Ken Berger

The Knicks' negotiations with the Rockets on a blockbuster deal that would send Tracy McGrady to New York continued to progress early Thursday as a key piece of Houston's leverage faded from the picture: the Chicago Bulls.

While New York and Houston continued negotiating the level of protection the Knicks would place on two first-round picks involved in the discussion, the Bulls were having trouble finding a third team -- preferably one with extra first-round picks to offer -- as a way to sweeten their proposal, sources said.

Though nothing was resolved over the draft pick issue, it appeared that the Rockets and Knicks were confident enough in the framework of their deal that the Bulls dropped out of the discussions, a high-level source involved in the process said. The situation was described Wednesday night as strictly between the Rockets and Knicks, with the key issue remaining how much protection the Knicks would require on two first-round picks involved in the trade.

In a sign of the Bulls' retreat, John Salmons did not play against the Knicks Wednesday night after management told him to stay at the team hotel in New York while they finalized a trade. Later, the Bulls engaged the Bucks in discussions that would send Salmons to Milwaukee for a package of expiring contracts -- perhaps Kurt Thomas and Francisco Elson, sources said. That deal would pave the way for the Knicks and Bulls to finally orchestrate their long-discussed swap centered around Al Harrington and Tyrus Thomas.

"It's still in play," a person with knowledge of the talks said.

New York officials reported back to the Rockets earlier Wednesday with their protection parameters, and the Rockets were pushing hard for less protection, two people familiar with the talks said. Sources have indicated that once the Rockets received New York's final determination on pick protection, they would choose between offers from the Knicks and Bulls for McGrady, whose $23 million expiring contract is one of the most coveted assets before Thursday's 3 p.m. ET deadline.

The Knicks, having been burned under previous regimes for giving away draft picks with little or no protection, were seeking to adequately protect a 2011 first-round pick that Houston would have the option of swapping with New York and a 2012 first-round pick that could go to the Rockets based on where it falls in the draft. Before word came Wednesday night of the Bulls' withdrawal from the talks, one person familiar with the negotiations said Houston was "asking for too much," while a second person with a stake in the deal continued to say the Knicks continued to have the leading proposal to extract McGrady.

The Knicks would get a package centered around McGrady in exchange for Jared Jeffries, Larry Hughes, Jordan Hill and the draft pick considerations. Shedding Jeffries, owed $6.9 million in 2010-11, comes at a high price -- one that Knicks president Donnie Walsh was having trouble getting comfortable accepting, sources said. The Rockets were asking for so much because they'd face little in the way of negative implications by keeping McGrady and simply letting his contract fall off the books.

Moving Jeffries is crucial to the Knicks' 2010 free agency plan because it would get New York within striking distance of its stated goal of clearing maximum cap space and flexibility heading into the crucial free-agent class that begins July 1. The Rockets, who are getting nothing from McGrady this season, would benefit from an approximately $7 million swing in luxury tax payments -- but that issue was described by one source as "not material" compared to the pick protection.

If the Knicks were successful in shedding Jeffries' $6.9 million contract for next season -- along with Hill, their No. 8 pick in 2009, and Hughes -- they'd be within about $2 million of their elusive goal of clearing space for two max free agents this summer. By completing the McGrady deal as currently constructed, New York would be able to get to the approximately $33 million needed for two straight-up max signings by buying out Eddy Curry's $11.3 million contract for next season. Curry's agent, Leon Rose, also represents the No. 1 potential catch in the 2010 sweepstakes, LeBron James.

Emboldened by the uncertainty surrounding the draft pick issue, the Bulls intensified their research on McGrady late Tuesday night and into Wednesday, a source said. The framework of the Bulls' offer was believed to have included Brad Miller, Thomas, and either Kirk Hinrich or Salmons. If Hinrich were involved, the deal likely would've had another player going to Chicago with McGrady; the Bulls are believed to have wanted either Luis Scola or Carl Landry. The Bulls' interest in one of those players -- combined with their desire to move either Hinrich or Salmons, both owed significant money next season -- appeared to have hurt Chicago's proposal. Hinrich has two years and $17 million remaining, and Salmons is owed $5.8 million next season.

The Knicks completed a minor deal Wednesday, sending Darko Milicic to Minnesota for Brian Cardinal in an exchange of expiring contracts that did not directly impact the McGrady discussions. Walsh told reporters at Madison Square Garden Wednesday night that the NBA had awarded the team cap relief on Cuttino Mobley's $9.5 million, insurance-protected contract -- another step in getting the team's books in order. Also on Wednesday, the Knicks became deeply involved in talks that would send Nate Robinson to Boston as part of a package that would yield 3-point specialist Eddie House.