United
States


Securities
and Exchange Commission


Washington,
D.C. 20549




FORM
10-Q




QUARTERLY
REPORT PURSUANT TO SECTION 13




OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For
the quarterly period ended September 30, 2008




Commission
file number 001-33106




DOUGLAS
EMMETT, INC.


(Exact
name of registrant as specified in its charter)








MARYLAND
            20-3073047(State
      or other jurisdiction of incorporation or organization)
            (I.R.S.
      Employer Identification No.)





808
      Wilshire Boulevard, Suite 200, Santa Monica, California
            90401(Address
      of principal executive offices)
            (Zip
      Code)





(310)
255-7700


(Registrant’s
telephone number, including area code)




None


(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  x     Noo




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
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):




Large
      accelerated filer  x
            Accelerated
      filer  oNon-accelerated
      filero(Do not
      check if a smaller reporting company)
            Smaller
      reporting company  o







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




Yes  o     Nox




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




Class
            
            Outstanding
      at October 31, 2008Common
      Shares of beneficial interest,
            
            121,737,224
      shares$0.01
      par value per share












DOUGLAS
EMMETT, INC.


FORM
10-Q


TABLE
OF CONTENTS





PAGE
      NO.PART
      I.
            FINANCIAL
      INFORMATION
            
            3Item 1.
            Financial
      Statements
            
            3Consolidated
      Balance Sheets as of September 30, 2008 (unaudited) and
      December 31, 2007
            
            3Consolidated
      Statements of Operations for the three and nine months ended
      September 30, 2008 and 2007 (unaudited)
            
            4Consolidated
      Statements of Cash Flows for the nine months ended September 30, 2008 and
      2007 (unaudited)
            
            5Notes
      to Consolidated Financial Statements
            
            6Item 2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            20Item 3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            
            26Item 4.
            Controls
      and Procedures
            
            26PART
      II.
            OTHER
      INFORMATION
            
            27Item 1.
            Legal
      Proceedings
            
            27Item 1A.
            Risk
      Factors
            
            27Item 2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            
            27Item 3.
            Defaults
      Upon Senior Securities
            
            27Item 4.
            Submission
      of Matters to a Vote of Security Holders
            
            27Item 5.
            Other
      Information
            
            27Item 6.
            Exhibits
            
            27SIGNATURES
            
            28








PART
I.  FINANCIAL INFORMATION





Item
1.  Financial Statements





Douglas
Emmett, Inc.


Consolidated
Balance Sheets


(in
thousands, except for share data)





September
      30,
                                                2008
                                              
                                              
                                              December
      31,
                                                2007(unaudited)AssetsInvestment
      in real estate:Land
                                              
                                              $
                                              892,239
                                              
                                              
                                              $
                                              825,560Buildings
      and improvements
                                              
                                              
                                              5,519,479
                                              
                                              
                                              
                                              4,978,124Tenant
      improvements and lease intangibles
                                              
                                              
                                              538,477
                                              
                                              
                                              
                                              460,4866,950,195
                                              
                                              
                                              
                                              6,264,170Less:
      accumulated depreciation
                                              
                                              
                                              (426,332
                                              )
                                              
                                              
                                              (242,114
                                              )Net
      investment in real estate
                                              
                                              
                                              6,523,863
                                              
                                              
                                              
                                              6,022,056Cash
      and cash equivalents
                                              
                                              
                                              2,155
                                              
                                              
                                              
                                              5,843Tenant
      receivables, net
                                              
                                              
                                              688
                                              
                                              
                                              
                                              955Deferred
      rent receivables, net
                                              
                                              
                                              31,691
                                              
                                              
                                              
                                              20,805Interest
      rate contracts
                                              
                                              
                                              92,223
                                              
                                              
                                              
                                              84,600Acquired
      lease intangible assets, net
                                              
                                              
                                              19,735
                                              
                                              
                                              
                                              24,313Other
      assets
                                              
                                              
                                              33,978
                                              
                                              
                                              
                                              31,396Total
      assets
                                              
                                              $
                                              6,704,333
                                              
                                              
                                              $
                                              6,189,968LiabilitiesSecured
      notes payable, including loan premium
                                              
                                              $
                                              3,733,872
                                              
                                              
                                              $
                                              3,105,677Accounts
      payable and accrued expenses
                                              
                                              
                                              65,844
                                              
                                              
                                              
                                              62,704Security
      deposits
                                              
                                              
                                              35,891
                                              
                                              
                                              
                                              31,309Acquired
      lease intangible liabilities, net
                                              
                                              
                                              207,184
                                              
                                              
                                              
                                              218,371Interest
      rate contracts
                                              
                                              
                                              144,496
                                              
                                              
                                              
                                              129,083Dividends
      payable
                                              
                                              
                                              22,814
                                              
                                              
                                              
                                              19,221Total
      liabilities
                                              
                                              
                                              4,210,101
                                              
                                              
                                              
                                              3,566,365Minority
      interests
                                              
                                              
                                              554,048
                                              
                                              
                                              
                                              793,764Stockholders’
      EquityCommon stock, $0.01 par value, 750,000,000 authorized, 121,672,224 and
      109,833,903 outstanding at September 30, 2008 and December 31, 2007,
      respectively.
                                              
                                              
                                              1,217
                                              
                                              
                                              
                                              1,098Additional
      paid-in capital
                                              
                                              
                                              2,280,396
                                              
                                              
                                              
                                              2,019,716Accumulated
      other comprehensive income
                                              
                                              
                                              (96,045
                                              )
                                              
                                              
                                              (101,163
                                              )Accumulated
      deficit
                                              
                                              
                                              (245,384
                                              )
                                              
                                              
                                              (89,812
                                              )Total
      stockholders’ equity
                                              
                                              
                                              1,940,184
                                              
                                              
                                              
                                              1,829,839Total
      liabilities and stockholders’ equity
                                              
                                              $
                                              6,704,333
                                              
                                              
                                              $
                                              6,189,968





See
notes to consolidated financial statements.


- 3
-


Douglas
Emmett, Inc.


Consolidated
Statements of Operations


(unaudited
and in thousands, except for share data)





Three
      Months Ended
                    September
      30,
                  
                  
                  Nine
      Months Ended
                    September
      30,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007RevenuesOffice
      rental:Rental
      revenues
                  
                  $
                  112,787
                  
                  
                  $
                  94,592
                  
                  
                  $
                  323,016
                  
                  
                  $
                  279,088Tenant
      recoveries
                  
                  
                  8,335
                  
                  
                  
                  7,973
                  
                  
                  
                  22,523
                  
                  
                  
                  23,138Parking
      and other income
                  
                  
                  14,681
                  
                  
                  
                  12,137
                  
                  
                  
                  41,252
                  
                  
                  
                  34,335Total
      office revenues
                  
                  
                  135,803
                  
                  
                  
                  114,702
                  
                  
                  
                  386,791
                  
                  
                  
                  336,561Multifamily
      rental:Rental
      revenues
                  
                  
                  16,483
                  
                  
                  
                  16,994
                  
                  
                  
                  50,130
                  
                  
                  
                  50,387Parking
      and other income
                  
                  
                  950
                  
                  
                  
                  765
                  
                  
                  
                  2,698
                  
                  
                  
                  2,338Total
      multifamily revenues
                  
                  
                  17,433
                  
                  
                  
                  17,759
                  
                  
                  
                  52,828
                  
                  
                  
                  52,725Total
      revenues
                  
                  
                  153,236
                  
                  
                  
                  132,461
                  
                  
                  
                  439,619
                  
                  
                  
                  389,286Operating
      expensesOffice
      expense
                  
                  
                  39,915
                  
                  
                  
                  34,086
                  
                  
                  
                  109,404
                  
                  
                  
                  100,121Multifamily
      expense
                  
                  
                  4,238
                  
                  
                  
                  4,592
                  
                  
                  
                  12,503
                  
                  
                  
                  13,943General
      and administrative
                  
                  
                  5,243
                  
                  
                  
                  5,862
                  
                  
                  
                  16,257
                  
                  
                  
                  16,024Depreciation
      and amortization
                  
                  
                  63,611
                  
                  
                  
                  50,629
                  
                  
                  
                  184,218
                  
                  
                  
                  152,244Total
      operating expenses
                  
                  
                  113,007
                  
                  
                  
                  95,169
                  
                  
                  
                  322,382
                  
                  
                  
                  282,332Operating
      income
                  
                  
                  40,229
                  
                  
                  
                  37,292
                  
                  
                  
                  117,237
                  
                  
                  
                  106,954Other
      (expense) income
                  
                  
                  (43
                  )
                  
                  
                  205
                  
                  
                  
                  489
                  
                  
                  
                  659Interest
      expense
                  
                  
                  (52,586
                  )
                  
                  
                  (41,504
                  )
                  
                  
                  (145,580
                  )
                  
                  
                  (118,119
                  )Loss
      before minority interests
                  
                  
                  (12,400
                  )
                  
                  
                  (4,007
                  )
                  
                  
                  (27,854
                  )
                  
                  
                  (10,506
                  )Minority
      interests
                  
                  
                  2,704
                  
                  
                  
                  1,222
                  
                  
                  
                  6,230
                  
                  
                  
                  3,188Net
      loss
                  
                  $
                  (9,696
                  )
                  
                  $
                  (2,785
                  )
                  
                  $
                  (21,624
                  )
                  
                  $
                  (7,318
                  )Net
      loss per common share – basic and diluted
                  
                  $
                  (0.08
                  )
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.18
                  )
                  
                  $
                  (0.06
                  )Dividends
      declared per common share
                  
                  $
                  0.1875
                  
                  
                  $
                  0.175
                  
                  
                  $
                  0.5625
                  
                  
                  $
                  0.525Weighted
      average shares of common stock outstanding -basic and
    diluted
                  
                  
                  121,509,098
                  
                  
                  
                  110,956,113
                  
                  
                  
                  120,372,893
                  
                  
                  
                  113,593,114





See
notes to consolidated financial statements.


