**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

----

**FORM 10-K**

**(Mark One)**

**x**                               ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**For the fiscal year ended December 31,2005**

**OR**

**o**                                  TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**For the transition periodfrom             to             **

**Commission file number 1-13531**

----

**Trammell Crow Company**

(Exact name of registrantas specified in its charter)

| **Delaware**                                                    | **75-2721454**                        |
|-----------------------------------------------------------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) | (IRS Employer  Identification Number) |
| **2001 Ross Avenue  Suite 3400  Dallas, Texas**            | **75201**                             |
| (Address of principal executive offices)                        | (Zip Code)                            |

 

**(214) 863-3000**

(Registrant’s telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act:

|                               | **Title of each class** | ** **               | ** ** | ** ** | ** ** | **Name of each exchange on  which registered** | ** ** | ** ** |
|-------------------------------|-------------------------|--------------------------|------------|------------|------------|------------------------------------------------|------------|------------|
| Common Stock,  $.01 par value |                    | New York Stock  Exchange |

 

Securitiesregistered pursuant to section 12(g) of the Act:

**None**

(Title of Class)

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes x  No o

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o  No x

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

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. x

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

Large acceleratedfiler x          Acceleratedfiler o          Non-acceleratedfiler o

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

The aggregate market valueof the voting and non-voting common equity held by non-affiliates on June 30,2005, was $785,691,072, based on the closing price of the registrant’s commonstock, $24.24 per share, reported on the New York Stock Exchange on June 30,2005.

There were 36,286,893****sharesof the registrant’s common stock outstanding as of March 1, 2006.

**DOCUMENTS INCORPORATED BY REFERENCE**

Portions of the registrant’sProxy Statement to be furnished to stockholders in connection with its 2006Annual Meeting of Stockholders are incorporated by reference in Part IIIof this Report.

 

----

**PART I**

**ITEM 1.**                BUSINESS

**Company Overview**

Trammell Crow Company (the “Company”), founded in 1948by Mr. Trammell Crow, is one of the largest diversified commercial realestate service companies in the world. The Company delivers brokerage, projectmanagement and building management services through its Global Services groupand undertakes development and investment activities through its Developmentand Investment group. The operations of each group are reported as separatesegments.

The Company servestwo different types of clients:

·       **User clients. **These clients includelarge corporations, healthcare systems, public sector clients and other endusers that occupy commercial property in connection with their businessoperations.

·       **Investor clients. **These clients include pension funds,advisors and others who own or manage real estate assets primarily forinvestment purposes.

**Global Services**

The Company’s GlobalServices group creates value for clients by applying knowledge, people,resources, processes and technology in a manner designed to enhance assetproductivity consistent with clients’ strategic objectives. The Global Servicesgroup’s approximately 6,200 employees provide strategic support in areas suchas organizational, portfolio and operational optimization with regard to themanagement of real estate and related services.

*User ClientServices*

The goal of theCompany’s user services business is to align the facilities and supportfunctions of its clients with their operational and strategic business objectives.The Company believes that organizations are increasingly outsourcing theirfacility or real estate-related functions to reduce costs, improveprofitability and refocus management and other resources on core competencies. TheCompany seeks to enter into multi-year, multi-service outsourcing contractswith its user clients, but also provides services on a one-off assignment orshort-term contract basis. Of the contracts with user clients that were up forrenewal in 2005, the Company lost less than 1% of the aggregate gross margingenerated by those contracts due to the clients’ decisions not to renew. Services provided to user clients by theCompany’s Global Services group are:

·       **Corporate Advisory Services****. **Brokerage and brokerage-related services provided touser clients are referred to as corporate advisory services and includeprimarily tenant representation brokerage services, as well as othertransaction or portfolio services such as acquisition/disposition brokerage,lease administration and lease audits. These services may be provided on aportfolio basis to a user client that has outsourced its transaction orportfolio requirements to the Company or on an individual transaction basis toa non-outsourcing client. Revenues are derived primarily from commissions basedon the value of the underlying real estate transaction (i.e., rental revenuesor sales price).

·       **Project Management. **Projectmanagement services provided to user clients include facility planning,construction oversight, space planning, site consolidations, multi-locationexpansion programs, facilities design, signage conversions, portfolio-wideoperational refits and upgrades, and workplace moves, adds, and changes. Projectmanagement services for user clients are typically provided on a portfolio-wideor programmatic basis. Revenues include fixed management fees, variable fees(based on an hourly rate, a percentage of project costs, square footage, etc.)and 

2

----

incentive fees if certainagreed-upon performance targets are met. Revenues may also includereimbursement of payroll and related costs for personnel providing theservices.

·       **Facilities Management. **Building management servicesprovided to user clients are typically referred to as facilities management andinclude administration and day-to-day operation, maintenance and repair ofclient-occupied facilities; office services; and call center services. TheCompany identifies best practices, implements technology solutions andleverages its resources to control clients’ facilities costs and enhance theworkplace environment. Contracts for facilities management services aretypically structured so the Company receives reimbursement of client-dedicatedpersonnel costs and associated overhead expenses plus a monthly base fee and,in some cases, annual incentives if certain agreed-upon performance targets aresatisfied.

*Investor ClientServices*

The Company providesservices to investor clients through an extensive network of real estateexperts in major markets throughout the United States. These local officedelivery teams are supported by a national accounts team whose function is tohelp insure quality service and to maintain and expand relationships with largeinstitutional clients, including buyers, sellers and landlords who need tolease, buy, sell and/or finance space. Servicesprovided to investor clients by the Company’s Global Services group are:

·       **Brokerage. **Brokerageservices provided to investor clients include project leasing and capitalmarkets (investment sales and capital sourcing) services.  Project leasing revenues are derived from therenewal and expansion of tenants and leasing of vacant space in investor-ownedproperties for which the Company has been engaged as the owner’s leasing agent.Fees for capital markets services are generated by representing buyers andsellers in connection with the sale and/or financing of office, industrial andretail space, and land, as well as hotels and multi-family housing. Feesreceived by the Company for brokerage services are typically based on apercentage of the value of the lease or sale transaction.

·       **Construction Management. **Project management servicesprovided to investor clients are referred to as construction management andprimarily include space planning and tenant finish coordination for investorclients, typically in conjunction with property management and leasing assignments.Fees are generally calculated as a percentage of project cost.

·       **Property Management. **Building management servicesprovided to investor clients are typically referred to as property management,and include all aspects of building operations, maintenance and repair, tenantrelations and oversight of building improvement processes. The Companytypically receives monthly management fees for the property management servicesit provides, based upon a specified percentage of the monthly rental income orrental receipts generated from the property under management, or in certaincases, the greater of such percentage fee or a minimum agreed-upon fee. TheCompany also may be reimbursed for a portion of its administrative and payrollcosts, as well as certain out-of-pocket expenses, directly attributable to theproperties under management.

The Company’s propertymanagement and leasing agreements with investor clients typically provide foran indefinite term but permit the client to terminate the agreement withoutcause upon 30 days prior written notice. While these customary terminationprovisions lend flexibility to the owner of the property, generally the Companyretains its property management and leasing assignments for multiple years.

*InternationalService Delivery*

Global Services clients are served through a networkof offices in the United States, Canada, Europe, Asia-Pacific and Latin/SouthAmerica. Operations outside of the United States are primarily focused on 

3

----

the provision of servicesto user clients, which generally include U.S.-based multi-nationals who haveoutsourced their services requirements to the Company on a portfolio basis.

The Company’sinternational service delivery is enhanced by its affiliations and allianceswith:

·       **Savills plc**, a leading property services company based inthe United Kingdom with operations throughout Europe and Asia. Savills islisted on the London Stock Exchange and is 19.6%-owned by the Company. TheCompany has had a strategic alliance with Savills dating to July 2000 andutilizes Savills throughout Europe and Asia-Pacific to execute brokeragetransactions on behalf of the Company’s user clients. Two of the Company’sexecutives serve on Savills’ Board of Directors.

·       **Trammell Crow Meghraj**, a leading property services companyin India. Trammell Crow Meghraj is jointly owned by the Company and certaininternational partners and is the vehicle through which the Company providesall brokerage, project management and building management services in India.

·       **JJ Barnicke**,a leading Canadian real estate services provider. The Company utilizes JJBarnicke to provide brokerage services for the Company’s user clients withCanadian requirements.

**Development and Investment**

The Company conducts real estate development andinvestment activities primarily through its Development and Investment group,which includes approximately 240 employees. The group provides developmentservices to users and pursues opportunistic but risk-mitigated development andinvestment in commercial real estate across a wide spectrum of product types,including industrial, office and retail properties; healthcare facilities ofall types (medical office buildings, hospitals and ambulatory surgery centers);higher education facilities, including student housing; andresidential/mixed-use projects. The Company acts as the general manager of thedevelopment process, providing services that are vital in all stages of theprocess, including: (i) site identification, due diligence andacquisition; (ii) evaluating project feasibility, budgeting, schedulingand cash flow analysis; (iii) procurement of approvals and permits,including zoning and other entitlements; (iv) project finance advisoryservices; (v) coordination of project design and engineering; (vi) constructionbidding and management and tenant finish coordination; and (vii) projectclose-out and tenant move coordination.

The Company’s network of development and investmenttalent, access to capital, local market knowledge (attained in part throughbrokers and other employees in the Global Services group) and brand name giveit the capability to source and implement a significant volume of real estatedevelopment and investment activity. Experienced local market development teamspursue opportunities in their markets supported, where applicable, by nationalexpertise in certain product types (“initiatives”), such as healthcare, highereducation, acquisitions, on-airport distribution and residential/mixed-use. Dealapproval and risk mitigation are centralized. Funds and programs with capitalpartners—generally targeted at specific types of products or opportunities—enhancethe efficiency of local development teams by providing focus to their effortsand pre-arranged capital for their sourced opportunities (includingpre-negotiated transaction terms and documents).

The Company may pursue development and investmentactivity on behalf of its user and investor clients (with no ownership), inpartnership with its clients (through co-investment—either on an individualproject basis or through a fund or program) or for its own account (100%Company ownership). Development activity in which the Company has an ownershipinterest is conducted through Company subsidiaries which are consolidated orunconsolidated for financial reporting purposes depending primarily on theextent and nature of the Company’s ownership interest.

Development and investment revenues include feesprimarily from development and construction services (including incentive fees)and gains on disposition of real estate. Development and Investment 

4

----

segment income is alsogenerated from operation and/or disposition of projects held in unconsolidatedsubsidiaries and from the operation and/or disposition of real estateclassified as “discontinued operations” (in general, where the Company will nothave significant continuing involvement with the project after sale). Theimpact of project sales accounted for as income from unconsolidatedsubsidiaries or as income from discontinued operations is a regular part of, andcontributes significantly to, Development and Investment segment results.

Fees for development services are typically based on anegotiated percentage of a project’s budgeted development and construction cost.Incentive bonuses may be received for completing a project under budget andwithin certain critical time deadlines. The Company also seeks to leverage thevalue creation (deal sourcing and execution) capabilities of its nationalnetwork of development talent to negotiate other compensation arrangements—incentivefees and promote structures—that allow the Company to participate in theinvestment returns on projects it develops for its investor clients.

Through approximately 1990, the Company focused itscommercial real estate development business on office, industrial and retailprojects primarily for investor clients. Since that time, the Company hasexpanded its focus to include other types of commercial development anddevelopment for user clients. National initiative teams source opportunitieswith both user and investor clients in healthcare, higher education, on-airportdistribution and residential/mixed-use development, and initiative personnelsupport local development teams in their development of the resulting projects.By expanding its focus to include development for user clients and in theseinitiatives, particularly those in the healthcare sector, the Company seeks tomitigate the cyclicality traditionally inherent in the commercial developmentbusiness.

The Development and Investment group also maintains aninitiative team focused on acquisitions of existing properties, primarily thosewith opportunities to add value through re-development or re-leasing. Tofacilitate the Company’s pursuit of opportunistic development and investment,including acquisitions, the Company has established a series of discretionarydevelopment and investment funds (Trammell Crow Investment Funds I through V). ThroughDecember 31, 2005, aggregate capital contributions and remaining unfundedcommitments to the funds totaled $138.6 million, sourced $90.9 million fromunrelated parties, $8.1****million fromcurrent or former employees of the Company and $39.6 million from the Company. Ofthe total funding contributions and commitments, $115.3****millionhad been invested through December 31, 2005, in projects with an aggregateproject or acquisition cost of approximately $996.8 million. Of thoseprojects, projects with total costs of $501.0 million had been sold through December 31,2005. The Company intends to establish a sixth discretionary development andinvestment fund in 2006, targeting funding commitments greater than any of theprevious five funds.

In order toincrease the focus and efficiency of its development teams and in an effort tobuild and ultimately realize portfolio value for developed and acquiredprojects (to the extent of its participation), the Company seeks to channel alarge part of its development and investment activity into programs withcapital partners, including those described below:

·       **ING Clarion Industrial Program. **During 2004, theCompany established an industrial development program with ING Clarion. TheCompany co-invests in the program, which is initially targeting up to $500million of product with a focus on the development, aggregation and sale of newbulk warehouse distribution centers in major markets throughout the UnitedStates. The program is structured as a joint venture with the Company sourcingprojects and providing development services for projects initiated by theprogram and ING Clarion providing the advisory, asset management and creditsupport to the underlying projects. None of the debt related to the projects isrecourse to the Company. Since its inception, the program has acquired orcontracted to acquire land to develop projects with aggregate budgeted projectcosts of approximately $473.3 million.

5

----

**·****      **Partners Health Trust.**  **Partners Health Trust is the brand used by theCompany to establish funds to carry out programmatic development and investmentactivity related to the Company’s healthcare initiatives. Under this brand, theCompany has established a fund with a prominent state retirement system. Thefund’s purpose is to acquire primarily on-campus medical office buildings fromleading not-for-profit healthcare systems around the country or from theCompany’s subsidiaries that have developed medical office buildings for thesesystems. In 2005, the fund acquired eight medical office buildings andpurchased partnership interests in two other buildings for an aggregate cost ofapproximately $112.0 million.

**·****      **Other Funds andPrograms.**  **The Company is activelypursuing the establishment of funds and programs for other product types.

**Segment Financial Information**

Financialinformation about the Global Services and Development and Investment segmentsis contained in “*Item 8. Financial Statements and Supplementary Data, Note 21.*”

**Competitive Advantages**

The Companybelieves that it possesses numerous competitive advantages, including:

·       **Comprehensive Service Offerings.  **The Company providesa comprehensive set of commercial real estate services and is a leadingprovider in each of its four core services: brokerage, project management,building management and development and investment. This enables the Company toprovide single source solutions for clients with multi-service requirements andenables the Company to grow its business with clients who may begin theirrelationship with the Company with a single service requirement.

·       **Scale and Geographic Reach.  **The Company’s scale andgeographic reach—and the infrastructure in place to support them—position itwell to handle existing and potential clients’ multi-service, multi-location,geographically dispersed requirements. At December 31, 2005:

·        The Company managed and/orleased approximately 548 million square feet of space for its user and investorcustomers, including over 210 million square feet of user customer facilitiesat over 29,000 locations;

·        The Company’sapproximately 6,700 employees included 670 brokers and 800 project managers;

·        Supplementing the Company’snetwork of full service offices throughout the United States, were (i) Companyemployees resident in 20 countries around the globe focused on serving thebrokerage, project management and building management needs of its user clientsin over 60 countries and (ii) alliance partners with operations throughoutEurope, Asia-Pacific and Canada with over 15,000 employees, includingapproximately 1,000 brokers; and

·        The Company had nearly$3.6 billion in development in process.

·       **Client Base.  **The Company’s existing clients includesome of the world’s largest corporations and leading investors with sizeableportfolios of commercial real estate and complex requirements, providing theCompany with strong organic growth potential.

·       **Development Capability.  **The Company’s developmentcapability is a product of its heritage and is unrivaled among its commercialreal estate services competitors. The Development and Investment segment is asignificant contributor to Company profits with an attractive risk/rewardprofile. Investor clients value highly the access to product and value addedreturns created by the Company.

6

----

·       **Brand.  **The Trammell Crow Company brand dates to 1948,and the Company believes that it is highly regarded and a significant asset inwinning new business.

·       **Management/Personnel.  **TheCompany’s 10-member Executive Committee has an average Company tenure ofmore than 18 years, providing experienced leadership with perspective acrosschanging operating environments.

**Long-Term Growth Strategy**

The Company’slong-term growth strategy is to build upon its competitive advantages anddemonstrable industry trends to:

·       **Capitalize on Outsourcing Opportunity*.*  **The commercialreal estate-related outsourcing business remains a significant growth opportunitywell suited to the Company’s full service capabilities. As an outsourcingindustry leader, the Company will continue to focus its resources on adding newclients and expanding its substantial relationships with existing outsourcingclients on both a domestic and global basis. The Company’s focus on integrateddelivery, its status as a leading provider in each of its service lines and itsgrowing international capability position the Company well to meet user clients’complex requirements.

·       **Enhance Brokerage Capability.  **The Company hascommitted significant resources to enhance its brokerage capability andcontinues to develop a highly competitive brokerage business. The Company isfocused on growing its brokerage headcount, expanding all lines of brokeragegeographically and broadening the expertise within each line. The Company’ssignificant portfolio of user and investor client relationships is an assetthat serves it well in its efforts in this regard.

·       **Leverage Development Network with Funds, Programs and Initiatives*.*  **Inorder to bring further focus and efficiencies to its development business (andthereby facilitate increased levels of activity), the Company seeks toestablish funds and programs with capital partners and to channel increasingamounts of development and investment activity into those funds and programs. Inaddition, the Company seeks to leverage its development field network withnational initiative teams focused on particular product types.

·       **Expand Business with Healthcare Customers.  **The Companyis focused on delivering customized real estate solutions to leading hospitals,HMOs and healthcare organizations across the country through a dedicatednational team of healthcare industry specialists who work with local teams tosecure and deliver these services. The Company believes that the healthcareindustry is less cyclical than the overall economy and thus believes it canpartially mitigate the cyclicality traditionally inherent in the commercialreal estate development business by focusing on healthcare-related development.

·       **Expand Geographically.  **The Company is committed tofurther expanding its geographic reach both domestically and internationally bycontinuing to add resources outside the United States and to expand the depthand breadth of its service offerings, both organically and through investmentsin and relationships with strategic alliance partners. The combination of newinvestments, business expansion, and focus on global customer solutions willdrive the Company’s international business expansion.

·       **ProvideConsistent Quality Service.  **Overlaying the five precedinggrowth strategies is the Company’s focus**on providinguniform product quality and service delivery across all its markets. TheCompany also seeks continuous improvement in its back office infrastructurecapabilities, including information technology, accounting and human resourcesin support of both internal and client activity. The Company has aimedsubstantial resources at these areas in recent years and has 

7

----

reorganized each tomake it more effective. The Company believes that continued progress in thisregard will create further growth opportunities.

**Competition**

The Company competes inseveral market segments within the commercial real estate industry, each ofwhich is highly competitive on a national and a local level. The Company facescompetition from other real estate services providers, consulting firms,in-house corporate real estate departments and developers. Some of the Company’sprincipal competitors in certain of these segments have capabilities andfinancial resources equal to or greater than those of the Company and a moresubstantial global presence. Many of the Company’s competitors are local orregional firms, which are smaller than the Company on an overall basis, but maybe substantially larger than the Company in a particular local or regionalmarket. While the Company does not believe that any of its competitors aredominant in the business lines in which the Company operates, the providers ofreal estate services that compete with the Company on a national level includeJones Lang LaSalle Incorporated, CB Richard Ellis, Cushman &Wakefield, Inc., Grubb & Ellis and national, regional and localdevelopers. The Company has faced increased competition in recent years, whichhas, in some cases, resulted in lower service fees, or compensationarrangements more closely aligned with the Company’s performance in renderingservices to its clients. In recent years, there has been a significant increasein real estate ownership by REITs, many of which self-manage most of their realestate assets. Continuation of this trend could shrink the asset base availableto be managed by third-party service providers, decrease the demand for theCompany’s services and thereby significantly increase its competition. Ingeneral, the Company expects the industry to remain competitive in the future. Therecan be no assurance that such competition will not have a material adverseeffect on the Company’s business, financial condition or results of operations.

**Employees**

Management believes its relations with employees aregood. Employees of the Company at certain properties are currently representedby labor unions.

**Geographic Areas**

The Company participatesin the commercial real estate business outside the United States both directlythrough wholly-owned subsidiaries and indirectly through its equity ownershipin certain of its alliance partners. The Company’s revenues generated fromdomestic operations represent approximately 97%, 96% and 96% of its totalrevenues in each of 2003, 2004 and 2005, respectively. Revenues derived fromvarious foreign operations comprised approximately 3%, 4% and 4% of the Company’stotal revenues in each of 2003, 2004 and 2005, respectively. The Company’sshare of the profits of Savills and Trammell Crow Meghraj flows through theCompany’s income statement as income from unconsolidated subsidiaries, not asrevenues. The Company’s Global Servicessegment generated income before income taxes outside of the United States ofapproximately 16%, 13% and 14% of total Global Services income before incometaxes in each of 2003, 2004 and 2005, respectively. Approximately 91%,91% and 79% of the Company’s long-lived assets at December 31, 2003, 2004and 2005, respectively, relate to the Company’s domestic operations, with theremaining portion of its long-lived assets relating to various foreignoperations.

**Insurance**

The Company has the types of insurance coverage,including comprehensive general liability and excess umbrella liabilityinsurance, that it believes are appropriate for a company in the lines ofbusiness in which it operates. The Company’s management uses its discretion indetermining the amounts, coverage limits and deductibility provisions ofappropriate insurance coverage on the Company’s properties and 

8

----

operations.In the event of a substantial loss, the Company’s insurance might not besufficient to pay the full value of the damages suffered by the Company. TheCompany’s management evaluates insurance coverage on an ongoing basis.

**Trademarks**

The trade name “TrammellCrow” is material to the Company’s business. The Company is party to a licenseagreement with respect to such trade name (the “License Agreement”) with CF98,L.P. (“CF98”), an affiliate of Crow Realty Investors, L.P. d/b/a Crow Holdings(“Crow Holdings”), which is wholly-owned by certain descendants and affiliatesof Mr. Trammell Crow. See *“Risk Factors—Trade NameLicense”* for additional information.

**Environmental Liability**

Various federal, state,local and foreign laws and regulations impose liability on current or previousreal property owners or operators for the cost of investigating, cleaning up orremoving contamination caused by hazardous or toxic substances at the property.If contamination occurs or is present during the Company’s role as a propertyor facility manager or developer, it could be held liable for such costs as acurrent “operator” of the property. Such liability may be imposed withoutregard to the legality of the acts or omissions that caused the contaminationand without regard to whether the Company knew of, or was responsible for, thepresence of such hazardous or toxic substances, and such liability may be jointand several with any other parties that are deemed legally liable for thecontamination. If the liability is joint and several, the Company could beresponsible for payment of the full amount of the liability, whether or not anyother responsible party is also liable. Under certain laws and common lawprinciples, any failure by the Company to disclose environmental contaminationat a property could subject the Company to liability to a buyer or lessee ofthe property. In addition, some environmental laws create a lien on acontaminated site for costs that a governmental entity incurs in connection withthe contamination. The operator of a site also may be liable under common lawto third parties for damages and injuries resulting from exposure to hazardoussubstances or environmental contamination at a site, including liabilitiesarising from exposure to asbestos-containing materials. There can be noassurance that any of these types of environmental liabilities to which theCompany or any of its affiliates become subject will not have a materialadverse effect on the Company’s business and results of operations.

Some of the propertiesowned, operated, managed or under development by the Company contain or areadjacent to or near properties that have contained in the past, or currentlycontain, underground and/or above-ground storage tanks used to storeregulated substances such as petroleum products or other hazardous or toxicsubstances. Some of the properties owned, operated or managed by the Companyare in the vicinity of properties which are currently, or have been, the siteof releases of regulated substances and remediation activity, and the Companyis currently aware of several properties owned, operated or managed by theCompany which may be impacted by regulated substances which may have migratedfrom adjacent or nearby properties or which may be within the borders of areassuspected to be impacted by regional groundwater contamination. In addition,the Company is aware of the presence or the potential presence of regulatedsubstances in the soil or groundwater at several properties owned, operated ormanaged by it, which may have resulted from historical or ongoing activities onthose properties. Based on the information available to date, the Companybelieves that the environmental issues described above are being or have beenappropriately managed and will not have a material adverse effect on theCompany, but there can be no assurance that environmental liabilities or claimswill not adversely affect the Company in the future.

9

----

**GovernmentRegulation**

The Company and its brokers, salespersons and, in someinstances, property managers are regulated by the states in which they dobusiness. These regulations may include licensing procedures, prescribedprofessional responsibilities and anti-fraud provisions. The Company’sactivities are also subject to various local, state, national and internationaljurisdictions’ fair advertising, trade, housing and real estate settlement lawsand regulations and are affected by laws and regulations relating to realestate and real estate finance and development. In particular, a number ofjurisdictions have imposed environmental controls, permitting requirements andzoning restrictions on the development of real estate. The Company is subjectto laws governing its relationship with employees, including minimum wagerequirements, overtime, working conditions and work permit requirements. TheCompany believes that it has the necessary permits and approvals to operateeach of its properties and their respective businesses.

Under the Americans withDisabilities Act of 1990 (“ADA”), all public accommodations are required tomeet certain federal requirements related to access and use by disabledpersons. While the Company believes that its properties in which it holds anequity interest are substantially in compliance with these requirements, adetermination that such properties are not in compliance with the ADA couldresult in the imposition of fines or an award of damages to private litigants.

**Available Information**

The Company’s Internetaddress is www.trammellcrow.com. The Company makes available free of chargethrough its Internet website its annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K,and amendments to those reports filed or furnished pursuant toSection 13(a) or 15(d) of the Exchange Act as soon as reasonablypracticable after it electronically files such material with, or furnishes itto, the Securities and Exchange Commission.

**ITEM 1A.**        RISKFACTORS

An investment in the Company involves certain risks. Readersshould read this entire report carefully and should consider among otherthings, the risks described below.

*TradeName License.  *The Company has entered into aLicense Agreement with an affiliate of Crow Holdings that allows the Company touse the name “Trammell Crow” perpetually throughout the world in any businessexcept the residential real estate business, although the Company can use thisname in serving certain mixed-use properties or in providing investment salesbrokerage services to buyers and sellers of multi-family residentialfacilities. This license can be revoked if the Company fails to maintaincertain quality standards or infringes upon certain of the licensor’sintellectual property rights. If the Company loses the right to use theTrammell Crow name, the Company’s business could suffer significantly.

The License Agreement permits certain existing uses ofthe name “Trammell Crow” by affiliates of Crow Holdings. The use of theTrammell Crow name or other similar names by third parties may create confusionor reduce the value associated with the Trammell Crow name.

*EconomicCyclicality.**  *TheCompany is impacted by cycles in the general economy and the commercial realestate industry and, as a result, its growth strategy is directly impacted bythose economic cycles. The commercial real estate market is cyclical anddepends on the perceptions of real estate users and investors as to generaleconomic conditions. Transaction volumes, rental rates, occupancy levels andsales prices are influenced by economic conditions and changes in suchconditions could have a negative impact on the Company’s revenues.

Because the Company’s investment strategy typicallyentails making relatively modest investments alongside its investor clients,its ability to conduct these activities depends in part on the supply ofinvestment capital for commercial real estate and related assets. Changes inmarket perceptions or other 

10

----

economic factors may leadto decreased availability of such capital, which could adversely impact theCompany’s development and investment strategy. Furthermore, in real estatedown-cycles, economic conditions may make certain development project pursuitsless viable, and the Company may decide not to continue pursuing such projects.Consequently, the Company’s financial results in down cycles may be (and havebeen) adversely impacted by increased write-offs of pursuit costs that havebeen capitalized in connection with potential development projects that theCompany has determined not to pursue or by impairment charges or reducedprofitability related to declines in real estate values.

Building occupancies and rental rates typicallydecline in an economic downturn. Therefore, it may take longer for the Companyto dispose of real estate investments or the selling prices may be lower thanoriginally anticipated. As a result, the carrying value of the Company’s realestate investments may become impaired and the Company could record losses as aresult of such impairment or the Company could experience reduced profitabilityrelated to declines in real estate values.

*RealEstate Investment and Co-investment Activities.**  *Selective investment in real estate projects is animportant part of the Company’s strategy and there is an inherent risk of lossof the Company’s investment. As of December 31, 2005, the Company had 41****consolidated real estate projects with invested equity of$72.3 million and $18.6 million of notes payable on real estate that arerecourse to the Company (beyond being recourse to the single-purpose entitythat holds the real estate asset and is the primary obligor on the notepayable). The estimated aggregate project cost of these consolidated realestate projects is $680.1****million. Inaddition, at December 31, 2005, the Company was involved as a principal(in most cases, co-investing with one of its clients) in 43****unconsolidatedreal estate subsidiaries in which the Company had invested $44.5 million andhad committed additional capital to these unconsolidated subsidiaries of $14.5****million. The Company also guaranteed notes payable of theseunconsolidated subsidiaries of $7.1 million.

Because the disposition of a single significantinvestment can impact the Company’s financial performance in any period, itsreal estate investment activities could increase (and have historicallyincreased) fluctuations in the Company’s net earnings and cash flow. In manycases, the Company has limited control over the timing of the disposition ofthese investments and the recognition of any related gain or loss.

*Recruitingand Retention of Qualified Personnel.**  *The Company’s continued success is highly dependenton the efforts of its executive officers and key employees. If any of theCompany’s key employees leave, its business may suffer. The growth of theCompany’s business is also largely dependent upon its ability to attract andretain qualified personnel in all areas of its business, including management. Ifthe Company is unable to attract and retain such qualified personnel, it may beforced to limit its growth, and its business and operating results could suffer.Organizational changes within the Company could also impact its ability toretain personnel.

*Relianceon Major Clients and Contract Retention.**  *A relatively small number of the Company’s clientsgenerate a significant portion of its revenues. The Company’s ten largestclients accounted for approximately 30% of its total revenues in 2005,including one client (Bank of America Technology and Operations, Inc.,which primarily receives services from the Company’s Global Services segment)that accounted for 13% of the Company’s total revenues. The loss of one or moreof its major clients could have a material adverse effect on the Company’sbusiness.

In 2005, revenue from property management and fromuser clients with whom the Company has outsourcing contracts constitutedapproximately 15% and 47%, respectively, of the Company’s total revenues. TheCompany’s property management contracts can generally be cancelled upon30 to 60 days notice by the client. Its outsourcing services contracts aretypically for multi-year terms with options to renew and may include provisionsgiving the customer certain early termination rights. Accordingly, contractsrepresenting a significant percentage of the Company’s revenues may beterminated or may 

11

----

expire in any given year. TheCompany has been successful in retaining and renewing a significant portion ofits contracts but may not be able to do so in the future. Moreover, increasedcompetition may force the Company to renew such contracts on less favorableterms.

*Long-TermGrowth.**  *TheCompany will continue to focus on additions to its base business that should beless impacted by economic down cycles over time and are expected to createlong-term growth. The Company’s historical growth and any significant futuregrowth will continue to place demands on the Company’s resources. The Company’sfuture success and profitability will depend, in part, on its ability toenhance its management and operating systems, manage and adapt to rapid changesin technology, obtain financing for capital expenditures or strategicacquisitions and retain employees and clients. The Company may not be able tosuccessfully manage any significant expansion or obtain adequate financing forsuch expansion on favorable terms, if at all.

*Business Acquisitions.  *TheCompany may pursue strategic acquisitions in the future. However, the Companymay not be able to acquire businesses on favorable terms, and may have to use asubstantial portion of its capital resources for any such acquisitions. Challengesand issues commonly encountered in strategic acquisitions include:

·       diversionof management’s attention to assimilating the acquired business;

·       maintainingemployment relationships with the Company’s employees and employees of anacquired business;

·       adverseshort-term effects on operating results;

·       integratingfinancial and other administrative systems;

·       amortizationor impairment of any acquired intangible assets; and

·       maintaininguniform standards, controls, procedures and policies.

In addition, the acquired businesses’ clients couldcease to do business with the Company. Potential conflicts between the Company’sclients and those of an acquired business could threaten its businessrelationships. If the Company is not able to manage these risks, its businesscould suffer significantly.

*International Operations.**  *The Company operates in several markets outside theUnited States and is subject to the risks common for international operationsand investments in foreign countries. These risks include:

·       difficultiesin staffing and managing geographically and culturally diverse, multi-nationaloperations;

·       lackof familiarity with local business customs and operating environments;

·       changesin foreign tax laws;

·       changesin currency exchange rates;

·       limitationson repatriation of earnings;

·       restrictiveactions by local governments;

·       nationalizationand expropriation; and

·       actsof terror, war and civil disturbances.

*Fluctuationsin Quarterly Operating Results.**  *Inrecent years, the Company’s revenues have been lower in each of the first threequarters than in the fourth quarter because its clients tend to closetransactions toward the end of their fiscal years (typically the calendar year).This causes the Company to earn a 

12

----

significant portion of itsrevenues under transaction-oriented service contracts or real estatetransactions in the fourth quarter.

In addition, a growing portion of the Company’soutsourcing contracts provide for bonus payments upon achieving certainperformance targets. These incentive payments are generally earned in thefourth quarter. Furthermore, revenues can be influenced by the timing ofsignificant individual transactions. The Company plans its capital andoperating expenditures based on its expectations of future revenues. Ifrevenues are below expectations in any given quarter, the Company may be unableto adjust expenditures to compensate for any unexpected revenue shortfall. TheCompany’s business could suffer as a consequence.

*Competition.  *TheCompany competes in several market segments within the commercial real estateindustry, each of which is highly competitive on an international, national andlocal level. The Company faces competition from other real estate servicesproviders, consulting firms, in-house corporate real estate departments anddevelopers. The adverse consequences of intense competition may include loss ofclients and downward pressure on pricing. In recent years, there has been asignificant increase in real estate ownership by REITs, many of whichself-manage most of their real estate assets. If this trend continues, it couldshrink the asset base available to be managed by third party service providersand decrease the demand for the Company’s services, thereby significantlyincreasing its competition.

*EnvironmentalLiability.**  *Variouslaws and regulations impose liability on real property owners or operators forthe cost of investigating, cleaning up or removing contamination caused byhazardous or toxic substances at the property. In the Company’s role as aproperty or facility manager or developer, the Company could be held liable asan operator for such costs. This liability may be imposed without regard to thelegality of the original actions and without regard to whether the Company knewof, or was responsible for, the presence of the hazardous or toxic substances. Ifthe Company fails to disclose environmental issues, the Company could also beliable to a buyer or lessee of the property. In addition, some environmentallaws create a lien on the contaminated site in favor of the government fordamages and costs incurred in connection with the contamination. If the Companyincurs any such liability, its business could suffer significantly.

*Anti-takeoverConsiderations.**  *Certainprovisions of the Company’s certificate of incorporation, bylaws and certainprovisions of Delaware law may deter or prevent a takeover attempt, includingan attempt that might result in a premium over the market price for its commonstock. These provisions include:

·       *Staggered Board of Directors.***  **The Company’s Board of Directors is divided intothree classes serving terms currently expiring in 2006, 2007 and 2008. Becausethe Company’s Board of Directors is divided into classes, members of its Boardof Directors may only be removed from office prior to the expiration of theirterms if such removal is for “cause.” Therefore, the staggered terms ofdirectors may limit the ability of holders of common stock to complete a changeof control.

·       *Stockholder Proposals.***  **TheCompany’s stockholders must follow an advance notification procedure forcertain stockholder nominations of candidates for the Company’s Board ofDirectors and for certain other business to be conducted at any stockholders’meeting. This limitation on stockholder proposals could inhibit a change ofcontrol.

·       *Special Meetings of the Stockholders*.**  **Subject to limited exceptions, special meetings ofstockholders may be called only by the Chairman of the Board of Directors or amajority of the members of the Board of Directors. This limitation on specialmeetings of the stockholders could inhibit a change of control.

·       *Preferred Stock.***  **TheCompany’s certificate of incorporation authorizes the Company’s Board ofDirectors to issue up to 30,000,000 shares of preferred stock having suchrights as may be 

13

----

designated by the Company’sBoard of Directors, without stockholder approval. The issuance of suchpreferred stock could inhibit a change of control.

·       *Delaware Anti-takeover Statute.***  **Section 203of the Delaware General Corporation Law restricts certain business combinationswith interested stockholders upon their acquiring 15% or more of the Company’scommon stock. This statute may have the effect of inhibiting a non-negotiatedmerger or other business combination.

**ITEM 1B.**       UNRESOLVEDSTAFF COMMENTS

None.

**ITEM 2.**                PROPERTIES

The Company’s executiveoffices are located at 2001 Ross Avenue, 3400 Trammell Crow Center, Dallas,Texas 75201 and consist of approximately 46,898 square feet of leased officespace. The Company’s telephone number at such address is (214) 863-3000.The Company’s lease at its executive offices expires on December 31, 2009.

**ITEM 3.**                LEGALPROCEEDINGS

The Company and one of itssubsidiaries were named defendants in a lawsuit styled***Bank OneOklahoma, N.A., et al.*(the “Bank”)*v. TrammellCrow Services, Inc. and Trammell Crow Company*, No. 03 C 3624,filed in the U.S. District Court for the Northern District of Illinois on April 2,2003. On January 25, 2006, the Company and the Bank resolved the lawsuitbetween them. The claims filed by each party have been dismissed.

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

**ITEM 4.**                SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of stockholders,through the solicitation of proxies or otherwise, during the quarter ended December 31,2005.

14

----

**PART II**

**ITEM5.**                MARKET FOR COMMONEQUITY AND RELATED STOCKHOLDER MATTERS

TheCommon Stock is listed on the New York Stock Exchange (“NYSE”) and trades underthe symbol “TCC.” At March 1, 2006, 36,286,893 shares were held byapproximately 2,349 stockholders of record. The following table sets forth thehigh and low sales prices per share of Common Stock as reported on the NYSEComposite Transaction Tape on a quarterly basis for the last two fiscal years.

| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| **2004**       |       |     |       |    |       |
| First Quarter  |       | $        | 14.52      |    | $          | 13.25 |   |
| Second Quarter |       | $        | 14.30      |    | $          | 12.25 |   |
| Third Quarter  |       | $        | 16.20      |    | $          | 12.51 |   |
| Fourth Quarter |       | $        | 18.51      |    | $          | 14.86 |   |
| **2005**       |       |     |       |    |       |
| First Quarter  |       | $        | 21.19      |    | $          | 15.83 |   |
| Second Quarter |       | $        | 26.91      |    | $          | 20.32 |   |
| Third Quarter  |       | $        | 27.88      |    | $          | 23.32 |   |
| Fourth Quarter |       | $        | 27.16      |    | $          | 23.05 |   |

 

The Company has not paiddividends in the last two fiscal years and does not anticipate paying dividendsin the foreseeable future. Any future payment of dividends will be at thediscretion of the Board of Directors and will depend upon the Company’s resultsof operations, financial condition, cash requirements and other factors deemedrelevant by the Board of Directors, including the terms of the Company’sindebtedness. Provisions in agreements governing the Company’s long-termindebtedness limit the amount of dividends that the Company may pay to itsstockholders. See “*Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations—Liquidityand Capital Resources.”*

The Company did notrepurchase any shares in the fourth quarter of 2005.

**SecuritiesAuthorized for Issuance under Equity Compensation Plans**

The information requiredby Item 201(d) of Regulation S-K is set forth under the heading “*Item 12. Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters.*”

**ITEM6.**                SELECTEDCONSOLIDATED FINANCIAL DATA

The selected financialdata set forth below have been derived from the audited consolidated financialstatements of the Company. The selected financial data should be read inconjunction with *“Item 7. Management*’*s Discussion and Analysis of Financial Condition andResults of Operations*,*”*and the consolidated financial statements and notes thereto contained elsewherein this report.

In accordance withStatement of Financial Accounting Standards No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets* (“FAS 144”), certain revenues and expensesfor the three quarterly periods ended March 31, June 30 and September 30,2005, and the years ended December 31, 2004, 2003 and 2002, have beenreclassified to conform to the presentation for the quarter ended December 31,2005. As a result, certain balances differ from the amounts reported inpreviously filed documents. See “*Item 7*. *Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Income fromDiscontinued Operations, Net of Income Taxes,”* for additionalinformation.

