UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT Of 1934

For the quarterly period ended April 30, 2007

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

For the transition period from                     to                     

Commission file number 1-4372

FOREST CITY ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)

Ohio		34-0863886
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

Terminal Tower		50 Public Square
Suite 1100		Cleveland, Ohio		44113
(Address of principal executive offices)				(Zip Code)

Registrant’s telephone number, including area code 216-621-6060

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ    No o

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

Large accelerated filer þ      Accelerated filer o      Non-accelerated filer o

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o    No þ

Indicate the number of shares outstanding, including unvested restricted stock, of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at June 4, 2007
Class A Common Stock, $.33 1/3 par value		77,487,155 shares
Class B Common Stock, $.33 1/3 par value		25,103,861 shares

 

 

Forest City Enterprises, Inc. and Subsidiaries

Table of Contents

								Page
PART I. FINANCIAL INFORMATION
		Item 1.		Financial Statements
				Forest City Enterprises, Inc. and Subsidiaries
						Consolidated Balance Sheets April 30, 2007 and January 31, 2007			2
						Consolidated Statements of Earnings Three Months Ended April 30, 2007 and 2006			3
						Consolidated Statements of Comprehensive Income Three Months Ended April 30, 2007 and 2006			4
						Consolidated Statements of Shareholders’ Equity Three Months Ended April 30, 2007 and 2006			5
						Consolidated Statements of Cash Flows Three Months Ended April 30, 2007 and 2006			6
				Notes to Consolidated Financial Statements					9
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations					24
		Item 3.		Quantitative and Qualitative Disclosures about Market Risk					45
		Item 4.		Controls and Procedures					49
PART II. OTHER INFORMATION
		Item 1.		Legal Proceedings					49
		Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds					49
		Item 6.		Exhibits					50
		Signatures							56
		Certifications
EX-31.1
EX-31.2
EX-32.1

PART I – FINANCIAL INFORMATION

Forest City Enterprises, Inc. and Subsidiaries

(Unaudited)

		April 30, 2007				January 31, 2007
		(in thousands)
Assets
Real Estate
Completed rental properties		$	6,928,936			$	6,659,054
Projects under development			1,396,768				1,396,083
Land held for development or sale			184,803				174,136
Total Real Estate			8,510,507				8,229,273
Less accumulated depreciation			(1,146,947	)			(1,085,978	)
Real Estate, net			7,363,560				7,143,295
Cash and equivalents			160,922				254,213
Restricted cash			269,540				292,461
Notes and accounts receivable, net			298,742				287,615
Investments in and advances to affiliates			407,490				333,782
Other assets			727,972				670,238
Total Assets		$	9,228,226			$	8,981,604
Liabilities and Shareholders’ Equity
Liabilities
Mortgage debt, nonrecourse		$	5,457,948			$	5,338,372
Notes payable			79,193				96,127
Bank revolving credit facility			140,000				—
Senior and subordinated debt			886,900				886,900
Accounts payable and accrued expenses			811,863				772,964
Deferred income taxes			464,410				486,329
Total Liabilities			7,840,314				7,580,692
Minority Interest			398,840				375,101
Commitments and Contingencies			—				—
Company-Obligated Trust Preferred Securities			—				—
Shareholders’ Equity
Preferred stock – without par value; 10,000,000 shares authorized; no shares issued			—				—
Common stock — $.33 1/3 par value
Class A, 271,000,000 shares authorized; 77,015,321 and 76,692,955 shares issued and 77,007,456 and 76,628,006 shares outstanding, respectively			25,671				25,564
Class B, convertible, 56,000,000 shares authorized; 25,171,860 and 25,254,210 shares issued and outstanding, respectively; 26,257,761 shares issuable			8,391				8,418
			34,062				33,982
Additional paid-in capital			241,520				247,884
Retained earnings			737,908				762,062
Less treasury stock, at cost; 7,865 and 64,949 Class A shares, respectively			(531	)			(3,449	)
			1,012,959				1,040,479
Accumulated other comprehensive loss			(23,887	)			(14,668	)
Total Shareholders’ Equity			989,072				1,025,811
Total Liabilities and Shareholders’ Equity		$	9,228,226			$	8,981,604

The accompanying notes are an integral part of these consolidated financial statements.

Forest City Enterprises, Inc. and Subsidiaries

(Unaudited)

		Three Months Ended April 30,
		2007				2006
		(in thousands, except per share data)
Revenues from real estate operations		$	280,567			$	272,238
Expenses
Operating expenses			177,439				155,739
Depreciation and amortization			60,800				41,417
			238,239				197,156
Interest expense			(78,407	)			(67,431	)
Amortization of mortgage procurement costs			(2,599	)			(2,946	)
Loss on early extinguishment of debt			(2,544	)			(803	)
Interest and other income			11,496				14,888
Equity in earnings of unconsolidated entities			1,361				379
Earnings (loss) before income taxes			(28,365	)			19,169
Income tax expense (benefit)
Current			(1,634	)			(496	)
Deferred			(12,098	)			7,662
			(13,732	)			7,166
Earnings (loss) before minority interest and discontinued operations			(14,633	)			12,003
Minority interest			(2,548	)			(4,063	)
Earnings (loss) from continuing operations			(17,181	)			7,940
Discontinued operations, net of tax and minority interest
Operating loss from rental properties			—				(885	)
Gain on disposition of rental properties			—				46,203
			—				45,318
Net earnings (loss)		$	(17,181	)		$	53,258
Basic and diluted earnings (loss) per common share
Earnings (loss) from continuing operations		$	(0.17	)		$	0.08
Earnings from discontinued operations, net of tax and minority interest			—				0.44
Net earnings (loss)		$	(0.17	)		$	0.52

The accompanying notes are an integral part of these consolidated financial statements.

Forest City Enterprises, Inc. and Subsidiaries

(Unaudited)

		Three Months Ended April 30,
		2007				2006
		(in thousands)
Net earnings (loss)		$	(17,181	)		$	53,258
Other comprehensive income (loss), net of tax and minority interest:
Unrealized net losses on investment securities			(41	)			(33	)
Change in unrealized net gains (losses) on interest rate derivative contracts			(9,178	)			267
Other comprehensive income (loss), net of tax and minority interest			(9,219	)			234
Comprehensive income (loss)		$	(26,400	)		$	53,492

The accompanying notes are an integral part of these consolidated financial statements.

Forest City Enterprises, Inc. and Subsidiaries

(Unaudited)

																																		Accumulated
		Common Stock																Additional																Other
		Class A								Class B								Paid-In				Retained				Treasury Stock								Comprehensive
		Shares				Amount				Shares				Amount				Capital				Earnings				Shares				Amount				(Loss) Income				Total
		(in thousands)
Three Months Ended April 30, 2007
Balances at January 31, 2007			76,693			$	25,564				25,254			$	8,418			$	247,884			$	762,062				65			$	(3,449	)		$	(14,668	)		$	1,025,811
Net loss																							(17,181	)															(17,181	)
Cumulative effect of change in accounting for uncertainty in income taxes (See Note A)																							245																245
Other comprehensive loss, net of tax and minority interest																																			(9,219	)			(9,219	)
Dividends $.07 per share																							(7,218	)															(7,218	)
Purchase of treasury stock																											50				(3,138	)							(3,138	)
Conversion of Class B to Class A shares			82				27				(82	)			(27	)																							-
Exercise of stock options			212				71												3,347																				3,418
Restricted stock granted out of treasury			(107	)			(36	)											(6,020	)							(107	)			6,056								-
Restricted stock vested			135				45												(45	)																			-
Stock-based compensation																			5,912																				5,912
Distribution of accumulated equity to minority partners (see Note A)																			(9,558	)																			(9,558	)
Balances at April 30, 2007			77,015			$	25,671				25,172			$	8,391			$	241,520			$	737,908				8			$	(531	)		$	(23,887	)		$	989,072
Three Months Ended April 30, 2006
Balances at January 31, 2006			75,436			$	25,146				26,149			$	8,716			$	247,926			$	612,371				—			$	—			$	223			$	894,382
Net earnings																							53,258																53,258
Other comprehensive income, net of tax and minority interest																																			234				234
Dividends $.06 per share																							(6,133	)															(6,133	)
Purchase of treasury stock																											18				(826	)							(826	)
Conversion of Class B to Class A shares			162				54				(162	)			(54	)																							—
Exercise of stock options			34				11												(55	)							(18	)			826								782
Restricted stock vested			56				19												(19	)																			—
Stock-based compensation																			3,044																				3,044
Balances at April 30, 2006			75,688			$	25,230				25,987			$	8,662			$	250,896			$	659,496				—			$	—			$	457			$	944,741

The accompanying notes are an integral part of these consolidated financial statements.