- 4
-


Douglas
Emmett, Inc.


Consolidated
Statements of Cash Flows


(unaudited
and in thousands)





Nine
      Months Ended
                  September
      30,2008
                
                
                2007Operating
      ActivitiesNet
      loss
                
                $
                (21,624
                )
                
                $
                (7,318
                )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Minority interests
                
                
                (6,230
                )
                
                
                (3,188
                )Depreciation and
      amortization
                
                
                184,218
                
                
                
                152,244Net accretion of acquired lease
      intangibles
                
                
                (32,330
                )
                
                
                (29,933
                )Amortization of deferred loan
      costs
                
                
                1,417
                
                
                
                782Amortization of loan
      premium
                
                
                (3,530
                )
                
                
                (3,331
                )Non-cash market value
      adjustments on interest rate contracts
                
                
                12,908
                
                
                
                9,466Non-cash amortization of
      stock-based compensation
                
                
                5,459
                
                
                
                1,884Change
      in working capital componentsTenant receivables
                
                
                267
                
                
                
                3,366Deferred rent
      receivables
                
                
                (10,886
                )
                
                
                (13,082
                )Accounts payable, accrued expenses
      and security deposits
                
                
                4,403
                
                
                
                18,337Other
                
                
                2,746
                
                
                
                (4,955
                )Net
      cash provided by operating activities
                
                
                136,818
                
                
                
                124,272Investing
      ActivitiesCapital
      expenditures and property acquisitions
                
                
                (656,758
                )
                
                
                (72,578
                )Net
      cash used in investing activities
                
                
                (656,758
                )
                
                
                (72,578
                )Financing
      ActivitiesProceeds
      from borrowings
                
                
                1,510,425
                
                
                
                249,800Deferred
      loan costs
                
                
                (6,745
                )
                
                
                (1,672
                )Repayment
      of borrowings
                
                
                (858,400
                )
                
                
                (73,000
                )Net
      change in short-term borrowings
                
                
                (20,300
                )
                
                
                2,300Contribution
      by minority interest partner to consolidated joint venture
                
                
                319
                
                
                ─Distributions
      to minority interests
                
                
                (21,239
                )
                
                
                (23,304
                )Redemption
      of minority interests
                
                
                (23,758
                )
                
                
                (29,211
                )Issuance
      of common stock
                
                
                667
                
                
                ─Repurchase
      of common stock
                
                ─
                
                
                
                (125,185
                )Cash
      dividends paid on common stock
                
                
                (64,717
                )
                
                
                (53,909
                )Net
      cash provided by (used in) financing activities
                
                
                516,252
                
                
                
                (54,181
                )Decrease
      in cash and cash equivalents
                
                
                (3,688
                )
                
                
                (2,487
                )Cash
      and cash equivalents at beginning of period
                
                
                5,843
                
                
                
                4,536Cash
      and cash equivalents at end of period
                
                $
                2,155
                
                
                $
                2,049





See
notes to consolidated financial statements.


- 5
-


Douglas
Emmett, Inc.


Notes
to Consolidated Financial Statements


(in
thousands, except shares and per share data)








1.
Organization and Description of Business





Douglas
Emmett, Inc., a Maryland corporation incorporated on June 28, 2005, is a fully
integrated, self-administered and self-managed Real Estate Investment Trust
(REIT).  We did not have any meaningful operating activity until the
consummation of our initial public offering (IPO) and the related acquisition of
our predecessor and certain other entities on October 30,
2006.  Through our interest in Douglas Emmett Properties, LP (our
operating partnership) and its subsidiaries, we own, manage, lease, acquire and
develop real estate.  As of September 30, 2008, we owned a portfolio
of 55 office properties (including ancillary retail space) and nine multifamily
properties, as well as the fee interests in two parcels of land that we lease to
third parties.  All of these properties are located in Los Angeles
County, California and Honolulu, Hawaii.  We qualified as a REIT for
federal income tax purposes beginning with our initial taxable year ending
December 31, 2006 and expect to maintain such qualification.





2.
Summary of Significant Accounting Policies





Basis
of Presentation





The
accompanying consolidated financial statements as of September 30, 2008 and
December 31, 2007 and for the three and nine months ended September 30, 2008 and
2007 are the consolidated financial statements of Douglas Emmett, Inc. and its
subsidiaries including our operating partnership.  All significant
intercompany balances and transactions have been eliminated in the consolidated
financial statements.  Certain prior period amounts have been
reclassified to conform with current period presentation.




Unaudited
Interim Financial Information




The accompanying unaudited interim
financial statements have been prepared pursuant to the rules and regulations of
the U.S. Securities and Exchange Commission (SEC). Certain information and
footnote disclosure normally included in the financial statements prepared in
accordance with accounting principles generally accepted in the United States
(GAAP) may have been condensed or omitted pursuant to such rules and
regulations, although we believe that the disclosures are adequate to make the
presentation not misleading.  The accompanying unaudited financial
statements include, in our opinion, all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the financial information set
forth therein. The results of operations for the interim periods are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2008.  The interim financial statements should be
read in conjunction with the consolidated financial statements in our 2007
Annual Report on Form 10-K and notes thereto.  Any reference to the
number of properties and square footage are unaudited and outside the scope of
our independent registered public accounting firm’s review of our financial
statements in accordance with the standards of the United States Public Company
Accounting Oversight Board.




Use
of Estimates





The preparation of financial statements
in conformity with GAAP requires us to make certain estimates and assumptions,
for example with respect to the allocation of the purchase price of acquisitions
among land, buildings, improvements, equipment and any related intangible assets
and liabilities.  These estimates and assumptions are subjective and
affect the reported amounts in the consolidated financial statements and
accompanying notes. Actual results could differ materially from those
estimates.





- 6
-


Douglas
Emmett, Inc.


Notes
to Consolidated Financial Statements--(continued)


(in
thousands, except shares and per share data)





Cash
and Cash Equivalents





For
purposes of the consolidated statements of cash flows, we consider short-term
investments with maturities of three months or less when purchased to be cash
equivalents.





Interest
Rate Contracts





We manage our interest rate risk
associated with borrowings by obtaining interest rate swap and interest rate cap
contracts.  The interest rate swap agreements we utilize effectively
modify our exposure to interest rate risk by converting our floating-rate debt
to a fixed-rate basis, thus reducing the impact of interest-rate changes on
future interest expense.  These agreements involve the receipt of
floating-rate amounts in exchange for fixed-rate interest payments over the life
of the agreements without an exchange of the underlying principal amount. We do
not use any other derivative instruments.





Statement
of Financial Accounting Standards (FAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities (FAS 133), as
amended and interpreted, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities.  As required by FAS 133,
we record all derivatives on the balance sheet at fair value.  The
accounting for changes in the fair value of derivatives depends on the intended
use of the derivative and the resulting designation. Derivatives used to hedge
the exposure to changes in the fair value of an asset, liability, or firm
commitment attributable to a particular risk, are considered fair value hedges.
Derivatives used to hedge the exposure to variability in expected future cash
flows, or other types of forecasted transactions, are considered cash flow
hedges.





Our
objective in using derivatives is to add stability to interest expense and to
manage our exposure to interest rate movements or other identified risks. 
To accomplish this objective, we primarily use interest rate swaps as part of
our cash flow hedging strategy.  Interest rate swaps designated as
cash flow hedges involve the receipt of variable-rate amounts in exchange for
fixed-rate payments over the life of the agreements without exchange of the
underlying principal amount.  For derivatives designated as cash flow
hedges, the effective portion of changes in the fair value of the derivative is
initially reported in other comprehensive income (outside of earnings) and
subsequently reclassified to earnings when the hedged transaction affects
earnings.  The ineffective portion of changes in the fair value of the
derivative is recognized directly in earnings.  We assess the
effectiveness of each hedging relationship by comparing the changes in fair
value or cash flows of the derivative hedging instrument with the changes in
fair value or cash flows of the designated hedged item or transaction. For
derivatives not designated as hedges, changes in fair value are recognized in
earnings.  The fair value of these hedges is obtained through
independent third-party valuation sources that use conventional valuation
algorithms. See Note 8 for the accounting of our interest rate
hedges.