15

----

 

| ** **                                                                                                                                    | ** ** | **Years Ended December 31,**          | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2001**                                             | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                                                                                                    | ** ** | **(in  thousands, except share and per share data)** | ** ** |
| **Statement  of Operations Data:**                                                                                                            |       |                                                 |       |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **REVENUES**                                                                                                                                  |       |                                                 |       |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ***User Services:***                                                                                                                          |       |                                                 |       |   | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Facilities management                                                                                                                         |       | $                                                    | 201,573    |   | $ | 233,756 |   | $ | 208,936 |   | $ | 211,062 |   | $ | 237,659 |   |
| Corporate advisory services                                                                                                                   |       | 115,599                                              |       | 108,414 |   | 123,335 |   | 143,266 |   | 186,847 |   |
| Project management services                                                                                                                   |       | 52,973                                               |       | 58,134 |   | 65,500 |   | 91,599 |   | 118,678 |   |
|                                                                                                                                          |       | 370,145                                              |       | 400,304 |   | 397,771 |   | 445,927 |   | 543,184 |   |
| ***Investor Services:***                                                                                                                      |       |                                                 |       |   |   |   |   |   |   |   |   |
| Property management                                                                                                                           |       | 174,279                                              |       | 147,613 |   | 143,727 |   | 137,193 |   | 136,665 |   |
| Brokerage                                                                                                                                     |       | 115,463                                              |       | 95,657 |   | 95,593 |   | 114,478 |   | 138,416 |   |
| Construction management                                                                                                                       |       | 13,082                                               |       | 10,006 |   | 10,736 |   | 11,187 |   | 11,973 |   |
|                                                                                                                                          |       | 302,824                                              |       | 253,276 |   | 250,056 |   | 262,858 |   | 287,054 |   |
| Development and construction                                                                                                                  |       | 76,630                                               |       | 55,112 |   | 43,203 |   | 38,346 |   | 47,159 |   |
|                                                                                                                                          |       | 749,599                                              |       | 708,692 |   | 691,030 |   | 747,131 |   | 877,397 |   |
| Gain on disposition of real estate                                                                                                            |       | 28,456                                               |       | 23,129 |   | 13,199 |   | 26,742 |   | 18,553 |   |
| **TOTAL  REVENUES**                                                                                                                           |       | 778,055                                              |       | 731,821 |   | 704,229 |   | 773,873 |   | 895,950 |   |
| **COSTS AND EXPENSES**                                                                                                                        |       |                                                 |       |   |   |   |   |   |   |   |   |
| Salaries, wages and benefits                                                                                                                  |       | 477,628                                              |       | 472,810 |   | 452,195 |   | 493,404 |   | 553,552 |   |
| Commissions                                                                                                                                   |       | 94,655                                               |       | 87,396 |   | 98,957 |   | 120,345 |   | 151,721 |   |
| General and administrative                                                                                                                    |       | 138,308                                              |       | 133,741 |   | 116,434 |   | 127,758 |   | 140,618 |   |
| Depreciation                                                                                                                                  |       | 15,811                                               |       | 15,236 |   | 14,704 |   | 9,985 |   | 9,257 |   |
| Amortization                                                                                                                                  |       | 8,164                                                |       | 2,579 |   | 1,856 |   | 1,359 |   | 738 |   |
| Interest                                                                                                                                      |       | 15,057                                               |       | 10,219 |   | 5,953 |   | 4,195 |   | 5,441 |   |
| Writedowns due to impairment of  goodwill, intangibles and investments                                                                        |       | 31,968                                               |       | — |   | — |   | — |   | — |   |
| Change in fair value of interest rate swap agreement                                                                                          |       | 4,809                                                |       | — |   | — |   | — |   | — |   |
| Restructuring charges                                                                                                                         |       | 10,952                                               |       | — |   | — |   | — |   | — |   |
| **TOTAL  EXPENSES**                                                                                                                           |       | 797,352                                              |       | 721,981 |   | 690,099 |   | 757,046 |   | 861,327 |   |
| Operating income  (loss)                                                                                                                      |       | (19,297                                              | )          | 9,840 |   | 14,130 |   | 16,827 |   | 34,623 |   |
| Interest and other  income                                                                                                                    |       | 1,596                                                |       | 1,186 |   | 2,236 |   | 2,797 |   | 2,835 |   |
| Income (loss) from  continuing operations  before income taxes, minority interest and income from investments in unconsolidated  subsidiaries |       | (17,701                                              | )          | 11,026 |   | 16,366 |   | 19,624 |   | 37,458 |   |
| Income tax  (expense) benefit                                                                                                                 |       | 5,893                                                |       | (4,915 | ) | (6,636 | ) | (7,452 | ) | (13,856 | ) |
| Minority interest,  net of income tax                                                                                                         |       | 880                                                  |       | 1,619 |   | 1,231 |   | (3,006 | ) | 2,528 |   |
| Income from  investments in unconsolidated subsidiaries, net of income tax expense                                                       |       | 5,717                                                |       | 4,961 |   | 9,839 |   | 10,971 |   | 15,154 |   |
| Income (loss) from  continuing operations                                                                                                     |       | (5,211                                               | )          | 12,691 |   | 20,800 |   | 20,137 |   | 41,284 |   |
| Income from  discontinued operations, net of income tax (1)                                                                                   |       | —                                               |       | 3,962 |   | 240 |   | 18,982 |   | 18,123 |   |
| Net income (loss)                                                                                                                             |       | $                                                    | (5,211     | ) | $ | 16,653 |   | $ | 21,040 |   | $ | 39,119 |   | $ | 59,407 |   |
| Income (loss) per  share from continuing operations:                                                                                          |       |                                                 |       |   |   |   |   |   |   |   |   |
| Basic                                                                                                                                         |       | $                                                    | (0.15      | ) | $ | 0.36 |   | $ | 0.58 |   | $ | 0.58 |   | $ | 1.22 |   |
| Diluted (2)                                                                                                                                   |       | $                                                    | (0.15      | ) | $ | 0.34 |   | $ | 0.56 |   | $ | 0.54 |   | $ | 1.13 |   |
| Income per share  from discontinued  operations, net of income taxes:                                                                    |       |                                                 |       |   |   |   |   |   |   |   |   |
| Basic                                                                                                                                         |       | $                                                    | —     |   | $ | 0.11 |   | $ | 0.01 |   | $ | 0.54 |   | $ | 0.54 |   |
| Diluted                                                                                                                                       |       | $                                                    | —     |   | $ | 0.11 |   | $ | 0.01 |   | $ | 0.51 |   | $ | 0.50 |   |
| Net income (loss)  per share:                                                                                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Basic                                                                                                                                         |       | $                                                    | (0.15      | ) | $ | 0.47 |   | $ | 0.59 |   | $ | 1.12 |   | $ | 1.76 |   |

 

16

----

 

| ** **                                                                             | ** ** | **Years Ended December 31,**          | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2001**                                             | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                                             | ** ** | **(in  thousands, except share and per share data)** | ** ** |
| **Statement  of Operations Data  (Continued):**                                        |       |                                                 |       |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Diluted (2)                                                                            |       | $                                                    | (0.15      | ) | $ | 0.45 |   | $ | 0.57 |   | $ | 1.05 |   | $ | 1.63 |   |
| Weighted-average common  shares outstanding:                                           |       |                                                 |       |   |   |   |   |   |   |   |   |
| Basic                                                                                  |       | 35,356,710                                           |       | 35,741,754 |   | 35,572,493 |   | 35,064,453 |   | 33,786,147 |   |
| Diluted (2)                                                                            |       | 35,356,710                                           |       | 36,797,012 |   | 36,780,515 |   | 37,239,801 |   | 36,440,940 |   |
| **Other Data:**                                                                        |       |                                                 |       |   |   |   |   |   |   |   |   |
| Calculation of EBITDA(3) and EBITDA,  as adjusted(4) (unaudited):            |       |                                                 |       |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                      |       | $                                                    | (5,211     | ) | $ | 16,653 |   | $ | 21,040 |   | $ | 39,119 |   | $ | 59,407 |   |
| Income tax expense (benefit)(5)                                                        |       | (926                                                 | )          | 13,391 |   | 14,350 |   | 23,954 |   | 34,880 |   |
| Depreciation(6)                                                                        |       | 15,811                                               |       | 15,236 |   | 15,001 |   | 10,210 |   | 9,574 |   |
| Amortization(7)                                                                        |       | 8,164                                                |       | 2,593 |   | 1,995 |   | 1,394 |   | 1,053 |   |
| Interest expense(8)                                                                    |       | 15,057                                               |       | 10,346 |   | 7,369 |   | 4,830 |   | 7,344 |   |
| EBITDA(3) (unaudited)                                                             |       | 32,895                                               |       | 58,219 |   | 59,755 |   | 79,507 |   | 112,258 |   |
| Writedowns due to impairment of  goodwill, intangibles, and investments                |       | 31,968                                               |       | — |   | — |   | — |   | — |   |
| Minority interest related to goodwill writedown,  before income taxes                  |       | (2,346                                               | )          | — |   | — |   | — |   | — |   |
| Change in fair value of interest rate  swap agreement                                  |       | 4,809                                                |       | — |   | — |   | — |   | — |   |
| Restructuring charges                                                                  |       | 10,952                                               |       | — |   | — |   | — |   | — |   |
| EBITDA, as adjusted(4) (unaudited)                                                |       | $                                                    | 78,278     |   | $ | 58,219 |   | $ | 59,755 |   | $ | 79,507 |   | $ | 112,258 |   |
| Net cash provided by (used in) operating activities                                    |       | 29,626                                               |       | 72,798 |   | 50,709 |   | 94,448 |   | (3,010 | ) |
| Net cash provided by (used in) investing activities                                    |       | (8,662                                               | )          | 3,762 |   | 1,962 |   | (37,112 | ) | (114,805 | ) |
| Net cash provided by (used in) financing activities                                    |       | (38,542                                              | )          | (36,614 | ) | (25,060 | ) | 685 |   | 31,097 |   |
| **Balance  Sheet Data:**                                                               |       |                                                 |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                              |       | $                                                    | 38,059     |   | $ | 78,005 |   | $ | 105,616 |   | $ | 163,637 |   | $ | 76,919 |   |
| Total assets                                                                           |       | 692,262                                              |       | 622,066 |   | 630,126 |   | 748,950 |   | 948,167 |   |
| Long-term debt (excluding notes payable on real  estate) and capital lease obligations |       | 62,013                                               |       | 22,717 |   | 13,106 |   | 377 |   | 36,336 |   |
| Notes payable on real estate(9)                                                        |       | 158,226                                              |       | 113,807 |   | 103,266 |   | 149,704 |   | 256,158 |   |
| Total liabilities                                                                      |       | 377,565                                              |       | 273,841 |   | 273,601 |   | 363,244 |   | 517,168 |   |
| Minority interest                                                                      |       | 28,574                                               |       | 39,871 |   | 28,896 |   | 44,756 |   | 29,528 |   |
| Stockholders’  equity                                                             |       | 286,123                                              |       | 308,354 |   | 327,629 |   | 340,950 |   | 401,471 |   |

----

(1)                Income fromdiscontinued operations includes the operations of real estate properties andgain on disposition of real estate properties held for sale or sold, in whichthe Company retained or expects to retain no continuing involvement, determinedin accordance with FAS 144. Dispositions of real estate assets have been andwill continue to be a significant part of the Company’s activities and, as aresult of applying the provisions of FAS 144, the Company expects a significantamount of these activities to continue to be classified as discontinuedoperations.

(2)                Theweighted-average shares outstanding used to calculate diluted earnings pershare for 2001 excludes the dilutive effect of options, as their inclusionwould have been anti-dilutive.

(3)                EBITDA representsearnings before interest, income taxes, depreciation and amortization. Managementbelieves that EBITDA is a meaningful measure of the Company’s operatingperformance, cash generation and ability to service debt. However, EBITDAshould not be considered as an alternative to: (i) net earnings(determined in accordance with United States generally accepted accountingprinciples (“GAAP”)); (ii) operating cash flow (determined in 

17

----

accordance with GAAP); or (iii) liquidity.Management also believes that EBITDA is sometimes useful to compare theoperating results of companies within an industry due to the fact that iteliminates the effects of certain financing and accounting decisions. TheCompany’s calculation of EBITDA may differ from similarly titled items reportedby other companies.

(4)                EBITDA, asadjusted, represents EBITDA (as described in note (3) above) before the 2001 write downdue to impairment of goodwill, intangibles and investments, net of relatedminority interest, the 2001 restructuring charges and the 2001 change in fairvalue of the Company’s interest rate swap agreement. No similar items haveoccurred since 2001, and Management believes that excluding these itemsprovides a more comparable measure of the Company’s results over the five-yearperiod.

(5)                Income tax expense(benefit) includes income taxes applicable to minority interest; income frominvestments in unconsolidated subsidiaries and discontinued operations, each ofwhich is presented net of income taxes in the Company’s consolidated statementsof operations.

(6)                Depreciationincludes $297, $225 and $317 related to discontinued operations for the yearsended December 31, 2003, 2004 and 2005, respectively.

(7)                Amortizationincludes $14, $139, $35 and $315****related todiscontinued operations for the years ended December 31, 2002, 2003, 2004and 2005, respectively.

(8)                Interest expenseincludes $127, $1,416, $635 and $1,903****related todiscontinued operations for the years ended December 31, 2002, 2003, 2004and 2005, respectively.

(9)                Notes payable onreal estate includes current portion of notes payable on real estate, notespayable on real estate, less current portion and notes payable included inliabilities related to real estate and other assets held for sale.

18

----

**ITEM 7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussionshould be read in conjunction with the Company’s consolidated financialstatements and the notes thereto and the other information included in Item15(a)(1) and (2) of this Annual Report on Form 10-K.

**Overview**

The Company’s Global Services revenue streams consistprimarily of payments pursuant to service contracts and variable transaction-orientedpayments for services provided to both user and investor clients. Revenues forcorporate advisory services provided to user clients are derived primarily fromcommissions based on the value of the underlying real estate transaction (i.e.,rental revenues or sales price). Project management revenues from user clientsinclude fixed management fees, variable fees (based on an hourly rate, apercentage of project costs, square footage, etc.) and incentive fees ifcertain agreed-upon performance targets are met. Revenues may also includereimbursement of payroll and related costs for personnel providing the services.Contracts for facilities management services are typically structured so theCompany receives reimbursement of client-dedicated personnel costs andassociated overhead expenses plus a monthly base fee and, in some cases, annualincentives if certain agreed upon performance targets are satisfied. Brokeragerevenues generated from investor clients include commissions based on apercentage of the value of the lease for project leasing services and the valueof the sale transaction for capital markets services. Fees for constructionmanagement services provided to investor clients are generally calculated as apercentage of project cost. Property management revenues are derived frommonthly management fees, generally based upon a specified percentage of themonthly rental income or rental receipts generated from the property undermanagement, or in certain cases, the greater of such percentage fee or aminimum agreed-upon fee. The Company may also be reimbursed for a portion ofits administrative and payroll costs, as well as certain out-of-pocketexpenses, directly attributable to the properties under management.

The Company’s Development and Investment revenuestreams consist primarily of payments related to real estate developmentprojects. Revenues from the Company’s development activities consist ofdevelopment and construction fees, which are typically based upon a negotiatedpercentage of a project’s budgeted development and investment cost, andincentive development fees for completing a development project under budget,within certain critical time deadlines and/or for achieving specified leasingtargets and value creation. Income from the Company’s investment activitiesprimarily consists of gains on disposition of real estate and income fromunconsolidated subsidiaries that hold real estate assets. Compensationarrangements, including incentives fees and promote structures, allow theCompany to participate in the investment returns on projects it develops forits investor clients. Dispositions of real estate in which the Company has nosignificant continuing involvement in the operations of the asset after itsdisposition are reported as discontinued operations in accordance with FAS 144.The Company’s Development and Investment revenue streams also include rentalrevenue earned by the Company’s consolidated operating real estate properties. TheCompany has limited control over the timing of the disposition of certain ofthese investments and the recognition of any related gain or loss. Because thedisposition or impairment of a single significant investment can impact theCompany’s financial performance in any period, these investment activitiescreate fluctuations in the Company’s revenues. Because the Company’s investmentstrategy often entails making relatively modest investments alongside itsinvestor clients, its ability to conduct these activities depends in part onthe supply of investment capital for commercial real estate and related assets.

The Company’s expenses typically consist of salaries,wages and benefits, commissions, general and administrative expenses,depreciation and amortization expense and interest. Salaries, wages andbenefits and commissions constitute a majority of the Company’s total costs andexpenses.

19

----

Over the last three years,an average of 67% of the Company’s net income was generated in the fourthquarter, due primarily to a demonstrated tendency of participants in thecommercial real estate industry to complete transactions toward year-end. Inaddition, certain of the Company’s outsourcing contracts provide for incentivepayments if the Company achieves certain performance targets, which aregenerally recognized in the fourth quarter. In contrast, the Company’s non-variableoperating expenses, which are treated as expenses when incurred during theyear, are relatively constant on a quarterly basis. See*“—Quarterly Results of Operations and Seasonality.”*

**Critical Accounting Policies**

Management of the Companyis required to make certain estimates and assumptions in connection with thepreparation of its consolidated financial statements in accordance with GAAP. Theseestimates and assumptions impact the reported amount of assets and liabilitiesand disclosures of contingent assets and liabilities as of the date of theconsolidated financial statements. They also impact the reported amount of netincome during any period. Actual results could differ from those estimates. Certainof the Company’s accounting policies and estimates have a more significantimpact on its financial statements than others, due to the magnitude of theunderlying financial statement elements.

*Consolidation*

The Company’s consolidatedfinancial statements include the accounts of the Company, variable interestentities (“VIEs”) in which the Company is the primary beneficiary and othersubsidiaries over which the Company has control.

*Variable Interest Entities*

The Company’s determination of the appropriateaccounting method with respect to its variable interests, includingco-investments with its clients, is based on Financial Accounting StandardsBoard (“FASB”) Interpretation No. 46 (revised December 2003), *Consolidation of Variable Interest Entities* (“FIN 46R”).The Company consolidates any VIE of which the Company is the primarybeneficiary and discloses significant variable interests in VIEs of which theCompany is not the primary beneficiary.

The Company determines if an entity is a VIE under FIN46R based on several factors, including whether the entity’s total equityinvestment at risk upon inception is sufficient to finance the entity’sactivities without additional subordinated financial support. The Company makesjudgments regarding the sufficiency of the equity at risk based first on aqualitative analysis, then a quantitative analysis if necessary. In aquantitative analysis, the Company incorporates various estimates, includingestimated future cash flows, asset hold periods and discount rates, as well asestimates of the probabilities of various scenarios occurring. If the entity isa VIE, the Company then determines whether it consolidates the entity as theprimary beneficiary. This determination of whether the Company is the primarybeneficiary includes any impact of an “upside economic interest” in the form ofa “promote” that the Company may have. A promote is an interest built into thedistribution structure of the entity based on the entity’s achievement ofcertain return hurdles.

The Company determineswhether an entity is a VIE and, if so, whether it should be consolidated byutilizing judgments and estimates that are inherently subjective. If theCompany made different judgments or utilized different estimates in theseevaluations, it could result in differing conclusions as to whether or not anentity is a VIE and whether or not to consolidate such entity.

*Limited Partnerships, Limited Liability Companiesand Other Subsidiaries*

The Company’s determination of the appropriateaccounting method with respect to its investments in limited partnerships,limited liability companies and other subsidiaries is based on control. For theCompany’s general partner interests, the Company is presumed to control (andtherefore consolidates) the entity, unless the other limited partners havesubstantive rights that overcome this presumption of control. 

20

----

These substantive rightsallow the limited partners to participate in significant decisions made in theordinary course of the entity’s business. The Company accounts for itsnon-controlling general partner investments in these entities under the equitymethod. This treatment also applies to the Company’s managing member interestsin limited liability companies.  See *New Accounting Pronouncements* below for additionaldiscussion of EITF Issue No. 04-5, *DeterminingWhether a General Partner, or the General Partners as a Group, Controls aLimited Partnership or Similar Entity When the Limited Partners Have CertainRights*(“EITF 04-5”) regarding the Company’s general partnerinterests.

The Company’s determination of the appropriateaccounting method for all other investments in subsidiaries is based on theamount of influence the Company has (including its ownership interest) in theunderlying entity. Those other investments where the Company has the ability toexercise significant influence (but not control) over operating and financialpolicies of such subsidiaries (including certain subsidiaries where the Companyhas less than 20% ownership) are accounted for using the equity method. Allremaining investments of the Company are accounted for using the cost method.

The Company’sdetermination of the appropriate accounting treatment for an investment in asubsidiary requires judgment of several factors, including the size and natureof the Company’s ownership interest and the other owners’ substantive rights tomake decisions for the entity. If the Company were to make different judgmentsor conclusions as to the level of its control or influence, it could result ina different accounting treatment. Accounting for an investment as eitherconsolidated or using the equity method generally would have no impact on theCompany’s net income or stockholders’ equity in any accounting period, but adifferent treatment would impact individual income statement and balance sheetitems, as consolidation would effectively “gross up” the Company’s incomestatement and balance sheet. If the Company’s evaluation of an investmentaccounted for using the cost method was different, it could result in theCompany being required to account for an investment by consolidation or by theequity method. Under the cost method, the investor only records its share ofthe underlying entity’s earnings to the extent that it receives dividends fromthe investee; when the dividends received by the investor exceed the investor’sshare of the investee’s earnings subsequent to the date of the investor’sinvestment, the investor records a reduction in the basis of its investment. Underthe cost method, the investor does not record its share of losses of the investee.Conversely, under either consolidation or equity method accounting, theinvestor effectively records its share of the underlying entity’s net income orloss, to the extent of its investment or its guarantees of the underlyingentity’s debt. At December 31, 2005, $2.2 million of the Company’s$175.4 million total investment in unconsolidated subsidiaries related toinvestments that are accounted for using the cost method. Accounting for aninvestment using either the equity or cost method has no impact on theevaluation of impairment of the underlying investment; under either method,impairment losses are recognized upon evidence of other-than-temporary lossesof value.

*Revenue Recognition*

The Companyrecognizes revenue in accordance with Staff Accounting Bulletin No. 104, *Revenue Recognition in Financial Statements*,which has four basic criteria that must be met before revenue is recognized:

·       existenceof persuasive evidence that an arrangement exists;

·       deliveryhas occurred or services have been rendered;

·       theseller’s price to the buyer is fixed and determinable; and

·       collectibilityis reasonably assured.

The Company’s various revenue recognition policies areconsistent with these criteria. The judgments involved in revenue recognitionare understanding the complex terms of the agreements and determining theappropriate time to recognize revenue for each transaction based on such terms.Each transaction is evaluated to determine: (1) at what point in timerevenues are earned, (2) whether there are contingencies 

21

----

involved that would impactthe timing of recognition of revenue, and (3) how and when suchcontingencies will be resolved. The actual timing of revenue recognition couldvary if different judgments were made. The revenues of the Company’s businessthat are subject to the most judgment are its brokerage commission revenues,incentive-based management and development fees and gains on dispositionof real estate (see *Real Estate*,below for additional discussion).

The Company’s brokerage commission revenues arecomprised of commissions earned for investment sales, project leasing andtenant representation transactions. Revenues from investment sales transactionsare recognized upon the closing of a sale and are generally paid to the Companyby the seller out of the sale proceeds; therefore, there is generally noestimation or judgment involved in the recognition of these revenues. Projectleasing and tenant representation commissions are generally recorded half uponexecution of a lease contract, and the remainder upon tenant occupancy. TheCompany performs thousands of project leasing and tenant representationtransactions annually, each of which is typically governed by a separatecommission agreement. While the majority of these agreements generally providethat half of the commission is earned upon execution of a lease contract andhalf upon tenant occupancy, agreements do vary as to their terms andcomplexity, usually due to negotiation of the commission agreement languagewith the client. The portion of commissions that is subject to contingencies isrecognized as revenue when such contingencies are resolved. The unique natureand complexity of each brokerage transaction require the Company to use varyinglevels of judgment in determining timing of revenue recognition.

The Company earnsincentive development and management fees from its development services andcertain services provided to user clients in the Company’s Global Servicessegment, including facilities management services, project management servicesand corporate advisory services. These fees are recognized when quantitativecriteria have been met (such as specified leasing or budget targets, clientservice levels, or achieved levels of operating expense savings) or, for thoseincentive fees based on qualitative criteria, upon approval of the fee by theclients. Certain incentive development fees allow the Company to share in thefair value of the developed real estate asset above cost. This sharing createsadditional revenue potential to the Company with no exposure to loss other thanopportunity cost. The Company’s incentive development and management feerevenues are not recognized to the extent that such revenues are subject tofuture performance contingencies, but rather once the contingency has beenresolved. The unique nature and complexity of each incentive fee require theCompany to use varying levels of judgment in determining timing of revenuerecognition.

*Real Estate*

As of December 31,2005, the value of the Company’s total real estate assets was $357.6 million(37.7% of total assets). The significant accounting policies and estimates withregard to the Company’s real estate assets relate to classification andimpairment evaluation, cost capitalization and allocation, dispositions of realestate and discontinued operations.

*Classification and Impairment Evaluation*

With respect to the Company’s real estate assets,FAS 144 establishes criteria to classify an asset as “held for sale.”  Assets included in real estate held for saleinclude only completed assets or land for sale in its present condition thatmeet all of the FAS 144 “held for sale” criteria. All other real estateassets are classified in one of the following line items in the Company’sbalance sheet: (i) real estate under development (current), which includesreal estate that the Company is in the process of developing that is expectedto be completed and disposed of within one year of the balance sheet date; (ii) realestate under development (non-current), which includes real estate that theCompany is in the process of developing that is expected to be completed anddisposed of more than one year from the balance sheet date; or (iii) realestate held for investment, which consists of completed assets not expected tobe disposed of within one year of the balance sheet date and land on whichdevelopment activities have not yet 

22

----

commenced. Any assetreclassified from real estate held for sale to real estate under development(current or non-current) or real estate held for investment is recordedindividually at the lower of its fair value at the date of the reclassificationor its carrying amount before it was classified as “held for sale,” adjusted(in the case of real estate held for investment) for any depreciation thatwould have been recognized had the asset been continuously classified as realestate held for investment.

Real estate held for sale is recorded at the lower ofcost or estimated fair value less cost to sell. If an asset’s fair value lesscost to sell, based on discounted future cash flows or market comparisons, isless than its carrying amount, an allowance is recorded against the asset. Determiningan asset’s fair value and the related allowance to record requires the Companyto utilize judgment and estimates.

Real estate under development and real estate held forinvestment are carried at cost less depreciation, as applicable. Whenindicators of impairment are present, real estate under development and realestate held for investment are evaluated for impairment and losses are recordedwhen undiscounted cash flows estimated to be generated by an asset are lessthan the asset’s carrying amount. The amount of the impairment loss iscalculated as the excess of the asset’s carrying value over its fair value, whichis determined using a discounted cash flow analysis or market comparisons. Thisdetermination of fair value and the amount, if any, of the impairment loss,requires the Company to utilize judgments and estimates. Buildings andimprovements included in real estate held for investment are depreciated usingthe straight-line method over estimated useful lives, generally 39 years. Tenantimprovements included in real estate held for investment are amortized usingthe straight-line method over the shorter of their estimated useful life or theterms of the respective leases.

The Company evaluates eachof its real estate assets on a quarterly basis in order to determine theclassification of each asset in the Company’s balance sheet. This evaluationrequires judgment by the Company in considering certain criteria that must beevaluated under FAS 144, such as the estimated time to complete assetsthat are under development and the timeframe in which the Company expects tosell its real estate assets. The classification of real estate assetsdetermines which real estate assets are to be depreciated as well as whatmethod is used to evaluate and measure impairment. Had the Company evaluatedits assets differently, the balance sheet classification of such assets, depreciationexpense and impairment losses could have been different.

*Cost Capitalization and Allocation*

When acquiring, developing and constructing realestate assets, the Company capitalizes costs in accordance with Statement ofFinancial Accounting Standards No. 67, *Accounting for Costs andthe Initial Rental Operations of Real Estate Properties*(“FAS 67”).Capitalization begins when the Company has determined that activities relatedto development have begun and ceases when activities are complete, which aretiming decisions that require judgment. Costs capitalized under FAS 67 includepursuit costs, or pre-acquisition/pre-construction costs, taxes and insurance,development and construction costs and costs of incidental operations. Pursuitcosts capitalized in connection with a potential development project that theCompany has determined based on its judgment not to pursue are written off inthe period that such determination is made. A difference in the timing of whenthis determination is made could cause the pursuit costs to be expensed in adifferent period.

The Company often purchases bulk land that it intendsto sell or develop in phases. The land basis allocated to each phase is basedon the relative estimated fair value of the phases before construction. TheCompany allocates construction costs incurred relating to more than one phasebetween the various phases; if the costs cannot be specifically identified to acertain phase or the improvements benefit more than one phase, the Companyallocates the costs between the phases based on their relative estimated salesvalues. Relative allocations of the costs are changed as the estimates arerevised. If the Company used different estimates in these cost allocations, theamount and timing of the related gain on disposition of real estate for theindividual parcels would differ.

23

----

When acquiring real estatewith existing buildings, the Company allocates the purchase price between land,building and intangibles related to in-place leases, if any, based on theirrelative fair values. The fair values of acquired land and buildings aredetermined based on an estimated discounted future cash flow model withlease-up assumptions as if the building was vacant upon acquisition. The fairvalue of in-place leases includes the value of net lease intangibles for aboveor below-market rents and tenant origination costs, determined on a lease bylease basis using assumptions for market rates, absorption periods, leasecommissions and tenant improvements. The capitalized values for both net leaseintangibles and tenant origination costs are amortized over the term of theunderlying leases. Amortization related to net lease intangibles is recorded aseither an increase to or a reduction of rental income and amortization for tenantorigination costs is recorded to amortization expense. If the Company useddifferent estimates in these valuations, the allocation of purchase price toeach component could differ, which could cause the amount of amortizationrelated to lease intangibles and tenant origination costs to be different, aswell as depreciation of the related building.

*Dispositions of Real Estate*

Gains on disposition ofreal estate are recognized upon sale of the underlying project in accordancewith Statement of Financial Accounting Standards No. 66, *Accounting for Sales of Real Estate*. TheCompany evaluates each real estate sale transaction to determine if itqualifies for gain recognition under the full accrual method. This evaluationrequires the Company to make judgments and estimates in assessing whether asale has been consummated, the adequacy of the buyer’s investment, thesubordination or collectibility of any receivable related to the purchase, andwhether the Company has transferred the usual risks and rewards of ownership tothe buyer, with no substantial continuing involvement by the Company. If thetransaction does not meet the criteria for the full accrual method of profitrecognition based on the Company’s assessment, the Company accounts for a salebased on an appropriate deferral method determined by the nature and extent ofthe buyer’s investment and the Company’s continuing involvement. In some cases,a deferral method could require the real estate asset and its relatedliabilities to remain on the Company’s balance sheet until the sale qualifiesfor a different deferral method or full accrual profit recognition.

*Discontinued Operations*

FAS 144 extends thereporting of a discontinued operation to a “component of an entity,” andfurther requires that a component be classified as a discontinued operation ifthe operations and cash flows of the component have been or will be eliminatedfrom the ongoing operations of the entity in the disposal transaction and theentity will not have any significant continuing involvement in the operationsof the component after the disposal transaction. As defined in FAS 144, a “componentof an entity” comprises operations and cash flows that can be clearlydistinguished, operationally and for financial reporting purposes, from therest of the entity. Because each of the Company’s real estate assets isgenerally accounted for in a discrete subsidiary, almost every real estateasset constitutes a component of an entity under FAS 144, increasing thelikelihood that the disposition of assets the Company holds for sale in theordinary course of business must be reported as a discontinued operation unlessthe Company has significant continuing involvement in the operations of theasset after its disposition. Furthermore, operating profits and losses on suchassets are required to be recognized and reported as operating profits andlosses on discontinued operations in the periods in which they occur. Theevaluation of whether the component’s cash flows have been eliminated and thelevel of the Company’s continuing involvement requires judgment by the Companyand a different assessment could result in items not being reported asdiscontinued operations. The Company has certain real estate assets that areland parcels and may constitute a component of an entity. From time to time,the Company disposes of these land parcels in smaller lots. An individual lotthat is part of a larger land parcel may constitute a component of an entitywithin the meaning of paragraph 41 of FAS 144 when it is either classified asheld for sale in accordance with FAS 144 or sold.

24

----

*Carrying Value ofGoodwill*

As of December 31, 2005, the Company’s totalgoodwill was $75.2 million (7.9% of total assets). Goodwill reflects theexcess of the purchase price over the fair value of the net assets of realestate service companies acquired by the Company primarily in 1998 and 1999.The Company accounts for its goodwill in accordance with Statement of FinancialAccounting Standards No. 142, *Goodwilland Other Intangible Assets* (“FAS 142”). This statementrequires the Company to evaluate the carrying value of goodwill based onassumptions and estimates of fair value and future cash flow information. Theseassumptions and estimates developed by the Company may differ from actualresults. If different assumptions and estimates were used, carrying valuescould be adversely impacted, resulting in writedowns that would adverselyaffect the Company’s earnings.

Under FAS 142, theCompany’s reporting units are the basis of its annual goodwill impairmenttests. The required impairment tests are based on a comparison of the fairvalue of each of the Company’s reporting units to the carrying value of suchunit. A writedown of goodwill must be recorded if the fair value of a reportingunit falls below its carrying value. The Company has identified its reportingunits to mirror its two segments, Global Services and Development andInvestment, as each segment’s underlying business units have similar long-termeconomic characteristics and service deliveries. If the Company defined itsreporting units differently, the results of its annual impairment tests couldbe impacted. The Company performed its required annual impairment tests ofgoodwill in 2005, and determined that no impairment of goodwill existed atDecember 31, 2005.

*Self-Insurance*

The Company is self-insured for portions of its healthand workers’ compensation benefits to employees and general and automotiveliability claims.

The Company self-insures (through a health and welfarebenefit trust) its health insurance benefits provided to substantially all ofits employees and has purchased stop-loss insurance to cover individual claimsin excess of $250,000. On a quarterly basis, the Company utilizes anindependent actuary to evaluate the estimate of incurred but not reportedclaims under the Company’s health insurance programs. Each quarter, the Companyadjusts its accrual to this estimate plus its share of unpaid reported claims. Theactuarial estimate of the Company’s exposure to health insurance claims issubjective, and the amount of claims actually incurred could differ, whichcould result in increased or decreased expense in future periods. As of December 31,2005, the Company’s liability relating to such claims (for both reported andestimated claims) was $2.1 million, included in accrued expenses on the Company’sconsolidated balance sheet.

The Company’s wholly-owned captive insurance company,which is subject to applicable insurance rules and regulations, insuresthe Company’s exposure related to workers’ compensation benefits provided toemployees and purchases excess coverage from an unrelated insurance carrier. TheCompany purchases general liability and automotive insurance through anunrelated insurance carrier. The captive insurance company reinsures thedeductibles. The captive insurance company also insures deductibles relating toother coverages. Given the nature of these types of claims, it may take severalyears for resolution and determination of the cost of these claims. The Companyis required to estimate the cost of these claims in its financial statements. Exposureto workers’ compensation, general liability and automotive claims is evaluatedon an annual basis during the Company’s fourth quarter by an independentactuary.

The Company adjusts itsannual expense based on this actuarial estimate, and utilizes this estimate asthe basis for the next year’s expense, until the actuary calculates the nextannual estimate. The estimates that the Company utilizes to record itspotential losses on claims are inherently subjective, and actual claims coulddiffer from amounts recorded, which could result in increased or decreasedexpense in future periods. As of December 31, 2005, the Company’s reservefor claims under these insurance programs was 

25

----

$15.1million, of which $4.3 million was included in other current liabilities andthe remainder is included in other liabilities on the Company’s consolidatedbalance sheet.

*New AccountingPronouncements*

On December 16, 2004, the FASB issued Statementof Financial Accounting Standards No. 123 (revised 2004), *Share-Based Payment* (“FAS 123R”), which is a revision ofStatement of Financial Accounting Standards No. 123, *Accounting for Stock-Based Compensation*(“FAS 123”). Generally, the approachin FAS 123R is similar to the approach described in FAS 123. However, FAS 123Rrequires all share-based payments to employees, including grants of employeestock options, to be recognized in the income statement based on their fairvalues. Pro forma disclosure is no longer an alternative.

FAS 123R will become effective for the Companybeginning January 1, 2006. FAS 123R permits public companies to adopt itsrequirements using one of two methods: a “modified-prospective” method or a “modified-retrospective”method. The Company plans to adopt FAS 123R using the modified-prospectivemethod under which it will record compensation expense for all share-basedawards granted after the effective date and for those unvested awards grantedprior to the effective date.

As permitted by FAS 123, the Company currentlyaccounts for share-based payments to employees using APB 25’s intrinsic valuemethod and, as such, generally recognizes no compensation cost for the fairvalue of employee stock options or for the difference between the employee’scost and the market value of stock purchased under the Company’s employee stockpurchase plan. Accordingly, the adoption of FAS 123R’s fair value methodcould have a significant impact on the Company’s results of operations,although it is not expected to impact the Company’s overall financial position.The total impact of adoption of FAS 123R cannot be predicted at this timebecause it will depend on levels of share-based payments granted in the future.However, the amount of additional expense the Company will recognize subsequentto adoption related to unvested stock options granted prior to adoption (net ofestimated forfeitures) is not material. FAS 123R will also require the Companyto estimate forfeitures of share-based payments upon grant. Prior to theadoption of FAS 123R, the Company’s policy has been to reverse expense relatedto forfeitures of restricted stock as they occur. In the first quarter of 2006,the Company will record additional income of approximately $1.0 million, net ofincome taxes, as a cumulative effect of a change in accounting principle. Thiscumulative effect represents a reversal of expense taken for those shares ofunvested restricted stock granted prior to adoption that the Company estimateswill be forfeited before vesting.

FAS 123R also requires the benefits of tax deductionsin excess of recognized compensation cost to be reported as a financing cashflow, rather than as an operating cash flow as required under currentliterature. This requirement will reduce net operating cash flows and increasenet financing cash flows in periods after adoption. While the Company cannotestimate what those amounts will be in the future (because they depend on,among other things, when employees exercise stock options), the amount ofoperating cash flows recognized in prior periods for such excess tax deductionsrelated to the exercise of stock options and vesting of restricted stock was$6.1 million in 2005 and not material in 2004 or 2003.

In June 2005, the FASB ratified the consensus inEITF 04-5, which states that the general partner in a limited partnershipis presumed to control that limited partnership. That presumption may beovercome if the limited partners have either (1) the substantive ability—eitherby a single limited partner or through a simple majority vote—to dissolve (liquidate)the limited partnership or otherwise remove the general partner without causeor (2) substantive participating rights. Substantive participating rightsprovide the limited partners with the ability to effectively participate insignificant decisions that would be expected to be made in the ordinary courseof the limited partnership’s business and thereby preclude the general partnerfrom exercising unilateral control over the partnership.

The effective date forapplying the guidance in EITF 04-5 to the Company’s general partnerinterests is June 29, 2005, for all new or amended limited partnershipsand January 1, 2006, for all other limited 

26

----

partnerships.The Company has applied EITF 04-5 for new or amended limited partnershipsafter June 29, 2005, in its December 31, 2005, financial statements. TheCompany is evaluating the impact of the new guidance on all other limitedpartnerships. The Company expects that the adoption for existing partnershipswill not have a material impact on the Company’s net income, earnings per shareor stockholders’ equity, but could require balance sheet consolidation orde-consolidation of certain of those existing partnerships.

**Resultsof Operations Year Ended December 31, 2005 Compared to Year Ended December 31,2004**

In accordance withFAS 144, certain revenues and expenses for the three quarterly periodsended March 31, June 30 and September 30, 2005, and the yearended December 31, 2004, have been reclassified to conform to thepresentation for the quarter ended December 31, 2005. As a result, certainbalances differ from the amounts reported in previously filed documents. See *Income from DiscontinuedOperations, Net of Income Taxes*, below, for additional information.

| ** **                                                                                                                            | ** ** | **For the Years  Ended  December 31,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                                                                                                            | ** ** | **2005**                                    | ** ** | **2004**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                                                                                                                            | ** ** | **(dollars in thousands)**                  | ** ** |
| **REVENUES:**                                                                                                                         |       |                                        |       |       |       |              |       |   |   |   |   |
| ***User  Services:***                                                                                                                 |       |                                        |       |       |       |              |       |   |   |   |   |
| Facilities management                                                                                                                 |       | $                                           | 237,659    |       | $          | 211,062           |       | $ | 26,597 |   |   | 12.6 | % |   |
| Corporate advisory  services                                                                                                          |       | 186,847                                     |       | 143,266    |       | 43,581            |       |   | 30.4 | % |   |
| Project management services                                                                                                           |       | 118,678                                     |       | 91,599     |       | 27,079            |       |   | 29.6 | % |   |
|                                                                                                                                  |       | 543,184                                     |       | 445,927    |       | 97,257            |       |   | 21.8 | % |   |
| ***Investor  Services:***                                                                                                             |       |                                        |       |       |       |              |       |   |   |   |   |
| Property management                                                                                                                   |       | 136,665                                     |       | 137,193    |       | (528              | )          |   | (0.4 | )% |   |
| Brokerage                                                                                                                             |       | 138,416                                     |       | 114,478    |       | 23,938            |       |   | 20.9 | % |   |
| Construction management                                                                                                               |       | 11,973                                      |       | 11,187     |       | 786               |       |   | 7.0 | % |   |
|                                                                                                                                  |       | 287,054                                     |       | 262,858    |       | 24,196            |       |   | 9.2 | % |   |
| Development and  construction                                                                                                         |       | 47,159                                      |       | 38,346     |       | 8,813             |       |   | 23.0 | % |   |
|                                                                                                                                  |       | 877,397                                     |       | 747,131    |       | 130,266           |       |   | 17.4 | % |   |
| Gain on disposition of  real estate                                                                                                   |       | 18,553                                      |       | 26,742     |       | (8,189            | )          |   | (30.6 | )% |   |
|                                                                                                                                  |       | 895,950                                     |       | 773,873    |       | 122,077           |       |   | 15.8 | % |   |
| **COST AND EXPENSES:**                                                                                                                |       |                                        |       |       |       |              |       |   |   |   |   |
| Salaries, wages and  benefits                                                                                                         |       | 553,552                                     |       | 493,404    |       | 60,148            |       |   | 12.2 | % |   |
| Commissions                                                                                                                           |       | 151,721                                     |       | 120,345    |       | 31,376            |       |   | 26.1 | % |   |
| General and  administrative                                                                                                           |       | 140,618                                     |       | 127,758    |       | 12,860            |       |   | 10.1 | % |   |
| Depreciation                                                                                                                          |       | 9,257                                       |       | 9,985      |       | (728              | )          |   | (7.3 | )% |   |
| Amortization                                                                                                                          |       | 738                                         |       | 1,359      |       | (621              | )          |   | (45.7 | )% |   |
| Interest                                                                                                                              |       | 5,441                                       |       | 4,195      |       | 1,246             |       |   | 29.7 | % |   |
|                                                                                                                                  |       | 861,327                                     |       | 757,046    |       | 104,281           |       |   | 13.8 | % |   |
| Operating income                                                                                                                      |       | 34,623                                      |       | 16,827     |       | 17,796            |       |   | 105.8 | % |   |
| Interest and other  income                                                                                                            |       | 2,835                                       |       | 2,797      |       | 38                |       |   | 1.4 | % |   |
| Income from continuing  operations before income taxes, minority interest and income from investments  in unconsolidated subsidiaries |       | 37,458                                      |       | 19,624     |       | 17,834            |       |   | 90.9 | % |   |
| Income tax expense                                                                                                                    |       | (13,856                                     | )          | (7,452     | )          | (6,404            | )          |   | (85.9 | )% |   |
| Minority interest, net  of income taxes                                                                                               |       | 2,528                                       |       | (3,006     | )          | 5,534             |       |   | 184.1 | % |   |
| Income from investments  in unconsolidated subsidiaries, net of income taxes                                                          |       | 15,154                                      |       | 10,971     |       | 4,183             |       |   | 38.1 | % |   |
| Income from continuing  operations                                                                                                    |       | 41,284                                      |       | 20,137     |       | 21,147            |       |   | 105.0 | % |   |
| Income from discontinued  operations, net of income taxes                                                                             |       | 18,123                                      |       | 18,982     |       | (859              | )          |   | (4.5 | )% |   |
| **Net income**                                                                                                                        |       | $                                           | 59,407     |       | $          | 39,119            |       | $ | 20,288 |   |   | 51.9 | % |   |

 

27

----

***SegmentPerformance.******  ***TheGlobal Services segment income before income taxes increased 79% from $38.3million in 2004 to $68.4 million in 2005. Revenues for this segment increased17%, from $710.8 million in 2004 to $831.7 million in 2005. Significantincreases in all of the user services revenues lines (facilities management up13%, corporate advisory services up 30%, and project management for usercustomers up 30%) contributed to the increase in income before income taxes, asdid the 21% increase in brokerage revenues from investor customers. The revenueincreases reflect the impact of the Company’s success winning new outsourcingbusiness—both through new contract awards and expansions with existingcustomers—and its continued efforts to grow its brokerage business.

