**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-K**

**(Mark One)**

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

**Forthe fiscal year ended December 31, 2004**

**OR**

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

**Forthe transition periodfrom             to             **

**Commissionfile number 1-13531**

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**Trammell Crow Company**

(Exact name of registrantas specified in its charter)

| **Delaware**                                                     | **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 telephonenumber, 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 |

 

Securities registeredpursuant to section 12(g) of the Act:

**None**

(Title of Class)

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. o

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

The aggregate market valueof the voting and non-voting common equity held by non-affiliates on June 30,2004, was $491,122,698, based on the closing price of the registrant’s commonstock, $14.10 per share, reported on the New York Stock Exchange on June 30,2004.

There were 35,729,345 shares of the registrant’scommon stock outstanding as of March 1, 2005.

**DOCUMENTSINCORPORATED BY REFERENCE**

Portionsof the registrant’s Proxy Statement to be furnished to stockholders inconnection with its 2005 Annual Meeting of Stockholders are incorporated byreference in Part III of this Report.

 

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**PART I**

**ITEM 1.     BUSINESS**

**Company Overview**

Trammell Crow Company (the “Company”) is one of thelargest diversified commercial real estate service companies in the world. TheCompany delivers a comprehensive range of services to leading multinationalcorporations, institutional investors and other users of real estate services.In the United States, the Company is a leading provider of commercial propertyand facilities management services, commercial property brokerage andtransaction management services, commercial property development andconstruction services and project management services. In addition to its fullservice offices located throughout the United States, the Company has officesin Canada, Europe, Asia and Latin/South America focused on the delivery of realestate services to users of commercial real estate. The Company deliversbrokerage services outside the United States through strategic alliances withleading providers—in Europe and Asia, through Savills plc (“Savills”), a leadingproperty services company based in the United Kingdom; and in Canada, throughJJ Barnicke, a leading Canadian real estate services provider. The Company,which is headquartered in Dallas, Texas, was founded in 1948 by Mr. TrammellCrow. From its founding through the 1980’s, the Company’s primary business wasthe development, ownership and management of industrial, office and retailprojects. In 1991, the Company was reconstituted as a real estate servicescompany. This reconstitution entailed the separation of the Company’scommercial real estate asset base and related operations from its real estateservices business. The Company continued to operate the real estate servicesbusiness while ownership of the commercial real estate asset base that existedin 1991 was segregated into a large number of separate entities distinct fromthe Company, with independent management and operations.

The Company delivers four core services—buildingmanagement services, brokerage services, project management services and developmentservices—to both user and investor clients. The Company’s business is organizedunder two separate national leadership structures. The Global Services Groupincludes substantially all of the building management services, brokerageservices, and project management services delivered to both user and investorclients. Substantially all of the Company’s real estate development andinvestment activities are conducted through the Company’s Development andInvestment Group. The Company’s revenues are generated primarily in the UnitedStates, with approximately 97%, 97% and 96% of its revenues derived fromdomestic operations in each of 2002, 2003 and 2004, respectively. Revenuesderived from various foreign operations comprised approximately 3%, 3% and 4%of the Company’s total revenues in each of 2002, 2003 and 2004, respectively.Approximately 92%, 91% and 91% of the Company’s long-lived assets at December 31,2002, 2003 and 2004, respectively, relate to the Company’s domestic operations,with the remaining portion of its long-lived assets relating to various foreignoperations.

Within the Global Services segment, with approximately6,000 full-time equivalent (“FTE”) employees, the Company provides services touser clients, including corporations, hospitals, universities and governmentagencies, that are typically the primary occupants of the commercial propertieswith respect to which services are performed, and investor clients that are nottypically the primary occupants of the commercial properties with respect towhich services are performed. The building management services provided to userclients consist primarily of facilities management, which entails providingcomprehensive day-to-day occupancy related services, principally to largecorporations, healthcare systems and other users that occupy commercialfacilities in multiple locations. These services include administration andday-to-day maintenance and repair of client-occupied facilities.Brokerage services provided to user clients include corporate advisory servicessuch as portfolio management and tenant representation. Project managementservices provided to user clients include facility planning and projectmanagement, such as construction oversight, space planning, siteconsolidations, facilities design, and 

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workplace moves, adds, andchanges. The building management services provided to investor clients includeproperty management services relating to all aspects of building operations,tenant relations and oversight of building improvement processes. Brokerageservices provided to investor clients include project leasing and investmentsales services whereby the Company advises buyers, sellers and landlords inconnection with the leasing and sale of office, industrial and retail space, andland. Project management services provided to investor clients includeconstruction management services such as space planning and tenant finishcoordination.

Within the Development andInvestment segment, encompassing approximately 200 FTE employees, the Companyprovides development services to investor and user clients—both those pursuantto which the Company takes an ownership or co-investment position and thosepursuant to which the Company provides development services for others on a feebasis. The Company provides comprehensive project development services andacquires and disposes of commercial real estate projects. The developmentservices provided include financial planning, site acquisition, procurement ofapprovals and permits, design and engineering coordination, constructionbidding and management, tenant finish coordination, project closeout andproject financing services. The Company will continue to focus its efforts inthis area on risk-mitigated opportunities for investor clients and feedevelopment and build-to-suit projects for user clients, including those inhealthcare. From time to time the Company pursues development and investmentactivities, including opportunistic property acquisitions and new development,for its own account or on a co-investment basis. With an organization comprisedof professionals dedicated fully to development and investment activities, theCompany is positioned to pursue and execute new development business,particularly programmatic business with the Company’s large investor clients,and exploit niche market opportunities.

**Long-Term Growth Strategy**

The Company’s long-term growth strategy is centeredaround taking advantage of its strong brand name, its scale and geographicscope, its large existing client base, its comprehensive service offerings and,in particular, its development capabilities, which differentiate it amongcommercial real estate companies, to grow with both user and investor clients,primarily in North America. The key components of this overall growth strategyare:

*Focus on Large Markets and Large Clients.  *TheCompany is focused on operating in large markets and believes that this focuswill allow the Company to achieve the critical mass that fuels growth withlarge clients. The Company believes that expanding its presence in thesemarkets will create key hubs of growth, enabling the Company to more easilyshift resources as needed, establish brand dominance and recruit top talent.The Company intends to maintain its focus on large clients, which havehistorically fueled much of the Company’s revenue growth. The Company believesthis focus on large clients will also benefit the Company as the trendcontinues for both investors and users of space to consolidate theirrequirements with a smaller number of service providers. While the Company hasand will continue to focus on large markets as noted, it does have and willcontinue to have a presence in a number of small and mid-sized markets. Thispresence allows the Company to serve large clients with needs in these marketsand to be opportunistic relative to locally generated requirements.

*Provide Consistent Quality Service.  *TheCompany is focused on providing uniform product quality and service deliveryacross all markets in which it is active. The Company is also focused oncontinually improving its back office infrastructure capabilities includinginformation technology, accounting, and human resources in support of bothinternal and client activity. The Company has aimed substantial resources atthese areas in recent years and has reorganized each to make it more effective.The Company believes that the sector in which it competes consistently has beenweak in these areas and that clients are eager for service providers todemonstrate improved capabilities. While the sector in general is now 

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improving, the Companybelieves its efforts in this regard should create a competitive advantage,particularly with large clients, which in turn should create growthopportunities.

*Expand Brokerage Network.  *TheCompany has committed significant resources to expand its brokerage network andto continue development of a highly competitive brokerage business. As part ofits strategy to build stronger brokerage teams in major markets, withappropriate coverage in secondary markets, the Company has added brokersthroughout its network in the U.S. The Company employed 570 FTE brokers at December 31,2004, in addition to 54 transaction managers who provide services to nationaluser clients, an increase from 526 FTE brokers and 46 transaction managers at December 31,2003. Also contributing to this initiative, the Company maintains across-border, strategic brokerage alliance with JJ Barnicke in Canada. Inaddition, the Company continues its strategic alliance with Savills, which hasbrokerage capability throughout Europe, Asia-Pacific and Australia, to providethe Company with a delivery platform to meet the needs of its clients in theseregions.

*Capitalize on Outsourcing Opportunity**.  *Thecommercial real estate-related outsourcing business remains a significantgrowth opportunity well suited to the Company’s full service capabilities. Asan outsourcing industry leader, the Company will continue to focus itsresources, primarily in the U.S. and, to a lesser degree, in Europe, on addingnew clients and growing its substantial relationships with existing outsourcingclients.

*Focus on DevelopmentOpportunities**.  *Witha national organization comprised of professionals dedicated fully to developmentand investment activities, the Company pursues and executes new developmentbusiness, with initiatives focused on programmatic business with the Company’slarge investor clients and, increasingly, build-to-suit projects for userclients, including those in healthcare. The healthcare industry in particularhas been less cyclical than the overall economy through the latest downturn in2001, 2002 and 2003, and the Company has increased its focus in this industry.In addition, from time to time the Company pursues opportunistic propertyacquisitions or new development with its capital partners or for its ownaccount. The Company has also increased its focus on acquisitions (includingthose acquisitions where opportunities exist for redevelopment, re-leasing orother areas where the Company can use its expertise to add value) and expectsthat this activity will increase in the future. The Company has also expandedits activities to include development of mixed-use facilities with aresidential component. The Company has assigned national functional experts to theseinitiatives. In 2004, starts and investments related to these initiatives andprograms accounted for approximately 36% of total 2004 starts and investments,based on aggregate budgeted project costs (an increase in project costs of 48%from 2003).

**Global Services Segment**

The Company providesservices to both user and investor clients through its Global Services segment.Global Services segment revenues were $710.8 million in 2004. Revenuesgenerated from the Global Services segment were $685.6 million, $676.5 million,$656.9 million and $649.6 million in 2000, 2001, 2002 and 2003, respectively.At December 31, 2002, 2003 and 2004, total assets attributable to theGlobal Services segment were $253.0 million, $296.9 million and$319.5 million, respectively. Other financial information about the GlobalServices segment is contained in *“Item 8.Financial Statements and Supplementary Data, Note 22.”*

***User Services***

The Company provides outsourcing services, includingfacilities management services, corporate advisory services and projectmanagement services, to user clients. As of December 31, 2004, the Companyutilized approximately 3,200 FTE employees to provide services to approximately24,000 properties for its outsourcing clients. The goal of the Company’s userservices business is to align the facilities and support 

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services of its clientswith their operational and strategic business objectives. Occupancy-relatedcosts frequently represent the second largest corporate expense item (aftercompensation and benefits), and the Company believes that organizations areincreasingly outsourcing their facility or real estate-related functions toreduce costs, improve profitability and refocus management and other resourceson core competencies. The Company has developed expertise in providing realestate outsourcing services to clients in the financial services, healthcare,automotive, oil and gas and technology/communications industries. The Companybelieves that its expertise in servicing clients within these industriescreates additional growth opportunities.

The Company administers outsourcing services using acentralized administrative, marketing and leadership organization combined withclient-based delivery systems. The Company offers the followingoutsourcing service delivery options: (i) dedicated Company employeeslocated at a client site; (ii) a team of Company employees dedicated to aclient but located at Company offices; and (iii) a flexible, nationwidenetwork of Company personnel providing the full menu of the Company’s realestate services from the Company’s local offices. Most of the Company’soutsourcing engagements provide for on-site presence of Company employees, whichthe Company believes enhances client communication, provides focused personalservice, enhances the protection of the client’s proprietary information andenables the Company to monitor client satisfaction on an ongoing basis.

The Company seeks to enter into multi-year,full-service outsourcing contracts with its clients. Most contracts arestructured so the Company receives a monthly base fee and, in some cases,annual incentives if certain agreed-upon performance targets are satisfied.Most contracts also provide for the reimbursement of client-dedicatedpersonnel costs and associated overhead expenses. In many cases, these revenuesources are augmented by variable revenues from transaction services andproject management services. The Company believes that significant growthopportunities exist within its existing client base.

The five largest clients for the Company’s outsourcingservices business, measured in 2004 revenues from such clients, collectivelyrepresented 23% of the Company’s total revenues in 2004.

In addition to theservices described below, the Company also offers strategic services, such asconsulting, development, properties portfolio management and real estate assetmanagement.

*FacilitiesManagement Services*

Facilities management servicesincludes the day-to-day maintenance and repair of facilities, office services(such as security, reprographics, mail, cafeteria, shipping and receiving, andreception services) and call center services (including work-order, dispatch,vendor management and emergency response). As of December 31, 2004, theCompany managed approximately 171.7 million square feet for itsoutsourcing clients. Revenues from facilities management services were$211.1 million in 2004 (27.1% of 2004 revenues), up from $151.5 millionin 2000. The growth in revenues is due to the addition of new clientsand the expansion of services provided to existing clients.

*Corporate AdvisoryServices*

Corporate advisoryservices include tenant representation and other transaction services such asacquisitions, dispositions, lease administration and lease audits. The Companyseeks to manage a client’s entire firm-wide property acquisition anddivestiture program, but provides services to many clients on atransaction-by-transaction basis. Revenues from corporate advisory serviceswere $143.3 million in 2004 (18.4% of 2004 revenues), as compared to$143.5 million in 2000. In 2001 and 2002, the Company experienceddecreases in corporate advisory revenues because the downturn in the economyhad a negative impact on the timing and amount of tenant representation andother corporate advisory services revenues earned by the Company. However, theCompany’s corporate advisory services business began to recover in 2003 and, by2004, had returned to the peak levels achieved in 2000. In 2004, corporateadvisory 

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servicesrevenues increased 16.2% over 2003 revenues. A substantial portion of thisgrowth was driven by an increase in the number of tenant representation brokersas part of the Company’s focus on expanding its brokerage network. In addition,growth stemmed from a focus on larger transactions and expansion of servicesprovided to existing clients. See *“Brokerage Services”*for additional information regarding the Company’s brokerage network.

*Project ManagementServices*

Project managementservices include facility planning and management of projects involvingconstruction, space planning, site consolidations, facilities design, workspacemoves, adds and changes, and furniture, signage and cabling requirements.Revenues from project management services were $91.6 million in 2004(11.8% of 2004 revenues), up from $53.4 million in 2000. Although thedownturn in the economy in 2001, 2002 and 2003 had a negative impact on userclients’ project spending, and hence on the timing and amount of projectmanagement revenues earned by the Company, revenues have increased since 2001because the Company has been successful in winning new business and expandingservices with existing clients.

***Investor Services***

The Company providesproperty management, brokerage, and construction management services toinvestors in commercial properties.

*Property ManagementServices*

As of December 31, 2004, the Company managedapproximately 221.2 million square feet of commercial properties(excluding facilities occupied by user clients) and served approximately 550clients and 12,000 tenants nationwide through its locally-based propertymanagement teams. The Company managed 312.7 million, 291.7 million,261.1 million and 247.7 million square feet of commercial property atthe end of 2000, 2001, 2002 and 2003, respectively. Revenues in 2004 fromproperty management services were $137.2 million (17.6% of 2004 revenues),down from $165.1 million in 2000. Property management revenues were adverselyimpacted by the downturn in the economy during 2001, 2002 and 2003, which hasresulted in decreases in occupancy levels and rents (which are driversof these revenues). Revenues also decreased due to decreases in squarefootage under management due to sales of buildings in the Company’s managementportfolio to REITs or other investors that self-manage their properties or useother service providers. Other square footage decreases resulted from clientstaking services back in-house or to other service providers. The decrease inrevenues is also the result of the Company’s sale of portions of the businessesacquired in 1998 from Faison & Associates and Faison Enterprises, Inc.(“Faison”) back to Faison in 2002 (see “*Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations”)*.The Company has also exited from certain less profitable property managementbusiness and has increased its focus on adding office product to its managementportfolio, which typically generates higher margins.

The objective of the Company’s property managementbusiness is to enhance its clients’ investment values by maintaining highlevels of occupancy and lowering property operating costs by offering a widerange of property management services. The property management services offeredby the Company consist of (i) building management services such asmaintenance, landscaping, security, energy management, owner’s insurance, lifesafety and capital repairs (many of which may be subcontracted by the Companyto third-party providers); (ii) tenant relations services such aspromotional activities, processing tenant work orders and lease administrationservices; (iii) coordinating tenant finish; and (iv) relatedfinancial management services including accounting, financial reporting andanalysis.

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The Company expects that a significant portion of itsnew property management engagements will result from (i) contract winsresulting from clients’ consolidation of service providers; (ii) propertytransfers; and (iii) projects that the Company develops for investorclients. The Company focuses on expanding relationships with certain of itsinvestor clients to obtain longer-term management contracts and to providesingle-source solutions for their multi-market and multi-functionalrequirements.

The properties managed by the Company are typicallyserved by locally-based teams of property managers and maintenancepersonnel supported by various corporate level service functions, includingtechnology support, accounting and purchasing. Large client accounts aretypically managed by National Account teams to ensure consistency of qualityand to ensure that all client real estate service requirements areappropriately addressed.

The Company typically receives monthly management feesfor the property management services it provides, based upon a specifiedpercentage of the monthly rental income or rental receipts generated from theproperty under management. In certain cases, the Company’s property managementagreements entitle it to receive the greater of a minimum agreed-upon base feeor a fee based upon monthly rental income or rental receipts as describedabove. The amount of the management fee varies depending upon local marketconditions, product type and rents, the leasing engagement, arrangements forexpense reimbursements and specific services required. Incentive fees aresometimes negotiated in turnaround or other unusual circumstances. The Companyalso may be reimbursed for a portion of its administrative and payroll costs,as well as certain out-of-pocket expenses, directly attributable to theproperties under management.

A typical propertymanagement agreement of the Company provides for an indefinite term, butpermits the property owner or the Company to terminate the agreement withoutcause upon 30 days prior written notice. The Company believes that these arecustomary termination provisions in the industry. From time to time the Companyloses assignments, most frequently in circumstances where a property has beensold and the new property owner assumes direct responsibility for managing theproperty or retains one of the Company’s competitors to manage the property.

*Brokerage Services*

Brokerage services are primarily comprised of projectleasing (leasing space in real estate owned by investor clients) and investmentsales (representing clients buying or selling land or income-producingreal estate). While, particularly in larger markets, some of the Company’sbrokers may specialize in specific types of transaction services (includingtenant representation activities, which are included in corporate advisoryservices), in many cases a broker may facilitate some combination of projectleasing, investment sales and tenant representation transactions.

Revenues from investor brokerage services havedecreased from $145.8 million in 2000 to $114.5 million in 2004(14.7% of 2004 revenues), but increased 19.8% from 2003 to 2004. A substantialportion of the decrease in revenues from 2000 to 2004 is due to a reduction inthe volume of leasing transactions due to reluctance on the part of clients andothers to make new real estate commitments due to the downturn in the economyduring 2001, 2002 and 2003, and a reduction in the inventory of projectsdeveloped by the Company and available for lease as a result of the decline inproject starts in 2002 and 2003. In addition, the economic downturn caused adecrease in rental rates, which are another driver of these revenues. TheCompany employed 574, 515, 501, 526 and 570 total brokers (including tenantrepresentation brokers facilitating transactions for user clients) at the endof 2000, 2001, 2002, 2003 and 2004, respectively.

The Company typically receives fees for brokerageservices based on a percentage of the value of the lease or sale transaction.Some transactions may stipulate a fixed fee or include an incentive bonuscomponent based on the performance of the brokerage professional or clientsatisfaction. Although 

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transaction volume, rentalrates and sales prices are influenced by economic conditions (thus impactingtotal brokerage revenues, including tenant representation fees), percentagebrokerage fee structures have remained relatively constant through botheconomic upswings and downturns.

Project leasing revenues are derived from the turnoverof tenants and leasing of new space in the Company’s property management andleasing portfolios of approximately 329.2 million square feet at December 31,2004. As space “rolls” each year, the Company has the opportunity to earn acommission paid by the owner of the property for renewing the existing tenant’slease or releasing the space to a new tenant. In addition, the Company earnscommissions for leasing of first generation space in certain projects developedby the Company. Investment sales revenues generally increase in economicupswings as available capital drives the trading of income-producingproperties and demand for additional space drives the purchase of land for newdevelopment. Investment sales revenues generally decline in economic downturnsas capital resources are more cautious in purchasing income-producingproperties and demand for new space slackens. This decline was mitigated in themost recent downturn by historically low interest rates, which have allowed realestate investments to remain attractive opportunities as compared to otherinvestment classes. In recent years, the Company’s brokerage services businesswas adversely impacted by the weakness of the economy as a whole. The downturnin the economy during 2001, 2002 and 2003 negatively impacted the timing andamount of project leasing revenues and to a lesser extent, investment salesrevenues earned by the Company, with total brokerage revenue decreasing$31.3 million from its peak in 2000. The Company’s 19.8% increase inbrokerage revenue in 2004 from the amount reported in 2003 reflects clients’increased confidence in the economic recovery and favorable capital marketsfundamentals.

The Company regards its brokerage force as animportant tool in marketing the broad array of services the Company provides toits client base. The Company’s large network of experienced brokers is avaluable asset when seeking new facilities and property management, projectmanagement and development services business. The sheer number of transactionsin which its brokers are involved can be a source of information from which theCompany can seek to identify business opportunities in specific local orregional markets.

Brokerage personnel earn commissions and are eligibleto receive other forms of incentive compensation including financial rewardsfor cross-selling efforts that result in new engagements for the Company,such as a development project or the acquisition of a new outsourcing account,which in turn enables the Company to acquire additional brokerage business.These incentives are designed to underscore the Company’s belief that thebrokerage business is often a key point of entry for new clients, and is thusintegral to firm wide efforts to cross-sell a full range of services.

The Company believes thatthe quality brand identification of its name, its large client base, the fullrange of services it offers clients, the overall breadth and scope of theCompany’s real estate activities and the Company’s incentive-basedcompensation system create an environment conducive to attracting experiencedand capable brokerage professionals.

*ConstructionManagement*

Construction managementservices primarily include space planning and tenant finish coordination forinvestor clients, typically in conjunction with property management and leasingassignments. These fees are typically based on a percentage of projectconstruction costs. In 2004, construction management revenues were$11.2 million (1.4% of 2004 revenues) as compared to $22.7 million in2000. This decrease in construction management revenues was driven by theCompany’s disposition of several construction businesses in 2001 and 2002, inaddition to general decreases in leasing activity.

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**Development andInvestment**

Revenues in the Company’s Development and Investmentsegment primarily consist of development and construction fees (includingincentive fees) and gain on disposition of real estate. In addition, segmentincome is generated from investments in unconsolidated subsidiaries and fromthe operation and/or disposition of real estate classified as “discontinuedoperations.” The impact of Development and Investment project sales accountedfor as income from unconsolidated subsidiaries or as income from discontinuedoperations is a regular part of, and can contribute significantly to,Development and Investment results in any given period.

The Company’s network of development talent, access tocapital and local market knowledge (attained in part through brokers and otheremployees in the Global Services segment) give it the capability to generateand implement a significant volume of real estate development and investmentactivity. The Company undertakes this activity on behalf of its clients, inpartnership with its clients (through co-investment) or, from time to time, forits own account.

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

In 2004, income before income taxes from developmentand investment activities was $24.8 million. Income before income taxesgenerated from the Development and Investment segment for 2000, 2001, 2002 and2003 was $40.4 million, $8.3 million, $15.3 million and $8.2 million,respectively. At December 31, 2002, 2003 and 2004, total assetsattributable to the Development and Investment segment were$369.1 million, $333.2 million and $429.5 million, respectively.Other financial information about the Development and Investment segment iscontained in *“Item 8. FinancialStatements and Supplementary Data, Note 22.”*

From January 1, 2000 through December 31,2004, the Company acquired and/or commenced development of approximately42.7 million square feet of projects with aggregate budgeted project costsof approximately $4.6 billion. Acquisitions (including projects acquiredfor redevelopment or re-leasing purposes) are included in these statistics.

The Company provides its clients with services thatare vital in all stages of the development and construction process, including:(i) evaluating project feasibility, budgeting, scheduling and cash flowanalysis; (ii) site identification, due diligence and acquisition; (iii) procurementof approvals and permits, including zoning and other entitlements; (iv) coordinationof project design and engineering; (v) construction bidding and managementand tenant finish coordination; (vi) project close-out and tenant movecoordination; and (vii) project finance advisory services.

The Company typically receives a fee for itsdevelopment services that is based on a negotiated percentage of a project’sbudgeted construction and development cost. Incentive bonuses may be receivedfor completing a project under budget and within certain critical timedeadlines. The Company also seeks to negotiate other incentive compensationarrangements that allow the Company to participate in the investment returns onprojects it develops for its clients. The Company may make a co-investment withits clients, receive its pro rata return on its investment in the project andalso receive an incentive 

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participation in theproject because of the Company’s role in sourcing the development projectand/or creating value through executing a variety of services in thedevelopment process. The Company’s co-investments in real estate projectstypically result in an upside economic interest substantially greater than theco-investment percentage.

To facilitate the Company’s pursuit of development andacquisitions/re-development opportunities that the Company believes haveattractive risk/reward profiles yet may not be suitable for its investorclients, from 1996 through 2004, the Company established a series of fivediscretionary development and investment funds (Trammell Crow Investment FundsI through V), which through December 31, 2004, had received aggregatefunding commitments of $154.2 million, consisting of $98.3 millionfrom unrelated parties, $10.9 million from current or former employees of theCompany and $45.0 million from the Company. Of the total funding commitments,$104.1 million had been invested through December 31, 2004, in projectswith an aggregate project cost of approximately $855.8 million. Of thoseprojects, projects with total costs of $435.5 million had been soldthrough December 31, 2004.

During 2004, the Company established an industrialdevelopment program with ING Clarion. The Company co-invests in the program,which is targeting up to $500 million of product with a focus on thedevelopment, aggregation and sale of new bulk warehouse distribution centers inmajor markets throughout the United States. The program is structured as ajoint venture with the Company sourcing projects and providing developmentservices for projects initiated by the program and ING Clarion providing thecredit support to the underlying projects. None of the debt related to theprojects is recourse to the Company. Since its inception, the program hassecured land to develop projects with aggregate budgeted project costs ofapproximately $160.0 million.

The Company’s intent is to explore new programmaticopportunities instead of concentrating on stand-alone real estate transactions.Specifically, the Company is working towards establishing a medical officebuilding fund with a major pension fund to develop, acquire and own medicaloffice buildings. The Company will continue to consider other product types forfuture programs.

The commercial real estatedevelopment business is cyclical and is driven by a variety of economicconditions. New development activity and activity associated with harvestingin-process projects slowed considerably from 2001 through 2003 in response tothe downturn in the general economy and its impact on real estate market fundamentals(primarily rental and occupancy rates). The reduced activity levels from 2001through 2003 led directly to the reduced revenue and earnings from peak levelsin 2000 for the Development and Investment segment in those years. During 2004,the pace of the Company’s development activity picked up significantly, asmeasured by the volume of development starts and acquisitions of propertieswith redevelopment potential.

**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 local developers.****The Company has faced increased competition in recentyears, which has, in some cases, resulted in lower service fees, orcompensation arrangements more closely 

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alignedwith the Company’s performance in rendering services to its clients. In recentyears, there has been a significant increase in real estate ownership by REITs,many of which self-manage most of their real estate assets. Continuation ofthis trend could shrink the asset base available to be managed by third-partyservice providers, decrease the demand for the Company’s services and therebysignificantly increase its competition. In general, the Company expects theindustry to remain very competitive in the future. There can be no assurancethat such competition will not have a material adverse effect on the Company’sbusiness, financial condition or results of operations.

**Employees**

As of March 1, 2005,the Company had approximately 6,300 employees. Management believes itsrelations with employees are good. Employees of the Company at certainproperties located in Reno, Nevada, New York, New York and Naperville, Illinoisare currently represented by a labor union. The unions represented at therespective locations are: Southern California—Nevada Regional Council ofCarpenters, Local #971; and Laborers’ International Union of NorthAmerica-AFL-CIO Local No. 169 (Reno, Nevada); International Union ofOperating Engineers Local Union #94-94A-94B AFL-CIO (New York, NewYork); and International Union of Operating Engineers Local No. 399(Naperville, Illinois).

**Insurance**

The Company has the typesof insurance coverage, including comprehensive general liability and excessumbrella liability insurance, that it believes are appropriate for a company inthe lines of business in which it operates. The Company’s management uses itsdiscretion in determining the amounts, coverage limits and deductibilityprovisions of appropriate insurance coverage on the Company’s properties andoperations at a reasonable cost and on suitable terms. This might result ininsurance coverage that, in the event of a substantial loss, would not besufficient to pay the full value of the damages suffered by the Company.

**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.

**EnvironmentalLiability**

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 connectionwith the contamination. The operator of a site also may be liable under commonlaw to third parties for damages and injuries resulting from exposure tohazardous substances or environmental contamination at a site, includingliabilities arising from exposure 

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toasbestos-containing materials. There can be no assurance that any ofthese types of environmental liabilities to which the Company or any of itsaffiliates become subject will not have a material adverse effect on theCompany’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.

**GovernmentRegulation**

The Company and itsbrokers, salespersons and, in some instances, property managers are regulatedby the states in which they do business. These regulations include licensingprocedures, prescribed fiduciary responsibilities and anti-fraud provisions.The Company’s activities are also subject to various local, state, national andinternational jurisdictions’ fair advertising, trade, housing and real estatesettlement laws and regulations and are affected by laws and regulationsrelating to real estate and real estate finance and development. In particular,a number of jurisdictions have imposed environmental controls, permittingrequirements and zoning restrictions on the development of real estate.

The Company is subject tolaws 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.

**Risk Factors**

An investment in theCompany involves certain risks. Readers should read this entire reportcarefully and should consider among other things, the risks described below.

*Trade Name License**.  *TheCompany has entered into a License Agreement with an affiliate of Crow Holdingsthat allows the Company to use the name “Trammell Crow” perpetually throughoutthe world in any business except the residential real estate business, althoughthe Company can use this name in serving certain mixed-use properties or inproviding investment sales brokerage services to buyers and sellers of multi-familyresidential facilities. This license can be revoked if the Company fails tomaintain certain 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.

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The License Agreementpermits certain existing uses of the name “Trammell Crow” by affiliates of CrowHoldings. The use of the Trammell Crow name or other similar names by thirdparties may create confusion or reduce the value associated with the TrammellCrow name.

*Real Estate Investment andCo-investment Activities.  *Selective investment in realestate projects is an important part of the Company’s strategy and there is aninherent risk of loss of the Company’s investment. As of December 31,2004, the Company had 46****consolidatedreal estate projects with invested equity of $26.9 million and $27.5 million ofnotes payable on real estate that are recourse to the Company (beyond beingrecourse to the single-purpose entity that holds the real estate asset and is theobligor on the note payable). The estimated aggregate project cost of theseconsolidated real estate projects is $516.9 million. In addition, at December 31,2004, the Company was involved as a principal (in most cases, co-investing withone of its clients) in 33****unconsolidatedreal estate subsidiaries in which the Company had invested $39.8 million andhad guaranteed notes payable of these unconsolidated subsidiaries of $15.4million.

Because the disposition ofa single significant investment can impact the Company’s financial performancein any period, its real estate investment activities could increase (and havehistorically increased) fluctuations in the Company’s net earnings and cashflow. The Company has limited control over the timing of the disposition ofthese investments and the recognition of any related gain or loss.

The commercial real estatemarket is cyclical and depends on the perceptions of real estate investors asto general economic conditions. Because the Company’s investment strategytypically entails making relatively modest investments alongside its investorclients, its ability to conduct these activities depends in part on the supplyof investment capital for commercial real estate and related assets. While theCompany believes ample supply of investment capital for real estate currentlyexists, changes in market perceptions or other economic factors may lead todecreased 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.

Building occupancies andrental rates typically decline in an economic downturn. Therefore, it may takelonger for the Company to dispose of real estate investments or the sellingprices may be lower than originally anticipated. As a result, the carryingvalue of the Company’s real estate investments may become impaired and theCompany could record losses as a result of such impairment.

*Recruitingand Retention of Qualified Personnel.**  *The Company’s continuedsuccess is highly dependent upon the efforts of its executive officers and keyemployees. If any of the Company’s key employees leave, its business maysuffer. The growth of the Company’s business is also largely dependent upon itsability to attract and retain qualified personnel in all areas of its business,including management. If the Company is unable to attract and retain suchqualified personnel, it may be forced to limit its growth, and its business andoperating results could suffer. Organizational changes within the Company couldimpact its ability to retain personnel.

