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, 2008

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 incorporation or organization)				(I.R.S. Employer Identification No.)
Terminal Tower Suite 1100		50 Public Square 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, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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 3, 2008
Class A Common Stock, $.33 1/3 par value		79,253,885 shares
Class B Common Stock, $.33 1/3 par value		23,698,349 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, 2008 and January 31, 2008			2
				Consolidated Statements of Operations Three Months Ended April 30, 2008 and 2007			3
				Consolidated Statements of Comprehensive Loss Three Months Ended April 30, 2008 and 2007			4
				Consolidated Statements of Shareholders’ Equity Three Months Ended April 30, 2008 and 2007			5
				Consolidated Statements of Cash Flows Three Months Ended April 30, 2008 and 2007			6
				Notes to Consolidated Financial Statements			8
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			30
		Item 3.		Quantitative and Qualitative Disclosures about Market Risk			53
		Item 4.		Controls and Procedures			57
PART II. OTHER INFORMATION
		Item 1.		Legal Proceedings			57
		Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			57
		Item 6.		Exhibits			58
		Signatures					63
		Certifications
EX-10.60
EX-31.1
EX-31.2
EX-32.1

PART I — FINANCIAL INFORMATION

Forest City Enterprises, Inc. and Subsidiaries

		April 30, 2008				January 31, 2008
		(Unaudited)
		(in thousands)
Assets
Real Estate
Completed rental properties		$	7,794,681			$	7,561,685
Projects under development			1,591,749				1,499,495
Land held for development or sale			161,875				155,524
Total Real Estate			9,548,305				9,216,704
Less accumulated depreciation			(1,291,523	)			(1,244,391	)
Real Estate, net			8,256,782				7,972,313
Cash and equivalents			179,850				254,434
Restricted cash			408,568				248,262
Notes and accounts receivable, net			415,233				419,090
Investments in and advances to affiliates			365,067				495,828
Other assets			887,595				829,998
Operating property assets held for sale			31,617				31,672
Total Assets		$	10,544,712			$	10,251,597
Liabilities and Shareholders’ Equity
Liabilities
Mortgage debt, nonrecourse		$	6,666,259			$	6,338,610
Notes payable			173,920				143,874
Bank revolving credit facility			32,000				39,000
Senior and subordinated debt			886,900				886,900
Accounts payable and accrued expenses			978,559				1,015,844
Deferred income taxes			460,420				477,238
Liabilities of operating property held for sale			28,570				28,498
Total Liabilities			9,226,628				8,929,964
Minority Interest			389,108				349,517
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, 78,834,468 and 78,237,993 shares issued and 78,781,255 and 78,201,673 shares outstanding, respectively			26,278				26,079
Class B, convertible, 56,000,000 shares authorized, 23,878,414 and 24,387,607 shares issued and outstanding, respectively; 26,257,961 issuable			7,960				8,129
			34,238				34,208
Additional paid-in capital			230,211				229,358
Retained earnings			734,359				782,871
Less treasury stock, at cost; 53,213 and 36,320 Class A shares, respectively			(2,307	)			(1,665	)
			996,501				1,044,772
Accumulated other comprehensive loss			(67,525	)			(72,656	)
Total Shareholders’ Equity			928,976				972,116
Total Liabilities and Shareholders’ Equity		$	10,544,712			$	10,251,597

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

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

		Three Months Ended April 30,
		2008				2007
			(in thousands, except per share data)
Revenues from real estate operations		$	307,646			$	268,365
Expenses
Operating expenses			207,676				168,592
Depreciation and amortization			66,619				59,787
			274,295				228,379
Interest expense			(83,371	)			(76,799	)
Amortization of mortgage procurement costs			(2,938	)			(2,564	)
Loss on early extinguishment of debt			(5,179	)			(2,544	)
Interest and other income			8,401				11,399
Gain on disposition of other investments			150				-
Loss before income taxes			(49,586	)			(30,522	)
Income tax expense (benefit)
Current			555				(1,692	)
Deferred			(20,134	)			(12,348	)
			(19,579	)			(14,040	)
Minority interest			(694	)			(2,548	)
Equity in (loss) earnings of unconsolidated entities			(9,647	)			1,361
Loss from continuing operations			(40,348	)			(17,669	)
Discontinued operations, net of tax:
Operating earnings from rental properties			79				488
Net loss		$	(40,269	)		$	(17,181	)
Basic and diluted loss per common share
Loss from continuing operations		$	(0.39	)		$	(0.17	)
Earnings from discontinued operations, net of tax			-				-
Net loss		$	(0.39	)		$	(0.17	)

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

Forest City Enterprises, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Loss
(Unaudited)

		Three Months Ended April 30,
		2008				2007
		(in thousands)
Net loss		$	(40,269	)		$	(17,181	)
Other comprehensive income (loss), net of tax and minority interest:
Unrealized net gains (losses) on investment securities			51				(41	)
Change in unrealized net gains (losses) on interest rate derivative contracts			5,080				(9,178	)
Other comprehensive income (loss), net of tax and minority interest		$	5,131			$	(9,219	)
Comprehensive loss		$	(35,138	)		$	(26,400	)