Forest City Enterprises, Inc. and Subsidiaries

(Unaudited)

		Three Months Ended April 30,
		2007				2006
		(in thousands)
Net Earnings (loss)		$	(17,181	)		$	53,258
Depreciation and amortization			60,800				41,417
Amortization of mortgage procurement costs			2,599				2,946
Loss on early extinguishment of debt			2,544				803
Equity in earnings of unconsolidated entities			(1,361	)			(379	)
Deferred income taxes			(12,098	)			7,662
Minority interest			2,548				4,063
Stock-based compensation			4,225				2,526
Cash distributions from operations of unconsolidated entities			6,358				11,983
Non-cash operating expenses:
Write-off of abandoned development projects			2,570				669
Discontinued operations:
Depreciation and amortization			—				2,315
Amortization of mortgage procurement costs			—				113
Gain on disposition of operating properties			—				(136,384	)
Minority interest			—				61,074
Deferred income taxes			—				29,101
Cost of sales of land included in projects under development and completed rental properties			3,266				11,353
Increase in land held for development or sale			(11,397	)			(17,182	)
(Increase) decrease in notes and accounts receivable			(8,611	)			28,545
(Increase) decrease in other assets			(7,343	)			6,163
Increase in restricted cash used for operating purposes			(4,774	)			(6,309	)
Decrease in accounts payable and accrued expenses			(31,343	)			(22,266	)
Net cash (used in) provided by operating activities		$	(9,198	)		$	81,471

     The accompanying notes are an integral part of these consolidated financial statements.

Forest City Enterprises, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)

		Three Months Ended April 30,
		2007				2006
		(in thousands)
Cash Flows from Investing Activities
Capital expenditures		$	(310,088	)		$	(229,567	)
Payment of lease procurement costs and other assets			(8,865	)			(5,783	)
Decrease (increase) in restricted cash to be used for capital expenditures			32,109				(95,945	)
Proceeds from disposition of rental properties			—				121,205
Increase in investments in and advances to affiliates			(27,648	)			(44,432	)
Net cash used in investing activities			(314,492	)			(254,522	)
Cash Flows from Financing Activities
Borrowings on bank revolving credit facility			193,000				—
Payments on bank revolving credit facility			(53,000	)			(82,500	)
Proceeds from nonrecourse mortgage debt			215,418				247,080
Principal payments on nonrecourse mortgage debt			(100,435	)			(122,368	)
Proceeds from notes payable			151				266
Payments on notes payable			(18,421	)			(19,261	)
Change in restricted cash and book overdrafts			(6,919	)			56,766
Payment of deferred financing costs			(4,148	)			(6,409	)
Purchase of treasury stock			(3,138	)			(826	)
Exercise of stock options			3,418				782
Distributions of accumulated equity to minority partners			(9,558	)			—
Dividends paid to shareholders			(7,160	)			(6,111	)
Increase (decrease) in minority interest			21,191				(7,592	)
Net cash provided by financing activities			230,399				59,827
Net decrease in cash and equivalents			(93,291	)			(113,224	)
Cash and equivalents at beginning of period			254,213				254,734
Cash and equivalents at end of period		$	160,922			$	141,510

The accompanying notes are an integral part of these consolidated financial statements.

Forest City Enterprises, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)

Supplemental Non-Cash Disclosures:

The table below represents the effect of the following non-cash transactions for the three months ended April 30, 2007 and 2006:

		Three Months Ended April 30,
		2007				2006
		(in thousands)
Operating Activities
Increase in notes and accounts receivable (1)(7)		$	(9,251	)		$	(5,059	)
Decrease in land held for development or sale (1)(5)			730				139
(Increase) decrease in other assets (1)(3)(7)			(61,208	)			365
Increase in restricted cash (1)			(2,307	)			—
Increase (decrease) in accounts payable and accrued expenses (1)(3)(5)(6)(7)			58,801				(30,150	)
Total effect on operating activities		$	(13,235	)		$	(34,705	)
Investing Activities
Decrease in projects under development (4)(5)(6)(7)		$	9,588			$	39,090
Increase in completed rental properties (1)(2)(3)			(56,400	)			—
Non-cash proceeds from disposition of properties (8)			—				109,302
Increase in investments in and advances to affiliates(1)			(5,534	)			—
Total effect on investing activities		$	(52,346	)		$	148,392
Financing Activities
Increase in notes payable (1)		$	—			$	4,701
Increase (decrease) in nonrecourse mortgage debt (1)(2)(7)(8)			65,364				(242,200	)
(Increase) decrease in restricted cash (1)(7)			(1,412	)			150,418
Decrease in minority interest (8)			—				(27,102	)
Increase in additional paid-in capital (4)			1,687				518
Dividends declared but not yet paid			(58	)			(22	)
Total effect on financing activities		$	65,581			$	(113,687	)

The accompanying notes are an integral part of these consolidated financial statements.

Forest City Enterprises, Inc. and Subsidiaries

(Unaudited)

A. Accounting Policies

Basis of Presentation

The interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the consolidated financial statements and related notes included in the Company’s annual report on Form 10-K for the year ended January 31, 2007, including the Report of Independent Registered Public Accounting Firm. The results of interim periods are not necessarily indicative of results for the full year or any subsequent period. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of financial position, results of operations and cash flows at the dates and for the periods presented have been included.

New Accounting Standards

In March 2007, the Financial Accounting Standards Board (“FASB”) ratified the consensus on EITF Issue No. 06-10, “Accounting for Collateral Assignment Split-Dollar Life Insurance” (“EITF No. 06-10”). Under the provisions of EITF No. 06-10, an employer is required to recognize a liability for the post-retirement benefit related to collateral assignment split-dollar life insurance arrangements. In addition, the EITF provides guidance for the recognition of an asset related to a collateral assignment split-dollar life insurance arrangement. The EITF is effective for fiscal years beginning after December 15, 2007. The Company is currently assessing the impact EITF No. 06-10 will have on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits a company to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities, with changes in fair value recognized as they occur. SFAS No. 159 permits the fair value option on an instrument by instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact SFAS No. 159, if adopted, will have on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about the use of fair value measurements. SFAS No. 157 does not require new fair value measurements, but applies to accounting pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact SFAS No. 157 will have on its consolidated financial statements.

FIN No. 48

On July 13, 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (“FIN No. 48”). FIN No. 48 prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that a company has taken or expects to take on a tax return (including a decision whether to file or not to file a return in a particular jurisdiction). Under FIN No. 48, the financial statements will reflect expected future tax consequences of such positions presuming the taxing authorities’ full knowledge of the position and all relevant facts, but without considering time values.

The Company adopted the provisions of FIN No. 48 effective February 1, 2007. Unrecognized tax benefits represent those tax benefits related to tax positions that have been taken or are expected to be taken in tax returns that are not recognized in the financial statements because management has either concluded that it is not more likely than not that the tax position will be sustained if audited by the appropriate taxing authority or the amount of the benefit will be less than the amount taken or expected to be taken in the Company’s income tax returns. The effect of this adoption on February 1, 2007 resulted in a cumulative effect adjustment of $245,000 as an increase in beginning retained earnings.