*Relianceon Major Clients and Contract Retention.**  *A relatively small number ofthe Company’s clients generate a significant portion of its revenues. TheCompany’s ten largest clients accounted for approximately 31% of its totalrevenues in 2004, including one client (Bank of America Technology and Operations, Inc.,which receives services primarily from the Company’s Global Services segment)that accounted for 12% 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 2004, revenue fromproperty management and from user clients with whom the Company has outsourcingcontracts constituted approximately 18% and 45%, respectively, of the Company’stotal 

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revenues.The Company’s property management contracts can generally be cancelled upon30 days notice by either party, and its outsourcing services contracts aretypically for multi-year terms with options to renew. Accordingly, contractsrepresenting a significant percentage of the Company’s revenues are terminableon short notice or may be scheduled to expire in any one year. The Company hasbeen successful in retaining and renewing a significant portion of itscontracts 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 through periods of internalchanges. The Company may not be able to successfully manage any significantexpansion or obtain adequate financing for such expansion on favorable terms,if at all. In addition, the Company is impacted by cycles in the generaleconomy and the commercial real estate industry and, as a result, its growthstrategy is directly impacted by those economic cycles.

*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.Challenges and 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 could cease to do business with the Company. Potential conflictsbetween the Company’s clients and those of an acquired business could threatenits business relationships. If the Company is not able to manage these risks,its business could suffer significantly.

*InternationalOperations.  *The Company operates in several marketsoutside the United States and is subject to the risks common for internationaloperations and investments in foreign countries. These risks include:

·       difficultiesin staffing and managing geographically and culturally diverse, multinationaloperations;

·       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.

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*Fluctuations in QuarterlyOperating Results.  *In recent years, the Company’srevenues have been lower in each of the first three quarters than in the fourthquarter because its clients tend to close transactions toward the end of theirfiscal years (typically the calendar year). This causes the Company to earn asignificant portion of its revenues under transaction-oriented servicecontracts or real estate transactions in the fourth quarter.

In addition, a growingportion of the Company’s outsourcing contracts provide for bonus payments uponachieving certain performance targets. These incentive payments are generallyearned in the fourth quarter. Furthermore, revenues can be influenced by thetiming of significant individual transactions. The Company plans its capitaland operating 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. Continuation of this trend couldshrink the asset base available to be managed by third party service providers,decrease the demand for the Company’s services and thereby significantlyincrease its competition.

*EnvironmentalLiability.  *Various laws and regulations imposeliability on real property owners or operators for the cost of investigating,cleaning up or removing contamination caused by hazardous or toxic substancesat the property. In the Company’s role as a property or facility manager ordeveloper, the Company could be held liable as an operator for such costs. Thisliability may be imposed without regard to the legality of the original actionsand without regard to whether the Company knew of, or was responsible for, thepresence of the hazardous or toxic substances. If the Company fails to discloseenvironmental issues, the Company could also be liable to a buyer or lessee ofthe property. In addition, some environmental laws create a lien on thecontaminated site in favor of the government for damages and costs incurred inconnection with the contamination. If the Company incurs any such liability,its business could suffer significantly.

*Anti-takeoverConsiderations.  *Certain provisions of the Company’scertificate of incorporation, bylaws and certain provisions of Delaware law maydeter or prevent a takeover attempt, including an attempt that might result ina premium over the market price for its common stock. These provisions include:

·       *Staggered Board of Directors.  *TheCompany’s Board of Directors is divided into three classes serving termscurrently expiring in 2005, 2006 and 2007. Because the Company’s Board ofDirectors is divided into classes, members of its Board of Directors may onlybe removed from office prior to the expiration of their terms if such removalis for “cause.” Therefore, the staggered terms of directors may limit theability of holders of common stock to complete a change of control.

·       *Stockholder Proposals.  *The Company’sstockholders must follow an advance notification procedure for certainstockholder nominations of candidates for the Company’s Board of Directors andfor certain other business to be conducted at any stockholders’ meeting. Thislimitation on stockholder proposals could inhibit a change of control.

·       *Special Meetings of the Stockholders*.   Subjectto limited exceptions, special meetings of stockholders may be called only bythe Chairman of the Board of Directors or a majority of the members of theBoard of Directors. This limitation on special meetings of the stockholderscould inhibit a change of control.

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·       *Preferred Stock.  *The Company’scertificate of incorporation authorizes the Company’s Board of Directors toissue up to 30,000,000 shares of preferred stock having such rights as may bedesignated by the Company’s Board of Directors, without stockholder approval.The issuance of such preferred stock could inhibit a change of control.

·       *Delaware Anti-takeover Statute.  *Section 203 ofthe 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.

**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 to Section 13(a) or15(d) of the Exchange Act as soon as reasonably practicable after itelectronically files such material with, or furnishes it to, the Securities andExchange Commission.

**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.**                LEGAL PROCEEDINGS

The Company and one of itssubsidiaries are defendants in a lawsuit styled***Bank One Oklahoma, N.A., et al.*(the“Bank”)*v. Trammell Crow Services, Inc. and TrammellCrow Company*, No. 03 C 3624, pending in the US District Courtfor the Northern District of Illinois, originally filed on April 2, 2003.The claims asserted by the plaintiffs relate to a sale/leaseback transactioninvolving a property in Oklahoma City previously owned by the Bank. The suitalleges breach of contract, breach of fiduciary duty, negligent misrepresentation,fraudulent misrepresentation and fraudulent concealment against the Companyand/or its subsidiary and alleges that the plaintiffs have been damaged in anunspecified amount in excess of $15.0 million. The plaintiffs seek to recoveractual damages, punitive damages and reasonable attorneys’ fees. The suit is inthe process of discovery, and no trial date has been set. As of the date ofthis Form 10-K, the outcome of the suit cannot be predicted with anycertainty, and the Company cannot at this time estimate an amount or range ofpotential loss in the event of an unfavorable outcome. While the Company cannotpredict with any certainty the outcome of this matter, the Company currentlybelieves the plaintiffs’ claims are without merit and is vigorously defendingthe lawsuit.

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

**ITEM 4.**                SUBMISSION OFMATTERS 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 31,2004.

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**PART II**

**ITEM5.**                MARKETFOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Common Stock is listedon the New York Stock Exchange (“NYSE”) and trades under the symbol “TCC.” At March 1,2005, 35,729,345 shares were held by approximately 2,151 stockholders ofrecord. The following table sets forth the high and low sales prices per shareof Common Stock as reported on the NYSE Composite Transaction Tape on aquarterly basis for the last two fiscal years. 
| ** **     | ** ** | ** High ** | ** ** | **  Low  ** | ** ** |
|----------------|------------|----------------------|------------|---------------------------------|------------|
| **2003:**      |       |                 |       |                            |       |
| First Quarter  |       | $                    | 9.67       |                            | $          | 7.75 |   |
| Second Quarter |       | $                    | 10.68      |                            | $          | 7.75 |   |
| Third Quarter  |       | $                    | 13.05      |                            | $          | 10.50 |   |
| Fourth Quarter |       | $                    | 14.15      |                            | $          | 11.30 |   |
| **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 |   |

 

The Company has nothistorically paid dividends and does not anticipate paying dividends in theforeseeable future. Any future payment of dividends will be at the discretionof the Board of Directors and will depend upon the Company’s results ofoperations, 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*’*s Discussion and Analysis of Financial Condition andResults of Operations—Liquidity and Capital Resources.”*

In March 2005, theCompany announced that its Board of Directors has authorized the purchase of upto $20 million of its common stock from time to time in open market purchasesor in privately negotiated transactions. The repurchase of shares is intendedto offset dilution resulting from equity incentive awards made under theCompany’s stock plans. The Company’s intent with respect to its stockrepurchase programs is to reserve the repurchased shares for issuance inconnection with the Company’s employee stock purchase plan and option exercisesor restricted stock grants under the Company’s long-term incentive plan andother equity-based incentive plans, as well as for other corporate purposes.

Purchases under theCompany’s stock repurchase programs in the fourth quarter of 2004 were asfollows:
| **Period**                                         | ** ** | ** ** | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number of Shares  Purchased as Part of  Publicly Announced  Plans or Programs** | ** ** | **Maximum Number (or  Approximate Dollar  Value) of Shares that  May Yet Be Purchased  Under the Plans or  Programs** | ** ** |
|----------------------------------------------------|------------|------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| October 1, 2004—October 31,  2004   |       | 2,354,437  | (1)        |                                         | $          | 15.75                                        |       |                                                                                                                                 |       | 2,354,437                                                                                                                                                                         |       |   |   | — |   |   |
| November 1,  2004—November 30, 2004 |       | —     |       |                                         | —     |                                         |       |                                                                                                                                 | —     |                                                                                                                                                                              |       |   | — |   |   |
| December 1,  2004—December 31, 2004 |       | —     |       |                                         | —     |                                         |       |                                                                                                                                 | —     |                                                                                                                                                                              |       |   | — |   |   |
| Total                                              |       | 2,354,437  |       |                                         | $          | 15.75                                        |       |                                                                                                                                 |       | 2,354,437                                                                                                                                                                         |       |   |   | — |   |   |

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(1)          OnSeptember 1, 2004, the Company commenced a Modified Dutch Auction tenderoffer to purchase up to 4,444,444 shares of its common stock at a purchaseprice not greater than $15.75 nor less than $13.50 per share. The offer expiredon October 1, 2004, and these shares were purchased pursuant to thatoffer.

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**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.*”

**ITEM 6.**                SELECTEDCONSOLIDATED FINANCIAL DATA

The selected financial data set forth below have beenderived from the consolidated financial statements of the Company. Theconsolidated financial statements of the Company as of December 31, 2004and 2003, and for each of the three years in the period ended December 31,2004, have been audited by Ernst & Young LLP, independent registeredpublic accounting firm, whose report thereon appears elsewhere herein.

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 30,2004 and the years ended December 31, 2003 and 2002, have beenreclassified to conform to the presentation for the quarter ended December 31,2004. 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.

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| ** **                                                                                                                                   | ** ** | **Years Ended December 31,**                                            | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **2000**                                                                               | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                                                                                                                                   | ** ** | **(in thousands, except share and per share data)** | ** ** |
| **Statement of Operations Data:**                                                                                                            | ** ** | ** **                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **REVENUES:**                                                                                                                                | ** ** | ** **                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ***User Services:***                                                                                                                         |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Facilities management                                                                                                                        |       | $                                                                                      | 151,515    |   | $ | 201,573 |   | $ | 233,756 |   | $ | 208,936 |   | $ | 211,062 |   |
| Corporate advisory  services                                                                                                                 |       | 143,536                                                                                |       | 115,599 |   | 108,414 |   | 123,335 |   | 143,266 |   |
| Project management  services                                                                                                                 |       | 53,430                                                                                 |       | 52,973 |   | 58,134 |   | 65,500 |   | 91,599 |   |
|                                                                                                                                         |       | 348,481                                                                                |       | 370,145 |   | 400,304 |   | 397,771 |   | 445,927 |   |
| ***Investor Services:***                                                                                                                     |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Property management                                                                                                                          |       | 165,081                                                                                |       | 174,279 |   | 147,613 |   | 143,727 |   | 137,193 |   |
| Brokerage                                                                                                                                    |       | 145,761                                                                                |       | 115,463 |   | 95,657 |   | 95,593 |   | 114,478 |   |
| Construction management                                                                                                                      |       | 22,672                                                                                 |       | 13,082 |   | 10,006 |   | 10,736 |   | 11,187 |   |
|                                                                                                                                         |       | 333,514                                                                                |       | 302,824 |   | 253,276 |   | 250,056 |   | 262,858 |   |
| Development and  construction                                                                                                                |       | 90,528                                                                                 |       | 76,630 |   | 55,112 |   | 44,299 |   | 40,846 |   |
|                                                                                                                                         |       | 772,523                                                                                |       | 749,599 |   | 708,692 |   | 692,126 |   | 749,631 |   |
| Gain on disposition of  real estate                                                                                                          |       | 47,119                                                                                 |       | 28,456 |   | 24,218 |   | 13,420 |   | 28,795 |   |
|                                                                                                                                         |       | 819,642                                                                                |       | 778,055 |   | 732,910 |   | 705,546 |   | 778,426 |   |
| **COSTS AND EXPENSES:**                                                                                                                      |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Salaries, wages and  benefits                                                                                                                |       | 437,891                                                                                |       | 477,628 |   | 472,810 |   | 452,195 |   | 493,438 |   |
| Commissions                                                                                                                                  |       | 119,702                                                                                |       | 94,655 |   | 87,396 |   | 98,957 |   | 120,357 |   |
| General and  administrative                                                                                                                  |       | 128,448                                                                                |       | 138,308 |   | 133,741 |   | 117,163 |   | 128,968 |   |
| Depreciation                                                                                                                                 |       | 12,544                                                                                 |       | 15,811 |   | 15,236 |   | 14,787 |   | 10,119 |   |
| Amortization                                                                                                                                 |       | 9,335                                                                                  |       | 8,164 |   | 2,579 |   | 1,991 |   | 1,395 |   |
| Interest                                                                                                                                     |       | 16,947                                                                                 |       | 15,057 |   | 10,219 |   | 6,088 |   | 4,573 |   |
| Writedowns due to  impairment of goodwill, intangibles and  investments                                                                      |       | 40,347                                                                                 |       | 31,968 |   | — |   | — |   | — |   |
| Change in fair value of  interest rate swap agreement                                                                                        |       | —                                                                                 |       | 4,809 |   | — |   | — |   | — |   |
| Restructuring charges                                                                                                                        |       | —                                                                                 |       | 10,952 |   | — |   | — |   | — |   |
|                                                                                                                                         |       | 765,214                                                                                |       | 797,352 |   | 721,981 |   | 691,181 |   | 758,850 |   |
| Operating income  (loss)                                                                                                                     |       | 54,428                                                                                 |       | (19,297 | ) | 10,929 |   | 14,365 |   | 19,576 |   |
| Interest and other  income                                                                                                                   |       | 1,738                                                                                  |       | 1,596 |   | 1,186 |   | 2,283 |   | 2,808 |   |
| Income (loss) from  continuing operations before income taxes, minority interest and income from  investments in unconsolidated subsidiaries |       | 56,166                                                                                 |       | (17,701 | ) | 12,115 |   | 16,648 |   | 22,384 |   |
| Income tax  (expense) benefit                                                                                                                |       | (22,492                                                                                | )          | 5,893 |   | (5,400 | ) | (6,751 | ) | (8,501 | ) |
| Minority interest,  net of income taxes                                                                                                      |       | (2,567                                                                                 | )          | 880 |   | 1,619 |   | 1,231 |   | (3,006 | ) |
| Income from  investments in unconsolidated subsidiaries, net of income taxes                                                                 |       | 4,347                                                                                  |       | 5,717 |   | 4,961 |   | 9,839 |   | 10,971 |   |
| Income (loss) from  continuing  operations                                                                                                   |       | 35,454                                                                                 |       | (5,211 | ) | 13,295 |   | 20,967 |   | 21,848 |   |
| Income from discontinued  operations, net of income taxes(1)                                                                            |       | —                                                                                 |       | — |   | 3,358 |   | 73 |   | 17,271 |   |
| Net income (loss)                                                                                                                            |       | $                                                                                      | 35,454     |   | $ | (5,211 | ) | $ | 16,653 |   | $ | 21,040 |   | $ | 39,119 |   |
| Income (loss) per share  from   continuing operations:                                                                                       |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Basic                                                                                                                                        |       | $                                                                                      | 1.02       |   | $ | (0.15 | ) | $ | 0.38 |   | $ | 0.59 |   | $ | 0.62 |   |
| Diluted(2)                                                                                                                                   |       | $                                                                                      | 0.98       |   | $ | (0.15 | ) | $ | 0.36 |   | $ | 0.57 |   | $ | 0.59 |   |
| Income per share from discontinued operations, net of  income taxes:                                                                         |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Basic                                                                                                                                        |       | $                                                                                      | —     |   | $ | — |   | $ | 0.09 |   | $ | — |   | $ | 0.50 |   |
| Diluted                                                                                                                                      |       | $                                                                                      | —     |   | $ | — |   | $ | 0.09 |   | $ | — |   | $ | 0.46 |   |

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| **Statement of Operations Data: (Continued)**                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| Earnings (loss) per share:                                                             |       |       |       |       |       |       |       |       |       |       |       |
| Basic                                                                                  |       | $          | 1.02       |       | $          | (0.15      | )          | $          | 0.47       |       | $          | 0.59 |   | $ | 1.12 |   |
| Diluted(2)                                                                             |       | $          | 0.98       |       | $          | (0.15      | )          | $          | 0.45       |       | $          | 0.57 |   | $ | 1.05 |   |
| Weighted average common  shares outstanding:                                           |       |       |       |       |       |       |       |       |       |       |       |
| Basic                                                                                  |       | 34,851,738 |       | 35,356,710 |       | 35,741,754 |       | 35,572,493 |       | 35,064,453 |       |
| Diluted(2)                                                                             |       | 36,147,744 |       | 35,356,710 |       | 36,797,012 |       | 36,780,515 |       | 37,239,801 |       |
| **Other Data:**                                                                        |       |       |       |       |       |       |       |       |       |       |       |
| Calculation of  EBITDA(3) and EBITDA, as adjusted(4):                        |       |       |       |       |       |       |       |       |       |       |       |
| Net income (loss)                                                                      |       | $          | 35,454     |       | $          | (5,211     | )          | $          | 16,653     |       | $          | 21,040 |   | $ | 39,119 |   |
| Income tax expense  (benefit)(5)                                                       |       | 23,681     |       | (926       | )          | 13,391     |       | 14,350     |       | 23,954     |       |
| Depreciation(6)                                                                        |       | 12,544     |       | 15,811     |       | 15,236     |       | 15,001     |       | 10,209     |       |
| Amortization(7)                                                                        |       | 9,335      |       | 8,164      |       | 2,593      |       | 1,995      |       | 1,395      |       |
| Interest  expense(8)                                                                   |       | 16,947     |       | 15,057     |       | 10,346     |       | 7,369      |       | 4,830      |       |
| EBITDA(3)                                                                              |       | 97,961     |       | 32,895     |       | 58,219     |       | 59,755     |       | 79,507     |       |
| Writedowns due to  impairment of goodwill, intangibles, and investments                |       | 40,347     |       | 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)                                                                |       | $          | 138,308    |       | $          | 78,278     |       | $          | 58,219     |       | $          | 59,755 |   | $ | 79,507 |   |
| Net cash provided  by operating   activities                                           |       | $          | 40,631     |       | $          | 28,826     |       | $          | 71,863     |       | $          | 48,810 |   | $ | 91,746 |   |
| Net cash provided  by (used in)   investing activities                                 |       | (45,489    | )          | (7,862     | )          | 4,697      |       | 3,861      |       | (34,410    | )          |
| Net cash provided  by (used in)   financing activities                                 |       | 12,967     |       | (38,542    | )          | (36,614    | )          | (25,060    | )          | 685        |       |
| **Balance Sheet Data:**                                                                |       |       |       |       |       |       |       |       |       |       |       |
| Cash and cash  equivalents                                                             |       | $          | 55,637     |       | $          | 38,059     |       | $          | 78,005     |       | $          | 105,616 |   | $ | 163,637 |   |
| Total assets                                                                           |       | 722,015    |       | 692,262    |       | 622,066    |       | 630,126    |       | 748,950    |       |
| Long-term  debt (excluding notes payable on real estate) and capital lease obligations |       | 88,242     |       | 62,013     |       | 22,717     |       | 13,106     |       | 377        |       |
| Notes payable on  real estate(9)                                                       |       | 148,098    |       | 158,226    |       | 113,807    |       | 103,266    |       | 149,704    |       |
| Total liabilities                                                                      |       | 391,274    |       | 377,565    |       | 273,841    |       | 273,601    |       | 363,244    |       |
| Minority interest                                                                      |       | 39,782     |       | 28,574     |       | 39,871     |       | 28,896     |       | 44,756     |       |
| Stockholders’  equity                                                             |       | 290,959    |       | 286,123    |       | 308,354    |       | 327,629    |       | 340,950    |       |

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(1)    Income from discontinued operations includes theoperations of real estate properties and gain on disposition of real estateproperties held for sale or sold subsequent to January 1, 2002, 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 greateramount of these activities to be classified as discontinued operations infuture periods as fewer asset dispositions will qualify for grandfatheredtreatment under FAS 144.

(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.

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(3)    EBITDArepresents earnings before interest, income taxes, depreciation andamortization. Management believes that EBITDA is a meaningful measure of theCompany’s operating performance, cash generation and ability to service debt.However, EBITDA should not be considered as an alternative to: (i) netearnings (determined in accordance with United States generally acceptedaccounting principles (“GAAP”)); (ii) operating cash flow (determined inaccordance with GAAP); or (iii) liquidity. Management also believes thatEBITDA is sometimes useful to compare the operating results of companies withinan industry due to the fact that it eliminates the effects of certain financingand accounting decisions. The Company’s calculation of EBITDA may differ fromsimilarly titled items reported by other companies.

(4)    EBITDA,as adjusted, represents EBITDA (as described in note (3) above) before the2000 and 2001 writedowns due to impairment of goodwill, intangibles andinvestments, net of related minority interest, the 2001 restructuring chargesand the 2001 change in fair value of the Company’s interest rate swapagreement. Management believes these items are not likely to recur within twoyears, and that excluding these items provides a more comparable measure of theCompany’s results over the five-year period.

(5)    Incometax expense (benefit) includes income taxes applicable to minority interest,income from investments in unconsolidated subsidiaries and discontinuedoperations, each of which is presented net of income taxes in the Company’sconsolidated statements of operations.

(6)    Depreciationincludes $214 and $90 related to discontinued operations for the years ended December 31,2003 and 2004, respectively.

(7)    Amortizationincludes $14 and $4 related to discontinued operations for the years ended December 31,2002 and 2003, respectively.

(8)    Interestexpense includes $127, $1,281 and $257 related to discontinued operations forthe years ended December 31, 2002, 2003 and 2004, respectively.

(9)    Notespayable on real estate includes current portion of notes payable on realestate, notes payable on real estate, less current portion and notes payableincluded in liabilities related to real estate and other assets held for sale.

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**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 made pursuant to service contracts and variabletransaction-oriented payments. The Company typically receives basemonthly fees from clients for services provided under its facilities managementand property management contracts. The fees received by the Company for theprovision of transaction services (corporate advisory services and brokerage)are typically paid in connection with the consummation of a transaction such asthe purchase or sale of commercial property or the execution of a lease. TheCompany also earns fees from project and construction management services thatare typically determined by the size and cost of the project. The arrangementmay be part of a management services contract or an individual projectengagement. In addition, the Company earns incentive fees under variousmanagement contracts that are based on quantitative and/or qualitativecriteria, such as achieving cost savings levels or certain client serviceratings.

The Company’s Development and Investment revenuestreams consist primarily of payments related to individual real estatedevelopment projects. Revenues from the Company’s development activitiesconsist of development and construction fees, which are typically based upon anegotiated percentage of a project’s cost, and incentive development fees forcompleting a development project under budget, within certain critical time deadlinesand/or for achieving specified leasing targets. Income from the Company’sinvestment activities primarily consists of gains on disposition of real estateand income from unconsolidated subsidiaries that hold real estate assets.Dispositions of real estate in which the Company has no significant continuinginvolvement in the operations of the asset after its disposition are reportedas discontinued operations in accordance with FAS 144. The Company’sDevelopment and Investment revenue streams also include rental revenue earnedby the Company’s consolidated operating real estate properties. The Company haslimited control over the timing of the disposition of certain of theseinvestments and the recognition of any related gain or loss. Because the dispositionor impairment of a single significant investment can impact the Company’sfinancial performance in any period, these investment activities createfluctuations 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.

Over the last three years,an average of 66% of the Company’s net income has been 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’snon-variable operating expenses, which are treated as expenses when incurredduring the year, are relatively constant on a quarterly basis. See *“—Quarterly Results of Operations and Seasonality.”*

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**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.These estimates and assumptions impact the reported amount of assets andliabilities and disclosures of contingent assets and liabilities as of the dateof the consolidated financial statements. They also impact the reported amountof net earnings during any period. Actual results could differ from thoseestimates. Certain of the Company’s accounting policies and estimates have amore significant impact on its financial statements than others, due to themagnitude of the underlying financial statement elements.

*Consolidation*

The Company’s consolidated financial statementsinclude the accounts of the Company, variable interest entities (“VIEs”) inwhich the Company is the primary beneficiary and other subsidiaries over whichthe Company has control.

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”). TheCompany consolidates any VIE of which the Company is the primary beneficiaryand discloses significant variable interests in VIEs of which the Company isnot 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 provided by anyparties, including equity holders. The Company makes judgments regarding thesufficiency of the equity at risk based first on qualitative analysis, thenquantitative analysis if necessary. In a quantitative analysis, the Companyincorporates various estimates, including estimated future cash flows, assethold periods and discount rates, as well as estimates of the probabilities ofvarious scenarios occurring. If the entity is a VIE, the Company thendetermines whether it will absorb the majority of expected losses and/orreceive the majority of expected returns, and if so, consolidates the entity asthe primary beneficiary. This determination of whether the Company will absorbthe majority of expected losses and/or receive the majority of expected returnsincludes any impact of an “upside economic interest” in the form of a “promote”that the Company may have. A promote is a disproportionate interest built intothe distribution structure of the entity based on the entity’s achievement ofcertain return hurdles. The Company determines whether an entity is a VIE and,if so, whether it should be consolidated by utilizing judgments and estimatesthat are inherently subjective. If the Company made different judgments orutilized different estimates in these evaluations, it could result in differingconclusions as to whether or not an entity is a VIE and whether or not toconsolidate such entity. The Company is not required to reconsider the entity’sVIE status if the entity incurs losses that exceed expectations, but isrequired to reconsider the status if the structure of the entity changes.

The Company’s determination of the appropriateaccounting method for all other investments in subsidiaries, including thosethat are not primary beneficiary interests in VIEs, is based on the amount ofcontrol or influence the Company has (considering its ownership interest) inthe underlying entity. The Company consolidates those other subsidiaries overwhich it exercises control. Those other investments in subsidiaries where theCompany has the ability to exercise significant influence (but not control)over operating and financial policies of such subsidiaries (including certainsubsidiaries where the Company has less than 20% ownership) are accounted foron the equity method. All remaining investments of the Company are accountedfor on the cost method.

Accounting for aninvestment as either consolidated or by the equity method generally would haveno impact on the Company’s net income or stockholders’ equity in any accountingperiod, but a change in 

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treatmentwould impact individual income statement and balance sheet items, asconsolidation would effectively “gross up” the Company’s income statement andbalance sheet. However, if control aspects of an investment accounted for bythe cost method were different, it could result in the Company being requiredto account for an investment by consolidation or by the equity method. Underthe cost method, the investor only records its share of the underlying entity’searnings to the extent that it receives dividends from the investee; when thedividends received by the investor exceed the investor’s share of the investee’searnings subsequent to the date of the investor’s investment, the investorrecords a reduction in the basis of its investment. Under the cost method, theinvestor does not record its share of losses of the investee. Conversely, undereither consolidation or equity method accounting, the investor effectivelyrecords its share of the underlying entity’s net income or loss, to the extentof its investment or its guarantees of the underlying entity’s debt. At December 31,2004, $2.4 million of the Company’s $74.1 million total investment inunconsolidated subsidiaries relates to investments that are accounted for usingthe cost method. Accounting for an investment under either the equity or costmethod has no impact on the evaluation of impairment of the underlyinginvestment; under either method, impairment losses are recognized upon evidenceof other-than-temporary losses of 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 revenues of the Company’s business that aresubject to the most judgment are its brokerage commission revenues andincentive-based management and development fees. The judgments involvedin revenue recognition are understanding the complex terms of the agreementsand determining the appropriate time to recognize revenue for each transactionbased on such terms. Each transaction is evaluated to determine: (1) atwhat point in time revenues are earned, (2) whether there arecontingencies involved that would impact the timing of recognition of revenue,and (3) how and when such contingencies will be resolved. The actualtiming of revenue recognition could vary if different judgments were made.

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 and complexity,usually due to negotiation of the commission agreement language with theclient. If there are any contingencies with respect to any portion of thecommission, that portion of the commission is not recognized as revenue untilthe contingency is resolved. The unique nature and complexity of each brokeragetransaction require the Company to use varying levels of judgment indetermining timing of revenue recognition.

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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 anyincrease in the fair value of the developed real estate asset. This sharingcreates additional revenue potential to the Company with no exposure to lossother than opportunity cost. The Company’s incentive development and managementfee revenues 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.

*Carrying Value ofReal Estate, Goodwill and Intangible Assets*

As of December 31,2004, the Company’s total real estate, goodwill and intangible assets were$221.0 million, $74.4 million and $3.5 million, respectively(30%, 10% and 0.5% of total assets, respectively). Goodwill reflects the excessof the purchase price over the fair value of the net assets of real estateservice companies acquired by the Company primarily in 1998 and 1999.Intangible assets primarily include management contracts andemployment/non-compete agreements for certain employees entered into inconnection with their hiring. Intangible assets also include upfront cashpayments made to clients and certain contract acquisition costs incurred uponinitiation of new long-term outsourcing contracts. The Company accounts for itsreal estate, goodwill and other intangibles in accordance with Statements ofFinancial Accounting Standards No. 142, *Goodwilland Other Intangible Assets* (“FAS 142”) and FAS 144. Thesestatements require the Company to evaluate the carrying value of its realestate, goodwill and intangible assets based on assumptions and estimates offair value and future cash flow information. These assumptions and estimatesdeveloped by the Company may differ from actual results. If differentassumptions and estimates were used, carrying values could be adverselyimpacted, resulting in writedowns that would adversely affect the Company’searnings.

*Real Estate*

With respect to the Company’s real estate assets,FAS 144 establishes restrictive criteria to classify an asset as “held forsale.” At December 31, 2004, 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 commenced. Any asset reclassified from realestate held for sale to real estate under development (current or non-current)or real estate held for investment is measured individually at the lower of itsfair value at the date of the reclassification or its carrying amount before itwas classified as “held for sale,” adjusted (in the case of real estate heldfor investment) for any depreciation that would have been recognized had theasset been continuously classified as real estate 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.

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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 is calculatedas the excess of the asset’s carrying value over its fair value, which isdetermined using a discounted cash flow analysis or market comparisons.Buildings and improvements included in real estate held for investment aredepreciated using the straight-line method over estimated useful lives,generally 39 years. Tenant improvements included in real estate held forinvestment are amortized using the straight-line method over the shorter oftheir estimated useful life or the terms of the respective leases.

The Company evaluates each of its real estate assetson a quarterly basis in order to determine the classification of each asset inthe Company’s balance sheet. This evaluation requires judgment by the Companyin considering certain criteria that must be evaluated under FAS 144, suchas the estimated time to complete assets that are under development and thetimeframe in which the Company expects to sell its real estate assets. Theclassification of real estate assets determines which real estate assets are tobe depreciated as well as what method is used to evaluate and measureimpairment. Had the Company evaluated its assets differently, the balance sheetclassification of such assets, depreciation expense and impairment losses couldhave been different.

When acquiring real estate with existing buildings,the Company allocates the purchase price between land, building and intangiblesrelated to in-place leases, if any, based on their relative fair values. Thefair values of acquired land and buildings are determined based on an estimateddiscounted future cash flow model with lease-up assumptions as if the buildingwas vacant upon acquisition. The fair value of in-place leases includes thevalue of net lease intangibles for above or below-market rents and tenantorigination costs, determined on a lease by lease basis using assumptions formarket rates, absorption periods, lease commissions and tenant improvements.The capitalized values for both net lease intangibles and tenant originationcosts 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. If the Company used different estimates inthese valuations, the allocation of purchase price to each component coulddiffer, which could cause the amount of amortization related to leaseintangibles and tenant origination costs to be different, as well as depreciationof the related building.