Income
Taxes




We
elected to be taxed as a REIT under the Internal Revenue Code of 1986, as
amended (IRC) commencing with our initial taxable year ending December 31,
2006.  To qualify as a REIT, we are required to distribute at least
90% of our REIT taxable income to our stockholders and meet the various other
requirements imposed by the IRC relating to such matters as operating results,
asset holdings, distribution levels and diversity of stock ownership. Provided
we qualify for taxation as a REIT, we are generally not subject to
corporate-level income tax on the earnings distributed currently to our
stockholders that we derive from our REIT qualifying activities. We are subject
to corporate-level tax on the earnings we derive through our taxable REIT
subsidiary (TRS). If we fail to qualify as a REIT in any taxable year, and are
unable to avail ourselves of certain savings provisions set forth in the IRC,
all of our taxable income would be subject to federal income tax at regular
corporate rates, including any applicable alternative minimum
tax.





- 7
-


Douglas
Emmett, Inc.


Notes
to Consolidated Financial Statements--(continued)


(in
thousands, except shares and per share data)





In
addition, we are subject to taxation by various state and local (and potentially
foreign) jurisdictions, including those in which we transact business or
reside.  Our non-TRS subsidiaries, including the operating
partnership, are either partnerships or disregarded entities for federal income
tax purposes.  Under applicable federal and state income tax rules,
the allocated share of net income or loss from the limited partnerships and
S-Corporation is reportable in the income tax returns of the respective partners
and stockholders.  Accordingly, no income tax provision is included in
the accompanying consolidated financial statements.




Earnings
Per Share (EPS)




Basic EPS
is calculated by dividing the net income applicable to common stockholders for
the period by the weighted average of common shares outstanding during the
period.  Diluted EPS is calculated by dividing the net income
applicable to common stockholders for the period by the weighted average number
of common and dilutive instruments outstanding during the period using the
treasury stock method.  Since we were in a net loss position during
the three and nine months ended September 30, 2008 and 2007, all potentially
dilutive instruments were anti-dilutive and have been excluded from our
computation of weighted average dilutive shares outstanding.




Recently
Issued Accounting Literature





In
February 2007, the Financial Accounting Standards Board (FASB) issued FAS No.
159, The Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115.  This standard permits entities to choose to
measure many financial instruments and certain other items at fair value and is
effective for the first fiscal year beginning after November 15, 2007, which for
us meant January 1, 2008.  We did not elect the fair value measurement
option for any financial assets or liabilities during the first nine months of
2008, nor do we currently expect to elect this option for any financial assets
or liabilities in the near future.





In
December 2007, the FASB issued FAS No. 160, Non-controlling Interests in
Consolidated Financial Statements-an Amendment of Accounting Research Bulletin
No. 51(FAS 160).  FAS 160 establishes new accounting and
reporting standards for a non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary.  Specifically, this statement
requires the recognition of a non-controlling interest (minority interest) as
equity in the consolidated financial statements separate from the parent’s
equity.  The amount of net income attributable to the non-controlling
interest will be included in consolidated net income on the face of the income
statement.  FAS 160 clarifies that changes in a parent’s ownership
interest in a subsidiary that do not result in deconsolidation are equity
transactions if the parent retains its controlling financial
interest.  In addition, this statement requires that a parent
recognize a gain or loss in net income when a subsidiary is
deconsolidated.  Such gain or loss will be measured using the fair
value of the non-controlling equity investment on the deconsolidation
date.  FAS 160 also includes expanded disclosure requirements
regarding the interests of the parent and its non-controlling
interest.  FAS 160 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008, which for us
means January 1, 2009.  We are currently evaluating the impact that
FAS 160 will have on our financial statements.





In
December 2007, the FASB issued FAS No. 141 (Revised 2007), Business Combinations (FAS
141R).  FAS 141R will significantly change the accounting for business
combinations.  Under FAS 141R, an acquiring entity will be required to
recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions.  FAS 141R
will require that transaction costs such as legal, accounting and advisory fees
be expensed.  FAS 141R also includes a substantial number of new
disclosure requirements.  FAS 141R applies prospectively to business
combinations occurring in any reporting period beginning on or after December
15, 2008, which for us means January 1, 2009.  We are currently
evaluating the impact that FAS 141R will have on our financial
statements.





- 8
-


Douglas
Emmett, Inc.


Notes
to Consolidated Financial Statements--(continued)


(in
thousands, except shares and per share data)







On
January 1, 2008, we adopted FAS No. 157, Fair Value Measurements(FAS
157). FAS 157
defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements.  FAS 157 applies to
reported balances that are required or permitted to be measured at fair value
under existing accounting pronouncements; accordingly, the standard does not
require any new fair value measurements of reported balances.  FAS 157
emphasizes that fair value is a market-based measurement, not an entity-specific
measurement.  Therefore, a fair value measurement should be determined
based on the assumptions that market participants would use in pricing the asset
or liability.  As a basis for considering market participant
assumptions in fair value measurements, FAS 157 establishes a fair value
hierarchy that distinguishes between market participant assumptions based on
market data obtained from sources independent of the reporting entity
(observable inputs that are classified within Levels 1 and 2 of the hierarchy)
and the reporting entity’s own assumptions about market participant assumptions
(unobservable inputs classified within Level 3 of the
hierarchy).  Level 1 inputs utilize quoted prices (unadjusted) in
active markets for identical assets or liabilities that we have the ability to
access. Level 2 inputs are inputs other than quoted prices included in Level 1
that are observable for the asset or liability, either directly or
indirectly.  Level 2 inputs may include quoted prices for similar
assets and liabilities in active markets, as well as inputs that are observable
for the asset or liability (other than quoted prices), such as interest rates,
foreign exchange rates, and yield curves that are observable at commonly quoted
intervals.





Currently,
we use interest rate swaps and capsto manage interest rate
risk resulting from variable interest payments on our floating rate
debt.  The valuation of these instruments is determined using widely
accepted valuation techniques including discounted cash flow analysis on the
expected cash flows of each derivative. This analysis reflects the contractual
terms of the derivatives, including the period to maturity, and uses observable
market-based inputs, including interest rate curves and implied
volatilities.





To comply
with the provisions of FAS 157, we incorporate credit valuation adjustments to
appropriately reflect both our own nonperformance risk and the respective
counterparty’s nonperformance risk in the fair value measurements.  In
adjusting the fair value of our derivative contracts for the effect of
nonperformance risk, we considered the impact of netting and any applicable
credit enhancements, such as collateral postings, thresholds, mutual puts and
guarantees.  We have determined that our derivative valuations in
their entirety are classified in Level 2 of the fair value
hierarchy.  We do not have any fair value measurements using
significant unobservable inputs (Level 3) as of September 30, 2008.





The table
below presents the assets and liabilities measured at fair value on a recurring
basis as of September 30, 2008, aggregated by the level in the fair value
hierarchy within which those measurements fall.





Quoted Prices in
                        Active
      Marketsfor
      Identical
                        Assets
      and Liabilities (Level 1)
                      
                      Significant
                        OtherObservable
                        Inputs (Level 2)
                      
                      SignificantUnobservable
                        Inputs (Level 3)
                      
                      Balance
      at
                        September
      30,2008AssetsInterest Rate
      Contracts
                      $                  ─
                      
                      $
                      92,223
                      
                      $                ─
                      
                      $
                      92,223LiabilitiesInterest Rate
      Contracts
                      $                  ─
                      
                      $
                      144,496
                      
                      $                ─
                      
                      $
                      144,496





- 9
-


Douglas
Emmett, Inc.


Notes
to Consolidated Financial Statements--(continued)


(in
thousands, except shares and per share data)





In March
2008, the FASB issued Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities(FAS 161), an amendment of
FAS 133, to expand disclosure requirements for an entity's derivative and
hedging activities.  Under FAS 161, entities are required to
provide enhanced disclosures about how and why an entity uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under FAS 133 and its related interpretations, and how derivative
instruments and related hedged items affect an entity's financial position,
financial performance, and cash flows.  In order to meet these
requirements, entities shall include quantitative disclosures about derivative
fair values and gains/losses on derivative instruments, qualitative disclosures
about objectives and strategies for using derivatives, and disclosures about
credit-risk-related contingent features in derivative agreements. FAS 161
is effective for fiscal years and interim periods beginning after
November 15, 2008, with early adoption encouraged.  We plan to
adopt FAS 161 on January 1, 2009 and do not expect FAS 161 to
have a significant impact as this statement only addresses
disclosures.




- 10
-


Douglas
Emmett, Inc.


Notes
to Consolidated Financial Statements--(continued)


(in
thousands, except shares and per share data)





3.
Acquisitions




On March 26, 2008, we acquired a
1.4 million square foot office portfolio consisting of six Class “A” buildings
all located in our core Los Angeles submarkets – Santa Monica, Beverly Hills,
Sherman Oaks/Encino and Warner Center/Woodland Hills – for a contract price of
approximately $610 million.  Subsequent to acquiring the properties,
we entered into a non-recourse $365 million term loan secured by the
six-property portfolio.  See Note 7 for a description of the
debt.  See Note 13 for a related transaction that occurred subsequent
to quarter end.