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

Forest City Enterprises, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity
(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, 2008
Balances at January 31, 2008			78,238			$	26,079				24,388			$	8,129			$	229,358			$	782,871				36			$	(1,665	)		$	(72,656	)		$	972,116
Net loss																							(40,269	)															(40,269	)
Other comprehensive income, net of tax and minority interest																																			5,131				5,131
Dividends $.08 per share																							(8,243	)															(8,243	)
Purchase of treasury stock																											17				(642	)							(642	)
Conversion of Class B to Class A shares			510				169				(510	)			(169	)																							-
Exercise of stock options			12				4												120																				124
Restricted stock vested			74				26												(26	)																			-
Stock-based compensation																			4,469																				4,469
Distribution of accumulated equity to minority partners																			(3,710	)																			(3,710	)
Balances at April 30, 2008			78,834			$	26,278				23,878			$	7,960			$	230,211			$	734,359				53			$	(2,307	)		$	(67,525	)		$	928,976
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
Cumulative effect of change in accounting for uncertain tax positions																							245																245
Net loss																							(17,181	)															(17,181	)
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																			(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

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,
		2008				2007
		(in thousands)
Net Loss		$	(40,269	)		$	(17,181	)
Depreciation and amortization			66,619				59,787
Amortization of mortgage procurement costs			2,938				2,564
(Gain) loss on early extinguishment of debt, net of cash prepayment penalties			(305	)			2,544
Gain on disposition of other investments			(150	)			-
Deferred income tax benefit			(20,134	)			(12,348	)
Minority interest			694				2,548
Equity in loss (earnings) of unconsolidated entities			9,647				(1,361	)
Stock-based compensation			2,737				4,225
Amortization and mark-to-market adjustments of derivative instruments			362				941
Cash distributions from operations of unconsolidated entities			11,619				6,358
Write-off of abandoned development projects			26,692				2,570
Discontinued operations:
Depreciation and amortization			5				1,013
Amortization of mortgage procurement costs			11				35
Deferred income tax expense			114				250
Cost of sales of land included in projects under development and completed rental properties			2,862				3,266
Increase in land held for development or sale			(10,533	)			(11,397	)
Decrease (increase) in notes and accounts receivable			14,909				(8,611	)
Increase in other assets			(3,270	)			(6,514	)
Decrease (increase) in restricted cash used for operating purposes			3,632				(4,774	)
Decrease in accounts payable and accrued expenses			(70,783	)			(33,113	)
Net cash used in operating activities			(2,603	)			(9,198	)
Cash Flows from Investing Activities
Capital expenditures, including real estate acquisitions			(236,535	)			(306,906	)
Payment of lease procurement costs and other assets			(40,730	)			(12,047	)
(Increase) decrease in restricted cash used for capital expenditures			(161,316	)			32,109
Proceeds from disposition of other investments			150				-
Decrease (increase) in investments in and advances to affiliates			56,655				(27,648	)
Net cash used in investing activities			(381,776	)			(314,492	)
Cash Flows from Financing Activities
Borrowings on bank revolving credit facility			80,000				193,000
Payments on bank revolving credit facility			(87,000	)			(53,000	)
Proceeds from nonrecourse mortgage debt			683,815				215,418
Principal payments on nonrecourse mortgage debt			(404,259	)			(100,435	)
Proceeds from notes payable			35,388				151
Payments on notes payable			(5,342	)			(18,421	)
Change in restricted cash and book overdrafts			5,697				(6,919	)
Payment of deferred financing costs			(22,694	)			(4,148	)
Purchase of treasury stock			(642	)			(3,138	)
Exercise of stock options			124				3,418
Distributions of accumulated equity to minority partners			(3,710	)			(9,558	)
Dividends paid to shareholders			(8,234	)			(7,160	)
Increase in minority interest			36,652				21,191
Net cash provided by financing activities			309,795				230,399
Net decrease in cash and equivalents			(74,584	)			(93,291	)
Cash and equivalents at beginning of period			254,434				254,213
Cash and equivalents at end of period		$	179,850			$	160,922

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, 2008 and 2007:

		Three Months Ended April 30,
		2008				2007
		(in thousands)
Operating Activities
Decrease (increase) in notes and accounts receivable (1)(2)		$	4,064			$	(9,251	)
Decrease (increase) in land held for development or sale (4)(5)			1,320				(2,537	)
Increase in other assets (1)(2)			(19,909	)			(61,208	)
Increase in restricted cash (1)			(363	)			(2,307	)
Increase in accounts payable and accrued expenses (1)(2)(4)(7)			34,607				58,801
Total effect on operating activities		$	19,719			$	(16,502	)
Investing Activities
(Increase) decrease in projects under development (1)(3)(4)(5)(7)		$	(100,878	)		$	12,855
Increase in completed rental properties (1)(2)(6)			25				(56,400	)
Increase in restricted cash (1)			(244	)			-
Decrease (increase) in investments in and advances to affiliates (1)			27,685				(5,534	)
Total effect on investing activities		$	(73,412	)		$	(49,079	)
Financing Activities
Increase in nonrecourse mortgage debt (1)(6)		$	51,970			$	65,364
Increase in restricted cash (1)			-				(1,412	)
Increase in additional paid-in capital (3)			1,732				1,687
Dividends declared but not yet paid			(9	)			(58	)
Total effect on financing activities		$	53,693			$	65,581

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

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(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, 2008, 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.

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 Variable Interest Entities (“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, which resulted in approximately $7,837,000 of accelerated depreciation expense reflected in the Consolidated Statements of Operations during the three months ended April 30, 2007.

Reclassification

Certain prior year amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year’s presentation.

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 restricted deposits with qualified intermediaries related to like-kind exchanges.

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 directly involved 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 as incurred.