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. TheCompany has certain real estate assets that are land parcels and constitute acomponent of an entity. From time to time, the Company disposes of these landparcels in smaller lots. An individual lot that is part of a larger land parceldoes not constitute a component of an entity within the meaning of paragraph 41of FAS 144 until it is either classified as held for sale in accordance withFAS 144 or sold.

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*Goodwill*

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 2004, and has determined that no impairment of goodwill exists at December 31,2004.

*Intangible Assets*

The Company’s intangible assets are evaluated forimpairment when indicators of impairment are present. Impairment losses arerecorded when estimates of undiscounted future cash flows are less than thevalue of the underlying asset. The amount of any impairment loss is calculatedas the excess of the intangible asset’s carrying value over its fair value,which is determined using a discounted cash flow analysis. The determination offuture cash flows is based on assumptions and estimates of forecasted financialinformation that may differ from actual results.

In 2002, the Company recognized a writedown of$1.1 million (recorded as a reduction of facilities management revenues)due to the impairment of an intangible related to an upfront cash payment madeto a client upon inception of a management contract in a previous period. TheCompany and the client mutually agreed to terminate the contract in 2002.

The Company has consideredthe average life of its acquired management contracts to determine the periodover which to amortize intangible assets related to these contracts, which isthe Company’s estimate of the useful life of the underlying management contracts.This estimate requires judgment by the Company, and had the Company chosen ashorter time period over which to amortize such intangible assets, amortizationexpense would have increased in the earlier periods, adversely impacting theCompany’s results of operations in such periods.****TheCompany amortizes intangible assets resulting from employment/non-competeagreements to compensation expense over the period of time that future servicesto the Company are required, as stipulated in the applicable agreement.Intangible assets related to upfront cash payments made to clients and certaincontract acquisition costs are amortized as a reduction of the related revenueover the non-cancelable term of the underlying contract.

*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.The actuarial 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 31,2004, the Company’s liability to the trust, primarily for unpaid claims (bothreported and not reported) related to these health insurance benefits, is $2.1million, included in accrued expenses on the Company’s consolidated balancesheet.

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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.The Company 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.Exposure to workers’ compensation, general liability and automotive claims isevaluated on an annual basis during the Company’s fourth quarter by anindependent actuary.

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, 2004, the Company’s reservefor claims under these insurance programs is $13.7 million, of which $3.7million is included in other current liabilities and the remainder is includedin other liabilities on the Company’s consolidated balance sheet.

28

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**Resultsof Operations**

Thefollowing table sets forth items from the Company’s consolidated statements ofincome for each of the three years in the period ended December 31, 2004,as a percent of total revenue for the periods indicated. 
| ** **                                                                                                                            | ** ** | **Years Ended December 31,**              | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                                                                            | ** ** | **    2002    ** | ** ** | **    2003    ** | ** ** | **    2004    ** | ** ** |
| **REVENUES:**                                                                                                                         |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| ***User Services:***                                                                                                                  |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Facilities management                                                                                                                 |       |                                                     | 31.9       | % |   |   | 29.6 | % |   |   | 27.1 | % |   |
| Corporate advisory services                                                                                                           |       |                                                     | 14.8       | % |   |   | 17.5 | % |   |   | 18.4 | % |   |
| Project management services                                                                                                           |       |                                                     | 7.9        | % |   |   | 9.3 | % |   |   | 11.8 | % |   |
|                                                                                                                                  |       |                                                     | 54.6       | % |   |   | 56.4 | % |   |   | 57.3 | % |   |
| ***Investor Services:***                                                                                                              |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Property management                                                                                                                   |       |                                                     | 20.1       | % |   |   | 20.4 | % |   |   | 17.6 | % |   |
| Brokerage                                                                                                                             |       |                                                     | 13.1       | % |   |   | 13.5 | % |   |   | 14.7 | % |   |
| Construction management                                                                                                               |       |                                                     | 1.4        | % |   |   | 1.5 | % |   |   | 1.4 | % |   |
|                                                                                                                                  |       |                                                     | 34.6       | % |   |   | 35.4 | % |   |   | 33.7 | % |   |
| Development and construction                                                                                                          |       |                                                     | 7.5        | % |   |   | 6.3 | % |   |   | 5.3 | % |   |
|                                                                                                                                  |       |                                                     | 96.7       | % |   |   | 98.1 | % |   |   | 96.3 | % |   |
| Gain on disposition of real estate                                                                                                    |       |                                                     | 3.3        | % |   |   | 1.9 | % |   |   | 3.7 | % |   |
|                                                                                                                                  |       |                                                     | 100.0      | % |   |   | 100.0 | % |   |   | 100.0 | % |   |
| **COSTS  AND EXPENSES:**                                                                                                              |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Salaries, wages and benefits                                                                                                          |       |                                                     | 64.5       | % |   |   | 64.1 | % |   |   | 63.4 | % |   |
| Commissions                                                                                                                           |       |                                                     | 11.9       | % |   |   | 14.0 | % |   |   | 15.5 | % |   |
| General and administrative                                                                                                            |       |                                                     | 18.2       | % |   |   | 16.6 | % |   |   | 16.5 | % |   |
| Depreciation                                                                                                                          |       |                                                     | 2.1        | % |   |   | 2.1 | % |   |   | 1.3 | % |   |
| Amortization                                                                                                                          |       |                                                     | 0.4        | % |   |   | 0.3 | % |   |   | 0.2 | % |   |
| Interest                                                                                                                              |       |                                                     | 1.4        | % |   |   | 0.9 | % |   |   | 0.6 | % |   |
|                                                                                                                                  |       |                                                     | 98.5       | % |   |   | 98.0 | % |   |   | 97.5 | % |   |
| Operating income                                                                                                                      |       |                                                     | 1.5        | % |   |   | 2.0 | % |   |   | 2.5 | % |   |
| Interest and  other income                                                                                                            |       |                                                     | 0.2        | % |   |   | 0.4 | % |   |   | 0.4 | % |   |
| Income from  continuing operations before income taxes, minority interest and income from  investments in unconsolidated subsidiaries |       |                                                     | 1.7        | % |   |   | 2.4 | % |   |   | 2.9 | % |   |
| Income tax  expense                                                                                                                   |       |                                                     | (0.7       | )% |   |   | (1.0 | )% |   |   | (1.1 | )% |   |
| Minority  interest, net of income taxes                                                                                               |       |                                                     | 0.2        | % |   |   | 0.2 | % |   |   | (0.4 | )% |   |
| Income from  investment in unconsolidated subsidiaries, net of income taxes                                                           |       |                                                     | 0.6        | % |   |   | 1.4 | % |   |   | 1.4 | % |   |
| Income from  continuing operations                                                                                                    |       |                                                     | 1.8        | % |   |   | 3.0 | % |   |   | 2.8 | % |   |
| Income from  discontinued operations, net of income taxes                                                                             |       |                                                     | 0.5        | % |   |   | 0.0 | % |   |   | 2.2 | % |   |
| Net income                                                                                                                            |       |                                                     | 2.3        | % |   |   | 3.0 | % |   |   | 5.0 | % |   |

 

29

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**Resultsof Operations—Year Ended December 31, 2004 Compared to Year Ended December 31,2003**

In accordance withFAS 144, certain revenues and expenses for the three quarterly periods endedMarch 31, June 30 and September 30, 2004 and the year ended December 31,2003, have been reclassified to conform to the presentation for the quarterended December 31, 2004. As a result, certain balances differ from theamounts reported in previously filed documents. See *Income from Discontinued Operations, Net of IncomeTaxes*, 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                                                                                                          |       | 40,846                                                |       | 44,299     |       | (3,453            | )          | (7.8 | )% |
|                                                                                                                                  |       | 749,631                                               |       | 692,126    |       | 57,505            |       | 8.3 | % |
| Gain on disposition of real estate                                                                                                    |       | 28,795                                                |       | 13,420     |       | 15,375            |       | 114.6 | % |
|                                                                                                                                  |       | 778,426                                               |       | 705,546    |       | 72,880            |       | 10.3 | % |
| **COST AND EXPENSES:**                                                                                                                |       |                                                  |       |       |       |              |       |   |   |
| Salaries, wages  and benefits                                                                                                         |       | 493,438                                               |       | 452,195    |       | 41,243            |       | 9.1 | % |
| Commissions                                                                                                                           |       | 120,357                                               |       | 98,957     |       | 21,400            |       | 21.6 | % |
| General and  administrative                                                                                                           |       | 128,968                                               |       | 117,163    |       | 11,805            |       | 10.1 | % |
| Depreciation                                                                                                                          |       | 10,119                                                |       | 14,787     |       | (4,668            | )          | (31.6 | )% |
| Amortization                                                                                                                          |       | 1,395                                                 |       | 1,991      |       | (596              | )          | (29.9 | )% |
| Interest                                                                                                                              |       | 4,573                                                 |       | 6,088      |       | (1,515            | )          | (24.9 | )% |
|                                                                                                                                  |       | 758,850                                               |       | 691,181    |       | 67,669            |       | 9.8 | % |
| Operating income                                                                                                                      |       | 19,576                                                |       | 14,365     |       | 5,211             |       | 36.3 | % |
| Interest and  other income                                                                                                            |       | 2,808                                                 |       | 2,283      |       | 525               |       | 23.0 | % |
| Income from  continuing operations before income taxes, minority interest and income from  investments in unconsolidated subsidiaries |       | 22,384                                                |       | 16,648     |       | 5,736             |       | 34.5 | % |
| Income tax  expense                                                                                                                   |       | (8,501                                                | )          | (6,751     | )          | (1,750            | )          | (25.9 | )% |
| 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                                                                                                    |       | 21,848                                                |       | 20,967     |       | 881               |       | 4.2 | % |
| Income from  discontinued operations, net of income  taxes                                                                            |       | 17,271                                                |       | 73         |       | 17,198            |       | 23,558.9 | % |
| **Net  income**                                                                                                                       |       | $                                                     | 39,119     |       | $          | 21,040            |       | $ | 18,079 |   | 85.9 | % |

 

30

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***Revenues.  ***Facilitiesmanagement revenue increased slightly from 2003. This increase primarilyresulted from an expansion of a client relationship in the second quarter of2004. The overall increase was offset by the termination of certain clientrelationships as part of the Company’s wind-down of its centralized call centeroperations. Reimbursement of salaries, wages, benefits, and out-of-pocketgeneral and administrative costs, a component of facilities management revenue,increased $7.3 million in 2004, compared to 2003. The composition offacilities management revenue, including management fees and reimbursements,can vary significantly from period to period based on the terms of theunderlying management agreements in effect each period.

Corporate advisory services revenue increased from2003, primarily driven by increased commission revenues in 2004. The increasewas the result of growth in the number of tenant representation brokers as partof the Company’s focus on expanding its brokerage network. In addition,transaction volumes have increased, reflecting clients’ increased confidence inthe economic recovery.

The revenue growth in project management services wasmainly the result of the expansion of services provided to existing clients(due to increases in clients’ portfolios, the scope of the Company’s servicesrequired 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 backin-house or to other service providers. These decreases were partially offsetby additions to 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.The addition 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 finishcoordination for investor clients in conjunction with property management andleasing assignments, and are directly related to clients’ real estate demands.

Development and construction revenue decreased in 2004primarily due to a decrease in incentive development fees, largely due to thetiming of significant transactions in 2004 as compared to 2003. In addition,the decrease in 2004 is due to a reduction in the Company’s development startsand investments (including property acquisitions) in recent years. Typically,the impact of increases and decreases in the Company’s development starts andinvestments is not reflected in financial results until later periods, and theCompany has experienced reduction in its 2004 development and constructionrevenue as a consequence of reduced 2002 and 2003 development starts andinvestments. However, development starts and investments began trending up in2004 with 2004 starts more than doubling those for 2003.

Historically, the Company primarily focused itscommercial real estate development business on office, industrial and retailprojects for investor clients. Increasingly, however, the Company has focusedon development for user clients, including corporations and those in thehealthcare sector. By expanding its focus on development for user clients,particularly those in the healthcare sector, the Company seeks to mitigate thecyclicality traditionally inherent in the commercial development business. Inaddition, through 

31

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High Street Residential, awholly-owned subsidiary of the Company, the Company has expanded its focus toinclude development of mixed-use facilities with a residential component,including condominium development and transit-oriented development. The Companyis also directing its efforts toward acquisitions, including those acquisitionswhere opportunities exist to add value through redevelopment or re-leasing.

The Company’s gain on disposition of real estateincreased significantly in 2004 from 2003. During 2004, the Company sold 18real estate projects for an aggregate net sales price of $127.3 million,resulting in an aggregate gain on disposition of $28.8 million, includingrecognition of deferred gain of $0.4 million relating to dispositions inprevious periods and interest forgiveness of $0.1 million. In 2003, the Companysold 19 real estate projects for an aggregate net sales price of $67.1 million,resulting in an aggregate gain on disposition of $13.4 million, includingrecognition of deferred gain of $0.3 million relating to dispositions in a previousperiod.

In addition, Development and Investment income isgenerated from investments in unconsolidated subsidiaries and from theoperation and/or disposition of real estate classified as “discontinuedoperations.” The impact of Development and Investment project sales accountedfor as income from unconsolidated subsidiaries or as income from discontinuedoperations is a regular part of, and can contribute significantly to,Development and Investment results in any given period.

***Costs and Expenses.  ***Salaries,wages and benefits expense includes all compensation paid to Company employeesother than brokerage commissions. As such, it includes salaries, benefits andannual incentive bonuses for employees whose compensation is reimbursed byclients (“reimbursed employees”); salaries, benefits and annual incentivebonuses for employees whose compensation is not so reimbursed (“unreimbursedemployees”); long-term incentive compensation associated with restricted stockgrants to certain employees; and transaction-related incentive compensationother than brokerage commissions, primarily paid in connection with developmentand investment transactions. The increase in 2004 was primarily driven bygrowth in salaries, wages and benefits for reimbursed employees as the Companyincreased its project management headcount to service client expansions and theaddition of new clients. In addition, the Company’s annual incentive bonusexpense and transaction-related incentive compensation expense increased due tothe Company’s increased profitability in 2004.

The 2004 increase incommission expense was directly attributable to the increase in the Company’scorporate advisory services and brokerage revenue discussed above.

General and administrativeexpenses increased in 2004 primarily due to increased client-reimbursedout-of-pocket general and administrative expenses, largely driven by the growthin the Company’s project management service line.

Depreciation andamortization expenses decreased in 2004 from the prior year. The Company hasreplaced many of its computer assets at a lower cost than the assets that wereretired, which has reduced the Company’s depreciation expense. In addition,several intangible asset balances related to acquired management contractsbecame fully amortized during 2004, which created a decrease in amortizationexpense as compared to 2003.

The decrease in interestexpense is due in part to the expiration of the Company’s interest rate swapagreement at the end of the first quarter of 2003 for which the Companyrecorded $0.6 million of interest expense in 2003. The Company also had loweraverage outstanding balances on its revolving line of credit and capital leasesduring 2004 as compared to 2003.

***Minority Interest, Net of IncomeTaxes.  ***Minority interest fluctuated from income in2003 to expense in 2004. This change is primarily a result of 2004 gains ondispositions of consolidated real estate projects in which outside parties havean interest. In addition, the results of operations of certain consolidatedreal 

32

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estate entitieswith outside owners improved due to lower charges for impairment of real estateheld by these entities in 2004, as compared to 2003.

***Income from Investments inUnconsolidated Subsidiaries, Net of Income Taxes.  ***Inthe ordinary course of business, a significant portion of the Company’sdevelopment and investment activities are conducted, and are expected to beconducted in future periods, through unconsolidated subsidiaries. The Companyalso has certain investments in unconsolidated subsidiaries which are notrelated to its development and investment activities. Income from investmentsin unconsolidated subsidiaries fluctuates from period to period based on thevolume and profitability of transactions carried out by the underlyingunconsolidated subsidiaries. The overall increase in 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 from DiscontinuedOperations, Net of Income Taxes.  ***Income fromdiscontinued operations includes the operations of real estate properties andgain on disposition of real estate properties held for sale or sold subsequentto the adoption of FAS 144 effective January 1, 2002, that were consideredcomponents of an entity under FAS 144 and in which the Company has not retainedor does not expect to retain significant continuing involvement. Dispositionsof real estate assets have been and will continue to be a significant part ofthe Company’s activities and, as a result of applying the provisions of FAS144, the Company expects a greater amount of these activities to be classifiedas discontinued operations in future periods as fewer asset dispositions willqualify for grandfathered treatment under FAS 144. During 2004, the Companysold four real estate projects that were considered discontinued operations foran aggregate net sales price of $78.0 million. The sales resulted in anaggregate gain on disposition of real estate (before income taxes) of $40.5million (including interest forgiveness of $0.3 million) and minority interestexpense of $10.8 million. In 2003, the Company sold four real estate projectsthat were considered discontinued operations for an aggregate sales price of$25.1 million, resulting in an aggregate gain on disposition of $5.3 million.Income from discontinued operations for 2003 includes 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 includes $1.4million of impairment on real estate. Both of these real estate assets weresold in 2004.

***Net Income.  ***Netincome increased due to the fluctuations in revenues and expenses describedabove, in addition to a decrease in the Company’s effective tax rate driven byfavorable results from state tax planning as well as the increase in theCompany’s income from its investment in Savills.

33

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**YearEnded December 31, 2003 Compared to Year Ended December 31, 2002**

Inaccordance with FAS 144, certain revenues and expenses for the years endedDecember 31, 2003 and 2002 have been reclassified to conform to thepresentation for the year ended December 31, 2004. As a result, certainbalances differ from the amounts reported in previously filed documents. See *Income from Discontinued Operations, Net of Income Taxes*,below, for additional information.
| ** **                                                                                                                            | ** ** | **For the Years  Ended  December 31,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                                                                                                            | ** ** | **2003**                                              | ** ** | **2002**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                                                                                                                            | ** ** | **(dollars in thousands)**                            | ** ** |
| **REVENUES:**                                                                                                                         |       |                                                  |       |       |       |              |       |   |   |   |   |
| ***User  Services:***                                                                                                                 |       |                                                  |       |       |       |              |       |   |   |   |   |
| Facilities management                                                                                                                 |       | $                                                     | 208,936    |       | $          | 233,756           |       | $ | (24,820 | ) |   | (10.6 | )% |   |
| Corporate advisory services                                                                                                           |       | 123,335                                               |       | 108,414    |       | 14,921            |       |   | 13.8 | % |   |
| Project management services                                                                                                           |       | 65,500                                                |       | 58,134     |       | 7,366             |       |   | 12.7 | % |   |
|                                                                                                                                  |       | 397,771                                               |       | 400,304    |       | (2,533            | )          |   | (0.6 | )% |   |
| ***Investor  Services:***                                                                                                             |       |                                                  |       |       |       |              |       |   |   |   |   |
| Property management                                                                                                                   |       | 143,727                                               |       | 147,613    |       | (3,886            | )          |   | (2.6 | )% |   |
| Brokerage                                                                                                                             |       | 95,593                                                |       | 95,657     |       | (64               | )          |   | (0.1 | )% |   |
| Construction management                                                                                                               |       | 10,736                                                |       | 10,006     |       | 730               |       |   | 7.3 | % |   |
|                                                                                                                                  |       | 250,056                                               |       | 253,276    |       | (3,220            | )          |   | (1.3 | )% |   |
| Development and construction                                                                                                          |       | 44,299                                                |       | 55,112     |       | (10,813           | )          |   | (19.6 | )% |   |
|                                                                                                                                  |       | 692,126                                               |       | 708,692    |       | (16,566           | )          |   | (2.3 | )% |   |
| Gain on disposition of real estate                                                                                                    |       | 13,420                                                |       | 24,218     |       | (10,798           | )          |   | (44.6 | )% |   |
|                                                                                                                                  |       | 705,546                                               |       | 732,910    |       | (27,364           | )          |   | (3.7 | )% |   |
| **COST AND EXPENSES:**                                                                                                                |       |                                                  |       |       |       |              |       |   |   |   |   |
| Salaries, wages and benefits                                                                                                          |       | 452,195                                               |       | 472,810    |       | (20,615           | )          |   | (4.4 | )% |   |
| Commissions                                                                                                                           |       | 98,957                                                |       | 87,396     |       | 11,561            |       |   | 13.2 | % |   |
| General and administrative                                                                                                            |       | 117,163                                               |       | 133,741    |       | (16,578           | )          |   | (12.4 | )% |   |
| Depreciation                                                                                                                          |       | 14,787                                                |       | 15,236     |       | (449              | )          |   | (2.9 | )% |   |
| Amortization                                                                                                                          |       | 1,991                                                 |       | 2,579      |       | (588              | )          |   | (22.8 | )% |   |
| Interest                                                                                                                              |       | 6,088                                                 |       | 10,219     |       | (4,131            | )          |   | (40.4 | )% |   |
|                                                                                                                                  |       | 691,181                                               |       | 721,981    |       | (30,800           | )          |   | (4.3 | )% |   |
| Operating income                                                                                                                      |       | 14,365                                                |       | 10,929     |       | 3,436             |       |   | 31.4 | % |   |
| Interest and other income                                                                                                             |       | 2,283                                                 |       | 1,186      |       | 1,097             |       |   | 92.5 | % |   |
| Income from continuing operations before income  taxes, minority interest and income from investments in unconsolidated  subsidiaries |       | 16,648                                                |       | 12,115     |       | 4,533             |       |   | 37.4 | % |   |
| Income tax expense                                                                                                                    |       | (6,751                                                | )          | (5,400     | )          | (1,351            | )          |   | (25.0 | )% |   |
| Minority interest, net of income taxes                                                                                                |       | 1,231                                                 |       | 1,619      |       | (388              | )          |   | (24.0 | )% |   |
| Income from investments in unconsolidated  subsidiaries, net of income taxes                                                          |       | 9,839                                                 |       | 4,961      |       | 4,878             |       |   | 98.3 | % |   |
| Income from continuing operations                                                                                                     |       | 20,967                                                |       | 13,295     |       | 7,672             |       |   | 57.7 | % |   |
| Income from discontinued operations, net of income  taxes                                                                             |       | 73                                                    |       | 3,358      |       | (3,285            | )          |   | (97.8 | )% |   |
| **Net income**                                                                                                                        |       | $                                                     | 21,040     |       | $          | 16,653            |       | $ | 4,387 |   |   | 26.3 | % |   |

 

***Revenues.  ***Facilitiesmanagement revenue decreased primarily due to the Company’s exit from certainunprofitable contracts and the loss of other clients during 2002 and the firsthalf of 2003, including certain client relationships terminated as part of theCompany’s wind-down of its centralized call center operations. Reimbursement ofsalaries, wages, benefits, and out-of-pocket general and administrative costs,a component of facilities management revenue, decreased $10.4 million in2003, compared to 2002. The composition of facilities management revenue,including management fees and reimbursements, can 

34

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vary significantly fromperiod to period based on the terms of the underlying management agreements ineffect each period.

Corporate advisory services revenues began to increasefrom the prior year in the second quarter 2003 as clients began showing lessreluctance to make new real estate commitments. In addition, during 2003 theCompany increased the number of tenant representation brokers as part of itsfocus on expanding its brokerage network. The Company was successful in closingseveral significant tenant representation transactions and other transactionson behalf of its user clients.

Project management revenue growth was primarily due tothe addition of new clients and the expansion of services provided to existingclients. The growth was partially offset by the sale of a majority of theoperations of the Company’s joint venture with Savills into the Asia-Pacificregion and the termination of a contract in the fourth quarter of 2002.

The decrease in property management revenue wasprimarily the result of a reduction in square footage under management in 2003,in addition to the Company’s sale of its mall management business to anaffiliate of Faison Enterprises, Inc. (the “Faison Sale”) in the firstquarter of 2002.

Brokerage revenue remained relatively flat from 2002to 2003. However, revenues in the fourth quarter of 2003 were significantlyahead of the comparable period in the prior year. This is in part the result ofan increase in the number of project leasing and investment sales brokers, aspart of the Company’s focus on expanding its brokerage network. In addition,the Company was successful in closing several significant transactions in the2003 fourth quarter, driven by stabilization of the economy and decreasingreluctance on the part of clients to make new real estate commitments.

Construction management revenue is generated fromservices including space planning and tenant finish coordination for investorclients in conjunction with property management and leasing assignments, and isdirectly related to tenants’ real estate demands. Revenues remained relativelyflat from 2002 to 2003.

The decrease in development and construction revenuewas primarily due to a $5.8 million decrease in rental revenue from operatingreal estate properties, resulting from the sale of various operating propertiesthat generated rental revenue in 2002. In addition, development andconstruction fees decreased due to the downturn in the economy, which hadresulted in a decrease in the Company’s development starts and investments inrecent years. Typically, the impact of decreases and increases in the Company’sdevelopment starts and investments is not reflected in results immediately andthe Company experienced the consequences of reduced previous periods’ startsand investments in its development and construction revenues for 2003. Thesedecreases in revenue were offset in 2003 by $1.6 million of revenue relating tothe Company’s receipt of a distribution from a cost method investment. Thisdistribution was the result of the disposition of the underlying real estateproject.

The Company’s gain on disposition of real estatedecreased significantly in 2003 from 2002. In 2003, the Company sold 19 realestate projects for an aggregate net sales price of $67.1 million,resulting in an aggregate gain on disposition of $13.4 million, includingrecognition of deferred gain of $0.3 million relating to a disposition ina previous period. In 2002, the Company sold 36 real estate projects for anaggregate net sales price of $142.1 million, resulting in an aggregategain on disposition of $24.2 million, including recognition of deferredgain of $0.9 million relating to a disposition in a previous period.

***Costs and Expenses.  ***Thedecrease in salaries, wages and benefits expense in 2003 was driven by a$23.9 million decrease in salaries, wages and benefits for unreimbursedemployees offset by a $3.3 million increase in salaries, wages andbenefits for reimbursed employees. The decrease in unreimbursed salaries, wagesand benefits is a result of the Company’s continued efforts to control costs aspart of the Company’s cost reduction efforts begun in the second quarter of2001, in addition to a reduction in headcount resulting from the Faison Saleand wind-down of the Company’s call center operations. These decreases in 

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unreimbursed salaries,wages and benefits were partially offset by increases due to new hiring in2003. The increase in reimbursed salaries, wages and benefits was driven by anincrease in project management services provided to clients, offset by areduction in headcount due to the wind-down of call center operations.

The increase in commission expense was primarilydriven by the increase in the Company’s corporate advisory services revenue,which was the result of an increase in headcount of tenant representationbrokers and the closing of several significant transactions during 2003 as theeconomy began to stabilize in the second half of 2003.

The overall decrease in general and administrativeexpenses was comprised of a $20.4 million decrease in costs that are notreimbursed by clients, offset by a $3.8 million increase in out-of-pocketgeneral and administrative expenses that are reimbursed by clients. Thedecrease in unreimbursed general and administrative expenses for 2003 is theresult of a $5.4 million decrease in pursuit cost expense, mainly due to awriteoff of capitalized pursuit costs in the second quarter of 2002 when negotiationson an international venture concluded unsuccessfully, as well as continuingefforts by the Company to control costs company-wide. In addition, costs wereincurred in 2002 to restructure or exit outsourcing contracts that wereunprofitable or otherwise judged likely to be unsuccessful in the long run. Theoverall decrease in general and administrative expenses in 2003 was partiallyoffset by $3.1 million of writedowns on real estate due to impairment andprovisions to reflect real estate held for sale assets at fair value less costto sell recorded in 2003 as compared to $2.4 million of such writedowns andprovisions in 2002.

Depreciation and amortization expenses decreasedbecause certain non-compete agreements became fully amortized in 2002 andcertain assets related to computer hardware became fully depreciated during2003 and therefore were not depreciated for a full year in 2003. This wasoffset by an increase in depreciation expense related to real estate assetsclassified as held for investment, in accordance with FAS 144.

The decrease in interest expense is primarily theresult of the dispositions in late 2002 of several operational real estateprojects that incurred interest expense in 2002. Also, during 2003, the Companyhad lower average outstanding balances on its revolving line of credit.

***Minority Interest, Net of IncomeTaxes.  ***The decrease in minority interest income,net of income taxes, is primarily a result of decreased losses in 2003 in theCompany’s consolidated international entities in which outside parties have aninterest. This decrease was partially offset by an increase in minorityinterest income, net of income taxes, due to larger 2003 losses in certainconsolidated real estate entities driven by 2003 charges for impairment of realestate.

***Income from Investments inUnconsolidated Subsidiaries, Net of Income Taxes.  ***Incomefrom investments in unconsolidated subsidiaries fluctuates from period toperiod based on the volume and profitability of transactions carried out by theunderlying unconsolidated subsidiaries. The Company’s share of income from suchtransactions is typically driven by its ownership percentage in theunconsolidated subsidiaries. The 2003 increase in income from unconsolidatedsubsidiaries was primarily driven by significant real estate sales by certainunconsolidated subsidiaries and increased income from the 10% investment thatthe Company owns in Savills, which it acquired upon initial formation of itsstrategic alliance with Savills.

***Income from DiscontinuedOperations, Net of Income Taxes.  ***In 2003, theCompany sold four real estate projects that were considered discontinuedoperations for an aggregate net sales price of $25.1 million. These salesresulted in an aggregate gain on disposition of real estate (before incometaxes) of $5.3 million. Income from discontinued operations for 2003 includes aprovision for loss of $1.4 million to reflect a real estate held for sale assetat fair value less cost to sell and $1.4 million of impairment on real estate.In 2002, 

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the Company sold four realestate projects with a gain on disposition of real estate (before income taxes)of $6.6 million for an aggregate net sales price of $31.2 million.

***Net Income.  ***Netincome increased due to the fluctuations in revenues and expenses describedabove, in addition to a decrease in the Company’s effective tax rate driven bythe increase in the Company’s income from its investment in Savills.

**QuarterlyResults of Operations and Seasonality**

Thefollowing table presents unaudited quarterly results of operations data for theCompany for each of the eight quarters in 2004 and 2003. 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 anyfuture period. Revenues and net income during the fourth fiscal quarterhistorically have been greater than in each of the first three fiscal quarters,primarily because 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)** | ** ** |
| **2004:**                                                           |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Total revenues                                                      |       | $                       | 158,478    |   | $ | 182,480 |   |   | $ | 188,966 |   |   |   | $ | 248,502 |   |   |
| Income (loss)  from discontinued operations, net of income taxes(1) |       | 340                     |       | (152 | ) |   | (86 | ) |   |   | 17,169 |   |   |
| Net income                                                          |       | 2,099                   |       | 3,214 |   |   | 5,854 |   |   |   | 27,952 |   |   |
| **2003:**                                                           |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Total revenues                                                      |       | $                       | 160,132    |   | $ | 169,146 |   |   | $ | 167,043 |   |   |   | $ | 209,225 |   |   |
| Income (loss)  from discontinued operations, net of income taxes(1) |       | (149                    | )          | (175 | ) |   | (385 | ) |   |   | 782 |   |   |
| Net income                                                          |       | 1,144                   |       | 3,072 |   |   | 1,783 |   |   |   | 15,041 |   |   |

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(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 andCapital Resources**

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

Net cash provided byoperating activities totaled $91.8 million for 2004, compared to $48.8 millionfor 2003. Cash provided by operating activities, excluding the change in realestate, net of related borrowings, increased to $93.1 million in 2004 ascompared to $52.4 million in 2003. This increase is partially due to the 

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collectionin 2004 of a large receivable from an affiliate that was outstanding atyear-end 2003. In addition, cash used in real estate activities (exclusive ofreal estate held for investment), net of related borrowings, was $1.3 millionin 2004, compared to $3.6 million in 2003. This change in cash used in realestate activities is a result of greater real estate dispositions in 2004,offset by increased borrowings on real estate notes payable in 2004.

Net cash used in investingactivities totaled $34.4 million in 2004, compared to $3.9 million of net cashprovided by investing activities in 2003. This change is primarily due to$105.8 million of expenditures made in 2004 related to real estate classifiedas “held for investment,” as compared to similar expenditures of $26.3 millionin 2003. These 2004 expenditures were offset by $67.3 million of proceeds fromthe dispositions of real estate projects classified as “held for investment” atthe time of disposition in accordance with FAS 144, as compared to $16.5million of such proceeds in 2003. In addition, distributions from investmentsin unconsolidated subsidiaries, net of contributions, decreased to $9.8 millionin 2004, compared to $24.1 million in 2003.