On
February 13, 2008, we acquired a two-thirds interest in a 78,298 square-foot
office building located in Honolulu, Hawaii.  As part of the same
transaction, we also acquired all of the assets of The Honolulu Club, a private
membership athletic and social club, which is located in the
building.  The aggregate contract price was approximately $18 million
and the purchase was made through a consolidated joint venture with our local
partner.  The joint venture financed the acquisition with an $18
million loan.  See Note 7 for a description of the debt.  On
May 1, 2008, the operations of the athletic club were sold to a third party for
a nominal cost.  Simultaneously, the acquirer leased from us the space
occupied by the athletic club.  The results of operations and loss on
sale of the assets of the athletic club were not material.





In May
2007, we acquired an approximate 50,000 rentable square foot Class “A” office
building located in one of our core Los Angeles submarkets, Century City, for a
contract price of $32 million.




The
results of operations for each of the acquired properties are included in our
consolidated statements of operations only from the date of each
acquisition.  The following table summarizes the allocations of
estimated fair values of the assets acquired and liabilities assumed at the date
of acquisition.  The amounts shown for 2008 acquisitions represent our
preliminary purchase price allocations.  These amounts are likely to
change based on a more thorough calculation to be performed during the one-year
purchase accounting period provided under the relevant accounting
standards.




The
following table represents acquisitions to our portfolio that impact the current
reporting periods:





2008
                  Acquisitions
                
                
                2007
                  AcquisitionInvestment
      in real estate:Land
                
                $
                66,661
                
                
                $
                3,650Buildings
      and improvements
                
                
                528,179
                
                
                
                26,274Tenant
      improvements and other in-place lease assets
                
                
                50,978
                
                
                
                3,024Tenant
      receivables and other assets
                
                ─
                
                
                
                24Accounts
      payable, accrued expenses and security deposits
                
                
                (3,476
                )
                
                
                (988
                )Acquired
      lease intangible liabilities, net
                
                
                (25,721
                )
                
                ─Net
      acquisition cost
                
                $
                616,621
                
                
                $
                31,984





Our
acquired lease intangibles related to above/below-market leases is summarized as
of:





September
      30,
                  2008
                
                
                December
      31,
                  2007Above-market
      tenant leases
                
                $
                34,227
                
                
                $
                32,770Accumulated
      amortization
                
                
                (17,541
                )
                
                
                (11,564
                )Below-market
      ground leases
                
                
                3,198
                
                
                
                3,198Accumulated
      amortization
                
                
                (149
                )
                
                
                (91
                )Acquired
      lease intangible assets, net
                
                $
                19,735
                
                
                $
                24,313Below-market
      tenant leases
                
                $
                288,437
                
                
                $
                261,260Accumulated
      accretion
                
                
                (94,851
                )
                
                
                (57,112
                )Above-market
      ground leases
                
                
                16,200
                
                
                
                16,200Accumulated
      accretion
                
                
                (2,602
                )
                
                
                (1,977
                )Acquired
      lease intangible liabilities, net
                
                $
                207,184
                
                
                $
                218,371


- 11
-


Douglas
Emmett, Inc.


Notes
to Consolidated Financial Statements--(continued)


(in
thousands, except shares and per share data)


4.
Other Assets





Other
assets consist of the following at:





September
      30,
                    2008
                  
                  
                  December
      31,
                    2007Deferred
      loan costs, net of accumulated amortization of $2,721 and
      $1,304at
      September 30, 2008 and December 31, 2007, respectively
                  
                  $
                  10,315
                  
                  
                  $
                  4,987Deposits
      in escrow
                  
                  ─
                  
                  
                  
                  4,000Restricted
      cash
                  
                  
                  2,929
                  
                  
                  
                  2,848Prepaid
      interest
                  
                  
                  4,977
                  
                  
                  
                  7,944Prepaid
      expenses
                  
                  
                  5,824
                  
                  
                  
                  3,095Interest
      receivable
                  
                  
                  5,044
                  
                  
                  
                  3,229Other
      indefinite-lived intangible
                  
                  
                  1,988
                  
                  
                  
                  1,988Other
                  
                  
                  2,901
                  
                  
                  
                  3,305$
                  33,978
                  
                  
                  $
                  31,396





We
incurred deferred loan cost amortization expense of $577 and $282 for the three
months ended September 30, 2008 and 2007, and $1,417 and $782 for the nine
months ended September 30, 2008 and 2007, respectively.  The deferred
loan cost amortization is included as a component of interest expense in the
consolidated statements of operations.





5.
Minimum Future Lease Rentals





We
have leased space to tenants primarily under noncancelable operating leases,
which generally contain provisions for a base rent plus reimbursement for
certain operating expenses. Operating expense reimbursements are reflected in
our consolidated statements of operations as tenant recoveries.





We have
leased space to certain tenants under noncancelable leases, which provide for
percentage rents based upon tenant revenues. Percentage rental income for the
three months ended September 30, 2008 and 2007 totaled $232 and $251,
respectively, and $661 and $872 for the nine months ended September 30, 2008 and
2007, respectively.





Future
minimum base rentals on non-cancelable office and ground operating leases at
September 30, 2008 were as follows:





Twelve
months ending September 30:


2009
              $
              389,0372010
              
              343,8112011
              
              292,0552012
              
              239,4522013
              
              186,577Thereafter
              
              477,827Total
      future minimum base rentals
              $
              1,928,759





The above
future minimum lease payments exclude residential leases, which typically have a
term of one year or less, as well as tenant reimbursements, amortization of
deferred rent receivables and above/below-market lease intangibles. Some leases
are subject to termination options, generally upon payment of a termination fee.
The preceding table assumes that these options are not exercised.





- 12
-


Douglas
Emmett, Inc.


Notes
to Consolidated Financial Statements--(continued)


(in
thousands, except shares and per share data)





6.
Accounts Payable and Accrued Expenses





Accounts
payable and accrued expenses consist of the following as of:





September
      30,
                    2008
                  
                  
                  December
      31,
                    2007Accounts
      payable
                  
                  $
                  37,465
                  
                  
                  $
                  43,449Accrued
      interest payable
                  
                  
                  21,933
                  
                  
                  
                  13,963Deferred
      revenue
                  
                  
                  6,446
                  
                  
                  
                  5,292$
                  65,844
                  
                  
                  $
                  62,704








7.
Secured Notes Payable





During
the first nine months of 2008, we borrowed additional debt as
follows:





·
            We
      obtained a non-recourse $365 million term loan secured by the six-property
      portfolio that we acquired on March 26, 2008 as described in Note
      3.  This loan bears interest at a floating rate equal to
      one-month LIBOR plus 165 basis points, however we have entered into
      interest rate swap contracts that effectively fix the interest at 5.515%
      (based on an actual/360-day basis) until September 4,
      2012.  This loan facility matures on August 18,
      2013.  This long-term loan replaces the $380 million bridge loan
      obtained in March 2008 in connection with the property
      acquisition.  Subsequent to quarter-end, this loan and the
      related properties that serve as collateral, were contributed to a newly
      formed institutional fund as described in Note
  13.





·
            We
      obtained a non-recourse $340 million term loan secured by four of our
      previously unencumbered office properties.  This loan bears
      interest at a floating rate equal to one-month LIBOR plus 150 basis
      points, however we have entered into interest rate swap contracts that
      effectively fix the interest rate at 4.77% (based on an actual/360-day
      basis) until January 2, 2013.  This loan facility matures on
      April 1, 2015.  Proceeds from this loan were utilized to repay
      our secured revolving credit facility and for general corporate
      purposes.





·
            The
      joint venture in which we have a two-thirds interest obtained an $18
      million loan that financed the February 2008 acquisition described in Note
      3.  This loan has an interest rate of one-month LIBOR plus 125
      basis points and a two-year term with a one-year
  extension.





- 13
-


Douglas
Emmett, Inc.