At April 30 and January 31, 2008, the Company has capitalized $24,921,000 and $26,840,000, respectively, of software costs net of accumulated amortization of $14,409,000 and $11,393,000, respectively. The Company has been implementing an enterprise resource planning (“ERP”) project of which the first phase was placed into service March 1, 2007. Total amortization of capitalized software costs amounted to $3,016,000 and $1,709,000 for the three months ended April 30, 2008 and 2007, respectively, primarily related to the first phase of the ERP project.

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

A. Accounting Policies (continued)

Historic and New Market 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 Internal Revenue Code (“IRC”) section 47 and new market tax credits on qualifying investments in designated community development entities (“CDEs”) under IRC section 45D, 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 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. 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. 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 for historic tax credits and upon certification of the qualifying investments in designated CDEs for new market tax credits 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 7 years. During the three months ended April 30, 2008 and 2007, the Company recognized income related to tax credits of $1,491,000 and $888,000, respectively, which were recorded in interest and other income in its Consolidated Statements of Operations.

Distribution of Accumulated Equity 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, 2008, the Company refinanced Nine MetroTech Center North, an office building located in Brooklyn, New York. Of the total nonrecourse refinancing proceeds distributed to its minority partner in this property during the three months ended April 30, 2008, $3,710,000 was in excess of its minority partners’ book capital accounts. 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.

Accumulated Other Comprehensive Loss

Net unrealized gains or losses on securities are included in accumulated other comprehensive income (loss) (“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 qualifying as cash flow hedges. The following table summarizes the components of accumulated OCI included within the Company’s Consolidated Balance Sheets.

		April 30, 2008				January 31, 2008
		(in thousands)
Unrealized gains on securities		$	168			$	91
Unrealized losses on interest rate contracts			(110,683	)			(119,953	)
			(110,515	)			(119,862	)
Minority interest and income tax benefit			(42,990	)			(47,206	)
Accumulated Other Comprehensive Loss		$	(67,525	)		$	(72,656	)

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

A. Accounting Policies (continued)

Accounting for Derivative Instruments and Hedging Activities

During the three months ended April 30, 2008 and 2007, the Company recorded interest expense of approximately $25,000 and $328,000, respectively, in the Consolidated Statements of Operations, representing the total ineffectiveness of all cash flow hedges. For the three months ended April 30, 2008 and 2007, the amount of hedge ineffectiveness relating to hedges designated and qualifying as fair value hedges under Statement of Financial Accountintg (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), was not material. The amount of derivative gains reclassified into earnings from accumulated 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 $-0- and $9,000 for the three months ended April 30, 2008 and 2007, respectively. As of April 30, 2008, 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 $15,449,000, net of tax.

The Company entered into various forward swaps to protect itself against fluctuations in the swap rate at terms ranging between five to ten years associated with forecasted fixed rate borrowings. At the time the Company secures and locks an interest rate on an anticipated financing, it intends to simultaneously terminate the forward hedge associated with that financing. The table below lists the forward swaps outstanding as of April 30, 2008 (in thousands):

Forward Swaps

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

For the three months ended April 30, 2008 and 2007, the Company recorded $12,000 and $(1,447,000), respectively, of interest income (expense) related to its forward swap in its Consolidated Statements of Operations, 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 Security Industry and Financial Markets Association (“SIFMA”) 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, 2008, the aggregate notional amount of TRS in which the Company and/or the Joint Ventures have an interest is approximately $499,520,000 (which includes the TRS on the $20,400,000 redevelopment bonds. Refer to Note D - Senior and Subordinated Debt). The Company believes the economic return and related risk associated with a TRS is generally comparable to that of nonrecourse variable-rate mortgage debt.

In addition, in May 2004 Stapleton Land, LLC, a consolidated subsidiary, 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 Structured Financing Arrangements section of Note E). 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, 2008 of approximately $24,278,000 and $23,108,000, respectively, is recorded in other assets in the Consolidated Balance Sheets.

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

A. Accounting Policies (continued)

The Company estimates the fair value of its hedging instruments based on interest rate market pricing models. At April 30 and January 31, 2008, interest rate caps and swaptions were reported at fair value of approximately $4,515,000 and $209,000, respectively, in other assets in the Consolidated Balance Sheets. At April 30 and January 31, 2008, interest rate swap agreements, which had a positive fair value of approximately $3,027,000 and $3,019,000, respectively, were included in other assets in the Consolidated Balance Sheets. At April 30 and January 31, 2008, interest rate swap agreements, which had a negative fair value of approximately $98,813,000 and $109,232,000, respectively, (which includes the forward swaps) were included in accounts payable and accrued expenses in the Consolidated Balance Sheets.

Variable Interest Entities

As of April 30, 2008, the Company determined that it is the primary beneficiary under Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities” (“FIN No. 46 (R)”) of 32 VIEs representing 20 properties (19 VIEs representing 9 properties in Residential Group, 11 VIEs representing 9 properties in Commercial Group, and 2 VIEs/properties in Land Development Group). As of April 30, 2008, the Company held variable interests in 43 VIEs for which it is not the primary beneficiary. As of April 30, 2008, the maximum exposure to loss as a result of the Company’s involvement with these unconsolidated VIEs is limited to its recorded investments in those VIEs totaling approximately $89,000,000. The Company’s 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, land development and the Nets.

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 D - Senior and Subordinated Debt) as of April 30, 2008.