Development and Investment segment income beforeincome taxes remained relatively flat, increasing 4% from $24.8 million in 2004to $25.9 million in 2005. Segment revenues plus income from unconsolidatedsubsidiaries plus income from discontinued operations (all before income taxes)were up 2% in total during 2005 as compared to 2004. As previously noted, FAS144 requires classification of certain real estate gains as “income fromdiscontinued operations” in those instances where the Company will have nosignificant continuing involvement with the real estate following the sale. Suchsales of real estate in part define the business of the Development andInvestment segment and they are expected to be a continuing source of segment(and Company) profitability. In addition, substantial indirect costs ofproducing this income from either source—such as local office salaries andbonuses that are driven by overall local office profitability—are included insegment expenses and not netted against income from unconsolidated subsidiariesor income from discontinued operations.

***Revenues.******  ***The increase in facilitiesmanagement revenue from 2004 was primarily the result of the addition ofseveral new customers. Additionally, the increase reflected the expansion of aclient relationship in the second quarter of 2004. Reimbursement of salaries,wages, benefits and out-of-pocket general and administrative costs, a componentof facilities management revenue, comprised the majority of the revenueincreases from 2004. The composition of facilities management revenue,including management fees and reimbursements, can vary significantly fromperiod to period based on the terms of the underlying management agreements ineffect each period.

Corporate advisory services revenue increased from2004, primarily due to increased commission revenues and incentive fees in 2005.This increase is in part the result of an increase in the number of tenantrepresentation brokers as the Company has focused on expanding its brokeragenetwork. In addition, transaction volumes have increased as clients continue toshow a willingness to make real estate commitments.

The increase in project management services revenuewas the result of the addition of new clients and the expansion of servicesprovided to existing clients (due to increases in clients’ portfolios, thescope of the Company’s services provided under certain outsourcing contractsand transaction volume).

The slight decrease in property management revenue wasthe result of decreased square footage under management in 2005 as compared to2004. The reduction in square footage primarily resulted from sales ofbuildings in the Company’s management portfolio to REITs or other investorsthat self-manage their properties or use other service providers. In addition,some square footage decreases resulted from clients taking services in-house orto other service providers. These decreases were partially offset by additionsto square footage from new business.

Brokerage revenue increased due to increases ininvestment sales commissions and, to a lesser extent, project leasingcommissions. Real estate remains a favored asset class among certain investorsas a result of improving leasing fundamentals and relatively low interest rates.As a result, investment sales activity and the resulting commission revenuehave increased.

The increase in construction management revenue from2004 resulted from a higher volume of construction projects as tenant leasingactivity increased and is consistent with the increase in brokerage revenue. Constructionmanagement revenue is generated from services including space planning andtenant finish coordination for investor clients in conjunction with propertymanagement and leasing assignments, and are directly related to tenants’ realestate demands.

28

----

Development and construction revenue increased from2004 due in part to an increase in development fees. Typically, the impact ofincreases and decreases in the Company’s development starts and investments isnot reflected in financial results until later periods. The Company experiencedan increase in development and construction revenue in 2005 as a consequence ofdevelopment starts and investments trending up in 2004, with 2004 starts morethan doubling those for 2003. In addition, development and construction revenueincreased due to an increase in rental revenue from acquisitions of operatingreal estate properties during the second half of 2004.

Through approximately 1990, the Company focused its commercialreal estate development business on office, industrial and retail projectsprimarily for investor clients. Since that time, the Company has expanded itsfocus to include other types of commercial development and development for userclients. National initiative teams source opportunities with both user andinvestor clients in healthcare, higher education, on-airport distribution andresidential/mixed-use development, and initiative personnel support localdevelopment teams in their development of the resulting projects. By expandingits focus to include development for user clients and in these initiatives,particularly those in the healthcare sector, the Company seeks to mitigate thecyclicality traditionally inherent in the commercial development business. TheCompany seeks to establish funds and programs with capital partners and tochannel increasing amounts of development and investment activity into thosefunds and programs.

The Company’s gain on disposition of real estatedecreased****in 2005 from 2004. During 2005, theCompany sold seven real estate projects for an aggregate net sales price of$41.7 million. The sales resulted in an aggregate gain on disposition of realestate of $18.6 million, including deferred gain of $0.7 million. In 2004, theCompany sold 17 real estate projects for an aggregate net sales price of $121.4million. The sales resulted in an aggregate gain on disposition of real estateof $26.7 million, including recognition of deferred gain of $0.4 millionrelating to dispositions in previous periods.

In addition, Development and Investment income isgenerated from investments in unconsolidated subsidiaries and from theoperation and/or disposition of real estate classified as “discontinuedoperations.”  The impact of Developmentand Investment project sales accounted for as income from the Company’sunconsolidated subsidiaries or as income from discontinued operations is aregular part of, and can contribute significantly to, Development andInvestment results in any given period. See *Income from Investments inUnconsolidated Subsidiaries, Net of Income Taxes*and *Income from Discontinued Operations Net of Income Taxes*below.

***Costs and Expenses.******  ***Salaries, wages and benefitsexpense includes all compensation paid to Company employees other thanbrokerage commissions. As such, it includes salaries, benefits and annualincentive bonuses for employees whose compensation is reimbursed by clients (“reimbursedemployees”); salaries, benefits and annual incentive bonuses for employeeswhose compensation is not so reimbursed (“unreimbursed employees”); long-termincentive compensation associated with restricted stock grants to certainemployees; and transaction-related incentive compensation other than brokeragecommissions, primarily paid in connection with development and investmenttransactions, including those transactions recorded as income from discontinuedoperations. Salaries, wages and benefits expense for both reimbursed andunreimbursed employees increased in 2005 from 2004. Salaries, wages andbenefits for reimbursed employees grew as the Company increased its facilitiesmanagement and project management headcount to service client expansions andnew clients. In addition, the Company’s annual incentive bonus expenseincreased due to the Company’s increased headcount and profitability in 2005.

The increase in commission expense for 2005 wasdirectly attributable to the increases in the Company’s corporate advisoryservices and brokerage revenue discussed above.

General and administrative expenses increased in 2005due in part to increased client-reimbursed out-of-pocket general andadministrative expenses due to growth in the Company’s facilities managementand project management service lines. In addition, the acquisition of severaloperating real estate properties in the second half of 2004 led to increasedreal estate operating expenses in 2005. These properties, which the Companyplans to redevelop, lease and sell, include acquisitions made through theCompany’s fifth discretionary development and investment fund (“Fund V”). TheCompany’s insurance expense also increased as a result of higher premium ratesbeing charged by the insurance industry.

29

----

Depreciation and amortization expenses decreased in2005 from the prior year. The Company has replaced many of its computer assetsat a lower cost than the assets that were retired, which has reduced theCompany’s depreciation expense. In addition, several intangible asset balancesrelated to acquired management contracts became fully amortized during 2004,which resulted in a decrease in amortization expense in 2005 as compared to2004.

The increase in interest expense in 2005 is primarilythe result of higher average outstanding balances and higher interest ratesrelated to the Company’s revolving line of credit as compared to 2004. In 2005,the Company drew amounts under its revolving line of credit to fund the Company’sacquisition of an increased ownership interest in Savills.

***Minority Interest,Net of Income Taxes.******  ***Minorityinterest fluctuated from an expense in 2004 to income in 2005. This changeprimarily relates to operating losses incurred by Fund V, which are shared withoutside partners. Fund V has acquired several operating real estate propertiessince the first half of 2004 that, as expected, generated operating losses inthe current period. The Company plans to redevelop, lease and sell theseproperties. In addition, a portion of the 2005 income relates to the minorityinterest owners’ share of fees earned by the Company related to certain realestate projects.

***Income fromInvestments in Unconsolidated Subsidiaries, Net of Income Taxes.******  ***In the ordinary course ofbusiness, a significant portion of the Company’s development and investmentactivities are conducted, and are expected to be conducted in future periods,through unconsolidated subsidiaries. The Company also has certain investmentsin unconsolidated subsidiaries which are not related to its development andinvestment activities. Income from investments in unconsolidated subsidiariesfluctuates from period to period based on the volume and profitability oftransactions carried out by the underlying unconsolidated subsidiaries. Theoverall increase in 2005 was primarily the result of increased income from theCompany’s investment in Savills, due to the purchase of additional shares ofSavills in 2005, which increased the Company’s ownership interest fromapproximately 10% to approximately 19.6% of the outstanding stock of Savills. In2005, income from the Company’s investment in Savills was partially offset byamortization of the portion of the Savills purchase price allocated to certainintangibles.

***Income fromDiscontinued Operations, Net of Income Taxes.******  ***Income from discontinuedoperations consisted of the operations of real estate properties and gain ondisposition of real estate properties held for sale or sold, that wereconsidered components of an entity under FAS 144 and in which the Company hadnot retained or did not expect to retain significant continuing involvement. Dispositionsof real estate assets have been and continue to be a significant part of theCompany’s activities and, as a result of applying the provisions of FAS 144,the Company expects a significant amount of these activities to be classifiedas discontinued operations in future periods. Because gains on sale of realestate projects accounted for as income from discontinued operations give riseto significant incentive compensation expense on account of local office andoverall Company profitability (which was separately accounted for as salaries,wages and benefits), the portion of the Company’s net income attributable tosales was significantly less than the amount shown as income from discontinuedoperations.

During 2005, the Company sold 22 real estate projectsthat were considered discontinued operations for an aggregate net sales priceof $120.3 million. The sales resulted in an aggregate gain on disposition ofreal estate (before income taxes) of $31.5 million. In 2004, the Company soldfive real estate projects that were considered discontinued operations for anaggregate net sales price of $83.9 million. The sales resulted in an aggregategain on disposition of real estate (before income taxes) of $42.5 million(including interest forgiveness of $0.3 million, and minority interest expenseof $10.8 million).

30

----

**Year Ended December 31, 2004 Compared to YearEnded December 31, 2003**

In accordance with FAS 144, certain revenues andexpenses for the years ended December 31, 2004 and 2003, have beenreclassified to conform to the presentation for the year ended December 31,2005. As a result, certain balances differ from the amounts reported inpreviously filed documents. See *Income from Discontinued Operations, Net of Income Taxes*,below, for additional information.

| ** **                                                                                                                            | ** ** | **For the Years Ended  December 31,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                                                                                                            | ** ** | **2004**                                                  | ** ** | **2003**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                                                                                                                            | ** ** | **(dollars in thousands)**                      | ** ** |
| **REVENUES:**                                                                                                                         |       |                                                      |       |       |       |              |       |   |   |   |   |
| ***User  Services:***                                                                                                                 |       |                                                      |       |       |       |              |       |   |   |   |   |
| Facilities  management                                                                                                                |       | $                                                         | 211,062    |       | $          | 208,936           |       | $ | 2,126 |   |   | 1.0 | % |   |
| Corporate  advisory services                                                                                                          |       | 143,266                                                   |       | 123,335    |       | 19,931            |       |   | 16.2 | % |   |
| Project  management services                                                                                                          |       | 91,599                                                    |       | 65,500     |       | 26,099            |       |   | 39.8 | % |   |
|                                                                                                                                  |       | 445,927                                                   |       | 397,771    |       | 48,156            |       |   | 12.1 | % |   |
| ***Investor  Services:***                                                                                                             |       |                                                      |       |       |       |              |       |   |   |   |   |
| Property management                                                                                                                   |       | 137,193                                                   |       | 143,727    |       | (6,534            | )          |   | (4.5 | )% |   |
| Brokerage                                                                                                                             |       | 114,478                                                   |       | 95,593     |       | 18,885            |       |   | 19.8 | % |   |
| Construction  management                                                                                                              |       | 11,187                                                    |       | 10,736     |       | 451               |       |   | 4.2 | % |   |
|                                                                                                                                  |       | 262,858                                                   |       | 250,056    |       | 12,802            |       |   | 5.1 | % |   |
| Development and  construction                                                                                                         |       | 38,346                                                    |       | 43,203     |       | (4,857            | )          |   | (11.2 | )% |   |
|                                                                                                                                  |       | 747,131                                                   |       | 691,030    |       | 56,101            |       |   | 8.1 | % |   |
| Gain on  disposition of real estate                                                                                                   |       | 26,742                                                    |       | 13,199     |       | 13,543            |       |   | 102.6 | % |   |
|                                                                                                                                  |       | 773,873                                                   |       | 704,229    |       | 69,644            |       |   | 9.9 | % |   |
| **COST  AND EXPENSES:**                                                                                                               |       |                                                      |       |       |       |              |       |   |   |   |   |
| Salaries, wages  and benefits                                                                                                         |       | 493,404                                                   |       | 452,195    |       | 41,209            |       |   | 9.1 | % |   |
| Commissions                                                                                                                           |       | 120,345                                                   |       | 98,957     |       | 21,388            |       |   | 21.6 | % |   |
| General and  administrative                                                                                                           |       | 127,758                                                   |       | 116,434    |       | 11,324            |       |   | 9.7 | % |   |
| Depreciation                                                                                                                          |       | 9,985                                                     |       | 14,704     |       | (4,719            | )          |   | (32.1 | )% |   |
| Amortization                                                                                                                          |       | 1,359                                                     |       | 1,856      |       | (497              | )          |   | (26.8 | )% |   |
| Interest                                                                                                                              |       | 4,195                                                     |       | 5,953      |       | (1,758            | )          |   | (29.5 | )% |   |
|                                                                                                                                  |       | 757,046                                                   |       | 690,099    |       | 66,947            |       |   | 9.7 | % |   |
| Operating income                                                                                                                      |       | 16,827                                                    |       | 14,130     |       | 2,697             |       |   | 19.1 | % |   |
| Interest and  other income                                                                                                            |       | 2,797                                                     |       | 2,236      |       | 561               |       |   | 25.1 | % |   |
| Income from  continuing operations before income taxes, minority interest and income from  investments in unconsolidated subsidiaries |       | 19,624                                                    |       | 16,366     |       | 3,258             |       |   | 19.9 | % |   |
| Income tax  expense                                                                                                                   |       | (7,452                                                    | )          | (6,636     | )          | (816              | )          |   | (12.3 | )% |   |
| Minority  interest, net of income taxes                                                                                               |       | (3,006                                                    | )          | 1,231      |       | (4,237            | )          |   | (344.2 | )% |   |
| Income from  investments in unconsolidated subsidiaries, net of income taxes                                                          |       | 10,971                                                    |       | 9,839      |       | 1,132             |       |   | 11.5 | % |   |
| Income from  continuing operations                                                                                                    |       | 20,137                                                    |       | 20,800     |       | (663              | )          |   | (3.2 | )% |   |
| Income from  discontinued operations, net of income taxes                                                                        |       | 18,982                                                    |       | 240        |       | 18,742            |       |   | 7,809.2 | % |   |
| **Net income**                                                                                                                        |       | $                                                         | 39,119     |       | $          | 21,040            |       | $ | 18,079 |   |   | 85.9 | % |   |

 

***Segment Performance.******  ***The Global Services segmentincome before income taxes increased 41% from $27.2 million in 2003 to $38.3million in 2004. Revenues for this segment increased 9%, from $649.6 millionin 2003 to $710.8 million in 2004. Significant increases in two of the userservices revenue lines (corporate advisory services up 16% and projectmanagement for user customers up 40%) 

31

----

contributed to theincrease in income before income taxes, as did the 20% increase in brokeragerevenues from investor customers. The revenue increases reflect the impact ofthe Company’s progress in growing its brokerage force and its strengtheningcapability in the area of outsourcing sales.

Development and Investment segment income beforeincome taxes more than tripled in 2004, increasing from $8.2 million in 2003 to$24.8 million in 2004. Segment revenues plus income from unconsolidatedsubsidiaries plus income from discontinued operations (all before income taxes)were up 53% in 2004 as compared to 2003.

***Revenues.******  ***Facilities management revenueincreased slightly from 2003. This increase primarily resulted from anexpansion of a client relationship in the second quarter of 2004. The overallincrease was offset by the termination of certain client relationships as partof the Company’s wind-down of its centralized call center operations. Reimbursementof salaries, wages, benefits, and out-of-pocket general and administrativecosts, a component of facilities management revenue, increased$7.3 million in 2004, compared to 2003.

Corporate advisory services revenue increased from2003, primarily increased commission revenues in 2004. The increase was theresult of growth in the number of tenant representation brokers as part of theCompany’s focus on expanding its brokerage network. In addition, transactionvolumes had increased, reflecting clients’ willingness to make real estatecommitments.

The increase in project management services revenuewas mainly the result of the expansion of services provided to existing clients(due to increases in clients’ portfolios, the scope of the Company’s servicesprovided under certain outsourcing contracts and transaction volume). Also, theCompany has added new clients.

The decrease in property management revenue waspartially the result of decreased square footage under management in 2004 ascompared to 2003. The reduction in square footage primarily resulted from salesof buildings in the Company’s management portfolio to REITs or other investorsthat self-manage their properties or use other service providers. In addition,some square footage decreases resulted from clients taking services in-house orto other service providers. These decreases were partially offset by additionsto square footage from new business.

The increase in brokerage revenue was driven by alarge increase in investment sales commissions, while project leasingcommissions increased slightly. Favorable capital markets fundamentals,including low interest rates, led to increased investment sales transactionvolumes, which contributed to the improvement in investment sales commissions. Theaddition of investment sales brokers, resulting from the Company’s focus onexpansion of its brokerage network, also contributed to the increase in suchcommissions.

Construction management revenue remained relativelyflat in 2004 as compared to 2003, although the Company did experience anincrease in new projects in the second half of 2004. Construction managementrevenue is generated from services including space planning and tenant finish coordinationfor investor clients in conjunction with property management and leasingassignments, and are directly related to tenants’ real estate demands.

Development and construction revenue decreased in 2004primarily due to a decrease in incentive development fees, which was largelydue to the timing of significant transactions in 2004 as compared to 2003. Inaddition, the decrease in 2004 is due to a reduction in the Company’sdevelopment starts and investments (including property acquisitions) in recentyears. Typically, the impact of increases and decreases in the Company’sdevelopment starts and investments is not reflected in financial results untillater periods, and the Company has experienced a reduction in its 2004development and construction revenue as a consequence of reduced 2002 and 2003development starts and investments. However, development starts and investmentsbegan trending up in 2004 with 2004 starts more than doubling those for 2003.

The Company’s gain on disposition of real estatedecreased slightly in 2004 from 2003. During 2004, the Company sold 17 realestate projects for an aggregate net sales price of $121.4 million. The salesresulted in an aggregate gain on disposition of $26.7 million, includingrecognition of deferred gain of $0.4 million related to dispositions inprevious periods. In 2003, the Company sold 19 real estate projects 

32

----

for an aggregate net salesprice of $67.1 million. The sales resulted in an aggregate gain on dispositionof $13.2 million, including recognition of deferred gain of $0.3 millionrelated to dispositions in a previous period.

***Costs and Expenses.******  ***The increase in salaries,wages, and benefits expense in 2004 was primarily due to growth in salaries,wages and benefits for reimbursed employees as the Company increased itsproject management headcount to service client expansions and the addition ofnew clients. In addition, the Company’s annual incentive bonus expense andtransaction-related incentive compensation expense increased due to the Company’sincreased profitability in 2004.

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 in 2004primarily due to increased client-reimbursed out-of-pocket general andadministrative expenses, largely driven by the growth in the Company’s projectmanagement service line.

Depreciation and amortization expenses decreased in2004 from the prior year. The Company has replaced many of its computer assetsat a lower cost than the assets that were retired, which has reduced theCompany’s depreciation expense. In addition, several intangible asset balancesrelated to acquired management contracts became fully amortized during 2004,which created a decrease in amortization expense as compared to 2003.

The decrease in interest expense is due in part to theexpiration of the Company’s interest rate swap agreement at the end of thefirst quarter of 2003 for which the Company recorded $0.6 million of interestexpense in 2003. The Company also had lower average outstanding balances on itsrevolving line of credit and capital leases during 2004 as compared to 2003.

***Minority Interest,Net of Income Taxes.******  ***Minorityinterest fluctuated from income in 2003 to an expense in 2004. This change 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 fromInvestments in Unconsolidated Subsidiaries, Net of Income Taxes.******  ***Income from investments inunconsolidated subsidiaries fluctuates from period to period based on thevolume and profitability of transactions carried out by the underlyingunconsolidated subsidiaries. The overall increase in 2004 was primarily theresult of significant income from an unconsolidated subsidiary that sold itsbuilding portfolio in the first quarter of 2004 and increased income from theCompany’s investment in Savills due to Savills’ improved operating results.

***Income fromDiscontinued Operations, Net of Income Taxes.******  ***During 2004, the Company soldfive real estate projects that were considered discontinued operations for anaggregate net sales price of $83.9 million. The sales resulted in anaggregate gain on disposition of real estate (before income taxes) of $42.5 million(including interest forgiveness of $0.3 million), and minority interest expenseof $10.8 million. In 2003, the Company sold four real estate projects that wereconsidered discontinued operations for an aggregate sales price of $25.1million. The sales resulted in an aggregate gain on disposition of $5.6 million.Income from discontinued operations for 2003 included a provision for loss of$1.4 million to reflect a real estate held for sale asset at fair value lesscost to sell. Income from discontinued operations for 2003 also included $2.1million of impairment on real estate. Both of these real estate assets weresold in 2004.

***Net Income.******  ***Net income increased due tothe fluctuations in revenues and expenses described above, in addition to adecrease in the Company’s effective tax rate driven by favorable results fromstate tax planning.

33

----

**QuarterlyResults of Operations and Seasonality**

Thefollowing table presents unaudited quarterly results of operations data for theCompany for each of the eight quarters in 2005 and 2004. This quarterlyinformation is unaudited but, in the opinion of management, reflects alladjustments (consisting only of normal recurring adjustments) necessary for afair presentation of the information for the periods presented. The results ofoperations for any quarter are not necessarily indicative of results for any futureperiod. Revenues and net income during the fourth fiscal quarter historicallyhave been greater than in each of the first three fiscal quarters, primarilybecause the Company’s 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 and otherfactors may also cause quarterly fluctuations in the Company’s results ofoperations.

| ** **                                                          | ** ** | **Quarter Ended**  | ** ** |
|---------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                          | ** ** | **March 31**       | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| ** **                                                          | ** ** | **(in thousands)** | ** ** |
| **2005:**                                                           |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Total revenues                                                      |       | $                       | 178,621    |   | $ | 211,989 |   |   | $ | 226,729 |   |   |   | $ | 278,611 |   |   |
| Income (loss)  from discontinued operations, net of income taxes(1) |       | (325                    | )          | 680 |   |   | 12,181 |   |   |   | 5,587 |   |   |
| Net income                                                          |       | 2,053                   |       | 8,264 |   |   | 14,517 |   |   |   | 34,573 |   |   |
| **2004:**                                                           |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Total revenues                                                      |       | $                       | 158,099    |   | $ | 181,933 |   |   | $ | 188,498 |   |   |   | $ | 245,343 |   |   |
| Income (loss)  from discontinued operations, net of income taxes(1) |       | 397                     |       | (18 | ) |   | (73 | ) |   |   | 18,676 |   |   |
| Net income                                                          |       | 2,099                   |       | 3,214 |   |   | 5,854 |   |   |   | 27,952 |   |   |

----

(1)                Discontinuedoperations include the operations of real estate properties and gain ondisposition of real estate properties held for sale or sold in which theCompany retained or expects to retain no continuing involvement, in accordancewith FAS 144.

**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 used in operating activities totaled $3.0million in 2005, compared to cash provided of $94.4 million in 2004. Cashprovided by operating activities, excluding the change in real estate andrelated borrowings, totaled $33.6 million in 2005 as compared to $95.7 millionin 2004. This decrease in cash provided by operating activities is partiallydue to higher outstanding accounts receivable balances in 2005, consistent withthe overall growth in the Company’s revenues from 2004 to 2005. In addition,the Company collected a large receivable from an affiliate in 2004 that wasoutstanding at year-end 2003, as compared to no such large receipts in 2005. TheCompany also made greater incentive compensation and income tax payments during2005 on account of 2004 activity, as compared to such payments made during 2004.Cash used in real estate activities, net of related borrowings, was $36.6million in 2005, compared to $1.3 million in 2004 as a result of increasedreal estate investment activity in 2005.

34

----

Net cash used in investing activities totaled $114.8million in 2005, compared to $37.1 million in 2004. This increase in cash usedis primarily due to investments in unconsolidated subsidiaries, net ofdistributions, of $86.0 million in 2005 as compared to distributions from theCompany’s unconsolidated subsidiaries, net of contributions, of $7.1 million in2004. The increase in investments is attributable to the Company’s purchase ofadditional shares of Savills in 2005. The Company’s wholly-owned captiveinsurance company also made purchases, net of sales proceeds and maturities, of$18.4 million in marketable securities in 2005, as compared to no suchpurchases in 2004. This increase in cash used was offset by a decrease inexpenditures related to real estate classified as “held for investment,” whichwere $39.5 million in 2005, as compared to $105.8 million in 2004. Theseexpenditures were offset by $38.9 million of proceeds from thedispositions of real estate projects classified as “held for investment” at thetime of disposition in accordance with FAS 144, as compared to $67.3 million ofsuch proceeds in 2004.

Net cash provided by financing activities totaled$31.1 million in 2005 as compared to $0.7 million in 2004. The increase in cashprovided in 2005 is due, in part, to borrowings, net of principal debtpayments, under the Company’s line of credit of $36.3 million, compared toprincipal debt payments, net of borrowings, of $13.4 million in 2004. TheCompany used these 2005 borrowings to fund its purchase of additional shares ofSavills. In addition, the Company received proceeds from the exercise ofemployee stock options of $8.2 million in 2005, as compared to $1.7 million in2004. Another factor contributing to the increase in cash provided was that theCompany used less cash in 2005 to repurchase common stock, or $20.1 million in2005 as compared to $37.9 million in 2004. This increase in cash provided wasoffset by a decrease in proceeds from borrowings, net of payments, on notespayable related to real estate held for investment, which were $12.5****million in 2005 as compared to $47.2 million in 2004. Inaddition, the Company made distributions, net of contributions, to minorityinterest holders of $9.1 million in 2005, compared to contributions received,net of distributions, of $0.2 million in 2004.

In June 2005, the Company obtained a$175.0 million revolving line of credit (the “Credit Facility”) arrangedby Bank of America, N.A., as the administrative agent, which replaced theCompany’s previous $150.0 million revolving line of credit. Borrowingsunder the Credit Facility are due in June 2008 and are either Base RateLoans or Eurodollar Rate Loans. Base Rate Loans bear interest at a base rateplus a margin up to 0.25% depending on the Company’s leverage ratio. The baserate is the higher of the prime lending rate or an average federal funds rateplus 0.5%. Eurodollar Rate Loans bear interest at the Eurodollar rate plus amargin, which ranges from 1.75% to 2.0%, depending upon the Company’s leverageratio. The Eurodollar rate is based on the British Bankers Association LIBORrate. The Credit Facility contains various covenants such as the maintenance ofminimum net worth, 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. Inaddition, the Company may not pay dividends, repurchase common shares, or makeother distributions on account of its common stock exceeding 50% of theprevious year’s net income before depreciation and amortization, plus, for theyear ended December 31, 2005 only, an amount equal to $20.0 million. TheCredit Facility is guaranteed by certain significant subsidiaries of theCompany and is secured by a pledge of stock of such significant subsidiariesand a pledge of certain intercompany indebtedness.

The Company’s participation in derivative transactionshas been limited to risk management purposes, and derivative instruments arenot held for trading purposes. If a certain interest coverage ratio is notmaintained, as defined in the agreement, the Credit Facility requires theCompany to enter into one or more interest rate agreements for the Company’sfloating rate indebtedness in excess of $30.0 million (other thanconstruction loans under which interest is capitalized in accordance with GAAP)ensuring the net interest on such excess is fixed, capped or hedged.

The Company also has a $25.0 million short-termrevolving line of credit (the “Swing Line”) with Bank of America, N.A. Eachloan obtained by the Company under the Swing Line matures in five business 

35

----

days, but no later than June 28,2008, and bears interest at a 30-day LIBOR-based rate (plus an applicablemargin as defined per the agreement). Borrowings under the Swing Line areunsecured and reduce borrowing capacity under the Credit Facility.

At December 31, 2005, the Company had outstandingborrowings of $35.0 million under the Credit Facility. The covenants containedin 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$175.0 million commitment. The Company’s unused borrowing capacity (takinginto account borrowings and letters of credit outstanding) under the CreditFacility was $133.9 million at December 31, 2005. Since many of thefinancial covenants in the Credit Facility are dependent on the Company’s “EBITDA,”as defined in the Credit Facility agreement and calculated on a trailingfour-quarter basis, a decline in the Company’s overall operations couldadversely impact the Company’s ability to comply with these financial covenantsand, in turn, the Company’s borrowing capacity.

At December 31, 2005, the Company was incompliance with all covenants of the Credit Facility. The Company expects tocontinue to borrow under the Credit Facility to finance future strategicacquisitions and investments, fund its co-investment activities and provide theCompany with an additional source of working capital.

In December 2005, 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 $25.7 million at December 31, 2005, and theCompany will receive payments if the LIBOR-based interest rate exceeds 5.5%. Theinterest rate cap agreement has not been designated as an effective hedge, andtherefore the interest rate cap agreement was marked to market each period withthe change in fair market value recognized in current period earnings. Theinterest rate cap agreement expires on January 2, 2008. Through December 31,2005, amounts recorded by the Company related to this interest rate cap agreementwere not material.

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

In February 2006, the Company announced that itsBoard of Directors has authorized the purchase of up to $50.0 million of itscommon stock from time to time in open market purchases or in privatelynegotiated transactions. The Company also amended its Credit Facility to allowfor additional repurchases or other distributions on account of its commonstock in an amount up to $100.0 million from the date of the repurchaseannouncement through December 31, 2006 and to reduce the minimum requirednet worth covenant. The repurchase of shares is intended to be accretive tofuture earnings per share for holders who retain their shares. The Company’sintent with respect to its stock repurchase programs is to reserve therepurchased shares for issuance in connection with the Company’s equity-basedincentive plans, as well as for other corporate purposes.

36

----

In March 2005, the Company announced that itsBoard of Directors authorized the purchase of up to $20.0 million of its commonstock from time to time in open market purchases or in privately negotiatedtransactions. In April 2005, the Company completed its $20.0 million sharerepurchase program. A total of 970,142 shares were repurchased, at an averageprice of $20.61 per share, all through open market purchases. The purchaseswere financed from the Company’s available cash, and the Company placed therepurchased shares in treasury.

In September 2004,the Company commenced a Modified Dutch Auction tender offer whereby it offeredto purchase up to 4,444,444 shares of its common stock. Under the terms of thetender offer, the Company invited stockholders to tender their shares at apurchase price not in excess of $15.75, nor less than $13.50 per share. Thetender offer was completed in October 2004, and as a result, the Companypurchased 2,354,437 shares of common stock priced at $15.75 per share for atotal of $37.9 million, including the costs of the tender offer. Thetransaction was financed from the Company’s available cash, and the Companyplaced the repurchased shares in treasury.

**Off-balanceSheet Arrangements and Contractual Obligations**

The Company has off-balance sheet arrangementsconsisting of certain debt repayment guarantees that have been provided by theCompany as security for the obligations of others (primarily unconsolidatedsubsidiaries of the Company) in the normal course of the Company’s real estatedevelopment business. The Company has not made any material payments under sucharrangements in the years ended December 31, 2003, 2004 or 2005. As of December 31,2005, the Company had guaranteed a maximum of $7.1 million of such notespayable, all of which was outstanding as of December 31, 2005. Paymentsrequired under these arrangements, if any, could be indicative of impairment inthe Company’s investments in the underlying unconsolidated subsidiaries andtherefore could result in additional expense to the Company.

TheCompany had various contractual obligations at December 31, 2005, assummarized below (in millions), that could impact its liquidity: 

| ** **                                     | ** ** | **Payments due by Period** | ** ** |
|------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                     | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1-3  years** | ** ** | **3-5  years** | ** ** | **After  5 years** | ** ** |
| Long-term debt  obligations                    |       | $                                         | 36.3       |   |   | $ | 1.3 |   |   | $ | 35.0 |   | $ | — |   |   | $ | — |   |   |
| Operating lease  obligations                   |       | 67.5                                      |       |   | 20.0 |   |   | 26.8 |   | 14.1 |   |   | 6.6 |   |   |
| Notes payable on real  estate (recourse)(1)(2) |       | 18.6                                      |       |   | 8.1 |   |   | 10.5 |   | — |   |   | — |   |   |
| Notes payable on real  estate (nonrecourse)(1) |       | 237.6                                     |       |   | 24.3 |   |   | 213.3 |   | — |   |   | — |   |   |
| Other long-term  obligations(3)                |       | 10.8                                      |       |   | — |   |   | 10.8 |   | — |   |   | — |   |   |
| **Total Contractual Obligations**              |       | $                                         | 370.8      |   |   | $ | 53.7 |   |   | $ | 296.4 |   | $ | 14.1 |   |   | $ | 6.6 |   |   |

----

(1)                Includes notesrelated to the Company’s various real estate projects and excludes futureinterest. The notes (primarily construction loans) have either fixed orvariable interest rates, ranging from 6% to 12% at December 31, 2005. Ingeneral, interest is drawn on the underlying construction loan and subsequentlypaid with principal with proceeds upon sale of the real estate project.

(2)                With respect to aproject to which $3.3 million of these obligations relate, the Company has anagreement with an investor client to purchase the project upon completion, theproceeds of which will be used to repay the related note payable.

(3)                These obligations,as well as $4.3 million recorded in other current liabilities, arecollateralized by outstanding letters of credit totaling $12.6 million.

37

----

**Effects of Inflation**

The Company does notbelieve that inflation has had a significant impact on its results of operationsin recent years. However, there can be no assurance that the Company’s businesswill not be affected by inflation in the future.

**Forward-Looking Statements**

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

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

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

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

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

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

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

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

·       thetiming of individual transactions,

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

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

In addition, the Company’s ability to achieve certainanticipated results will be subject to other factors affecting the Company’sbusiness that are beyond the Company’s control, including but not limited togeneral economic conditions (including interest rates, the cost andavailability of capital for investment in real estate, clients’ willingness tomake real estate commitments and other factors impacting the value of realestate assets), the effect of government regulation on the conduct of theCompany’s business and the threat of terrorism and acts of war. Given theseuncertainties, readers are cautioned not to place undue reliance on suchforward-looking statements. The Company disclaims any obligation to update anysuch statements or publicly announce any updates or revisions to any of theforward-looking statements contained herein to reflect any change in theCompany’s expectation with regard thereto or any change in events, conditions,circumstances or assumptions underlying such statements.

38

----

**ITEM 7A.**        QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s primary market risk exposure is tochanges in interest rates. The Company is exposed to market risk related to itsCredit Facility and loans secured by real estate properties as discussed in *“Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Liquidity and Capital Resources”* and in Notes 8 and 9 to the Company’sCondensed Consolidated Financial Statements. The Credit Facility and themajority of the loans secured by real estate bear interest at variable ratesand are subject to fluctuations in the market. In 2005, the Company borrowed$35.0 million, net of principal debt payments, under the Credit Facility,primarily to fund the Company’s acquisition of an additional ownership stake inSavills. This borrowing could further expose the Company to fluctuations ininterest rates. From time to time, the Company purchases interest rateagreements to hedge, cap or lock a portion, but not all, of its exposure tofluctuations in interest rates, and, as such, the effects of interest ratechanges may be limited.

If an increase or decrease in market interest rates of100 basis points were to have occurred at December 31, 2005, the Company’stotal estimated interest costs for 2006 would increase or decrease byapproximately $2.9 million. The Company’s sensitivity analysis is based onborrowings outstanding as of December 31, 2005 and includes the effects ofthe Company’s various interest rate cap agreements, as applicable. If themarket interest rates for variable rate debt had been 100 basis points higheror lower in 2005, the Company’s total interest costs would have increased byapproximately $2.1 million or decreased by approximately $2.2 million,accordingly, after considering the effect of the interest rate agreements ineffect during 2005. Interest costs include both interest that is expensed andinterest that is capitalized as part of the cost of real estate. A portion ofthe interest relating to the Company’s real estate debt ($256.2 million atDecember 31, 2005) is capitalized. This analysis does not consider theeffects of the reduced level of overall economic activity that could exist in ahigher interest rate environment.

The Company’s earnings aresomewhat affected by fluctuations in the value of the U.S. dollar as comparedto foreign currencies as a result of the operations of the Company and itsconsolidated and unconsolidated subsidiaries in Canada, Europe, Asia-Pacificand Latin/South America. Due to the increase in the Company’s ownershipinterest in Savills from approximately 10.0% to 19.6% in April 2005, theimpact of fluctuations in currency exchange rates may become more significantto the Company’s results of operations. At December 31, 2005, a uniform10% strengthening or weakening in the value of the dollar relative to thecurrencies in which the Company’s foreign operations are denominated wouldresult in an estimated decrease or increase accordingly in income before incometaxes of approximately $1.0 million for the year ending December 31,2006. If, during the year ended December 31, 2005, a uniform 10%strengthening or weakening in the value of the dollar relative to thecurrencies in which the Company’s foreign operations are denominated hadoccurred, it would have resulted in a decrease or increase accordingly inincome before income taxes of approximately $0.9 million (primarily inincome from investments in unconsolidated subsidiaries). These calculationsassume that each exchange rate would change in the same direction relative tothe U.S. dollar and are based on either the Company’s actual 2005 or anestimate of 2006 income before income taxes from foreign operations. TheCompany’s sensitivity analysis of the effects of changes in foreign currencyexchange rates does not factor in potential changes to its 2006 anticipatedlevel of foreign operations or local currency prices.

**ITEM 8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

Reference is made to theList of Financial Statements and Financial Statement Schedule on page F-2for a listing of the Company’s financial statements and notes thereto and forthe financial statement schedule contained herein.

39

----

**ITEM 9.**                CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

**ITEM 9A.**        CONTROLSAND PROCEDURES

*Disclosure Controlsand Procedures*

As of the end of theperiod covered by this report, the Company carried out an evaluation, under thesupervision and with the participation of management, including its ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of theCompany’s disclosure controls and procedures (as defined in 13a-15(e) ofthe Exchange Act). Based on that evaluation, the Chief Executive Officer andChief Financial Officer concluded that the Company’s disclosure controls andprocedures are effective in timely alerting them to material informationrelating to the Company (including its consolidated subsidiaries) required tobe included in this report.

*Management’s Reporton Internal Control Over Financial Reporting*

Management of the Company is responsible forestablishing and maintaining adequate internal control over financial reportingas defined in Rules 13a-15(f) and 15d-15(f) underthe Securities Exchange Act of 1934. The Company’s internal control overfinancial reporting is designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Therefore,even those systems determined to be effective can provide only reasonableassurance with respect to financial statement preparation and presentation. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

Management assessed the effectiveness of the Company’sinternal control over financial reporting as of December 31, 2005. Inmaking this assessment, management used the criteria set forth by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO) in InternalControl-Integrated Framework.

Based on management’s assessment and those criteria,management believes that the Company maintained effective internal control overfinancial reporting as of December 31, 2005.

The Company’s independentauditors have issued an attestation report on management’s assessment of theCompany’s internal control over financial reporting. That report appears in *“Item 8. Financial Statements and Supplementary Data.”*

*Changes in InternalControl Over Financial Reporting*

There were no changes inthe Company’s internal control over financial reporting (as defined in Rule 13a-15(f) underthe Exchange Act) that occurred during the Company’s last fiscal quarter thathave materially affected or are reasonably likely to materially affect theCompany’s internal control over financial reporting.

**ITEM 9B.**       OTHERINFORMATION

None.

40

----

**PART III**

**ITEM 10.**         DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT

The information set forthunder the headings “*Proposal One—Election of Class IIIDirectors,*” “*Directors,*” “*Executive Officers,*” “*Meetings and Committees ofDirectors,*” “*Code of Business Conductand**Ethics*” and “*Section 16(a) BeneficialOwnership Reporting Compliance*” contained in the Company’s definitiveProxy Statement to be filed pursuant to Regulation 14A of the Exchange Actin connection with the Company’s 2006 Annual Meeting of Stockholders isincorporated herein by reference.

**ITEM 11.**         EXECUTIVECOMPENSATION

The information set forthunder the heading *“Executive Compensation”*containedin the Company’s definitive Proxy Statement to be filed pursuant toRegulation 14A of the Exchange Act in connection with the Company’s 2006Annual Meeting of Stockholders is incorporated herein by reference.

**ITEM 12.**         SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

At December 31,2005, securities authorized for issuance under the Company’s equitycompensation plans are as follows: 

| **Plan category**                                      | ** ** | ** ** | ** ** | **Number of securities  to be issued upon  exercise of  outstanding options,  warrants and rights  (a)** | ** ** | **Weighted-average  exercise price  of outstanding  options, warrants  and rights  (b)** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding securities  reflected in column (a))  (c)** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation  plans approved by security holders     |       |       | 4,878,342  |                                                                                                                                                  |       |                                                                                                         | $          | 13.56                                                                                                                                                                                                                 |       |   |   | 817,728 |   |   |
| Equity compensation  plans not approved by security holders |       |       | 7,500      |                                                                                                                                                  |       |                                                                                                         | $          | 11.44                                                                                                                                                                                                                 |       |   |   | — |   |   |
| Total                                                       |       |       | 4,885,842  |                                                                                                                                                  |       |                                                                                                         | $          | 13.55                                                                                                                                                                                                                 |       |   |   | 817,728 |   |   |

 

The options to acquire****7,500shares issuable under plans that were not approved by stockholders were grantedon May 1, 2000, and vested one-quarter each year on each of the first fouranniversaries of the grant date. The options expire ten years from the date ofgrant.