Notes
to Consolidated Financial Statements--(continued)


(in
thousands, except shares and per share data)





The
following summarizes our secured notes payable at:


Type
      of Debt
              
              Maturity
                Date
              
              September
      30,
                2008
              
              December
      31,
                2007
              
              Variable
      Rate
              
              Effective
      Annual Fixed
                Rate(1)
              
              Swap
      Maturity DateVariable
      Rate Swapped to Fixed Rate:Fannie
      Mae Loan I (2)
              
              06/01/12
              
              $293,000
              
              $293,000
              
              DMBS
      + 0.60%
              
              4.70%
              
              08/01/11Fannie
      Mae Loan II(2)
              
              06/01/12
              
              95,080
              
              95,080
              
              DMBS
      + 0.60%
              
              5.78
              
              08/01/11Modified
      Term Loan I(3)(4)
              
              08/31/12
              
              2,300,000
              
              2,300,000
              
              LIBOR
      + 0.85%
              
              5.13
              
              08/01/10-08/01/12Term
      Loan II(5)
              
              08/18/13
              
              365,000
              
              ─
              
              LIBOR
      + 1.65%
              
              5.52
              
              09/04/12Fannie
      Mae Loan III(2)
              
              02/01/15
              
              36,920
              
              36,920
              
              DMBS
      + 0.60%
              
              5.78
              
              08/01/11Fannie
      Mae Loan IV(2)
              
              02/01/15
              
              75,000
              
              75,000
              
              DMBS
      + 0.76%
              
              4.86
              
              08/01/11Term
      Loan III(6)
              
              04/01/15
              
              340,000
              
              ─
              
              LIBOR
      + 1.50%
              
              4.77
              
              01/02/13Fannie
      Mae Loan V(2)
              
              02/01/16
              
              82,000
              
              82,000
              
              LIBOR
      + 0.62%
              
              5.62
              
              03/01/12Fannie
      Mae Loan VI(2)
              
              06/01/17
              
              18,000
              
              18,000
              
              LIBOR
      + 0.62%
              
              5.82
              
              06/01/12Subtotal
              
              
              
              3,605,000
              
              2,900,000
              
              
              
              5.14%(1)Variable
      Rate:Wells
      Fargo Loan(8)
              
              03/01/10(9)
              
              18,000
              
              ─
              
              LIBOR
      + 1.25%
              
              --
              
              --$370
      Million Senior Secured Revolving Credit Facility(10)
              
              10/30/09(11)
              
              89,175
              
              180,450
              
              LIBOR
      / Fed Funds+(12)
              
              --
              
              --Subtotal
              
              
              
              3,712,175
              
              3,080,450Unamortized
      Loan Premium(13)
              
              
              
              21,697
              
              25,227Total
              
              
              
              $3,733,872
              
              $3,105,677


(1)
            Includes
      the effect of interest rate contracts.  Based on actual/360-day
      basis and excludes amortization of loan fees and unused fees on credit
      line.  The total effective rate on an actual/365-day basis is
      5.21% at September 30, 2008.


(2)
            Secured
      by four separate collateralized pools.  Fannie Mae Discount
      Mortgage-Backed Security (DMBS) generally tracks 90-day
    LIBOR.


(3)
            Secured
      by seven separate cross-collateralized pools.  Requires monthly
      payments of interest only, with outstanding principal due upon
      maturity.


(4)
            Includes
      $1.11 billion swapped to 4.96% until August 1, 2010; $545.0 million
      swapped to 5.83% until December 1, 2010; $322.5 million swapped to 5.05%
      until August 1, 2011; and $322.5 million swapped to 5.09% until August 1,
      2012.


(5)
            Secured
      by six properties in a cross-collateralized pool.  Requires
      monthly payments of interest only, with outstanding principal due upon
      maturity.


(6)
            Secured
      by four properties in a cross-collateralized pool.  Requires
      monthly payments of interest only, with outstanding principal due upon
      maturity.


(7)
            As
      of September 30, 2008, the weighted average remaining life of our total
      outstanding debt is 4.4 years, and the weighted average remaining life of
      the interest rate swaps is 2.7
years.


(8)
            This
      is an $18 million loan to a consolidated joint venture in which our
      Operating Partnership owns a two-thirds interest.  The loan has
      a one-year extension option.


(9)
            The
      original maturity date of March 1, 2010 may be extended by one year to
      March 1, 2011, subject to certain
conditions.


(10)
            This
      credit facility is secured by nine properties and has two one-year
      extension options available.


(11)
            The
      original maturity date of October 30, 2009 may be extended by two years to
      October 30, 2011, subject to certain
conditions.


(12)
            This
      revolver bears interest at either LIBOR +0.70% or Fed Funds +0.95% at our
      election.  If the amount outstanding exceeds
      $262.5 million, the credit facility bears interest at either LIBOR
      +0.80% or Fed Funds +1.05% at our
election.


(13)
            Represents
      non-cash mark-to-market adjustment on variable rate debt associated with
      office properties.


- 14
-


Douglas
Emmett, Inc.


Notes
to Consolidated Financial Statements--(continued)


(in
thousands, except shares and per share data)





The
minimum future principal payments due on our secured notes payable, excluding
the non-cash loan premium amortization, at September 30, 2008 were as
follows:




Twelve
      months ending September 30:2009
              $
              ─2010
              
              107,1752011
              
              ─2012
              
              2,688,0802013
              
              365,000Thereafter
              
              551,920Total
      future principal payments
              $
              3,712,175





Senior
Secured Revolving Credit Facility


We have a
$370 million revolving credit facility with a group of banks led by Bank of
America, N.A. and Banc of America Securities, LLC.  It bears interest
at a rate per annum equal to either LIBOR plus 70 basis points or Federal Funds
Rate plus 95 basis points if the amount outstanding is $262.5 million or less
and at either LIBOR plus 80 basis points or Federal Funds Rate plus 105 basis
points if the amount outstanding is greater than $262.5 million.  Our
secured revolving credit facility contains an accordion feature that allows us
to increase the availability by an additional $130 million to $500 million under
specified circumstances.  The facility bears interest at 15 basis
points on the undrawn balance.  The facility expires during the fourth
quarter of 2009, with two one-year extensions at our option.




8.
Interest Rate Contracts





As of
September 30, 2008, approximately 97% or $3.6 billion of our outstanding
debt had interest payments designated as hedged transactions to
receive-floating/pay-fixed interest rate swap agreements.  These
derivatives were designated and qualify as highly effective cash flow hedges
under FAS 133 and remove the variability from the hedged cash
flows.  The change in fair value of these cash flow hedges was
recorded as an unrealized gain (loss) during each of the respective reporting
periods shown in the following table.  Such unrealized gains (losses)
were recorded to accumulated other comprehensive income in our consolidated
balance sheets.  An immaterial amount of hedge ineffectiveness has
also been recorded in interest expense.  See Note 2 for a discussion
about market and credit risk as it relates to our application of FAS
157.




The
components of comprehensive income consist of the following:







Three
      Months Ended September 30,
                
                
                Nine
      Months Ended September 30,2008
                
                
                2007
                
                
                2008
                
                
                2007Net
      loss
                
                $
                (9,696
                )
                
                $
                (2,785
                )
                
                $
                (21,624
                )
                
                $
                (7,318
                )Cash
      flow hedge adjustment
                
                
                (7,867
                )
                
                
                (65,103
                )
                
                
                5,118
                
                
                
                (34,318
                )Comprehensive
      income
                
                $
                (17,563
                )
                
                $
                (67,888
                )
                
                $
                (16,506
                )
                
                $
                (41,636
                )





- 15
-


Douglas
Emmett, Inc.


Notes
to Consolidated Financial Statements--(continued)


(in
thousands, except shares and per share data)





We also
have additional interest rate swaps that we acquired from our predecessor at the
time of our IPO.  Our predecessor had $2.2 billion notional of
pay-fixed interest rate swaps at swap rates ranging between 4.04% and
5.00%.  Concurrent with the completion of our IPO, we executed
receive-fixed swaps for the same notional amount at swap rates ranging between
4.96% and 5.00%, which were intended to largely offset the future cash flows and
future change in fair value of our predecessor’s pay-fixed swaps.  The
acquired pay-fixed swaps and the new receive-fixed swaps were not designated as
hedges under FAS 133 and as such, the changes in fair value of these interest
rate swaps have been recognized in earnings for all periods.  The
aggregate fair value of these swaps decreased $5.5 million and
$3.3 million for the three months ended September 30, 2008 and 2007,
respectively, and $12.9 million and $9.8 million for the nine months
ended September 30, 2008 and 2007, respectively.





9.
Stockholders’ Equity and Minority Interests





Minority interests in our operating
partnership relate to interests in that partnership which are not owned by
us.  Minority interests in our operating partnership amounted to
approximately 22% at September 30, 2008.  A unit in our operating
partnership and a share of our common stock have essentially the same economic
characteristics as they share equally in the total net income or loss
distributions of our operating partnership.  Investors who own units
in our operating partnership have the right to cause our operating partnership
to redeem any or all of their units in our operating partnership for cash equal
to the then-current market value of one share of common stock, or, at our
election, shares of our common stock on a one-for-one basis.  At the
end of each reporting period, we calculate the book value of net assets
allocable to minority interests, and adjust the balance to reflect the
calculated amount with a reclass to or from the retained earnings (accumulated
deficit) balance.





Minority
interests also includes the interest of a minority partner in a joint venture
formed during the first quarter of 2008 to purchase an office building in
Honolulu, Hawaii.  The joint venture is two-thirds owned by our
operating partnership and is consolidated in our financial statements as of
September 30, 2008.





Dividends


During
the first nine months of 2008 and 2007, we declared quarterly dividends of
$0.1875 and $0.175 per share, respectively, which equals an annualized rate of
$0.75 and $0.70 per share, respectively.





Equity
Conversions and Repurchases


During
the first nine months of 2008, investors converted 11.8 million operating
partnership units to shares of common stock and we repurchased approximately
1.1 million share equivalents in private transactions for a total
consideration of approximately $23.8 million.  We may make
additional purchases of our share equivalents from time to time in private
transactions or in the public markets, but do not have any commitments to do
so.  Additionally, during the first nine months of 2008, we issued
approximately 31,000 shares of common stock to satisfy the exercise of certain
vested employee stock options.