New Accounting Standards

In May 2008, the FASB issued FASB Staff Position (“FSP”) No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”), which requires the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) to be separately accounted for in a manner that reflects the issuer’s nonconvertible debt borrowing rate. FSP APB 14-1 requires the initial debt proceeds from the sale of a company’s convertible debt instrument to be allocated between a liability component and an equity component. The resulting debt discount will be amortized over the debt instrument’s expected life as additional interest expense. As a result, a lower net income could be reflected as interest expense would include both the current period’s amortization of the debt discount and the instrument’s coupon interest. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008, and for interim periods within those fiscal years, with retrospective application required. This statement will change the accounting treatment for the Company’s 3.625% Puttable Equity-Linked Senior Notes due October 2011, which were issued in October 2006. The impact of this new accounting treatment could be significant to the Company’s results of operations and result in an increase to non-cash interest expense beginning in fiscal year 2009 for financial statements covering past and future periods. The Company is currently assessing the impact FSP APB 14-1 will have on its consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”), which is intended to improve financing reporting by identifying a consistent framework or hierarchy for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP for nongovernmental entities. SFAS No. 162 is effective 60 days following the Securities and Exchange Commission’s (“SEC”) approval of the Public Company Accounting Oversight Board amendment to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Company does not expect adoption of SFAS No. 162 to have a material impact on its consolidated financial statements.

In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets.” This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”. This FSP allows the Company to use its historical experience in renewing or extending the useful life of intangible assets. This FSP is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years and shall be applied prospectively to intangible assets acquired after the effective date. The Company does not expect the application of this FSP to have a material impact on its consolidated financial statements.

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

A. Accounting Policies (continued)

In March 2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”). SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133 with the intent to provide users of financial statements with an enhanced understanding of how derivative instruments and hedging activities affect an entity’s financial position, financial performance and cash flows. These disclosure requirements include a tabular summary of the fair values of derivative instruments and their gains and losses, disclosure of derivative features that are credit risk related to provide more information regarding an entity’s liquidity and cross-referencing within footnotes to make it easier for financial statement users to locate important information about derivative instruments. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 with early application encouraged. The Company is currently assessing the impact SFAS No. 161 will have on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) provides greater consistency in the accounting and financial reporting of business combinations. SFAS No. 141(R) requires the acquiring entity in a business combination to recognize all assets acquired and liabilities assumed in the transaction, establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed and requires the acquirer to disclose the nature and financial effect of the business combination. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008. The Company is currently assessing the impact SFAS No. 141(R) will have on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements” an Amendment of Accounting Research Bulletin No. 51 (“SFAS No. 160”). A non-controlling interest, sometimes called minority interest, is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. The objective of this statement is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards that require: (i) the ownership interest in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity; (ii) the amount of consolidated net income attributable to the parent and to the non-controlling interest be clearly identified and presented on the face of the consolidated statement of operations; (iii) changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently and requires that they be accounted for similarly, as equity transactions; (iv) when a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary be initially measured at fair value, the gain or loss on the deconsolidation of the subsidiary is measured using fair value of any non-controlling equity investments rather than the carrying amount of that retained investment; and (v) entities provide sufficient disclosures that clearly identify and distinguish between the interest of the parent and the interest of the non-controlling owners. This statement is effective for fiscal years, and interim reporting periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company is currently assessing the impact SFAS No. 160 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. In February 2008, the FASB issued two Staff Positions on SFAS No. 157: (1) FSP No. FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” (“FSP FAS 157-1”) and (2) FSP No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”). FSP FAS 157-1 excludes SFAS No. 13, “Accounting for Leases” (“SFAS No. 13”), and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under SFAS No. 13 from SFAS No. 157’s scope. FSP FAS 157-2 delays the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. The Company partially adopted this statement for its financial assets and liabilities on February 1, 2008 (see Note F - Fair Value Measurements).

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

B. Investments in and Advances to Affiliates

Included in investments in and advances to affiliates are unconsolidated investments in entities that 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,
		2008				2008
		(in thousands)
Members’ and partners’ equity, as below		$	608,445			$	741,871
Equity of other members and partners			477,235				553,842
Company’s investment in partnerships			131,210				188,029
Advances to and on behalf of other affiliates			233,857				307,799
Total Investments in and Advances to Affiliates		$	365,067			$	495,828

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

		(Combined 100%)
		April 30,				January 31,
		2008				2008
		(in thousands)
Balance Sheet:
Completed rental properties		$	3,029,984			$	2,989,525
Projects under development			1,352,943				1,271,998
Land held for development or sale			281,395				265,943
Accumulated depreciation			(619,452	)			(606,961	)
Restricted cash - military housing bond funds			948,816				1,029,503
Other restricted cash			544,055				574,638
Other assets			425,737				409,973
Total Assets		$	5,963,478			$	5,934,619
Mortgage debt, nonrecourse		$	4,526,885			$	4,486,786
Other liabilities			828,148				705,962
Members’ and partners’ equity			608,445				741,871
Total Liabilities and Members’/Partners’ Equity		$	5,963,478			$	5,934,619

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

B. Investments in and Advances to Affiliates (continued)

		(Combined 100%)
		Three Months Ended April 30,
		2008				2007
		(in thousands)
Operations:
Revenues		$	240,838			$	216,949
Operating expenses			(168,886	)			(154,568	)
Interest expense			(59,533	)			(53,925	)
Depreciation and amortization			(48,235	)			(37,677	)
Interest and other income			17,364				19,187
Loss from continuing operations			(18,452	)			(10,034	)
Discontinued operations:
Gain on disposition of rental properties (1)			3,070				4,212
Operating earnings (loss) from rental properties			(18	)			699
Discontinued operations subtotal			3,052				4,911
Net loss (pre-tax)		$	(15,400	)		$	(5,123	)
Company’s portion of net (loss) earnings (pre-tax)		$	(9,647	)		$	1,361