Net cash provided byfinancing activities totaled $0.7 million in 2004, compared to $25.1 million ofnet cash used in financing activities in 2003. In 2004, the Company receivedproceeds from borrowings, net of payments, of $47.2 million under notes payablerelated to real estate held for investment as compared to net proceeds of $1.9million in 2003. In addition, the Company received contributions, net ofdistributions, from minority interest holders of $0.2 million in 2004, ascompared to $8.0 million of distributions, net of contributions in 2003. Theincrease in cash provided in 2004 was offset by $37.9 million in cash used tofacilitate the Company’s 2004 Modified Dutch Auction tender offer (includingrelated costs), as compared to $10.4 million in cash used in the Company’srepurchase program completed in 2003.

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

The Company’sparticipation in derivative transactions has been limited to hedging purposes,and derivative instruments are not held for trading purposes. The CreditFacility requires the Company to enter into one or more interest rateagreements for the Company’s floating rate indebtedness in excess of $30.0million (other than construction loans under which interest is capitalized inaccordance with GAAP) ensuring the net interest on such excess is fixed, cappedor hedged. In March 2001, the Company renewed an existing interest rateswap agreement for a two-year period ending March 24, 2003, with a fixedinterest pay rate of 4.68% and a notional amount of $150.0 million. Theinterest rate swap agreement expired on March 24, 2003, and the relatedweighted average receive rate was 1.37% for the three months ended March 31,2003. Subsequent to the expiration of the interest rate swap agreement, theCompany has 

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enteredinto various short-term interest rate agreements to comply with therequirements of the Credit Facility. In December 2004, the Company enteredinto an interest rate cap agreement with a notional amount of $10.0 millionexpiring March 24, 2005, under which the Company will receive payments ifthe 30-day LIBOR based interest rate exceeds 3.0%. The interest rate capagreement has not been designated as an effective hedge (although it wasentered into for hedging purposes), and the Company will recognize changes infair value of the interest rate cap agreement in current period earnings.Through December 31, 2004, amounts recorded by the Company related to thisinterest rate cap agreement were not material. The Company was not incompliance with the Credit Facility’s interest rate agreement requirement at December 31,2004. The Company held $1.5 million of floating rate indebtedness (in excess ofthe $30.0 million allowed under the Credit Facility), which was not subject tothe interest rate cap agreement. The Company obtained a waiver effective February 28,2005, from the lenders under the Credit Facility waiving compliance with thiscovenant for the period commencing on December 31, 2004, until, but notincluding, June 30, 2005.

The Company also has a$25.0 million discretionary line of credit (the “Discretionary Line”) withBank of America, N.A. Each loan obtained by the Company under theDiscretionary Line matures in five business days, but no later than June 28,2005, and bears interest at a rate agreed upon between the Company and thebank. Borrowings under the Discretionary Line are unsecured and reduceborrowing capacity under the Credit Facility.

At December 31, 2004,the Company had no outstanding borrowings under the Credit Facility or theDiscretionary Line. The covenants contained in the Credit Facility and theamount of the Company’s other borrowings and contingent liabilities may havethe effect of limiting the credit available to the Company under the CreditFacility to an amount less than the $150.0 million commitment. As it takeslonger for the Company to dispose of real estate investments in a weakereconomy, an economic slowdown could adversely impact the Company’s ability tocomply with certain of the real estate-related financial covenants in theCompany’s Credit Facility, which could negatively impact the Company’sborrowing capacity. Since many of the financial covenants in the CreditFacility are dependent on the Company’s “EBITDA,” as defined in the CreditAgreement and calculated on a trailing four quarter basis, a decline in theCompany’s overall operations could adversely impact the Company’s ability tocomply with these financial covenants and, in turn, the Company’s borrowingcapacity or the amount of its investments in real estate. The Company’s unusedborrowing capacity (taking into account letters of credit outstanding) underthe Credit Facility was $126.5 million at December 31, 2004. TheCompany expects to continue to borrow under the Credit Facility to financefuture strategic acquisitions, fund its co-investment activities and providethe Company with an additional source of working capital.

In December 2004, theCompany entered into an interest rate cap agreement in order to limit itsinterest expense on a construction loan with a 30-day LIBOR-basedfloating interest rate related to a consolidated real estate project. Theinterest rate cap agreement has an initial notional amount of $1.1 million andthe Company will receive payments if the LIBOR-based interest rateexceeds 3.5%. The interest rate cap agreement has not been designated as aneffective hedge, and therefore the interest rate cap agreement will be markedto market each period with the change in fair market value recognized incurrent period earnings. The interest rate cap agreement expires on January 1,2006. Through December 31, 2004, amounts recorded by the Company relatedto this interest rate cap agreement were not material.

In March 2003, theCompany entered into an interest rate cap agreement in order to limit itsinterest expense on a construction loan with a 30-day LIBOR-basedfloating interest rate related to a consolidated real estate project. Theinterest rate cap agreement has a notional amount of $11.4 million and theCompany will receive payments if the LIBOR-based interest rate exceeds3.5%. The interest rate cap agreement has not been designated as an effectivehedge, and therefore the interest rate cap agreement will be marked to marketeach period with the change in fair market value recognized in current period 

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earnings.The interest rate cap agreement expires on March 1, 2005. Through December 31,2004, amounts recorded by the Company related to this interest rate capagreement were not material.

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

In March 2005, theCompany announced that its Board of Directors has authorized the purchase of upto $20.0 million of its common stock from time to time in open market purchasesor in privately negotiated transactions. The repurchase of shares is intendedto offset dilution resulting from equity incentive awards made under theCompany’s stock plans. The Company’s intent with respect to stock repurchaseprograms is to reserve the repurchased shares for issuance in connection withthe Company’s employee stock purchase plan and option exercises or restrictedstock grants under the Company’s long-term incentive plan and otherequity-based incentive plans, as well as for other corporate purposes.

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 shareholders 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.

In May 2001, theCompany’s Board of Directors authorized the repurchase of up to $15.0 millionof the Company’s common stock from time to time in open market purchases orthrough privately negotiated transactions. The repurchase program was completedduring the second quarter of 2003 and resulted in the repurchase of 1,593,900shares at an average cost of $9.41 per share. The purchases were made withfunds generated from operations and existing cash, and the Company placed therepurchased shares in treasury.

**Off-balanceSheet Arrangements and Contractual Obligations**

The Company hasoff-balance sheet arrangements consisting of certain debt repayment guaranteesthat have been provided by the Company as security for the obligations ofothers (primarily unconsolidated subsidiaries of the Company) in the normalcourse of the Company’s real estate development business. The Company has notmade any material payments under such arrangements in the years ended December 31,2002, 2003 or 2004. As of December 31, 2004, the Company has guaranteed amaximum of $16.2 million of such notes payable, of which $15.4 million isoutstanding as of December 31, 2004. Payments required under thesearrangements, if any, would generally result in an increase in the Company’sinvestment in the underlying unconsolidated subsidiaries.

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TheCompany has various contractual obligations at December 31, 2004, 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                                |       | $                                         | —     |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Capital lease  obligations                     |       | 0.4                                       |       |   | 0.4 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Operating leases                               |       | 65.9                                      |       |   | 19.7 |   |   |   | 28.6 |   |   |   | 13.7 |   |   |   | 3.9 |   |   |
| Notes payable on  real estate (recourse)(1)(2) |       | 27.5                                      |       |   | 4.4 |   |   |   | 23.1 |   |   |   | — |   |   |   | — |   |   |
| Notes payable on  real estate (nonrecourse)(1) |       | 122.2                                     |       |   | 9.0 |   |   |   | 107.8 |   |   |   | 5.4 |   |   |   | — |   |   |
| Purchase  obligations                          |       | 120.5                                     |       |   | 119.2 |   |   |   | 1.3 |   |   |   | — |   |   |   | — |   |   |
| Other  obligations(3)                          |       | 10.0                                      |       |   | — |   |   |   | 10.0 |   |   |   | — |   |   |   | — |   |   |
| **Total  Contractual Obligations**             |       | $                                         | 346.5      |   |   | $ | 152.7 |   |   |   | $ | 170.8 |   |   |   | $ | 19.1 |   |   |   | $ | 3.9 |   |   |

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(1)          Includes notes relatedto the Company’s various real estate projects and excludes future interest. Thenotes have either fixed or variable interest rates, ranging from 4.06% to 12%at December 31, 2004. In general, interest is drawn on the underlyingconstruction loan and subsequently paid with principal with proceeds upon saleof 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)          Theseobligations, as well as $3.6 million recorded in other current liabilities, arecollateralized by outstanding letters of credit totaling $10.1 million.

**Effects of Inflation**

The Company does notbelieve that inflation has had a significant impact on its results ofoperations in recent years. However, there can be no assurance that the Company’sbusiness will 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,”“forecast,” “will,” “may,” “expect,” “envision,” “project,” “budget,” “target,”“estimate,” “could,” “should,” “conceivable,” “intend,” “possible,” “foresee,” “lookfor,” “look to” and words of similar import, are forward-lookingstatements within the meaning of the federal securities laws. Such forward-lookingstatements involve known and unknown risks, uncertainties and other matterswhich may cause the actual results, performance or achievements of the Companyor industry results to be materially different from any future results,performance or achievements expressed or implied by such forward-lookingstatements. Such risks, uncertainties and other matters include, but are notlimited to:

·       thetiming of individual transactions,

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

·       theability of the Company to compete effectively in the international arena,

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

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

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·       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,

·       theability of the Company to continue to pursue its growth strategy,

·       theability of the Company to pursue strategic acquisitions on favorable terms andmanage challenges and issues commonly encountered as a result of thoseacquisitions,

·       theability of the Company to compete in highly competitive national and localbusiness lines, and

·       theability of the Company to attract and retain qualified personnel in all areasof its business (particularly senior management).

In addition, the Company’sability to achieve certain anticipated results will be subject to other factorsaffecting the Company’s business that are beyond the Company’s control,including but not limited to general economic conditions (including the costand availability of capital for investment in real estate and clients’willingness to make real estate commitments) and the effect of governmentregulation on the conduct of the Company’s business and the threat of terrorismand acts of war. Given these uncertainties, readers are cautioned not to placeundue reliance on such forward-looking statements. The Company disclaimsany obligation to update any such statements or publicly announce any updatesor revisions to any of the forward-looking statements contained herein toreflect any change in the Company’s expectation with regard thereto or anychange in events, conditions, circumstances or assumptions underlying suchstatements.

**ITEM 7A.**        QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s primary market risk exposure is to changesin interest rates. The Company is exposed to market risk related to its CreditFacility 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.”*The Credit Facility and the majority of the loans secured by real estate bearinterest at variable rates and are subject to fluctuations in the market. Fromtime to time, the Company purchases interest rate agreements to hedge a portion,but not all, of its exposure to fluctuations in interest rates.

If an increase or decrease in market interest rates of100 basis points were to have occurred at December 31, 2004, the Company’stotal estimated interest costs for 2005 would increase or decrease byapproximately $1.5 million. The Company’s sensitivity analysis is based onborrowings outstanding as of December 31, 2004 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 2004, the Company’s total interest costs would have increased ordecreased accordingly by approximately $1.3 million, after considering theeffect of the interest rate agreements in effect during 2004. Interest costsinclude both interest that is expensed and interest that is capitalized as partof the cost of real estate. A portion of the interest relating to the Company’sreal estate debt ($149.7 million at December 31, 2004) is capitalized.This analysis does not consider the effects of the reduced level of overalleconomic activity that could exist in a higher 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 its operations in Canada, Europe, Asia andAustralia. At December 31, 2004, a uniform 10% strengthening or weakeningin the value of the dollar relative to the currencies in which the Company’sforeign operations are denominated would result in an estimated decrease orincrease accordingly in income before income taxes of approximately$0.5 million for the year ending December 31, 2005. If, during theyear ended December 31, 2004, a uniform 10% strengthening or weakening inthe value of the dollar relative to the currencies in which the Company’sforeign operations are denominated had occurred, it would have resulted in adecrease or increase accordingly in income 

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beforeincome taxes of approximately $0.5 million (primarily in income frominvestments in unconsolidated subsidiaries). These calculations assume thateach exchange rate would change in the same direction relative to the U.S.dollar and are based on either the Company’s actual 2004 or an estimate of 2005income before income taxes from foreign operations. The Company’s sensitivityanalysis of the effects of changes in foreign currency exchange rates does notfactor in potential changes to its 2005 anticipated level of foreign operationsor 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.

**ITEM 9.**                CHANGES IN ANDDISAGREEMENT 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) under the SecuritiesExchange Act of 1934. The Company’s internal control over financial reportingis designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles.

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 aresubject to the risk that controls may become inadequate because of changes inconditions, or that the degree of compliance with the policies or proceduresmay deteriorate.

Management assessed the effectiveness of the Company’sinternal control over financial reporting as of December 31, 2004. 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 our assessment and those criteria, managementbelieves that the Company maintained effective internal control over financialreporting as of December 31, 2004.

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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.

**PART III**

**ITEM 10.**         DIRECTORS AND EXECUTIVEOFFICERS OF THE REGISTRANT

The information set forthunder the headings “*Proposal One—Election of Class IIDirectors*,” “*Directors*,” “*Executive Officers*,” “*Meetings and Committees ofDirectors*,” “*Code of Business Conductand Ethics*” and “*Section 16(a) BeneficialOwnership Reporting Compliance*” contained in the Company’sdefinitive Proxy Statement to be filed pursuant to Regulation 14A of theExchange Act in connection with the Company’s 2005 Annual Meeting ofStockholders is incorporated herein by reference.

**ITEM 11.**         EXECUTIVE COMPENSATION

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 2005Annual Meeting of Stockholders is incorporated herein by reference.

**ITEM 12.**         SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT

At December 31,2004, 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** | ** ** | **Number of securities  remaining available for  future issuance under equity  compensation plans  (excluding securities reflected  in column (a))** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders     |       |       | 5,942,316  |                                                                                                                                                  |       |                                                                                                | $          | 12.90                                                                                                                                                                                                            |       |   |   | 1,033,722 |   |   |
| Equity  compensation plans not approved by security holders |       |       | 24,500     |                                                                                                                                                  |       |                                                                                                | $          | 11.46                                                                                                                                                                                                            |       |   |   | — |   |   |
| Total                                                       |       |       | 5,966,816  |                                                                                                                                                  |       |                                                                                                | $          | 12.90                                                                                                                                                                                                            |       |   |   | 1,033,722 |   |   |

 

The options to acquire 24,500 shares issuable underplans that were not approved by stockholders were granted between May 1,2000, and July 17, 2000, and vested one-quarter each year on each of thefirst four anniversaries of the grant date. The options expire ten years fromthe date of grant.

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 2005Annual Meeting of Stockholders is incorporated herein by reference.

44

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**ITEM 13.**         CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS

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 2005 Annual Meeting of Stockholders is incorporated hereinby reference.

**ITEM 14.**         PRINCIPAL ACCOUNTANT FEESAND SERVICES

The information set forth under the heading “*Fees Paid to Independent Registered Public Accounting Firm*”and “*Audit Committee Policies and Procedures forPre-Approval of Audit and Non-Audit Services*” contained in theCompany’s definitive Proxy Statement to be filed pursuant to Regulation 14A ofthe Exchange Act in connection with the Company’s 2005 Annual Meeting ofStockholders is incorporated herein by reference.

45

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**PART IV**

**ITEM 15.**         EXHIBITS AND FINANCIALSTATEMENT 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.

Financial statements ofTFK Retail, Ltd. are filed as part of this Report at Item 8 pursuant to Rule 3-09of 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(10)   | Second Amendment to Bylaws of the Company                                                                                                                                      |
|   | 3.2.3(12)   | Third Amendment to Bylaws of the Company                                                                                                                                       |
|   | 4.1(1)      | Form of certificate for shares of Common Stock  of the Company                                                                                                            |
|   | 10.1(9)     | Credit Agreement dated June 28, 2002, among the  Company, Bank of America, N.A. as Administrative Agent and the lender parties  thereto                                   |
|   | 10.1.1(14)  | First Amendment of Credit Agreement dated  September 1, 2004, between the Company and Bank of America, N.A.                                                               |
|   | 10.2(1)     | Form of License Agreement among the Company and  CFH                                                                                                                      |
|   | 10.2.1(9)   | First Amendment to License Agreement dated  July 31, 2002, between the Company and CFH                                                                                    |
|   | 10.3(16)    | 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(10)  | 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(8)   | Third Amendment to the Company’s Employee Stock  Purchase Plan                                                                                                            |
|   | 10.7.4(11)  | Fourth Amendment to the Company’s Employee Stock  Purchase Plan                                                                                                           |
|   | 10.7.5(11)  | Fifth Amendment to the Company’s Employee Stock  Purchase Plan                                                                                                            |
|   | 10.7.6(17)  | 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(9)     | Consulting Agreement dated as of June 1, 2002,  between the Company and J. McDonald Williams                                                                              |
|   | 10.10(11)   | Employment Agreement dated as of October 17,  2003, between the Company and Robert E. Sulentic                                                                            |
|   | 10.10.1(13) | Amendment to Employment Agreement dated as of  April 6, 2004, between the Company and Robert E. Sulentic                                                                  |
|   | 10.11(11)   | Employment Agreement dated as of October 17,  2003, between the Company and Derek R. McClain                                                                              |

46

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|        | 10.11.1(13) | Amendment to Employment Agreement dated as of  April 6, 2004, between the Company and Derek R. McClain                                                            |
|--------|-------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 10.12(11)   | Employment Agreement  dated as of October 17, 2003, between the Company and James R. Groch                                                                        |
|   | 10.12.1(13) | Amendment to Employment Agreement dated as of  April 6, 2004, between the Company and James R. Groch                                                              |
|   | 10.13(12)   | Employment Agreement dated as of January 9,  2004, between the Company and Michael J. Lafitte                                                                     |
|   | 10.13.1(13) | Amendment to Employment Agreement dated as of  April 6, 2004, between the Company and Michael J. Lafitte                                                          |
|   | 10.14(12)   | Employment Agreement dated as of March 2, 2004,  between the Company and John A. Stirek                                                                           |
|   | 10.14.1(13) | Amendment to Employment Agreement dated as of  April 6, 2004, between the Company and John A. Stirek                                                              |
|   | 10.15(13)   | Employment Agreement dated as of November 24,  2003, between the Company and William F. Concannon                                                                 |
|   | 10.15.1(13) | Amendment to Employment Agreement dated as of  April 6, 2004, between the Company and William F. Concannon                                                        |
|   | 10.16(13)   | Employment Agreement dated as of April 6, 2004,  between the Company and T. Christopher Roth                                                                      |
|   | 10.17(13)   | Employment Agreement dated as of April 27,  2004, between the Company and Diane Paddison                                                                          |
|   | 10.18(15)   | Employment Agreement dated as of September 28,  2004, between the Company and Matthew S. Khourie                                                                  |
|   | 14.1(12)    | 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.

47

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

(6)                 Previouslyfiled as an exhibit to the Company’s Form 10-K filed with theSecurities and Exchange Commission on March 29, 2001 and incorporatedherein by reference.

(7)                 Previouslyfiled as 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)                 Previouslyfiled as an exhibit to the Company’s Form 10-K filed with theSecurities and Exchange Commission on March 29, 2002 and incorporatedherein by reference.

(9)                 Previouslyfiled as an exhibit to the Company’s Form 10-Q filed with theSecurities and Exchange Commission on August 14, 2002 and incorporatedherein by reference.

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

(11)             Previouslyfiled as an exhibit to the Company’s Form 10-Q filed with theSecurities and Exchange Commission on November 14, 2003 and incorporatedherein by reference.

(12)             Previouslyfiled as an exhibit to the Company’s Form 10-K filed with theSecurities and Exchange Commission on March 15, 2004 and incorporatedherein by reference.

(13)             Previouslyfiled as an exhibit to the Company’s Form 10-Q filed with theSecurities and Exchange Commission on May 10, 2004 and incorporated hereinby reference.

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

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

(16)             Previouslyfiled as an exhibit to the Company’s Form 10-Q filed with theSecurities and Exchange Commission on November 9, 2004 and incorporatedherein by reference.

(17)             Previouslyfiled as an exhibit 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.

(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.

48

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**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 16, 2005 | *Chief  Executive Officer*              |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated. 
|                         | **Name** | ** **                                       | ** ** | ** **           | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|-------------------------|----------|--------------------------------------------------|------------|----------------------|-----------|------------|------------|------------|----------|------------|
| /s/  ROBERT E. SULENTIC |     | Chairman of the Board, President and Chief       |       | March 16,  2005 |
| Robert E.  Sulentic     |     | Executive Officer (Principal  Executive Officer) |       |                 |
| *                       |     | Executive Vice President  and                    |       | March 16,  2005 |
| Derek R. McClain        |     | Chief Financial Officer                          |       |                 |
| *                       |     | Executive Vice President  and                    |       | March 16,  2005 |
| Arlin E. Gaffner        |     | Chief Accounting Officer                         |       |                 |
| *                       |     | Director                                         |       | March 16,  2005 |
| Curtis F. Feeny         |     |                                             |       |                 |
| *                       |     | Director                                         |       | March 16,  2005 |
| Michael A. Moses        |     |                                             |       |                 |
| *                       |     | Chairman Emeritus                                |       | March 16,  2005 |
| J. McDonald  Williams   |     |                                             |       |                 |
| *                       |     | Vice Chairman                                    |       | March 16,  2005 |
| William F.  Concannon   |     |                                             |       |                 |
| *                       |     | Director                                         |       | March 16,  2005 |
| James R. Erwin          |     |                                             |       |                 |
| *                       |     | Director                                         |       | March 16,  2005 |
| Jeffrey M. Heller       |     |                                             |       |                 |
| *                       |     | Director                                         |       | March 16,  2005 |
| 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 16,  2005 |
|--------|------------------------|--------|--------|--------|----------------------|
|   | Robert E.  Sulentic    |   |   |   |                 |
|   | *Attorney-in-fact*     |   |   |   |                 |

 

49

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**Exhibit Index**
| Exhibit Number                | ** ** | **Description**                                                                                                                                                                |
|------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      3.1(1)    |       | Certificate of Incorporation of the Company                                                                                                                                    |
|      3.2(1)    |       | Bylaws of the Company                                                                                                                                                          |
|      3.2.1(5)  |       | First Amendment to Bylaws of the Company                                                                                                                                       |
|      3.2.2(10) |       | Second Amendment to Bylaws of the Company                                                                                                                                      |
|      3.2.3(12) |       | Third Amendment to Bylaws of the Company                                                                                                                                       |
|      4.1(1)    |       | Form of certificate for shares of Common Stock  of the Company                                                                                                            |
|    10.1(9)               |       | Credit Agreement dated June 28, 2002, among the  Company, Bank of America, N.A. as Administrative Agent and the lender parties  thereto                                   |
|    10.1.1(14)            |       | First Amendment of Credit Agreement dated  September 1, 2004, between the Company and Bank of America, N.A.                                                               |
|    10.2(1)               |       | Form of License Agreement among the Company and  CFH                                                                                                                      |
|    10.2.1(9)             |       | First Amendment to License Agreement dated  July 31, 2002, between the Company and CFH                                                                                    |
|    10.3(16)              |       | 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(10)            |       | 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(8)             |       | Third Amendment to the Company’s Employee Stock  Purchase Plan                                                                                                            |
|    10.7.4(11)            |       | Fourth Amendment to the Company’s Employee Stock  Purchase Plan                                                                                                           |
|    10.7.5(11)            |       | Fifth Amendment to the Company’s Employee Stock  Purchase Plan                                                                                                            |
|    10.7.6(17)            |       | 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(9)               |       | Consulting Agreement dated as of June 1, 2002,  between the Company and J. McDonald Williams                                                                              |
|    10.10(11)             |       | Employment Agreement dated as of October 17,  2003, between the Company and Robert E. Sulentic                                                                            |
|    10.10.1(13)           |       | Amendment to Employment Agreement dated as of  April 6, 2004, between the Company and Robert E. Sulentic                                                                  |
|    10.11(11)             |       | Employment Agreement dated as of October 17,  2003, between the Company and Derek R. McClain                                                                              |
|    10.11.1(13)           |       | Amendment to Employment Agreement dated as of  April 6, 2004, between the Company and Derek R. McClain                                                                    |
|    10.12(11)             |       | Employment Agreement dated as of October 17,  2003, between the Company and James R. Groch                                                                                |
|    10.12.1(13)           |       | Amendment to Employment Agreement dated as of  April 6, 2004, between the Company and James R. Groch                                                                      |
|    10.13(12)             |       | Employment Agreement dated as of January 9,  2004, between the Company and Michael J. Lafitte                                                                             |
|    10.13.1(13)           |       | Amendment to Employment Agreement dated as of  April 6, 2004, between the Company and Michael J. Lafitte                                                                  |

50

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|    10.14(12)   |   | Employment Agreement  dated as of March 2, 2004, between the Company and John A. Stirek                                                                           |
|--------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    10.14.1(13) |   | Amendment to Employment Agreement dated as of  April 6, 2004, between the Company and John A. Stirek                                                              |
|    10.15(13)   |   | Employment Agreement  dated as of November 24, 2003, between the Company and William F.  Concannon                                                                |
|    10.15.1(13) |   | Amendment to Employment Agreement dated as of  April 6, 2004, between the Company and William F. Concannon                                                        |
|    10.16(13)   |   | Employment Agreement dated as of April 6, 2004,  between the Company and T. Christopher Roth                                                                      |
|    10.17(13)   |   | Employment Agreement dated as of April 27,  2004, between the Company and Diane Paddison                                                                          |
|    10.18(15)   |   | Employment Agreement dated as of September 28,  2004, between the Company and Matthew S. Khourie                                                                  |
|    14.1(12)    |   | 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.

(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)                 Previouslyfiled as 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)                 Previouslyfiled as 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.

51

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

(6)                 Previouslyfiled as an exhibit to the Company’s Form 10-K filed with theSecurities and Exchange Commission on March 29, 2001 and incorporatedherein by reference.

(7)                 Previouslyfiled as 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)                 Previouslyfiled as an exhibit to the Company’s Form 10-K filed with theSecurities and Exchange Commission on March 29, 2002 and incorporatedherein by reference.

(9)                 Previouslyfiled as an exhibit to the Company’s Form 10-Q filed with theSecurities and Exchange Commission on August 14, 2002 and incorporatedherein by reference.

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

(11)             Previouslyfiled as an exhibit to the Company’s Form 10-Q filed with theSecurities and Exchange Commission on November 14, 2003 and incorporatedherein by reference.

(12)             Previouslyfiled as an exhibit to the Company’s Form 10-K filed with theSecurities and Exchange Commission on March 15, 2004 and incorporatedherein by reference.

(13)             Previouslyfiled as an exhibit to the Company’s Form 10-Q filed with theSecurities and Exchange Commission on May 10, 2004 and incorporated hereinby reference.

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

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

(16)             Previouslyfiled as an exhibit to the Company’s Form 10-Q filed with theSecurities and Exchange Commission on November 9, 2004 and incorporatedherein by reference.

(17)             Previouslyfiled as an exhibit 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.

52

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**ANNUAL REPORT ON FORM 10-K**

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

**LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENTSCHEDULE**

**FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

**CERTAIN EXHIBITS**

**FINANCIAL STATEMENT SCHEDULE**

**YEAR ENDED DECEMBER 31, 2004**

**TRAMMELL CROW COMPANY AND SUBSIDIARIES**

**DALLAS,TEXAS**

F-1

----

 

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

Thefollowing consolidated financial statements of Trammell Crow Company andSubsidiaries for the year ended December 31, 2004, are included inItem 8: 
| Reports of Independent  Registered Public Accounting Firm                                                         |   | F-3  |
|-------------------------------------------------------------------------------------------------------------------|--------|------|
| Consolidated Balance Sheets as of  December 31, 2004 and 2003                                                |   | F-5  |
| Consolidated Statements of  Income for the Years Ended December 31, 2004, 2003 and 2002                      |   | F-6  |
| Consolidated Statements of  Stockholders’ Equity for the Years Ended December 31, 2004, 2003   and 2002 |   | F-7  |
| Consolidated Statements of  Cash Flows for the Years Ended December 31, 2004, 2003 and 2002                  |   | F-8  |
| Consolidated Statements of  Comprehensive Income for the Years Ended December 31, 2004, 2003 and  2002       |   | F-9  |
| Notes  to Consolidated Financial Statements                                                                       |   | F-10 |

 

The following consolidatedfinancial statement schedule of Trammell Crow Company and Subsidiaries isincluded in Item 15(d):
| Schedule III—Real  Estate Investments and Accumulated Depreciation         |   | F-52 |
|---------------------------------------------------------------------------------|--------|------|
| Note to Schedule III—Real  Estate Investments and Accumulated Depreciation |   | F-54 |

 

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-55 |
|---------------------------------------------------------------------------------|--------|------|

 

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.

F-2

----

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

Board of Directors and StockholdersTrammell Crow Company

We have audited the accompanying consolidated balancesheets of Trammell Crow Company as of December 31, 2004 and 2003, and therelated consolidated statements of income, stockholders’ equity, cash flows andcomprehensive income for each of the three years in the period ended December 31,2004. Our audits also included the financial statement schedule listed in theindex at Item 15(a). These financial statements and schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements and schedule based 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 examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of Trammell Crow Company at December 31, 2004 and 2003, and theconsolidated results of its operations and its cash flows for each of the threeyears in the period ended December 31, 2004, in conformity with UnitedStates generally accepted accounting principles. Also, in our opinion, therelated financial statement schedule, when considered in relation to the basicfinancial statements taken as a whole, presents fairly in all material respectsthe 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 31,2004, based on criteria established in Internal Control—Integrated Framework issued bythe Committee of Sponsoring Organizations of the Treadway Commission and ourreport dated March 14, 2005 expressed an unqualified opinion thereon.
|                     | /s/ ERNST & YOUNG LLP |
|---------------------|--------------------------------|
| Dallas, Texas       |
| March 14, 2005 |

F-3

----

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Board of Directors and StockholdersTrammell Crow Company

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control over Financial Reporting,that Trammell Crow Company maintained effective internal control over financialreporting as of December 31, 2004, based on criteria established inInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). Trammell CrowCompany’s management is responsible for maintaining effective internal controlover financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to express anopinion on management’s assessment and an opinion on the effectiveness of thecompany’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. 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.

In our opinion, management’s assessment that TrammellCrow Company maintained effective internal control over financial reporting asof December 31, 2004, is fairly stated, in all material respects, based onthe COSO criteria. Also, in our opinion, Trammell Crow Company maintained, inall material respects, effective internal control over financial reporting asof December 31, 2004, based on the COSO criteria.

Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the 2004 consolidated financialstatements of Trammell Crow Company and our report dated March 14, 2005expressed an unqualified opinion thereon.
|                     | /s/ ERNST & YOUNG LLP |
|---------------------|--------------------------------|
| Dallas, Texas       |
| March 14, 2005 |

 

F-4

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS**
| ** **                                                                                                                                                                                                  | ** **                        | **December 31,**                                                              | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------|------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                                                                                  | ** **                        | **2004**                                                                           | ** ** | **2003** | ** ** |
| ** **                                                                                                                                                                                                  | ** **                        | **(in thousands, except share  and per share data)** | ** ** |
| **ASSETS**                                                                                                                                                                                                  |                              |                                                                               |       |   |   |   |   |   |   |
| Current assets                                                                                                                                                                                              |                              |                                                                               |       |   |   |   |   |   |   |
| Cash and cash  equivalents                                                                                                                                                                                  |                              |                                                                               | $          | 163,637 |   |   |   | $ | 105,616 |   |   |
| Restricted cash                                                                                                                                                                                             |                              |                                                                               | 9,950      |   |   |   | 7,647 |   |   |
| Accounts  receivable, net of allowance for doubtful accounts of $3,144 in 2004 and  $3,886   in 2003                                                                                                        |                              |                                                                               | 103,551    |   |   |   | 97,479 |   |   |
| Receivables from  affiliates                                                                                                                                                                                |                              |                                                                               | 1,626      |   |   |   | 1,593 |   |   |
| Notes and other  receivables                                                                                                                                                                                |                              |                                                                               | 19,726     |   |   |   | 9,784 |   |   |
| Deferred income  taxes                                                                                                                                                                                      |                              |                                                                               | 4,021      |   |   |   | 3,754 |   |   |
| Real estate under  development                                                                                                                                                                              |                              |                                                                               | 20,756     |   |   |   | 39,341 |   |   |
| Real estate and  other assets held for sale                                                                                                                                                                 |                              |                                                                               | 5,045      |   |   |   | 74,050 |   |   |
| Other current  assets                                                                                                                                                                                       |                              |                                                                               | 18,089     |   |   |   | 20,650 |   |   |
| Total current  assets                                                                                                                                                                                       |                              |                                                                               | 346,401    |   |   |   | 359,914 |   |   |
| Furniture and  equipment, net                                                                                                                                                                               |                              |                                                                               | 18,649     |   |   |   | 21,290 |   |   |
| Deferred income  taxes                                                                                                                                                                                      |                              |                                                                               | 22,935     |   |   |   | 19,898 |   |   |
| Real estate under  development                                                                                                                                                                              |                              |                                                                               | 60,530     |   |   |   | 6,345 |   |   |
| Real estate held  for investment                                                                                                                                                                            |                              |                                                                               | 135,754    |   |   |   | 50,066 |   |   |
| Investments in  unconsolidated subsidiaries                                                                                                                                                                 |                              |                                                                               | 74,090     |   |   |   | 65,025 |   |   |
| Goodwill, net                                                                                                                                                                                               |                              |                                                                               | 74,357     |   |   |   | 74,346 |   |   |
| Receivables from  affiliates                                                                                                                                                                                |                              |                                                                               | —     |   |   |   | 14,485 |   |   |
| Other assets                                                                                                                                                                                                |                              |                                                                               | 16,234     |   |   |   | 18,757 |   |   |
|                                                                                                                                                                                                        |                              |                                                                               | $          | 748,950 |   |   |   | $ | 630,126 |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                               |                              |                                                                               |       |   |   |   |   |   |   |
| Current liabilities                                                                                                                                                                                         |                              |                                                                               |       |   |   |   |   |   |   |
| Accounts payable                                                                                                                                                                                            |                              |                                                                               | $          | 23,731 |   |   |   | $ | 16,183 |   |   |
| Accrued expenses                                                                                                                                                                                            |                              |                                                                               | 148,758    |   |   |   | 114,322 |   |   |
| Payables to  affiliates                                                                                                                                                                                     |                              |                                                                               | 40         |   |   |   | 104 |   |   |
| Income taxes  payable                                                                                                                                                                                       |                              |                                                                               | 18,121     |   |   |   | 7,468 |   |   |
| Current portion of  long-term debt                                                                                                                                                                          |                              |                                                                               | 6          |   |   |   | 1,081 |   |   |
| Current portion of  capital lease obligations                                                                                                                                                               |                              |                                                                               | 363        |   |   |   | 1,297 |   |   |
| Current portion of  notes payable on real estate                                                                                                                                                            |                              |                                                                               | 21,937     |   |   |   | 47,235 |   |   |
| Liabilities  related to real estate and other assets held for sale                                                                                                                                          |                              |                                                                               | 5,336      |   |   |   | 51,777 |   |   |
| Other current  liabilities                                                                                                                                                                                  |                              |                                                                               | 12,260     |   |   |   | 9,829 |   |   |
| Total current  liabilities                                                                                                                                                                                  |                              |                                                                               | 230,552    |   |   |   | 249,296 |   |   |
| Long-term  debt, less current portion                                                                                                                                                                       |                              |                                                                               | 8          |   |   |   | 10,014 |   |   |
| Capital lease  obligations, less current portion                                                                                                                                                            |                              |                                                                               | —     |   |   |   | 714 |   |   |
| Notes payable on  real estate, less current portion                                                                                                                                                         |                              |                                                                               | 122,656    |   |   |   | 7,118 |   |   |
| Other liabilities                                                                                                                                                                                           |                              |                                                                               | 10,028     |   |   |   | 6,459 |   |   |
| Total liabilities                                                                                                                                                                                           |                              |                                                                               | 363,244    |   |   |   | 273,601 |   |   |
| Minority interest                                                                                                                                                                                           |                              |                                                                               | 44,756     |   |   |   | 28,896 |   |   |
| 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 37,902,998 shares issued   and 35,605,007 shares outstanding in 2004, and 37,783,595 shares issued and  36,862,242 shares outstanding in 2003 |                              |                                                                               | 379        |   |   |   | 377 |   |   |
| Paid-in  capital                                                                                                                                                                                            |                              |                                                                               | 196,314    |   |   |   | 192,336 |   |   |
| Retained earnings                                                                                                                                                                                           |                              |                                                                               | 190,252    |   |   |   | 151,560 |   |   |
| Accumulated other  comprehensive income                                                                                                                                                                     |                              |                                                                               | 2,043      |   |   |   | 1,106 |   |   |
| Less:                                                                                                                                                                                                       | Treasury stock                    |                                                                               |       | (36,921 | ) |   |   | (8,363 | ) |   |
|                                                                                                                                                                                                        | Unearned stock  compensation, net |                                                                               |       | (11,117 | ) |   |   | (9,387 | ) |   |
| Total stockholders’  equity                                                                                                                                                                            |                              |                                                                               | 340,950    |   |   |   | 327,629 |   |   |
|                                                                                                                                                                                                        |                              |                                                                               | $          | 748,950 |   |   |   | $ | 630,126 |   |   |

 

See accompanying notes.

F-5

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFINCOME**
| ** **                                                                                                                                             | ** ** | **Years Ended December 31,**                                            | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                             | ** ** | **2004**                                                                               | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                                                                             | ** ** | **(in thousands, except share and per share data)** | ** ** |
| **REVENUES**                                                                                                                                           | ** ** | ** **                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| ***User  Services:***                                                                                                                                  |       |                                                                                   |       |   |   |   |   |
| Facilities  management                                                                                                                                 |       | $                                                                                      | 211,062    |   | $ | 208,936 |   | $ | 233,756 |   |
| Corporate advisory  services                                                                                                                           |       | 143,266                                                                                |       | 123,335 |   | 108,414 |   |
| Project management  services                                                                                                                           |       | 91,599                                                                                 |       | 65,500 |   | 58,134 |   |
|                                                                                                                                                   |       | 445,927                                                                                |       | 397,771 |   | 400,304 |   |
| ***Investor  Services:***                                                                                                                              |       |                                                                                   |       |   |   |   |   |
| Property  management                                                                                                                                   |       | 137,193                                                                                |       | 143,727 |   | 147,613 |   |
| Brokerage                                                                                                                                              |       | 114,478                                                                                |       | 95,593 |   | 95,657 |   |
| Construction  management                                                                                                                               |       | 11,187                                                                                 |       | 10,736 |   | 10,006 |   |
|                                                                                                                                                   |       | 262,858                                                                                |       | 250,056 |   | 253,276 |   |
| Development and  construction                                                                                                                          |       | 40,846                                                                                 |       | 44,299 |   | 55,112 |   |
|                                                                                                                                                   |       | 749,631                                                                                |       | 692,126 |   | 708,692 |   |
| Gain on  disposition of real estate                                                                                                                    |       | 28,795                                                                                 |       | 13,420 |   | 24,218 |   |
|                                                                                                                                                   |       | 778,426                                                                                |       | 705,546 |   | 732,910 |   |
| **COSTS AND EXPENSES**                                                                                                                                 |       |                                                                                   |       |   |   |   |   |
| Salaries, wages  and benefits                                                                                                                          |       | 493,438                                                                                |       | 452,195 |   | 472,810 |   |
| Commissions                                                                                                                                            |       | 120,357                                                                                |       | 98,957 |   | 87,396 |   |
| General and  administrative                                                                                                                            |       | 128,968                                                                                |       | 117,163 |   | 133,741 |   |
| Depreciation                                                                                                                                           |       | 10,119                                                                                 |       | 14,787 |   | 15,236 |   |
| Amortization                                                                                                                                           |       | 1,395                                                                                  |       | 1,991 |   | 2,579 |   |
| Interest                                                                                                                                               |       | 4,573                                                                                  |       | 6,088 |   | 10,219 |   |
|                                                                                                                                                   |       | 758,850                                                                                |       | 691,181 |   | 721,981 |   |
| Operating income                                                                                                                                       |       | 19,576                                                                                 |       | 14,365 |   | 10,929 |   |
| Interest and other  income                                                                                                                             |       | 2,808                                                                                  |       | 2,283 |   | 1,186 |   |
| Income from  continuing operations before income taxes, minority   interest and income from investments in unconsolidated subsidiaries                 |       | 22,384                                                                                 |       | 16,648 |   | 12,115 |   |
| Income tax expense                                                                                                                                     |       | (8,501                                                                                 | )          | (6,751 | ) | (5,400 | ) |
| Minority interest,  net of income tax (expense) benefit of $1,840, $(839) and $(1,302) in 2004,  2003 and 2002, respectively                           |       | (3,006                                                                                 | )          | 1,231 |   | 1,619 |   |
| Income from  investments in unconsolidated subsidiaries, net of income   tax expense of $6,718, $6,711 and $3,988 in 2004, 2003 and 2002, respectively |       | 10,971                                                                                 |       | 9,839 |   | 4,961 |   |
| Income from  continuing operations                                                                                                                     |       | 21,848                                                                                 |       | 20,967 |   | 13,295 |   |
| Income from  discontinued operations, net of income tax expense of $10,575, $49 and $2,701  in 2004, 2003 and 2002, respectively                       |       | 17,271                                                                                 |       | 73 |   | 3,358 |   |
| Net income                                                                                                                                             |       | $                                                                                      | 39,119     |   | $ | 21,040 |   | $ | 16,653 |   |
| Income per share from continuing operations:                                                                                                           |       |                                                                                   |       |   |   |   |   |
| Basic                                                                                                                                                  |       | $                                                                                      | 0.62       |   | $ | 0.59 |   | $ | 0.38 |   |
| Diluted                                                                                                                                                |       | $                                                                                      | 0.59       |   | $ | 0.57 |   | $ | 0.36 |   |
| Income per share from discontinued operations, net of  income taxes:                                                                                   |       |                                                                                   |       |   |   |   |   |
| Basic                                                                                                                                                  |       | $                                                                                      | 0.50       |   | $ | — |   | $ | 0.09 |   |
| Diluted                                                                                                                                                |       | $                                                                                      | 0.46       |   | $ | — |   | $ | 0.09 |   |
| Net income per share:                                                                                                                                  |       |                                                                                   |       |   |   |   |   |
| Basic                                                                                                                                                  |       | $                                                                                      | 1.12       |   | $ | 0.59 |   | $ | 0.47 |   |
| Diluted                                                                                                                                                |       | $                                                                                      | 1.05       |   | $ | 0.57 |   | $ | 0.45 |   |
| Weighted average common shares outstanding:                                                                                                            |       |                                                                                   |       |   |   |   |   |
| Basic                                                                                                                                                  |       | 35,064,453                                                                             |       | 35,572,493 |   | 35,741,754 |   |
| Diluted                                                                                                                                                |       | 37,239,801                                                                             |       | 36,780,515 |   | 36,797,012 |   |

 

See accompanying notes.

F-6

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITYYears ended December 31, 2004, 2003 and 2002(in thousands, except share data)**
| ** **                                                        | ** ** | **Common Shares** | ** ** | **Common  Stock Par** | ** ** | **Paid-In** | ** ** | **Retained** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Treasury**           | ** ** | **Unearned  Stock** | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|-------------|------------|--------------|------------|---------------------------------------|------------|------------------------|------------|---------------------|------------|------------------|------------|
| ** **                                                        | ** ** | **Issued**             | ** ** | **Treasury**               | ** ** | **Value**   | ** ** | **Capital**  | ** ** | **Earnings**                          | ** ** | **Income (Loss)** | ** ** | **Stock**           | ** ** | **Compensation** | ** ** | **Total** | ** ** |
| Balance at January 1, 2002                                   |       | 35,879,515             |       | 295,092                    |       |        | $          | 359          |       |                                  | $          | 176,354                |       | $                   | 115,084    |             |       | $ | (1,331 | ) |   | $ | (2,951 | ) |   | $ | (1,392 | ) |   | $ | 286,123 |   |
| Net income                                                        |       | —                 |       | —                     |       |        | —     |         |       | —                                |       | 16,653                 |       |                | —     |             |       | — |   |   | — |   |   | 16,653 |   |
| Issuance of restricted stock                                      |       | 30,000                 |       | —                     |       |        | —     |         |       | 417                                   |       | —                 |       |                | —     |             |       | — |   |   | (417 | ) |   | — |   |
| Forfeiture of restricted stock                                    |       | —                 |       | 41,614                     |       |        | —     |         |       | (96                                   | )          | —                 |       |                | —     |             |       | (398 | ) |   | 163 |   |   | (331 | ) |
| Amortization of unearned stock compensation                       |       | —                 |       | —                     |       |        | —     |         |       | —                                |       | —                 |       |                | —     |             |       | — |   |   | 840 |   |   | 840 |   |
| Issuance of common stock                                          |       | 318,305                |       | (288,059                   | )          |        | 3          |         |       | 2,302                                 |       | (863                   | )          |                | —     |             |       | 2,885 |   |   | — |   |   | 4,327 |   |
| Foreign currency translation adjustments, net of tax              |       | —                 |       | —                     |       |        | —     |         |       | —                                |       | —                 |       |                | 1,208      |             |       | — |   |   | — |   |   | 1,208 |   |
| Change in fair value of interest rate swap agreement,  net of tax |       | —                 |       | —                     |       |        | —     |         |       | —                                |       | —                 |       |                | (466       | )                |       | — |   |   | — |   |   | (466 | ) |
| Balance at December 31, 2002                                 |       | 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 adjustments, 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 adjustments, 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 |   |

 

See accompanying notes.

F-7

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**TRAMMELL CROW COMPANY AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFCASH FLOWS**
| ** **                                                             | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                             | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                             | ** ** | **(in thousands)**                     | ** ** |
| **Operating  activities**                                              |       |                                        |       |   |   |   |   |
| Cash flows from earnings:                                              |       |                                        |       |   |   |   |   |
| Net income                                                             |       | $                                           | 39,119     |   | $ | 21,040 |   | $ | 16,653 |   |
| Reconciliation of net  income to net cash provided by earnings:        |       |                                        |       |   |   |   |   |
| Depreciation                                                           |       | 10,208                                      |       | 15,001 |   | 15,236 |   |
| Amortization                                                           |       | 1,396                                       |       | 1,995 |   | 2,593 |   |
| Amortization of  employment contracts and unearned stock compensation  |       | 9,213                                       |       | 5,103 |   | 2,467 |   |
| Amortization of contract  intangibles                                  |       | 2,205                                       |       | 2,079 |   | 2,718 |   |
| Bad debt expense                                                       |       | 1,116                                       |       | 2,764 |   | 4,762 |   |
| Provision for  losses and writedowns for impairment on real estate     |       | 672                                         |       | 5,908 |   | 2,422 |   |
| Loss (gain) on  sale of real estate held for investments               |       | (17,084                                     | )          | 41 |   | — |   |
| Writedowns due to  impairment of goodwill, intangibles and investments |       | —                                      |       | — |   | 1,149 |   |
| Minority interest                                                      |       | 15,687                                      |       | (2,070 | ) | (2,921 | ) |
| Deferred income  tax provision                                         |       | (3,978                                      | )          | (356 | ) | 4,087 |   |
| Change in fair  value of interest rate swap agreement                  |       | —                                      |       | — |   | 72 |   |
| Income from  investments in unconsolidated subsidiaries                |       | (17,689                                     | )          | (16,550 | ) | (8,949 | ) |
| Net cash provided  by earnings                                         |       | 40,865                                      |       | 34,955 |   | 40,289 |   |
| Changes in operating  assets and liabilities:                          |       |                                        |       |   |   |   |   |
| Restricted cash                                                        |       | (2,303                                      | )          | 1,274 |   | (8,921 | ) |
| Accounts  receivable                                                   |       | (7,182                                      | )          | 16,834 |   | 39,267 |   |
| Receivables from  affiliates                                           |       | 16,365                                      |       | (12,240 | ) | 1,162 |   |
| Notes receivable  and other assets                                     |       | (8,776                                      | )          | (7,715 | ) | 11,839 |   |
| Real estate held  for sale and under development                       |       | (9,287                                      | )          | (7,271 | ) | 35,617 |   |
| Notes payable on  real estate held for sale and under development      |       | 7,953                                       |       | 3,651 |   | (26,438 | ) |
| Accounts payable  and accrued expenses                                 |       | 39,550                                      |       | 6,167 |   | (15,099 | ) |
| Payables to  affiliates                                                |       | (64                                         | )          | 104 |   | (1,609 | ) |
| Income taxes  payable/recoverable                                      |       | 10,653                                      |       | 4,347 |   | 148 |   |
| Other liabilities                                                      |       | 3,972                                       |       | 8,704 |   | (4,392 | ) |
| Net cash flows  from changes in working capital                        |       | 50,881                                      |       | 13,855 |   | 31,574 |   |
| Net cash provided  by operating activities                             |       | 91,746                                      |       | 48,810 |   | 71,863 |   |
| **Investing  activities**                                              |       |                                        |       |   |   |   |   |
| Expenditures for  furniture and equipment                              |       | (5,735                                      | )          | (10,458 | ) | (4,314 | ) |
| Additions to real  estate held for investment                          |       | (105,809                                    | )          | (26,303 | ) | — |   |
| Net proceeds from  disposition of real estate held for investment      |       | 67,298                                      |       | 16,479 |   | — |   |
| Cash related to  consolidation of entities (See Note 5)                |       | —                                      |       | — |   | 1,873 |   |
| Investments in  unconsolidated subsidiaries                            |       | (6,715                                      | )          | (6,594 | ) | (6,975 | ) |
| Distributions from  unconsolidated subsidiaries                        |       | 16,551                                      |       | 30,737 |   | 14,113 |   |
| Net cash provided  by (used in) investing activities                   |       | (34,410                                     | )          | 3,861 |   | 4,697 |   |
| **Financing  activities**                                              |       |                                        |       |   |   |   |   |
| Principal payments  on long-term debt and capital lease obligations    |       | (121,934                                    | )          | (98,695 | ) | (228,125 | ) |
| Proceeds from long-term  debt                                          |       | 108,538                                     |       | 86,923 |   | 190,214 |   |
| Contributions from  minority interest                                  |       | 19,742                                      |       | 3,488 |   | 4,778 |   |
| Distributions to  minority interest                                    |       | (19,569                                     | )          | (11,497 | ) | (7,808 | ) |
| Proceeds from  notes payable on real estate held for investment        |       | 77,832                                      |       | 5,148 |   | — |   |
| Payments on notes  payable on real estate held for investment          |       | (30,596                                     | )          | (3,259 | ) | — |   |
| Purchase of common  stock                                              |       | (37,934                                     | )          | (10,435 | ) | — |   |
| Proceeds from  exercise of stock options                               |       | 1,691                                       |       | 904 |   | 1,763 |   |
| Proceeds from  issuance of common stock                                |       | 2,915                                       |       | 2,363 |   | 2,564 |   |
| Net cash provided  by (used in) financing activities                   |       | 685                                         |       | (25,060 | ) | (36,614 | ) |
| Net increase in  cash and cash equivalents                             |       | 58,021                                      |       | 27,611 |   | 39,946 |   |
| Cash and cash  equivalents, beginning of year                          |       | 105,616                                     |       | 78,005 |   | 38,059 |   |
| Cash and cash  equivalents, end of year                                |       | $                                           | 163,637    |   | $ | 105,616 |   | $ | 78,005 |   |

 

See accompanying notes.

F-8

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**TRAMMELL CROW COMPANY AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME**
| ** **                                                                                                             | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                             | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                                             | ** ** | **(in thousands)**                     | ** ** |
| Net income                                                                                                             |       | $                                           | 39,119     |   | $ | 21,040 |   | $ | 16,653 |   |
| Other  comprehensive income:                                                                                           |       |                                        |       |   |   |   |   |
| Foreign currency translation adjustments, net of tax  expense of $674 in 2004, $1,033 in 2003 and $1,093 in 2002       |       | 937                                         |       | 1,358 |   | 1,208 |   |
| Change in fair value of interest rate swap  agreement, net of tax expense (benefit) of $229 in 2003 and $(317) in 2002 |       | —                                      |       | 337 |   | (466 | ) |
| Comprehensive income                                                                                                   |       | $                                           | 40,056     |   | $ | 22,735 |   | $ | 17,395 |   |

 

See accompanying notes.

F-9

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**TRAMMELLCROW COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2004(dollars in thousands, except per share data)**

**1.**   Organization and Summary of SignificantAccounting Policies

*Organization*

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

Within the Global Services segment, with approximately6,000 full-time equivalent (“FTE”) employees, the Company provides services touser clients, including corporations, hospitals, universities and governmentagencies, that are typically the primary occupants of the commercial propertieswith respect to which services are performed, and investor clients that are nottypically the primary occupants of the commercial properties with respect towhich services are performed. The building management services provided to userclients consist primarily of facilities management, which entails providingcomprehensive day-to-day occupancy related services, principally to largecorporations, healthcare systems and other users that occupy commercialfacilities in multiple locations. These services include administration andday-to-day maintenance and repair of client-occupied facilities.Brokerage services provided to user clients include corporate advisory servicessuch as portfolio management and tenant representation. Project managementservices provided to user clients include facility planning and projectmanagement, such as construction oversight, space planning, siteconsolidations, facilities design and workspace moves, adds and changes. Thebuilding management services provided to investor clients include propertymanagement services relating to all aspects of building operations, tenantrelations and oversight of building improvement processes. Brokerage servicesprovided to investor clients include project leasing and investment salesservices whereby the Company advises buyers, sellers and landlords inconnection with the leasing and sale of office, industrial and retail space andland. Project management services provided to investor clients includeconstruction management services such as space planning and tenant finishcoordination.

Within the Development andInvestment segment, encompassing approximately 200 FTE employees, the Companyprovides development services to investor and user clients—both those pursuantto which the 

F-10

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

**1.**   Organization andSummary of Significant Accounting Policies (Continued)

Companytakes an ownership or co-investment position in a project and those pursuant towhich the Company provides development services to others in exchange for fees.The Company provides comprehensive project development services and acquiresand disposes of commercial real estate projects. The development services providedinclude financial planning, site acquisition, procurement of approvals andpermits, design and engineering coordination, construction bidding andmanagement, tenant finish coordination, project closeout and project financingservices. The Company will continue to focus its efforts in this area onrisk-mitigated opportunities for investor clients and fee development andbuild-to-suit projects for user clients, including those in healthcare. Fromtime to time, the Company pursues development and investment activities,including opportunistic property acquisitions and new development, for its ownaccount or on a co-investment basis. With an organization comprised ofprofessionals dedicated fully to development and investment activities, theCompany is positioned to pursue and execute new development business,particularly programmatic business with the Company’s large investor clients,and exploit niche market opportunities.

*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 31,2003, and certain revenues and expenses for the first three quarters of 2004,and the years ended December 31, 2003 and 2002, have been reclassified toconform to the presentation at and for the year ended December 31, 2004(see Notes 9 and 14). As a result, certain balances differ from the amountsreported in previously filed documents.

*Use of Estimates*

The preparation of thefinancial statements in accordance with United States generally acceptedaccounting principles (“GAAP”) requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes. Actual results could differ from those estimates.

*Consolidation*

The accompanying consolidated financial statementsinclude the accounts of the Company, variable interest entities (“VIEs”) inwhich the Company is the primary beneficiary and other subsidiaries over whichthe Company has control. Intercompany accounts and transactions have beeneliminated.

The Company’s determination of the appropriate accountingmethod with respect to its variable interests in VIEs is based on FinancialAccounting Standards 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. The Company determineswhether an entity is a VIE, and if so, whether it should be consolidated, by utilizingjudgments and estimates that are inherently subjective. If the Company madedifferent judgments or utilized different estimates in these 

F-11

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

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

evaluations, it couldresult in differing conclusions as to whether or not an entity is a VIE andwhether or not to consolidate such entity.

The Company’sdetermination of the appropriate accounting method for all other investments insubsidiaries, including those that are not primary beneficiary interests inVIEs, is based on the amount of control or influence the Company has(considering its ownership interest) in the underlying entity. The Companyconsolidates those other subsidiaries over which it exercises control. Thoseother investments in subsidiaries where the Company has the ability to exercisesignificant influence (but not control) over operating and financial policiesof such subsidiaries (including certain subsidiaries where the Company has lessthan 20% ownership) are accounted for on the equity method. The Companyeliminates transactions with such equity method subsidiaries to the extent ofits ownership in such subsidiaries. Accordingly, the Company’s share of theearnings or losses of these equity method subsidiaries is included inconsolidated net income. All remaining investments of the Company are carriedat cost. Under either the equity or cost method, impairment losses arerecognized upon evidence of other-than-temporary losses 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 property management and facilities managementservices based on various quantitative and/or qualitative criteria specified inthe management agreement. These fees are recognized when quantitative criteriahave been met or, for those incentive fees based on qualitative criteria, uponapproval of the fee by the client. The Company’s management and incentive feerevenues are not recognized to the extent that such revenues are subject tofuture performance contingencies, but are recognized once the contingency hasbeen resolved.

The Company’s project leasing and tenantrepresentation transactions are subject to commission agreements between theCompany and the client which typically describe the calculation of the fee andwhen the Company earns such fee. The recognition of revenue for eachtransaction is dictated by the terms of the relevant commission agreement, eachof which may be unique. The commission agreements generally provide that 50% ofthe commission is earned and payable upon execution of the lease and 50% is earnedand payable upon the tenant’s occupancy of the space. Generally the first 50%of the commission is not contingent on the subsequent occupancy of the space.However, sometimes these agreements contain refund provisions whereby the first50% of the commission may be refundable should the tenant not occupy thesubject space. In cases where refund provisions or other contingencies exist,the Company does not recognize the revenue until the contingency is eliminated.Investment sales brokerage revenue is recognized upon closing of the underlyingreal estate transaction. The Company does not recognize these revenues untilthere is evidence of an arrangement, services have been rendered, the price isdeterminable, and collectibility is reasonably assured. These policies havebeen in place since the Company’s initial public offering in 1997.

F-12

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

**1.**   Organization andSummary of Significant Accounting Policies (Continued)

Development services and project management services generatefees from development and construction management projects and net constructionrevenues, which are gross construction revenues net of subcontract costs. Forprojects where the Company operates as a general contractor, fees are generallyrecognized using the percentage-of-completion method based on costs incurred asa percentage of total expected costs. Gross construction services revenuestotaled $35,438, $33,526, and $45,065 and subcontract costs totaled $30,986,$26,215 and $33,332 in 2004, 2003 and 2002, respectively. Some development andconstruction management and project management assignments are subject toagreements between the Company and the client that describe the calculation offees and when the Company earns such fees. The earnings terms of theseagreements dictate when the Company recognizes the related revenues. TheCompany may also earn incentive development fees by reaching specified timetable, leasing or budget targets, as defined in the relevant developmentservices agreement. Certain incentive development fees allow the Company toshare in any increase in the fair value of the developed real estate asset.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.

Gains on disposition of real estate are recognizedupon sale of the underlying project in accordance with Statement of FinancialAccounting Standards No. 66, *Accountingfor Sales of Real Estate*.

The Company records deferred income to the extent thatcash payments have been received, or amounts have been billed, in accordancewith the terms of underlying agreements, but such amounts have not yet met thecriteria for revenue recognition in accordance with GAAP. When such revenuesmeet the appropriate criteria, the Company recognizes revenue as permitted.

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.

*Long-Lived Assets*

***Real Estate***

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 meetsall 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 

F-13

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

**1.**   Organization andSummary of Significant Accounting Policies (Continued)

for sale to real estateunder development (current or non-current) or real estate held for investmentis measured individually at the lower of its fair value at the date of thereclassification or its carrying amount before it was classified as “held forsale,” 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 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,which is determined using a discounted cash flow analysis or marketcomparisons. Buildings and improvements included in real estate held forinvestment are depreciated using the straight-line method over estimated usefullives, generally 39 years. Tenant improvements included in real estateheld for investment are amortized using the straight-line method over theshorter of their estimated useful lives or terms of the respective leases.

When acquiring real estate with existing buildings,the Company allocates the purchase price between land, building and intangiblesrelated to in-place leases, if any, based on their relative fair values. Thefair values of acquired land and buildings are determined based on an estimateddiscounted future cash flow model with lease-up assumptions as if the buildingwas vacant upon acquisition. The fair value of in-place leases includes thevalue of net lease intangibles for above or below-market rents and tenantorigination costs, determined on a lease by lease basis. The capitalized valuesfor both net lease intangibles and tenant origination costs are amortized overthe term of the underlying leases. Amortization related to net lease intangiblesis recorded as either an increase to or a reduction of rental income andamortization for tenant origination costs is recorded to amortization expense.

FAS 144 extends thereporting of a discontinued operation to a “component of an entity,” but furtherrequires that a component be classified as a discontinued operation if theoperations and cash flows of the component have been or will be eliminated fromthe ongoing operations of the entity in the disposal transaction and the entitywill not have any significant continuing involvement in the operations of thecomponent 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 

F-14

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

**1.**   Organization andSummary of Significant AccountingPolicies (Continued)

andlosses on discontinued operations in the periods in which they occur. TheCompany has certain real estate assets that are land parcels and constitute acomponent of an entity. From time to time, the Company disposes of these landparcels in smaller lots. An individual lot that is part of a larger land parceldoes not constitute a component of an entity within the meaning of paragraph 41of FAS 144 until it is either classified as held for sale in accordance withFAS 144 or sold.

***Goodwill and Indefinite Lived Intangibles***

Goodwill reflects theexcess of purchase price over the fair value of specifically identified netassets purchased. Accumulated amortization of goodwill was $9,837 and $9,957 atDecember 31, 2004 and 2003, 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 has determined that no impairment of its goodwill exists at December 31,2004.

***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.The Company also classifies any writedowns of such capitalized upfront paymentsor costs due to impairment in value, such as might occur upon the earlytermination of a contract, as a reduction of revenue. See Note 15 fordiscussion of impairment losses recognized on contract intangibles in 2002.

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 

F-15

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

**1.**   Organization andSummary of Significant Accounting Policies (Continued)

contractually tied to anemployee’s future service with the Company, the amount is expensed ascompensation over the period of time that such future services to the Companyare required, as stipulated in the applicable agreement. Amounts loaned toemployees under these arrangements are included in notes and other receivablesand other assets in the Company’s consolidated balance sheet.

In connection with certainacquisitions, the Company has recorded intangible assets related to the valueof certain management contracts acquired. These intangible assets are amortizedover periods from five to six years.

*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.

*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, 2004and 2003, restricted cash primarily consists of $8,254 and $7,647,respectively, received by the Company from clients for future development costson buildings being renovated or constructed by the Company on behalf of suchclients. Contractual restrictions provide that these funds can only be used topay for construction costs related to the underlying renovation or constructionprojects.

*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. Leasehold improvements are amortized over theshorter of the remaining lease term or the remaining useful life.

*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.

F-16

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

**1.**   Organization andSummary of Significant Accounting Policies (Continued)

*Earnings Per Share*

The weighted-averagecommon shares outstanding used to calculate diluted earnings per share for2004, 2003 and 2002 include 2,175,348, 1,208,022 and 1,055,258 shares,respectively, to reflect the dilutive effect of unvested restricted stock and outstandingoptions to purchase shares of common stock.

*Stock-BasedCompensation*

The Company has elected to use the intrinsic methodunder Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees* (“APB25”), to account for its stock-based compensation arrangements (seeNote 10). 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 Company recognizes compensation expenserelated to restricted stock awards over the vesting period of the underlyingaward in an amount equal to the fair market value of the Company’s stock on thedate of grant.

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 and 2002, respectively:risk-free interest rates of 3.21% and 4.86%; a dividend yield of 0.00%;volatility factors of the expected market price of the Company’s common stockof 0.407 and 0.420; and a weighted-average expected life of the optionsof seven years. The Company made no option grants in 2004.