Taxability
of Dividends


Earnings
and profits, which determine the taxability of distributions to stockholders,
will differ from income reported for financial reporting purposes due to the
differences for federal income tax purposes in the treatment of loss on
extinguishment of debt, revenue recognition, compensation expense and in the
basis of depreciable assets and estimated useful lives used to compute
depreciation.





- 16
-


Douglas
Emmett, Inc.


Notes
to Consolidated Financial Statements--(continued)


(in
thousands, except shares and per share data)





10.
Stock-Based Compensation





The
Douglas Emmett, Inc. 2006 Omnibus Stock Incentive Plan, our stock incentive
plan, was adopted by our board of directors and approved by our stockholders
prior to the consummation of our IPO. Our stock incentive plan is
administered by the compensation committee of our board of directors.  All
full-time and part-time officers, employees, directors and other key persons
(including consultants and prospective employees) are eligible to participate in
our stock incentive plan.  For more information on our stock incentive
plan, please refer to the notes to the consolidated financial statements in our
2007 Annual Report on Form 10-K.





During
the first quarter of 2008, we granted approximately 2.7 million long-term
incentive units and stock options with a total fair market value of $9.9
million.  No additional grants have been made during
2008.  Upon the vesting of equity awards, we recognized non-cash
compensation expense of $1.1 million and $0.5 million for the three months
ended September 30, 2008 and 2007, respectively, and $3.3 million and
$1.8 million for the nine months ended September 30, 2008 and 2007,
respectively.  An additional $2.2 million of equity awards vested
during the first quarter of 2008 to satisfy a portion of the bonuses accrued
during 2007.





11.
Commitments and Contingencies





We are
subject to various legal proceedings and claims that arise in the ordinary
course of business. These matters are generally covered by
insurance.  We believe that the ultimate outcome of these actions will
not have a material adverse effect on our financial position and results of
operations or cash flows.





Concentration
of Credit Risk


Our
properties are located in premier submarkets within Los Angeles County,
California and Honolulu, Hawaii. The ability of the tenants to honor the terms
of their respective leases is dependent upon the economic, regulatory and social
factors affecting the markets in which the tenants operate.  We
perform ongoing credit evaluations of our tenants for potential credit
losses.  Financial instruments that subject us to credit risk consist
primarily of cash, accounts receivable, deferred rents receivable and interest
rate contracts. We maintain our cash and cash equivalents with high quality
financial institutions. Accounts at each institution are insured by the Federal
Deposit Insurance Corporation up to $250,000.00 under the recently increased
limit that the U.S. Congress has temporarily granted until December 31,
2009.  We have not experienced any losses to date on our deposited
cash.  All of our deposits are maintained at banks with investment
grade ratings as evaluated by the predominant rating agencies.





Asset
Retirement Obligations


FASB
Interpretation No. 47, Accounting for Conditional Asset
Retirement Obligations—an interpretation of FASB Statement No. 143
clarifies that the term “conditional asset retirement obligation” as used in FAS
No. 143, Accounting for
Asset Retirement Obligations, represents a legal obligation to perform an
asset retirement activity in which the timing and/or method of settlement is
conditional on a future event that may or may not be within a company’s
control.  Under this standard, a liability for a conditional asset
retirement obligation must be recorded if the fair value of the obligation can
be reasonably estimated.  Environmental site assessments and
investigations have identified 18 properties in our portfolio containing
asbestos, which would have to be removed in compliance with applicable
environmental regulations if these properties undergo major renovations or are
demolished.  As of September 30, 2008, the obligations to remove the
asbestos from these properties have indeterminable settlement dates, and
therefore, we are unable to reasonably estimate the fair value of the associated
conditional asset retirement obligation.





- 17
-


Douglas
Emmett, Inc.


Notes
to Consolidated Financial Statements--(continued)


(in
thousands, except shares and per share data)





Future
Minimum Lease Payments


We lease
portions of the land underlying three of our office properties as more fully
described in the notes to consolidated financial statements contained in our
2007 Annual Report on Form 10-K. We expensed ground lease payments in the amount
of $809 and $693 for the three months ended September 30, 2008 and 2007,
respectively, and $2,400 and $2,397 for the nine months ended September 30, 2008
and 2007, respectively.





The
following is a schedule of minimum ground lease payments as of September 30,
2008:





Twelve
      months ending September 30:2009
              $
              6682010
              
              7332011
              
              7332012
              
              7332013
              
              733Thereafter
              
              3,970$
              7,570





Tenant
Concentrations


For the nine months ended September 30,
2008 and 2007, no tenant accounted for more than 10% of our total rental revenue
and tenant recoveries.




12.
Segment Reporting





FAS
No. 131, Disclosures
about Segments of an Enterprise and Related Information, established
standards for disclosure about operating segments and related disclosures about
products and services, geographic areas and major customers. Segment information
is prepared on the same basis that our management reviews information for
operational decision-making purposes. We operate in two business segments: (i)
the acquisition, redevelopment, ownership and management of office real estate
and (ii) the acquisition, redevelopment, ownership and management of multifamily
real estate.  The products for our office segment primarily include
rental of office space and other tenant services including parking and storage
space rental. The products for our multifamily segment include rental of
apartments and other tenant services including parking and storage space
rental.





Asset
information by segment is not reported because we do not use this measure to
assess performance and make decisions to allocate
resources.  Therefore, depreciation and amortization expense is not
allocated among segments.  Interest and other income, management
services, general and administrative expenses, interest expense, depreciation
and amortization expense and net derivative gains and losses are not included in
rental revenues less rental expenses as the internal reporting addresses these
items on a corporate level.





Rental
revenues less rental expenses is not a measure of operating results or cash
flows from operating activities as measured by GAAP, and it is not indicative of
cash available to fund cash needs and should not be considered an alternative to
cash flows as a measure of liquidity. Not all companies may calculate rental
revenues less rental expenses in the same manner. We consider rental revenues
less rental expenses to be an appropriate supplemental measure to net income
because it assists both investors and management in understanding the core
operations of our properties.





- 18
-


Douglas
Emmett, Inc.


Notes
to Consolidated Financial Statements--(continued)


(in
thousands, except shares and per share data)





The
following table represents operating activity within our reportable
segments:





Three
      Months Ended September 30, 2008
                
                
                Three
      Months Ended September 30, 2007Office
                
                
                Multifamily
                
                
                Total
                
                
                Office
                
                
                Multifamily
                
                
                TotalRental
      revenues
                
                $
                135,803
                
                
                $
                17,433
                
                
                $
                153,236
                
                
                $
                114,702
                
                
                $
                17,759
                
                
                $
                132,461Percentage
      of total
                
                
                89
                %
                
                
                11
                %
                
                
                100
                %
                
                
                87
                %
                
                
                13
                %
                
                
                100
                %Rental
      expenses
                
                $
                39,915
                
                
                $
                4,238
                
                
                $
                44,153
                
                
                $
                34,086
                
                
                $
                4,592
                
                
                $
                38,678Percentage
      of total
                
                
                90
                %
                
                
                10
                %
                
                
                100
                %
                
                
                88
                %
                
                
                12
                %
                
                
                100
                %Rental
      revenues less rental expenses
                
                $
                95,888
                
                
                $
                13,195
                
                
                $
                109,083
                
                
                $
                80,616
                
                
                $
                13,167
                
                
                $
                93,783Percentage
      of total
                
                
                88
                %
                
                
                12
                %
                
                
                100
                %
                
                
                86
                %
                
                
                14
                %
                
                
                100
                %





Nine
      Months Ended September 30, 2008
                
                
                Nine
      Months Ended September 30, 2007Office
                
                
                Multifamily
                
                
                Total
                
                
                Office
                
                
                Multifamily
                
                
                TotalRental
      revenues
                
                $
                386,791
                
                
                $
                52,828
                
                
                $
                439,619
                
                
                $
                336,561
                
                
                $
                52,725
                
                
                $
                389,286Percentage
      of total
                
                
                88
                %
                
                
                12
                %
                
                
                100
                %
                
                
                86
                %
                
                
                14
                %
                
                
                100
                %Rental
      expenses
                
                $
                109,404
                
                
                $
                12,503
                
                
                $
                121,907
                
                
                $
                100,121
                
                
                $
                13,943
                
                
                $
                114,064Percentage
      of total
                
                
                90
                %
                
                
                10
                %
                
                
                100
                %
                
                
                88
                %
                
                
                12
                %
                
                
                100
                %Rental
      revenues less rental expenses
                
                $
                277,387
                
                
                $
                40,325
                
                
                $
                317,712
                
                
                $
                236,440
                
                
                $
                38,782
                
                
                $
                275,222Percentage
      of total
                
                
                87
                %
                
                
                13
                %
                
                
                100
                %
                
                
                86
                %
                
                
                14
                %
                
                
                100
                %








The
following is a reconciliation of rental revenues less rental expenses to net
loss:





Three
      Months Ended
                  September
      30,
                
                
                Nine
      Months Ended
                  September
      30,2008
                
                
                2007
                
                
                2008
                
                
                2007Rental
      revenues less rental expenses
                
                $
                109,083
                
                
                $
                93,783
                
                
                $
                317,712
                
                
                $
                275,222Other
      (expense) income
                
                
                (43
                )
                