		Three Months Ended April 30,
		2008				2007
One International Place (Office Building)                                (Cleveland, Ohio)		$	3,070			$	-
White Acres (Apartments)                                          (Richmond Heights, Ohio)			-				4,212
Total gain on disposition of equity method rental properties		$	3,070			$	4,212
Company’s portion of gain on disposition of equity method rental properties			881				2,106

Included in the amounts above are the following amounts for the three months ended April 30, 2008 and 2007 related to the Company’s investment in an entity that is reported in the Nets segment. This entity primarily reports on the operations of the New Jersey Nets basketball team, a franchise of the National Basketball Association, in which the Company has been an equity method investor since August 16, 2004. Summarized financial information for this equity method investment is as follows:

		Three Months Ended April 30,
		2008				2007
		(in thousands)
Operations:
Revenues and interest income		$	48,216			$	42,358
Operating expenses			(50,471	)			(48,017	)
Interest expense			(1,857	)			(2,676	)
Depreciation and amortization			(20,214	)			(20,528	)
Net loss (pre-tax)		$	(24,326	)		$	(28,863	)
Company’s portion of net loss (pre-tax)		$	(12,827	)		$	(2,670	)

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

C. Bank Revolving Credit Facility

At April 30 and January 31, 2008, the Company’s bank revolving credit facility, as amended, provides for maximum borrowings of $750,000,000 and matures in March 2010. The facility bears interest at the Company’s option at either (1) a LIBOR-based rate plus 1.45% (4.39% and 4.89% at April 30 and January 31, 2008, respectively), or (2) a Prime-based rate plus .50%. The Company has historically elected the LIBOR-based rate option. Of the available borrowings, up to $100,000,000 may be used for letters of credit or surety bonds. The credit facility also contains certain financial covenants, including maintenance of certain debt service and cash flow coverage ratios, specified levels of net worth (as defined in the credit facility) and a dividend and stock repurchase limitation of $40,000,000 per annual period.

Outstanding balances on the bank revolving credit facility at April 30 and January 31, 2008 were as follows (in thousands):

		April 30, 2008				January 31, 2008
Outstanding balances:
Borrowings		$	32,000			$	39,000
Letters of credit		$	82,312			$	71,802
Surety bonds		$	-			$	-

D. Senior and Subordinated Debt

The Company’s Senior and Subordinated Debt is comprised of the following at both April 30 and January 31, 2008 (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

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 C — 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, which began 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.

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

D. Senior and Subordinated Debt (continued)

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 Securities Act of 1933, as amended (“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 the Company’s 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. At April 30, 2008, the maximum potential additional amounts that could be required to be paid by the Company is approximately $796,000 for the remaining period in which the shelf registration is required to be effective. At April 30, 2008, in accordance with FASB Statement No. 5, “Accounting for Contingencies,” the Company 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 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.

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

D. Senior and Subordinated Debt (continued)

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, such securities 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. 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.

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 the SIFMA 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 bonds bear a fixed interest rate of 7.875%. 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 determined that the transfer did not qualify for sale accounting treatment principally because the Company 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 and the book value (which approximated 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)

E. 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.

On July 13, 2005, Stapleton Land II, LLC, a consolidated subsidiary, entered into an agreement whereby it will receive a 1% fee on the Senior Subordinate Bonds in exchange for providing certain credit enhancement. In connection with this transaction, Stapleton Land II, LLC provided a combination of cash and notes receivable aggregating approximately $10,000,000 as collateral. During the year ended January 31, 2008, the cash component was replaced as collateral by certain notes receivable owned by the Company. For the three months ended April 30, 2008 and 2007, the Company recorded $160,000 and $231,000 of interest income related to this arrangement in the Consolidated Statements of Operations, respectively. 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, 2008, 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, a consolidated subsidiary, 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. As of April 30, 2008, the District had withdrawn a total of $58,000,000 of funds from the trustee for reimbursement of certain Qualifying Expenditures, of which $14,000,000 was withdrawn during the three months ended April 30, 2008. 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 transferred the Converted Bonds to investment banks and the Company simultaneously entered into TRS with a notional amount of $58,000,000. The Company receives a fixed rate of 8.5% and pays SIFMA plus a spread on the TRS related to the Converted Bonds. The Company determined the sale of the Converted Bonds to the investment banks and simultaneous execution of the TRS did not surrender control; 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 OCI. The fair value of the Converted Bonds was $58,000,000 and $44,000,000, respectively, at April 30, 2008 and January 31, 2008. For the three months ended April 30, 2008 and 2007, the Company recorded net interest income of $838,000 and $214,000, respectively, related to the TRS in the Consolidated Statements of Operations.

Other Structured 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 SIFMA index plus 40 basis points, less all fees and expenses due to the third party (collectively, the “Fee”). As of April 30, 2008, the DURA bonds have not been repurchased or remarketed.

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

E. Financing Arrangements (continued)

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.

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 $24,278,000 and $23,108,000 at April 30, 2008 and January 31, 2008, respectively, is recorded in other assets in the Consolidated Balance Sheets. For the three months ended April 30, 2008 and 2007, the Company recorded interest income of $1,170,000 and $2,006,000, respectively, related to the Fee in the Consolidated Statements of Operations.

Stapleton Land, LLC has committed to fund $24,500,000 to the District to be used for certain infrastructure projects and has funded $13,788,000 of this commitment as of April 30, 2008.

F. Fair Value Measurements

The Company adopted SFAS No. 157 on February 1, 2008 for its financial assets and liabilities. The Company determined the financial assets and liabilities subject to SFAS No. 157 were interest rate caps and swaptions, interest rate swap agreements (including forward swaps), TRS, borrowings subject to TRS, and the DURA purchase obligation and related fee (see page 10).