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.In addition, 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-17

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

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

For the purpose of pro formadisclosures, the estimated fair value of the options is amortized to expenseover the options’ vesting period. Pro forma information is as follows:
| ** **                                                                                                                                             | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                                             | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net income, as  reported                                                                                                                               |       | $                                           | 39,119     |   | $ | 21,040 |   | $ | 16,653 |   |
| Add: Stock-based  employee compensation expense included in net income, net of related tax  effects                                               |       | 4,097                                       |       | 2,216 |   | 287 |   |
| Deduct: Stock-based  employee compensation expense (benefit) determined under fair value based  method for all awards, net of related tax effects |       | 5,844                                       |       | 5,034 |   | (15 | ) |
| Pro forma net  income                                                                                                                                  |       | $                                           | 37,372     |   | $ | 18,222 |   | $ | 16,955 |   |
| Net income per  share:                                                                                                                                 |       |                                        |       |   |   |   |   |
| Basic—as reported                                                                                                                                 |       | $                                           | 1.12       |   | $ | 0.59 |   | $ | 0.47 |   |
| Basic—pro forma                                                                                                                                   |       | $                                           | 1.07       |   | $ | 0.51 |   | $ | 0.47 |   |
| Net income per  share:                                                                                                                                 |       |                                        |       |   |   |   |   |
| Diluted—as reported                                                                                                                               |       | $                                           | 1.05       |   | $ | 0.57 |   | $ | 0.45 |   |
| Diluted—pro forma                                                                                                                                 |       | $                                           | 1.00       |   | $ | 0.50 |   | $ | 0.46 |   |

 

*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. The initialrecognition and measurement provisions of FIN 45 are applicable on aprospective basis to guarantees issued or modified after December 31,2002. See Note 20 for disclosures related to the Company’s guarantees inaccordance 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, 2004, the estimated settlement value of non-controllinginterests in the Company’s consolidated limited life subsidiaries is $9,859, ascompared to book value (included in 

F-18

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

**1.**   Organization andSummary of Significant Accounting Policies (Continued)

minorityinterest on the Company’s balance sheet) of $7,497. The excess of settlementvalue over book value is driven by an even larger estimated appreciation ofcertain consolidated real estate assets and investments from the Company’s bookvalue, offset by estimated selling costs and debt prepayment 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 must be adopted no later than July 1,2005. Early adoption will be permitted in periods in which financial statementshave not yet been issued. The Company expects to adopt FAS 123R on July 1,2005. FAS 123R permits public companies to adopt its requirements using one oftwo methods:

A “modified-prospective” method in which compensationcost is recognized beginning with the effective date of adoption (a) basedon the requirements of FAS 123R for all share-based payments granted after theeffective date and (b) based on the requirements of FAS 123 for all awardsgranted to employees prior to the effective date of FAS 123R that remainunvested on the effective date.

A “modified-retrospective” method which includes therequirements of the modified-prospective method described above, but alsopermits entities to restate based on the amounts previously recognized underFAS 123 for purposes of pro forma disclosures either (a) all prior periodspresented or (b) prior interim periods of the year of adoption.

The company plans to adopt FAS 123R using themodified-prospective method.

As permitted by FAS 123, the Company currentlyaccounts for share-based payments to employees using APB 25’s intrinsic valuemethod and, as such, generally recognizes no compensation cost for employeestock options. Accordingly, the adoption of FAS 123R’s fair value method couldhave a significant impact on the Company’s results of operations, although itwill have no impact on the Company’s overall financial position. The impact ofadoption of FAS 123R cannot be predicted at this time because it will depend onlevels of share-based payments granted in the future. However, had the Companyadopted FAS 123R in 2002, 2003 and 2004, the impact of that standard would haveapproximated the impact of FAS 123 as described in the disclosure of pro formanet income and earnings per share in this Note 1. FAS 123R also requires thebenefits of tax deductions in excess of recognized compensation cost to bereported as a financing cash flow, rather than as an operating cash flow asrequired under current literature. This requirement will reduce net operatingcash flows and increase net financing cash flows in periods after adoption.While the company cannot estimate what those amounts will be in the future(because they depend on, among other things, when employees exercise stockoptions), the amount of operating cash flows recognized in prior periods forsuch excess tax deductions were $542, $86 and $170 in 2004, 2003 and 2002,respectively.

F-19

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

**2.**   Variable Interest Entities

The Company was involved in forming a legal entity toact primarily as an agent of the Company to enter into policies with insurancecarriers. The policies are for various types of insurance, including generalliability, workers’ compensation and auto. The entity is wholly-owned by anemployee of the Company who holds the appropriate local insurance agent’slicense required to issue these insurance policies on behalf of the insurancecarriers. The entity collects premiums and remits them to the insurancecarriers. In exchange, the entity receives commissions from the insurancecarriers and remits a portion of the commission revenue to the Company(determined at the Company’s full discretion) in accordance with a facilitiesand services agreement. Based upon its evaluation, the Company consolidatesthis entity as the primary beneficiary of a VIE under FIN 46. The Company has$1,696 recorded in restricted cash and $400 recorded in cash and cashequivalents that serve as collateral for the VIE’s obligations to the insurancecarriers.

In September 2004, the Company issued a budgetguaranty relating to a development project. Under the budget guaranty, theCompany is responsible for all costs in excess of an approved budget ofapproximately $35,400. The Company was involved in the design of the underlyingentity and has determined that its budget guaranty represents a variableinterest in a VIE for which the Company is not the primary beneficiary. TheCompany cannot estimate its actual maximum exposure to loss as a result of itsinvolvement with this VIE because the budget guaranty is unlimited. However,based on the Company’s experience of minimal payments under similararrangements and the existence of a guaranteed maximum contract between thegeneral contractor and the owner of the project that mitigates the Company’srisk, the Company believes that its exposure to loss is minimal.

In December 2003, the Company sold a parcel ofland for $1,750 to an independent third party (see Note 3). The considerationreceived included a $1,125 interest-bearing note from the buyer which theCompany has determined is a variable interest in a VIE. The VIE is a singleasset entity financed with the Company’s note and another loan subordinate tothe Company’s note. Based on the Company’s evaluation, the Company is not theprimary beneficiary of the entity, and therefore, has not consolidated theentity. The Company’s maximum exposure to loss as a result of its involvementwith this VIE is limited to its outstanding note balance of $1,099 as of December 31,2004.

The Company is part of a co-lender group with anindependent third party that issued a mezzanine loan to the owner of two officebuildings. In April 2000, the Company provided $567 of the total $5,667mezzanine loan. At that time, another independent third-party lender providedthe senior financing of $19,100 to the owner. The Company also providesbuilding management and leasing services for the buildings under a long-termcontract at market rates for such services. The mezzanine loan arrangement isconsidered to be a variable interest in the entity that owns the property,which the Company believes is a VIE. However, based upon the Company’sevaluation, the Company is not the primary beneficiary of the entity andtherefore, the Company has not consolidated the VIE. The VIE sold one of itsbuildings in December 2004 and paid a portion of the Company’s notereceivable at that time. The Company’s maximum exposure to loss as a result ofits involvement with this VIE is limited to its outstanding note balance of$438 as of December 31, 2004.

F-20

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

**2.**   VariableInterest Entities (Continued)

In 2002, the Company paid$1,500 to an entity in exchange for entering into a management agreement andobtaining participation rights in the residual cash flows of the entityavailable to its equity holders after repayment of debt. This arrangement isconsidered to be a variable interest in the entity, which is a VIE. The Companyholds no other interest in the entity. The entity is a single purpose entitywhich owns and operates a real estate asset with an estimated fair value inexcess of $90,000 as of December 31, 2004. Based on the Company’sevaluation, the Company is not the primary beneficiary of the entity andtherefore, has not consolidated the entity. The Company’s maximum exposure toloss as a result of its involvement with this VIE is limited to $1,500(recorded in other assets on the Company’s consolidated balance sheet) as of December 31,2004.

**3.**   RealEstate

TheCompany provides build-to-suit services for its clients and also develops orpurchases certain projects which it intends to sell to institutional investorsupon project completion or redevelopment. Therefore, the Company has ownershipof real estate until such projects are sold. Certain real estate assets ownedby the Company secure the outstanding balances of underlying mortgage orconstruction loans. All real estate is included in the Company’s Developmentand Investment segment (see Note 22). At December 31, real estateconsists of the following:
| ** **                                                 | ** ** | **2004** | ** ** |
|------------------------------------------------------------|------------|----------|------------|
| ** **                                                 | ** ** | **Land** | ** ** | **Buildings and  Improvements** | ** ** | **Other** | ** ** | **Total** | ** ** |
| Real estate under  development (current)                   |       | $        | 6,200      |   |   | $ | 14,556 |   |   | $ | — |   | $ | 20,756 |   |
| Real estate  included in assets held for sale (see Note 9) |       | 2,664    |       |   | 1,281 |   |   | — |   | 3,945 | (1) |
| Real estate under  development  (non-current)              |       | 30,713   |       |   | 29,817 |   |   | — |   | 60,530 |   |
| Real estate held  for investment                           |       | 94,932   |       |   | 39,676 | (2) |   | 1,146 | (3) | 135,754 |   |
|                                                       |       | $        | 134,509    |   |   | $ | 85,330 |   |   | $ | 1,146 |   | $ | 220,985 |   |

 
| ** **                                                 | ** ** | **2003** | ** ** |
|------------------------------------------------------------|------------|----------|------------|
| ** **                                                 | ** ** | **Land** | ** ** | **Buildings and  Improvements** | ** ** | **Other** | ** ** | **Total** | ** ** |
| Real estate under  development (current)                   |       | $        | 25,502     |   |   | $ | 13,839 |   |   | $ | — |   | $ | 39,341 |   |
| Real estate included in  assets held for sale (see Note 9) |       | 32,284   |       |   | 38,919 |   |   | — |   | 71,203 | (1) |
| Real estate under  development  (non-current)              |       | 5,760    |       |   | 585 |   |   | — |   | 6,345 |   |
| Real estate held for  investment                           |       | 36,837   |       |   | 13,105 | (2) |   | 124 | (3) | 50,066 |   |
|                                                       |       | $        | 100,383    |   |   | $ | 66,448 |   |   | $ | 124 |   | $ | 166,955 |   |

----

(1)          Net of allowance of $0and $1,048 at December 31, 2004 and 2003, respectively, to reflect assetsat fair value less cost to sell.

F-21

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

**3.**   Real Estate(Continued)

(2)          Net of accumulateddepreciation of $1,000 and $307 at December 31, 2004 and 2003,respectively.

(3)          Includes balances forlease intangibles and tenant origination costs of $(1,238) and $2,384 at December 31,2004, and $101 and $23 at December 31, 2003, respectively. The Companyrecords lease intangibles and tenant origination costs upon acquiring buildingswith in-place leases. The balances are shown net of amortization (recorded as areduction of rental income for lease intangibles and as amortization expensefor tenant origination costs).

In 2004, 2003 and 2002, the Company recordedprovisions for losses on real estate (included in general and administrativeexpenses or discontinued operations in the consolidated statement of income) of$94, $1,903 and $539, respectively, to increase the allowances on real estateheld for sale to reflect assets at fair value less cost to sell. With respectto one project to which these allowances relate, the related non-recourse notepayable matured in 2004, and the Company conveyed the underlying property tothe lender in order to satisfy the note.

During 2004, 2003 and 2002, the Company recordedwritedowns for impairment of real estate (not classified as held for sale atthe time of such writedowns) totaling $578, $4,005, and $623, respectively. In2004 and 2003, $120 and $2,826 of such impairments are included in discontinuedoperations in the consolidated statement of income, and all remaining amountsin all periods are included in general and administrative expenses.

The 2004 writedowns for impairment primarily relate toa vacant land parcel in a market in which rental rates continue to decline andvacancy rates continue to increase. The Company obtained market comparisons forthe land parcel and determined that, based on those market comparisons, thevalue of the land was impaired. 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 theCompany. The Company sold the underlying asset and funded $316 of the recoursenote payable in August 2004.****The 2003writedowns also reflect****impairment relatedto a single-tenant office/industrial real estate project. The non-recourse notepayable related to the project had matured and subsequently, the Companyconveyed the underlying property to the lender to satisfy the note. The fairvalue of the asset was determined based on a discounted cash flow projectionprior to the conveyance of the property to the lender.

In 2002, the Company recorded a writedown forimpairment of $623 primarily related to a land parcel located in an office parkheavily dependent on the telecom industry. Due to significant layoffs in thetelecom industry and the resulting vacancies in office space, the Companyobtained market comparisons for the land parcel and determined that, based onthose market comparisons, the value of the land was impaired.

In 2002, the Company recorded adjustments totaling$1,472 to the carrying amount of buildings and improvements previouslyclassified as “held for sale,” but reclassified to real estate held forinvestment, when adopting the provisions of FAS 144. The adjustments were madeto reflect depreciation that would have been recorded had the assets beencontinuously classified as real estate held for investment since the Company’sacquisition of the assets. Of the total $1,472 adjustment, $1,260 was recordedas provision for 

F-22

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

**3.**   Real Estate(Continued)

losses on real estate(included in general and administrative expenses in the statement of income).Certain assets owned by Trammell Crow Investment Fund IV, L.P. (“Fund IV”),which was accounted for using the equity method until December 31, 2002(see Note 5), were reclassified from real estate held for sale to real estateheld for investment. Accordingly, income from investments in unconsolidatedsubsidiaries (before income taxes) reflects an adjustment of $212 fordepreciation on these assets since the reclassification of these assetsoccurred prior to the consolidation of Fund IV by the Company.

Also in 2004, the Company sold a 150-acre land parcelto a third party for cash of $30,010. At the time of sale, a consolidatedsubsidiary of the Company (other than the entity that sold the property) held apurchase contract on seven acres of the 150-acre land parcel. As a result, theCompany recorded the transaction specific to the seven-acre parcel as afinancing transaction, rather than a sale. As of December 31, 2004, realestate and other assets held for sale includes $344 of real estate, andliabilities related to real estate and other assets held for sale includes$1,386 of notes payable related to this seven-acre land parcel.

In 2003, the Company sold a parcel of land for $1,750to an entity determined to be a VIE, of which $1,125 of the considerationreceived was in the form of an interest-bearing note from the buyer (seeNote 2). The Company retained a unilateral right to repurchase theproperty at any time through 2006, in addition to maintaining the right toapprove any plans for development on the property. If the Company exercises itsrepurchase option, the Company would repay the amount it received from thebuyer, 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 31,2004, real estate and other assets held for sale includes $1,408 of real estateand $1,099 of notes receivable, and liabilities related to real estate andother assets held for sale includes $1,750 of notes payable and $211 of accruedinterest related to this parcel of land.

The estimated costs to complete the 39 projects underdevelopment or to be developed by the Company as of December 31, 2004,total $294,929. At December 31, 2004, the Company had commitments for thesale of four 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 $10,081 and $7,115, respectively in 2004, $9,434 and $4,632,respectively, in 2003 and $15,271 and $6,354, respectively, in 2002.

F-23

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

**4.**   Furnitureand Equipment

Furnitureand equipment consist of the following at December 31:
| ** **                                                                                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Owned assets, at  cost                                                                                         |       | $        | 47,418     |     | $          | 61,427 |   |
| Less: Accumulated  depreciation on owned assets                                                                |       | 30,388   |       | 41,011   |       |
|                                                                                                           |       | 17,030   |       | 20,416   |       |
| Assets under  capital leases                                                                                   |       | 4,890    |       | 4,185    |       |
| Less: Accumulated  amortization on assets under capital leases                                                 |       | 3,271    |       | 3,296    |       |
|                                                                                                           |       | 1,619    |       | 889      |       |
| Less: Furniture  and equipment, net, included in real estate and other assets held for  sale (see Note 9) |       | —   |       | 15       |       |
| Furniture and equipment,  net                                                                                  |       | $        | 18,649     |     | $          | 21,290 |   |

 

**5.**   Investmentsin Unconsolidated Subsidiaries

Investmentsin unconsolidated subsidiaries consist of the following at December 31:
| ** **  | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------|------------|----------|------------|----------|------------|
| Real estate |       | $        | 39,829     |     | $          | 35,546 |   |
| Other       |       | 34,261   |       | 29,479   |       |
|        |       | $        | 74,090     |     | $          | 65,025 |   |

 

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.

In 2004, the Company recorded a writedown forimpairment of $536 related to an investment in an unconsolidated subsidiaryaccounted for by the equity method. The unconsolidated subsidiary owns asuburban office building in a market which has experienced high vacancies andwhere a planned major airport expansion, which was anticipated to positivelyimpact the geographic area where the building is located, has been delayed fora number of years. The Company reviewed the undiscounted cash flows expected tobe generated by the investment and determined that they are less than thecarrying amount of the investment. Accordingly, the investment was written downto its fair value determined based upon the expected present value ofdiscounted cash flow projections.

The aggregate carrying amount of the Company’s costmethod investments is $2,441 at December 31, 2004. The Company evaluatedthe carrying amount of its cost method investments for impairment anddetermined that no impairment exists as of December 31, 2004.

On December 31, 2002, the Company paid $13 topurchase all of the outstanding shares of common stock of Realty Holdings, Inc.(“RHI”), a corporation that was formed to invest in real estate partnerships(the “RHI Purchase”). As a result, the Company became the sole shareholder ofRHI on such date. Prior to the RHI purchase, the Company had invested $100 inexchange for all of the 500 shares of non-voting 

F-24

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

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

preferred stock of RHI,and eleven individuals, all of whom were current or former executives of theCompany, collectively owned the 990 shares of outstanding common stock of RHI(with each of these individuals investing $1). These executives’ ownership of commonstock of RHI was not contingent on continued employment with the Company.However, a majority of the stockholders of RHI had the ability to cause RHI topurchase any other stockholder’s shares of RHI at any time for any reason. RHIalso had the right of first refusal to purchase the shares of a commonstockholder if such stockholder wished to sell his shares and had a bona fidewritten offer from a third party. RHI is controlled by its Board of Directors,which is elected by the common shareholder(s). Each of the three directors isan officer of the Company, but none was a stockholder of RHI. Through December 31,2001, RHI had invested in five single-purpose real estate projects as a0.5% or 1.0% general partner, with wholly-owned subsidiaries of the Company as99.5% or 99.0% limited partners. RHI and the Company each had minimalinvestments in such subsidiaries, since the underlying real estate projectswere 100% financed with third-party debt.

RHI has controlling interests in each of the entitiesin which it invests. Prior to the RHI Purchase, the Company did not control RHIand, as such, it accounted for its investment in RHI under the equity methodand, accordingly, recorded its share of profits and losses of such underlyingentities as income (loss) from unconsolidated subsidiaries. As a result of theRHI Purchase, the Company owns 100% of RHI, and accordingly, on December 31,2002, began to account for RHI as a consolidated subsidiary.

RHI has a 0.5% general partnership interest in FundIV, a discretionary development and investment fund in which the Company holdsa 37.0% limited partnership interest, with the remaining limited partnerinterests held by unrelated parties. Since RHI controls Fund IV, and RHI is awholly-owned subsidiary of the Company as of December 31, 2002, theCompany began consolidating Fund IV on December 31, 2002.

The Company’s share of income (loss) of RHI and FundIV was $341 and $(379), respectively, for 2002 (up to the time that RHI andFund IV were consolidated by the Company).

F-25

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

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

The consolidation of RHIand Fund IV on December 31, 2002, resulted in the following non-cashchanges in the Company’s balance sheet:
| Assets:                                                        |   |   |   |
|----------------------------------------------------------------|--------|--------|--------|
| Real estate                                                    |   | $      | 67,208 |   |
| Investments in unconsolidated subsidiaries                     |   | (6,001 | )      |
| Accounts receivable                                            |   | 410    |   |
| Notes and other receivables                                    |   | 279    |   |
| Other current assets                                           |   | 776    |   |
| Other assets                                                   |   | 47     |   |
| Net non-cash  change in assets                                 |   | 62,719 |   |
| Liabilities:                                                   |   |   |   |
| Notes payable on real estate                                   |   | 47,341 |   |
| Accounts payable                                               |   | 1,580  |   |
| Accrued expenses                                               |   | 1,044  |   |
| Other current liabilities                                      |   | 75     |   |
| Net non-cash  change in liabilities                            |   | 50,040 |   |
| Minority interest                                              |   | 14,552 |   |
| Cash from consolidation  of previously unconsolidated entities |   | $      | 1,873  |   |

 

The Company owns approximately 10% of the outstandingstock of Savills, a property services firm headquartered in the United Kingdomand a leading provider of real estate services in Europe, Asia-Pacific andAustralia. The investment is classified as an “other” investment in the firsttable of this Note 5. The Company accounts for its interest in Savills onthe equity method because it has significant influence over Savills due to thefollowing factors: (i) the Company has the right to designate two membersof Savills’ board of directors (which has significant influence over themanagement of Savills), which is comparable to the rights of investors owningapproximately 20% at the time the Company acquired the shares; and (ii) theCompany has a strategically significant commercial relationship with Savills.The Company also has an option giving it the right to purchase from Savills thenumber of shares necessary to increase its share ownership to approximately 20%of the Savills shares then outstanding. This option is exercisable at any timeduring the period from May 9, 2003 through May 9, 2005 at 120% of themarket price prevailing at the time of exercise. The Company’s portion ofSavills’ undistributed earnings totals $9,302 at December 31, 2004, and isincluded in retained earnings. The aggregate market value of the investment at December 31,2004, is $59,500, which exceeds its carrying value.

F-26

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

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

Summarized financialinformation for unconsolidated subsidiaries accounted for on the equity methodis as follows:
| ** **                    | ** ** | **December 31** | ** ** |
|-------------------------------|------------|----------------------|------------|
| ** **                    | ** ** | **2004**             | ** ** | **2003** | ** ** |
| **Real Estate:**              |       |                 |       |   |   |
| Real estate                   |       | $                    | 287,791    |   | $ | 294,317 |   |
| Other assets                  |       | 50,482               |       | 28,898 |   |
| Total assets                  |       | $                    | 338,273    |   | $ | 323,215 |   |
| Notes payable on  real estate |       | $                    | 160,799    |   | $ | 120,958 |   |
| Other liabilities             |       | 9,986                |       | 12,806 |   |
| Equity                        |       | 167,488              |       | 189,451 |   |
| Total liabilities and equity  |       | $                    | 338,273    |   | $ | 323,215 |   |
| **TFK  Retail, Ltd.:(1)**     |       |                 |       |   |   |
| Real estate                   |       | $                    | —     |   | $ | 101,106 |   |
| Other assets                  |       | —               |       | 4,870 |   |
| Total assets                  |       | $                    | —     |   | $ | 105,976 |   |
| Notes payable on  real estate |       | $                    | —     |   | $ | 104,195 |   |
| Other liabilities             |       | —               |       | 2,483 |   |
| Equity                        |       | —               |       | (702 | ) |
| Total liabilities and equity  |       | $                    | —     |   | $ | 105,976 |   |
| **Other:**                    |       |                 |       |   |   |
| Current assets                |       | $                    | 410,161    |   | $ | 327,632 |   |
| Non-current  assets           |       | 122,826              |       | 117,880 |   |
| Total assets                  |       | $                    | 532,987    |   | $ | 445,512 |   |
| Current  liabilities          |       | $                    | 282,425    |   | $ | 192,893 |   |
| Non-current  liabilities      |       | 37,445               |       | 65,803 |   |
| Minority interest             |       | 303                  |       | 1,003 |   |
| Equity                        |       | 212,814              |       | 185,813 |   |
| Total liabilities and equity  |       | $                    | 532,987    |   | $ | 445,512 |   |
| **Total:**                    |       |                 |       |   |   |
| Assets                        |       | $                    | 871,260    |   | $ | 874,703 |   |
| Liabilities                   |       | $                    | 490,655    |   | $ | 499,138 |   |
| Minority interest             |       | 303                  |       | 1,003 |   |
| Equity                        |       | 380,302              |       | 374,562 |   |
| Total liabilities  and equity |       | $                    | 871,260    |   | $ | 874,703 |   |

 

F-27

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

**5.**   Investments in Unconsolidated Subsidiaries (Continued)
| ** **               | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------|------------|---------------------------------------------|------------|
| ** **               | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Real Estate:**         |       |                                        |       |   |   |   |   |
| Total revenues           |       | $                                           | 22,957     |   | $ | 25,945 |   | $ | 47,776 |   |
| Total expenses           |       | 13,530                                      |       | 14,880 |   | 28,622 |   |
| Net income               |       | $                                           | 9,427      |   | $ | 11,065 |   | $ | 19,154 |   |
| **TFK Retail, Ltd.:(1)** |       |                                        |       |   |   |   |   |
| Total revenues           |       | $                                           | 38,311     |   | $ | 16,277 |   | $ | 16,307 |   |
| Total expenses           |       | 2,289                                       |       | 20,938 |   | 17,238 |   |
| Net income               |       | $                                           | 36,022     |   | $ | (4,661 | ) | $ | (931 | ) |
| **Other:**               |       |                                        |       |   |   |   |   |
| Total revenues           |       | $                                           | 679,856    |   | $ | 558,802 |   | $ | 450,087 |   |
| Total expenses           |       | 614,727                                     |       | 524,187 |   | 433,911 |   |
| Net income               |       | $                                           | 65,129     |   | $ | 34,615 |   | $ | 16,176 |   |
| **Total:**               |       |                                        |       |   |   |   |   |
| Total revenues           |       | $                                           | 741,124    |   | $ | 601,024 |   | $ | 514,170 |   |
| Total expenses           |       | 630,546                                     |       | 560,005 |   | 479,771 |   |
| Net income               |       | $                                           | 110,578    |   | $ | 41,019 |   | $ | 34,399 |   |

----

(1)          Forthe year ended December 31, 2004, TFK Retail, Ltd. (“TFK”), an entity thatheld a portfolio of real estate assets, represents a significant subsidiary inaccordance with Rule 3-09 of Regulation S-X. The Company holds a16.97% ownership interest in TFK, which disposed of all its assets in 2004.

**6.**   Accrued Expenses

Accruedexpenses consist of the following at December 31:
| ** **                                                                                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Payroll and  bonuses                                                                                                |       | $        | 67,315     |     | $          | 42,316 |   |
| Commissions                                                                                                         |       | 36,171   |       | 38,337   |       |
| Development costs                                                                                                   |       | 16,601   |       | 15,045   |       |
| Deferred income                                                                                                     |       | 13,160   |       | 5,691    |       |
| Interest                                                                                                            |       | 455      |       | 1,175    |       |
| Insurance                                                                                                           |       | 2,150    |       | 3,032    |       |
| Restructuring  charges (see Note 17)                                                                                |       | 1,902    |       | 1,864    |       |
| Other                                                                                                               |       | 11,229   |       | 9,584    |       |
|                                                                                                                |       | 148,983  |       | 117,044  |       |
| Less: Accrued  expenses included in liabilities related to real estate and other assets held  for sale (See Note 9) |       | 225      |       | 2,722    |       |
|                                                                                                                |       | $        | 148,758    |     | $          | 114,322 |   |

 

F-28

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

**7.**   Long-Term Debt and Capital LeaseObligations

Long-termdebt consists of the following at December 31:
| ** **                                                                                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Borrowings under  $150,000 line of credit with a bank (the “Credit Facility”)                        |       |     | $          | —   |       |   | $ | 10,000 |   |
| Borrowings under  a $25,000 discretionary line of credit with a bank                                           |       |     | —     |     |       | — |   |
| Borrowings under  a £3,900  short-term borrowing facility with a bank (the “European Facility”) |       |     | —     |     |       | — |   |
| Other                                                                                                          |       |     | 14         |     |       | 1,095 |   |
| Total long-term  debt                                                                                          |       |     | 14         |     |       | 11,095 |   |
| Less: Current  portion of long-term debt                                                                       |       |     | 6          |     |       | 1,081 |   |
|                                                                                                           |       |     | $          | 8        |       |   | $ | 10,014 |   |

 

During June 2002, the Company entered into theCredit Facility. Borrowings under the Credit Facility are due in June 2005,and bear interest at 1) the greater of prime or the Federal FundsEffective Rate plus 0.5%, plus a margin up to 0.75%, or 2) theEurocurrency rate, plus a margin ranging from 1.75% to 2.5%, payable monthly.The weighted average interest rate for borrowings under the Credit Facility was2.89% in 2004.

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

The Company is subject to various covenants associatedwith the Credit Facility, such as maintenance of minimum equity and liquidityand certain key financial data. In addition, the Company may not pay dividendsor make other distributions on account of its common stock exceeding 50% of theprevious year’s net income before depreciation and amortization, and there arecertain restrictions on investments and acquisitions that can be made by theCompany. In September 2004, the Credit Facility was amended, primarily topermit certain stock transactions, including the Company’s Modified DutchAuction tender offer (see Note 10). At December 31, 2004, the Company isin compliance with all covenants of the Credit Facility, except the interestrate agreement requirement as discussed in this Note 7 (which noncompliance waswaived as herein discussed).

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 $150,000 commitment. At December 31,2004, the Company has unused borrowing capacity of $126,454 (taking intoaccount letters of credit outstanding) under its Credit Facility.

Under the Credit Facility, the Company pays aquarterly fee equal to 0.25% of the unused commitments under the line. Inaddition, the Credit Facility requires the Company to enter into one or moreinterest rate agreements for the Company’s floating rate indebtedness in excessof $30,000 (other than construction loans under which interest is capitalizedin accordance with GAAP) ensuring the net interest is fixed, capped or hedged.The Company was not in compliance with the Credit Facility’s interest 

F-29

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

**7.**   Long-Term Debtand Capital Lease Obligations(Continued)

rate agreement requirementat December 31, 2004. The Company held $1,542 of floating rateindebtedness (in excess of the $30,000 allowed under the Credit Facility),which was not subject to the interest rate cap agreement (see Note 19). TheCompany obtained a waiver effective February 28, 2005, from the lendersunder the Credit Facility waiving compliance with this covenant for the periodcommencing on December 31, 2004, until, but not including, June 30,2005.

Borrowings under the Company’s $25,000 discretionaryline of credit are unsecured and reduce the borrowing capacity under the CreditFacility dollar for dollar. Each loan under the line matures in five businessdays, no later than June 28, 2005. Each loan bears interest at a rateagreed upon between the Company and the bank (weighted average borrowing rateof 2.89% in 2004), payable at the maturity of each loan.

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 2.75% (weightedaverage borrowing rate of 5.95% in 2004), are payable quarterly, and arerecourse to the Company.

Principalmaturities of long-term debt at December 31, 2004, are as follows:
| 2005   |   | $ | 6      |   |
|--------|--------|---|--------|--------|
| 2006   |   | 5 |   |
| 2007   |   | 3 |   |
|   |   | $ | 14     |   |

 

The Company has obligations under capital leases,primarily for furniture and equipment, with maturity dates through December 2005,and bearing interest at various rates ranging from 0.41% to 7.53% per annum at December 31,2004. Capital lease obligations are secured by the underlying assets.

Capital lease obligationsconsist of the following at December 31:
| ** **                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
| Capital lease  obligations                          |       | $        | 363        |     | $          | 2,011 |   |
| Less: Current  portion of capital lease obligations |       | 363      |       | 1,297    |       |
|                                                |       | $        | —     |     | $          | 714 |   |

 

Futureminimum payments under capital lease obligations at December 31, 2004, areas follows: 
| 2005                                         |   | $ | 366    |   |
|----------------------------------------------|--------|---|--------|--------|
| Less: Amount  representing interest          |   | 3 |   |
| Present value of net  minimum lease payments |   | $ | 363    |   |

 

F-30

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

**8.**   Notes Payable on Real Estate

TheCompany has loans secured by real estate (the majority of which areconstruction loans) consisting of the following at December 31:
| ** **                                                                                                                | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Current portion of notes  payable on real estate                                                                          |       | $        | 21,937     |     | $          | 47,235 |   |
| Notes payable on real  estate included in liabilities related to real estate and other assets held  for sale (see Note 9) |       | 5,111    |       | 48,913   |       |
| Total notes payable on  real estate, current portion                                                                      |       | 27,048   |       | 96,148   |       |
| Notes payable on real  estate, non-current portion                                                                        |       | 122,656  |       | 7,118    |       |
| Total notes payable on real estate                                                                                        |       | $        | 149,704    |     | $          | 103,266 |   |

 

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

At December 31, 2004,$9,370 of the current portion and $18,178 of the non-current portion of notespayable on real estate are recourse to the Company (beyond being recourse tothe single-purpose entity that holds the real estate asset and is the obligoron the note payable). With respect to a project to which $3,322 of the currentrecourse obligations relate, the Company has an agreement with an investorclient to purchase the project upon completion, the proceeds of which will beused to repay the related note payable.