At February 1, 2007, the Company had total unrecognized tax benefits of $4,892,000, primarily from timing differences, exclusive of interest and penalties. There were no material changes in the amount of unrecognized tax benefits during the three months ended April 30, 2007. Of this amount, $844,000 represents tax positions that, if recognized, would impact the effective tax rate.

Based upon the Company’s assessment of the outcome of examinations that are in progress, the settlement of liabilities, or as a result of the expiration of the statute of limitations for certain jurisdictions, it is reasonably possible that the related unrecognized tax benefits for tax positions taken regarding previously filed tax returns will materially change from those recorded at February 1, 2007. Included in the $4,892,000 of unrecognized benefits noted above, is $3,868,000 which, due to the outcome of examinations that are in progress, the settlement of liabilities or as a result of the expiration of the statute of limitations for certain jurisdictions, could significantly increase or decrease during the next twelve months.

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

A. Accounting Policies (continued)

The Company recognizes estimated interest payable on underpayments of income taxes and estimated penalties that may result from the settlement of some uncertain tax positions as components of income tax expense. As of February 1, 2007, the Company had accrued $682,000 in estimated interest and penalties. For the three months ended April 30, 2007, the Company accrued an additional $331,000 of interest and penalties.

The Company files a consolidated United States federal income tax return. Where applicable, the Company files combined income tax returns in various states, and it files individual separate income tax returns in other states. The Company’s Federal consolidated income tax return and certain of its state returns for the year ended January 31, 2003 and subsequent years are subject to examination by the Internal Revenue Service or other taxing authorities. Certain of the Company’s state returns for the year ended January 31, 2004 and subsequent years are subject to examination.

Variable Interest Entities

As of April 30, 2007, the Company determined that it is the primary beneficiary of 32 Variable Interest Entities (“VIE”) representing 19 properties (18 VIEs representing 8 properties in Residential Group, 12 VIEs representing 9 properties in Commercial Group, and 2 VIEs/properties in Land Development Group). As of April 30, 2007, the Company held variable interests in 43 VIEs for which it is not the primary beneficiary. As of April 30, 2007, the maximum exposure to loss as a result of the Company’s involvement with these unconsolidated VIEs is limited to our recorded investments in those VIEs totaling approximately $113,000,000. In addition, the Company has various VIEs that were previously consolidated that remain consolidated under FASB Interpretation No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities” (“FIN No. 46 (R)”). These VIEs consist of joint ventures that are engaged, directly or indirectly, in the ownership, development and management of office buildings, regional malls, specialty retail centers, apartment communities, military housing, supported-living communities and land development.

In addition to the VIEs described above, the Company has also determined that it is the primary beneficiary of a VIE which holds collateralized borrowings of $29,000,000 (Note E – Senior and Subordinated Debt) as of April 30, 2007.

Restricted Cash

Restricted cash represents legally restricted deposits with financial institutions for taxes and insurance, security deposits, capital replacement, improvement and operating reserves, bond funds, development escrows, construction escrows and collateral on total rate of return swaps, as well as certain internally restricted deposits with qualified intermediaries related to like-kind exchanges.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related notes. Some of the critical estimates made by the Company include, but are not limited to, estimates of useful lives for long-lived assets, reserves for collection on accounts and notes receivable and other investments, provisions for decline in real estate and the computation of expected losses on VIEs. As a result of the nature of estimates made by the Company, actual results could differ.

In March 2007, management approved a plan to demolish two buildings owned by the Company adjacent to Ten MetroTech Center, an office building located in Brooklyn, New York, to clear the land for a residential project named 80 DeKalb Avenue. Due to the new development plan, the estimated useful lives of the two adjacent buildings were adjusted to expire at the scheduled demolition date in April 2007 resulting in approximately $7,837,000 of accelerated depreciation expense reflected in the Consolidated Statement of Earnings for the three months ended April 30, 2007.

Historic Tax Credit Entities

The Company has certain investments in properties that have received, or the Company believes are entitled to receive, historic rehabilitation tax credits on qualifying expenditures under section 47 of the Internal Revenue Code of 1986 as well as various state credit programs. The Company typically enters into these investments with sophisticated financial investors. In exchange for the financial investors’ initial contribution into these investments, they are entitled to substantially all of the benefits derived from the historic tax credit, but generally have no material interest in the underlying economics of the properties. Typically, these arrangements have put/call provisions (which range up to 7 years) whereby the Company may be obligated (or entitled) to repurchase the financial investors’ interest. Due to the economic structure, the Company has consolidated each of these properties in its consolidated financial statements, and has reflected the investors’ contribution as a liability in its Consolidated Balance Sheets. The Company guarantees the financial investor that in the event of a subsequent recapture by a taxing authority due to the Company’s noncompliance with applicable tax credit guidelines that it will indemnify the financial investor for any recaptured tax credits. Within

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

A. Accounting Policies (continued)

the Company’s consolidated financial statements, the Company initially records a liability for the cash received from the financial investor. The Company generally records income upon completion and certification of the qualifying development expenditures resulting in an adjustment of the liability at each balance sheet date to the amount that would be paid to the financial investor based upon the tax credit compliance regulations, which range from 0 to 5 years. During the three months ended April 30, 2007, the Company recognized income related to federal tax credits of $888,000, which was recorded in interest and other income in the Company’s Consolidated Statement of Earnings. During the three months ended April 30, 2006, the Company recognized income related to state tax credits of $8,838,000, which was recorded in interest and other income in the Company’s Consolidated Statement of Earnings.

Capitalized Software Costs

Costs related to software developed or obtained for internal use are capitalized pursuant to Statement of Position No. 98-1 “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” and amortized using the straight-line method over their estimated useful life, which is primarily three years. The Company capitalizes significant costs incurred in the acquisition or development of software for internal use, including the costs of the software, materials, consultants, interest and payroll and payroll-related costs for employees incurred in developing internal-use computer software once final selection of the software is made. Costs incurred prior to the final selection of software and costs not qualifying for capitalization are charged to expense. At April 30 and January 31, 2007, the Company has capitalized $26,224,000 and $24,659,000, respectively, of software costs net of accumulated amortization. The increase in software costs primarily relates to the enterprise resource planning project the Company is currently implementing, of which the first phase was placed into service during the quarter ended April 30, 2007. The costs are being amortized on a straight-line basis over a three year period. The Company recorded $1,709,000 and $86,000 of amortization expense related to capitalized software for the three months ended April 30, 2007 and 2006, respectively.

Accounting for Derivative Instruments and Hedging Activities

During the three months ended April 30, 2007, the Company recorded interest expense of approximately $328,000 in the Consolidated Statement of Earnings, which represented the total ineffectiveness of all cash flow hedges. During the three months ended April 30, 2006, the Company recorded interest income of approximately $2,000, which represented the total ineffectiveness of all cash flow hedges. For the three months ended April 30, 2007 and 2006, the amount of hedge ineffectiveness relating to hedges designated and qualifying as fair value hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), was not material. The amount of derivative gains or (losses) reclassified into earnings from accumulated other comprehensive income (“OCI”) as a result of forecasted transactions that did not occur by the end of the originally specified time period or within an additional two-month period of time thereafter was $9,000 and $(32,000) for the three months ended April 30, 2007 and 2006, respectively. As of April 30, 2007, the Company expects that within the next twelve months it will reclassify amounts recorded in accumulated OCI into earnings as an increase in interest expense of approximately $540,000, net of tax.