The information set forthunder the heading *“Security Ownership ofCertain Beneficial Owners, Directors and Management”* contained inthe Company’s definitive Proxy Statement to be filed pursuant toRegulation 14A of the Exchange Act in connection with the Company’s 2006Annual Meeting of Stockholders is incorporated herein by reference.

**ITEM 13. CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

The information set forthunder the headings *“Executive Compensation”*and *“Certain Relationships and RelatedTransactions”* contained in the Company’s definitive Proxy Statementto be filed pursuant to Regulation 14A of the Exchange Act in connectionwith the Company’s 2006 Annual Meeting of Stockholders is incorporated hereinby reference.

**ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**

The information set forthunder the heading “*Fees Billed By IndependentRegistered Public**Accounting**Firm*” and “*Audit Committee Policiesand Procedures for Pre-Approval of Audit and Non-Audit Services*”contained in the Company’s definitive Proxy Statement to be filed pursuant toRegulation 14A of the Exchange Act in connection with the Company’s 2006Annual Meeting of Stockholders is incorporated herein by reference.

41

----

**PART IV**

**ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

(a)(1)            Thefinancial statements filed as part of this Report at Item 8 are listed in theList of Financial Statements and Financial Statement Schedule on page F-2of this Report.

Financialstatements of TFK Retail, Ltd. are filed as part of this Report at Item 8pursuant to Rule 3-09 of Regulation S-X.

(a)(2)            Thefinancial statement schedule filed as part of this Report at Item 8 is listedin the List of Financial Statements and Financial Statement Schedule on page F-2of this Report.

(a)(3)            Thefollowing documents are filed or incorporated by reference as exhibits to thisReport: 

|   3.1(1)    |   | Certificate  of Incorporation of the Company                                                                                                                                               |
|-----------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   3.2(1)    |   | Bylaws  of the Company                                                                                                                                                                     |
|   3.2.1(5)  |   | First  Amendment to Bylaws of the Company                                                                                                                                                  |
|   3.2.2(9)  |   | Second  Amendment to Bylaws of the Company                                                                                                                                                 |
|   3.2.3(11) |   | Third  Amendment to Bylaws of the Company                                                                                                                                                  |
|   4.1(1)    |   | Form of  certificate for shares of Common Stock of the Company                                                                                                                        |
| 10.1(16)              |   | Credit  Agreement, dated June 28, 2005, among the Company, Bank of America, N.A.  as administrative agent, swing line lender and issuing bank, and the other  lender parties thereto. |
| 10.1.1(18)            |   | First  Amendment of Credit Agreement dated February 22, 2006, between the  Company and Bank of America, N.A.                                                                          |
| 10.2(1)               |   | Form of  License Agreement among the Company and CF98                                                                                                                                 |
| 10.2.1(8)             |   | First  Amendment to License Agreement dated July 31, 2002, between the Company  and CF98                                                                                              |
| 10.3(14)              |   | Form of  Indemnification Agreement, with schedule of signatures                                                                                                                       |
| 10.4(1)               |   | Predecessor  Company’s 1997 Stock Option Plan                                                                                                                                         |
| 10.5(1)               |   | Company’s  Long-Term Incentive Plan                                                                                                                                                   |
| 10.5.1(2)             |   | Amendment  No. 1 to Long-Term Incentive Plan                                                                                                                                          |
| 10.5.2(9)             |   | Second  Amendment to Long-Term Incentive Plan                                                                                                                                              |
| 10.6(1)               |   | Company’s  1995 Profit Sharing Plan                                                                                                                                                   |
| 10.7(3)               |   | Company’s  Employee Stock Purchase Plan                                                                                                                                               |
| 10.7.1(4)             |   | First  Amendment to the Company’s Employee Stock Purchase Plan                                                                                                                        |
| 10.7.2(6)             |   | Second  Amendment to the Company’s Employee Stock Purchase Plan                                                                                                                       |
| 10.7.3(7)             |   | Third  Amendment to the Company’s Employee Stock Purchase Plan                                                                                                                        |
| 10.7.4(10)            |   | Fourth  Amendment to the Company’s Employee Stock Purchase Plan                                                                                                                       |
| 10.7.5(10)            |   | Fifth  Amendment to the Company’s Employee Stock Purchase Plan                                                                                                                        |
| 10.7.6(15)            |   | Sixth  Amendment to the Company’s Employee Stock Purchase Plan                                                                                                                        |
| 10.8(1)               |   | Form of  Stockholders’ Agreement among the Company, Crow Family Partnership L.P., CFH  Trade-Names, L.P., J. McDonald Williams and certain other signatories  thereto            |
| 10.9(10)              |   | Employment  Agreement dated as of October 17, 2003, between the Company and Robert  E. Sulentic                                                                                       |
| 10.9.1(12)            |   | Amendment  to Employment Agreement dated as of April 6, 2004, between the Company  and Robert E. Sulentic                                                                             |
| 10.9.2(17)            |   | Amendment  to Employment Agreement dated as of October 17, 2005, between the  Company and Robert E. Sulentic                                                                          |
| 10.10(10)             |   | Employment  Agreement dated as of October 17, 2003, between the Company and Derek R.  McClain                                                                                         |
| 10.10.1(12)           |   | Amendment  to Employment Agreement dated as of April 6, 2004, between the Company  and Derek R. McClain                                                                               |
| 10.10.2(17)           |   | Amendment  to Employment Agreement dated as of October 17, 2005, between the  Company and Derek R. McClain                                                                            |

42

----

 

| 10.11(10)   |   | Employment  Agreement dated as of October 17, 2003, between the Company and James R.  Groch                                                                       |
|-------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.11.1(12) |   | Amendment  to Employment Agreement dated as of April 6, 2004, between the Company  and James R. Groch                                                             |
| 10.11.2(17) |   | Amendment  to Employment Agreement dated as of October 17, 2005, between the  Company and James R. Groch                                                          |
| 10.12(17)   |   | Amended  and Restated Employment Agreement dated as of October 17, 2005, between  the Company and Michael J. Lafitte                                              |
| 10.13(11)   |   | Employment  Agreement dated as of March 2, 2004, between the Company and John A.  Stirek                                                                          |
| 10.13.1(12) |   | Amendment  to Employment Agreement dated as of April 6, 2004, between the Company  and John A. Stirek                                                             |
| 10.13.2(17) |   | Amendment  to Employment Agreement dated as of October 17, 2005, between the  Company and John A. Stirek                                                          |
| 10.14(17)   |   | Amended  and Restated Employment Agreement dated as of October 17, 2005, between  the Company and William F. Concannon                                            |
| 10.15(12)   |   | Employment  Agreement dated as of April 6, 2004, between the Company and T.  Christopher Roth                                                                     |
| 10.15.1(17) |   | Amendment  to Employment Agreement dated as of October 17, 2005, between the  Company and T. Christopher Roth                                                     |
| 10.16(12)   |   | Employment  Agreement dated as of April 27, 2004, between the Company and Diane Paddison                                                                          |
| 10.16.1(17) |   | Amendment  to Employment Agreement dated as of October 17, 2005, between the  Company and Diane Paddison                                                          |
| 10.17(13)   |   | Employment  Agreement dated as of September 28, 2004, between the Company and  Matthew S. Khourie                                                                 |
| 10.17.1(17) |   | Amendment  to Employment Agreement dated as of October 17, 2005, between the  Company and Matthew S. Khourie                                                      |
| 14.1(11)    |   | Code  of Business Conduct and Ethics                                                                                                                                   |
| 21.1        |   | Subsidiaries  of the Company                                                                                                                                           |
| 23.1        |   | Consent  of Ernst & Young LLP                                                                                                                                 |
| 23.2        |   | Consent  of Ernst & Young LLP                                                                                                                                 |
| 24.1        |   | Power  of Attorney for Derek R. McClain                                                                                                                                |
| 24.2        |   | Power  of Attorney for Arlin E. Gaffner                                                                                                                                |
| 24.3        |   | Power  of Attorney for Curtis F. Feeny                                                                                                                                 |
| 24.4        |   | Power  of Attorney for Michael A. Moses                                                                                                                                |
| 24.5        |   | Power  of Attorney for J. McDonald Williams                                                                                                                            |
| 24.6        |   | Power  of Attorney for William F. Concannon                                                                                                                            |
| 24.7        |   | Power  of Attorney for James R. Erwin                                                                                                                                  |
| 24.8        |   | Power  of Attorney for Jeffrey M. Heller                                                                                                                               |
| 24.9        |   | Power  of Attorney for Rowland T. Moriarty                                                                                                                             |
| 24.10       |   | Power  of Attorney for Robert E. Sulentic                                                                                                                              |
| 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 |

----

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

43

----

(2)                Previouslyfiled as an exhibit to the Company’s Form S-8 (File Number 333-50585)filed with the Securities and Exchange Commission on June 24, 1999 andincorporated herein by reference.

(3)                Previously filedas an exhibit to the Company’s Form S-8 (File Number 333-50579)filed with the Securities and Exchange Commission on April 21, 1998 andincorporated herein by reference.

(4)                Previously filedas an exhibit to the Company’s Form S-8 (File Number 333-50579)filed with the Securities and Exchange Commission on June 24, 1999 andincorporated herein by reference.

(5)                Previously filedas an exhibit to the Company’s Form 10-Q filed with the Securitiesand Exchange Commission on August 11, 2000 and incorporated herein byreference.

(6)                Previously filedas an exhibit to the Company’s Form 10-K filed with the Securitiesand Exchange Commission on March 29, 2001 and incorporated herein byreference.

(7)                Previously filedas an exhibit to the Company’s Form S-8 (File Number 333-62884)filed with the Securities and Exchange Commission on June 13, 2001 andincorporated herein by reference.

(8)                Previously filedas an exhibit to the Company’s Form 10-Q filed with the Securitiesand Exchange Commission on August 14, 2002 and incorporated herein byreference.

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

(10)           Previously filed as anexhibit to the Company’s Form 10-Q filed with the Securities andExchange Commission on November 14, 2003 and incorporated herein byreference.

(11)           Previously filed as anexhibit to the Company’s Form 10-K filed with the Securities andExchange Commission on March 15, 2004 and incorporated herein byreference.

(12)           Previously filed as anexhibit to the Company’s Form 10-Q filed with the Securities andExchange Commission on May 10, 2004 and incorporated herein by reference.

(13)           Previously filed as anexhibit to the Company’s Form 8-K filed with the Securities andExchange Commission on September 29, 2004 and incorporated herein byreference.

(14)           Previously filed as anexhibit to the Company’s Form 10-Q filed with the Securities andExchange Commission on November 9, 2004 and incorporated herein byreference.

(15)           Previously filed as anexhibit to the Company’s Form S-8 (File Number 333-121053)filed with the Securities and Exchange Commission on December 7, 2004 andincorporated herein by reference.

(16)      Previously filed as an exhibit to the Company’s Form 8-Kfiled with the Securities and Exchange Commission on July 1, 2005 andincorporated herein by reference.

(17)      Previously filed as an exhibit to the Company’s Form 8-Kfiled with the Securities and Exchange Commission on October 20, 2005 andincorporated herein by reference.

(18)      Previously filed as Exhibit 10.1 to theCompany’s Form 8-K filed with the Securities and Exchange Commissionon February 23, 2006 and incorporated herein by reference.

(b)          The exhibits required byItem 601 of Regulation S-K are filed as part of this Report.

(c)           The required financialstatements and financial schedule are filed as part of this Report.

44

----

**SIGNATURE**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
|                           | TRAMMELL CROW COMPANY                   |
|---------------------------|-----------------------------------------|
|                      | By:                                     | /s/  ROBERT E. SULENTIC |
| * *                  | Robert E. Sulentic                      |
| * *                  | *Chairman  of the Board, President and* |
| Date: March 15, 2006 | *Chief  Executive Officer*              |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated. 
|                        | **Name** | ** **                                       | ** ** | ** **          | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|------------------------|----------|--------------------------------------------------|------------|---------------------|-----------|------------|------------|------------|----------|------------|
| /s/ ROBERT E. SULENTIC |     | Chairman of the  Board, President and Chief      |       | March 15, 2006 |
| Robert  E. Sulentic    |     | Executive Officer  (Principal Executive Officer) |       |                |
| *                      |     | Executive Vice  President and                    |       | March 15, 2006 |
| Derek  R. McClain      |     | Chief Financial  Officer                         |       |                |
| *                      |     | Executive Vice  President and                    |       | March 15, 2006 |
| Arlin  E. Gaffner      |     | Chief Accounting  Officer                        |       |                |
| *                      |     | Director                                         |       | March 15, 2006 |
| Curtis  F. Feeny       |     |                                             |       |                |
| *                      |     | Director                                         |       | March 15, 2006 |
| Michael  A. Moses      |     |                                             |       |                |
| *                      |     | Chairman Emeritus                                |       | March 15, 2006 |
| J. McDonald  Williams  |     |                                             |       |                |
| *                      |     | Vice Chairman                                    |       | March 15, 2006 |
| William  F. Concannon  |     |                                             |       |                |
| *                      |     | Director                                         |       | March 15, 2006 |
| James  R. Erwin        |     |                                             |       |                |
| *                      |     | Director                                         |       | March 15, 2006 |
| Jeffrey  M. Heller     |     |                                             |       |                |
| *                      |     | Director                                         |       | March 15, 2006 |
| Rowland T. Moriarty    |     |                                             |       |                |

 

RobertSulentic, by signing his name hereto, does hereby sign this Annual Report on Form 10-Kon behalf of each of the above-named directors and officers of theCompany on the date indicated below, pursuant to powers of attorney executed byeach of such directors and officers and contemporaneously filed herewith withthe Commission.
| *By:   | /s/ ROBERT E. SULENTIC |   |   |   | March 15,  2006 |
|--------|------------------------|--------|--------|--------|----------------------|
|   | Robert E. Sulentic     |   |   |   |                 |
|   | *Attorney-in-fact*     |   |   |   |                 |

 

45

----

**Exhibit Index**

|   3.1(1)    |   | Certificate of Incorporation of the Company                                                                                                                                               |
|-----------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   3.2(1)    |   | Bylaws of the Company                                                                                                                                                                     |
|   3.2.1(5)  |   | First Amendment to Bylaws of the Company                                                                                                                                                  |
|   3.2.2(9)  |   | Second Amendment to Bylaws of the Company                                                                                                                                                 |
|   3.2.3(11) |   | Third Amendment to Bylaws of the Company                                                                                                                                                  |
|   4.1(1)    |   | Form of certificate for shares of Common Stock  of the Company                                                                                                                       |
| 10.1(16)              |   | Credit Agreement, dated June 28, 2005, among  the Company, Bank of America, N.A. as administrative agent, swing line lender  and issuing bank, and the other lender parties thereto. |
| 10.1.1(18)            |   | First Amendment of Credit Agreement dated  February 22, 2006, between the Company and Bank of America, N.A.                                                                          |
| 10.2(1)               |   | Form of License Agreement among the Company and  CF98                                                                                                                                |
| 10.2.1(8)             |   | First Amendment to License Agreement dated  July 31, 2002, between the Company and CF98                                                                                              |
| 10.3(14)              |   | Form of Indemnification Agreement, with  schedule of signatures                                                                                                                      |
| 10.4(1)               |   | Predecessor Company’s 1997 Stock Option Plan                                                                                                                                         |
| 10.5(1)               |   | Company’s Long-Term Incentive Plan                                                                                                                                                   |
| 10.5.1(2)             |   | Amendment No. 1 to Long-Term Incentive  Plan                                                                                                                                         |
| 10.5.2(9)             |   | Second Amendment to Long-Term Incentive Plan                                                                                                                                              |
| 10.6(1)               |   | Company’s 1995 Profit Sharing Plan                                                                                                                                                   |
| 10.7(3)               |   | Company’s Employee Stock Purchase Plan                                                                                                                                               |
| 10.7.1(4)             |   | First Amendment to the Company’s Employee Stock Purchase  Plan                                                                                                                       |
| 10.7.2(6)             |   | Second Amendment to the Company’s Employee Stock  Purchase Plan                                                                                                                      |
| 10.7.3(7)             |   | Third Amendment to the Company’s Employee Stock  Purchase Plan                                                                                                                       |
| 10.7.4(10)            |   | Fourth Amendment to the Company’s Employee Stock  Purchase Plan                                                                                                                      |
| 10.7.5(10)            |   | Fifth Amendment to the Company’s Employee Stock  Purchase Plan                                                                                                                       |
| 10.7.6(15)            |   | Sixth Amendment to the Company’s Employee Stock  Purchase Plan                                                                                                                       |
| 10.8(1)               |   | Form of Stockholders’ Agreement among the  Company, Crow Family Partnership L.P., CFH Trade-Names, L.P., J.  McDonald Williams and certain other signatories thereto            |
| 10.9(10)              |   | Employment Agreement dated as of October 17,  2003, between the Company and Robert E. Sulentic                                                                                       |
| 10.9.1(12)            |   | Amendment to Employment Agreement dated as of  April 6, 2004, between the Company and Robert E. Sulentic                                                                             |
| 10.9.2(17)            |   | Amendment to Employment Agreement dated as of  October 17, 2005, between the Company and Robert E. Sulentic                                                                          |
| 10.10(10)             |   | Employment Agreement dated as of October 17,  2003, between the Company and Derek R. McClain                                                                                         |
| 10.10.1(12)           |   | Amendment to Employment Agreement dated as of  April 6, 2004, between the Company and Derek R. McClain                                                                               |
| 10.10.2(17)           |   | Amendment to Employment Agreement dated as of  October 17, 2005, between the Company and Derek R. McClain                                                                            |
| 10.11(10)             |   | Employment Agreement dated as of October 17,  2003, between the Company and James R. Groch                                                                                           |
| 10.11.1(12)           |   | Amendment to Employment Agreement dated as of  April 6, 2004, between the Company and James R. Groch                                                                                 |
| 10.11.2(17)           |   | Amendment to Employment Agreement dated as of  October 17, 2005, between the Company and James R. Groch                                                                              |
| 10.12(17)             |   | Amended and Restated Employment Agreement dated as  of October 17, 2005, between the Company and Michael J. Lafitte                                                                  |

46

----

 

| 10.13(11)   |   | Employment Agreement dated as of March 2, 2004,  between the Company and John A. Stirek                                                                           |
|-------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.13.1(12) |   | Amendment to Employment Agreement dated as of  April 6, 2004, between the Company and John A. Stirek                                                              |
| 10.13.2(17) |   | Amendment to Employment Agreement dated as of  October 17, 2005, between the Company and John A. Stirek                                                           |
| 10.14(17)   |   | Amended and Restated Employment Agreement dated as  of October 17, 2005, between the Company and William F. Concannon                                             |
| 10.15(12)   |   | Employment Agreement dated as of April 6, 2004,  between the Company and T. Christopher Roth                                                                      |
| 10.15.1(17) |   | Amendment to Employment Agreement dated as of  October 17, 2005, between the Company and T. Christopher Roth                                                      |
| 10.16(12)   |   | Employment Agreement dated as of April 27,  2004, between the Company and Diane Paddison                                                                          |
| 10.16.1(17) |   | Amendment to Employment Agreement dated as of  October 17, 2005, between the Company and Diane Paddison                                                           |
| 10.17(13)   |   | Employment Agreement dated as of September 28,  2004, between the Company and Matthew S. Khourie                                                                  |
| 10.17.1(17) |   | Amendment to Employment Agreement dated as of  October 17, 2005, between the Company and Matthew S. Khourie                                                       |
| 14.1(11)    |   | Code of Business Conduct and Ethics                                                                                                                                    |
| 21.1        |   | Subsidiaries of the Company                                                                                                                                            |
| 23.1        |   | Consent of Ernst & Young LLP                                                                                                                                  |
| 23.2        |   | Consent of Ernst & Young LLP                                                                                                                                  |
| 24.1        |   | Power of Attorney for Derek R. McClain                                                                                                                                 |
| 24.2        |   | Power of Attorney for Arlin E. Gaffner                                                                                                                                 |
| 24.3        |   | Power of Attorney for Curtis F. Feeny                                                                                                                                  |
| 24.4        |   | Power of Attorney for Michael A. Moses                                                                                                                                 |
| 24.5        |   | Power of Attorney for J. McDonald Williams                                                                                                                             |
| 24.6        |   | Power of Attorney for William F. Concannon                                                                                                                             |
| 24.7        |   | Power of Attorney for James R. Erwin                                                                                                                                   |
| 24.8        |   | Power of Attorney for Jeffrey M. Heller                                                                                                                                |
| 24.9        |   | Power of Attorney for Rowland T. Moriarty                                                                                                                              |
| 24.10       |   | Power of Attorney for Robert E. Sulentic                                                                                                                               |
| 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 |

----

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

(2)                 Previously filed as an exhibit to theCompany’s Form S-8 (File Number 333-50585) filed with theSecurities and Exchange Commission on June 24, 1999 and incorporatedherein by reference.

(3)                 Previously filed as an exhibit to theCompany’s Form S-8 (File Number 333-50579) filed with theSecurities and Exchange Commission on April 21, 1998 and incorporatedherein by reference.

47

----

(4)                 Previously filed as an exhibit to theCompany’s Form S-8 (File Number 333-50579) filed with theSecurities and Exchange Commission on June 24, 1999 and incorporatedherein by reference.

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

(6)                 Previously filed as an exhibit to theCompany’s Form 10-K filed with the Securities and ExchangeCommission on March 29, 2001 and incorporated herein by reference.

(7)                 Previously filed as an exhibit to theCompany’s Form S-8 (File Number 333-62884) filed with theSecurities and Exchange Commission on June 13, 2001 and incorporatedherein by reference.

(8)                 Previously filed as an exhibit to theCompany’s Form 10-Q filed with the Securities and ExchangeCommission on August 14, 2002 and incorporated herein by reference.

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

(10)             Previously filed as an exhibit to theCompany’s Form 10-Q filed with the Securities and ExchangeCommission on November 14, 2003 and incorporated herein by reference.

(11)             Previously filed as an exhibit to theCompany’s Form 10-K filed with the Securities and ExchangeCommission on March 15, 2004 and incorporated herein by reference.

(12)             Previously filed as an exhibit to theCompany’s Form 10-Q filed with the Securities and ExchangeCommission on May 10, 2004 and incorporated herein by reference.

(13)             Previously filed as an exhibit to theCompany’s Form 8-K filed with the Securities and Exchange Commissionon September 29, 2004 and incorporated herein by reference.

(14)             Previously filed as an exhibit to theCompany’s Form 10-Q filed with the Securities and ExchangeCommission on November 9, 2004 and incorporated herein by reference.

(15)             Previously filed as an exhibit to theCompany’s Form S-8 (File Number 333-121053) filed with theSecurities and Exchange Commission on December 7, 2004 and incorporatedherein by reference.

(16)       Previously filed as an exhibit to the Company’s Form 8-Kfiled with the Securities and Exchange Commission on July 1, 2005 andincorporated herein by reference.

(17)       Previously filed as an exhibit to the Company’s Form 8-Kfiled with the Securities and Exchange Commission on October 20, 2005 andincorporated herein by reference.

(18)       Previously filed as Exhibit 10.1 to the Company’s Form 8-Kfiled with the Securities and Exchange Commission on February 23, 2006 andincorporated herein by reference.

(b)           The exhibits required by Item 601 ofRegulation S-K are filed as part of this Report.

(c)            The required financial statements andfinancial schedule are filed as part of this Report.

48

----

**ANNUAL REPORT ON FORM 10-K**

**ITEM 8, ITEM 15(a)(1) and (2) and (c)**

**LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENTSCHEDULE**

**FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

**CERTAIN EXHIBITS**

**FINANCIAL STATEMENT SCHEDULE**

**YEAR ENDED DECEMBER 31, 2005**

**TRAMMELL CROW COMPANY AND SUBSIDIARIES**

**DALLAS, TEXAS**

F-1

----

**FORM 10-K—ITEM15(a)(1) and (2)TRAMMELL CROW COMPANY AND SUBSIDIARIESLIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE**

Thefollowing consolidated financial statements of Trammell Crow Company andSubsidiaries for the year ended December 31, 2005, are included inItem 8: 

| Reports of Independent  Registered Public Accounting Firm                                                       |   | F-3  |   |
|-----------------------------------------------------------------------------------------------------------------|--------|------|--------|
| Consolidated  Balance Sheets as of December 31, 2005 and 2004                                              |   | F-5  |   |
| Consolidated Statements of Income for the Years Ended  December 31, 2005, 2004 and 2003                    |   | F-6  |   |
| Consolidated Statements of Stockholders’ Equity for  the Years Ended December 31, 2005, 2004 and 2003 |   | F-7  |   |
| Consolidated Statements of Cash Flows for the Years  Ended December 31, 2005, 2004 and 2003                |   | F-8  |   |
| Consolidated Statements of Comprehensive Income for  the Years Ended December 31, 2005, 2004 and 2003      |   | F-9  |   |
| Notes to Consolidated Financial Statements                                                                      |   | F-10 |   |

 

The following consolidatedfinancial statement schedule of Trammell Crow Company and Subsidiaries isincluded in Item 15(c):

| Schedule III—Real Estate  Investments and Accumulated Depreciation         |   | F-48 |   |
|---------------------------------------------------------------------------------|--------|------|--------|
| Note to  Schedule III—Real Estate Investments and Accumulated Depreciation |   | F-50 |   |

 

All other schedules for which provision is made in theapplicable accounting regulation of the Securities and Exchange Commission arenot required under the related instructions or are inapplicable and thereforehave been omitted.

The financial statementsand related notes of TFK Retail, Ltd. as of June 30, 2004 are includedbelow. The financial statements are included as TFK Retail, Ltd. is deemed tobe a significant subsidiary pursuant to Rule 3-09 of Regulation S-X.

| Financial Statements of TFK  Retail, Ltd. for the year ended June 30, 2004 |   | F-51 |   |
|---------------------------------------------------------------------------------|--------|------|--------|

 

F-2

----

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Board of Directors and StockholdersTrammell Crow Company

We have audited the accompanying consolidated balancesheets of Trammell Crow Company and subsidiaries as of December 31, 2005and 2004, and the related consolidated statements of income, stockholders’equity, cash flows and comprehensive income for each of the three years in theperiod ended December 31, 2005. Our audits also included the financialstatement schedule listed in the index at Item 15(a). These financialstatements and schedule are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements andschedule based on our audits.

We conducted our audits in accordance with the auditingstandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of Trammell Crow Company and subsidiaries at December 31, 2005and 2004, and the consolidated results of their operations and their cash flowsfor each of the three years in the period ended December 31, 2005, inconformity with U.S. generally accepted accounting principles. Also, in ouropinion, the related financial statement schedule, when considered in relationto the basic financial statements taken as a whole, presents fairly in allmaterial respects the information set forth therein.

Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of Trammell CrowCompany’s internal control over financial reporting as of December 31,2005, based on criteria established in Internal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated March 13, 2006 expressed an unqualified opinionthereon.

/s/ ERNST & YOUNGLLP

Dallas, TexasMarch 13, 2006

F-3

----

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Board of Directors andShareholdersTrammell Crow Company

We have audited management’sassessment, included in the accompanying Management’s Report on InternalControl over Financial Reporting, that Trammell Crow Company maintainedeffective internal control over financial reporting as of December 31,2005, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(the COSO criteria). Trammell Crow Company’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting. Ourresponsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the company’s internal control over financialreporting based on our audit.

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

In our opinion, management’sassessment that Trammell Crow Company maintained effective internal controlover financial reporting as of December 31, 2005, is fairly stated, in allmaterial respects, based on the COSO criteria. Also, in our opinion, TrammellCrow Company maintained, in all material respects, effective internal controlover financial reporting as of December 31, 2005, based on the COSOcriteria.

Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the 2005 consolidated financialstatements of Trammell Crow Company and the financial statement schedule listedin the index at Item 15(a), and our report dated March 13, 2006 expressedan unqualified opinion thereon.

/s/ ERNST & YOUNGLLP

Dallas, TexasMarch 13, 2006

F-4

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands, except share and per share data)**

| ** **                                                                                                                                                                                                | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| ** **                                                                                                                                                                                                | ** ** | ** **            | ** ** | **(Note 1)**     | ** ** |
| **ASSETS**                                                                                                                                                                                                |       |                  |       | ** **            |       |   |   |   |   |
| Current assets                                                                                                                                                                                            |       |                  |       |                  |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                                                 |       |                  | $          | 76,919                |       |   |   | $ | 163,637 |   |   |
| Restricted cash                                                                                                                                                                                           |       |                  | 1,416      |                  |       |   | 9,950 |   |   |
| Accounts receivable, net of allowance for doubtful  accounts of $3,235 in 2005 and $3,144  in 2004                                                                                                        |       |                  | 127,784    |                  |       |   | 103,551 |   |   |
| Receivables from affiliates                                                                                                                                                                               |       |                  | 2,146      |                  |       |   | 1,626 |   |   |
| Notes and other receivables                                                                                                                                                                               |       |                  | 16,303     |                  |       |   | 20,825 |   |   |
| Deferred income taxes                                                                                                                                                                                     |       |                  | 3,935      |                  |       |   | 4,021 |   |   |
| Real estate under development                                                                                                                                                                             |       |                  | 129,963    |                  |       |   | 9,564 |   |   |
| Real estate and other assets held for sale                                                                                                                                                                |       |                  | 20,791     |                  |       |   | 49,637 |   |   |
| Available for sale securities                                                                                                                                                                             |       |                  | 542        |                  |       |   | — |   |   |
| Other current assets                                                                                                                                                                                      |       |                  | 27,399     |                  |       |   | 17,657 |   |   |
| Total current assets                                                                                                                                                                                      |       |                  | 407,198    |                  |       |   | 380,468 |   |   |
| Furniture and equipment, net                                                                                                                                                                              |       |                  | 19,787     |                  |       |   | 18,649 |   |   |
| Deferred income taxes                                                                                                                                                                                     |       |                  | 16,270     |                  |       |   | 22,935 |   |   |
| Real estate under development                                                                                                                                                                             |       |                  | 117,210    |                  |       |   | 56,394 |   |   |
| Real estate held for investment                                                                                                                                                                           |       |                  | 89,906     |                  |       |   | 106,157 |   |   |
| Investments in unconsolidated subsidiaries                                                                                                                                                                |       |                  | 175,411    |                  |       |   | 74,090 |   |   |
| Goodwill, net                                                                                                                                                                                             |       |                  | 75,239     |                  |       |   | 74,357 |   |   |
| Receivables from affiliates                                                                                                                                                                               |       |                  | 7,458      |                  |       |   | — |   |   |
| Available for sale securities                                                                                                                                                                             |       |                  | 18,089     |                  |       |   | — |   |   |
| Other assets                                                                                                                                                                                              |       |                  | 21,599     |                  |       |   | 15,900 |   |   |
|                                                                                                                                                                                                      |       |                  | $          | 948,167               |       |   |   | $ | 748,950 |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                             |       |                  |       | ** **            |       |   |   |   |   |
| Current liabilities                                                                                                                                                                                       |       |                  |       |                  |       |   |   |   |   |
| Accounts payable                                                                                                                                                                                          |       |                  | $          | 31,698                |       |   |   | $ | 23,731 |   |   |
| Accrued expenses                                                                                                                                                                                          |       |                  | 155,760    |                  |       |   | 146,026 |   |   |
| Payables to affiliates                                                                                                                                                                                    |       |                  | 4          |                  |       |   | 40 |   |   |
| Income taxes payable                                                                                                                                                                                      |       |                  | 16,313     |                  |       |   | 18,121 |   |   |
| Current portion of long-term debt                                                                                                                                                                         |       |                  | 1,302      |                  |       |   | 6 |   |   |
| Current portion of notes payable on real estate                                                                                                                                                           |       |                  | 133,941    |                  |       |   | 10,263 |   |   |
| Liabilities related to real estate and other assets  held for sale                                                                                                                                        |       |                  | 17,508     |                  |       |   | 31,643 |   |   |
| Other current liabilities                                                                                                                                                                                 |       |                  | 5,944      |                  |       |   | 12,585 |   |   |
| Total current liabilities                                                                                                                                                                                 |       |                  | 362,470    |                  |       |   | 242,415 |   |   |
| Long-term debt, less current portion                                                                                                                                                                      |       |                  | 35,034     |                  |       |   | 8 |   |   |
| Notes payable on real estate, less current portion                                                                                                                                                        |       |                  | 106,216    |                  |       |   | 110,794 |   |   |
| Other liabilities                                                                                                                                                                                         |       |                  | 13,448     |                  |       |   | 10,027 |   |   |
| Total liabilities                                                                                                                                                                                         |       |                  | 517,168    |                  |       |   | 363,244 |   |   |
| Minority interest                                                                                                                                                                                         |       |                  | 29,528     |                  |       |   | 44,756 |   |   |
| Stockholders’ equity                                                                                                                                                                                 |       |                  |       |                  |       |   |   |   |   |
| Preferred stock; $0.01 par value; 30,000,000 shares  authorized; none issued or outstanding                                                                                                               |       |                  | —     |                  |       |   | — |   |   |
| Common stock; $0.01 par value; 100,000,000 shares  authorized; 37,903,058 shares issued and 36,040,317 shares outstanding in  2005 and 37,902,998 shares issued and 35,605,007 shares outstanding in 2004 |       |                  | 379        |                  |       |   | 379 |   |   |
| Paid-in capital                                                                                                                                                                                           |       |                  | 205,084    |                  |       |   | 196,314 |   |   |
| Retained earnings                                                                                                                                                                                         |       |                  | 240,887    |                  |       |   | 190,252 |   |   |
| Accumulated other comprehensive income                                                                                                                                                                    |       |                  | 1,713      |                  |       |   | 2,043 |   |   |
| Less:   Treasury  stock                                                                                                                                                                         |       |                  | (32,776    | )                     |       |   | (36,921 | ) |   |
| Unearned stock compensation, net                                                                                                                                                                          |       |                  | (13,816    | )                     |       |   | (11,117 | ) |   |
| Total stockholders’ equity                                                                                                                                                                           |       |                  | 401,471    |                  |       |   | 340,950 |   |   |
|                                                                                                                                                                                                      |       |                  | $          | 948,167               |       |   |   | $ | 748,950 |   |   |

 

See accompanying notes.

F-5

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFINCOME(in thousands, except share and per share data)**

| ** **                                                                                                                                                 | ** **   | **Years Ended December 31,** | ** **   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|---------------------------------------------|--------------|
| ** **                                                                                                                                                 | ** **   | **2005**                                    | ** **   | **2004** | ** ** | **2003** | ** ** |
| **REVENUES**                                                                                                                                               | ** **   | ** **                                  | ** **   | ** ** | ** ** | ** ** | ** ** |
| ***User Services:***                                                                                                                                       | *** *** | *** ***                                | *** *** | *** *** | *** *** | *** *** | *** *** |
| Facilities management                                                                                                                                      |         | $                                           | 237,659      |   | $ | 211,062 |   | $ | 208,936 |   |
| Corporate advisory services                                                                                                                                |         | 186,847                                     |         | 143,266 |   | 123,335 |   |
| Project management services                                                                                                                                |         | 118,678                                     |         | 91,599 |   | 65,500 |   |
|                                                                                                                                                       |         | 543,184                                     |         | 445,927 |   | 397,771 |   |
| ***Investor Services:***                                                                                                                                   |         |                                        |         |   |   |   |   |
| Property management                                                                                                                                        |         | 136,665                                     |         | 137,193 |   | 143,727 |   |
| Brokerage                                                                                                                                                  |         | 138,416                                     |         | 114,478 |   | 95,593 |   |
| Construction management                                                                                                                                    |         | 11,973                                      |         | 11,187 |   | 10,736 |   |
|                                                                                                                                                       |         | 287,054                                     |         | 262,858 |   | 250,056 |   |
| Development and construction                                                                                                                               |         | 47,159                                      |         | 38,346 |   | 43,203 |   |
|                                                                                                                                                       |         | 877,397                                     |         | 747,131 |   | 691,030 |   |
| Gain on disposition of real estate                                                                                                                         |         | 18,553                                      |         | 26,742 |   | 13,199 |   |
| **TOTAL REVENUES**                                                                                                                                         |         | 895,950                                     |         | 773,873 |   | 704,229 |   |
| **COSTS  AND EXPENSES**                                                                                                                                    |         |                                        |         |   |   |   |   |
| Salaries, wages and benefits                                                                                                                               |         | 553,552                                     |         | 493,404 |   | 452,195 |   |
| Commissions                                                                                                                                                |         | 151,721                                     |         | 120,345 |   | 98,957 |   |
| General and administrative                                                                                                                                 |         | 140,618                                     |         | 127,758 |   | 116,434 |   |
| Depreciation                                                                                                                                               |         | 9,257                                       |         | 9,985 |   | 14,704 |   |
| Amortization                                                                                                                                               |         | 738                                         |         | 1,359 |   | 1,856 |   |
| Interest                                                                                                                                                   |         | 5,441                                       |         | 4,195 |   | 5,953 |   |
| **TOTAL EXPENSES**                                                                                                                                         |         | 861,327                                     |         | 757,046 |   | 690,099 |   |
| Operating income                                                                                                                                           |         | 34,623                                      |         | 16,827 |   | 14,130 |   |
| Interest and other income                                                                                                                                  |         | 2,835                                       |         | 2,797 |   | 2,236 |   |
| Income from continuing operations before income taxes,  minority interest and income from investments in unconsolidated subsidiaries                       |         | 37,458                                      |         | 19,624 |   | 16,366 |   |
| Income tax expense                                                                                                                                         |         | (13,856                                     | )            | (7,452 | ) | (6,636 | ) |
| Minority interest, net of income tax (expense)  benefit of $(1,485), $1,840 and $(839) in 2005, 2004 and 2003,  respectively                          |         | 2,528                                       |         | (3,006 | ) | 1,231 |   |
| Income from investments in unconsolidated  subsidiaries, net of income tax expense of $8,898, $6,718 and $6,711 in  2005, 2004 and 2003, respectively |         | 15,154                                      |         | 10,971 |   | 9,839 |   |
| Income from continuing operations                                                                                                                          |         | 41,284                                      |         | 20,137 |   | 20,800 |   |
| Income from discontinued operations, net of income  tax expense of $10,641, $11,624 and $164 in 2005, 2004 and 2003, respectively                          |         | 18,123                                      |         | 18,982 |   | 240 |   |
| Net income                                                                                                                                                 |         | $                                           | 59,407       |   | $ | 39,119 |   | $ | 21,040 |   |
| Income per share  from continuing operations:                                                                                                              |         |                                        |         |   |   |   |   |
| Basic                                                                                                                                                      |         | $                                           | 1.22         |   | $ | 0.58 |   | $ | 0.58 |   |
| Diluted                                                                                                                                                    |         | $                                           | 1.13         |   | $ | 0.54 |   | $ | 0.56 |   |
| Income per share  from discontinued operations, net of income taxes:                                                                                  |         |                                        |         |   |   |   |   |
| Basic                                                                                                                                                      |         | $                                           | 0.54         |   | $ | 0.54 |   | $ | 0.01 |   |
| Diluted                                                                                                                                                    |         | $                                           | 0.50         |   | $ | 0.51 |   | $ | 0.01 |   |
| Net income per  share:                                                                                                                                     |         |                                        |         |   |   |   |   |
| Basic                                                                                                                                                      |         | $                                           | 1.76         |   | $ | 1.12 |   | $ | 0.59 |   |
| Diluted                                                                                                                                                    |         | $                                           | 1.63         |   | $ | 1.05 |   | $ | 0.57 |   |
| Weighted-average  common shares outstanding:                                                                                                               |         |                                        |         |   |   |   |   |
| Basic                                                                                                                                                      |         | 33,786,147                                  |         | 35,064,453 |   | 35,572,493 |   |
| Diluted                                                                                                                                                    |         | 36,440,940                                  |         | 37,239,801 |   | 36,780,515 |   |

 

See accompanying notes.

F-6

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIESCONSOLIDATED STATEMENTSOF STOCKHOLDERS’ EQUITYYears ended December 31, 2005, 2004 and 2003(in thousands, except share data)**

| ** **                                                                      | ** ** | **Common Shares** | ** ** | **Common  Stock Par** | ** ** | **Paid-In** | ** ** | **Retained** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Treasury** | ** ** | **Unearned  Stock** | ** ** | ** **       | ** ** |      |
|---------------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|-------------|------------|--------------|------------|---------------------------------------|------------|--------------|------------|---------------------|------------|------------------|------------|-----------|
| ** **                                                                      | ** ** | **Issued**             | ** ** | **Treasury**               | ** ** | **Value**   | ** ** | **Capital**  | ** ** | **Earnings**                          | ** ** | **Income**   | ** ** | **Stock**           | ** ** | **Compensation** | ** ** | **Total** | ** ** |   |
| Balance at January 1, 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                                                                      |       | —                 |       | —                     |       |        | —     |         |       | —                                |       |         | 39,119     |                |       |             | —     |      |   |   | — |   |   |   | — |   |   | 39,119 |   |
| Issuance of restricted stock                                                    |       | 28,000                 |       | (644,313                   | )          |        | 1          |         |       | 2,846                                 |       |         | —     |                |       |             | —     |      |   |   | 5,870 |   |   |   | (8,717 | ) |   | — |   |
| Forfeiture of restricted stock                                                  |       | —                 |       | 32,632                     |       |        | —     |         |       | —                                |       |         | —     |                |       |             | —     |      |   |   | (394 | ) |   |   | 304 |   |   | (90 | ) |
| Amortization of unearned stock compensation                                     |       | —                 |       | —                     |       |        | —     |         |       | —                                |       |         | —     |                |       |             | —     |      |   |   | — |   |   |   | 6,683 |   |   | 6,683 |   |
| Issuance of common stock                                                        |       | 91,403                 |       | (366,118                   | )          |        | 1          |         |       | 1,132                                 |       |         | (427       | )                   |       |             | —     |      |   |   | 3,900 |   |   |   | — |   |   | 4,606 |   |
| Stock repurchase                                                                |       | —                 |       | 2,354,437                  |       |        | —     |         |       | —                                |       |         | —     |                |       |             | —     |      |   |   | (37,934 | ) |   |   | — |   |   | (37,934 | ) |
| Foreign currency translation adjustment, net of tax                             |       | —                 |       | —                     |       |        | —     |         |       | —                                |       |         | —     |                |       |             | 937        |      |   |   | — |   |   |   | — |   |   | 937 |   |
| Balance at December 31, 2004                                               |       | 37,902,998             |       | 2,297,991                  |       |        | 379        |         |       | 196,314                               |       |         | 190,252    |                |       |             | 2,043      |      |   |   | (36,921 | ) |   |   | (11,117 | ) |   | 340,950 |   |
| Net income                                                                      |       | —                 |       | —                     |       |        | —     |         |       | —                                |       |         | 59,407     |                |       |             | —     |      |   |   | — |   |   |   | — |   |   | 59,407 |   |
| Issuance of restricted stock                                                    |       | —                 |       | (431,589                   | )          |        | —     |         |       | 2,677                                 |       |         | —     |                |       |             | —     |      |   |   | 7,603 |   |   |   | (10,280 | ) |   | — |   |
| Forfeiture of restricted stock                                                  |       | —                 |       | 196,255                    |       |        | —     |         |       | —                                |       |         | —     |                |       |             | —     |      |   |   | (3,593 | ) |   |   | 513 |   |   | (3,080 | ) |
| Amortization of unearned stock compensation                                     |       | —                 |       | —                     |       |        | —     |         |       | 2,905                                 |       |         | —     |                |       |             | —     |      |   |   | — |   |   |   | 7,068 |   |   | 9,973 |   |
| Issuance of common stock                                                        |       | 60                     |       | (1,170,058                 | )          |        | —     |         |       | 3,188                                 |       |         | (8,772     | )                   |       |             | —     |      |   |   | 20,185 |   |   |   | — |   |   | 14,601 |   |
| Stock repurchase                                                                |       | —                 |       | 970,142                    |       |        | —     |         |       | —                                |       |         | —     |                |       |             | —     |      |   |   | (20,050 | ) |   |   | — |   |   | (20,050 | ) |
| Foreign currency translation adjustment, net of tax                             |       | —                 |       | —                     |       |        | —     |         |       | —                                |       |         | —     |                |       |             | (475       | )         |   |   | — |   |   |   | — |   |   | (475 | ) |
| Unrealized holding gains/(losses) on available for  sale securities, net of tax |       | —                 |       | —                     |       |        | —     |         |       | —                                |       |         | —     |                |       |             | 145        |      |   |   | — |   |   |   | — |   |   | 145 |   |
| Balance at  December 31, 2005                                              |       | 37,903,058             |       | 1,862,741                  |       |        | $          | 379          |       |                                  | $          | 205,084      |       |                | $          | 240,887          |       |      |   | $ | 1,713 |   |   |   | $ | (32,776 | ) |   |   | $ | (13,816 | ) |   | $ | 401,471 |   |

 

See accompanying notes.