Fair Value Hierarchy

SFAS No. 157 specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (also referred to as observable inputs). In accordance with SFAS No. 157, the following summarizes the fair value hierarchy:

	•		Level 1 — Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
	•		Level 2 — Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant observable inputs are available, either directly or indirectly such as interest rates and yield curves that are observable at commonly quoted intervals; and
	•		Level 3 — Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

Measurement of Fair Value

The Company estimates the fair value of its hedging instruments, which includes the interest rate caps and swaptions, and interest rate swap agreements (including forward swaps), based on interest rate market pricing models. Although the Company has determined that the significant inputs used to value its hedging instruments fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with the Company’s counterparties and its own credit risk utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of April 30, 2008, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its hedging instruments positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its hedging instruments. As a result, the Company has determined that its hedging instruments valuations in their entirety are classified in Level 2 of the fair value hierarchy.

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

F. Fair Value Measurements (continued)

The Company’s TRS have termination values equal to the difference between the fair value of the underlying bonds and the bonds base (acquired) price times the stated par amount of the bonds. Upon termination of the contract with the counterparty, the Company is entitled to receive the termination value if the underlying fair value of the bonds is greater than the base price and is obligated to pay the termination value if the underlying fair value of the bonds is less than the base price. The underlying borrowings generally have call features at par and without prepayment penalties. The call features of the underlying borrowings would result in a significant discount factor to any value attributed to the exchange of cash flows in these contracts by another market participant willing to purchase the Company’s positions. Therefore, the Company believes the termination value of the TRS approximates the fair value another market participant would assign to these contracts. The Company compares estimates of fair value to those provided by the respective counterparties on a quarterly basis. The Company has determined its fair value estimate of TRS is classified in Level 3 of the fair value hierarchy.

To determine the fair value of the underlying borrowings subject to TRS, the base price is initially used as the estimate of fair value. The Company adjusts the fair value based upon observable and unobservable measures such as the financial performance of the underlying collateral; interest rate risk spreads for similar transactions and loan to value ratios. In the absence of such evidence, management’s best estimate is used. The Company compares estimates of fair value to those provided by the respective counterparties on a quarterly basis. The Company has determined its fair value estimate of borrowings subject to TRS is classified in Level 3 of the fair value hierarchy.

To determine the fair value of the DURA purchase obligation and related fee, the Company uses observable and unobservable measures such as the underlying tax revenue to support future bonding capacity of DURA, credit spreads, movements in variable interest rates, the period remaining before the remarketing date, and management’s estimates of the likelihood of remarketing the underlying bonds. Additionally, the Company compares its estimate of fair value to an independent calculation by the counterparty. The Company has determined its fair value estimate of the DURA purchase obligation and related fee is classified in Level 3 of the fair value hierarchy.

Items Measured at Fair Value on a Recurring Basis

The Company’s financial assets consists of interest rate caps and swaptions, interest rate swap agreements with a positive fair value, TRS with a positive fair value, and the DURA purchase obligation and related fee and are included in other assets. The Company’s financial liabilities consists of interest rate swap agreements with a negative fair value (which includes the forward swaps) and TRS with a negative fair value included in accounts payable and accrued expenses and borrowings subject to TRS included in mortgage debt, nonrecourse. The following table presents information about the Company’s financial assets and liabilities that were measured at fair value on a recurring basis as of April 30, 2008, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

		Fair Value Measurements
		at April 30, 2008
		Level 1				Level 2				Level 3				Total
		(in thousands)
Interest rate caps and swaptions		$	-			$	4,515			$	-			$	4,515
Interest rate swap agreements (positive fair value)			-				3,027				-				3,027
TRS (positive fair value)			-				-				1,542				1,542
DURA purchase obligation and related fee			-				-				24,278				24,278
Interest rate swap agreements (negative fair value)			-				(98,813	)			-				(98,813	)
TRS (negative fair value)			-				-				(10,472	)			(10,472	)
Fair value adjustment to the borrowings subject to TRS			-				-				4,983				4,983
Total		$	-			$	(91,271	)		$	20,331			$	(70,940	)

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

F. Fair Value Measurements (continued)

The table below presents a reconciliation of all financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended April 30, 2008.

		Fair Value Measurements
		Three Months ended April 30, 2008
		(in thousands)
						Fair value
						adjustment to the								DURA purchase
		Net				borrowings				Total TRS				obligation and
		TRS				subject to TRS				Related				related fee
Balance, February 1, 2008		$	(2,866	)		$	(934	)		$	(3,800	)		$	23,108
Total realized and unrealized gains (losses):
Included in earnings			(6,064	)			5,917				(147	)			1,170
Included in other comprehensive income			-				-				-				-
Purchases, issuances and settlements			-				-				-				-
Balance, April 30, 2008		$	(8,930	)		$	4,983			$	(3,947	)		$	24,278

G. Stock-Based Compensation

During the three months ended April 30, 2008, the Company granted 26,594 stock options and 24,289 shares of restricted stock under the Company’s 1994 Stock Plan. The stock options had a total grant-date fair value of $250,000, or $9.40 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 22.5%, risk-free interest rate of 2.69%, and expected dividend yield of .54%. The exercise price of the options is $37.68, 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 $924,360, or $38.06 weighted average fair value per share, which was valued at the closing price of the stock on the respective grant dates.