The Company entered into various forward swaps to protect itself against fluctuations in the 10-year swap rate. At the time the Company secures and locks an interest rate on an anticipated financing, it intends to simultaneously terminate the forward hedge attributed to that financing. The table below lists the 10-year forward swaps outstanding as of April 30, 2007 (in thousands):

Forward Swaps

										Property Accounted for
										under the Equity Method of
		Fully Consolidated Properties								Accounting
Expirations for Years Ending		Notional(1)								Notional(2)
January 31,		Amount				Rate				Amount				Rate
2008		$	258,920				5.76	%		$	—				—
2009		$	440,000				5.69	%		$	—				—
2010		$	91,625				5.72	%		$	120,000				5.93	%
Thereafter		$	—				—			$	—				—

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

A. Accounting Policies (continued)

For the three months ended April 30, 2007 and 2006, the Company recorded $1,447,000 and $-0-, respectively, of interest expense related to its 10-year forward swaps in its Consolidated Statements of Earnings, which represents the change in fair value of the swap that did not qualify for hedge accounting.

From time to time, the Company and/or certain of its joint ventures (the “Joint Ventures”) enter into total rate of return swaps (“TRS”) on various tax-exempt fixed-rate borrowings generally held by the Company and/or within the Joint Ventures. The TRS convert these borrowings from a fixed rate to a variable rate and provide an efficient financing product to lower the cost of capital. In exchange for a fixed rate, the TRS require that the Company and/or the Joint Ventures pay a variable rate, generally equivalent to the Bond Market Association (“BMA”) rate. Additionally, the Company and/or the Joint Ventures have guaranteed the principal balance of the underlying borrowing. Any fluctuation in the value of the guarantee would be offset by the fluctuation in the value of the underlying borrowing, resulting in no financial impact to the Company and/or the Joint Ventures. At April 30, 2007, the aggregate notional amount of TRS in which the Company and/or the Joint Ventures have an interest is approximately $415,956,000 (which includes the TRS on the $20,400,000 redevelopment bonds. Refer to Note E Senior and Subordinated Debt). The fair value of such contracts is immaterial at April 30, 2007 and January 31, 2007. The Company believes the economic return and related risk associated with a TRS is generally comparable to that of nonrecourse variable-rate mortgage debt.

The Company estimates the fair value of its hedging instruments based on interest rate market pricing models. At April 30 and January 31, 2007, interest rate caps and swaptions were reported at fair value of approximately $1,682,000 and $2,372,000, respectively, in other assets in the Consolidated Balance Sheets. At April 30 and January 31, 2007, interest rate swap agreements, which had a negative fair value of approximately $37,005,000 and $21,961,000, respectively, (which includes the 10-year forward swaps) were included in accounts payable and accrued expenses in the Consolidated Balance Sheets. At April 30 and January 31, 2007, interest rate swap agreements, which had a positive fair value of approximately $3,448,000 and $6,059,000, respectively, were included in other assets in the Consolidated Balance Sheets. Included in the fair value of the interest rate swap agreements is a TRS held by Stapleton Land, LLC. Stapleton Land, LLC does not hold the underlying borrowings on this TRS and the change in the fair value is marked to market through earnings. The fair value of the TRS at April 30 and January 31, 2007 was approximately $-0- and $255,000, respectively.

In addition, in May 2004 Stapleton Land, LLC entered into an agreement to purchase $200,000,000 of tax increment revenue bonds issued by the Denver Urban Renewal Authority (“DURA”) from a trust if they are not repurchased or remarketed between June 1, 2007 and June 1, 2009 (see the Other Financing Arrangements section of Note F). Stapleton Land, LLC will receive a fee upon removal of the DURA bonds from the trust. This purchase obligation and related fee have been accounted for as a derivative with changes in fair value recorded through earnings. The fair value at April 30 and January 31, 2007 of approximately $17,096,000 and $15,090,000, respectively, is recorded in other assets in the Consolidated Balance Sheets.

Distributions of Refinancing Proceeds to Minority Partners

Distributions to minority partners in excess of their recorded minority interest balance related to refinancing proceeds from nonrecourse debt, which generally arise from appreciation of the underlying real estate assets, are reported as a reduction of additional paid-in-capital in the Consolidated Statements of Shareholders’ Equity. During the three months ended April 30, 2007, the Company refinanced Promenade in Temecula, a regional mall located in Temecula, California and Columbia Park Center, a specialty retail center located in North Bergen, New Jersey. Of the total nonrecourse refinancing proceeds distributed to its minority partners in these two properties during the three months ended April 30, 2007, $9,558,000 was in excess of its minority partners’ book capital accounts. These distributions were recorded as a reduction of shareholders’ equity through additional paid-in capital.

Other Comprehensive Income

Net unrealized gains or losses on securities are included in accumulated OCI and represent the difference between the market value of investments in unaffiliated companies that are available-for-sale at the balance sheet date and the Company’s cost. Also included in accumulated OCI is the Company’s portion of the unrealized gains and losses on the effective portions of derivative instruments designated and qualified as cash flow hedges. The amount of income tax benefit included in accumulated OCI was $15,042,000 and $9,237,000 as of April 30, 2007 and January 31, 2007, respectively.

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

A.

Accounting Policies (continued)

The following table summarizes the components of accumulated OCI included within the Company’s Consolidated Balance Sheets, net of tax and minority interest.

		April 30,				January 31,
		2007				2007
		(in thousands)
Unrealized gains on securities		$	130			$	171
Unrealized losses on interest rate contracts			(24,017	)			(14,839	)
Accumulated Other Comprehensive Loss		$	(23,887	)		$	(14,668	)

Reclassification

Certain prior year amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year’s presentation. For the three months ended April 30, 2006, the Company has revised its presentation of certain operating and investing activities to reflect accruals of certain construction payables in the amount of approximately $20,000,000 as a non-cash item to conform to the current period and year ended January 31, 2007 presentation.

B. Stock-Based Compensation

During the three months ended April 30, 2007, the Company granted 1,067,600 stock options and 153,200 shares of restricted stock under the Company’s 1994 Stock Plan (as Amended and Restated as of June 21, 2005). The stock options had a total grant-date fair value of $18,309,000, or $17.15 per option, which was computed using the Black-Scholes option-pricing model with the following assumptions: expected term of 5.5 years, expected volatility of 18.3%, risk-free interest rate of 4.51%, and expected dividend yield of .54%. The exercise price of the options is $65.35, which was the closing price of the underlying stock on the date of grant. The restricted stock had a total grant-date fair value of $10,012,000, or $65.35 per share, which was the closing price of the stock on the date of grant.

At April 30, 2007, there was $27,010,000 of unrecognized compensation cost related to unvested stock options that is expected to be recognized over a weighted-average period of 3.34 years, and there was $16,944,000 of unrecognized compensation cost related to unvested restricted stock that is expected to be recognized over a weighted-average period of 3.39 years.

The amount of stock-based compensation costs and related deferred income tax benefit recognized in the financial statements are as follows:

		Three Months Ended April 30,
		2007				2006
		(in thousands)
Stock option costs		$	4,215			$	2,243
Restricted stock costs			1,697				801
Total stock-based compensation costs			5,912				3,044
Less amount capitalized into qualifying real estate projects			(1,687	)			(518	)
Amount charged to operating expenses			4,225				2,526
Depreciation expense relating to amounts previously capitalized			20				—
Total stock-based compensation expense		$	4,245			$	2,526
Deferred income tax benefit		$	1,450			$	840

SFAS No. 123(R) “Share-Based Payment” requires the immediate recognition of stock-based compensation costs for awards granted to retirement-eligible grantees. The amount of grant-date fair value expensed immediately for awards granted to retirement-eligible grantees during the three months ended April 30, 2007 and 2006 was $2,152,000 and $1,170,000, respectively.

In connection with the vesting of restricted stock during the three months ended April 30, 2007 and 2006, the Company repurchased into treasury 50,186 shares and 17,970 shares, respectively, of Class A common stock to satisfy the employees’ related minimum statutory tax withholding requirements. These shares were placed in treasury with an aggregate cost basis of $3,138,000 and $826,000, respectively.

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

C.