                
                205
                
                
                
                489
                
                
                
                659General
      and administrative
                
                
                (5,243
                )
                
                
                (5,862
                )
                
                
                (16,257
                )
                
                
                (16,024
                )Interest
      expense
                
                
                (52,586
                )
                
                
                (41,504
                )
                
                
                (145,580
                )
                
                
                (118,119
                )Depreciation
      and amortization
                
                
                (63,611
                )
                
                
                (50,629
                )
                
                
                (184,218
                )
                
                
                (152,244
                )Minority
      interests
                
                
                2,704
                
                
                
                1,222
                
                
                
                6,230
                
                
                
                3,188Net
      loss
                
                $
                (9,696
                )
                
                $
                (2,785
                )
                
                $
                (21,624
                )
                
                $
                (7,318
                )








13.
Subsequent Events





On
October 29, 2008 we contributed six Class "A" office properties to our newly
formed institutional fund, Douglas Emmett Fund X, LLC (Fund).  These
properties were acquired by us on March 26, 2008.  See Note 3 for
a description of the acquisition.  The contribution occurred in
connection with the initial closing of $300 million of equity commitments for
the Fund.  As part of the contribution of the properties, the
$365 million loan secured by the properties has been transferred to the
Fund.  See Note 7 for a description of the debt.


- 19
-


Item
2.  Management’s Discussion and Analysis of Financial
Condition and Results of Operations





Forward
Looking Statements.


This
Quarterly Report on Form 10-Q (Report) contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended
(the Exchange Act).  You can find many (but not all) of these
statements by looking for words such as “approximates,” “believes,” “expects,”
“anticipates,” “estimates,” “intends,” “plans,” “would,” “may” or other similar
expressions in this Report.  We claim the protection of the safe
harbor contained in the Private Securities Litigation Reform Act of
1995.  We caution investors that any forward-looking statements
presented in this Report, or those that we may make orally or in writing from
time to time, are based on the beliefs of, assumptions made by, and information
currently available to us.  Such statements are based on assumptions
and the actual outcome will be affected by known and unknown risks, trends,
uncertainties and factors that are beyond our control or ability to
predict.  Although we believe that our assumptions are reasonable, they are
not guarantees of future performance and some will inevitably prove to be
incorrect.  As a result, our actual future results can be expected to
differ from our expectations, and those differences may be
material.  Accordingly, investors should use caution in relying on
past forward-looking statements, which are based on known results and trends at
the time they are made, to anticipate future results or trends.





Some
of the risks and uncertainties that may cause our actual results, performance or
achievements to differ materially from those expressed or implied by
forward-looking statements include the following: adverse economic or real
estate developments in Southern California and Honolulu; decreased rental rates
or increased tenant incentive and vacancy rates; defaults on, early termination
of, or non-renewal of leases by tenants; increased interest rates and operating
costs; failure to generate sufficient cash flows to service our outstanding
indebtedness; difficulties in identifying properties to acquire and completing
acquisitions; failure to successfully operate acquired properties and
operations; failure to maintain our status as a Real Estate Investment Trust
(REIT) under the Internal Revenue Code of 1986, as amended; possible adverse
changes in rent control laws and regulations; environmental uncertainties; risks
related to natural disasters; lack or insufficient amount of insurance;
inability to successfully expand into new markets and submarkets; risks
associated with property development; conflicts of interest with our officers;
changes in real estate, zoning laws and increases in real property tax rates;
and the consequences of any future terrorist attacks. For further discussion of
these and other factors, see “Item 1A.  Risk Factors” in our 2007
Annual Report on Form 10-K.





This
Report and all subsequent written and oral forward-looking statements
attributable to us or any person acting on our behalf are expressly qualified in
their entirety by the cautionary statements contained or referred to in this
section.  We do not undertake any obligation to release publicly any
revisions to our forward-looking statements to reflect events or circumstances
after the date of this Report.








Critical
Accounting Policies





Our
discussion and analysis of our historical financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with GAAP.  The preparation of these financial
statements in conformity with GAAP requires us to make estimates of certain
items and judgments as to certain future events, for example with respect to the
allocation of the purchase price of acquired property among land, buildings,
improvements, equipment, and any related intangible assets and liabilities, or
the effect of a property tax reassessment of our properties.  These
determinations, even though inherently subjective and prone to change, affect
the reported amounts of our assets, liabilities, revenues and
expenses.  While we believe that our estimates are based on reasonable
assumptions and judgments at the time they are made, some of our assumptions,
estimates and judgments will inevitably prove to be incorrect.  As a
result, actual outcomes will likely differ from our accruals, and those
differences—positive or negative—could be material.  Some of our
accruals are subject to adjustment, as we believe appropriate based on revised
estimates and reconciliation to the actual results when available.





In
addition, we identified certain critical accounting policies that affect certain
of our more significant estimates and assumptions used in preparing our
consolidated financial statements in our 2007 Annual Report on Form
10-K.  We have not made any material changes to these policies during
the periods covered by this Report.





- 20
-




Historical Results of
Operations





Overview





We are a
fully integrated, self-administered and self-managed REIT and one of the largest
owners and operators of high-quality office and multifamily properties in Los
Angeles County, California and in Honolulu, Hawaii.  Our presence in
Los Angeles and Honolulu is the result of a consistent and focused strategy of
identifying submarkets that are supply constrained, have high barriers to entry
and exhibit strong economic characteristics such as population and job growth
and a diverse economic base.  In our office portfolio, we focus
primarily on owning and acquiring a substantial share of top-tier office
properties within submarkets located near high-end executive housing and key
lifestyle amenities. In our multifamily portfolio, we focus primarily on owning
and acquiring select properties at premier locations within these same
submarkets.  Our properties are concentrated in nine premier Los
Angeles County submarkets—Brentwood, Olympic Corridor, Century City, Santa
Monica, Beverly Hills, Westwood, Sherman Oaks/Encino, Warner Center/Woodland
Hills and Burbank—as well as in Honolulu, Hawaii.





Significant
Transactions





Acquisitions and
Dispositions.  During the first nine months of 2008, we
completed the following transactions (see Note 3 to our consolidated
financial statements included in this Report):





·
            In
      March 2008, we acquired a 1.4 million square foot office portfolio
      consisting of six Class “A” buildings located in our core Los Angeles
      submarkets – Santa Monica, Beverly Hills, Sherman Oaks/Encino and Warner
      Center/Woodland Hills – for a contract price of approximately $610
      million.





·
            In
      February 2008, we acquired a 78,298 square-foot office building located in
      Honolulu, Hawaii.  As part of the same transaction, we also
      acquired all of the assets of The Honolulu Club, a private membership
      athletic and social club, which is located in the building.  The
      aggregate contract price was approximately $18 million and the purchase
      was made in a consolidated joint venture with our local
      partner.  In May 2008, we transferred the operations of the
      athletic club to a third party for a nominal cost and incurred an
      immaterial loss on disposition.




Financings.  During the first
nine months of 2008, we completed the following transactions (see Note 7 to
our consolidated financial statements included in this Report):





·
            In
      August 2008, we obtained a $365 million term loan to repay a
      $380 million bridge loan obtained from an affiliate of the seller in
      the March 2008 acquisitions described above.  The term loan
      bears interest at a floating rate equal to one-month LIBOR plus 165 basis
      points; however, we entered into interest rate swap contracts that
      effectively fix the interest at 5.515% (based on an actual/360-day basis)
      until September 4, 2012.  This loan facility matures on August
      18, 2013.





·
            In
      March 2008, we obtained a non-recourse $340 million term loan secured
      by four of our previously unencumbered office properties.  This
      loan bears interest at a floating rate equal to one-month LIBOR plus 150
      basis points, however we entered into interest rate swap contracts that
      effectively fix the interest rate at 4.77% (based on an actual/360-day
      basis) until January 2, 2013.  This loan facility matures on
      April 1, 2015.





·
            The
      joint venture, in which we have a two-thirds interest, obtained an $18
      million loan that financed the February 2008 acquisition described
      above.





- 21
-







Comparison
of three months ended September 30, 2008 to three months ended September 30,
2007


Revenues





Total Office
Revenue.  Total office revenue consists of rental revenue,
tenant recoveries and parking and other income.  For the reasons
described below, total office portfolio revenue increased by $21.1 million, or
18.4%, to $135.8 million for the three months ended September 30, 2008 compared
to $114.7 million for the three months ended September 30, 2007.





Rental
Revenue.  Rental revenue includes rental revenues from our
office properties, percentage rent on the retail space contained within office
properties, and lease termination income.  Total office rental revenue
increased by $18.2 million, or 19.2%, to $112.8 million for the three months
ended September 30, 2008 compared to $94.6 million for the three months ended
September 30, 2007.  The increase is due to $14.7 million of
incremental rent from the eight properties we acquired subsequent to the
beginning of the third quarter of 2007, as well as increases in average rental
rates for new and renewal leases across our existing office
portfolio.