At April 30, 2008, there was $17,370,000 of unrecognized compensation cost related to unvested stock options that is expected to be recognized over a weighted-average period of 2.43 years, and there was $19,214,000 of unrecognized compensation cost related to unvested restricted stock that is expected to be recognized over a weighted-average period of 3.18 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,
		2008				2007
		(in thousands)
Stock option costs		$	2,576			$	4,215
Restricted stock costs			1,893				1,697
Total stock-based compensation costs			4,469				5,912
Less amount capitalized into qualifying real estate projects			(1,732	)			(1,687	)
Amount charged to operating expenses			2,737				4,225
Depreciation expense on capitalized stock-based compensation			61				20
Total stock-based compensation expense		$	2,798			$	4,245
Deferred income tax benefit		$	921			$	1,450

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

G. Stock-Based Compensation (continued)

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, 2008 and 2007 was $974,000 and $2,152,000, respectively.

In connection with the vesting of restricted stock during the three months ended April 30, 2008 and 2007, the Company repurchased into treasury 16,893 shares and 50,186 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 $642,000 and $3,138,000, respectively.

H. Income Taxes

Income tax benefit for the three months ended April 30, 2008 and 2007 was $(19,579,000) and $(14,040,000), respectively. The difference in the income tax benefit reflected in the Consolidated Statements of Operations versus the income tax benefit computed at the statutory federal income tax rate is primarily attributable to state income taxes, additional general business credits, changes to the Company’s charitable contribution and state NOL valuation allowances based upon management’s assessment of the Company’s ability to utilize such deferred tax assets, and various permanent differences between pre-tax GAAP income and taxable income.

The Company applies an estimated annual income tax rate to its year-to-date earnings from operations to derive its tax provision each quarter. Certain circumstances may arise which makes it difficult for the Company to determine a reasonable estimate of its effective tax rate for the year. FASB Interpretation No. 18, “Accounting for Income Taxes in Interim Periods” (“FIN No. 18”) provides that if a reliable estimate cannot be made, the actual effective tax rate for the year-to-date may be the best estimate of the annual effective tax rate. The Company’s current projected operating results coupled with permanent items results in an effective tax rate that changes significantly with small variations in projected income or loss from operations. With the recent difficulties in the lending and capital markets and uncertainties in the housing markets, variations in the current projected operating results are probable which would significantly impact the estimated annual income tax rate. Therefore, for the three months ended April 30, 2008, the Company has determined that a reliable estimate cannot be made, and that the actual effective tax rate for the year-to-date period is its best estimate of the annual effective tax rate.

At January 31, 2008, the Company had a net operating loss carryforward for tax purposes of $64,589,000 (generated primarily from the impact on the Company’s net earnings of tax depreciation expense from real estate properties and excess deductions from stock-based compensation) that will expire in the years ending January 31, 2024 through January 31, 2028, a charitable contribution deduction carryforward of $40,676,000 that will expire in the years ending January 31, 2009 through January 31, 2013 ($7,111,000 expiring in the year ended January 31, 2009), general business credit carryovers of $13,866,000 that will expire in the years ending January 31, 2009 through January 31, 2028 ($39,000 expiring in the year ended January 31, 2009), and an alternative minimum tax (“AMT”) credit carryforward of $34,894,000 that is available to be used to reduce Federal tax to the AMT amount. The Company has a full valuation allowance against the deferred tax asset associated with its charitable contributions because management believes at this time that it is more likely than not that the Company will not realize these benefits. The Company’s policy is to consider a variety of tax-deferral strategies, including tax deferred exchanges, when evaluating its future tax position.

The Company applies the “with-and-without” methodology for recognizing excess tax benefits from the deduction of stock-based compensation. The net operating loss available for the tax return, as is noted in the paragraph above, is significantly greater than the net operating loss available for the tax provision due to excess deductions from stock-based compensation reported on the return, as well as the impact of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (“FIN No. 48”) adjustments to the net operating loss. The Company has not recorded a net deferred tax asset of approximately $13,355,000 from excess stock-based compensation deductions for which a benefit has not yet been recognized.

FIN No. 48

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 its income tax returns.

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

H. Income Taxes (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 April 30 and January 31, 2008, the Company had approximately $929,000 and $840,000, respectively, of accrued interest and penalties related to uncertain income tax positions. During the three months ended April 30, 2008 and 2007, $89,000 and $331,000, respectively, of tax expense was booked relating to interest and penalties.

As of April 30 and January 31, 2008, the Company had unrecognized tax benefits of $2,699,000 and $2,556,000, respectively.

The total amount of unrecognized tax benefits that would affect the Company’s effective tax rate, if recognized as of April 30, 2008 and 2007, is $348,000 and $549,000, respectively. 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 statutes of limitation 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 April 30, 2008. Included in the $2,699,000 of unrecognized benefits noted above, is $2,583,000 which, due to the reasons above, could significantly decrease during the next twelve months.

I.

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 Operations for the three months ended April 30, 2008 and 2007. 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.

Sterling Glen of Lynbrook, a supported-living apartment community in Lynbrook, New York, was held for sale at April 30 and January 31, 2008. Sterling Glen of Lynbrook’s assets and liabilities as of April 30 and January 31, 2008 are presented in the table below.