Discontinued Operations, Gain on Disposition of Rental Properties and Provision for Decline in Real Estate

Discontinued Operations

Pursuant to the definition of a component of an entity in SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS No. 144”) all earnings of discontinued operations sold or held for sale, assuming no significant continuing involvement, have been reclassified in the Consolidated Statements of Earnings for the three months ended April 30, 2007 and 2006. The Company considers assets held for sale when the transaction has been approved and there are no significant contingencies related to the sale that may prevent the transaction from closing.

Landings of Brentwood, an apartment community in Nashville, Tennessee, was held for sale at April 30, 2007. Landings of Brentwood’s assets and liabilities as of April 30, 2007 are presented in the table below. The earnings of Landings of Brentwood have not been reclassified to discontinued operations for the three months ended April 30, 2007 as the results do not have a material impact on the Consolidated Statement of Earnings.

		April 30,
		2007
		(in thousands)
Assets
Real estate		$	42,578
Cash and equivalents			29
Restricted cash			3,602
Notes and accounts receivable, net			96
Other assets			560
Total Assets		$	46,865
Liabilities
Mortgage debt, nonrecourse		$	35,725
Accounts payable and accrued expenses			1,627
Total Liabilities		$	37,352

The following table lists the consolidated rental properties included in discontinued operations:

Three Months

Three Months

Square Feet/

Quarter/ Year

Ended

Ended

Property

Location

Number of Units

Disposed

4/30/2007

4/30/2006

Commercial Group:

Battery Park City Retail

Manhattan, New York

166,000 square feet

Q3-2006

—

Yes

Embassy Suites Hotel

Manhattan, New York

463 rooms

Q3-2006

—

Yes

G Street Retail

Philadelphia, Pennsylvania

13,000 square feet

Q1-2006

—

Yes

Hilton Times Square

Manhattan, New York

444 rooms

Q1-2006

—

Yes

Residential Group:

Mount Vernon Square

Alexandria, Virginia

1,387 units

Q4-2006

—

Yes

Providence at Palm Harbor

Tampa, Florida

236 units

Q2-2006

—

Yes

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

C.

Discontinued Operations, Gain on Disposition of Rental Properties and Provision for Decline in Real Estate (continued)

The operating results related to discontinued operations were as follows:

		Three Months
		Ended
		April 30, 2006
		(in thousands)
Revenues		$	22,776
Expenses
Operating expenses			18,941
Depreciation and amortization			2,315
			21,256
Interest expense			(3,543	)
Amortization of mortgage procurement costs			(113	)
Interest income			682
Gain on disposition of rental properties			136,384
Earnings before income taxes			134,930
Income tax expense (benefit)
Current			(563	)
Deferred			29,101
			28,538
Earnings before minority interest			106,392
Minority interest, net of tax
Gain on disposition of rental properties			61,086
Operating loss from rental properties			(12	)
			61,074
Net earnings from discontinued operations		$	45,318

Gain on Disposition of Rental Properties

The following table summarizes the gain on disposition of rental properties, before tax and minority interest, for the three months ended April 30, 2007 and 2006:

						Three Months Ended April 30,
						2007				2006
						(in thousands)
Discontinued Operations:
Hilton Times Square Hotel (1)		Manhattan, New York				$	—			$	135,945
G Street Retail (Specialty Retail Center)		Philadelphia, Pennsylvania					—				439
Total						$	—			$	136,384

Investments accounted for on the equity method are not subject to the provisions of SFAS No. 144, and therefore the gains or losses on the sales of equity method properties are reported in continuing operations when sold. The following table summarizes the Company’s proportionate share of the gain on an equity method investment disposed of during the three months ended April 30, 2007, which is included in equity in earnings of unconsolidated entities in the Consolidated Statements of Earnings. There were no equity method investments disposed of during the three months ended April 30, 2006.

						Three Months Ended April 30,
						2007				2006
						(in thousands)
White Acres (Apartments)		Richmond Heights, Ohio				$	2,106			$	—

The Company disposed of its interest in White Acres in a non-monetary exchange for the remaining outside interest in Midtown Towers, which was also an equity method investment. The Company has accounted for the non-monetary transaction based upon the fair value of the equity method investments exchanged, which resulted in the above gain of $2,106,000.

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

C.

Discontinued Operations, Gain on Disposition of Rental Properties and Provision for Decline in Real Estate (continued)

Provision for Decline in Real Estate

The Company reviews its real estate portfolio, including land held for development or sale, to determine if its carrying costs will be recovered from future undiscounted cash flows whenever events or changes indicate that recoverability of long-lived assets may not be supported by current assumptions. In cases where the Company does not expect to recover its carrying costs, an impairment loss is recorded as a provision for decline in real estate for assets in its real estate portfolio pursuant to the guidance established in SFAS No. 144.

There was no provision for decline in real estate recorded for the three months ended April 30, 2007 or 2006.

D.

Bank Revolving Credit Facility

The bank revolving credit facility as amended June 30, 2006 provides, among other things, for 1) available borrowings up to $600,000,000; 2) at the Company’s election, interest rates of 1.75% over the London Interbank Offered Rate (“LIBOR”) or ¹/2% over the prime rate (the Company generally elects 1.75% over LIBOR); 3) a maturity date of March 2009; 4) maintenance of debt service coverage ratios and specified levels of net worth (as defined in the credit facility); 5) dividend and stock repurchase limitation of $40,000,000 per annual period; and 6) the ability to use up to $100,000,000 of available borrowings for letters of credit or surety bonds. On October 3, 2006, the bank revolving credit facility was further amended to provide the Company the ability to repurchase shares of outstanding Class A common stock using proceeds from the issuance of the 3.625% Puttable Equity-Linked Senior Notes (see Note E – Senior and Subordinated Debt) in an aggregate amount not to exceed $50,000,000. There were $83,760,000 in letters of credit and $-0- in surety bonds outstanding at April 30, 2007.

As of January 31, 2006 and until June 30, 2006, the bank revolving credit facility provided for borrowings of up to $450,000,000 with a $100,000,000 accordion provision subject to bank approval. The revolving credit facility also provided for interest rates, at the Company’s election, of 1.95% over LIBOR or ¹/2% over the prime rate and an annual dividend and stock repurchase limitation of $30,000,000. Other terms of the facility were similar to the Company’s current arrangement.

The outstanding balance of the bank revolving credit facility was $140,000,000 and $-0- at April 30, 2007 and January 31, 2007, respectively.

Subsequent to April 30, 2007, the Company’s 13-member bank group approved an amended and restated bank revolving credit facility. Refer to Note K – Subsequent Events.

E.

Senior and Subordinated Debt

The Company’s Senior and Subordinated Debt is comprised of the following at both April 30, 2007 and January 31, 2007
(in thousands):

Senior Notes:
3.625% Puttable Equity-Linked Senior Notes due 2011		$	287,500
Other Senior Notes:
7.625% Senior Notes due 2015			300,000
6.500% Senior Notes due 2017			150,000
7.375% Senior Notes due 2034			100,000
Total Senior Notes			837,500
Subordinated Debt:
Redevelopment Bonds due 2010			20,400
Subordinate Tax Revenue Bonds due 2013			29,000
Total Subordinated Debt			49,400
Total Senior and Subordinated Debt		$	886,900

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

E.

Senior and Subordinated Debt (continued)

Puttable Equity-Linked Senior Notes

On October 10, 2006, the Company issued $287,500,000 of 3.625% puttable equity-linked senior notes due October 15, 2011 in a private placement. The proceeds from this offering (net of $25,000,000 of offering costs, underwriting fees and the cost of the puttable note hedge and warrant transactions described below) were used to repurchase $24,962,000 of the Company’s Class A common stock, to repay the outstanding balance of $190,000,000 under the bank revolving credit facility (see Note D – Bank Revolving Credit Facility) and for general working capital purposes. The notes were issued at par and accrued interest is payable semi-annually in arrears on April 15 and October 15 of each year, beginning on April 15, 2007. The Company may not redeem these notes prior to maturity. The notes are unsecured unsubordinated obligations and rank equally with all other unsecured and unsubordinated indebtedness.