Principal maturities ofnotes payable on real estate at December 31, 2004, are as follows:
| 2005   |   | $      | 13,372  |   |
|--------|--------|--------|---------|--------|
| 2006   |   | 34,491 |    |
| 2007   |   | 96,460 |    |
| 2008   |   | 5,381  |    |
|   |   | $      | 149,704 |   |

 

Interest rates on loans outstanding at December 31,2004, range from 4.06% to 12.0%. Generally, interest only 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 in2004 and 2003 totaled $10,898 and $2,726, 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, resulting in a non-cashincrease in notes payable on real estate totaling $796.

The Company has aparticipating mortgage loan obligation related to a real estate project that isclassified as real estate under development (non-current). The participatingmortgage loan is subordinate to a construction loan on the underlying project.The lender participates in net operating cash flow of the mortgaged real estateproject, if any, and capital proceeds, net of related expenses, upon the saleof the 

F-31

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

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

project,after payment of amounts due under the construction loan. The lender receives6% fixed interest on the outstanding balance of its note, compounded monthly,and participates in 35% to 80% of proceeds remaining after the constructionloan is paid, based on reaching various internal rates of return. The amount ofthe participating liability and the related debt discount are $10,030 and$4,894, respectively, at December 31, 2004. In 2004, the Company amortized$5,136 of the debt discount, which has been capitalized to real estate underdevelopment (non-current).

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

Real estate and otherassets held for sale include completed real estate projects or land for sale intheir present condition that have met all of the “held for sale” criteria ofFAS 144 and other assets directly related to such projects. Liabilitiesrelated to real estate and other assets held for sale have been included as asingle line item in the Company’s balance sheet. In accordance with FAS 144,balances related to assets classified as held for sale at December 31,2004, that were not classified as such at December 31, 2003, have beenreclassified to real estate and other assets held for sale in the Company’sbalance sheet as of December 31, 2003.

Real estate and otherassets held for sale and related liabilities are as follows at December 31:
| ** **                                                               | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Assets:                                                                  |       |     |       |     |       |
| Notes and other  receivables                                             |       | $        | 1,099      |     | $          | 1,285 |   |
| Real estate held for  sale (see Note 3)                                  |       | 3,945    |       | 71,203   |       |
| Other current assets                                                     |       | 1        |       | 1,481    |       |
| Furniture and equipment,  net                                            |       | —   |       | 15       |       |
| Other assets                                                             |       | —   |       | 66       |       |
| Total real estate and  other assets held for sale                        |       | 5,045    |       | 74,050   |       |
| Liabilities:                                                             |       |     |       |     |       |
| Accrued expenses (see  Note 6)                                           |       | 225      |       | 2,722    |       |
| Notes payable on real  estate held for sale (see Note 8)                 |       | 5,111    |       | 48,913   |       |
| Other current  liabilities                                               |       | —   |       | 142      |       |
| Total liabilities  related to real estate and other assets held for sale |       | 5,336    |       | 51,777   |       |
| Net real estate and other assets held for sale                           |       | $        | (291       | )        | $          | 22,273 |   |

 

 

**10.**   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.

F-32

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

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

In September 2004, the Company commenced aModified Dutch Auction tender offer whereby it offered to purchase up to4,444,444 shares of its common stock. Under the terms of the tender offer, theCompany invited stockholders to tender their shares at a purchase price not inexcess of $15.75 nor less than $13.50 per share. The tender offer was completedin October 2004, and as a result, the Company purchased 2,354,437 sharesof common stock priced at $15.75 per share for a total of $37,934, includingthe costs of the tender offer. The transaction was financed from the Company’savailable cash, and the Company placed the repurchased shares in treasury.

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.The options 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, 2004, common shares reservedfor future issuance under the Assumed Option Plan total 896,135.

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.Options to acquire shares of common stock granted by the Company under theLong-Term Plan have exercise prices equal to the fair market value of the commonstock on the date of grant and expire 7 to 10 years from the date ofgrant.

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

The Long-Term Plan also provides for the awards ofStock Appreciation Rights, Restricted Stock and Performance Units. In 2004,2003 and 2002, the Company granted 671,313 shares, 1,636,500 shares and 30,000shares, respectively, of restricted stock under the Long-Term Plan. Therestricted stock vests over periods of up to five years. The weighted-averagegrant date fair value per share of the Company’s restricted stock issued in2004, 2003 and 2002 was $12.90, $8.75 and $13.90, respectively. The Companyrecognized compensation expense of $6,605, $3,727 and $519 in 2004, 2003 and2002, respectively, related to the grants of restricted stock, net of forfeitures.

At December 31, 2004, common shares reserved forfuture issuance under the Long-Term Plan total 6,079,903 shares, of which1,033,722 common shares are available for future awards.

F-33

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

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

Asummary of the Company’s stock option activity and related information, for theyears ended December 31, 2004, 2003 and 2002, is as follows:
| ** **                                           | ** ** | **Exercise Price  of $3.85 (below  market price  at grant date)** | ** ** | **Exercise Price  of $9.74 to  $14.50 (at  market price  at grant date)** | ** ** | **Exercise Price  of $14.51 to  $22.75 (at  market price  at grant date)** | ** ** | **Exercise Price  of $22.76 to  $36.00 (at  market price  at grant date)** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|-----------|------------|
| ** **                                           | ** ** | **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 |   |   |   |   |

 

F-34

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

**10.**   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** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|-----------|------------|
| ** **                                           | ** ** | **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 |   |   |   |   |

 
| ** **                                            | ** ** | **2002** | ** ** |
|-------------------------------------------------------|------------|----------|------------|
| **Options outstanding:**                              |       |     |       | *** *** |   |   |   | *** *** |   |   |   | *** *** |   |   |   | *** *** |   |   |   |
| Beginning of year                                     |       |     | 1,288,179  |   |   |   | 2,863,453 |   |   |   | 2,979,552 |   |   |   | 217,298 |   |   | 7,348,482 |   |
| Granted                                               |       |     | —     |   |   |   | 1,228,533 |   |   |   | — |   |   |   | — |   |   | 1,228,533 |   |
| Exercised                                             |       |     | (270,784   | ) |   |   | (65,000 | ) |   |   | — |   |   |   | — |   |   | (335,784 | ) |
| Forfeited                                             |       |     | —     |   |   |   | (731,500 | ) |   |   | (693,667 | ) |   |   | (51,851 | ) |   | (1,477,018 | ) |
| Expired                                               |       |     | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   | — |   |
| End of year                                           |       |     | 1,017,395  |   |   |   | 3,295,486 |   |   |   | 2,285,885 |   |   |   | 165,447 |   |   | 6,764,213 |   |
| **Weighted-average  exercise price of options:** |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Granted                                               |       |     | —     |   |   |   | $ | 13.90 |   |   |   | — |   |   |   | — |   |   |   |   |
| Exercised                                             |       |     | $          | 3.85 |   |   |   | $ | 11.08 |   |   |   | — |   |   |   | — |   |   |   |   |
| Forfeited                                             |       |     | —     |   |   |   | $ | 11.51 |   |   |   | $ | 17.62 |   |   |   | $ | 31.64 |   |   |   |   |
| Outstanding at end  of year                           |       |     | $          | 3.85 |   |   |   | $ | 11.82 |   |   |   | $ | 17.69 |   |   |   | $ | 29.04 |   |   |   |   |
| Weighted-average  fair value of options granted       |       |     | —     |   |   |   | $ | 7.19 |   |   |   | — |   |   |   | — |   |   |   |   |
| Weighted-average  remaining contractual life          |       |     | 4.6 years  |   |   |   | 6.3 years |   |   |   | 5.6 years |   |   |   | 5.3 years |   |   |   |   |
| **Options exercisable:**                              |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Number of options                                     |       |     | 1,017,395  |   |   |   | 925,028 |   |   |   | 2,082,132 |   |   |   | 152,103 |   |   | 4,176,658 |   |
| Weighted-average exercise price                       |       |     | $          | 3.85 |   |   |   | $ | 11.15 |   |   |   | $ | 17.70 |   |   |   | $ | 29.09 |   |   |   |   |

 

F-35

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

**11.   Income Taxes**

Theprovision for income taxes consists of the following for the years ended December 31:
| ** **    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------|------------|----------|------------|----------|------------|----------|------------|
| Current       |       |     |       |     |       |     |       |
| Federal       |       | $        | 22,061     |     | $          | 11,505   |       | $ | 7,133 |   |
| State         |       | 4,454    |       | 2,323    |       | 1,440    |       |
| International |       | 743      |       | (384     | )          | 731      |       |
|          |       | 27,258   |       | 13,444   |       | 9,304    |       |
| Deferred      |       |     |       |     |       |     |       |
| Federal       |       | (2,749   | )          | 754      |       | 3,401    |       |
| State         |       | (555     | )          | 152      |       | 686      |       |
|          |       | (3,304   | )          | 906      |       | 4,087    |       |
|          |       | $        | 23,954     |     | $          | 14,350   |       | $ | 13,391 |   |

 

The components of the netdomestic deferred tax asset are summarized below as of December 31:
| ** **                                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets                                    |       |     |       |     |       |
| Impairment of investments                              |       | $        | 14,539     |     | $          | 16,630 |   |
| Compensation expense relating to restricted stock      |       | 5,526    |       | 2,784    |       |
| Compensation expense relating to stock options         |       | 4,473    |       | 4,798    |       |
| Dispositions of real estate                            |       | 4,017    |       | 256      |       |
| Insurance reserves                                     |       | 1,374    |       | —   |       |
| Depreciation and amortization                          |       | 1,190    |       | 1,740    |       |
| Bad debts                                              |       | 1,111    |       | 1,151    |       |
| Restructuring charges relating to future rent  expense |       | 607      |       | 732      |       |
| Basis difference on real estate                        |       | —   |       | 342      |       |
| Other                                                  |       | 3,810    |       | 3,050    |       |
|                                                   |       | 36,647   |       | 31,483   |       |
| Less: valuation allowance                              |       | 961      |       | 1,026    |       |
| Total deferred tax assets                              |       | 35,686   |       | 30,457   |       |
| Deferred tax liabilities                               |       |     |       |     |       |
| Goodwill amortization                                  |       | (3,973   | )          | (2,648   | )          |
| Foreign currency translation adjustments               |       | (1,897   | )          | (1,223   | )          |
| Basis difference on real estate                        |       | (585     | )          | —   |       |
| Other                                                  |       | (2,275   | )          | (2,934   | )          |
| Total deferred tax liabilities                         |       | (8,730   | )          | (6,805   | )          |
| Net deferred tax asset                                 |       | $        | 26,956     |     | $          | 23,652 |   |

 

F-36

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

**11.**   Income Taxes (Continued)

The components of the netinternational deferred tax asset are summarized below as of December 31:
| ** **                                | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax asset                        |       |     |       |     |       |
| International tax attribute carryforwards |       | $        | 1,739      |     | $          | 1,217 |   |
| Less: valuation allowance                 |       | 1,739    |       | 1,217    |       |
| 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 has determined that valuationallowances required at December 31, 2004, to reduce deferred tax assets tothe amounts that will more likely than not be realized are $961 relating tocertain nonqualified stock options and $1,739 relating to international taxattribute carryforwards. The changes in valuation allowances for the current yearare a decrease of $65 for the domestic deferred tax asset and an increase of$522 for the international deferred tax asset.

Componentsof deferred income taxes are as follows at December 31:
| ** **              | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|
| Current                 |       | $        | 4,021      |     | $          | 3,754 |   |
| Noncurrent              |       | 22,935   |       | 19,898   |       |
| Net deferred tax  asset |       | $        | 26,956     |     | $          | 23,652 |   |

 

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 are:
| ** **                                                                              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Tax at statutory  rate applied to income from continuing operations before income taxes |       | $        | 12,432     |     | $          | 11,829   |       | $ | 8,856 |   |
| State income  taxes, net of federal tax benefit                                         |       | 1,523    |       | 1,450    |       | 1,086    |       |
| Non-deductible  meals                                                                   |       | 756      |       | 704      |       | 727      |       |
| Change in  international valuation allowance                                            |       | 522      |       | 280      |       | 848      |       |
| International                                                                           |       | 221      |       | (664     | )          | (117     | )          |
| Change in  domestic valuation allowance                                                 |       | (65      | )          | 346      |       | (702     | )          |
| Income from  investments in unconsolidated subsidiaries                                 |       | (1,640   | )          | (743     | )          | (259     | )          |
| Other                                                                                   |       | (370     | )          | 1,099    |       | 251      |       |
|                                                                                    |       | $        | 13,379     |     | $          | 14,301   |       | $ | 10,690 |   |

 

F-37

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

**12.**   Operating Leases

The Company has commitments under operating leases foroffice space and office equipment. During the years ended December 31,2004, 2003 and 2002, rent expense was $23,197, $22,909 and $25,353,respectively.

Minimum future rentals tobe paid and received under noncancelable operating lease and subleasecommitments in effect at December 31, 2004, are as follows:
| ** ** | ** ** | **Leases** | ** ** | ** Subleases ** | ** ** | **Net** | ** ** |
|------------|------------|------------|------------|---------------------------|------------|---------|------------|
| 2005       |       | $          | 21,164     |                      |       | $       | (1,481     | ) |   | $ | 19,683 |   |
| 2006       |       | 17,720     |       |                      | (1,091     | )       |       | 16,629 |   |
| 2007       |       | 12,637     |       |                      | (660       | )       |       | 11,977 |   |
| 2008       |       | 7,969      |       |                      | (62        | )       |       | 7,907 |   |
| 2009       |       | 5,800      |       |                      | (16        | )       |       | 5,784 |   |
| Thereafter |       | 3,934      |       |                      | —     |    |       | 3,934 |   |
|       |       | $          | 69,224     |                      |       | $       | (3,310     | ) |   | $ | 65,914 |   |

 

**13.**   Employee Benefit Plans

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 2004, 2003 and 2002,including amounts reimbursed by clients, was $7,799, $7,035 and $7,102,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. The ESPP is available to allemployees and requires a six-month holding period for stock purchased under theplan. The Company has reserved 2,000,000 shares of common stock for issuanceunder the ESPP, of which 1,863,125 have been issued as of December 31,2004. In December 2004, the Company amended the ESPP (subject tostockholder approval) to increase the number of shares of common stock reservedfor issuance by 1,000,000 shares, increase the required holding period totwelve months, and establish the date of issuance as the date to value theshares for purposes of establishing the per share purchase price.

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

Realestate dispositions excluding those accounted for as discontinued operationsduring the years ended December 31 are as follows:
| ** **     | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------|------------|----------|------------|----------|------------|----------|------------|
| Projects sold  |       | 18       |       | 19       |       | 36       |       |
| Net sale price |       | $        | 127,325    |     | $          | 67,115   |       | $ | 142,149 |   |
| Gain on sale   |       | $        | 28,795     |     | $          | 13,420   |       | $ | 24,217 |   |

 

F-38

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

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

The net sale prices for 2004 and 2003 noted aboveinclude notes receivable for $14,250 and $230, respectively, from purchasers ofreal estate projects.

In September 2004, the Company sold a real estateproject for $15,875. The Company is leasing back a portion of the space in theproject, and also had other continuing obligations to the buyer at the time ofthe sale. As a result, the transaction, initially recorded as a financingtransaction, was ultimately accounted for as a sale when the continuingobligation period ended in the fourth quarter of 2004. The gain on this salewill be recognized over the 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, including $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 (increase inaccounts receivable of $2, decrease in other current assets of $164, decreasein real estate held for sale of $10,698 and a decrease in other assets of $93),and a non-cash reduction in liabilities related to real estate and other assetsheld for sale of $10,950 (increase in accounts payable of $57, decrease inaccrued expenses of $273 and a decrease in notes payable on real estate of$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), a decrease in accountsreceivable (included in real estate and other assets held for sale) of $4, anda non-cash reduction in liabilities related to real estate and other assetsheld for sale of $3,029 (decrease in accounts payable of $202 and a decrease innotes payable on real estate of $2,827). The Company expects to recognize again on disposition of $789 as a result of this transaction. The Company isrecognizing the gain based on the percentage-of-completion method of profitrecognition because it retained the obligation to complete the in-processdevelopment activities. As of December 31, 2004, $357 of the gain wasrecognized with the balance of the expected gain deferred into future periods.

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), adecrease in cash (included in real estate and other assets held for sale) of$92, and a non-cash reduction in liabilities related to real estate and otherassets held for sale of $11,804 (decrease in accounts payable of $61, increasein accrued expenses of $164 and a decrease in notes payable on real estate of$11,907), and a non-cash increase in minority interest of $210. The Companyrecognized a gain on disposition of $1,530 as a result of this transaction.

In connection with a sale in 2002, the purchaserassumed a portion of the Company’s note with respect to such project, resultingin a non-cash decrease in notes payable on real estate totaling $12,000. 

F-39

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

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

The Company repaid theremaining balance of the note with the sales proceeds. The Company recorded aloss on disposition of real estate related to this project totaling $797.

In 2002, upon substantial completion of two realestate projects under development, the Company and outside partners contributeda total of $2,703 and $30,398, respectively, to the Company’s consolidated realestate subsidiaries owning such projects. The funds were used to pay off debttotaling $33,101, and the Company was released from its guarantees relating tosuch debt. As it no longer exercised control over the entities, the Companybegan using the equity method of accounting for these two real estate subsidiaries,resulting in a non-cash reduction of real estate held for sale totaling $33,776and a non-cash increase in investments in unconsolidated subsidiaries totaling$675. Also in 2002, the Company contributed its interest in a real estateproject to a new partnership owned 48% by the Company, 32% by anon-wholly-owned partnership controlled and consolidated by the Company and 20%by partners unrelated to the Company. Because the outside partners control thenew partnership, the Company accounts for its interest in this partnership asan equity method investment. The transaction resulted in a non-cash reductionin real estate held for sale totaling $23,711, a non-cash reduction in notespayable on real estate held for sale totaling $9,400, a non-cash reduction inaccrued interest totaling $795, a non-cash increase in investment inunconsolidated subsidiaries totaling $18,310, and a non-cash increase inminority interest totaling $4,000. Additionally, in another transaction during2002, the partnership agreement of a real estate partnership that wasconsolidated by the Company was amended, eliminating the Company’s control ofthe partnership. As it no longer exercised control over the partnership, theCompany began using the equity method of accounting for this real estatesubsidiary, resulting in a non-cash reduction in real estate held for sale of$15,931, a non-cash reduction in notes payable on real estate held for sale of$10,821, a non-cash increase in investments in unconsolidated subsidiaries of$1,591, and a non-cash reduction in minority interest of $3,710. No gains orlosses were recognized on these transactions.

Realestate dispositions accounted for as discontinued operations under FAS 144during the years ended December 31 are as follows:
| ** **     | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------|------------|----------|------------|----------|------------|----------|------------|
| Projects sold  |       | 4        |       | 4        |       | 4        |       |
| Net sale price |       | $        | 77,960     |     | $          | 25,064   |       | $ | 31,151 |   |
| Gain on sale   |       | $        | 40,481     |     | $          | 5,336    |       | $ | 6,559 |   |

 

F-40

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

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

The components ofdiscontinued operations for the years ended December 31 are as follows:
| ** **                                                | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Revenues:**                                             |       |     |       |     |       |     |       |
| Development and  construction                             |       | $        | 377        |     | $          | 182      |       | $ | 416 |   |
| Gain on  disposition of real estate                       |       | 40,481   |       | 5,336    |       | 6,559    |       |
|                                                      |       | $        | 40,858     |     | $          | 5,518    |       | $ | 6,975 |   |
| **Expenses:**                                             |       |     |       |     |       |     |       |
| Salaries, wages  and benefits                             |       | —   |       | 55       |       | 110      |       |
| Commissions                                               |       | 1,375    |       | 279      |       | 423      |       |
| General and  administrative                               |       | 454      |       | 3,588    |       | 243      |       |
| Depreciation                                              |       | 90       |       | 214      |       | —   |       |
| Amortization                                              |       | —   |       | 4        |       | 14       |       |
| Interest                                                  |       | 257      |       | 1,281    |       | 127      |       |
|                                                      |       | 2,176    |       | 5,421    |       | 917      |       |
| Operating income                                          |       | 38,682   |       | 97       |       | 6,058    |       |
| Interest and  other income                                |       | 5        |       | 25       |       | 1        |       |
| Income from  discontinued operations, before income taxes |       | 38,687   |       | 122      |       | 6,059    |       |
| Income tax expense                                        |       | (10,575  | )          | (49      | )          | (2,701   | )          |
| Minority interest                                         |       | (10,841  | )          | —   |       | —   |       |
| Income from discontinued  operations, net of income taxes |       | $        | 17,271     |     | $          | 73       |       | $ | 3,358 |   |

 

**15.**   IntangibleAssets and 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.

F-41

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

**15.**   Intangible Assets and Acquisitions of Real Estate ServiceCompanies (Continued)

Intangible assets consistof the following at December 31:
| ** **                                      | ** ** | **2004**                    | ** ** | **2003**                      | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **                                      | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Contract  intangibles                           |       | $                           | 13,672     |                          |       | $ | (10,210 | ) |   | $ | 13,299 |   |   | $ | (8,181 | ) |   |
| Employment  contracts and noncompete agreements |       | 8,584                       |       |                          | (8,584     | ) |   | 11,201 |   |   | (10,952 | ) |   |
| Acquired  management contracts                  |       | 4,026                       |       |                          | (4,026     | ) |   | 8,094 |   |   | (7,546 | ) |   |
|                                            |       | $                           | 26,282     |                          |       | $ | (22,820 | ) |   | $ | 32,594 |   |   | $ | (26,679 | ) |   |

 

In 2002, the Company recorded a writedown of $1,149,recognized as a reduction of facilities management revenue, due to impairmentof a contract intangible for which the underlying management agreement wasterminated in 2002. The contract intangible was written down to zero.

Theestimated future charges for the intangible asset balance at December 31,2004, are as follows:
| 2005                 |   | $     | 2,319  |   |
|----------------------|--------|-------|--------|--------|
| 2006                 |   | 1,009 |   |
| 2007                 |   | 89    |   |
| 2008                 |   | 43    |   |
| 2009 and  thereafter |   | 2     |   |
|                 |   | $     | 3,462  |   |

 

**16.**   Dispositionsof Businesses

Effective March 1, 2002, the Company soldbusinesses that were engaged primarily in the development of retail centers andthe management and leasing of regional malls to an affiliate of FaisonEnterprises, Inc. (the “Faison Sale”). These businesses were acquired in1998 as part of the Company’s acquisition of portions of the businesses ofFaison & Associates and Faison Enterprises, Inc. (the “FaisonAcquisition”). The Company continues to provide leasing and management servicesof non-retail assets and certain retail projects under contracts acquired inconnection with the Faison Acquisition. The Company retained most of the networking capital in the disposed businesses and carried interests in certaindevelopment projects and received approximately $1,825 in exchange for suchbusinesses and related assets upon completion of the transaction. Because theCompany has continuing involvement with the disposed businesses, the operationshave not been reported as discontinued operations. The Company recorded a gainof $79 upon disposition of the businesses in the first quarter of 2002. TheFaison Sale was motivated by changes in the Company’s overall retail strategy,operating losses incurred in these businesses, and declining forecasts forfuture operations of these businesses (primarily due to the downturn in thereal estate investment market and continuing consolidation of regional mallownership into REIT’s, which tend to self-manage their properties). Henry J.Faison, Chairman of the Board of Faison 

F-42

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

**16.**   Dispositions ofBusinesses (Continued)

Enterprises, served on theCompany’s Board of Directors from the time of the Faison Acquisition until May 24,2002, the day of the Company’s 2002 annual meeting of stockholders.

On November 25, 2002,Trammell Crow Savills Asia-Pacific completed the sale to an unrelated thirdparty of three of its operations primarily engaged in project managementservices, effective October 1, 2002 (the “Transfer Date”). The purchaseprice of approximately $2,607, which was settled in the second quarter of 2003,was offset by $414 for amounts to be paid to the purchaser as a provision forlosses on certain assets and contracts transferred to the purchaser on theTransfer Date. In addition, $320 was offset against the purchase price formanagement services that the purchaser provided to the remaining Trammell CrowSavills Asia-Pacific operations for one year following the completion of thesale. The Company recorded a loss of approximately $297 in the fourth quarterof 2002 with respect to the sale, including professional fees and provisions tobe made to the seller, offset by minority interest. Because there were notclearly distinguishable operations and cash flows for the operations sold, theoperations have not been reported as discontinued operations.

**17.**   RestructuringCharges

During 2001, the Company announced an internalreorganization of its business designed to consolidate all of the property andfacilities management, brokerage and corporate advisory, and construction andproject management services delivered to both user and investor clients under asingle leadership structure. As part of its restructuring plans, primarilyduring the fourth quarter of 2001, the Company closed several offices andidentified offices with excess space that it intends to sublease to thirdparties. The Company recorded restructuring charges primarily comprised oflease obligations, costs to sublease excess space (offset by estimated futuresublease income) and miscellaneous furniture and equipment writeoffs. Theseaccruals will be relieved over the remaining terms of the underlying leasesthrough March 2012. In 2004, the Company recognized $356 of additionalcharges due to a decrease in the expected amount of sublease income related toone of the identified offices with excess space.

Activity related to theCompany’s lease obligations and related costs included in restructuringaccruals in 2004 and 2003 is as follows:
| ** **                         | ** ** | **Lease Obligations  and Related Costs** | ** ** |
|------------------------------------|------------|---------------------------------------------------------|------------|
| Balance at  December 31, 2002 |       |                                                    | $          | 2,609 |   |   |
| Cash payments                      |       |                                                    | 745        |   |   |
| Balance at  December 31, 2003 |       |                                                    | 1,864      |   |   |
| Charges                            |       |                                                    | 356        |   |   |
| Cash payments                      |       |                                                    | 318        |   |   |
| Balance at  December 31, 2004 |       |                                                    | $          | 1,902 |   |   |

 

**18.**   RelatedParty Transactions

In 2004, 2003 and 2002, the Company derived 2%, 2% and4%, respectively, of its total revenues from services provided principally totwo affiliated parties that are no longer affiliated with the Company. In 

F-43

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

**18.**   Related PartyTransactions (Continued)

addition, in 2004, 2003and 2002, the Company derived 2%, 2% and 1%, respectively, of its totalrevenues from services provided to a client of which one of the Company’sdirectors is an officer. The Company also paid amounts in 2004, 2003 and 2002,representing 0.6%, 0.1% and 0.1%, respectively, of its total expenses to thissame client. These costs primarily relate to hosting computer servers in anoff-site location on behalf of the Company.

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, 2004, 2003 and 2002, theCompany derived 1% of its total revenues from such unconsolidated subsidiaries.

**19.**   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 rates under the interest rate swapagreement for 2003 and 2002 were 1.37% and 1.80%, respectively.

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

Accordingly, changes in fair value of the interestrate swap agreement attributable solely to the passage of time and paymentsmade to settle the liability serve to reduce the liability, thereforebenefiting net income in future periods. The Company recorded payments of $588and $3,611 in 2003 and 2002, respectively, against its liability that wouldhave been recorded to interest expense had the interest rate 

F-44

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

**19.**   FinancialInstruments (Continued)

swap agreement beendesignated as a hedge since its inception. Changes in the fair value of theinterest rate swap agreement attributable to changes in benchmark marketinterest rates represent the effective portion of the hedge relationship andwere recorded in other comprehensive income in accordance with FAS 133.Any hedge ineffectiveness was recorded in current period earnings. The interestrate swap agreement expired on March 24, 2003, therefore the liabilitybalance is zero at December 31, 2004 and 2003. The Company recordedincremental interest expense of $567 in 2003 and $765 in 2002. Since theinterest rate swap agreement expired on March 24, 2003, there was norelated interest expense recorded in the year ended December 31, 2004.

On September 1, 2002, as a result of a decreasein the Company’s floating interest rate debt, the Company dedesignated $50,000of the interest rate swap agreement previously designated as a hedge in orderto maintain the relationship between the notional amount of the designatedportion of the interest rate swap agreement and the amount of the Company’sfloating rate debt. On November 30, 2002, an additional $25,000 wasdedesignated. By dedesignating a portion of the interest rate swap agreement asa hedge, the remaining designated portion was still deemed an effective hedge.As a result of these changes, the Company recognized $(4) and $72 ofexpense in the years ended December 31, 2003 and 2002, respectively,related to the change in fair value of the portion of the interest rate swapagreement that was not designated as a hedge.

In December 2004, the Company entered into aninterest rate cap agreement with a notional amount of $10,000 expiring March 24,2005, under which the Company will receive payments if the 30-day LIBOR basedinterest rate exceeds 3.0%. The interest rate cap agreement has not beendesignated as an effective hedge (although it was entered into for hedgingpurposes), and the Company will recognize changes in the fair value of theinterest rate cap agreement in current period earnings. Through December 31,2004, amounts recorded by the Company related to this interest rate capagreement were not material.

In December 2004, the Company entered into aninterest rate cap agreement in order to limit its interest expense on aconstruction loan with a 30-day LIBOR-based floating interest raterelated to a consolidated real estate project. The interest rate cap agreementhas an initial notional amount of $1,110 and the Company will receive paymentsif the LIBOR-based interest rate exceeds 3.5%. The interest rate capagreement has not been designated as an effective hedge, and therefore theinterest rate cap agreement will be marked to market each period with thechange in fair market value recognized in current period earnings. The interestrate cap agreement expires on January 1, 2006. Through December 31,2004, amounts recorded by the Company related to this interest rate capagreement were not material.

F-45

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

**19.   FinancialInstruments (Continued)**

In March 2003, the Company entered into aninterest rate cap agreement in order to limit its interest expense on aconstruction loan with a 30-day LIBOR-based floating interest rate related to aconsolidated real estate project. The interest rate cap agreement has anotional amount of $11,400 and the Company will receive payments if theLIBOR-based interest rate exceeds 3.5%. The interest rate cap agreement has notbeen designated as an effective hedge, and therefore the interest rate capagreement will be marked to market each period with the change in fair marketvalue recognized in current period earnings. The interest rate cap agreementexpires on March 1, 2005. Through December 31, 2004, amounts recordedby the Company related to this interest rate cap agreement were not material.

Accounts receivable,accounts payable and accrued expenses and other liabilities are carried atamounts that reasonably approximate their fair values. The 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.

**20.   Commitments and Contingencies**

At December 31, 2004, the Company guaranteedrepayment of a maximum of $16,158 of real estate notes payable of itsunconsolidated subsidiaries of which $15,408 of the underlying notes payablewas outstanding as of December 31, 2004. These notes are secured by theunderlying real estate and have maturity dates through December 2009.

During 2004, the Company issued several debt repaymentguarantees of others that are subject to the fair value provisions of FASBInterpretation No. 45, *Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Direct Guarantees ofIndebtedness of Others* (“FIN 45”).

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 minimaland has recorded the fair value of the guaranty in an amount equivalent to theconsideration received, or $102.

In 2004, the Company also issued a debt repaymentguaranty of an unconsolidated subsidiary in conjunction with a $30,000 loanagreement. As part of this loan agreement, the Company issued a repaymentguaranty of up to 50% of the loan balance plus any accrued and unpaid interest.At such time as the principal balance has been reduced to $15,000 or less and atarget loan-to-value ratio has been reached, the Company’s guaranty is reducedto 25%. In exchange for the guaranty, the Company will receive a priorityreturn with respect to its capital contribution based on the outstanding amountof principal on the loan. The Company estimates that its likely exposure underthe guaranty is minimal and has determined that the present value of thepriority return is the best estimate of the fair value of the guaranty underFIN 45. The Company has recorded a liability offset by an increase in itsinvestment in unconsolidated subsidiary balance of $1,886.