F-7

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIESCONSOLIDATED STATEMENTSOF CASH FLOWS(in thousands)**

| ** **                                                            | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                            | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Operating activities**                                              |       |                                        |       |   |   |   |   |
| Cash flows from earnings:                                             |       |                                        |       |   |   |   |   |
| Net Income                                                            |       | $                                           | 59,407     |   | $ | 39,119 |   | $ | 21,040 |   |
| Reconciliation  of net income to net cash provided by earnings:       |       |                                        |       |   |   |   |   |
| Depreciation                                                          |       | 9,574                                       |       | 10,210 |   | 15,001 |   |
| Amortization                                                          |       | 1,053                                       |       | 1,394 |   | 1,995 |   |
| Amortization of employment contracts and unearned  stock compensation |       | 10,045                                      |       | 9,213 |   | 5,103 |   |
| Amortization of contract intangibles                                  |       | 1,777                                       |       | 2,205 |   | 2,079 |   |
| Bad debt expense                                                      |       | 853                                         |       | 1,116 |   | 2,764 |   |
| Provision for losses and writedowns for impairment on  real estate    |       | 23                                          |       | 672 |   | 5,908 |   |
| Loss (gain) on disposition of real estate held for  investment        |       | (11,661                                     | )          | (17,084 | ) | 41 |   |
| Minority interest                                                     |       | (4,013                                      | )          | 15,687 |   | (2,070 | ) |
| Deferred income tax expense (benefit)                                 |       | 7,003                                       |       | (3,978 | ) | (356 | ) |
| Income from investments in unconsolidated  subsidiaries               |       | (24,052                                     | )          | (17,689 | ) | (16,550 | ) |
| Distributions of earnings from unconsolidated  subsidiaries           |       | 7,721                                       |       | 2,702 |   | 1,899 |   |
| Net cash provided by earnings                                         |       | 57,730                                      |       | 43,567 |   | 36,854 |   |
| Changes  in operating assets and liabilities:                         |       |                                        |       |   |   |   |   |
| Restricted cash                                                       |       | 8,534                                       |       | (2,303 | ) | 1,274 |   |
| Accounts receivable                                                   |       | (25,114                                     | )          | (7,182 | ) | 16,834 |   |
| Receivables from affiliates                                           |       | (7,978                                      | )          | 16,365 |   | (12,240 | ) |
| Notes receivable and other assets                                     |       | (4,711                                      | )          | (8,776 | ) | (7,715 | ) |
| Real estate held for sale and under development                       |       | (146,387                                    | )          | (9,287 | ) | (7,271 | ) |
| Notes payable on real estate held for sale and under  development     |       | 109,824                                     |       | 7,953 |   | 3,651 |   |
| Accounts payable and accrued expenses                                 |       | 2,687                                       |       | 39,550 |   | 6,167 |   |
| Payables to affiliates                                                |       | (36                                         | )          | (64 | ) | 104 |   |
| Income taxes payable                                                  |       | 4,285                                       |       | 10,653 |   | 4,347 |   |
| Other liabilities                                                     |       | (1,844                                      | )          | 3,972 |   | 8,704 |   |
| Net cash flows from changes in working capital                        |       | (60,740                                     | )          | 50,881 |   | 13,855 |   |
| Net cash provided by (used in) operating activities                   |       | (3,010                                      | )          | 94,448 |   | 50,709 |   |
| **Investing activities**                                              |       |                                        |       |   |   |   |   |
| Expenditures for furniture and equipment                              |       | (9,819                                      | )          | (5,735 | ) | (10,458 | ) |
| Proceeds from sales and maturities of securities                      |       | 6,699                                       |       | — |   | — |   |
| Payment for purchase of securities                                    |       | (25,101                                     | )          | — |   | — |   |
| Additions to real estate held for investment                          |       | (39,492                                     | )          | (105,809 | ) | (26,303 | ) |
| Net proceeds from disposition of real estate held for  investment     |       | 38,881                                      |       | 67,298 |   | 16,479 |   |
| Investments in unconsolidated subsidiaries                            |       | (114,515                                    | )          | (6,715 | ) | (6,594 | ) |
| Distributions from unconsolidated subsidiaries                        |       | 28,542                                      |       | 13,849 |   | 28,838 |   |
| Net cash provided by (used in) investing activities                   |       | (114,805                                    | )          | (37,112 | ) | 1,962 |   |
| **Financing activities**                                              |       |                                        |       |   |   |   |   |
| Principal payments on long-term debt and  capital lease obligations   |       | (146,081                                    | )          | (121,934 | ) | (98,695 | ) |
| Proceeds from long-term debt                                          |       | 182,400                                     |       | 108,538 |   | 86,923 |   |
| Contributions from minority interest                                  |       | 18,444                                      |       | 19,742 |   | 3,488 |   |
| Distributions to minority interest                                    |       | (27,510                                     | )          | (19,569 | ) | (11,497 | ) |
| Proceeds from notes payable on real estate held for  investment       |       | 30,130                                      |       | 77,832 |   | 5,148 |   |
| Payments on notes payable on real estate held for  investment         |       | (17,649                                     | )          | (30,596 | ) | (3,259 | ) |
| Proceeds from exercise of stock options                               |       | 8,218                                       |       | 1,691 |   | 904 |   |
| Proceeds from issuance of common stock                                |       | 3,195                                       |       | 2,915 |   | 2,363 |   |
| Purchase of common stock                                              |       | (20,050                                     | )          | (37,934 | ) | (10,435 | ) |
| Net cash provided by (used in) financing activities                   |       | 31,097                                      |       | 685 |   | (25,060 | ) |
| Net increase (decrease) in cash and cash equivalents                  |       | (86,718                                     | )          | 58,021 |   | 27,611 |   |
| Cash and cash equivalents, beginning of period                        |       | 163,637                                     |       | 105,616 |   | 78,005 |   |
| Cash and cash  equivalents, end of period                             |       | $                                           | 76,919     |   | $ | 163,637 |   | $ | 105,616 |   |

 

See accompanying notes.

F-8

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIESCONSOLIDATED STATEMENTSOF COMPREHENSIVE INCOME(in thousands)**

| ** **                                                                                                                   | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                   | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income                                                                                                                   |       | $                                           | 59,407     |   | $ | 39,119 |   | $ | 21,040 |   |
| Other  comprehensive income:                                                                                                 |       |                                        |       |   |   |   |   |
| Foreign currency translation adjustments, net of tax  (expense) benefit of $336 in 2005, $(674) in 2004 and $(1,033) in 2003 |       | (475                                        | )          | 937 |   | 1,358 |   |
| Unrealized holding gains/(losses) on available for  sale securities, net of tax expense of $84 in 2005                       |       | 145                                         |       | — |   | — |   |
| Change in fair value of interest rate swap  agreement, net of tax expense of $229 in 2003                                    |       | —                                      |       | — |   | 337 |   |
| Comprehensive income                                                                                                         |       | $                                           | 59,077     |   | $ | 40,056 |   | $ | 22,735 |   |

 

See accompanying notes.

F-9

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 (dollars in thousands, except per share data)**

**1.**   Organization andSummary of Significant Accounting Policies

*Organization*

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

Services provided to user clients by the Company’sGlobal Services group are: corporate advisory services, project management andfacilities management. Corporate advisory services are brokerage andbrokerage-related services that include primarily tenant representationbrokerage services, as well as other transaction or portfolio services such asacquisition/disposition brokerage, lease administration and lease audits. Projectmanagement services include facility planning, construction oversight, spaceplanning, site consolidations, multi-location expansion programs, facilitiesdesign, signage conversions, portfolio-wide operational refits and upgrades,and workplace moves, adds, and changes. Facilities management services are buildingmanagement services that include administration and day-to-day operation,maintenance and repair of client-occupied facilities; office services;and call center services.

Services provided to investor clients by the Company’sGlobal Services group are: brokerage, construction management and propertymanagement. Brokerage services include project leasing (when the Company isengaged as the owner’s leasing agent for renewals, expansions and leasing ofvacant space in investor-owned properties) and capital markets (investmentsales and capital sourcing) services.  Construction management services are projectmanagement services that primarily include space planning and tenant finishcoordination, typically in conjunction with property management and leasingassignments. Property management services are building management services thatinclude all aspects of building operations, maintenance and repair, tenantrelations and oversight of building improvement processes.

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

The Development and Investment group provides developmentservices to users and pursues opportunistic but risk-mitigated development andinvestment in commercial real estate across a wide spectrum of product types,including industrial, office and retail properties; healthcare facilities ofall types (medical office buildings, hospitals and ambulatory surgery centers);higher education facilities, including 

F-10

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

**1.**   Organization and Summary of Significant Accounting Policies(Continued)

student housing; andresidential/mixed-use projects. The Company acts as the general manager of thedevelopment process, providing services that are vital in all stages of theprocess, including: (i) site identification, due diligence andacquisition; (ii) evaluating project feasibility, budgeting, schedulingand cash flow analysis; (iii) procurement of approvals and permits,including zoning and other entitlements; (iv) project finance advisoryservices; (v) coordination of project design and engineering; (vi) constructionbidding and management and tenant finish coordination; and (vii) projectclose-out and tenant move coordination. The Company may pursue development andinvestment activity on behalf of its user and investor clients (with noownership), in partnership with its clients (through co-investment—either on anindividual project basis or through a fund or program) or for its own account(100% Company ownership).

*Reclassifications*

In accordance withStatement of Financial Accounting Standards No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets* (“FAS 144”), certain assets and liabilities at December 31,2004, and certain revenues and expenses for the first three quarters of 2005,and the years ended December 31, 2004 and 2003, were reclassified toconform to the presentation at and for the year ended December 31, 2005(see Notes 10 and 15). As a result, certain balances differ from the amountsreported in previously filed documents. Certain distributions fromunconsolidated subsidiaries have been reclassified in the Company’sconsolidated statements of cash flows. As a result, cash flows from operatingactivities and investing activities differ from previously filed documents. Thesereclassifications had no impact on the Company’s consolidated balance sheets,statements of operations or earnings per share amounts.

*Use of Estimates*

The preparation of thefinancial statements in accordance with U.S. generally accepted accountingprinciples (“GAAP”) requires management to make estimates and assumptions thataffect the amounts reported in the financial statements and accompanying notes.Actual results could differ from those estimates.

*Consolidation*

The Company’s consolidatedfinancial statements include the accounts of the Company, variable interestentities (“VIEs”) in which the Company is the primary beneficiary and othersubsidiaries over which the Company has control.

*Variable Interest Entities*

The Company’s determinationof the appropriate accounting method with respect to its variable interests,including co-investments with its clients, is based on Financial AccountingStandards Board (“FASB”) Interpretation No. 46 (revised December 2003),*Consolidation of Variable Interest Entities*(“FIN 46R”). The Company consolidates any VIE of which the Company is theprimary beneficiary and discloses significant variable interests in VIEs ofwhich the Company is not the primary beneficiary.

F-11

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

**1.**   Organization and Summary of Significant Accounting Policies (Continued)

*Limited Partnerships, Limited Liability Companiesand Other Subsidiaries*

The Company’s determination of the appropriateaccounting method with respect to its investments in limited partnerships,limited liability companies and other subsidiaries is based on control. For theCompany’s general partner interests, the Company is presumed to control (andtherefore consolidates) the entity, unless the other limited partners havesubstantive rights that overcome this presumption of control. These substantiverights allow the limited partners to participate in significant decisions madein the ordinary course of the entity’s business. The Company accounts for itsnon-controlling general partner investments in these entities under the equitymethod. This treatment also applies to the Company’s managing member interestsin limited liability companies.  See *New Accounting Pronouncements* below for additionaldiscussion of EITF Issue No. 04-5, *DeterminingWhether a General Partner, or the General Partners as a Group, Controls aLimited Partnership or Similar Entity When the Limited Partners Have CertainRights*(“EITF 04-5”) regarding the Company’s general partnerinterests.

The Company’s determinationof the appropriate accounting method for all other investments in subsidiariesis based on the amount of influence the Company has (including its ownershipinterest) in the underlying entity. Those other investments where the Companyhas the ability to exercise significant influence (but not control) overoperating and financial policies of such subsidiaries (including certainsubsidiaries where the Company has less than 20% ownership) are accounted forusing the equity method. The Company eliminates transactions with such equitymethod subsidiaries to the extent of its ownership in such subsidiaries.Accordingly, the Company’s share of the earnings or losses of these equitymethod subsidiaries is included in consolidated net income. All remaininginvestments of the Company are carried at cost. Under either the equity or costmethod, impairment losses are recognized upon evidence of other-than-temporarylosses of value.

*Revenue Recognition*

The Company recognizes fees from property managementand facilities management services over the terms of the respective managementcontracts. Most of the property management contracts are cancelable at will orwith 30 days notice. The terms of the facilities management contractsgenerally range from three to five years, although many provide for shorterterms or earlier termination rights under certain circumstances. Also, theCompany earns incentive fees for facilities management services based onvarious quantitative and/or qualitative criteria specified in the managementagreement. These fees are recognized when quantitative criteria have been metor, for those incentive fees based on qualitative criteria, upon approval ofthe fee by the client. The Company’s management and incentive fee revenues arenot recognized to the extent that such revenues are subject to futureperformance contingencies, but are recognized once the contingency has beenresolved.

The Company’s project leasing and tenantrepresentation transactions are subject to commission agreements that typicallydescribe the calculation of the fee and when the Company earns such fee. Therecognition of revenue for each transaction is dictated by the terms of therelevant commission agreement, each of which may be unique. The commissionagreements generally provide that 50% of the commission is earned and payableupon execution of the lease and 50% is earned and payable upon the tenant’s 

F-12

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

**1.**   Organization and Summary of Significant Accounting Policies (Continued)

occupancy of the space. Generallythe first 50% of the commission is not contingent on the subsequent occupancyof the space. However, sometimes these agreements contain refund provisionswhereby the first 50% of the commission may be refundable should the tenant notoccupy the subject space. In cases where refund provisions or othercontingencies exist, the Company does not recognize the revenue until thecontingency is eliminated. Investment sales brokerage revenue is recognizedupon closing of the underlying real estate transaction. The Company does notrecognize these revenues until there is evidence of an arrangement, serviceshave been rendered, the price is determinable, and collectibility is reasonablyassured. These policies have been in place since the Company’s initial publicoffering in 1997.

Development services and project management servicesgenerate fees from development and construction management projects and netconstruction revenues, which are gross construction revenues net of subcontractcosts. For projects where the Company operates as a general contractor, feesare generally recognized using the percentage-of-completion method based oncosts incurred as a percentage of total expected costs. Gross constructionservices revenues totaled $46,641, $35,438 and $33,526 and subcontract coststotaled $41,775, $30,986 and $26,215 in 2005, 2004 and 2003, respectively. Somedevelopment and construction management and project management assignments aresubject to agreements that describe the calculation of fees and when theCompany earns such fees. The earnings terms of these agreements dictate whenthe Company recognizes the related revenues. The Company may earn incentive feesfor project management services based upon achievement of certain performancecriteria as set forth in the project management services agreement. The Companymay also earn incentive development fees by reaching specified time table,leasing, budget or value creation targets, as defined in the relevantdevelopment services agreement. Certain incentive development fees allow theCompany to share in the fair value of the developed real estate asset abovecost. This sharing creates additional revenue potential to the Company with noexposure to loss other than opportunity cost. The Company recognizes such feeswhen the specified target is attained.

The Company records deferred income to the extent thatcash payments have been received in accordance with the terms of underlyingagreements, but such amounts have not yet met the criteria for revenuerecognition in accordance with GAAP. The Company recognizes such revenues whenthe appropriate criteria are met.

Certain of the Company’scontracts provide for reimbursement for employee-related costs which theCompany recognizes as revenue. Also, in accordance with EITF 01-14, *Income Statement Characterization of ReimbursementsReceived for “Out-of-Pocket” Expenses Incurred*, certainreimbursements received from clients for out-of-pocket expenses arecharacterized as revenue in the statement of income rather than as a reductionof the expenses incurred. Since the Company is the primary obligor, hassupplier discretion and bears credit risk for such expenses, the Companyrecords reimbursement revenue for such out-of-pocket expenses. Reimbursementrevenue is recognized when the underlying reimbursable costs are incurred.

F-13

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

**1.**   Organization and Summary of Significant Accounting Policies (Continued)

*Real Estate*

*Classification and Impairment Evaluation*

The Company classifies real estate in accordance withthe criteria of FAS 144 as follows: (i) Real estate held for sale, whichincludes completed assets or land for sale in its present condition that meetall of the FAS 144 “held for sale” criteria, (ii) Real estate underdevelopment (current), which includes real estate that the Company is in theprocess of developing that is expected to be completed and disposed of withinone year of the balance sheet date; (iii) Real estate under development(non-current), which includes real estate that the Company is in the process ofdeveloping that is expected to be completed and disposed of more than one yearfrom the balance sheet date; or (iv) Real estate held for investment,which consists of completed assets not expected to be disposed of within oneyear of the balance sheet date and land on which development activities havenot yet commenced. Any asset reclassified from real estate held for sale toreal estate under development (current or non-current) or real estate held forinvestment is recorded individually at the lower of its fair value at the dateof the reclassification or its carrying amount before it was classified as “heldfor sale,” adjusted (in the case of real estate held for investment) for anydepreciation that would have been recognized had the asset been continuouslyclassified as real estate held for investment.

Real estate held for sale is recorded at the lower ofcost or fair value less cost to sell. If an asset’s fair value less cost tosell, based on discounted future cash flows or market comparisons, is less thanits carrying amount, an allowance is recorded against the asset.

Real estate underdevelopment and real estate held for investment are carried at cost lessdepreciation, as applicable. When indicators of impairment are present, realestate under development and real estate held for investment are evaluated forimpairment and losses are recorded when undiscounted cash flows estimated to begenerated by an asset are less than the asset’s carrying amount. The amount ofthe impairment loss is calculated as the excess of the asset’s carrying valueover its fair value, which is determined using a discounted cash flow analysisor market comparisons. Buildings and improvements included in real estate heldfor investment are depreciated using the straight-line method over estimateduseful lives, generally 39 years. Tenant improvements included in realestate held for investment are amortized using the straight-line method overthe shorter of their estimated useful lives or terms of the respective leases.

*Cost Capitalization and Allocation*

When acquiring, developing and constructing realestate assets, the Company capitalizes costs in accordance with Statement ofFinancial Accounting Standards No. 67, *Accounting for Costs andthe Initial Rental Operations of Real Estate Properties*(“FAS 67”). Capitalizationbegins when the activities related to development have begun and ceases whenactivities are complete. Costs capitalized under FAS 67 include pursuit costs,or pre-acquisition/pre-construction costs, taxes and insurance, development andconstruction costs and costs of incidental operations. Pursuit costscapitalized in connection with a potential development project that the Companyhas determined not to pursue are written off in the period that determinationis made.

F-14

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

**1.**   Organization and Summary of Significant Accounting Policies (Continued)

The Company often purchases bulk land that it intendsto sell or develop in phases. The land basis allocated to each phase is basedon the relative estimated fair value of the phases before construction. TheCompany allocates construction costs incurred relating to more than one phasebetween the various phases; if the costs cannot be specifically identified to acertain phase or the improvements benefit more than one phase, the Companyallocates the costs between the phases based on their relative estimated salesvalues. Relative allocations of the costs are changed as the estimates arerevised.

When acquiring real estatewith existing buildings, the Company allocates the purchase price between land,building and intangibles related to in-place leases, if any, based on theirrelative fair values. The fair values of acquired land and buildings aredetermined based on an estimated discounted future cash flow model withlease-up assumptions as if the building was vacant upon acquisition. The fairvalue of in-place leases includes the value of net lease intangibles for aboveor below-market rents and tenant origination costs, determined on a lease bylease basis. The capitalized values for both net lease intangibles and tenantorigination costs are amortized over the term of the underlying leases. Amortizationrelated to net lease intangibles is recorded as either an increase to or areduction of rental income and amortization for tenant origination costs isrecorded to amortization expense.

*Dispositions of Real Estate*

Gains on disposition ofreal estate are recognized upon sale of the underlying project in accordancewith Statement of Financial Accounting Standards No. 66, *Accounting for Sales of Real Estate*. TheCompany evaluates each real estate sale transaction to determine if itqualifies for gain recognition under the full accrual method. If thetransaction does not meet the criteria for the full accrual method of profitrecognition based on the Company’s assessment, the Company accounts for a salebased on an appropriate deferral method determined by the nature and extent ofthe buyer’s investment and the Company’s continuing involvement.

*Discontinued Operations*

FAS 144 extends thereporting of a discontinued operation to a “component of an entity,” butfurther requires that a component be classified as a discontinued operation ifthe operations and cash flows of the component have been or will be eliminatedfrom the ongoing operations of the entity in the disposal transaction and theentity will not have any significant continuing involvement in the operationsof the component after the disposal transaction. As defined in FAS 144, a “componentof an entity” comprises operations and cash flows that can be clearlydistinguished, operationally and for financial reporting purposes, from therest of the entity. Because each of the Company’s real estate assets isgenerally accounted for in a discrete subsidiary, almost every real estateasset constitutes a component of an entity under FAS 144, increasing thelikelihood that the disposition of assets the Company holds for sale in theordinary course of business must be reported as a discontinued operation unlessthe Company has significant continuing involvement in the operations of theasset after its disposition. Furthermore, operating profits and losses on suchassets are required to be recognized and reported as operating profits andlosses on discontinued operations in the periods in which they occur. TheCompany has certain real estate assets that are land parcels and may constitutea component of an entity. From time to time, the 

F-15

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

**1.**   Organization and Summary of Significant Accounting Policies (Continued)

Companydisposes of these land parcels in smaller lots. An individual lot that is partof a larger land parcel may constitute a component of an entity within themeaning of paragraph 41 of FAS 144 when it is either classified as held forsale in accordance with FAS 144 or sold.

*Goodwill*

Goodwill reflects theexcess of purchase price over the fair value of specifically identified netassets purchased. Accumulated amortization of goodwill was $9,840 and $9,837 atDecember 31, 2005 and 2004, respectively. In accordance with Statement ofFinancial Accounting Standards No. 142, *Goodwilland Other Intangibles* (“FAS 142”), goodwill and intangibleassets deemed to have indefinite lives are not amortized but are subject toannual impairment tests. These impairment tests are based on the comparison ofthe fair value of each of the Company’s reporting units to the carrying valueof such unit. If the fair value of the reporting unit falls below its carryingvalue, goodwill is deemed to be impaired and a writedown of goodwill isrecognized. The Company’s reporting units mirror its two segments, GlobalServices and Development and Investment, as each segment’s underlying businessunits have similar long-term economic characteristics and service deliverycapabilities. All of the Company’s goodwill relates to its Global Servicessegment. The Company has performed the required impairment tests underFAS 142 and determined that no impairment of its goodwill existed at December 31,2005.

*Intangible Assets*

The Company’s intangible assets primarily includecontract intangibles, employment-related contracts and the value of managementcontracts acquired by the Company through business acquisitions. Intangibleassets are evaluated when indicators of impairment are present and losses arerecorded when undiscounted cash flows estimated to be generated by an asset areless than an asset’s carrying amount. The amount of the impairment loss iscalculated as the excess of the asset’s carrying value over its fair value,which is determined using a discounted cash flow analysis.

The Company’s contract intangibles consist of upfrontcash payments to clients and direct third party costs incurred in order toenter into new long-term outsourcing contracts. These costs are considered partof the total contract cost when negotiating the future revenue to be receivedunder a new contract. These payments and costs are capitalized and amortized asa reduction of the related revenue over the life of the underlying contract. TheCompany also classifies any writedowns of such capitalized upfront payments orcosts due to impairment in value, such as might occur upon the earlytermination of a contract, as a reduction of revenue.

F-16

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

**1.**   Organizationand Summary of Significant Accounting Policies (Continued)

From time to time, the Company enters into contractswith certain management-level employees and brokers, as well as employees hiredin connection with acquisitions of real estate services companies. To theextent that any amount paid or loaned to an employee (generally at theinception of the employment relationship or in connection with employeerelocations) in accordance with these agreements is contractually tied to anemployee’s future performance with the Company, the amount is expensed ascompensation over the period that such performance is achieved, as stipulatedin the applicable agreement. Amounts loaned to employees under thesearrangements are included in notes and other receivables and other assets inthe Company’s consolidated balance sheet.

In connection with certain acquisitions, the Companyhas recorded intangible assets related to the value of certain managementcontracts acquired. These intangible assets are amortized over the estimatedlife of the contracts, generally from five to six years.

*MarketableSecurities*

The Company accounts for investments in marketabledebt and equity securities in accordance with Statement of Financial AccountingStandards No. 115,*Accounting forCertain Investments in Debt and Equity Securities* (“FAS 115”). TheCompany determines the appropriate classification of debt and equity securitiesat the time of purchase and reevaluates such designation as of each balancesheet date. The Company classifies marketable securities it acquires with theintent to generate a profit from short-term movements in market prices astrading securities. Debt securities are classified as held to maturity when theCompany has the positive intent and ability to hold the securities to maturity.Marketable equity and debt securities not classified as trading or held tomaturity are classified as available for sale. All of the marketable securitiesheld by the Company at December 31, 2005 were classified as available forsale.

In accordance with FAS115, the available for sale securities are carried at their fair market valueand any difference between cost and market value expected to be temporary isrecorded as unrealized gain or loss, net of income taxes, and is reported asaccumulated other comprehensive income in the consolidated statement ofstockholders’ equity. Premiums and discounts are recognized in interest andother income using the effective interest method. Realized gains and losses anddeclines in value expected to be other-than-temporary on available for salesecurities are included in interest and other income. The cost of securitiessold is based on the specific identification method. Interest and dividends onsecurities classified as available for sale are included in interest and otherincome.

*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.

F-17

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

**1.**   Organization and Summary of Significant AccountingPolicies (Continued)

*Cash and CashEquivalents*

Cash and cash equivalentsconsist of cash and short-term, highly liquid investments with originalmaturities of 90 days or less when purchased.

*Restricted Cash*

At December 31, 2005and 2004, restricted cash primarily consisted of $950 and $8,254, respectively,received by the Company from clients for future development costs on buildingsbeing renovated or constructed by the Company on behalf of such clients. Contractualrestrictions provide that these funds can only be used to pay for constructioncosts related to the underlying renovation or construction projects. Inaddition, restricted cash included $449 and $1,696 at December 31, 2005and 2004, respectively, related to cash held by a VIE that the Companyconsolidates as the primary beneficiary (see Note 2).

*Furniture andEquipment*

Furniture and equipmentare stated at cost and include assets under capital leases. Depreciation iscomputed using the straight-line method over estimated useful lives, whichgenerally range from three to five years, and includes amortization of assetsrecorded under capital leases.

*Concentration ofCredit Risk*

The Company providesservices to owners and users of real estate assets primarily in the UnitedStates. The Company generally does not require collateral from its clients. Therisk associated with this concentration is mitigated because of the largenumber of clients and their geographic dispersion.

*Earnings Per Share*

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

| ** **                                          | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                          | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Basic  weighted-average common shares outstanding   |       | 33,786,147                                  |       | 35,064,453 |   | 35,572,493 |   |
| Dilutive effect  of common stock equivalents        |       | 2,654,793                                   |       | 2,175,348 |   | 1,208,022 |   |
| Diluted weighted-average  common shares outstanding |       | 36,440,940                                  |       | 37,239,801 |   | 36,780,515 |   |

 

*Stock-BasedCompensation*

The Company has elected to use the intrinsic methodunder Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees* (“APB25”), to account for its stock-based compensation arrangements (seeNote 11). Compensation expense for stock options is recognized to theextent the market price of the underlying stock on the date of grant exceedsthe exercise price of the option. The 

F-18

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

**1.**   Organization and Summary of Significant Accounting Policies (Continued)

Company recognizescompensation expense related to restricted stock awards over the vesting periodof the underlying award in an amount equal to the fair market value of theCompany’s stock on the date of grant.  For awards with graded vesting, compensationexpense is recognized using the accelerated expense attribution methoddescribed in FASB Interpretation No. 28, *Accountingfor Stock Appreciation Rights and Other Variable Stock Option or Award Plans*.

Pro forma information regarding net income and netincome per share, shown in the table below, has been determined as if theCompany had applied the fair value recognition provisions of Statement ofFinancial Accounting Standards No. 123, *Accountingfor Stock-Based Compensation*(“FAS 123”). The fair value for these options was estimated atthe date of grant using a Black-Scholes option pricing model with thefollowing weighted-average assumptions for 2003: risk-free interest ratesof 3.21%; a dividend yield of 0.00%; volatility factors of the expected marketprice of the Company’s common stock of 0.407; and a weighted-averageexpected life of the options of seven years. The Company made no option grantsin 2004 or 2005.

The Company elected to use the intrinsic method inaccounting for its stock-based compensation arrangements in part because thealternative fair value accounting requires the use of option valuation modelsthat were not developed for use in valuing employee stock options. The Black-Scholesoption valuation model was developed for use in estimating the fair value oftraded options, which have no vesting restrictions and are fully transferable. Inaddition, option valuation models require the input of highly subjectiveassumptions including the expected stock price volatility. Because the Company’semployee stock options have characteristics significantly different than thoseof traded options, and because changes in the subjective input assumptions canmaterially affect the fair value estimate, in management’s opinion, theexisting models do not necessarily provide a reliable single measure of thefair value of its employee stock options.

F-19

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

**1.**   Organization and Summary of Significant AccountingPolicies (Continued)

For the purpose of proforma disclosures, the estimated fair value of the options was amortized toexpense over the options’ vesting period. Pro forma information is as follows:

| ** **                                                                                                                              | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                              | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income, as  reported                                                                                                                |       | $                                           | 59,407     |   | $ | 39,119 |   | $ | 21,040 |   |
| Add: Stock-based  employee compensation expense included in net income, net of related tax  effects                                     |       | 4,288                                       |       | 4,097 |   | 2,216 |   |
| Deduct:  Stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | 5,125                                       |       | 5,844 |   | 5,034 |   |
| Pro forma net  income                                                                                                                   |       | $                                           | 58,570     |   | $ | 37,372 |   | $ | 18,222 |   |
| Net income per  share:                                                                                                                  |       |                                        |       |   |   |   |   |
| Basic—as reported                                                                                                                  |       | $                                           | 1.76       |   | $ | 1.12 |   | $ | 0.59 |   |
| Basic—pro forma                                                                                                                    |       | $                                           | 1.73       |   | $ | 1.07 |   | $ | 0.51 |   |
| Net income per share:                                                                                                                   |       |                                        |       |   |   |   |   |
| Diluted—as reported                                                                                                                |       | $                                           | 1.63       |   | $ | 1.05 |   | $ | 0.57 |   |
| Diluted—pro forma                                                                                                                  |       | $                                           | 1.61       |   | $ | 1.00 |   | $ | 0.50 |   |

 

*Guarantees*

The Company accounts forits guarantees of the obligations of others in accordance with FASBInterpretation No. 45, *Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including DirectGuarantees of Indebtedness of Others* (“FIN 45”). FIN 45 requiresthat guarantors recognize a liability for certain guarantees at the fair valueof the guaranteed obligation at the inception of the guarantee, even if thelikelihood of performance under the guarantee is remote. See Note 19 fordisclosures related to the Company’s guarantees in accordance with FIN 45.

*Non-ControllingInterests in Consolidated Limited Life Subsidiaries*

In May 2003, the FASBissued Statement of Financial Accounting Standards No. 150, *Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity* (“FAS 150”). Certainprovisions of FAS 150 would have required the Company to classifynon-controlling interests in consolidated limited life subsidiaries asliabilities adjusted to their settlement values in the Company’s financialstatements. In November 2003, the FASB indefinitely deferred applicationof the measurement and recognition provisions (but not the disclosurerequirements) of FAS 150 with respect to these non-controlling interests. As ofDecember 31, 2005, the estimated settlement value of non-controllinginterests in the Company’s consolidated limited life subsidiaries was $4,908,as compared to book value (included in minority interest on the Company’sbalance sheet) of $4,657. The excess of settlement value over book value isdriven by an even larger estimated appreciation of certain consolidated realestate assets and 

F-20

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

**1.**   Organization and Summary of Significant AccountingPolicies (Continued)

investmentsfrom the Company’s book value, offset by estimated selling costs and debtprepayment penalties, if any.

*New AccountingPronouncements*

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

FAS 123R will become effective for the Companybeginning January 1, 2006. FAS 123R permits public companies to adopt itsrequirements using one of two methods: a “modified-prospective” method or a “modified-retrospective”method. The Company plans to adopt FAS 123R using the modified-prospectivemethod under which it will record compensation expense for all share-basedawards granted after the effective date and for those unvested awards grantedprior to the effective date.

As permitted by FAS 123, the Company currentlyaccounts for share-based payments to employees using APB 25’s intrinsic valuemethod and, as such, generally recognizes no compensation cost for the fairvalue of employee stock options or for the difference between the employee’scost and the market value of stock purchased under the Company’s employee stockpurchase plan. Accordingly, the adoption of FAS 123R’s fair value methodcould have a significant impact on the Company’s results of operations,although it is not expected to impact the Company’s overall financial position.The total impact of adoption of FAS 123R cannot be predicted at this timebecause it will depend on levels of share-based payments granted in the future.However, the amount of additional expense the Company will recognize subsequentto adoption related to unvested stock options granted prior to adoption (net ofestimated forfeitures) is not material. FAS 123R will also require the Companyto estimate forfeitures of share-based payments upon grant. Prior to theadoption of FAS 123R, the Company’s policy has been to reverse expense relatedto forfeitures of restricted stock as they occur. In the first quarter of 2006,the Company will record additional income of approximately $1,006, net ofincome taxes, as a cumulative effect of a change in accounting principle. Thiscumulative effect represents a reversal of expense taken for those shares ofunvested restricted stock granted prior to adoption that the Company estimateswill be forfeited before vesting.

FAS 123R also requires the benefits of tax deductionsin excess of recognized compensation cost to be reported as a financing cashflow, rather than as an operating cash flow as required under currentliterature. This requirement will reduce net operating cash flows and increasenet financing cash flows in periods after adoption. While the Company cannotestimate what those amounts will be in the future (because they depend on,among other things, when employees exercise stock options), the amount ofoperating cash flows recognized in prior periods for such excess tax deductionsrelated to the exercise of stock options and vesting of restricted stock was$6,093 in 2005 and not material in 2004 or 2003.

F-21

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

**1.**   Organization and Summary of Significant AccountingPolicies (Continued)

In June 2005, the FASB ratified the consensus inEITF 04-5, which states that the general partner in a limited partnershipis presumed to control that limited partnership. That presumption may beovercome if the limited partners have either (1) the substantive ability—eitherby a single limited partner or through a simple majority vote—to dissolve(liquidate) the limited partnership or otherwise remove the general partnerwithout cause or (2) substantive participating rights. Substantiveparticipating rights provide the limited partners with the ability toeffectively participate in significant decisions that would be expected to bemade in the ordinary course of the limited partnership’s business and therebypreclude the general partner from exercising unilateral control over thepartnership.

The effective date forapplying the guidance in EITF 04-5 to the Company’s general partnerinterests is June 29, 2005, for all new or amended limited partnershipsand January 1, 2006, for all other limited partnerships. The Company hasapplied EITF 04-5 for new or amended limited partnerships after June 29,2005, in its December 31, 2005, financial statements. The Company isevaluating the impact of the new guidance on all other limited partnerships. TheCompany expects that the adoption for existing partnerships will not have amaterial impact on the Company’s net income, earnings per share or stockholders’equity, but could require balance sheet consolidation or de-consolidation ofcertain of those existing partnerships.

**2.**   Variable InterestEntities

The Company was involved in the formation of a legalentity to act primarily as an agent of the Company to enter into policies withinsurance carriers. The policies are for various types of insurance, includinggeneral liability, workers’ compensation and automotive. The entity iswholly-owned by an employee of the Company who holds the appropriate localinsurance agent’s license required to issue these insurance policies on behalfof the insurance carriers. The entity collects premiums and remits them to theinsurance carriers. In exchange, the entity receives commissions from theinsurance carriers and remits a portion of the commission revenue to theCompany (determined at the Company’s full discretion) in accordance with a facilitiesand services agreement. Based upon its evaluation, the Company consolidatesthis entity as the primary beneficiary of a VIE under FIN 46R. As of December 31,2005, the Company had $449 recorded in restricted cash and $344 recorded inavailable for sale securities (non-current) that serve as collateral for theVIE’s obligations to the insurance carriers.

In 2005, the Company restructured a consolidatedentity established to develop an office building by admitting a majorityinterest partner. Based upon its evaluation at this reconsideration event, theCompany consolidates this entity as the primary beneficiary of a VIE. Theentity’s note payable balance of $26,520 at December 31, 2005, isnon-recourse to the Company and is collateralized by the underlying real estateproject.

F-22

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

**2.**   VariableInterest Entities (Continued)

In 2005, the Company acquired $110,000 of tax creditsthrough a program enacted by the Community Renewal Tax Relief Act of 2000. Thisprogram creates tax credits for equity investments in Community DevelopmentEntities (“CDEs”). The CDEs make qualified loans to Qualified Active Low-IncomeCommunity Businesses. Also in 2005, the Company obtained 0% to 0.01% managinginterests in various CDEs established to make these loans. The CDEs’ equityused to fund the loans was contributed by its 99.99% to 100% third partyinvestor members. Through December 31, 2005, the CDEs have made qualifiedloans totaling approximately $59,875. The Company has determined that each ofthese CDEs is a VIE. However, based upon its evaluation, the Company is not theprimary beneficiary of the entities. The Company believes that its maximumexposure to loss as a result of its involvement with these VIEs is notmaterial. Additionally, in 2005, the Company obtained a 49% membership interestin a related entity that acts as the administrative member performing loanservicing and tax matters for the CDEs. Based upon the Company’s evaluation,this entity is also a VIE since the entity’s equity was funded from up-frontfees received from the CDEs. However, based upon its evaluation, the Company isnot the primary beneficiary of the entity. The Company believes that itsmaximum exposure to loss as a result of its involvement with this VIE is notmaterial.

In 2004, the Company issued a budget guaranty relatingto a development project. Under the budget guaranty, the Company is responsiblefor all costs in excess of an approved budget of approximately $35,520. TheCompany was involved in the design of the underlying entity and has determinedthat its budget guaranty represents a variable interest in a VIE for which theCompany is not the primary beneficiary. The Company cannot estimate its actualmaximum exposure to loss as a result of its involvement with this VIE becausethe budget guaranty is unlimited. However, based on the Company’s experience ofminimal payments under similar arrangements and the existence of a guaranteedmaximum price contract between the general contractor and the owner of theproject that mitigates the Company’s risk, the Company believes that itsexposure to loss is not material.

The Company is part of aco-lender group with an independent third party that issued a mezzanine loan tothe owner of two office buildings. In April 2000, the Company provided$567 of the total $5,667 mezzanine loan. At that time, another independentthird-party lender provided the senior financing of $19,100 to the owner. TheCompany also provides building management and leasing services for thebuildings under a long-term contract at market rates for such services. Themezzanine loan arrangement is considered to be a variable interest in theentity that owns the property, which the Company believes is a VIE. However,based upon the Company’s evaluation, the Company is not the primary beneficiaryof the entity, and, therefore, the Company has not consolidated the VIE. TheVIE sold one of its buildings in December 2004 and paid a portion of theCompany’s note receivable at that time. The Company’s maximum exposure to lossas a result of its involvement with this VIE is limited to its outstanding notebalance of $430 as of December 31, 2005.