Holders may put their notes to the Company at their option on any day prior to the close of business on the scheduled trading day immediately preceding July 15, 2011 only under the following circumstances: (1) during the five business-day period after any five consecutive trading-day period (the “measurement period”) in which the trading price per note for each day of that measurement period was less than 98% of the product of the last reported sale price of the Company’s Class A common stock and the put value rate (as defined) on each such day; (2) during any fiscal quarter after the fiscal quarter ending January 31, 2007, if the last reported sale price of the Company’s Class A common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter exceeds 130% of the applicable put value price in effect on the last trading day of the immediately preceding fiscal quarter; or (3) upon the occurrence of specified corporate events as set forth in the applicable indenture. On and after July 15, 2011 until the close of business on the scheduled trading day immediately preceding the maturity date, holders may put their notes to the Company at any time, regardless of the foregoing circumstances. In addition, upon a designated event, as defined, the holders may require the Company to purchase for cash all or a portion of their notes for 100% of the principal amount of the notes plus accrued and unpaid interest, if any, as set forth in the applicable indenture.

If a note is put to the Company, a holder would receive (i) cash equal to the lesser of the principal amount of the note or the put value and (ii) to the extent the put value exceeds the principal amount of the note, shares of the Company’s Class A common stock, cash, or a combination of Class A common stock and cash, at the Company’s option. The initial put value rate was 15.0631 shares of Class A common stock per $1,000 principal amount of notes (equivalent to a put value price of $66.39 per share of Class A common stock). The put value rate will be subject to adjustment in some events but will not be adjusted for accrued interest. In addition, if a “fundamental change,” as defined, occurs prior to the maturity date, the Company will in some cases increase the put value rate for a holder that elects to put its notes.

The Company entered into a registration rights agreement that required a shelf registration statement to be filed within 90 days and declared effective under the United States Securities Act of 1933 (“Securities Act”) within 180 days after October 10, 2006. The Company filed a shelf registration statement under the Securities Act for the resale of the notes and the Class A common stock issuable upon the Company’s exercise of the net share settlement option on January 4, 2007 and it was immediately effective due to our status as a Well-Known Seasoned Issuer. The Company will use its best efforts to keep the shelf registration statement effective until the earliest of: (1) the date all of the registrable securities have been sold pursuant to the shelf registration statement; (2) the expiration of the holding period under Rule 144(k) under the Securities Act, or any successor provision; or (3) two years from the date the shelf registration statement is declared effective. The Company refers to each of the following as an effective failure: (1) the shelf registration statement ceases to be effective, or (2) the Company suspends the use of the prospectus or the holders are otherwise prevented or restricted by the Company from effecting sales pursuant to the shelf registration statement, and either continues for more than 30 days, whether or not consecutive, in any 90-day period, or for more than 90 days, whether or not consecutive, during any 12-month period.

Upon the occurrence of an effective failure, the Company will be required to pay additional amounts, in cash, to holders of the notes. Such additional amounts will accrue on the notes that are registrable securities, from and including the day following the effective failure to but excluding, the earlier of the time such holders are again able to make resales under the shelf registration statement and the date the shelf registration statement is no longer required to be kept effective. Additional amounts will be paid semiannually in arrears on each April 15 and October 15 and will accrue at a rate per annum equal to 0.25% for the first 90 days after the occurrence of the event and 0.50% after the first 90 days. In no event will additional amounts exceed 0.50% per annum. The maximum potential additional amounts that could be required to be paid by the Company is approximately $2,674,000 for the two year period in which the shelf registration is required to be effective. At April 30, 2007, the Company, in accordance with FASB Statement No. 5, “Accounting for Contingencies”, has concluded that it is not probable it will be required to pay additional amounts as a result of an effective failure.

Concurrent with the issuance of the notes, the Company purchased a call option on its Class A common stock in a private transaction. The purchased call option allows the Company to receive shares of its Class A common stock and/or cash from counterparties equal to the amounts of Class A common stock and/or cash related to the excess put value that it would pay to the holders of the notes if put to

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

E.

Senior and Subordinated Debt (continued)

the Company. These purchased call options will terminate upon the earlier of the maturity dates of the notes or the first day all of the notes are no longer outstanding due to a put or otherwise. The purchased call options, which cost an aggregate $45,885,000 ($28,155,000 net of the related tax benefit), were recorded net of tax as a reduction of shareholders’ equity through additional paid-in capital during the year ended January 31, 2007. In a separate transaction, the Company sold warrants to issue shares of the Company’s Class A common stock at an exercise price of $74.35 per share in a private transaction. If the average price of the Company’s Class A common stock during a defined period ending on or about the respective settlement dates exceeds the exercise price of the warrants, the warrants will be settled in shares of the Company’s Class A common stock. Proceeds received from the issuance of the warrants totaled approximately $28,923,000 and were recorded as an addition to shareholders’ equity through additional paid-in capital during the year ended January 31, 2007.

Other Senior Notes

Along with its wholly-owned subsidiaries, Forest City Enterprises Capital Trust I (“Trust I”) and Forest City Enterprises Capital Trust II (“Trust II”), the Company filed an amended shelf registration statement with the SEC on May 24, 2002. This shelf registration statement amended the registration statement previously filed with the SEC in December 1997. This registration statement is intended to provide the Company flexibility to raise funds from the offering of Class A common stock, preferred stock, depositary shares and a variety of debt securities, warrants and other securities. Trust I and Trust II have not issued securities to date and, if issued, would represent the sole net assets of the trusts.

On May 19, 2003, the Company issued $300,000,000 of 7.625% senior notes due June 1, 2015 in a public offering under its shelf registration statement. Accrued interest is payable semi-annually on December 1 and June 1. These senior notes may be redeemed by the Company, at any time on or after June 1, 2008 at a redemption price of 103.813% beginning June 1, 2008 and systematically reduced to 100% in years thereafter.

On January 25, 2005, the Company issued $150,000,000 of 6.500% senior notes due February 1, 2017 in a public offering under its shelf registration statement. Accrued interest is payable semi-annually on February 1 and August 1, commencing on August 1, 2005. These senior notes may be redeemed by the Company, at any time on or after February 1, 2010 at a redemption price of 103.250% beginning February 1, 2010 and systematically reduced to 100% in the years thereafter. However, if the Company completes one or more public equity offerings prior to February 1, 2008, up to 35% of the original principal amount of the notes may be redeemed using all or a portion of the net proceeds within 75 days of the completion of the public equity offering at 106.50% of the principal amount of the notes.

On February 10, 2004, the Company issued $100,000,000 of 7.375% senior notes due February 1, 2034 in a public offering under its shelf registration statement. Accrued interest is payable quarterly on February 1, May 1, August 1, and November 1. These senior notes may be redeemed by the Company, in whole or in part, at any time on or after February 10, 2009 at a redemption price equal to 100% of their principal amount plus accrued interest.

The Company’s senior notes are unsecured senior obligations and rank equally with all existing and future unsecured indebtedness; however, they are effectively subordinated to all existing and future secured indebtedness and other liabilities of the Company’s subsidiaries to the extent of the value of the collateral securing such other debt, including the bank revolving credit facility. The indentures governing the senior notes contain covenants providing, among other things, limitations on incurring additional debt and payment of dividends.

Subordinated Debt

In November 2000, the Company issued $20,400,000 of redevelopment bonds in a private placement. The bonds bear a fixed interest rate of 8.25% and are due September 15, 2010. The Company has entered into a TRS for the benefit of these bonds that expires on September 15, 2008. Under this TRS, the Company receives a rate of 8.25% and pays BMA rate plus a spread (1.15% through September 2006 and 0.90% thereafter). Interest is payable semi-annually on March 15 and September 15. This debt is unsecured and subordinated to the senior notes and the bank revolving credit facility.