		April 30,				January 31,
		2008				2008
		(in thousands)
Assets
Real estate		$	29,858			$	29,858
Notes and accounts receivable, net			83				179
Other assets			1,676				1,635
Total Assets		$	31,617			$	31,672
Liabilities
Mortgage debt, nonrecourse		$	27,700			$	27,700
Accounts payable and accrued expenses			870				798
Total Liabilities		$	28,570			$	28,498

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

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

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

				Number		Period		Three Months Ended
Property		Location		of Units		Disposed		4/30/2008		4/30/2007
Residential Group:
Sterling Glen of Lynbrook		Lynbrook, New York		130 units		Q2-2008		Yes		Yes
Sterling Glen of Bayshore		Bayshore, New York		85 units		Q2-2007		-		Yes
Sterling Glen of Center City		Philadelphia, Pennsylvania		135 units		Q2-2007		-		Yes
Sterling Glen of Darien		Darien, Connecticut		80 units		Q2-2007		-		Yes
Sterling Glen of Forest Hills		Forest Hills, New York		83 units		Q2-2007		-		Yes
Sterling Glen of Plainview		Plainview, New York		79 units		Q2-2007		-		Yes
Sterling Glen of Stamford		Stamford, Connecticut		166 units		Q2-2007		-		Yes

During the year ended January 31, 2008, the Company consummated an agreement to sell eight (seven operating properties and one property that was under construction at the time of the agreement) and lease four supported-living apartment properties to a third party. Pursuant to the agreement, during the second quarter of 2007, six operating properties listed in the table above and the property under construction, Sterling Glen of Roslyn located in Roslyn, New York, were sold. The seventh operating property, Sterling Glen of Lynbrook, was being operated by the purchaser under a short-term lease through the date of sale. On May 20, 2008, the Company sold this property for $39,000,000.

Pursuant to the agreement, the four remaining properties entered into long-term operating leases with the purchaser. The operating leases have stated terms of five or ten years with various put and call provisions at a pre-determined purchase price that can be exercised beginning in the second year of each lease at an amount that is in excess of the current carrying amount of the properties. The Company is generally entitled to a fixed lease payment from the lessee over the term of the lease in exchange for the operations of the properties, which will be retained by the lessee. The Company has continued to consolidate the leased properties in its Consolidated Balance Sheets as the criteria for sales accounting pursuant to the provisions of SFAS No. 66, “Accounting for Sales of Real Estate” (“SFAS No. 66”), have not been achieved. Further, the Company has concluded that the leased properties have met the criteria as VIEs pursuant to FIN No. 46(R), and due to the Company’s obligation to absorb a majority of expected losses, the leased properties are consolidated by the Company at April 30, 2008. These properties do not meet the qualifications of assets held for sale under SFAS No. 144 as of April 30, 2008; therefore, these properties have not been included in discontinued operations.

The operating results related to discontinued operations were as follows:

		Three Months
		Ended April 30,
		2008				2007
		(in thousands)
Revenues		$	544			$	12,202
Expenses
Operating expenses			211				8,847
Depreciation and amortization			5				1,013
			216				9,860
Interest expense			(192	)			(1,608	)
Amortization of mortgage procurement costs			(11	)			(35	)
Interest income			4				97
Earnings before income taxes			129				796
Income tax expense (benefit)
Current			(64	)			58
Deferred			114				250
			50				308
Net earnings from discontinued operations		$	79			$	488

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

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

Gain on Disposition of Rental Properties

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 equity method investments disposed of during the three months ended April 30, 2008 and 2007, which is included in equity in earnings of unconsolidated entities in the Consolidated Statements of Operations.

						Three Months
						Ended April 30,
						2008				2007
						(in thousands)
One International Place (Office Building)		Cleveland, Ohio				$	881			$	-
White Acres (Apartments) (1)		Richmond Heights, Ohio					-				2,106
Total						$	881			$	2,106

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 pursuant to the guidance established in SFAS No. 144. For its equity method real estate investments, a loss in value of an investment which is other than a temporary decline is recognized as a provision for decline in real estate based upon the length of time elapsed, severity of decline and all other relevant facts and circumstances.

There was no provision for decline in real estate recorded for the three months ended April 30, 2008 or 2007.

J. Dividends

The Company pays quarterly cash dividends on shares of Class A and Class B common stock. The quarterly dividend of $.08 per share on both Class A and Class B common stock was declared on March 26, 2008 and will be paid on June 17, 2008 to shareholders of record at the close of business on June 2, 2008.

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

K. 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” (“EITF 03-6”), 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. Therefore, the Class A units are included in the computation of basic and diluted earnings per share if the effect of applying the if-converted method is dilutive.

The computation of EPS for continuing operations and net earnings for the three months ended April 30, 2008 and 2007 did not allocate any amounts to the holders of the Class A Common Units, which are considered participating securities in accordance with EITF 03-6. For the three months ended April 30, 2008 and 2007, the $40,348,000 and $17,669,000, respectively, loss from continuing operations and the $40,269,000 and $17,181,000, respectively, net loss were allocated solely to the holders of common stock as the participating security holders do not share in the losses in accordance with EITF 03-6.

The reconciliation of the amounts used in the basic and diluted earnings per share computations is shown in the following table (in thousands, except share and per share amounts).

		Three Months Ended April 30,
		2008				2007
Numerators
Loss from continuing operations - basic and diluted		$	(40,348	)		$	(17,669	)
Net loss - basic and diluted		$	(40,269	)		$	(17,181	)
Denominators
Weighted average shares outstanding - basic			102,613,817				101,990,754
Effect of stock options and restricted stock (1)			-				-
Effect of convertible Class A Common Units (1)			-				-
Weighted average shares outstanding - diluted (2)			102,613,817				101,990,754
Earnings Per Share
Loss from continuing operations - basic and diluted		$	(0.39	)		$	(0.17	)
Net loss - basic and diluted		$	(0.39	)		$	(0.17	)