**3.**   Real Estate

The Company providesbuild-to-suit services for its clients and also develops or purchases certainprojects which it intends to sell to institutional investors upon projectcompletion or redevelopment. Therefore, the Company has ownership of realestate until such projects are sold. Certain real estate assets 

F-23

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

**3.**   Real Estate (Continued)

owned bythe Company secure the outstanding balances of underlying mortgage orconstruction loans. All real estate is included in the Company’s Developmentand Investment segment (see Note 21). At December 31, real estateconsisted of the following:

| ** **                                                        | ** ** | **2005** | ** ** |
|-------------------------------------------------------------------|------------|----------|------------|
| ** **                                                        | ** ** | **Land** | ** ** | **Buildings and  Improvements** | ** ** | **Other** | ** ** | **Total** | ** ** |
| Real estate under  development (current)                          |       | $        | 36,625     |   |   | $ | 93,338 |   |   | $ | — |   | $ | 129,963 |   |
| Real estate  included in assets held for sale  (see Note 10) |       | 6,289    |       |   | 14,245 |   |   | — |   | 20,534 |   |
| Real estate under  development  (non-current)                     |       | 107,634  |       |   | 9,576 |   |   | — |   | 117,210 |   |
| Real estate held  for investment                                  |       | 44,710   |       |   | 44,990 | (1) |   | 206 |   | 89,906 |   |
|                                                              |       | $        | 195,258    |   |   | $ | 162,149 |   |   | $ |    206 | (2) | $ | 357,613 |   |

 

| ** **                                                       | ** ** | **2004** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|
| ** **                                                       | ** ** | **Land** | ** ** | **Buildings and  Improvements** | ** ** | **Other** | ** ** | **Total** | ** ** |
| Real estate under  development (current)                         |       | $        | 2,926      |   |   | $ | 6,638 |   |   | $ | — |   | $ | 9,564 |   |
| Real estate  included in assets held for sale (see Note 10) |       | 31,931   |       |   | 16,938 |   |   | 1 |   | 48,870 |   |
| Real estate under  development  (non-current)                    |       | 27,529   |       |   | 28,865 |   |   | — |   | 56,394 |   |
| Real estate held  for investment                                 |       | 72,123   |       |   | 32,889 | (1) |   | 1,145 |   | 106,157 |   |
|                                                             |       | $        | 134,509    |   |   | $ |  85,330 |   |   | $ | 1,146 | (2) | $ | 220,985 |   |

----

(1)                Net of accumulateddepreciation of $2,075 and $783 at December 31, 2005 and 2004,respectively.

(2)                Includes balancesfor lease intangibles and tenant origination costs of $(1,627) and $1,833 at December 31,2005, and $(1,238) and $2,384 at December 31, 2004, respectively. TheCompany records lease intangibles and tenant origination costs upon acquiringbuildings with in-place leases. The balances are shown net of amortization(recorded as an increase to or a reduction of rental income for leaseintangibles and as amortization expense for tenant origination costs).

No material provisions for losses on real estate heldfor sale were recorded in 2005 or 2004. In 2003, the Company recordedprovisions for losses on real estate of $1,903 to increase the allowances onreal estate held for sale to reflect assets at fair value less cost to sell, ofwhich $1,395 was included in discontinued operations in the consolidatedstatement of income and all remaining amounts were included in general andadministrative expenses. With respect to one project to which these allowancesrelate, the related non-recourse note payable matured in 2004, and the Companyconveyed the underlying property to the lender in order to satisfy the note.

During 2004 and 2003, the Company recorded writedownsfor impairment of real estate (not classified as held for sale at the time ofsuch writedowns) totaling $578 and $4,005, respectively. In 2004 and 2003, 

F-24

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

**3.**   Real Estate (Continued)

$120 and $2,826 of suchimpairments were included in discontinued operations in the consolidatedstatement of income, and all remaining amounts were included in general andadministrative expenses. There were no such writedowns for impairment in 2005.

The 2004 writedowns for impairment primarily relate toa vacant land parcel in a market in which rental rates continued to decline andvacancy rates continued to increase. The Company obtained market comparisonsfor the land parcel and determined that, based on those market comparisons, thevalue of the land was impaired. A portion of the 2004 and 2003 writedownsrelated to a real estate project located in a market with high vacancy ratesand other buildings likely to lease up prior to the Company’s building. Thefair value of the asset was based on market comparisons obtained by the Company.The Company sold the underlying asset and funded $316 of the recourse notepayable in August 2004. The 2003 writedowns also reflected****impairment related to a single-tenant office/industrialreal estate project. The non-recourse note payable related to the project hadmatured and subsequently, the Company conveyed the underlying property to thelender to satisfy the note. The fair value of the asset was determined based ona discounted cash flow projection prior to the conveyance of the property tothe lender.

In 2005, the partnership agreements of two real estatepartnerships that were consolidated by the Company were amended. The other partnersof the partnerships have substantive rights and therefore, the Company beganusing the equity method of accounting for these real estate subsidiaries,resulting in a non-cash reduction in real estate of $29,859, a non-cashdecrease in other current assets of $866, a non-cash increase in investment insubsidiaries of $4,376, a non-cash decrease in other assets of $247, a non-cashincrease in accrued expenses of $57, a non-cash reduction in notes payable onreal estate of $24,390 and a non-cash decrease in minority interest of $2,149. Nogain or loss was recognized on these transactions.

In 2003, the Company sold a parcel of land for $1,750,of which $1,125 of the consideration received was in the form of aninterest-bearing note from the buyer. The Company retained a unilateral rightto repurchase the property at any time through 2006, in addition to maintainingthe right to approve any plans for development on the property. If the Companyexercises its repurchase option, the Company would repay the amount it receivedfrom the buyer, plus a return on the buyer’s investment. Because of the Company’scontinuing involvement in and option to repurchase the property, thetransaction was recorded as a financing transaction rather than a sale. As of December 31,2005, real estate under development (non-current) included $1,408 and currentportion of notes payable on real estate included $1,750 related to this parcelof land.

The estimated costs to complete the 31 consolidatedreal estate projects under development or to be developed by the Company as of December 31,2005, totaled $310,172. At December 31, 2005, the Company had commitmentsfor the sale of five of the projects.

Rental revenues (which areincluded in development and construction revenue) and expenses (which areincluded in general and administrative expenses) relating to the Company’soperational real estate properties, excluding those reported as discontinuedoperations, were $8,849 and $7,889, respectively in 2005, $10,081 and $7,115,respectively, in 2004 and $9,434 and $4,632, respectively, in 2003.

F-25

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

**4.**   Marketable Securities

Thefollowing table is a summary of marketable securities held by the Company at December 31,2005, all of which were classified as available for sale. The Company held nomarketable securities at December 31, 2004.

| ** **                                                            | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| U.S. Treasury  securities and obligations of U.S. government agencies |       |                | $          | 6,158                        |       |                          |       | $                          | 10         |   |   |   | $ | (57 | ) |   |   | $ | 6,111 |   |   |
| Corporate debt  securities                                            |       |                | 3,254      |                         |       |                          | 2          |                       |       |   | (42 | ) |   |   | 3,214 |   |   |
| Asset-backed  securities                                              |       |                | 1,592      |                         |       |                          | 4          |                       |       |   | (6 | ) |   |   | 1,590 |   |   |
| Collateralized  mortgage obligations                                  |       |                | 1,715      |                         |       |                          | 1          |                       |       |   | (18 | ) |   |   | 1,698 |   |   |
| Total debt  securities                                                |       |                | 12,719     |                         |       |                          | 17         |                       |       |   | (123 | ) |   |   | 12,613 |   |   |
| Equity securities                                                     |       |                | 5,683      |                         |       |                          | 511        |                       |       |   | (176 | ) |   |   | 6,018 |   |   |
| Total available for sale  securities                                  |       |                | $          | 18,402                       |       |                          |       | $                          | 528        |   |   |   | $ | (299 | ) |   |   | $ | 18,631 |   |   |

 

Thenet carrying value and estimated fair value of debt securities at December 31,2005, by contractual maturity, are shown below. Actual repayment dates maydiffer from contractual maturities because the issuers of the securities mayhave the right to prepay obligations.

| ** **                              | ** ** | **Amortized  Cost** | ** ** | **Estimated  Fair Value** | ** ** |
|-----------------------------------------|------------|---------------------|------------|--------------------------------|------------|
| **Debt securities:**                    |       |                |       |                           |       |   |   |   |   |
| Due in one year  or less                |       |                | $          | 499                            |       |   |   | $ | 495 |   |   |
| Due after one  year through five years  |       |                | 5,208      |                           |       |   | 5,154 |   |   |
| Due after five  years through ten years |       |                | 3,543      |                           |       |   | 3,512 |   |   |
| Due after ten  years                    |       |                | 162        |                           |       |   | 163 |   |   |
| Asset-backed  securities                |       |                | 1,592      |                           |       |   | 1,591 |   |   |
| Collateralized  mortgage obligations    |       |                | 1,715      |                           |       |   | 1,698 |   |   |
| Total debt securities                   |       |                | $          | 12,719                         |       |   |   | $ | 12,613 |   |   |

 

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

F-26

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

**5.**   Furnitureand Equipment

Furnitureand equipment consisted of the following at December 31: 

| ** **                                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|
| Owned assets, at  cost                                         |       | $        | 53,314     |     | $          | 47,418 |   |
| Less: Accumulated  depreciation on owned assets                |       | 33,801   |       | 30,388   |       |
|                                                           |       | 19,513   |       | 17,030   |       |
| Assets under capital  leases                                   |       | 525      |       | 4,890    |       |
| Less: Accumulated  amortization on assets under capital leases |       | 251      |       | 3,271    |       |
|                                                           |       | 274      |       | 1,619    |       |
| Furniture and equipment,  net                                  |       | $        | 19,787     |     | $          | 18,649 |   |

 

**6.**   Investments in UnconsolidatedSubsidiaries

Investmentsin unconsolidated subsidiaries consisted of the following at December 31:

| ** **  | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------|------------|----------|------------|----------|------------|
| Real estate |       | $        | 44,496     |     | $          | 39,829 |   |
| Other       |       | 130,915  |       | 34,261   |       |
|        |       | $        | 175,411    |     | $          | 74,090 |   |

 

As part of its real estate development activities, theCompany has numerous investments in unconsolidated subsidiaries, generally withunaffiliated parties. These underlying entities typically own real estateinvestments and carry debt related to the financing of such real estate.

The aggregate carrying amount of the Company’s costmethod investments was $2,209 at December 31, 2005. The Company evaluatedthe carrying amount of its cost method investments for impairment anddetermined that no impairment existed as of December 31, 2005.

In April 2005, the Company exercised its optionto acquire additional shares of Savills. The exercise of the option resulted inthe issuance of 5,243,229 shares by Savills at a price of 701.28 pence pershare, for a total cost of £36,770 ($70,392). The exercise represented a 20%premium to the average mid-market closing price of the shares in trading on theLondon Stock Exchange for the five trading days preceding the exercise of theoption. Preceding its exercise of the option, also in April 2005, thecompany acquired 1,677,970 of Savills’ Ordinary Shares in open market purchasesat an average price of 650.00 pence per share, having the effect of reducingthe number of shares purchasable under the option. The option exercise and themarket purchase together increased the Company’s ownership stake toapproximately 19.6% of Savills’ Ordinary Shares then outstanding. The aggregatecost of the market purchases and the shares issued upon exercise of the optionwas $91,272. The purchases were funded by borrowings under the Company’s lineof credit.

The Company has completed its purchase priceallocation of this additional ownership interest in Savills. Of the totalpurchase price, $3,251 has been allocated to the value of customerrelationships, property and facilities management contracts and backlog. Thisamount is being amortized over periods up 

F-27

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

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

to ten years. Thedifference between the carrying value of the additional investment and theamount of underlying equity in net assets of $67,371 will be evaluated forimpairment as part of the investment as a whole when evidence of a loss invalue occurs.

The Company accounts for its interest in Savills onthe equity method because it has significant influence over Savills due to the followingfactors: (i) the Company has the right to designate two members of Savills’board of directors (which has significant influence over the management ofSavills); and (ii) the Company has a strategically significant commercialrelationship with Savills. The Company’s portion of Savills’ undistributedearnings totaled $16,328 at December 31, 2005, and was included inretained earnings. The aggregate market value of the investment at December 31,2005, was $221,300, which exceeded its carrying value.

Summarizedfinancial information for unconsolidated subsidiaries accounted for on theequity method was as follows:  

| ** **                    | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2005**              | ** ** | **2004** | ** ** |
| **Real Estate:**              |       |                  |       |   |   |
| Real estate                   |       | $                     | 435,980    |   | $ | 287,791 |   |
| Other assets                  |       | 82,162                |       | 50,482 |   |
| Total assets                  |       | $                     | 518,142    |   | $ | 338,273 |   |
| Notes payable on  real estate |       | $                     | 283,259    |   | $ | 160,799 |   |
| Other liabilities             |       | 21,465                |       | 9,986 |   |
| Equity                        |       | 213,418               |       | 167,488 |   |
| Total liabilities and equity  |       | $                     | 518,142    |   | $ | 338,273 |   |
| **Other:**                    |       |                  |       |   |   |
| Current assets                |       | $                     | 519,910    |   | $ | 410,161 |   |
| Non-current  assets           |       | 197,024               |       | 122,826 |   |
| Total assets                  |       | $                     | 716,934    |   | $ | 532,987 |   |
| Current  liabilities          |       | $                     | 344,824    |   | $ | 282,425 |   |
| Non-current  liabilities      |       | 61,902                |       | 37,445 |   |
| Minority interest             |       | 988                   |       | 303 |   |
| Equity                        |       | 309,220               |       | 212,814 |   |
| Total liabilities and equity  |       | $                     | 716,934    |   | $ | 532,987 |   |
| **Total:**                    |       |                  |       |   |   |
| Assets                        |       | $                     | 1,235,076  |   | $ | 871,260 |   |
| Liabilities                   |       | $                     | 711,450    |   | $ | 490,655 |   |
| Minority interest             |       | 988                   |       | 303 |   |
| Equity                        |       | 522,638               |       | 380,302 |   |
| Total liabilities  and equity |       | $                     | 1,235,076  |   | $ | 871,260 |   |

** **

F-28

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

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

 

| ** **              | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------|------------|---------------------------------------------|------------|
| ** **              | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Real Estate:****(1)** |       |                                        |       |   |   |   |   |
| Total revenues          |       | $                                           | 46,014     |   | $ | 61,268 |   | $ | 42,222 |   |
| Total expenses          |       | 18,158                                      |       | 15,819 |   | 35,818 |   |
| Net income              |       | $                                           | 27,856     |   | $ | 45,449 |   | $ | 6,404 |   |
| **Other:**              |       |                                        |       |   |   |   |   |
| Total revenues          |       | $                                           | 754,724    |   | $ | 679,856 |   | $ | 558,802 |   |
| Total expenses          |       | 683,973                                     |       | 614,727 |   | 524,187 |   |
| Net income              |       | $                                           | 70,751     |   | $ | 65,129 |   | $ | 34,615 |   |
| **Total:**              |       |                                        |       |   |   |   |   |
| Total revenues          |       | $                                           | 800,738    |   | $ | 741,124 |   | $ | 601,024 |   |
| Total expenses          |       | 702,131                                     |       | 630,546 |   | 560,005 |   |
| Net income              |       | $                                           | 98,607     |   | $ | 110,578 |   | $ | 41,019 |   |

----

(1)                Theamounts for the years ended December 31, 2004 and 2003, include TFKRetail, Ltd. (“TFK”), an entity that held a portfolio of real estate assets. TFKwas a significant subsidiary in accordance with Rule 3-09 ofRegulation S-X. The Company held a 16.97% ownership interest in TFK, whichdisposed of all its assets in 2004.

**7.**   Accrued Expenses

Accruedexpenses consisted of the following at December 31:

| ** **                                                                                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Payroll and  bonuses                                                                                                |       | $        | 68,683     |     | $          | 67,315 |   |
| Commissions                                                                                                         |       | 34,449   |       | 36,171   |       |
| Development costs                                                                                                   |       | 24,016   |       | 16,601   |       |
| Deferred income                                                                                                     |       | 13,193   |       | 13,160   |       |
| Interest                                                                                                            |       | 398      |       | 455      |       |
| Insurance                                                                                                           |       | 2,144    |       | 2,150    |       |
| Restructuring  charges                                                                                              |       | 1,810    |       | 1,902    |       |
| Other                                                                                                               |       | 12,574   |       | 11,229   |       |
|                                                                                                                |       | 157,267  |       | 148,983  |       |
| Less: Accrued expenses included in liabilities  related to real estate and other assets held for sale (see Note 10) |       | 1,507    |       | 2,957    |       |
|                                                                                                                |       | $        | 155,760    |     | $          | 146,026 |   |

 

F-29

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

**8.**   Long-Term Debt andCapital Lease Obligations

Long-termdebt consisted of the following at December 31:

| ** **                                                                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Borrowings under  $175,000 line of credit with a bank (the “Credit Facility”)                |       | $        | 35,000     |     |       | $ | — |   |   |
| Borrowings under  $25,000 short-term revolving line of credit with a bank (the “Swing Line”)      |       | —   |       |     | —     |   |   |
| Borrowings under  £1,100 short-term borrowing facility with a bank (the “European Facility”) |       | 1,286    |       |     | —     |   |   |
| Other                                                                                                       |       | 50       |       |     | 14         |   |   |
| Total long-term  debt                                                                                       |       | 36,336   |       |     | 14         |   |   |
| Less: Current  portion of long-term debt                                                                    |       | 1,302    |       |     | 6          |   |   |
|                                                                                                        |       | $        | 35,034     |     |       | $ | 8 |   |   |

 

During June 2005, the Company entered into theCredit Facility and the Company’s previous $150,000 line of credit wasterminated. The Company repaid borrowings outstanding under the previous lineof credit with proceeds from the Credit Facility. Borrowings under the CreditFacility are due in June 2008 and are either Base Rate Loans or EurodollarRate Loans. Base Rate Loans bear interest at a base rate plus a margin of 0.25%depending on the Company’s leverage ratio. The base rate is the higher of theprime lending rate or an average federal funds rate plus 0.5%. Eurodollar RateLoans bear interest at the Eurodollar plus a margin which ranges from 1.75% to2.0%, depending upon the Company’s leverage ratio. The Eurodollar rate is basedon the British Bankers Association LIBOR rate. The interest rate for borrowingsunder the Credit Facility was 6.0% at December 31, 2005.

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

The Company is subject to various covenants associatedwith the Credit Facility, such as maintenance of minimum net worth andliquidity and certain key financial data. In addition, the Company may not paydividends or make other distributions on account of its common stock exceeding50% of the previous year’s net income before depreciation and amortization,plus, for the year ending December 31, 2005 only, an amount equal to$20,000. There are also restrictions on investments and acquisitions that canbe made by the Company. At December 31, 2005, the Company was incompliance with all covenants of the Credit Facility.

The covenants associated with the Credit Facility andthe amount of the Company’s other borrowings and contingent liabilities mayhave the effect of limiting the borrowing capacity available to the Companyunder the Credit Facility to an amount less than the $175,000 commitment. At December 31,2005, the Company had unused borrowing capacity of $133,914 (taking intoaccount borrowings and letters of credit outstanding) under its CreditFacility.

Under the Credit Facility, the Company pays aquarterly fee equal to 0.25% per annum of the unused commitment under the line.If a certain interest coverage ratio is not maintained, as defined in theagreement, the Credit Facility requires the Company to enter into one or moreinterest rate agreements 

F-30

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

**8.**   Long-Term Debt and Capital Lease Obligations(Continued)

for the Company’s floatingrate indebtedness in excess of $30,000 (other than construction loans underwhich interest is capitalized in accordance with GAAP) ensuring the netinterest is fixed, capped or hedged.

The Swing Line is a component of the Credit Facility. Borrowingsunder the Swing Line mature five business days from the date drawn (no laterthan June 28, 2008) and bear interest at a 30-day LIBOR-based rate(plus an applicable margin as defined in the agreement). Borrowings under theSwing Line reduce borrowing capacity under the Credit Facility.

The European Facility is held by the Company’sEuropean outsourcing subsidiary. Borrowings under the European Facility arepayable on demand, bear interest at the bank’s base rate plus 1.75% (borrowingrate of 6.25% at December 31, 2005), are payable quarterly, and arerecourse to the Company.

Principalmaturities of long-term debt at December 31, 2005, were as follows: 

| 2006   |   | $      | 1,302  |   |
|--------|--------|--------|--------|--------|
| 2007   |   | 12     |   |
| 2008   |   | 35,010 |   |
| 2009   |   | 8      |   |
| 2010   |   | 4      |   |
|   |   | $      | 36,336 |   |

 

At December 31, 2004,the Company had current obligations under capital leases of $363, primarily forfurniture and equipment, which were secured by the underlying assets. TheCompany had no such obligations at December 31, 2005.

**9.**   Notes Payable onReal Estate

TheCompany had loans secured by real estate (the majority of which wereconstruction loans), which consisted of the following at December 31:

| ** **                                                                                                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Current portion  of notes payable on real estate                                                                           |       | $        | 133,941    |     | $          | 10,263 |   |
| Notes payable on  real estate included in liabilities related to real estate and other assets  held for sale (see Note 10) |       | 16,001   |       | 28,647   |       |
| Total notes  payable on real estate, current portion                                                                       |       | 149,942  |       | 38,910   |       |
| Notes payable on  real estate, non-current portion                                                                         |       | 106,216  |       | 110,794  |       |
| Total notes payable on  real estate                                                                                        |       | $        | 256,158    |     | $          | 149,704 |   |

 

Notes payable on real estate held for sale areincluded in liabilities related to real estate and other assets held for sale. Notespayable on real estate under development (current) are included in currentportion of notes payable on real estate. Notes payable on real estate underdevelopment (non-current) and real estate held for investment are classifiedaccording to payment terms and maturity date.

F-31

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

**9.**   NotesPayable on Real Estate (Continued)

At December 31, 2005, $8,300 of the currentportion and $10,269 of the non-current portion of notes payable on real estatewere recourse to the Company (beyond being recourse to the single-purposeentity that held the real estate asset and was the obligor on the notepayable). With respect to a project to which $3,322 of the current recourseobligations related, the Company has an agreement to sell the project uponcompletion, the proceeds of which will be used to repay the related notepayable.

Principalmaturities of notes payable on real estate at December 31, 2005, were asfollows: 

| 2006   |   | $       | 32,430  |   |
|--------|--------|---------|---------|--------|
| 2007   |   | 174,149 |    |
| 2008   |   | 49,579  |    |
|   |   | $       | 256,158 |   |

 

Interest rates on loans outstanding at December 31,2005, ranged from 6.0% to 12.0%. Generally, only interest is payable on thereal estate loans (and is generally drawn on the underlying construction loan),with all unpaid principal and interest due at maturity. Capitalized interest in2005 and 2004 totaled $15,654 and $10,898, respectively.

In 2003, in conjunction with the purchase of a realestate project held for investment, the Company assumed the seller’sobligations on a note with respect to the project, which resulted in a non-cashincrease in notes payable on real estate totaled $796.

The Company has aparticipating mortgage loan obligation related to a real estate project underdevelopment. The participating mortgage loan is subordinate to a constructionloan on the underlying project. The mortgage lender participates in netoperating cash flow of the mortgaged real estate project, if any, and capitalproceeds, net of related expenses, upon the sale of the project, after paymentof amounts due under the construction loan. The lender receives 6% fixed intereston the outstanding balance of its note, compounded monthly, and participates in35% to 80% of proceeds that remain after the construction loan is paid, basedon reaching various internal rates of return. The amount of the participatingliability and the related debt discount were $12,809 and $1,835, respectively,at December 31, 2005 and $10,030 and $4,844, respectively, at December 31,2004. In 2005 and 2004, the Company amortized $5,839 and $5,136, respectively,of the debt discount, which was capitalized to real estate.

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

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

F-32

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

**10.**   Real Estate and Other Assets Held for Sale and RelatedLiabilities (Continued)

Real estate and otherassets held for sale and related liabilities were as follows at December 31:

| ** **                                                               | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Assets:**                                                              |       |     |       |     |       |
| Real estate held for  sale (see Note 3)                                  |       | $        | 20,534     |     | $          | 48,870 |   |
| Other current  assets                                                    |       | 72       |       | 433      |       |
| Other assets                                                             |       | 185      |       | 334      |       |
| Total real estate  and other assets held for sale                        |       | 20,791   |       | 49,637   |       |
| **Liabilities:**                                                         |       |     |       |     |       |
| Accrued expenses  (see Note 7)                                           |       | 1,507    |       | 2,957    |       |
| Notes payable on  real estate held for sale (see Note 9)                 |       | 16,001   |       | 28,647   |       |
| Other current  liabilities                                               |       | —   |       | 39       |       |
| Total liabilities  related to real estate and other assets held for sale |       | 17,508   |       | 31,643   |       |
| **Net real estate and other  assets held for sale**                      |       | $        | 3,283      |     | $          | 17,994 |   |

 

**11.**   Stockholders’Equity

The holders of shares of the Company’s common stockare entitled to one vote for each share held on all matters submitted to a voteof common stockholders. Each share of common stock is entitled to participateequally in dividends, when and if declared, and in the distribution of assetsin the event of liquidation, dissolution or winding up of the Company, subjectin all cases to any rights of outstanding shares of preferred stock.

Under the Trammell Crow Company 1997 Option Plan (the “AssumedOption Plan”), the Company issued options to purchase 2,423,769 shares of theCompany’s common stock at an exercise price of $3.85 per share. All optionsavailable under the Assumed Option Plan were granted on August 1, 1997. Theoptions vested at the closing of the Company’s initial public offering on December 1,1997, and became exercisable 30 days after that date. The options expire10 years from the date of grant and are not contingent on continuedemployment with the Company. At December 31, 2005, common shares reservedfor future issuance under the Assumed Option Plan totaled 412,255.

The Trammell Crow Long-Term Incentive Plan (the “Long-TermPlan”) originally provided for the issuance of up to 5,334,878 shares of commonstock. In May 1999, the Long-Term Plan was amended to increase the numberof shares available for future awards to 8,634,878 shares of common stock. Optionsto acquire shares of common stock granted by the Company under the Long-TermPlan have exercise prices equal to the fair market value of the common stock onthe date of grant and expire 7 to 10 years from the date of grant.

Except for options granted to members of the Board ofDirectors and options granted in connection with acquisitions of real estateservice companies, options vesting over periods ranging from three to fiveyears, and generally have partial vesting on anniversaries of the grant date.

The Long-Term Plan also provides for the awards ofStock Appreciation Rights, Restricted Stock and Performance Units. In 2005,2004 and 2003, the Company granted 431,589 shares, 672,313 shares and 

F-33

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

**11.**   Stockholders’ Equity(Continued)

1,636,500 shares,respectively, of restricted stock under the Long-Term Plan. The restrictedstock vests over periods up to five years. The weighted-average grantdate fair value per share of the Company’s restricted stock issued in 2005,2004 and 2003 was $23.82, $12.90 and $8.75, respectively. The Companyrecognized compensation expense of $6,806, $6,605 and $3,727 in 2005, 2004 and2003, respectively, related to the grants of restricted stock, net offorfeitures.

At December 31, 2005, common shares reserved forfuture issuance under the Long-Term Plan totaled 5,283,815 shares, of which817,728 common shares were available for future awards.

TheCompany’s stock option activity and related information, for the years ended December 31,2005, 2004 and 2003, was as follows:

| ** **                                            | ** ** | **Exercise price  of $3.85 (below  market price  at grant date)** | ** ** | **Exercise price of  $9.74 to $14.50  (at market price  at grant date)** | ** ** | **Exercise price of  $14.51 to $22.75  (at market price  at grant date)** | ** ** | **Exercise price of  $22.76 to $36.00  (at market price  at grant date** | ** ** | **Total** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|
| ** **                                            | ** ** | **2005**                                                                                        | ** ** |
| **Options  outstanding:**                             |       |                                                                                            |       |                                                                                                             |       |                                                                                                              |       |                                                                                                             |       |      |       |   |   |   |   |   |   |   |   |
| Beginning of year                                     |       |                                                                                            | 896,135    |                                                                                                             |       |                                                                                                              | 3,004,925  |                                                                                                             |       |      | 1,921,135  |   |   |   | 144,621 |   |   | 5,966,816 |   |
| Granted                                               |       |                                                                                            | —     |                                                                                                             |       |                                                                                                              | —     |                                                                                                             |       |      | —     |   |   |   | — |   |   | — |   |
| Exercised                                             |       |                                                                                            | (414,830   | )                                                                                                                |       |                                                                                                              | (226,634   | )                                                                                                                |       |      | (321,764   | ) |   |   | — |   |   | (963,228 | ) |
| Forfeited                                             |       |                                                                                            | (69,050    | )                                                                                                                |       |                                                                                                              | (37,705    | )                                                                                                                |       |      | (10,991    | ) |   |   | — |   |   | (117,746 | ) |
| Expired                                               |       |                                                                                            | —     |                                                                                                             |       |                                                                                                              | —     |                                                                                                             |       |      | —     |   |   |   | — |   |   | — |   |
| End of year                                           |       |                                                                                            | 412,255    |                                                                                                             |       |                                                                                                              | 2,740,586  |                                                                                                             |       |      | 1,588,380  |   |   |   | 144,621 |   |   | 4,885,842 |   |
| **Weighted-average  exercise price of options:** |       |                                                                                            |       |                                                                                                             |       |                                                                                                              |       |                                                                                                             |       |      |       |   |   |   |   |   |   |   |   |
| Granted                                               |       |                                                                                            | —     |                                                                                                             |       |                                                                                                              | —     |                                                                                                             |       |      | —     |   |   |   | — |   |   |   |   |
| Exercised                                             |       |                                                                                            | 3.85       |                                                                                                             |       |                                                                                                              | 11.35      |                                                                                                             |       |      | 17.63      |   |   |   | — |   |   |   |   |
| Forfeited                                             |       |                                                                                            | 3.85       |                                                                                                             |       |                                                                                                              | 11.70      |                                                                                                             |       |      | 17.67      |   |   |   | — |   |   |   |   |
| Outstanding at end of year                            |       |                                                                                            | 3.85       |                                                                                                             |       |                                                                                                              | 11.80      |                                                                                                             |       |      | 17.72      |   |   |   | 28.66 |   |   |   |   |
| Weighted-average  fair value of options granted       |       |                                                                                            | —     |                                                                                                             |       |                                                                                                              | —     |                                                                                                             |       |      | —     |   |   |   | — |   |   |   |   |
| Weighted-average  remaining contractual life          |       |                                                                                            | 1.6 years  |                                                                                                             |       |                                                                                                              | 3.4 years  |                                                                                                             |       |      | 2.6 years  |   |   |   | 2.3 years |   |   |   |   |
| **Options  exercisable:**                             |       |                                                                                            |       |                                                                                                             |       |                                                                                                              |       |                                                                                                             |       |      |       |   |   |   |   |   |   |   |   |
| Number of options                                     |       |                                                                                            | 412,255    |                                                                                                             |       |                                                                                                              | 2,481,378  |                                                                                                             |       |      | 1,588,380  |   |   |   | 144,621 |   |   | 4,626,634 |   |
| Weighted-average  exercise price                 |       |                                                                                            | $          | 3.85                                                                                                             |       |                                                                                                              |       | $                                                                                                                | 11.63      |      |       |   | $ | 17.72 |   |   |   | $ | 28.66 |   |   |   |   |
|                                                       |            |                                                                                                 |            |                                                                                                                  |            |                                                                                                                   |            |                                                                                                                  |            |           |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-34

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

**11.**   Stockholders’ Equity (Continued)

| ** **                                            | ** ** | **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** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|
| ** **                                            | ** ** | **2004**                                                                                        | ** ** |
| **Options outstanding:**                              |       |                                                                                            |       |                                                                                                             |       |                                                                                                              |       |                                                                                                             |       |      |       |   |   |   |   |   |   |   |   |
| Beginning of year                                     |       |                                                                                            | 956,649    |                                                                                                             |       |                                                                                                              | 3,207,925  |                                                                                                             |       |      | 2,086,341  |   |   |   | 151,739 |   |   | 6,402,654 |   |
| Granted                                               |       |                                                                                            | —     |                                                                                                             |       |                                                                                                              | —     |                                                                                                             |       |      | —     |   |   |   | — |   |   | — |   |
| Exercised                                             |       |                                                                                            | (60,514    | )                                                                                                                |       |                                                                                                              | (111,375   | )                                                                                                                |       |      | —     |   |   |   | — |   |   | (171,889 | ) |
| Forfeited                                             |       |                                                                                            | —     |                                                                                                             |       |                                                                                                              | (91,625    | )                                                                                                                |       |      | (165,206   | ) |   |   | (7,118 | ) |   | (263,949 | ) |
| Expired                                               |       |                                                                                            | —     |                                                                                                             |       |                                                                                                              | —     |                                                                                                             |       |      | —     |   |   |   | — |   |   | — |   |
| End of year                                           |       |                                                                                            | 896,135    |                                                                                                             |       |                                                                                                              | 3,004,925  |                                                                                                             |       |      | 1,921,135  |   |   |   | 144,621 |   |   | 5,966,816 |   |
| **Weighted-average exercise price  of options:** |       |                                                                                            |       |                                                                                                             |       |                                                                                                              |       |                                                                                                             |       |      |       |   |   |   |   |   |   |   |   |
| Granted                                               |       |                                                                                            | —     |                                                                                                             |       |                                                                                                              | —     |                                                                                                             |       |      | —     |   |   |   | — |   |   |   |   |
| Exercised                                             |       |                                                                                            | $          | 3.85                                                                                                             |       |                                                                                                              |       | $                                                                                                                | 11.21      |      |       |   | — |   |   |   | — |   |   |   |   |
| Forfeited                                             |       |                                                                                            | —     |                                                                                                             |       |                                                                                                              | $          | 11.20                                                                                                            |       |      |       | $ | 17.62 |   |   |   | $ | 30.91 |   |   |   |   |
| Outstanding at end of  year                           |       |                                                                                            | $          | 3.85                                                                                                             |       |                                                                                                              |       | $                                                                                                                | 11.76      |      |       |   | $ | 17.70 |   |   |   | $ | 28.66 |   |   |   |   |
| Weighted-average fair  value of options granted       |       |                                                                                            | —     |                                                                                                             |       |                                                                                                              | —     |                                                                                                             |       |      | —     |   |   |   | — |   |   |   |   |
| Weighted-average  remaining contractual life          |       |                                                                                            | 2.6 years  |                                                                                                             |       |                                                                                                              | 4.4 years  |                                                                                                             |       |      | 3.6 years  |   |   |   | 3.3 years |   |   |   |   |
| **Options exercisable:**                              |       |                                                                                            |       |                                                                                                             |       |                                                                                                              |       |                                                                                                             |       |      |       |   |   |   |   |   |   |   |   |
| Number of options                                     |       |                                                                                            | 896,135    |                                                                                                             |       |                                                                                                              | 2,222,051  |                                                                                                             |       |      | 1,921,135  |   |   |   | 144,621 |   |   | 5,183,942 |   |
| Weighted-average exercise price                       |       |                                                                                            | $          | 3.85                                                                                                             |       |                                                                                                              |       | $                                                                                                                | 11.54      |      |       |   | $ | 17.70 |   |   |   | $ | 28.66 |   |   |   |   |

 

| ** **                                            | ** ** | **2003** | ** ** |
|-------------------------------------------------------|------------|----------|------------|
| **Options outstanding:**                              |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Beginning of year                                     |       |     | 1,017,395  |   |   |   | 3,295,486 |   |   |   | 2,285,885 |   |   |   | 165,447 |   |   | 6,764,213 |   |
| Granted                                               |       |     | —     |   |   |   | 153,314 |   |   |   | — |   |   |   | — |   |   | 153,314 |   |
| Exercised                                             |       |     | (60,746    | ) |   |   | (59,000 | ) |   |   | — |   |   |   | — |   |   | (119,746 | ) |
| Forfeited                                             |       |     | —     |   |   |   | (181,875 | ) |   |   | (199,544 | ) |   |   | (13,708 | ) |   | (395,127 | ) |
| Expired                                               |       |     | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   | — |   |
| End of year                                           |       |     | 956,649    |   |   |   | 3,207,925 |   |   |   | 2,086,341 |   |   |   | 151,739 |   |   | 6,402,654 |   |
| **Weighted-average exercise price  of options:** |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Granted                                               |       |     | —     |   |   |   | $ | 9.74 |   |   |   | — |   |   |   | — |   |   |   |   |
| Exercised                                             |       |     | $          | 3.85 |   |   |   | $ | 10.94 |   |   |   | — |   |   |   | — |   |   |   |   |
| Forfeited                                             |       |     | —     |   |   |   | $ | 11.95 |   |   |   | $ | 17.66 |   |   |   | $ | 32.10 |   |   |   |   |
| Outstanding at end of  year                           |       |     | $          | 3.85 |   |   |   | $ | 11.73 |   |   |   | $ | 17.70 |   |   |   | $ | 28.76 |   |   |   |   |
| Weighted-average fair  value of options granted       |       |     | —     |   |   |   | $ | 4.63 |   |   |   | — |   |   |   | — |   |   |   |   |
| Weighted-average  remaining contractual life          |       |     | 3.6 years  |   |   |   | 5.4 years |   |   |   | 4.6 years |   |   |   | 4.4 years |   |   |   |   |
| **Options exercisable:**                              |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Number of options                                     |       |     | 956,649    |   |   |   | 1,642,633 |   |   |   | 2,049,674 |   |   |   | 151,739 |   |   | 4,800,695 |   |
| Weighted-average exercise price                       |       |     | $          | 3.85 |   |   |   | $ | 11.29 |   |   |   | $ | 17.69 |   |   |   | $ | 28.76 |   |   |                     |   |

 

F-35

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

**12.**   Income Taxes

Theprovision for income taxes consisted of the following for the years ended December 31: 

| ** **    | ** ** | **2005**      | ** ** | **2004**      | ** ** | **2003**      | ** ** |
|---------------|------------|---------------|------------|---------------|------------|---------------|------------|
| Current       |       |          |       |          |       |          |       |
| Federal       |       | $ 21,926 |       | $ 22,061 |       | $ 11,505 |       |
| State         |       | 5,140         |       | 4,454         |       | 2,323         |       |
| International |       | 1,063         |       | 743           |       | (384          | )          |
|          |       | 28,129        |       | 27,258        |       | 13,444        |       |
| Deferred      |       |          |       |          |       |          |       |
| Federal       |       | 5,469         |       | (2,749        | )          | 754           |       |
| State         |       | 1,282         |       | (555          | )          | 152           |       |
|          |       | 6,751         |       | (3,304        | )          | 906           |       |
|          |       | $ 34,880 |       | $ 23,954 |       | $ 14,350 |       |

 

Thecomponents of the net domestic deferred tax asset are summarized below as of December 31:

| ** **                                             | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|--------------------------------------------------------|------------|---------------|------------|---------------|------------|
| Deferred tax assets                                    |       |          |       |          |       |
| Impairment of investments                              |       | $ 11,920 |       | $ 14,539 |       |
| Compensation expense relating to restricted stock      |       | 5,746         |       | 5,526         |       |
| Deferred income                                        |       | 2,822         |       | 2,271         |       |
| Compensation expense relating to stock options         |       | 2,211         |       | 4,473         |       |
| Insurance reserves                                     |       | 1,585         |       | 1,374         |       |
| Bad debts                                              |       | 1,263         |       | 1,111         |       |
| Straight-line rent                                     |       | 989           |       | 587           |       |
| Restructuring charges relating to future rent  expense |       | 587           |       | 607           |       |
| Dispositions of real estate                            |       | 397           |       | 4,017         |       |
| Depreciation and amortization                          |       | —        |       | 1,190         |       |
| Other                                                  |       | 2,729         |       | 952           |       |
|                                                   |       | 30,249        |       | 36,647        |       |
| Less: valuation allowance                              |       | —        |       | 961           |       |
| Total deferred tax assets                              |       | 30,249        |       | 35,686        |       |
| Deferred tax liabilities                               |       |          |       |          |       |
| Goodwill amortization                                  |       | (5,891        | )          | (3,973        | )          |
| Depreciation and amortization                          |       | (1,866        | )          | —        |       |
| Foreign currency translation adjustments               |       | (1,642        | )          | (1,897        | )          |
| Basis difference on real estate                        |       | —        |       | (585          | )          |
| Other                                                  |       | (645          | )          | (2,275        | )          |
| Total deferred tax liabilities                         |       | (10,044       | )          | (8,730        | )          |
| Net deferred tax asset                                 |       | $ 20,205 |       | $ 26,956 |       |

 

F-36

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

**12.**   Income Taxes (Continued)

The components of the netinternational deferred tax asset were as follows as of December 31: 

| ** **                                | ** ** | **2005**                              | ** ** | **2004**                              | ** ** |
|-------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| Deferred tax asset                        |       |                                  |       |                                  |       |
| International tax attribute carryforwards |       | $ 2,363                          |       | $ 1,739                          |       |
| Less: valuation allowance                 |       | 2,363                                 |       | 1,739                                 |       |
| Net deferred tax asset                    |       | $     — |       | $     — |       |

 

Statement of Financial Accounting Standards No. 109,*Accounting for Income Taxes*, requires avaluation allowance to reduce the deferred tax assets reported if, based on theweight of the evidence, it is more likely than not that some portion or all ofthe deferred tax assets will not be realized. After consideration of all theevidence, both positive and negative, the Company determined that the valuationallowance required at December 31, 2005, to reduce a deferred tax asset tothe amount that will more likely than not be realized was $2,363 relating tointernational tax attribute carryforwards. The changes in valuation allowancesfor 2005 were a decrease of $961 for the domestic deferred tax asset relatingto certain nonqualified stock options and an increase of $624 for theinternational deferred tax asset.

Componentsof deferred income taxes were as follows at December 31: 

| ** **              | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|-------------------------|------------|---------------|------------|---------------|------------|
| Current                 |       | $ 3,935  |       | $ 4,021  |       |
| Non-current             |       | 16,270        |       | 22,935        |       |
| Net deferred tax  asset |       | $ 20,205 |       | $ 26,956 |       |

 

Thedifferences between the provisions for income taxes and the amounts computed byapplying the statutory federal income tax rates to income from continuingoperations before income taxes for the years ended December 31 were: 

| ** **                                                                              | ** ** | **2005**      | ** ** | **2004**      | ** ** | **2003**      | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| Tax at statutory  rate applied to income from continuing operations before income taxes |       | $ 22,992 |       | $ 11,466 |       | $ 11,731 |       |
| State income  taxes, net of federal tax benefit                                         |       | 2,818         |       | 1,405         |       | 1,438         |       |
| Non-deductible  meals                                                                   |       | 825           |       | 756           |       | 704           |       |
| Change in  international valuation allowance                                            |       | 624           |       | 522           |       | 280           |       |
| International                                                                           |       | 439           |       | 221           |       | (664          | )          |
| Change in  domestic valuation allowance                                                 |       | (961          | )          | (65           | )          | 346           |       |
| Income from  investments in unconsolidated subsidiaries                                 |       | —        |       | (1,640        | )          | (743          | )          |
| Foreign tax  credit                                                                     |       | (2,586        | )          | —        |       | —        |       |
| Other                                                                                   |       | 88            |       | (335          | )          | 1,094         |       |
|                                                                                    |       | $ 24,239 |       | $ 12,330 |       | $ 14,186 |       |

 

F-37

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

**13.**   Operating Leases

The Company has commitments under operating leases foroffice space and office equipment. Office leases are generally noncancelableand provide for payments of base rent plus the Company’s share of operatingexpenses. During the years ended December 31, 2005, 2004 and 2003, rentexpense was $23,883, $23,197 and $22,909, respectively.