In May 2003, the Company purchased $29,000,000 of subordinate tax revenue bonds that were contemporaneously transferred to a custodian, which in turn issued custodial receipts that represent ownership in the bonds to unrelated third parties. The Company evaluated the transfer pursuant to the provisions of SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities (“SFAS No. 140”) and has determined that the transfer does not qualify for sale accounting treatment principally because the Company has guaranteed the payment of principal and interest in the unlikely event that there is insufficient tax revenue to support the bonds when the custodial receipts are subject to mandatory tender on December 1, 2013. As such, the Company is the primary beneficiary of this VIE (see the “Variable Interest Entities” section of Note A) and the book value (which approximates amortized costs) of the bonds was recorded as a collateralized borrowing reported as senior and subordinated debt and as held-to-maturity securities reported as other assets in the Consolidated Balance Sheets.

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

F.

Financing Arrangements

Collateralized Borrowings

On July 13, 2005, the Park Creek Metropolitan District (the “District”) issued $65,000,000 Senior Subordinate Limited Property Tax Supported Revenue Refunding and Improvement Bonds (“Senior Subordinate Bonds”), Series 2005. The District used a portion of the proceeds to repay developer advances and accrued interest of $30,271,000 to Stapleton Land, LLC.

On July 13, 2005, Stapleton Land II, LLC entered into an agreement whereby it will receive a 1% fee on the $65,000,000 Senior Subordinate Bonds described above in exchange for providing certain credit enhancement. In connection with this transaction, Stapleton Land II, LLC provided collateral of approximately $10,000,000 which is recorded in the Consolidated Balance Sheets. For the three months ended April 30, 2007, the Company recorded approximately $231,000 of interest income related to this arrangement in the Consolidated Statements of Earnings. Of the interest income amount, approximately $158,000 is fee interest income and $73,000 is interest income on the collateral. For the three months ended April 30, 2006, the Company recorded approximately $237,000 of interest income related to this arrangement in the Consolidated Statements of Earnings. Of the interest income amount, approximately $158,000 is fee interest income and $79,000 is interest income on the collateral. The counterparty to the credit enhancement arrangement also owns the underlying Senior Subordinate Bonds and can exercise its rights requiring payment from Stapleton Land II, LLC upon an event of default of the Senior Subordinate Bonds, a refunding of the Senior Subordinate Bonds, or failure of Stapleton Land II, LLC to post required collateral. The agreement is scheduled to expire on July 1, 2009. The maximum potential amount of payments Stapleton Land II, LLC could be required to make under the agreement is the par value of the Senior Subordinate Bonds. The Company does not have any rights or obligations to acquire the $65,000,000 Senior Subordinate Bonds under this agreement. At April 30, 2007, the fair value of this agreement, which is deemed to be a derivative financial instrument, was immaterial. Subsequent changes in fair value, if any, will be marked to market through earnings.

On August 16, 2005, the District issued $58,000,000 Junior Subordinated Limited Property Tax Supported Revenue Bonds, Series 2005 (the “Junior Subordinated Bonds”). The Junior Subordinated Bonds initially pay a variable rate of interest. Upon issuance, the Junior Subordinated Bonds were purchased by a third party and the sales proceeds were deposited with a trustee pursuant to the terms of the Series 2005 Investment Agreement. Under the terms of the Series 2005 Investment Agreement, after March 1, 2006, the District may elect to withdraw funds from the trustee for reimbursement for certain qualified infrastructure and interest expenditures (“Qualifying Expenditures”). In the event that funds from the trustee are used for Qualifying Expenditures, a corresponding amount of the Junior Subordinated Bonds converts to an 8.5% fixed rate and matures in December 2037 (“Converted Bonds”). On August 16, 2005, Stapleton Land, LLC entered into a Forward Delivery Placement Agreement (“FDA”) whereby Stapleton Land, LLC is entitled to and obligated to purchase the converted fixed rate Junior Subordinated Bonds through June 2, 2008. Prior to the incurrence of Qualifying Expenditures and the resulting Converted Bonds, Stapleton Land, LLC has no rights or obligations relating to the Junior Subordinated Bonds. In the event the District does not incur Qualifying Expenditures, the Junior Subordinated Bonds will mature on June 2, 2008. During 2006, the District withdrew $20,000,000 of funds from the trustee for reimbursement of certain Qualifying Expenditures. Therefore, a corresponding amount of the Junior Subordinated Bonds became Converted Bonds and were acquired by Stapleton Land, LLC under the terms of the FDA. Stapleton Land, LLC immediately sold the Converted Bonds to investment banks and the Company simultaneously entered into TRS with a notional amount of $20,000,000. The Company receives a fixed rate of 8.5% and pays BMA plus a spread on the TRS. The Company determined the sale of the Converted Bonds to the investment banks and simultaneous execution of the TRS did not surrender control, and therefore the Converted Bonds have been recorded as a secured borrowing in the Consolidated Balance Sheets. The Company has classified the Converted Bonds as available for sale, with unrealized holding gains and losses recorded in accumulated other comprehensive income. The fair value of the Converted Bonds was approximately $20,000,000 at both April 30, 2007 and January 31, 2007. For the three months ended April 30, 2007, the Company recorded $404,000 of interest income and $190,000 of interest expense related to the TRS in the Consolidated Statement of Earnings. As of April 30, 2007 no further draws have been made by the District.

Other Financing Arrangements

In May 2004, a third party purchased $200,000,000 in tax increment revenue bonds issued by DURA, with a fixed-rate coupon of 8.0% and maturity date of October 1, 2024, which were used to fund the infrastructure costs associated with phase II of the Stapleton development project. The DURA bonds were transferred to a trust that issued floating rate trust certificates. Stapleton Land, LLC entered into an agreement with the third party to purchase the DURA bonds from the trust if they are not repurchased or remarketed between June 1, 2007 and June 1, 2009. Stapleton Land, LLC will receive a fee upon removal of the DURA bonds from the trust equal to the 8.0% coupon rate, less the BMA index (fixed at 2.85% through June 1, 2007) plus 40 basis points, less all fees and expenses due to the third party (collectively, the “Fee”).

The Company has concluded that the trust described above is considered a qualified special purpose entity pursuant to the provisions of SFAS No. 140 and thus is excluded from the scope of FIN No. 46 (R). As a result, the DURA bonds and the activity of the trust have not been recorded in the consolidated financial statements. The purchase obligation and the Fee have been accounted for as a derivative with changes in fair value recorded through earnings.

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

The fair market value of the purchase obligation and the Fee is determined based on the present value of the estimated amount of future cash flows considering possible variations in the amount and/or timing. The fair value of $17,096,000 at April 30, 2007 and $15,090,000, respectively, at January 31, 2007 is recorded in other assets in the Consolidated Balance Sheets. For the three months ended April 30, 2007 and 2006, the Company has reported interest income of approximately $2,006,000 and $1,134,000, respectively, related to the Fee in the Consolidated Statements of Earnings.

Also in May 2004, Stapleton Land, LLC entered into a TRS and an interest rate swap both with notional amounts of $75,000,000. Stapleton Land, LLC receives a rate of 6.3% and pays BMA plus 60 basis points on the TRS (Stapleton Land, LLC paid BMA plus 160 basis points for the first 6 months under this agreement). On the interest rate swap, Stapleton Land, LLC pays a rate of 2.85% and receives BMA. Stapleton Land, LLC does not hold the underlying borrowings on the TRS. (See the Accounting for Derivative Instruments and Hedging Activities section in Note A). The change in the fair value of the TRS is marked to market through earnings. The fair value of the TRS was $-0- and $255,000 at April 30 and January 31, 2007, respectively.

Stapleton Land, LLC has committed to fund $24,500,000 to the Park Creek Metropolitan District to be used for certain infrastructure projects. Stapleton Land, LLC has funded $3,031,000 of this commitment as of April 30, 2007.

G.