F-46

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

**20.**   Commitments andContingencies (Continued)

During 2004, the Company issued several other debtrepayment guarantees of unconsolidated subsidiaries that are subject to theprovisions of FIN 45. The Company estimates that its likely exposure underthese guarantees is minimal. On this basis, the Company estimates that the fairvalue of these guarantees is equivalent to the amount necessary to secure theguarantees using letters of credit from a bank, and the aggregate amount isnominal.

At December 31, 2004, the Company has outstandingletters of credit totaling $23,546, including $8,709 and $6,424 of whichcollateralize amounts recorded in other current liabilities and otherliabilities, respectively. The letters of credit expire at varying datesthrough November 2005.

In addition, at December 31, 2004, the Companyhas numerous completion and budget guarantees relating to development projects.These guarantees are made with third-party owners in the normal course ofbusiness. Each of these guarantees requires the Company to completeconstruction of the relevant project within a specified 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 generalcontractor with respect to construction projects. The Company does not considerthese activities to be a material part of its business. In connection withthese activities, the Company seeks to subcontract construction work forcertain projects to reputable subcontractors. Should construction defects ariserelated to the underlying projects, the Company could potentially be liable tothe client for the costs to repair such defects, but the Company wouldgenerally look to the subcontractor that performed the work to remedy thedefect. Management does not expect to incur material losses with respect toconstruction defects.

The Company has made non-refundable earnest moneydeposits totaling $3,098 in conjunction with contracts to acquire approximately$120,516 of real estate from other entities.

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

F-47

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

**20.**   Commitments andContingencies (Continued)

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

**21.   SupplementalCash Flow Information**

Supplementalcash flow information is summarized below for the three years ended December 31:
| ** **                                                                                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Interest paid                                                                               |       | $        | 15,555     |     | $          | 8,347    |       | $ | 10,875 |   |
| Income taxes paid                                                                           |       | 15,387   |       | 8,998    |       | 8,611    |       |
| Non cash activities:                                                                        |       |     |       |     |       |     |       |
| Issuance of restricted stock, net of forfeitures                                            |       | 8,323    |       | 12,289   |       | (77      | )          |
| Capital lease obligations                                                                   |       | 667      |       | 2,161    |       | 1,180    |       |
| Recognition of deferred gains related to  dispositions in previous periods                  |       | 381      |       | 339      |       | 941      |       |
| Writeoff of furniture and equipment against prior  year restructuring reserve               |       | —   |       | —   |       | 876      |       |
| Conversion to  equity of note payable to minority shareholder of consolidated joint venture |       | —   |       | —   |       | 2,406    |       |
|                                                                                             |            |          |            |          |            |          |            |  |  |  |

 

**22.   SegmentInformation**

*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.

F-48

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

**22.**   SegmentInformation (Continued)

*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 inspecific geographic areas, as non-development services provided to user andinvestor clients often require similar expertise.

Approximately 96% of the Company’s revenues are fromclients located in the United States. In 2004 and 2003, one individual clientaccounts for $96,237, or 12%, and $73,668, or 10%, respectively, of the Company’sconsolidated revenues. Revenues from this client are included primarily in theCompany’s Global Services segment. No individual client accounted for more than10% of the Company’s consolidated revenues in 2002.

Summarizedfinancial information for reportable segments is as follows:
| ** **                                                                                                                                  | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                                  | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Global Services:**                                                                                                                        |       |                                        |       |   |   |   |   |
| Total revenues                                                                                                                              |       | $                                           | 710,845    |   | $ | 649,617 |   | $ | 656,855 |   |
| Costs and  expenses(1)                                                                                                                      |       | 682,735                                     |       | 628,234 |   | 648,293 |   |
| Operating income                                                                                                                            |       | 28,110                                      |       | 21,383 |   | 8,562 |   |
| Interest and  other income                                                                                                                  |       | 1,424                                       |       | 863 |   | 259 |   |
| Income from  continuing operations before income taxes, minority interest and income from  investments in unconsolidated subsidiaries  |       | 29,534                                      |       | 22,246 |   | 8,821 |   |
| Minority  interest, before income taxes                                                                                                     |       | 560                                         |       | 675 |   | 3,323 |   |
| Income from  investments in unconsolidated subsidiaries, before income taxes                                                                |       | 7,252                                       |       | 3,913 |   | 1,789 |   |
| Income from  continuing operations, before income taxes                                                                                     |       | 37,346                                      |       | 26,834 |   | 13,933 |   |
| Income from  discontinued operations, before income taxes                                                                                   |       | 946                                         |       | 376 |   | 791 |   |
| Income before  income taxes                                                                                                                 |       | $                                           | 38,292     |   | $ | 27,210 |   | $ | 14,724 |   |

 

F-49

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

**22.**   SegmentInformation (Continued)
| ** **                                                                                                                                         | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                                         | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Development and Investment:**                                                                                                                    |       |                                        |       |   |   |   |   |
| Total revenues                                                                                                                                     |       | $                                           | 67,581     |   | $ | 55,929 |   | $ | 76,055 |   |
| Costs and  expenses(1)                                                                                                                             |       | 76,115                                      |       | 62,947 |   | 73,688 |   |
| Operating income  (loss)                                                                                                                           |       | (8,534                                      | )          | (7,018 | ) | 2,367 |   |
| Interest and  other income                                                                                                                         |       | 1,384                                       |       | 1,420 |   | 927 |   |
| Income (loss)  from continuing operations before income taxes, minority interest and income  from investments in unconsolidated subsidiaries  |       | (7,150                                      | )          | (5,598 | ) | 3,294 |   |
| Minority  interest, before income taxes                                                                                                            |       | (5,406                                      | )          | 1,395 |   | (402 | ) |
| Income from  investments in unconsolidated subsidiaries, before income taxes                                                                       |       | 10,437                                      |       | 12,637 |   | 7,160 |   |
| Income (loss)  from continuing operations, before income taxes                                                                                     |       | (2,119                                      | )          | 8,434 |   | 10,052 |   |
| Income (loss)  from discontinued operations, before income taxes                                                                                   |       | 26,900                                      |       | (254 | ) | 5,268 |   |
| Income before  income taxes                                                                                                                        |       | $                                           | 24,781     |   | $ | 8,180 |   | $ | 15,320 |   |
| **Total:**                                                                                                                                         |       |                                        |       |   |   |   |   |
| Total revenues                                                                                                                                     |       | $                                           | 778,426    |   | $ | 705,546 |   | $ | 732,910 |   |
| Costs and  expenses(1)                                                                                                                             |       | 758,850                                     |       | 691,181 |   | 721,981 |   |
| Operating income                                                                                                                                   |       | 19,576                                      |       | 14,365 |   | 10,929 |   |
| Interest and  other income                                                                                                                         |       | 2,808                                       |       | 2,283 |   | 1,186 |   |
| Income from  continuing operations before income taxes, minority interest and income from  investments in unconsolidated subsidiaries         |       | 22,384                                      |       | 16,648 |   | 12,115 |   |
| Minority  interest, before income taxes                                                                                                            |       | (4,846                                      | )          | 2,070 |   | 2,921 |   |
| Income from  investments in unconsolidated subsidiaries, before income taxes                                                                       |       | 17,689                                      |       | 16,550 |   | 8,949 |   |
| Income from  continuing operations, before income taxes                                                                                            |       | 35,227                                      |       | 35,268 |   | 23,985 |   |
| Income from  discontinued operations, before income taxes                                                                                          |       | 27,846                                      |       | 122 |   | 6,059 |   |
| Income before income  taxes                                                                                                                        |       | $                                           | 63,073     |   | $ | 35,390 |   | $ | 30,044 |   |

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

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(1)          Costsand expenses include non-cash compensation expense related to the amortizationof employment contracts and unearned stock compensation of $6,572, $3,701 and$2,319 related to the Global Services segment and $2,641, $1,402 and $148related to the Development and Investment segment in 2004, 2003 and 2002,respectively.

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**TRAMMELL CROW COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 (dollars in thousands, except per share data)**

**23.   UnauditedInterim Financial Information**

Unauditedsummarized financial information by quarter is as follows:
| ** **                                                          | ** ** | **Quarter Ended** | ** ** |
|---------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                          | ** ** | **March 31**      | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| **2004:**                                                           |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Total revenues                                                      |       | $                      | 158,478    |   | $ | 182,480 |   |   | $ | 188,966 |   |   |   | $ | 248,502 |   |   |
| Income (loss)  from discontinued operations, net of income taxes(1) |       | 340                    |       | (152 | ) |   | (86 | ) |   |   | 17,169 |   |   |
| 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 |   |   |
| **2003:**                                                           |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Total revenues                                                      |       | $                      | 160,132    |   | $ | 169,146 |   |   | $ | 167,043 |   |   |   | $ | 209,225 |   |   |
| Income (loss)  from discontinued operations, net of income taxes(1) |       | (149                   | )          | (175 | ) |   | (385 | ) |   |   | 782 |   |   |
| Net income                                                          |       | 1,144                  |       | 3,072 |   |   | 1,783 |   |   |   | 15,041 |   |   |
| Net income per share:                                               |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Basic                                                               |       | $                      | 0.03       |   | $ | 0.09 |   |   | $ | 0.05 |   |   |   | $ | 0.42 |   |   |
| Diluted                                                             |       | $                      | 0.03       |   | $ | 0.08 |   |   | $ | 0.05 |   |   |   | $ | 0.41 |   |   |

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(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.

**24.   Subsequent Event**

In March 2005, the Company announced that itsBoard of Directors has authorized the purchase of up to $20,000 of its commonstock from time to time in open market purchases or in privately negotiatedtransactions. The repurchase of shares is intended to offset dilution resultingfrom equity incentive awards made under the Company’s stock plans.

F-51

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**TRAMMELL CROW COMPANY AND SUBSIDIARIESSCHEDULE III—REAL ESTATEINVESTMENTS AND ACCUMULATED DEPRECIATIONDecember 31, 2004(In thousands)**
| ** **      | ** ** | ** ** | ** ** | **Initial Cost**     | ** ** | ** ** | ** ** | **Balance at December 31, 2004** | ** ** | ** ** | ** ** | ** **                                 | ** ** | ** ** | ** ** |
|-----------------|------------|------------|------------|---------------------------|------------|------------|------------|------------------------------------------------------|------------|------------|------------|--------------------------------------------|------------|------------|------------|
| **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)**      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|--------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| **Retail**                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cockrell Hill,  Dallas, TX                       |   |   | — |   |   | 1,159  |   |   | — |   |   | — |   |   | 25     |   |   | 1,177  |   |   | 7      |   |   | — |   |   | 1,184  |   |   |   | — |   |   |   | — |   |   |   | 2004   |   |   |   | 2004   |   |   |
| Parmer Lane  Village, Austin, TX                 |   |   | 1,890  |   |   | 252    |   |   | — |   |   | — |   |   | 1,612  |   |   | 394    |   |   | 1,470  |   |   | — |   |   | 1,864  |   |   |   | — |   |   |   | — |   |   |   | 2003   |   |   |   | 2003   |   |   |
| **Office**                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Aberdeen,  Aberdeen, MS                          |   |   | 4,773  |   |   | — |   |   | — |   |   | — |   |   | 4,728  |   |   | 756    |   |   | 3,972  |   |   | — |   |   | 4,728  |   |   |   | — |   |   |   | — |   |   |   | 2004   |   |   |   | 2004   |   |   |
| BMP North Garland,  Garland, TX                  |   |   | 3,127  |   |   | 1,017  |   |   | — |   |   | — |   |   | 3,911  |   |   | 1,065  |   |   | 3,863  |   |   | — |   |   | 4,928  |   |   |   | — |   |   |   | — |   |   |   | 2004   |   |   |   | 2004   |   |   |
| **Industrial**                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Conroe  Distribution, Conroe, TX                 |   |   | 683    |   |   | 264    |   |   | — |   |   | — |   |   | 91     |   |   | 279    |   |   | 76     |   |   | — |   |   | 355    |   |   |   | — |   |   |   | — |   |   |   | 2004   |   |   |   | 2004   |   |   |
| South River One,  Cranbury Township, NJ          |   |   | 6,224  |   |   | 2,206  |   |   | — |   |   | — |   |   | 5,491  |   |   | 2,532  |   |   | 5,165  |   |   | — |   |   | 7,697  |   |   |   | — |   |   |   | — |   |   |   | 2003   |   |   |   | 2003   |   |   |
| **REAL ESTATE HELD FOR SALE**                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Industrial**                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| TCDFW Ave E,  Arlington, TX                      |   |   | 1,975  |   |   | 445    |   |   | 1,162  |   |   | — |   |   | 92     |   |   | 418    |   |   | 1,281  |   |   | — |   |   | 1,699  |   |   |   | — |   |   |   | — |   |   |   | 1968   |   |   |   | 2003   |   |   |
| **Land**                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Glendale &  91st, Phoenix, AZ           |   |   | 1,386  |   |   | 344    |   |   | — |   |   | — |   |   | — |   |   | 344    |   |   | — |   |   | — |   |   | 344    |   |   |   | — |   |   |   | — |   |   |   | N/A    |   |   |   | 2001   |   |   |
| Hampden Town  Center, Denver, CO                 |   |   | 1,750  |   |   | — |   |   | — |   |   | — |   |   | 1,408  |   |   | 1,408  |   |   | — |   |   | — |   |   | 1,408  |   |   |   | — |   |   |   | — |   |   |   | N/A    |   |   |   | 1999   |   |   |
| Killeen, Killeen,  TX                            |   |   | — |   |   | 490    |   |   | — |   |   | — |   |   | 3      |   |   | 493    |   |   | — |   |   | — |   |   | 493    |   |   |   | — |   |   |   | — |   |   |   | N/A    |   |   |   | 1999   |   |   |
| **REAL ESTATE UNDER DEVELOPMENT (NON-CURRENT)**  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Office**                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Concord Commons,  Englewood, CO                  |   |   | — |   |   | 997    |   |   | — |   |   | — |   |   | 1,690  |   |   | 1,735  |   |   | 952    |   |   | — |   |   | 2,687  |   |   |   | — |   |   |   | — |   |   |   | N/A    |   |   |   | 2004   |   |   |
| **Mixed-Use (Multi-family/Retail)**              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| High Street  Columbia, Washington, D.C.          |   |   | 52,237 |   |   | 19,169 |   |   | 7,693  |   |   | — |   |   | 29,532 |   |   | 27,529 |   |   | 28,865 |   |   | — |   |   | 56,394 |   |   |   | — |   |   |   | — |   |   |   | 2002   |   |   |   | 2002   |   |   |
| **Land**                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cityview Village  Retail Center, San Antonio, TX |   |   | 803    |   |   | 1,248  |   |   | — |   |   | — |   |   | 110    |   |   | 1,358  |   |   | — |   |   | — |   |   | 1,358  |   |   |   | — |   |   |   | — |   |   |   | N/A    |   |   |   | 2004   |   |   |
| Katy POB I, LP,  Houston, TX                     |   |   | — |   |   | 46     |   |   | — |   |   | — |   |   | — |   |   | 46     |   |   | — |   |   | — |   |   | 46     |   |   |   | — |   |   |   | — |   |   |   | N/A    |   |   |   | 2004   |   |   |
| Sugarland POB I,  LP, Houston, TX                |   |   | — |   |   | 47     |   |   | — |   |   | — |   |   | — |   |   | 47     |   |   | — |   |   | — |   |   | 47     |   |   |   | — |   |   |   | — |   |   |   | N/A    |   |   |   | 2004   |   |   |
| **REAL ESTATE HELD FOR INVESTMENT**              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Retail**                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Arvada  Marketplace, Arvada, CO                  |   |   | 4,476  |   |   | 2,477  |   |   | 5,000  |   |   | — |   |   | 348    |   |   | 2,507  |   |   | 5,318  |   |   | — |   |   | 7,825  |   |   |   | (32    | )      |   |   | 39     |   |   |   | 1987   |   |   |   | 2004   |   |   |
| Crossroads Mall,  San Antonio, TX                |   |   | — |   |   | 6,984  |   |   | 6,571  |   |   | (648   | )      |   | 24     |   |   | 6,990  |   |   | 6,655  |   |   | (714   | )      |   | 12,931 |   |   |   | (25    | )      |   |   | 39     |   |   |   | 1961   |   |   |   | 2004   |   |   |
| Rosewood, Houston,  TX                           |   |   | 1,589  |   |   | 1,363  |   |   | — |   |   | — |   |   | 2,727  |   |   | 3,128  |   |   | 962    |   |   | — |   |   | 4,090  |   |   |   | — |   |   |   | — |   |   |   | 2002   |   |   |   | 2002   |   |   |
| **Office**                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Barton, Lenexa, KS                               |   |   | 578    |   |   | 198    |   |   | 535    |   |   | 40     |   |   | (29    | )      |   | 198    |   |   | 546    |   |   | — |   |   | 744    |   |   |   | (19    | )      |   |   | 39     |   |   |   | 1989   |   |   |   | 2003   |   |   |
| Chase Park,  Austin, TX                          |   |   | 11,112 |   |   | 3,592  |   |   | 6,246  |   |   | 2,551  |   |   | 690    |   |   | 3,600  |   |   | 7,619  |   |   | 1,860  |   |   | 13,079 |   |   |   | (126   | )      |   |   | 39     |   |   |   | 1969   |   |   |   | 2004   |   |   |
| Dallas #1, Dallas,  TX                           |   |   | 8,000  |   |   | 4,781  |   |   | — |   |   | — |   |   | — |   |   | 4,781  |   |   | — |   |   | — |   |   | 4,781  |   |   |   | — |   |   |   | — |   |   |   | 1957   |   |   |   | 2004   |   |   |
| Meridian Tower,  Tulsa, OK                       |   |   | 6,303  |   |   | 1,200  |   |   | 7,489  |   |   | — |   |   | 961    |   |   | 1,200  |   |   | 8,450  |   |   | — |   |   | 9,650  |   |   |   | (513   | )      |   |   | 39     |   |   |   | 1981   |   |   |   | 2001   |   |   |
| Riata Gateway,  Austin, TX                       |   |   | 2,155  |   |   | 3,505  |   |   | 325    |   |   | — |   |   | 645    |   |   | 3,652  |   |   | 823    |   |   | — |   |   | 4,475  |   |   |   | — |   |   |   | — |   |   |   | 2004   |   |   |   | 2004   |   |   |
| TCDFW Ave F,  Arlington, TX.                     |   |   | 1,439  |   |   | 1,370  |   |   | 1,970  |   |   | 226    |   |   | (139   | )      |   | 1,317  |   |   | 2,110  |   |   | — |   |   | 3,427  |   |   |   | (90    | )      |   |   | 39     |   |   |   | 1960   |   |   |   | 2003   |   |   |

 

F-52

 

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIES SCHEDULE III—REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION (Continued) December 31, 2004 (In thousands)**
| ** **      | ** ** | ** ** | ** ** | **Initial Cost**                 | ** ** | ** **                                   | ** ** | **Balance at December 31, 2004** | ** ** | ** ** | ** ** | ** **                                 | ** ** | ** ** | ** ** |
|-----------------|------------|------------|------------|---------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------------|------------|------------|------------|--------------------------------------------|------------|------------|------------|
| **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 (Continued)** |   |   |           |   |   |           |   |   |          |   |   |         |   |   |          |   |   |           |   |   |          |   |   |         |   |           |   |   |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|-------------------------------------------------|--------|--------|----------------|--------|--------|----------------|--------|--------|---------------|--------|--------|--------------|--------|--------|---------------|--------|--------|----------------|--------|--------|---------------|--------|--------|--------------|--------|----------------|--------|--------|---------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| **Industrial**                                  |   |   |           |   |   |           |   |   |          |   |   |         |   |   |          |   |   |           |   |   |          |   |   |         |   |           |   |   |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Pennsy Drive,  Landover, MD                     |   |   | 4,832          |   |   | 2,437          |   |   | 4,766         |   |   | —       |   |   | 807           |   |   | 2,437          |   |   | 5,573         |   |   | —       |   | 8,010          |   |   | (87           | )      |   |   | 39     |   |   |   | 1966   |   |   |   | 2004   |   |   |
| TCDFW Division,  Arlington, TX                  |   |   | 1,532          |   |   | 1,175          |   |   | 2,446         |   |   | 234          |   |   | (191          | )      |   | 1,120          |   |   | 2,544         |   |   | —       |   | 3,664          |   |   | (108          | )      |   |   | 39     |   |   |   | 1971   |   |   |   | 2003   |   |   |
| **Mixed-Use (Multi-family/Retail)**             |   |   |           |   |   |           |   |   |          |   |   |         |   |   |          |   |   |           |   |   |          |   |   |         |   |           |   |   |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| High Street  Clarkson, Denver, CO               |   |   | 527            |   |   | 1,203          |   |   | —        |   |   | —       |   |   | 597           |   |   | 1,740          |   |   | 60            |   |   | —       |   | 1,800          |   |   | —        |   |   |   | — |   |   |   | 2004   |   |   |   | 2003   |   |   |
| **Land**                                        |   |   |           |   |   |           |   |   |          |   |   |         |   |   |          |   |   |           |   |   |          |   |   |         |   |           |   |   |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 777 6th Street,  Washington, D.C.               |   |   | 18,840         |   |   | 14,827         |   |   | —        |   |   | —       |   |   | 2,238         |   |   | 17,065         |   |   | —        |   |   | —       |   | 17,065         |   |   | —        |   |   |   | — |   |   |   | N/A    |   |   |   | 2004   |   |   |
| Arrowwood,  Charlotte, NC                       |   |   | —         |   |   | 321            |   |   | —        |   |   | —       |   |   | —        |   |   | 321            |   |   | —        |   |   | —       |   | 321            |   |   | —        |   |   |   | — |   |   |   | N/A    |   |   |   | 1999   |   |   |
| Ballpark Way,  Houston, TX                      |   |   | 5,380          |   |   | 6,401          |   |   | —        |   |   | —       |   |   | 1,634         |   |   | 8,035          |   |   | —        |   |   | —       |   | 8,035          |   |   | —        |   |   |   | — |   |   |   | N/A    |   |   |   | 2000   |   |   |
| Bee Caves, Austin,  TX                          |   |   | —         |   |   | 153            |   |   | —        |   |   | —       |   |   | 19            |   |   | 172            |   |   | —        |   |   | —       |   | 172            |   |   | —        |   |   |   | — |   |   |   | N/A    |   |   |   | 2003   |   |   |
| Cameron,  Alexandria, VA                        |   |   | —         |   |   | 3,359          |   |   | —        |   |   | —       |   |   | 3,609         |   |   | 6,968          |   |   | —        |   |   | —       |   | 6,968          |   |   | —        |   |   |   | — |   |   |   | N/A    |   |   |   | 2000   |   |   |
| Centerpoint  Commons, Bradenton, FL             |   |   | 8,092          |   |   | 9,844          |   |   | —        |   |   | —       |   |   | 17            |   |   | 9,859          |   |   | 2             |   |   | —       |   | 9,861          |   |   | —        |   |   |   | — |   |   |   | N/A    |   |   |   | 2004   |   |   |
| Cleveland,  Cleveland, TN                       |   |   | —         |   |   | 260            |   |   | —        |   |   | —       |   |   | (160          | )      |   | 100            |   |   | —        |   |   | —       |   | 100            |   |   | —        |   |   |   | — |   |   |   | N/A    |   |   |   | 1996   |   |   |
| Fairway Center,  Pasadena, TX                   |   |   | —         |   |   | 875            |   |   | —        |   |   | —       |   |   | 3,373         |   |   | 4,248          |   |   | —        |   |   | —       |   | 4,248          |   |   | —        |   |   |   | — |   |   |   | N/A    |   |   |   | 2001   |   |   |
| Greenhill, Tulsa,  OK                           |   |   | —         |   |   | 327            |   |   | —        |   |   | —       |   |   | 39            |   |   | 366            |   |   | —        |   |   | —       |   | 366            |   |   | —        |   |   |   | — |   |   |   | N/A    |   |   |   | 2002   |   |   |
| John Young Pkwy  Retail, Orlando, FL            |   |   | —         |   |   | 942            |   |   | —        |   |   | —       |   |   | 10            |   |   | 952            |   |   | —        |   |   | —       |   | 952            |   |   | —        |   |   |   | — |   |   |   | N/A    |   |   |   | 2004   |   |   |
| Lake Park Plaza,  Lewisville, TX                |   |   | —         |   |   | 926            |   |   | —        |   |   | —       |   |   | 590           |   |   | 1,516          |   |   | —        |   |   | —       |   | 1,516          |   |   | —        |   |   |   | — |   |   |   | N/A    |   |   |   | 1999   |   |   |
| Lakeline Retail,  Cedar Park, TX                |   |   | —         |   |   | 75             |   |   | —        |   |   | —       |   |   | (70           | )      |   | 5              |   |   | —        |   |   | —       |   | 5              |   |   | —        |   |   |   | — |   |   |   | N/A    |   |   |   | 2000   |   |   |
| Nashville—MOB,  Nashville, TN              |   |   | —         |   |   | 648            |   |   | —        |   |   | —       |   |   | 27            |   |   | 658            |   |   | 17            |   |   | —       |   | 675            |   |   | —        |   |   |   | — |   |   |   | N/A    |   |   |   | 2004   |   |   |
| Sierra Corporate  Center, Reno, NV              |   |   | —         |   |   | 926            |   |   | —        |   |   | —       |   |   | 612           |   |   | 1,538          |   |   | —        |   |   | —       |   | 1,538          |   |   | —        |   |   |   | — |   |   |   | N/A    |   |   |   | 1999   |   |   |
| South River  Office, Cranbury Township, NJ      |   |   | —         |   |   | 1,061          |   |   | —        |   |   | —       |   |   | (10           | )      |   | 1,051          |   |   | —        |   |   | —       |   | 1,051          |   |   | —        |   |   |   | — |   |   |   | N/A    |   |   |   | 1998   |   |   |
| Springtown Land,  Austin, TX                    |   |   | —         |   |   | 227            |   |   | —        |   |   | —       |   |   | —        |   |   | 227            |   |   | —        |   |   | —       |   | 227            |   |   | —        |   |   |   | — |   |   |   | N/A    |   |   |   | 1999   |   |   |
| TCDC Land,  Englewood, CO                       |   |   | —         |   |   | 1,888          |   |   | —        |   |   | —       |   |   | 1,945         |   |   | 3,833          |   |   | —        |   |   | —       |   | 3,833          |   |   | —        |   |   |   | — |   |   |   | N/A    |   |   |   | 1999   |   |   |
| TCDFW LCT, Irving,  TX                          |   |   | —         |   |   | 3,603          |   |   | —        |   |   | —       |   |   | 244           |   |   | 3,847          |   |   | —        |   |   | —       |   | 3,847          |   |   | —        |   |   |   | — |   |   |   | N/A    |   |   |   | 2000   |   |   |
| Telco, Englewood,  CO                           |   |   | —         |   |   | 1,405          |   |   | —        |   |   | —       |   |   | (538          | )      |   | 867            |   |   | —        |   |   | —       |   | 867            |   |   | —        |   |   |   | — |   |   |   | N/A    |   |   |   | 2000   |   |   |
| Wetmore, San  Antonio, TX                       |   |   | —         |   |   | 484            |   |   | —        |   |   | —       |   |   | 146           |   |   | 630            |   |   | —        |   |   | —       |   | 630            |   |   | —        |   |   |   | — |   |   |   | N/A    |   |   |   | 2002   |   |   |
| Total                                           |   |   | $ 149,703 |   |   | $ 106,521 |   |   | $ 44,203 |   |   | $ 2,403 |   |   | $ 68,858 |   |   | $ 134,509 |   |   | $ 86,330 |   |   | $ 1,146 |   | $ 221,985 |   |   | $ (1,000 | )      |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

(A)               The aggregate cost for Federal Income taxpurposes is approximately $223.4 million.

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

(C)               Includes an adjustment to reflect depreciation (onassets previously classified as “held for sale”) that would have been recordedhad the assets been continuously classified as real estate held for investmentsince acquisition (Meridian Tower—$271).

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

F-53

 

----

**TRAMMELL CROW COMPANY AND SUBSIDIARIESNOTE TO SCHEDULE III—REALESTATE INVESTMENTSAND ACCUMULATED DEPRECIATIONDecember 31, 2004(In thousands)**

Changesin real estate investments and accumulated depreciation for the three yearsended December 31 are as follows:
| ** **                        | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Real estate investments:**      |       |     |       |     |       |     |       |   |   |   |   |   |   |
| Balance at  beginning of year     |       |     | $          | 167,262  |       |     |       | $ | 174,173 |   |   |   | $ | 232,440 |   |   |
| Additions and improvements        |       |     | 196,871    |     |       |     | 74,609     |   |   |   | 103,637 |   |   |
| Dispositions                      |       |     | (141,435   | )        |       |     | (75,858    | ) |   |   | (159,270 | ) |   |
| Other adjustments(1)              |       |     | (713       | )        |       |     | (5,662     | ) |   |   | (2,634 | ) |   |
| Balance at end of  year           |       |     | $          | 221,985  |       |     |       | $ | 167,262 |   |   |   | $ | 174,173 |   |   |
| **Accumulated  depreciation(2):** |       |     |       |     |       |     |       |   |   |   |   |   |   |
| Balance at  beginning of year     |       |     | $          | (307     | )          |     |       | $ | — |   |   |   |   |   |   |
| Depreciation expense              |       |     | (888       | )        |       |     | (1,148     | ) |   |   |   |   |   |
| Dispositions                      |       |     | 195        |     |       |     | 82         |   |   |   |   |   |   |
| Other adjustments(1)              |       |     | —     |     |       |     | 759        |   |   |   |   |   |   |
| Balance at end of year            |       |     | $          | (1,000   | )          |     |       | $ | (307 | ) |   |   |   |   |   |

----

(1)          Includes amortization oflease intangibles and tenant origination costs, allowances to reflect certainassets at fair value less cost to sell, writedowns for impairment, andadjustments to reflect cumulative depreciation on assets that were reclassifiedfrom “held for sale.” Also includes reclassification of accumulateddepreciation to real estate basis upon reclassification of assets to “held forsale.”

(2)          Prior to the Company’sadoption of FAS 144 in 2002, all real estate was classified as “held for sale”and therefore not depreciated.

F-54

----

 

FINANCIALSTATEMENTS

TFKRetail, Ltd., A Texas Limited Partnership

*Years ended June 30, 2004, 2003, and 2002*

F-55

----

 

**TFK Retail, Ltd., A Texas Limited PartnershipFinancial StatementsYears ended June 30, 2004, 2003, and 2002Contents**
| Report of Independent  Auditors                  |   | F-57   |
|--------------------------------------------------|--------|--------|
| Audited Financial  Statements                    |   |   |
| Balance Sheets                                   |   | F-58   |
| Statements of Operations                         |   | F-59   |
| Statements of Changes in Partners’  Capital |   | F-60   |
| Statements of Cash Flows                         |   | F-61   |
| Notes  to Financial Statements                   |   | F-62   |

 

F-56

----

 

**Report of Independent Registered Public AccountingFirm**

ThePartners

TFK 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 financialstatements based 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 and disclosuresin the financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, 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 endedJune 30, 2004, in conformity with United States generally acceptedaccounting principles.

|                    | /s/ ERNST & YOUNG LLP |
|--------------------|--------------------------------|
| March 8, 2005 |

 

F-57

----

**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-58

----

**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-59

----

 

**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-60

----

 

**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-61

----

**TFKRetail, Ltd., A Texas Limited PartnershipNotes to Financial StatementsJune 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.**   Summaryof Significant 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.

F-62

----

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

**2.**   Summary ofSignificant Accounting Policies (Continued)

**Deferred Loan 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.

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 the statementsof 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-63

----

**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 of returnover the ownership period of the property. Management determined that the valueof the participating interest was $21,916,946 at the time of sale, and thisamount was paid at closing. The difference between the actual amounts paid andthe amount estimated as of June 30, 2003, is included as a component ofinterest expense.

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

**4.**   NotesPayable

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.**   Partnership Agreement

**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, as defined, may require that thepartners make additional capital contributions in order to fund cash needs ofthe Partnership.

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**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,to the 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.

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

**5.**   PartnershipAgreement (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 the partners in proportion to their respective partnership interests.

**6.   LeasingActivities**

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, 2004, 2003, and 2002, 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.

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