Minimumfuture rentals to be paid and received under noncancelable operating lease andsublease commitments in effect at December 31, 2005, were as follows:

| ** ** | ** ** | **Leases**    | ** ** | **Subleases** | ** **    | **Net** | ** ** |
|------------|------------|---------------|------------|---------------|---------------|---------|------------|
| 2006       |       | $ 21,016 |       |          | $ (1,056 | )       |       | $ 19,960 |   |
| 2007       |       | 16,210        |       |          | (688          | )       |       | 15,522 |   |
| 2008       |       | 11,259        |       |          | (24           | )       |       | 11,235 |   |
| 2009       |       | 8,781         |       |          | (16           | )       |       | 8,765 |   |
| 2010       |       | 5,346         |       |          | —        |    |       | 5,346 |   |
| Thereafter |       | 6,623         |       |          | —        |    |       | 6,623 |   |
|       |       | $ 69,235 |       |          | $ (1,784 | )       |       | $ 67,451 |   |

 

**14.**   Employee BenefitPlans

The Company’s employees participate in a definedcontribution savings plan, which provides the opportunity for pretaxcontributions by employees. The Company matches 50% of the employee’scontributions up to 6% of the employee’s annual earnings or a maximum of $7 peremployee per annum. The Company’s contribution expense for 2005, 2004 and 2003,including amounts reimbursed by clients, was $8,942, $7,799 and $7,035,respectively.

The Company has alsoestablished the Trammell Crow Company Employee Stock Purchase Plan (the “ESPP”).Employees may elect to have bi-weekly payroll deductions of 1% to 10% of grossearnings, which is used to purchase, on a semi-annual basis, stock of theCompany at a 15% discount from market value, which is established on the dateof issuance. The ESPP is available to all employees and requires a twelve-monthholding period for stock purchased under the plan. The Company has reserved3,000,000 shares of common stock for issuance under the ESPP, of which2,060,513 had been issued as of December 31, 2005.

**15.**   Gain on Dispositionof Real Estate and Discontinued Operations

Realestate dispositions excluding those accounted for as discontinued operationsduring the years ended December 31 were as follows:

| ** **     | ** ** | **2005**      | ** ** | **2004**       | ** ** | **2003**      | ** ** |
|----------------|------------|---------------|------------|----------------|------------|---------------|------------|
| Projects sold  |       | 7             |       | 17             |       | 19            |       |
| Net sale price |       | $ 41,660 |       | $ 121,361 |       | $ 67,115 |       |
| Gain on sale   |       | $ 18,553 |       | $ 26,742  |       | $ 13,199 |       |

 

The net sales prices for 2005 and 2004 noted aboveincluded notes receivable for $12,244 and $14,250, respectively, frompurchasers of real estate projects.

F-38

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

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

In 2005, the Company paid $13,915 to purchase theother partner’s 70% ownership interest in a partnership holding real estate. Priorto the purchase, the Company did not control the partnership through its 30%ownership interest and, as such, accounted for its investment in thepartnership under the equity method. As a result of the purchase, the Companyobtained 100% ownership in the entity and accordingly, began to account for thepartnership as a consolidated subsidiary. The consolidation of the partnershipresulted in a non-cash increase in real estate and other assets held for saleof $19,123 (increase in real estate held for sale of $19,162 and a decrease inaccounts receivable of $39), a non-cash reduction in investment in subsidiariesof $2,471 and a non-cash increase in liabilities related to real estate andother assets held for sale of $16,652 (accounts payable and accrued expenses of$13,952 and notes payable on real estate held for sale of $2,700). No gain orloss was recognized on this transaction. The Company subsequently sold the realestate project and recognized gain on disposition of $6,832 in 2005.

In 2004, the Company sold a real estate project for$15,875. The Company is leasing back a portion of the space in the project, andalso had other continuing obligations to the buyer at the time of the sale. Asa result, the transaction, initially recorded as a financing transaction, wasultimately accounted for as a sale when the continuing obligation period endedin the fourth quarter of 2004. The gain on this sale is being recognized overthe Company’s lease term.

In 2004, the Company conveyed a multi-tenantindustrial real estate project to the lender in order to satisfy the underlyingnon-recourse note that had matured. With respect to this disposition, theCompany recorded a loss on disposition of real estate of $3, net of $61 ofincome from extinguishment of debt. The transaction resulted in a non-cashdecrease in real estate and other assets held for sale of $10,593 (increasedaccounts receivable $2, decreased other current assets $164, decreased realestate held for sale $10,698 and decreased other assets $93), and a non-cashreduction in liabilities related to real estate and other assets held for saleof $10,950 (increased accounts payable $57, decreased accrued expenses $273 anddecreased notes payable on real estate $10,734).

In 2004, the Company sold its 100% interest in aconsolidated subsidiary, which owned a partially-developed building, to anunrelated party for a net sales price of $808. The transaction resulted in anon-cash decrease in real estate and other assets held for sale of $3,032 (realestate held for sale of $2,951 and other assets of $81), decreased accountsreceivable (included in real estate and other assets held for sale) $4, and anon-cash reduction in liabilities related to real estate and other assets heldfor sale of $3,029 (decreased accounts payable $202 and decreased notes payableon real estate $2,827). In 2005 and 2004, the Company recognized gain ondisposition of $426 and $357, respectively, based on thepercentage-of-completion method of profit recognition.

Also in 2004, the Company sold a 150-acre landparcel to a third party for cash of $30,010. At the time of sale, aconsolidated subsidiary of the Company (other than the entity that sold theproperty) held a purchase contract on seven acres of the 150-acre landparcel. As a result, the Company recorded the transaction related to theseven-acre parcel as a financing transaction, rather than a sale. In 2005, theCompany terminated the purchase contract in exchange for additional netproceeds of $1,275 and recognized total gain on disposition of real estate(including the portion of the 2004 transaction 

F-39

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

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

related to the seven-acreparcel) of $2,317. This amount is included in discontinued operations in theconsolidated statements of income.

In 2003, the Company conveyed a single-tenantoffice/industrial real estate project to the lender in order to satisfy theunderlying non-recourse note that had matured. With respect to thisdisposition, the Company recorded a gain on disposition of real estate of $798,of which $677 was extinguishment of debt. Also in 2003, the Company sold its50% partnership interest in a consolidated subsidiary to the other partner inthe partnership for a net sales price of $1,032. The transaction resulted in anon-cash decrease in real estate and other assets held for sale of $11,004(accounts receivable of $4 and real estate held for sale of $11,000), decreasedcash (included in real estate and other assets held for sale) $92, and anon-cash reduction in liabilities related to real estate and other assets heldfor sale of $11,804 (decreased accounts payable $61, increased accrued expenses$164 and decreased notes payable on real estate $11,907), and a non-cashincrease in minority interest of $210. The Company recognized a gain ondisposition of $1,530 as a result of this transaction.

Realestate dispositions accounted for as discontinued operations under FAS 144during the years ended December 31 were as follows:

| ** **     | ** ** | **2005**       | ** ** | **2004**      | ** ** | **2003**      | ** ** |
|----------------|------------|----------------|------------|---------------|------------|---------------|------------|
| Projects sold  |       | 22             |       | 5             |       | 4             |       |
| Net sale price |       | $ 120,344 |       | $ 83,924 |       | $ 25,064 |       |
| Gain on sale   |       | $ 31,510  |       | $ 42,535 |       | $ 5,557  |       |

 

The components ofdiscontinued operations for the years ended December 31 were as follows:

| ** **                                                | ** ** | **2005**                 | ** ** | **2004**                 | ** ** | **2003**         | ** ** |
|-----------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|------------------|------------|
| **Revenues:**                                             |       |                     |       |                     |       |             |       |
| Development and  construction                             |       | $   3,834 |       | $   2,877 |       | $ 1,278     |       |
| Gain on disposition of  real estate                       |       | 31,510                   |       | 42,535                   |       | 5,557            |       |
| Total Revenues                                            |       | 35,344                   |       | 45,412                   |       | 6,835            |       |
| **Expenses:**                                             |       |                     |       |                     |       |             |       |
| Salaries, wages, and  benefits                            |       | 224                      |       | 33                       |       | 55               |       |
| Commissions                                               |       | 704                      |       | 1,388                    |       | 280              |       |
| General and  administrative                               |       | 3,194                    |       | 1,665                    |       | 4,316            |       |
| Depreciation                                              |       | 317                      |       | 225                      |       | 297              |       |
| Amortization                                              |       | 315                      |       | 35                       |       | 139              |       |
| Interest                                                  |       | 1,903                    |       | 635                      |       | 1,416            |       |
| Total Expenses                                            |       | 6,657                    |       | 3,981                    |       | 6,503            |       |
| Operating income                                          |       | 28,687                   |       | 41,431                   |       | 332              |       |
| Interest and other  income                                |       | 77                       |       | 16                       |       | 72               |       |
| Income from discontinued  operations, before income taxes |       | 28,764                   |       | 41,447                   |       | 404              |       |
| Income tax expense                                        |       | (10,641                  | )          | (11,624                  | )          | (164             | )          |
| Minority interest                                         |       | —                   |       | (10,841                  | )          | —           |       |
| Income from discontinued operations, net of income  taxes |       | $ 18,123            |       | $ 18,982            |       | $  240 |       |

 

F-40

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

**16.**   Intangible Assetsand Acquisitions of Real Estate Service Companies

In 2003, the Company strengthened and extended through2008 its strategic alliance with Savills. The strategic alliance was initiallyformed in 2000 for the purposes of providing each company’s clients access tothe commercial real estate service capabilities of the other. As part of the2003 agreement, the Company subscribed to $9 of additional capital in TrammellCrow Savills Limited, the Company’s consolidated European venture jointly ownedwith Savills, effectively increasing the Company’s ownership in this venture toapproximately 95%. In addition, the Company purchased all of Savills’ ownershipin Trammell Crow Savills Asia-Pacific Limited, the Company’s consolidated Asianjoint venture, for a nominal amount, increasing the Company’s ownership of thisventure to substantially 100%. While the Company recorded no gain or loss onthis transaction, it recorded a non-cash increase in minority interest of $639,and an offsetting non-cash decrease in furniture and equipment. In 2004, theCompany acquired Savills’ remaining 5% ownership in Trammell Crow SavillsLimited for nominal consideration.

Intangibleassets consisted of the following at December 31:

| ** **                                      | ** ** | **2005**                    | ** ** | **2004**                      | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **                                      | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Contract intangibles                            |       | $                           | 12,675     |                          |       | $ | (10,012 | ) |   | $ | 13,672 |   |   | $ | (10,210 | ) |   |
| Employment contracts and  noncompete agreements |       | 8,510                       |       |                          | (8,510     | ) |   | 8,584 |   |   | (8,584 | ) |   |
| Acquired management  contracts                  |       | 4,026                       |       |                          | (4,026     | ) |   | 4,026 |   |   | (4,026 | ) |   |
|                                            |       | $                           | 25,211     |                          |       | $ | (22,548 | ) |   | $ | 26,282 |   |   | $ | (22,820 | ) |   |

 

Theestimated future amortization of the intangible asset balance at December 31,2005, is as follows:

| 2006                |   | $   | 1,271  |   |
|---------------------|--------|-----|--------|--------|
| 2007                |   | 672 |   |
| 2008                |   | 330 |   |
| 2009                |   | 258 |   |
| 2010 and thereafter |   | 132 |   |
|                |   | $   | 2,663  |   |

 

**17.**   Related PartyTransactions

In 2005, 2004 and 2003, the Company derived less than1% of its total revenues from services provided principally to a party thatceased to be affiliated with the Company in May 2003. In addition, in eachof 2005, 2004 and 2003, the Company derived 2% of its total revenues fromservices provided to a client of which one of the Company’s directors is anofficer.

The Company has agreementsto provide development and brokerage services to certain of its unconsolidatedsubsidiaries accounted for under the equity method under terms that the Companybelieves are consistent with the terms in similar agreements with unrelatedparties. In each of the years ended December 31, 2005, 2004 and 2003, theCompany derived 1% of its total revenues from such unconsolidated subsidiaries.

F-41

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

**18.**   FinancialInstruments

As required under the Company’s Credit Facility, theCompany has entered into various interest rate agreements to manage marketrisks related to changes in interest rates. The Company’s participation inderivative transactions has been limited to hedging purposes. Derivativeinstruments are not held or issued for trading purposes.

On March 24, 2001, the Company renewed anexisting interest rate swap agreement 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 this interest rate swap agreement, if the actualLIBOR-based rate was less than the specified fixed interest rate, theCompany was obligated to pay the differential interest amount, such amountbeing recorded as incremental interest expense. Conversely, if the LIBOR-basedrate was greater than the specified fixed interest rate, the differentialinterest amount was paid to the Company and recorded as a reduction of interestexpense. The weighted-average receive rate under the interest rate swapagreement for 2003 was 1.37%.

The interest rate swap agreement was not initiallydesignated as an effective hedge (although it was entered into for hedgingpurposes), but on November 1, 2001, the Company designated it as aneffective hedge. The Company recorded payments of $588 in 2003 against its swapliability that would have been recorded to interest expense had the interestrate swap agreement been designated as a hedge since its inception. Changes inthe fair value of the interest rate swap agreement attributable to changes inbenchmark market interest rates represented the effective portion of the hedgerelationship and were recorded in other comprehensive income in accordance withFAS 133. Any hedge ineffectiveness was recorded in current period earnings.The interest rate swap agreement expired on March 24, 2003, therefore theliability balance was zero at December 31, 2005 and 2004. The Companyrecorded incremental interest expense of $567 in 2003. Since the interest rateswap agreement expired on March 24, 2003, there was no related interestexpense recorded in 2005 or 2004.

During 2002, as a result of a decrease in the Company’sfloating interest rate debt, the Company dedesignated $75,000 of the interestrate swap agreement previously designated as a hedge in order to maintain the relationshipbetween the notional amount of the designated portion of the interest rate swapagreement and the amount of the Company’s floating rate debt. By redesignatinga portion of the interest rate swap agreement as a hedge, the remainingdesignated portion was still deemed an effective hedge. As a result of thischange, the Company recognized expense in 2003 related to the change in fairvalue of the portion of the interest rate swap agreement that was notdesignated as a hedge. The amount of the expense was not material.

From time to time, the Company enters into interestrate cap agreements in order to limit its interest expense on the CreditFacility or on certain construction loans related to consolidated real estateprojects. These interest rate cap agreements are not designated as effectivehedges and therefore are marked to market each period with the change in fairmarket value recognized in current period earnings. From 2003 to 2005, theCompany had such agreements with notional amounts ranging from $1,110 to$11,400 and the Company was to receive payments if the 30-day LIBOR-basedfloating interest rate exceeded rates ranging from 3.0% to 3.5%. As of December 31,2005, these agreements had expired or had been terminated. In addition, at December 31,2005, the Company held one such agreement with a notional amount of $25,650 

F-42

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

**18.**   Financial Instruments (Continued)

and the Company receivespayments if the 30-day LIBOR-based floating interest rate exceeds 5.5%. Thisagreement expires on January 2, 2008. Through December 31, 2005,amounts recorded related to these interest rate cap agreements were notmaterial.

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

**19.**   Commitments andContingencies

At December 31, 2005, the Company guaranteedrepayment of a maximum of $7,131 of real estate notes payable of itsunconsolidated subsidiaries of which $7,086 of the underlying notes payable wasoutstanding as of December 31, 2005. These notes are secured by theunderlying real estate and have maturity dates through December 2009.

In 2004, the Company issued a debt repayment guarantyof an unconsolidated subsidiary in conjunction with a $30,000 loan agreement. Aspart of this loan agreement, the Company issued a repayment guaranty of up to50% of the loan balance plus any accrued and unpaid interest. In accordancewith the terms of the guaranty, at such time as the principal balance has beenreduced to $15,000 or less and a target loan-to-value ratio has been reached,the Company’s guaranty is reduced to 25% of the loan balance. In exchange forthe guaranty, the Company receives a priority return with respect to itscapital contribution based on its exposure under the guaranty. The Companyestimates that its likely exposure under the guaranty is not material and hasdetermined that the present value of the priority return is the best estimateof the fair value of the guaranty under FIN 45. The Company initially recordeda liability offset by an increase in its investment in unconsolidatedsubsidiary balance of $1,886. The underlying note was paid down to $15,000 inthe second quarter of 2005, resulting in a decrease in the Company’s guaranty. Asa result, the Company decreased the liability balance, with a correspondingdecrease to the investment balance. The liability balance was $472 at December 31,2005.

In 2004, the Company issued a $1,000 debt repaymentguaranty on a $10,185 construction loan in order to obtain a development feecontract and allow a third-party owner to obtain financing for a constructionproject. The guaranty expires upon project completion and achievement of aspecified leasing target. The third-party owner has secured its obligation tothe Company with a deed of trust on a separate parcel of land, should theCompany be required to perform under the guaranty. The loan matures in November 2009.The Company estimates that its likely exposure under the guaranty is notmaterial and has recorded the fair value of the guaranty in an amountequivalent to the consideration received, or $102.

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

F-43

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

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

At December 31, 2005, the Company had outstandingletters of credit totaling $18,683, including $2,992, $4,321 and $8,276 ofwhich collateralize amounts recorded in accrued expenses, other currentliabilities and other liabilities, respectively. The letters of credit expireat varying dates through December 2006.

In addition, at December 31, 2005, the Companyhad numerous completion and budget guarantees relating to development projects.These guarantees were 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 timeframe and/or withina specified budget, with the Company potentially being liable for costs tocomplete in excess of such budget. However, the Company generally has “guaranteedmaximum price” contracts with reputable general contractors with respect toprojects for which the Company provides these guarantees. These contracts areintended to pass the budget risk to such contractors. Management does notexpect to incur any material losses under these guarantees.

From time to time, the Company acts as a general contractorwith respect to construction projects. The Company does not consider theseactivities to be a material part of its business. In connection with theseactivities, the Company seeks to subcontract construction work for certainprojects to reputable subcontractors. Should construction defects arise relatingto the underlying projects, the Company could potentially be liable to theclient for the costs to repair such defects, but the Company would generallylook to the subcontractor that performed the work to remedy the defect. Managementdoes not expect to incur material losses with respect to construction defects.

As of December 31, 2005, the Company had madenon-refundable earnest money deposits totaling $6,924 in conjunction withcontracts to acquire approximately $224,089 of real estate from other entities.

The Company and one of itssubsidiaries were named defendants in a lawsuit styled***Bank OneOklahoma, N.A., et al.*(the “Bank”)*v. TrammellCrow Services, Inc. and Trammell Crow Company*, No. 03 C3624, filed in the U.S. District Court for the Northern District of Illinois onApril 2, 2003. On January 25, 2006, the Company and the Bank resolvedthe lawsuit between them. The claims filed by each party have been dismissed. TheCompany accrued the amount required under the terms of the settlement as of December 31,2005.

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.

F-44

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

**20.**   Supplemental CashFlow Information

Supplementalcash flow information is summarized below for the three years ended December 31:

| ** **                                                                 | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Interest paid                                                              |       | $        | 22,305     |     | $          | 15,555   |       | $ | 8,347 |   |
| Income taxes paid                                                          |       | 23,441   |       | 17,096   |       | 10,310   |       |
| Non-cash activities:                                                       |       |     |       |     |       |     |       |
| Issuance of restricted stock, net of forfeitures                           |       | 6,687    |       | 8,323    |       | 12,289   |       |
| Capital lease obligations                                                  |       | 3        |       | 667      |       | 2,161    |       |
| Recognition of  deferred gains related to dispositions in previous periods |       | 672      |       | 381      |       | 339      |       |
|                                                                            |            |          |            |          |            |          |            |  |  |  |

 

**21.**   Segment Information

*Description ofServices by Segment*

The Global Servicessegment includes property and facilities management, brokerage and corporateadvisory services, and project and construction management services deliveredto both user and investor clients. The Development and Investment segmentincludes development activities performed on behalf of investor and userclients on a fee basis, as well as development and investment activitiespursuant to which the Company takes an ownership position. The Development andInvestment segment also includes activities related to the Company’s operatingreal estate projects prior to disposition.

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

Approximately 96% of the Company’s revenues were fromclients located in the United States. In 2005, 2004 and 2003, one individualclient accounted for $116,268, $96,237 and $73,668, respectively, of theCompany’s consolidated revenues. Revenues from this client are includedprimarily in the Company’s Global Services segment.

F-45

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

**21.**   Segment Information (Continued)

Financial information forreportable segments was as follows:

| ** **                                                                                                                                  | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                                  | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Global Services:**                                                                                                                        | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total revenues                                                                                                                              |       | $                                           | 831,703    |   | $ | 710,814 |   | $ | 649,617 |   |
| Costs and expenses(1)                                                                                                                       |       | 778,333                                     |       | 682,723 |   | 628,234 |   |
| Operating income                                                                                                                            |       | 53,370                                      |       | 28,091 |   | 21,383 |   |
| Interest and other  income                                                                                                                  |       | 2,136                                       |       | 1,424 |   | 863 |   |
| Income from continuing  operations before income taxes, minority interest and income from investments  in unconsolidated subsidiaries  |       | 55,506                                      |       | 29,515 |   | 22,246 |   |
| Minority interest,  before income taxes                                                                                                     |       | 556                                         |       | 560 |   | 675 |   |
| Income from investments  in unconsolidated subsidiaries, before income taxes                                                                |       | 11,160                                      |       | 7,252 |   | 3,913 |   |
| Income from continuing  operations, before income taxes                                                                                     |       | 67,222                                      |       | 37,327 |   | 26,834 |   |
| Income from discontinued  operations, before income taxes                                                                                   |       | 1,178                                       |       | 965 |   | 376 |   |
| Income before income  taxes                                                                                                                 |       | $                                           | 68,400     |   | $ | 38,292 |   | $ | 27,210 |   |
| **Development and Investment:**                                                                                                             |       |                                        |       |   |   |   |   |
| Total revenues                                                                                                                              |       | $                                           | 64,247     |   | $ | 63,059 |   | $ | 54,612 |   |
| Costs and expenses(1)                                                                                                                       |       | 82,994                                      |       | 74,323 |   | 61,865 |   |
| Operating loss                                                                                                                              |       | (18,747                                     | )          | (11,264 | ) | (7,253 | ) |
| Interest and other  income                                                                                                                  |       | 699                                         |       | 1,373 |   | 1,373 |   |
| Loss from continuing  operations before income taxes, minority interest and income from investments  in unconsolidated subsidiaries         |       | (18,048                                     | )          | (9,891 | ) | (5,880 | ) |
| Minority interest,  before income taxes                                                                                                     |       | 3,457                                       |       | (5,406 | ) | 1,395 |   |
| Income from investments  in unconsolidated subsidiaries, before income taxes                                                                |       | 12,892                                      |       | 10,437 |   | 12,637 |   |
| Income (loss) from  continuing operations, before income taxes                                                                              |       | (1,699                                      | )          | (4,860 | ) | 8,152 |   |
| Income from discontinued  operations, before income taxes                                                                                   |       | 27,586                                      |       | 29,641 |   | 28 |   |
| Income before income  taxes                                                                                                                 |       | $                                           | 25,887     |   | $ | 24,781 |   | $ | 8,180 |   |
| **Total:**                                                                                                                                  |       |                                        |       |   |   |   |   |
| Total revenues                                                                                                                              |       | $                                           | 895,950    |   | $ | 773,873 |   | $ | 704,229 |   |
| Costs and expenses(1)                                                                                                                       |       | 861,327                                     |       | 757,046 |   | 690,099 |   |
| Operating income                                                                                                                            |       | 34,623                                      |       | 16,827 |   | 14,130 |   |
| Interest and other  income                                                                                                                  |       | 2,835                                       |       | 2,797 |   | 2,236 |   |
| Income from continuing  operations before income taxes, minority interest and income from investments  in unconsolidated subsidiaries  |       | 37,458                                      |       | 19,624 |   | 16,366 |   |
| Minority interest,  before income taxes                                                                                                     |       | 4,013                                       |       | (4,846 | ) | 2,070 |   |
| Income from investments  in unconsolidated subsidiaries, before income taxes                                                                |       | 24,052                                      |       | 17,689 |   | 16,550 |   |
| Income from continuing  operations, before income taxes                                                                                     |       | 65,523                                      |       | 32,467 |   | 34,986 |   |
| Income from discontinued  operations, before income taxes                                                                                   |       | 28,764                                      |       | 30,606 |   | 404 |   |
| Income before income taxes                                                                                                                  |       | $                                           | 94,287     |   | $ | 63,073 |   | $ | 35,390 |   |

** **

F-46

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2005 (dollars in thousands, except per share data)**

**21.**   Segment Information (Continued)

 

| ** **                  | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Total Assets:**           | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Global Services             |       | $                     | 434,712    |   | $ | 319,464 |   | $ | 296,876 |   |
| Development and  Investment |       | 513,455               |       | 429,486 |   | 333,250 |   |
| Total consolidated assets   |       | $                     | 948,167    |   | $ | 748,950 |   | $ | 630,126 |   |

----

(1)                Costsand expenses include non-cash compensation expense related to the amortizationof employment contracts and unearned stock compensation of $7,475, $6,572 and$3,701 related to the Global Services segment and $2,570, $2,641 and $1,402related to the Development and Investment segment in 2005, 2004 and 2003,respectively.

**22.**   UnauditedInterim Financial Information

Unauditedfinancial information by quarter was as follows:

| ** **                                                          | ** ** | **Quarter Ended** | ** ** |
|---------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                          | ** ** | **March 31**      | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| **2005:**                                                           |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Total revenues                                                      |       | $                      | 178,621    |   | $ | 211,989 |   |   | $ | 226,729 |   |   |   | $ | 278,611 |   |   |
| Income (loss) from  discontinued operations, net of income taxes(1) |       | (325                   | )          | 680 |   |   | 12,181 |   |   |   | 5,587 |   |   |
| Net income                                                          |       | 2,053                  |       | 8,264 |   |   | 14,517 |   |   |   | 34,573 |   |   |
| Net income per share:                                               |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Basic                                                               |       | $                      | 0.06       |   | $ | 0.25 |   |   | $ | 0.43 |   |   |   | $ | 1.01 |   |   |
| Diluted                                                             |       | $                      | 0.06       |   | $ | 0.23 |   |   | $ | 0.40 |   |   |   | $ | 0.94 |   |   |
| **2004:**                                                           |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Total revenues                                                      |       | $                      | 158,099    |   | $ | 181,933 |   |   | $ | 188,498 |   |   |   | $ | 245,343 |   |   |
| Income (loss) from  discontinued operations, net of income taxes(1) |       | 397                    |       | (18 | ) |   | (73 | ) |   |   | 18,676 |   |   |
| Net income                                                          |       | 2,099                  |       | 3,214 |   |   | 5,854 |   |   |   | 27,952 |   |   |
| Net income per share:                                               |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Basic                                                               |       | $                      | 0.06       |   | $ | 0.09 |   |   | $ | 0.16 |   |   |   | $ | 0.83 |   |   |
| Diluted                                                             |       | $                      | 0.06       |   | $ | 0.09 |   |   | $ | 0.15 |   |   |   | $ | 0.77 |   |   |

----

(1)                Discontinuedoperations include the operations of real estate properties and gain ondisposition of real estate properties held for sale or sold in which theCompany retained or expects to retain no continuing involvement, in accordancewith FAS 144.

**23.**   SubsequentEvents

In February 2006, the Company announced that itsBoard of Directors has authorized the purchase of up to $50,000 of its commonstock from time to time in open market purchases or in privately negotiatedtransactions. The Company also amended its Credit Facility to allow for additionalrepurchases or other distributions on account of its common stock in an amountup to $100,000 from the date of the repurchase announcement through December 31,2006 and to reduce the minimum required net worth covenant. The repurchase ofshares is intended to be accretive to future earnings per share for holders whoretain their shares. The Company’s intent with respect to its stock repurchaseprograms is to reserve the repurchased shares for issuance in connection withthe Company’s equity-based incentive plans, as well as for other corporatepurposes.

F-47

----

**TRAMMELLCROW COMPANY AND SUBSIDIARIESSCHEDULE III—REAL ESTATEINVESTMENTS AND ACCUMULATED DEPRECIATIONDecember 31, 2005(In thousands)**

 
|                 | ** ** | ** ** | ** ** | ** **                 | ** ** | **Initial Cost** | ** ** | ** **                         | ** ** | **Balance at December 31, 2005** | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** **                         | ** ** |
|-----------------|------------|------------|------------|----------------------------|------------|------------------|------------|------------------------------------|------------|----------------------------------|------------|----------------------------------------------|------------|------------|------------|------------------------------------|------------|
| **Description** | ** ** | ** ** | ** ** | **Related   Encumbrances** | ** ** | **Land**         | ** ** | **Buildings   and   Improvements** | ** ** | **Other**                        | ** ** | **Costs   Subsequent to   Acquisition** | ** ** | **Land**   | ** ** | **Buildings   and   Improvements** | ** ** | **Other** | ** ** | **Total (A),   (C), (D)** | ** ** | **Accumulated   Depreciation** | ** ** | **Depreciable   Lives in   Years(B)** | ** ** | **Date of   Construction** | ** ** | **Date   Acquired** | ** ** |
|                 |            |            |            |                            |            |                  |            |                                    |            |                                  |            |                                              |            |            |            |                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |
| **REAL ESTATE UNDER DEVELOPMENT  (CURRENT)**    | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
|-------------------------------------------------|------------|--------|------------|------------|--------|------------|------------|--------|------------|------------|--------|--------|------------|------------|--------|--------|------------|------------|--------|------------|------------|--------|------------|------------|--------|--------|------------|------------|--------|--------|------------|------------|--------|--------|------------|------------|--------|--------|------------|------------|--------|--------|------------|------------|--------|--------|------------|------------|--------|
| **Industrial**                                  | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| South River One, Cranbury Township, NJ          |       |   | 9,259      | ** ** |   | 2,206      |       |   | —     | ** ** |   |   | —     | ** ** |   |   | 7,060      | ** ** |   | 2,743      |       |   | 6,523      | ** ** |   |   | —     | ** ** |   |   | 9,266      | ** ** |   |   | —     | ** ** |   |   | —     | ** ** |   |   | (E)        | ** ** |   |   | 2003       | ** ** |   |
| **Medical Office**                              | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| TCDFW DSCH, Burleson, TX                        |       |   | 5,916      | ** ** |   | —     |       |   | —     | ** ** |   |   | —     | ** ** |   |   | 7,896      | ** ** |   | —     |       |   | 7,896      | ** ** |   |   | —     | ** ** |   |   | 7,896      | ** ** |   |   | —     | ** ** |   |   | —     | ** ** |   |   | (E)        | ** ** |   |   | 2005       | ** ** |   |
| **Mixed-Use (Multi-family/Retail)**             | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Hight Street Clarkson, Denver, CO               |       |   | 3,075      | ** ** |   | 1,203      |       |   | —     | ** ** |   |   | —     | ** ** |   |   | 3,863      | ** ** |   | 1,970      |       |   | 3,096      | ** ** |   |   | —     | ** ** |   |   | 5,066      | ** ** |   |   | —     | ** ** |   |   | —     | ** ** |   |   | (E)        | ** ** |   |   | 2004       | ** ** |   |
| High Street Columbia, Washington, DC            |       |   | 97,587     | ** ** |   | 20,499     |       |   | 7,636      | ** ** |   |   | —     | ** ** |   |   | 79,600     | ** ** |   | 31,912     |       |   | 75,823     | ** ** |   |   | —     | ** ** |   |   | 107,735    | ** ** |   |   | —     | ** ** |   |   | —     | ** ** |   |   | (E)        | ** ** |   |   | 2002       | ** ** |   |
| **REAL  ESTATE HELD FOR SALE**                  | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| **Office**                                      | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Concord Commons, Englewood, CO                  |       |   | 1,992      | ** ** |   | 582        |       |   | —     | ** ** |   |   | —     | ** ** |   |   | 3,198      | ** ** |   | 945        |       |   | 2,835      | ** ** |   |   | —     | ** ** |   |   | 3,780      | ** ** |   |   | —     | ** ** |   |   | —     | ** ** |   |   | 2005       | ** ** |   |   | 2004       | ** ** |   |
| Riata Gateway, Austin, TX                       |       |   | 13,194     | ** ** |   | 3,505      |       |   | 325        | ** ** |   |   | —     | ** ** |   |   | 11,120     | ** ** |   | 3,909      |       |   | 11,041     | ** ** |   |   | —     | ** ** |   |   | 14,950     | ** ** |   |   | —     | ** ** |   |   | —     | ** ** |   |   | 2004       | ** ** |   |   | 2004       | ** ** |   |
| **Retail**                                      | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Atascocita Commons outparcel, Humble, TX        |       |   | 816        | ** ** |   | 584        |       |   | —     | ** ** |   |   | —     | ** ** |   |   | 207        | ** ** |   | 791        |       |   | —     | ** ** |   |   | —     | ** ** |   |   | 791        | ** ** |   |   | —     | ** ** |   |   | —     | ** ** |   |   | 2005       | ** ** |   |   | 2005       | ** ** |   |
| Cockrell Hill, Dallas, TX                       |       |   | —     | ** ** |   | 427        |       |   | —     | ** ** |   |   | —     | ** ** |   |   | 585        | ** ** |   | 644        |       |   | 368        | ** ** |   |   | —     | ** ** |   |   | 1,012      | ** ** |   |   | —     | ** ** |   |   | —     | ** ** |   |   | 2004       | ** ** |   |   | 2004       | ** ** |   |
| **REAL  ESTATE UNDER DEVELOPMENT(NON-CURRENT)** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| **Industrial**                                  | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| TCDFW I-20 I, Dallas, TX                        |       |   | 2,107      | ** ** |   | 1,316      |       |   | —     | ** ** |   |   | —     | ** ** |   |   | 745        | ** ** |   | 1,927      |       |   | 134        | ** ** |   |   | —     | ** ** |   |   | 2,061      | ** ** |   |   | —     | ** ** |   |   | —     | ** ** |   |   | (E)        | ** ** |   |   | 2005       | ** ** |   |
| **Land**                                        | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Beaumont, Beaumont, CA                          |       |   | —     | ** ** |   | 5,054      |       |   | —     | ** ** |   |   | —     | ** ** |   |   | 69         | ** ** |   | 5,123      |       |   | —     | ** ** |   |   | —     | ** ** |   |   | 5,123      | ** ** |   |   | —     | ** ** |   |   | —     | ** ** |   |   | N/A        | ** ** |   |   | 2005       | ** ** |   |
| Hampden Town Center, Denver, CO                 |       |   | 1,750      | ** ** |   | —     |       |   | —     | ** ** |   |   | —     | ** ** |   |   | 1,408      | ** ** |   | 1,408      |       |   | —     | ** ** |   |   | —     | ** ** |   |   | 1,408      | ** ** |   |   | —     | ** ** |   |   | —     | ** ** |   |   | N/A        | ** ** |   |   | 1999       | ** ** |   |
| John Young Parkway Retail, Orlando, FL          |       |   | —     | ** ** |   | 653        |       |   | —     | ** ** |   |   | —     | ** ** |   |   | 128        | ** ** |   | 781        |       |   | —     | ** ** |   |   | —     | ** ** |   |   | 781        | ** ** |   |   | —     | ** ** |   |   | —     | ** ** |   |   | N/A        | ** ** |   |   | 2004       | ** ** |   |
| RP Land, Austin, TX                             |       |   | —     | ** ** |   | 5,502      |       |   | —     | ** ** |   |   | —     | ** ** |   |   | 168        | ** ** |   | 5,670      |       |   | —     | ** ** |   |   | —     | ** ** |   |   | 5,670      | ** ** |   |   | —     | ** ** |   |   | —     | ** ** |   |   | N/A        | ** ** |   |   | 2005       | ** ** |   |
| Scottsdale-Paradise Lane, Phoenix, AZ           |       |   | —     | ** ** |   | 13,514     |       |   | —     | ** ** |   |   | —     | ** ** |   |   | 16         | ** ** |   | 13,530     |       |   | —     | ** ** |   |   | —     | ** ** |   |   | 13,530     | ** ** |   |   | —     | ** ** |   |   | —     | ** ** |   |   | N/A        | ** ** |   |   | 2005       | ** ** |   |
| TCDFW I-20 II, Dallas, TX                       |       |   | 2,127      | ** ** |   | 1,621      |       |   | —     | ** ** |   |   | —     | ** ** |   |   | 68         | ** ** |   | 1,689      |       |   | —     | ** ** |   |   | —     | ** ** |   |   | 1,689      | ** ** |   |   | —     | ** ** |   |   | —     | ** ** |   |   | N/A        | ** ** |   |   | 2005       | ** ** |   |
| **Medical Office**                              | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| TC DUHS, Charlotte, NC                          |       |   | 3,412      | ** ** |   | —     |       |   | —     | ** ** |   |   | —     | ** ** |   |   | 4,955      | ** ** |   | 480        |       |   | 4,475      | ** ** |   |   | —     | ** ** |   |   | 4,955      | ** ** |   |   | —     | ** ** |   |   | —     | ** ** |   |   | (E)        | ** ** |   |   | 2005       | ** ** |   |
| **Mixed-Use (Multi-family/Retail)**             |       |   |       | ** ** |   |       |       |   |       | ** ** |   |   |       | ** ** |   |   |       | ** ** |   |       |       |   |       | ** ** |   |   |       | ** ** |   |   |       | ** ** |   |   |       | ** ** |   |   |       | ** ** |   |   |       | ** ** |   |   |       | ** ** |   |
| High Street Rainey, Austin, TX                  |       |   | —     | ** ** |   | 4,409      |       |   | —     | ** ** |   |   | —     | ** ** |   |   | 1,021      | ** ** |   | 5,154      |       |   | 276        | ** ** |   |   | —     | ** ** |   |   | 5,430      | ** ** |   |   | —     | ** ** |   |   | —     | ** ** |   |   | (E)        | ** ** |   |   | 2005       | ** ** |   |
| Timbercreek, Dallas, TX                         |       |   | 25,650     | ** ** |   | 28,510     |       |   | —     | ** ** |   |   | —     | ** ** |   |   | 112        | ** ** |   | 28,622     |       |   | —     | ** ** |   |   | —     | ** ** |   |   | 28,622     | ** ** |   |   | —     | ** ** |   |   | —     | ** ** |   |   | (E)        | ** ** |   |   | 2005       | ** ** |   |
| **Office**                                      |       |   |       | ** ** |   |       |       |   |       | ** ** |   |   |       | ** ** |   |   |       | ** ** |   |       |       |   |       | ** ** |   |   |       | ** ** |   |   |       | ** ** |   |   |       | ** ** |   |   |       | ** ** |   |   |       | ** ** |   |   |       | ** ** |   |
| 777 6th Street, Washington, DC                  |       |   | 26,520     | ** ** |   | 14,835     |       |   | —     | ** ** |   |   | —     | ** ** |   |   | 8,734      | ** ** |   | 19,923     |       |   | 3,646      | ** ** |   |   | —     | ** ** |   |   | 23,569     | ** ** |   |   | —     | ** ** |   |   | —     | ** ** |   |   | (E)        | ** ** |   |   | 2004       | ** ** |   |
| **Retail**                                      | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Atascocita Commons, Humble, TX                  |       |   | 10,087     | ** ** |   | 8,504      |       |   | —     | ** ** |   |   | —     | ** ** |   |   | 3,122      | ** ** |   | 10,581     |       |   | 1,045      | ** ** |   |   | —     | ** ** |   |   | 11,626     | ** ** |   |   | —     | ** ** |   |   | —     | ** ** |   |   | (E)        | ** ** |   |   | 2005       | ** ** |   |
| Centre Point Commons,  Bradenton, FL            |       |   | 7,824      | ** ** |   | 8,332      |       |   | —     | ** ** |   |   | —     | ** ** |   |   | 4,413      | ** ** |   | 12,745     |       |   | —     | ** ** |   |   | —     | ** ** |   |   | 12,745     | ** ** |   |   | —     | ** ** |   |   | —     | ** ** |   |   | (E)        | ** ** |   |   | 2004       | ** ** |   |

 

F-48

 