Dividends

The Company pays quarterly cash dividends on shares of Class A and Class B common stock. The first quarterly dividend of $.07 per share on both Class A and Class B common stock was declared on March 22, 2007 and will be paid on June 15, 2007 to shareholders of record at the close of business on June 1, 2007.

H.

Earnings per Share

Earnings per share (“EPS”) has been computed under the provisions of SFAS No. 128 “Earnings Per Share”. Pursuant to EITF No. 03-6 “Participating Securities and the Two-Class Method under FASB 128”, the Class A Common Units issued in exchange for Bruce C. Ratner’s minority interests in the Forest City Ratner Company portfolio in November 2006, which are reflected as minority interest in the Company’s Consolidated Balance Sheets, are considered participating securities as they are entitled to participate in any dividends paid to the Company’s common stock holders and therefore are included in the computation of basic and diluted earnings per share if the effect of applying the if-converted method is dilutive.

The following table presents the computation of EPS for the periods indicated (in thousands, except share and per share amounts):

						Weighted Average
		Earnings (Loss) from				Common Shares
		Continuing Operations				Outstanding				Per Common
		(Numerator)				(Denominator)				Share
Three Months Ended April 30,
2007
Basic loss per share		$	(17,181	)			101,990,754			$	(.17	)
Effect of dilutive securities (1)(2)			—				—				-
Diluted loss per share		$	(17,181	)			101,990,754			$	(.17	)
2006
Basic earnings per share		$	7,940				101,622,302			$	.08
Effect of dilutive securities (3)			—				1,374,700				—
Diluted earnings per share		$	7,940				102,997,002			$	.08

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

I.

Investments in and Advances to Affiliates

Included in investments in and advances to affiliates are unconsolidated investments in entities which the Company does not control and/or is not deemed to be the primary beneficiary, and which are accounted for under the equity method of accounting, as well as advances to partners and other affiliates.

Following is a reconciliation of members’ and partners’ equity to the Company’s carrying value in the accompanying Consolidated Balance Sheets:

		April 30,				January 31,
		2007				2007
		(in thousands)
Members’ and partners’ equity as below		$	561,073			$	592,681
Equity of other members and partners			467,228				496,971
Company’s investment in partnerships			93,845				95,710
Advances to and on behalf of other affiliates			313,645				238,072
Total Investments in and Advances to Affiliates		$	407,490			$	333,782

Summarized financial information for the equity method investments is as follows:

		(Combined 100%)
		April 30,				January 31,
		2007				2007
		(in thousands)
Balance Sheet:
Completed rental properties		$	2,676,120			$	2,697,454
Projects under development			869,125				777,419
Land held for development or sale			194,247				160,296
Accumulated depreciation			(568,517	)			(554,910	)
Restricted cash			1,396,988				1,432,636
Other assets			531,990				526,142
Total Assets		$	5,099,953			$	5,039,037
Mortgage debt, nonrecourse		$	3,918,561			$	3,834,085
Other liabilities			620,319				612,271
Members’ and partners’ equity			561,073				592,681
Total Liabilities and Members’/Partners’ Equity		$	5,099,953			$	5,039,037
		(Combined 100%)
		Three Months Ended April 30,
		2007				2006
		(in thousands)
Operations:
Revenues		$	217,460			$	166,940
Operating expenses			(154,781	)			(122,800	)
Interest expense			(54,043	)			(32,379	)
Depreciation and amortization			(37,744	)			(37,418	)
Interest and other income			19,189				3,046
Loss from continuing operations			(9,919	)			(22,611	)
Discontinued operations:
Gain on disposition of rental properties (1)			4,212				—
Operating earnings (loss) from rental properties			584				(57	)
		$	4,796			$	(57	)
Net loss (pre-tax)		$	(5,123	)		$	(22,668	)
Company’s portion of net loss (pre-tax)		$	1,361			$	379

		Three Months Ended April 30,
		2007				2006
White Acres (Apartments)                                                                                                    (Richmond Heights, Ohio)		$	4,212			$	—
Company’s portion of gain on disposition of equity method rental properties		$	2,106			$	—

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

J.

Segment Information

The Company uses a measure defined as Earnings Before Depreciation, Amortization and Deferred Taxes (“EBDT”) to report its operating results. EBDT is defined as net earnings excluding the following items: i) gain (loss) on disposition of rental properties, division and other investments (net of tax); ii) the adjustment to recognize rental revenues and rental expense using the straight-line method; iii) non-cash charges for real estate depreciation, amortization, amortization of mortgage procurement costs and deferred income taxes; iv) preferred payment which is classified as minority interest expense in the Company’s Consolidated Statement of Earnings; v) provision for decline in real estate (net of tax); vi) extraordinary items (net of tax); and vii) cumulative effect of change in accounting principle (net of tax).

The Company believes that, although its business has many facets such as development, acquisitions, disposals, and property management, the core of its business is the recurring operations of its portfolio of real estate assets. The Company’s Chief Executive Officer (“CEO”), the chief operating decision maker, uses EBDT, as presented, to assess performance of its portfolio of real estate assets by operating segment because it provides information on the financial performance of the core real estate portfolio operations. EBDT tells the CEO how profitable a real estate segment is simply by operating for the sole purpose of collecting rent, paying operating expenses and servicing its debt. The Company’s segments adhere to the accounting policies further described in Note A.

The following tables summarize financial data for the following strategic business units: Commercial Group, Residential Group, Land Development Group and the following additional segments: The Nets (an equity method investment) and Corporate Activities. All amounts are presented in thousands.

		April 30,				January 31,					Three Months Ended April 30,
		2007				2007					2007				2006
											Expenditures for Additions to
		Identifiable Assets									Real Estate
Commercial Group		$	6,503,126			$	6,346,155				$	241,825			$	186,408
Residential Group			2,207,280				2,032,617					67,078				38,854
Land Development Group			394,849				371,729					347				4,237
The Nets			10,182				7,999					—				—
Corporate Activities			112,789				223,104					838				68
		$	9,228,226			$	8,981,604				$	310,088			$	229,567
		Three Months Ended April 30,									Three Months Ended April 30,
		2007				2006					2007				2006
		Revenues from Real Estate
		Operations									Operating Expenses
Commercial Group		$	197,434			$	175,350				$	102,549			$	87,379
Commercial Group Land Sales			5,593				20,989					3,266				11,353
Residential Group			66,807				55,083					45,650				36,219
Land Development Group			10,733				20,816					12,097				12,999
The Nets			—				—					—				—
Corporate Activities			—				—					13,877				7,789
		$	280,567			$	272,238				$	177,439			$	155,739
		Three Months Ended April 30,									Three Months Ended April 30,									Three Months Ended April 30,
		2007				2006					2007				2006					2007				2006
																				Depreciation and Amortization
		Interest and Other Income									Interest Expense									Expense
Commercial Group		$	1,938			$	885				$	47,369			$	43,371				$	45,589			$	29,106
Residential Group			3,941				9,930					14,890				12,058					14,476				11,927
Land Development Group			5,010				3,546					2,306				1,829					178				45
The Nets			—				—					—				—					—				—
Corporate Activities			607				527					13,842				10,173					557				339
		$	11,496			$	14,888				$	78,407			$	67,431				$	60,800			$	41,417
		Three Months Ended April 30,									Three Months Ended April 30,
		2007				2006					2007				2006
											Earnings Before Depreciation,
		Earnings Before Income Taxes									Amortization & Deferred Taxes
		(EBIT) (1)									(EBDT)
Commercial Group		$	3,140			$	24,609				$	44,801			$	48,597
Residential Group			(3,348	)			4,715					12,490				23,815
Gain on disposition of equity method property			2,106				—					—				—
Land Development Group			657				16,320					(2,697	)			6,850
The Nets			(3,251	)			(8,701	)				(2,050	)			(5,375	)
Corporate Activities			(27,669	)			(17,774	)				(18,015	)			(10,548	)
		$	(28,365	)		$	19,169				$	34,529			$	63,339