----

**TRAMMELLCROW COMPANY AND SUBSIDIARIESSCHEDULE III—REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION (Continued)December 31, 2005(In thousands)**
|                 | ** ** | ** ** | ** ** | **Initial Cost**          | ** ** | ** ** | ** ** | **Balance at December 31, 2005** | ** ** | ** ** | ** ** | ** **                                 | ** ** | ** ** | ** ** |
|-----------------|------------|------------|------------|---------------------------|------------|------------|------------|----------------------------------|------------|------------|------------|--------------------------------------------|------------|------------|------------|
| **Description** | ** ** | ** ** | ** ** | **Related  Encumbrances** | ** ** | **Land**   | ** ** | **Buildings  and  Improvements** | ** ** | **Other**  | ** ** | **Costs  Subsequent to  Acquisition** | ** ** | **Land**   | ** ** | **Buildings  and  Improvements** | ** ** | **Other** | ** ** | **Total (A),  (C), (D)** | ** ** | **Accumulated  Depreciation** | ** ** | **Depreciable  Lives in  Years(B)** | ** ** | **Date of  Construction** | ** ** | **Date  Acquired** | ** ** |
|                 |            |            |            |                           |            |            |            |                                  |            |            |            |                                            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| **REAL ESTATE HELD FOR INVESTMENT** | ** ** |   | ** **         | ** ** |   | ** **         | ** ** |   | ** **        | ** ** |   | ** **       | ** ** |   | ** **         | ** ** |   | ** **         | ** ** |   | ** **         | ** ** |   | ** **           | ** ** |   | ** **         | ** ** |   |   | ** **        | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
|-------------------------------------|------------|--------|--------------------|------------|--------|--------------------|------------|--------|-------------------|------------|--------|------------------|------------|--------|--------------------|------------|--------|--------------------|------------|--------|--------------------|------------|--------|----------------------|------------|--------|--------------------|------------|--------|--------|-------------------|------------|--------|--------|------------|------------|--------|--------|------------|------------|--------|--------|------------|------------|--------|
| **Industrial**                      | ** ** |   | ** **         | ** ** |   | ** **         | ** ** |   | ** **        | ** ** |   | ** **       | ** ** |   | ** **         | ** ** |   | ** **         | ** ** |   | ** **         | ** ** |   | ** **           | ** ** |   | ** **         | ** ** |   |   | ** **        | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Long Vista Industrial, Austin, TX   |       |   | 6,549              | ** ** |   | 2,054              |       |   | 6,122             | ** ** |   | —           |       |   | 33                 |       |   | 2,062              |       |   | 6,147              | ** ** |   | —               |       |   | 8,209              | ** ** |   |   | (66               | )          |   |   | 39         | ** ** |   |   | 1991       | ** ** |   |   | 2005       | ** ** |   |
| Pennsy Drive, Landover, MD          |       |   | 7,695              | ** ** |   | 2,437              |       |   | 4,766             | ** ** |   | —           |       |   | 3,090              |       |   | 2,437              |       |   | 7,856              | ** ** |   | —               |       |   | 10,293             | ** ** |   |   | (262              | )          |   |   | 39         | ** ** |   |   | 1966       | ** ** |   |   | 2004       | ** ** |   |
| **Land**                            | ** ** |   | ** **         | ** ** |   | ** **         | ** ** |   | ** **        | ** ** |   | ** **       | ** ** |   | ** **         | ** ** |   | ** **         | ** ** |   | ** **         | ** ** |   | ** **           | ** ** |   | ** **         | ** ** |   |   | ** **        | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Arrowwood, Charlotte, NC            |       |   | —             | ** ** |   | 321                |       |   | —            | ** ** |   | —           |       |   | —             |       |   | 321                |       |   | —             | ** ** |   | —               |       |   | 321                | ** ** |   |   | —            |       |   |   | —     | ** ** |   |   | N/A        | ** ** |   |   | 1999       | ** ** |   |
| Ballpark Way, Houston, TX           |       |   | 5,380              | ** ** |   | 6,479              |       |   | —            | ** ** |   | —           |       |   | 1,557              |       |   | 8,036              |       |   | —             | ** ** |   | —               |       |   | 8,036              | ** ** |   |   | —            |       |   |   | —     | ** ** |   |   | N/A        | ** ** |   |   | 2000       | ** ** |   |
| Bee Caves, Austin, TX               |       |   | —             | ** ** |   | 153                |       |   | —            | ** ** |   | —           |       |   | 19                 |       |   | 172                |       |   | —             | ** ** |   | —               |       |   | 172                | ** ** |   |   | —            |       |   |   | —     | ** ** |   |   | N/A        | ** ** |   |   | 2003       | ** ** |   |
| Cleveland, Cleveland, TN            |       |   | —             | ** ** |   | 260                |       |   | —            | ** ** |   | —           |       |   | (160               | )          |   | 100                |       |   | —             | ** ** |   | —               |       |   | 100                | ** ** |   |   | —            |       |   |   | —     | ** ** |   |   | N/A        | ** ** |   |   | 1998       | ** ** |   |
| Fairway Center, Pasadena, TX        |       |   | —             | ** ** |   | 1,967              |       |   | —            | ** ** |   | —           |       |   | 2,283              |       |   | 4,250              |       |   | —             | ** ** |   | —               |       |   | 4,250              | ** ** |   |   | —            |       |   |   | —     | ** ** |   |   | N/A        | ** ** |   |   | 2001       | ** ** |   |
| Greenhill, Tulsa, OK                |       |   | —             | ** ** |   | 327                |       |   | —            | ** ** |   | —           |       |   | 69                 |       |   | 396                |       |   | —             | ** ** |   | —               |       |   | 396                | ** ** |   |   | —            |       |   |   | —     | ** ** |   |   | N/A        | ** ** |   |   | 2002       | ** ** |   |
| Lake Park Plaza, Lewisville, TX     |       |   | —             | ** ** |   | 926                |       |   | —            | ** ** |   | —           |       |   | 406                |       |   | 1,332              |       |   | —             | ** ** |   | —               |       |   | 1,332              | ** ** |   |   | —            |       |   |   | —     | ** ** |   |   | N/A        | ** ** |   |   | 1999       | ** ** |   |
| Lakeline Retail, Cedar Park, TX     |       |   | —             | ** ** |   | 75                 |       |   | —            | ** ** |   | —           |       |   | (70                | )          |   | 5                  |       |   | —             | ** ** |   | —               |       |   | 5                  | ** ** |   |   | —            |       |   |   | —     | ** ** |   |   | N/A        | ** ** |   |   | 2000       | ** ** |   |
| NCC Consortium, Reston, VA          |       |   | —             | ** ** |   | 9                  |       |   | —            | ** ** |   | —           |       |   | 54                 |       |   | 63                 |       |   | —             | ** ** |   | —               |       |   | 63                 | ** ** |   |   | —            |       |   |   | —     | ** ** |   |   | N/A        | ** ** |   |   | 2005       | ** ** |   |
| Sierra Corporate Center, Reno, NV   |       |   | —             | ** ** |   | 588                |       |   | —            | ** ** |   | —           |       |   | 1,014              |       |   | 1,602              |       |   | —             | ** ** |   | —               |       |   | 1,602              | ** ** |   |   | —            |       |   |   | —     | ** ** |   |   | N/A        | ** ** |   |   | 1999       | ** ** |   |
| TCDC Land, Englewood, CO            |       |   | —             | ** ** |   | 2,955              |       |   | —            | ** ** |   | —           |       |   | 880                |       |   | 3,835              |       |   | —             | ** ** |   | —               |       |   | 3,835              | ** ** |   |   | —            |       |   |   | —     | ** ** |   |   | N/A        | ** ** |   |   | 1999       | ** ** |   |
| TCDFW LCT, Irving, TX               |       |   | —             | ** ** |   | 3,603              |       |   | —            | ** ** |   | —           |       |   | 244                |       |   | 3,847              |       |   | —             | ** ** |   | —               |       |   | 3,847              | ** ** |   |   | —            |       |   |   | —     | ** ** |   |   | N/A        | ** ** |   |   | 2000       | ** ** |   |
| Telco, Englewood, CO                |       |   | —             | ** ** |   | 1,405              |       |   | —            | ** ** |   | —           |       |   | (528               | )          |   | 877                |       |   | —             | ** ** |   | —               |       |   | 877                | ** ** |   |   | —            |       |   |   | —     | ** ** |   |   | N/A        | ** ** |   |   | 2000       | ** ** |   |
| Wetmore, San Antonio, TX            |       |   | —             | ** ** |   | 484                |       |   | —            | ** ** |   | —           |       |   | 146                |       |   | 630                |       |   | —             | ** ** |   | —               |       |   | 630                | ** ** |   |   | —            |       |   |   | —     | ** ** |   |   | N/A        | ** ** |   |   | 2002       | ** ** |   |
| **Office**                          | ** ** |   | ** **         | ** ** |   | ** **         | ** ** |   | ** **        | ** ** |   | ** **       | ** ** |   | ** **         | ** ** |   | ** **         | ** ** |   | ** **         | ** ** |   | ** **           | ** ** |   | ** **         | ** ** |   |   | ** **        | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Chase Park, Austin, TX              |       |   | 11,826             | ** ** |   | 3,592              |       |   | 6,246             | ** ** |   | 2,551            |       |   | 761                |       |   | 3,600              |       |   | 8,382              | ** ** |   | 1,167                |       |   | 13,149             | ** ** |   |   | (507              | )          |   |   | 39         | ** ** |   |   | 1969       | ** ** |   |   | 2004       | ** ** |   |
| Meridian Tower, Tulsa, OK           |       |   | 6,221              | ** ** |   | 1,200              |       |   | 7,489             | ** ** |   | —           |       |   | 1,271              |       |   | 1,200              |       |   | 8,760              | ** ** |   | —               |       |   | 9,960              | ** ** |   |   | (831              | )          |   |   | 39         | ** ** |   |   | 1981       | ** ** |   |   | 2001       | ** ** |   |
| **Retail**                          | ** ** |   | ** **         | ** ** |   | ** **         | ** ** |   | ** **        | ** ** |   | ** **       | ** ** |   | ** **         | ** ** |   | ** **         | ** ** |   | ** **         | ** ** |   | ** **           | ** ** |   | ** **         | ** ** |   |   | ** **        | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Arvada Marketplace East, Arvada, CO |       |   | 5,098              | ** ** |   | 2,477              |       |   | 5,000             | ** ** |   | —           |       |   | 423                |       |   | 2,507              |       |   | 5,393              | ** ** |   | —               |       |   | 7,900              | ** ** |   |   | (170              | )          |   |   | 39         | ** ** |   |   | 1987       | ** ** |   |   | 2004       | ** ** |   |
| Crossroads Mall, San Antonio, TX    |       |   | —             | ** ** |   | 6,984              |       |   | 6,571             | ** ** |   | (648             | )          |   | 2,124              |       |   | 6,990              |       |   | 9,002              | ** ** |   | (961                 | )          |   | 15,031             | ** ** |   |   | (225              | )          |   |   | 39         | ** ** |   |   | 1961       | ** ** |   |   | 2004       | ** ** |   |
| Parmer Lane Village, Austin, TX     |       |   | 2,074              | ** ** |   | 245                |       |   | —            | ** ** |   | —           |       |   | 1,730              |       |   | 449                |       |   | 1,526              | ** ** |   | —               |       |   | 1,975              | ** ** |   |   | (14               | )          |   |   | 39         | ** ** |   |   | 2003       | ** ** |   |   | 2003       | ** ** |   |
| **TOTAL**                           | ** ** |   | **$ 256,159** | ** ** |   | **$ 159,797** | ** ** |   | **$ 44,155** | ** ** |   | **$ 1,903** | ** ** |   | **$ 153,834** | ** ** |   | **$ 195,258** | ** ** |   | **$ 164,224** | ** ** |   | **$  206** | ** ** |   | **$ 359,688** | ** ** |   |   | **$ (2,075** | **)**      |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |

----

(A)               The aggregate cost for Federal Income tax purposes isapproximately $362.8 million.

(B)                Land, real estate under development and real estateheld for sale are not depreciated.

(C)               Includes adjustments to reflect depreciation (on assetspreviously classified as “held for sale”) that would have been recorded had theassets been continuously classified as real estate held for investment sinceacquisition (Meridian Tower—$271).

(D)               Reflects a writedown for impairment (Telco—$553,Cleveland—$170, Lakeline—$70, and TCDFW LCT—$357)

(E)               Project is under construction as of December 31,2005.

F-49

 

----

**TRAMMELL CROWCOMPANY AND SUBSIDIARIES**

**NOTETO SCHEDULE III—REAL ESTATE INVESTMENTS**

**AND ACCUMULATEDDEPRECIATION**

**December 31,2005**

**(Inthousands)**

Changesin real estate investments and accumulated depreciation for the three yearsended December 31 were as follows:

| ** **                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Real estate investments:**  |       |     |       |     |       |     |       |
| Balance at  beginning of year |       | $        | 221,768    |     | $          | 167,178  |       | $ | 174,173 |   |
| Additions and improvements    |       | 255,244  |       | 196,871  |       | 74,609   |       |
| Dispositions                  |       | (116,884 | )          | (141,435 | )          | (75,858  | )          |
| Other adjustments(1)          |       | (440     | )          | (846     | )          | (5,746   | )          |
| Balance at end of  year       |       | $        | 359,688    |     | $          | 221,768  |       | $ | 167,178 |   |
| **Accumulated depreciation:** |       |     |       |     |       |     |       |
| Balance at  beginning of year |       | $        | (783       | )        | $          | (223     | )          | $ | — |   |
| Depreciation expense          |       | (1,609   | )          | (888     | )          | (1,148   | )          |
| Dispositions                  |       | 317      |       | 195      |       | 82       |       |
| Other adjustments(1)          |       | —   |       | 133      |       | 843      |       |
| Balance at end of year        |       | $        | (2,075     | )        | $          | (783     | )          | $ | (223 | ) |

----

(1)                Includesamortization of lease intangibles and tenant origination costs, allowances toreflect certain assets at fair value less cost to sell, writedowns for impairment,and adjustments to reflect cumulative depreciation on assets that werereclassified from “held for sale.”  Alsoincludes reclassification of accumulated depreciation to real estate basis uponreclassification of assets to “held for sale.”

F-50

----

FINANCIALSTATEMENTSTFK Retail, Ltd., ATexas Limited Partnership*Years ended June 30, 2004, 2003, and2002*

F-51

----

**TFK Retail, Ltd., A Texas Limited PartnershipFinancial StatementsYears ended June 30, 2004, 2003, and 2002Contents**
| Report of Independent  Registered Public Accounting Firm |   | F-53   |   |
|----------------------------------------------------------|--------|--------|--------|
| Audited Financial  Statements                            |   |   |   |
| Balance Sheets                                           |   | F-54   |   |
| Statements  of Operations                                |   | F-55   |   |
| Statements of Changes in Partners’ Capital          |   | F-56   |   |
| Statements  of Cash Flows                                |   | F-57   |   |
| Notes to  Financial Statements                           |   | F-58   |   |

 

F-52

----

**Report of Independent Registered Public AccountingFirm**

The PartnersTFK Retail, Ltd.

We have audited the accompanying balance sheets of TFKRetail, Ltd., a Texas limited partnership, as of June 30, 2004 and 2003,and the related statements of operations, changes in partners’ capital, andcash flows for each of the three years in the period ended June 30, 2004.These financial statements are the responsibility of the Partnership’smanagement. Our responsibility is to express an opinion on these financial statementsbased on our audits.

We conducted our audits in accordance with theauditing standards of the Public Company Accounting Oversight Board (UnitedStates). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes consideration of internal control overfinancial reporting as a basis for designing audit procedures that areappropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Partnership’s internal control overfinancial reporting. Accordingly, we express no such opinion. An audit alsoincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of TFK Retail, Ltd., a Texas limitedpartnership, at June 30, 2004 and 2003, and the results of its operationsand its cash flows for each of the three years in the period ended June 30,2004, in conformity with United States generally accepted accountingprinciples.

/s/ ERNST & YOUNG LLP

March 8, 2005

F-53

----

**TFK Retail, Ltd., A Texas Limited PartnershipBalance Sheets**
|                                                                                                                   | ** ** | **June 30** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                        | ** ** | **2004**         | ** ** | **2003** | ** ** |
| **Assets**                                                                                                        |       |             |       |   |   |
| Real estate:                                                                                                      |       |             |       |   |   |
| Land                                                                                                              |       | $                | —     |   | $ | 16,450,615 |   |
| Buildings and improvements                                                                                        |       | —           |       | 95,820,423 |   |
|                                                                                                              |       | —           |       | 112,271,038 |   |
| Accumulated depreciation                                                                                          |       | —           |       | (11,063,633 | ) |
|                                                                                                              |       | —           |       | 101,207,405 |   |
| Cash and cash  equivalents                                                                                        |       | 692,162          |       | 2,406,619 |   |
| Other receivables                                                                                                 |       | 785,727          |       | — |   |
| Tenant  receivables, net of allowance for doubtful accounts of $0 and $146,713 at  June 30, 2004 and 2003    |       | 280,590          |       | 1,561,699 |   |
| Deferred loan  costs, net of accumulated amortization of $0 and $26,714 at June 30,  2004 and 2003           |       | —           |       | 7,756 |   |
| Deferred leasing  commissions, net of accumulated amortization of $0 and $323,400 at  June 30, 2004 and 2003 |       | —           |       | 780,197 |   |
| Other assets                                                                                                      |       | 4,340            |       | 331,128 |   |
| Total assets                                                                                                      |       | $                | 1,762,819  |   | $ | 106,294,804 |   |
| **Liabilities  and Partners’ Capital**                                                                       |       |             |       |   |   |
| Liabilities:                                                                                                      |       |             |       |   |   |
| Notes payable                                                                                                     |       | $                | 696,307    |   | $ | 102,849,602 |   |
| Accrued property taxes                                                                                            |       | —           |       | 997,200 |   |
| Accrued interest                                                                                                  |       | —           |       | 427,325 |   |
| Payables to affiliates                                                                                            |       | —           |       | 222,230 |   |
| Accounts payable and accrued liabilities                                                                          |       | 107,196          |       | 296,415 |   |
| Prepaid rent                                                                                                      |       | —           |       | 527,994 |   |
| Tenant security deposits                                                                                          |       | 6,153            |       | 224,060 |   |
| Total liabilities                                                                                                 |       | 809,656          |       | 105,544,826 |   |
| Partners’  capital:                                                                                          |       |             |       |   |   |
| General partners                                                                                                  |       | 19,064           |       | 14,722 |   |
| Limited partners                                                                                                  |       | 934,099          |       | 735,256 |   |
| Total partners’  capital                                                                                     |       | 953,163          |       | 749,978 |   |
| Total liabilities and  partners’ capital                                                                     |       | $                | 1,762,819  |   | $ | 106,294,804 |   |

 

See accompanying notes.

F-54

----

**TFK Retail, Ltd., A Texas Limited PartnershipStatements of Operations**
|                                              | ** ** | **Year ended June 30** | ** **     |
|----------------------------------------------|------------|---------------------------------------|----------------|
| ** **                                   | ** ** | **2004**                              | ** **     | **2003** | ** ** | **2002** | ** ** |
| **Revenues**                                 |       |                                  |           |   |   |   |   |
| Rental                                       | ** ** | **$**                                 | **8,400,393**  |   | $ | 12,511,650 |   | $ | 12,413,240 |   |
| Tenant  reimbursements                       | ** ** | **3,114,886**                         |           | 3,497,529 |   | 3,704,480 |   |
| Other                                        | ** ** | **62,119**                            |           | 94,052 |   | 75,968 |   |
|                                         | ** ** | **11,577,398**                        |           | 16,103,231 |   | 16,193,688 |   |
| **Operating  Expenses**                      |       |                                  |           |   |   |   |   |
| Repairs and  maintenance                     | ** ** | **890,260**                           |           | 1,173,779 |   | 1,181,640 |   |
| Utilities                                    | ** ** | **189,285**                           |           | 240,027 |   | 233,176 |   |
| Insurance                                    | ** ** | **219,208**                           |           | 314,285 |   | 230,370 |   |
| Property taxes                               | ** ** | **1,348,470**                         |           | 1,966,523 |   | 1,949,693 |   |
| General and  administrative                  | ** ** | **655,293**                           |           | 831,033 |   | 698,625 |   |
| Management fees                              | ** ** | **691,518**                           |           | 1,156,216 |   | 1,048,607 |   |
| Bad debts                                    | ** ** | **182,440**                           |           | 19,151 |   | 305,418 |   |
| Other                                        | ** ** | **31,484**                            |           | — |   | 4,876 |   |
|                                         | ** ** | **4,207,958**                         |           | 5,701,014 |   | 5,652,405 |   |
| Income from  operations                      | ** ** | **7,369,440**                         |           | 10,402,217 |   | 10,541,283 |   |
| Depreciation and amortization                | ** ** | **1,702,213**                         |           | 3,175,804 |   | 2,990,645 |   |
| Interest                                     | ** ** | **22,588,942**                        |           | 11,347,039 |   | 8,328,072 |   |
| Net loss before  gain on sale of real estate | ** ** | **(16,921,715**                       | **)**          | (4,120,626 | ) | (777,434 | ) |
| Gain on sale of real estate                  | ** ** | **51,303,496**                        |           | — |   | — |   |
| Net income (loss)                            | ** ** | **$**                                 | **34,381,781** |   | $ | (4,120,626 | ) | $ | (777,434 | ) |

 

See accompanying notes.

F-55

----

**TFK Retail, Ltd., A Texas Limited PartnershipStatements of Changes inPartners’ Capital**
|                                 | ** ** | **General Partners** | ** **   | **Limited Partners**           | ** ** | ** **                    | ** **   |
|---------------------------------|------------|---------------------------|--------------|-------------------------------------|------------|-------------------------------|--------------|
| ** **                      | ** ** | **GPI-Lincoln,  Inc.**    | ** **   | **TC Houston  TFK, Inc.** | ** ** | **MDLP  Holdings, Inc.** | ** **   | **TCH TFK,  L.P.** | ** ** | **GPIL, Inc.** | ** ** | **Tri-States  Retail  Investments,  L.L.C.** | ** ** | **Total** | ** ** |
| Capital at June 30,  2001  |       |                      | $            | 93,509                              |       |                          |         | $ | 90,367 |   |   |   | $ | 80,475 |   |   | $ | 1,441,595 |   | $ | 7,592,630 |   |   | $ | — |   |   | $ | 9,298,576 |   |
| Distributions                   |       |                      | (21,764      | )                                   |       |                          | (21,764      | ) |   |   | (18,717 | ) |   | (347,571 | ) | (1,766,582 | ) |   | — |   |   | (2,176,398 | ) |
| Net loss                        |       |                      | (7,832       | )                                   |       |                          | (7,484       | ) |   |   | (6,742 | ) |   | (119,341 | ) | (636,035 | ) |   | — |   |   | (777,434 | ) |
| Capital at June 30,  2002  |       |                      | 63,913       |                                |       |                          | 61,119       |   |   |   | 55,016 |   |   | 974,683 |   | 5,190,013 |   |   | — |   |   | 6,344,744 |   |
| Distributions                   |       |                      | (14,742      | )                                   |       |                          | (14,742      | ) |   |   | (12,677 | ) |   | (235,420 | ) | (1,196,559 | ) |   | — |   |   | (1,474,140 | ) |
| Net loss                        |       |                      | (41,602      | )                                   |       |                          | (39,224      | ) |   |   | (35,822 | ) |   | (625,229 | ) | (3,378,749 | ) |   | — |   |   | (4,120,626 | ) |
| Capital at June 30,  2003  |       |                      | 7,569        |                                |       |                          | 7,153        |   |   |   | 6,517 |   |   | 114,034 |   | 614,705 |   |   | — |   |   | 749,978 |   |
| Transfer of  ownership          | ** ** | ** **                | **—**   | ** **                          | ** ** | ** **                    | **—**   | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | **—** | ** ** | **(254,902** | **)** | ** ** | **254,902** | ** ** | ** ** | **—** | ** ** |
| Distributions                   | ** ** | ** **                | **(341,786** | **)**                               | ** ** | ** **                    | **(341,786** | **)** | ** ** | ** ** | **(247,971** | **)** | ** ** | **(9,805,616** | **)** | **(359,803** | **)** | ** ** | **(23,081,634** | **)** | ** ** | **(34,178,596** | **)** |
| Net income                      | ** ** | ** **                | **343,749**  | ** **                          | ** ** | ** **                    | **344,165**  | ** ** | ** ** | ** ** | **246,315** | ** ** | ** ** | **10,158,632** | ** ** | **—** | ** ** | ** ** | **23,288,920** | ** ** | ** ** | **34,381,781** | ** ** |
| Capital at  June 30,  2004 | ** ** | ** **                | **$**        | **9,532**                           | ** ** | ** **                    | ** **   | **$** | **9,532** | ** ** | ** ** | ** ** | **$** | **4,861** | ** ** | ** ** | **$** | **467,050** | ** ** | **$** | **—** | ** ** | ** ** | **$** | **462,188** | ** ** | ** ** | **$** | **953,163** | ** ** |

 

See accompanying notes.

F-56

----

**TFK Retail, Ltd., A Texas Limited PartnershipStatements of Cash Flows**
|                                                                                           | ** ** | **Year ended June 30** | ** **     |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------|----------------|
| ** **                                                                                | ** ** | **2004**                              | ** **     | **2003** | ** ** | **2002** | ** ** |
| **Operating Activities**                                                                  |       |                                  |           |   |   |   |   |
| Net income (loss)                                                                         | ** ** | **$**                                 | **34,381,781** |   | $ | (4,120,626 | ) | $ | (777,434 | ) |
| Adjustments to reconcile  net income (loss) to net cash provided by operating activities: |       |                                  |           |   |   |   |   |
| Gain on sale of real estate                                                               | ** ** | **(51,303,496**                       | **)**          | — |   | — |   |
| Depreciation and amortization                                                             | ** ** | **1,702,213**                         |           | 3,175,804 |   | 2,990,645 |   |
| Amortization of deferred loan costs                                                       | ** ** | **1,723**                             |           | 6,894 |   | 6,894 |   |
| Loan participation amortization                                                           | ** ** | **17,437,951**                        |           | 3,648,294 |   | 629,327 |   |
| Bad debt expense                                                                          | ** ** | **182,440**                           |           | 19,151 |   | 305,418 |   |
| Changes in  operating assets and liabilities:                                             |       |                                  |           |   |   |   |   |
| Tenant receivables                                                                        | ** ** | **1,098,669**                         |           | 85,268 |   | (493,169 | ) |
| Other assets                                                                              | ** ** | **326,788**                           |           | (14,352 | ) | (178,135 | ) |
| Accrued interest                                                                          | ** ** | **(427,325**                          | **)**          | — |   | — |   |
| Accrued property taxes                                                                    | ** ** | **(997,200**                          | **)**          | (97,806 | ) | (98,842 | ) |
| Accounts payable and accrued liabilities                                                  | ** ** | **(419,349**                          | **)**          | 72,204 |   | 54,049 |   |
| Prepaid rent                                                                              | ** ** | **(527,994**                          | **)**          | 81,501 |   | 166,547 |   |
| Tenant security deposits                                                                  | ** ** | **(217,907**                          | **)**          | (21,410 | ) | (9,142 | ) |
| Net cash provided  by operating activities                                                | ** ** | **1,238,294**                         |           | 2,834,922 |   | 2,596,158 |   |
| **Investing  Activities**                                                                 |       |                                  |           |   |   |   |   |
| Property  improvements                                                                    | ** ** | **(661,704**                          | **)**          | (1,542,580 | ) | (556,101 | ) |
| Other receivables                                                                         | ** ** | **(785,727**                          | **)**          | — |   | — |   |
| Leasing  commissions                                                                      | ** ** | **(695,615**                          | **)**          | (446,901 | ) | (183,364 | ) |
| Proceeds from  sale                                                                       | ** ** | **152,960,137**                       |           | — |   | — |   |
| Net cash provided  by (used in) investing activities                                      | ** ** | **150,817,091**                       |           | (1,989,481 | ) | (739,465 | ) |
| **Financing  Activities**                                                                 |       |                                  |           |   |   |   |   |
| Payment of notes  payable                                                                 | ** ** | **(119,591,246**                      | **)**          | — |   | — |   |
| Partner  distributions                                                                    | ** ** | **(34,178,596**                       | **)**          | (1,474,140 | ) | (2,176,398 | ) |
| Net cash used in  financing activities                                                    | ** ** | **(153,769,842**                      | **)**          | (1,474,140 | ) | (2,176,398 | ) |
| Net decrease in cash and cash equivalents                                                 | ** ** | **(1,714,457**                        | **)**          | (628,699 | ) | (319,705 | ) |
| Cash and cash  equivalents at beginning of year                                           | ** ** | **2,406,619**                         |           | 3,035,318 |   | 3,355,023 |   |
| Cash and cash  equivalents at end of year                                                 | ** ** | **$**                                 | **692,162**    |   | $ | 2,406,619 |   | $ | 3,035,318 |   |
| **Supplemental  Cash Flow Disclosure**                                                    |       |                                  |           |   |   |   |   |
| Cash paid for interest,  excluding loan participation                                     | ** ** | **$**                                 | **5,576,593**  |   | $ | 7,691,851 |   | $ | 7,691,851 |   |

 

See accompanying notes.

F-57

----

**TFK Retail, Ltd., A Texas Limited Partnership Notes to Financial Statements**

**June 30, 2004**

**1.**   Organization

TFK Retail, Ltd. (the Partnership) was formed on August 16,1999, for the purpose of acquiring, owning, and operating neighborhood retailshopping centers anchored by large national companies. The Partnership wasoriginally owned by GPI-Lincoln, Inc. and TC Houston TFK, Inc. asco-general partners, and MDLP Holdings, Inc., TCH TFK, L.P. and GPIL, Inc.as limited partners. On July 1, 2003, GPIL, Inc. sold its interest intotal to Tri-States Retail Investments, L.L.C. GPI-Lincoln, Inc., MDLPHoldings, Inc., and Tri-States Retail Investments, L.L.C. are collectivelyreferred to as “Granite.” TC Houston TFK, Inc. and TCH TFK, L.P. arecollectively referred to as “Crow.”

On March 1, 2004, thePartnership sold all of its real estate assets in a single transaction. ThePartnership is currently winding up its affairs and distributing its remainingnet assets to its partners.

**2.**   Summary ofSignificant Accounting Policies

**Real Estate**

Real estate is recorded at cost, less accumulateddepreciation.

Depreciationis calculated on a straight-line basis, based upon the following useful lives:

| Buildings and  improvements |   | 39 years |   |
|-----------------------------|--------|----------|--------|
| Site improvements           |   | 10 years |   |

 

Tenant improvements are capitalized and depreciatedover the life of the related lease.

Expenditures for maintenance and repairs are chargedto operations as incurred. Significant renovations or betterments, which extendthe economic useful lives of the assets, are capitalized.

Under the guidelines set forth under FAS 144,depreciation of the assets is to be discontinued once real estate assets areclassified as held for sale. Further, assets held for sale are recorded at thelower of their carrying value or sales price less costs to sell. In connectionwith the sale of the properties on March 1, 2004, the Partnershipclassified the properties as held for sale on December 1, 2003.Depreciation was discontinued as of that date, and no write-down to the lowerof carrying value or sales price less costs to sell was necessary.

The Partnership recordsimpairment losses on long-lived assets used in operations when events andcircumstances indicate that the assets might be impaired and the estimatedundiscounted cash flows to be generated by those assets are less than thecarrying amounts of those assets. Impaired assets are reported at the lower ofcost or fair value. No impairment losses have been recognized to date.

**Cash and Cash Equivalents**

The Partnership considersall highly liquid investments with an original maturity date of three months orless when purchased to be cash equivalents.

**DeferredLoan Costs and Leasing Commissions**

Costs associated with financing the properties aredeferred and amortized over the term of the respective loan using the effectiveinterest method. Costs incurred to obtain leases are amortized using thestraight-line method over the terms of the respective leases.

F-58

----

**TFK Retail, Ltd., A Texas Limited Partnership Notes to Financial Statements (Continued)**

**2.**   Summary of Significant Accounting Policies (Continued)

All deferred loan costsand leasing commissions were written off in connection with the sale of theproperties on March 1, 2004.

**Income Tax Matters**

Under present income taxlaws, the Partnership is not subject to federal income taxes; therefore, notaxes have been provided in the accompanying financial statements. The partnersare to include their respective share of Partnership income or loss in theirindividual tax returns. The availability of these losses is subject to Section 704(d) ofthe Internal Revenue Code (Limitation on Allowance of Losses).

**Revenue Recognition**

Rental income includes the base rent each tenant isrequired to pay in accordance with the terms of the respective lease and isreported on a straight-line basis over the noncancelable lease term. Rentalincome earned in excess of rent payments received pursuant to the terms of theindividual lease agreements is recorded as rent receivable. Certain leaseagreements contain provisions that provide for the reimbursement of real estatetaxes and certain other operating costs above their base-year costs. Thesereimbursements are included in rental and tenant reimbursements in thestatements of operations.

Several tenants are alsorequired to pay rent as a percentage of their gross sales volume to the extentsuch percentage rents exceed their base rents. Such percentage rents amountedto $169,219, $194,482, and $305,879 for the years ended June 30, 2004,2003, and 2002, respectively.

**Loan Participations**

Management estimates thefair value of the participation feature of its loan at the time of inception ofthe loan or if conditions indicate that a change in value has occurred. Thefair value of the participation feature is amortized over the life of the loanas a component of interest expense. Upon the sale of the properties, theparticipation was calculated based on the sales proceeds and paid to thelender.

**Use of Estimates**

The preparation of thePartnership’s financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the reported amounts included in the financialstatements and the accompanying notes thereto. Actual results could differ fromthose estimates.

F-59

----

**TFK Retail, Ltd., A Texas Limited Partnership Notes to Financial Statements (Continued)**

**3.**   RealEstate

Realestate is comprised of the following:

| ** **                  | ** ** | **June 30** | ** **                                                                                                 |
|-----------------------------|------------|------------------|------------------------------------------------------------------------------------------------------------|
| ** **                  | ** ** | **2004**         | ** **                                                                                                 | **2003** | ** ** |
| Land                        | ** ** | **$**            | **—**                                                                                                 |   | $ | 16,450,615 |   |
| Buildings and  improvements | ** ** | **—**       |                                                                                                       | 88,032,177 |   |
| Site improvements           | ** ** | **—**       |                                                                                                       | 6,827,483 |   |
| Tenant  improvements        | ** ** | **—**       |                                                                                                       | 960,763 |   |
| ** **                  |       | **—**       |                                                                                                       | 112,271,038 |   |
| Accumulated  depreciation   | ** ** | **—**       |                                                                                                       | (11,063,633 | ) |
| ** **                  |       | **$**            | **                —** |   | $ | 101,207,405 |   |

 

On August 20, 1999, the Partnership purchased aportfolio of four retail properties for $108,527,000.

As of June 30,2003, the Partnership owned four retail properties, as follows:

| **Retail Center** | ** ** | ** **                                                                       | ** ** | **Location** | ** ** | **Net Rentable Square Feet** | ** ** |
|------------------------|------------|----------------------------------------------------------------------------------|------------|--------------|------------|---------------------------------------------|------------|
| First Colony  Commons  |       | Houston,  Texas                                                                  |       |         | 410,047    |                                        |       |
| Largo Mall             |       | Tampa,  Florida                                                                  |       |         | 372,202    |                                        |       |
| Tates Creek  Centre    |       | Lexington,  Kentucky           |       |         | 184,497    |                                        |       |
| TJ Maxx Plaza          |       | Miami, Florida                                                                   |       |         | 161,802    |                                        |       |

 

**Sale of Assets**

On March 1, 2004, the Partnership sold all of itsoperating properties in a single transaction to a third party. The sale pricewas $160,358,000. The gain from the sale after selling expenses amounted to$51,303,496. With the proceeds from the sale, the Partnership paid off thefirst and second lien mortgages, amounting to $81,395,250 and $16,279,050,respectively.

The second lien mortgagescontained a participation feature. The lender was entitled to receive, at theearlier of maturity of the loans or upon sale or other disposition of theproperties, an amount equal to 49% of the net proceeds, defined as the salesprice or appraised value, less the note amounts, selling costs not to exceed 3%to 4%, and an amount necessary to give the Partnership a 15% internal rate ofreturn over the ownership period of the property. Management determined thatthe value of the participating interest was $21,916,946 at the time of sale,and this amount was paid at closing. The difference between the actual amountspaid and the amount estimated as of June 30, 2003, is included as acomponent of interest expense.

F-60

----

**TFK Retail, Ltd., A Texas Limited Partnership Notes to Financial Statements (Continued)**

**4.**   Notes Payable

Thenotes payable are summarized as follows:

| ** **                                                                                                                                                     | ** ** | **June 30** | ** **  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|-------------|
| ** **                                                                                                                                                     | ** ** | **2004**         | ** **  | **2003** | ** ** |
| First lien  mortgages, fixed rate of 7.15%, maturing on August 19, 2004, with two 1-year  extensions available, requiring monthly interest payments only  | ** ** | **$**            | **—**  |   | $ | 81,395,250 |   |
| Second lien  mortgages, fixed rate of 11.5%, maturing on August 19, 2004, with two 1-year  extensions available, requiring monthly interest payments only | ** ** | **—**       |        | 16,279,050 |   |
| Accumulated amortization of participating interest                                                                                                             | ** ** | **696,307**      |        | 5,175,302 |   |
|                                                                                                                                                           | ** ** | **$**            | **696,307** |   | $ | 102,849,602 |   |

 

The notes payable,including the loan participation, were repaid in full in connection with thesale of the Partnership’s properties on March 1, 2004 (see Note 3). At June 30,2004, the participation represents additional amounts due the lender relatingto activity subsequent to the sale of the properties.

**5.**   PartnershipAgreement

**Capital Contributions**

Underthe terms of the Agreement of Limited Partnership of TFK Retail, Ltd., a Texaslimited partnership, the partners committed a total of $11,596,908 to thePartnership. As of June 30, 2004 and 2003, the partners have contributed$10,829,812 to the Partnership, as follows:

| **Partner**                                                                                                            | ** ** | ** ** | ** ** | **Initial  Partnership  Interest** | ** ** | **Tier I  Partnership  Interest** | ** ** | **Tier II  Partnership  Interest** | ** ** | **Committed  Capital** | ** ** | **Contributed  Capital** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------------------------------|------------|----------------------------------------|------------|-----------------------------------------|------------|------------------------|------------|--------------------------|------------|
| *General  Partners*                                                                                                    |       |       |       |                               |       |                                   |       |                                    |       |                   |       |                     |       |   |   |   |   |
| TC Houston  TFK, Inc., a Delaware corporation                                                                     |       |       | 1.00       | %                                  |       |                                   | 1.00       | %                                       |       |                   | 1.00       | %                        |       | $ | 115,966 |   | $ | 105,662 |   |
| GPI-Lincoln, Inc.,  a Texas corporation                                                                           |       |       | 1.00       |                               |       |                                   | 1.00       |                                    |       |                   | 1.00       |                     |       | 115,966 |   | 108,825 |   |
| *Limited  Partners*                                                                                                    |       |       |       |                               |       |                                   |       |                                    |       |                   |       |                     |       |   |   |   |   |
| TCH TFK, L.P., a  Texas limited partnership                                                                            |       |       | 15.97      |                               |       |                                   | 34.00      |                                    |       |                   | 49.00      |                     |       | 1,851,983 |   | 1,685,841 |   |
| GPIL, Inc., a  Delaware corporation/Tri-States Retail Investments, L.L.C., an Oklahoma  limited liability company |       |       | 81.17      |                               |       |                                   | 63.33      |                                    |       |                   | 48.49      |                     |       | 9,412,993 |   | 8,835,838 |   |
| MDLP  Holdings, Inc., a Delaware corporation                                                                      |       |       | 0.86       |                               |       |                                   | 0.67       |                                    |       |                   | 0.51       |                     |       | 100,000 |   | 93,646 |   |
|                                                                                                                   |       |       | 100.00     | %                                  |       |                                   | 100.00     | %                                       |       |                   | 100.00     | %                        |       | $ | 11,596,908 |   | $ | 10,829,812 |   |

 

The majority partner, asdefined, may require that the partners make additional capital contributions inorder to fund cash needs of the Partnership.

F-61

----

**TFK Retail, Ltd., A Texas Limited Partnership Notes to Financial Statements (Continued)**

**5.**   Partnership Agreement (Continued)

On July 1, 2003, GPIL, Inc.sold its interest to Tri-States Retail Investments, L.L.C., who assumed GPIL’spartnership interest.

**Distributions**

Subsequent to theestablishment of adequate cash reserves, monthly distributions of cash flow areto be distributed to the partners as follows:

·                    First,to the payment of accrued interest on any Optional Loans, as defined;

·                    Second,to the payment of principal on any Optional Loans, as defined; and

·                    Third,to the partners in proportion to their respective partnership interests.

In the event of aCapital Transaction, as defined, the Capital Proceeds, as defined, are to bedistributed to the partners as follows:

·                    First,to the payment of Partnership debt;

·                    Second,to the payment of accrued interest on any Optional Loans, as defined;

·                    Third,to the payment of principal on any Optional Loans, as defined;

·                    Fourth,to the partners in the amount and respective percentage of their UnreturnedCapital Contributions;

·                    Fifth,to the partners in proportion to their partnership interest until the partners’IRR, as defined, on their Capital Contributions equals 18%;

·                    Sixth,to the partners in proportion to their Tier I partnership interest until thepartners’ IRR, as defined, on their Capital Contributions equals 25%; and

·                    Seventh, tothe partners in proportion to their Tier II partnership interest.

**Profit and Loss Allocations**

Profits prior tothe liquidation of the Partnership are to be allocated as follows:

·                    First,to the amounts distributed to each partner;

·                    Second,to the extent of any previously allocated losses; and

·                    Third,to the partners in proportion to their respective partnership interests.

Profits and lossesin connection with the liquidation of the Partnership are to be allocated asfollows:

·                    First,to the partners in order to restore any negative capital account balances;

·                    Second,to the partners, an amount required to cause their respective capital accountbalances to be in the ratio of their respective partnership interests; and

·                    Third,to the partners in proportion to their respective partnership interests.

F-62

----

**TFK Retail, Ltd., A Texas Limited Partnership Notes to Financial Statements (Continued)**

**5.**   Partnership Agreement (Continued)

Net losses are to be allocated as follows:

·                    First,to the partners in proportion to their respective positive capital accountbalances;

·                    Second,to the partners, an amount required to cause their respective capital accountbalances to be in the ratio of their respective partnership interests; and

·                    Third, to thepartners in proportion to their respective partnership interests.

**6.**   Leasing Activities

The Partnership leased apad site adjacent to its property in Tampa. The Partnership was required to pay$11,193 per month in rent for this lease, which would have expired on June 15,2025. During the years ended June 30, 2004, 2003, and 2002, thePartnership paid $89,542, $134,314, and $134,314 respectively, in ground rent.

**7.**   Related PartyTransactions

An affiliate of Crow provides leasing and propertymanagement services for the properties. The affiliate is paid 4% to 6% ofrental income and 3.25% of Gross Income, as defined, respectively, for theseservices. For the years ended June 30, 2005, 2004, and 2003, thePartnership paid $813,528, $446,901, and $259,884, respectively, in leasingcommissions and $376,291, $601,403, and $515,267, respectively, in property andconstruction management fees. As part of the sale agreement, in lieu ofmanagement fees for the period from March through June 2004, salariesfor property management personnel were reimbursed to a Crow affiliate by thePartnership. The amount related to this agreement totaled $27,040, which isreflected in the total salary amounts.

An affiliate of Crow provided brokerage services inconnection with the sale of the properties. The affiliate was paid $3,608,055for these services.

An affiliate of Crow also provides insurance to thePartnership. During the years ended June 30, 2004, 2003, and 2002, $-0-,$344,464, and $284,906, respectively, was paid to this affiliate. ThePartnership’s payroll costs are allocated by an affiliate of Crow based on theamount of time personnel spend at the properties. For the years ended June 30,2004, 2003, and 2002, the Partnership paid $5,000, $326,347, and $337,486,respectively, in payroll costs to the affiliate of Crow.

The lender is entitled to an asset management fee,calculated as 5% of the net operating income, as defined, of the properties.Asset management fees incurred for the years ended June 30, 2004, 2003,and 2002, amounted to $315,227, $554,813, and $533,340, respectively.

F-63

----