Parking and Other
Income.  Total office parking and other income increased by
$2.5 million, or 21.0%, to $14.7 million for the three months ended September
30, 2008 compared to $12.1 million for the three months ended September 30,
2007.  The increase is primarily due to incremental revenues of $1.8
million from the eight properties we acquired subsequent to the beginning of the
third quarter of 2007, as well as increases in parking rates implemented across
the portfolio and increases in ground rent income.





Total Multifamily
Revenue.Total multifamily revenue consists of rent, parking
income and other income.  Total multifamily revenue decreased by $0.3
million, or 1.8%, to $17.4 million for the three months ended September 30,
2008, compared to $17.7 million for the three months ended September 30,
2007.  The decrease is primarily due to $1.0 million in amortization
of below-market leases for certain multifamily units initially recorded at the
time of our IPO and formation that were fully amortized during the second
quarter of 2008, thus causing a decline when comparing the third quarter of 2007
to 2008.  This decrease was partially offset by an increase of
$0.6 million resulting from increased occupancy and an increase in rents
charged to both new and existing tenants, including increases for select Santa
Monica multifamily units.  These units were under leases signed prior
to a 1999 change in California Law that allows landlords to reset rents to
market rates when a tenant moves out.  Therefore, a portion of the
multifamily increase was due to the rollover to market rents of several of these
rent-controlled units, or “Pre-1999 Units”, since October 1, 2007.





Operating
Expenses





Office Rental
Expenses.  Total office rental expense increased by $5.8
million, or 17.1%, to $39.9 million for the three months ended September 30,
2008, compared to $34.1 million for the three months ended September 30,
2007.  The increase was due primarily to $6.4 million of incremental
operating expenses from the eight properties we acquired subsequent to the
beginning of the third quarter of 2007, slightly offset by lower expenses at our
existing portfolio.





Depreciation and
Amortization.  Depreciation and amortization expense increased
$13.0 million, or 25.6%, to $63.6 million for the three months ended September
30, 2008, compared to $50.6 million for the three months ended September 30,
2007.  The increase is primarily due to incremental depreciation and
amortization of $8.6 million from the eight properties we acquired subsequent to
the beginning of the third quarter of 2007, as well as the
finalization of the purchase price allocation and related lives of real estate
assets combined at the time of our IPO and incorporation
transactions.





Non-Operating
Income and Expenses





Interest
Expense.  Interest expense increased $11.1 million, or 26.7%,
to $52.6 million for the three months ended September 30, 2008, compared to
$41.5 million for the three months ended September 30, 2007.  The
increase for the comparable periods was primarily due to an increase in
additional borrowings during 2008 to fund property acquisitions and for general
corporate purposes.





- 22
-







Comparison
of nine months ended September 30, 2008 to nine months ended September 30,
2007




Revenues





Total Office
Revenue.  For the reasons described below, total office
portfolio revenue increased by $50.2 million, or 14.9%, to $386.8 million for
the nine months ended September 30, 2008 compared to $336.6 million for the nine
months ended September 30, 2007.





Rental
Revenue.  Total office rental revenue increased by $43.9
million, or 15.7%, to $323.0 million for the nine months ended September 30,
2008 compared to $279.1 million for the nine months ended September 30,
2007.  Rent increased due to $32.4 million of incremental rent from
the nine properties we acquired subsequent to the beginning of the first quarter
of 2007, as well as increases in average rental rates for new and renewal leases
across our existing office portfolio.





Tenant
Recoveries.  Total office tenant recoveries decreased by $0.6
million, or 2.7%, to $22.5 million for the nine months ended September 30, 2008
compared to $23.1 million for the nine months ended September 30,
2007.  This is due in part to a reduction in the accrual of property
tax expense during the third quarter of 2007.  This reduction was
partially offset by a $2.6 million increase in incremental recoverable operating
expenses from the nine properties we acquired subsequent to the beginning of the
first quarter of 2007.





Parking and Other
Income.  Total office parking and other income increased by
$6.9 million, or 20.1%, to $41.3 million for the nine months ended September 30,
2008 compared to $34.3 million for the nine months ended September 30,
2007.  The increase is primarily due to incremental revenues of $3.8
million from the nine properties we acquired subsequent to the beginning of the
first quarter of 2007, as well as increases in parking rates implemented across
the portfolio and increases in ground rent income.





Operating
Expenses





Office Rental
Expenses.  Total office rental expense increased by $9.3
million, or 9.3%, to $109.4 million for the nine months ended September 30,
2008, compared to $100.1 million for the nine months ended September 30,
2007.  The increase is primarily due to $13.7 million of incremental
operating expenses from the nine properties we acquired subsequent to the
beginning of the first quarter of 2007. The increase was partially offset by a
reduction in the accrual of property tax expense during the third quarter of
2007.





Multifamily Rental Expenses.Total multifamily rental expense decreased by $1.4 million, or 10.3%, to
$12.5 million for the nine months ended September 30, 2008, compared to $13.9
million for the nine months ended September 30, 2007.  This is
primarily due to a reduction in the accrual of property tax expense during the
third quarter of 2007.





Depreciation and
Amortization.  Depreciation and amortization expense increased
$32.0 million, or 21.0%, to $184.2 million for the nine months ended September
30, 2008, compared to $152.2 million for the nine months ended September 30,
2007.  The increase is primarily due to $18.7 million of incremental
depreciation and amortization from the nine properties we acquired subsequent to
the beginning of the first quarter of 2007, as well as the finalization of the
purchase price allocation and related lives of real estate assets combined at
the time of our IPO and formation transactions,


- 23
-


Non-Operating
Income and Expenses





Interest
Expense.  Interest expense increased $27.5 million, or 23.2%,
to $145.6 million for the nine months ended September 30, 2008, compared to
$118.1 million for the nine months ended September 30, 2007.  The
increase for the comparable periods was primarily due to an increase in
outstanding borrowings during 2008 to fund property acquisitions and for general
corporate purposes.








Liquidity
and Capital Resources





Available
Borrowings, Cash Balances and Capital Resources





On
October 29, 2008, we completed the initial closing of $300 million of
equity commitments for our newly formed institutional fund, Douglas Emmett Fund
X, LLC, of which we have committed $150 million.  Upon its final
closing, the Fund is expected to range from $500 million to $1 billion
in equity commitments.  With limited exceptions, the Fund will be our
exclusive investment vehicle, and will follow our identical investment strategy,
focusing primarily on real estate opportunities within the same markets and
pursuing the same disciplined underwriting and leverage principles which have
governed acquisitions at Douglas Emmett for more than 20 years.  The
Fund contemplates an investment period of up to four years followed by a
ten-year value creation period.





In
connection with the initial closing, we contributed to the Fund the six Class
"A" office properties which we acquired on March 26, 2008.  In August,
we replaced the original bridge financing on the contributed properties with a
non-recourse 5-year term loan in the amount of $365 million.  As
part of the contribution of the properties, this loan has been transferred to
the Fund.  The loan facility matures on August 18,
2013.  See Note 3 to our consolidated financial statements included in
this Report for further description of the acquisition and Note 7 to our
consolidated financial statements included in this Report for further
description of the debt.





We had
total indebtedness of $3.7 billion at September 30, 2008, excluding a loan
premium representing the mark-to-market adjustment on variable rate debt assumed
from our predecessor.   Please see Note 7 to our consolidated
financial statements included in this Report.





We have a
revolving credit facility with a group of banks led by Bank of America, N.A. and
Banc of America Securities LLC totaling $370 million.  At September
30, 2008, there was approximately $280.8 million available to us under this
credit facility.  We have used our revolving credit facility for
general corporate purposes, including acquisition funding, redevelopment and
repositioning opportunities, tenant improvements and capital expenditures, share
equivalent repurchases, recapitalizations and working capital.





We have
historically financed our capital needs through short-term lines of credit and
long-term secured mortgages at floating rates.  To mitigate the impact
of fluctuations in short-term interest rates on our cash flow from operations,
we generally enter into interest rate swap or interest rate cap
agreements.  At September 30, 2008, 97% of our debt was effectively
fixed at an overall rate of 5.14% (on an actual / 360-day basis) by virtue of
interest rate swap and interest rate cap agreements in place at the end of the
reporting period.  See Notes 7 and 8 to our consolidated financial
statements included in this Report.





None of
our term loans with swapped-to-fixed interest rates mature until
2012.  Our other loan obligations, which remain at variable rates, are
the $370 million revolving credit facility described above, whose maturity can
be extended, under certain conditions, by two years to October 30, 2011, and an
$18 million secured acquisition loan, whose maturity can be extended, under
certain conditions, by one year to March 1, 2011.




- 24
-




At
September 30, 2008, our total borrowings under secured loans, excluding the
portion of consolidated debt attributable to our minority partner on the
Honolulu Club joint venture, represented 50.7% of our total market
capitalization of $7.3 billion.  Total market capitalization
includes our portion of the consolidated debt and the value of common stock and
operating partnership units each based on our common stock closing price at
September 30, 2008 on the New York Stock Exchange of $23.07 per
share.





The
nature of our business, and the requirements imposed by REIT rules that we
distribute a substantial majority of our income on an annual basis, will cause
us to have substantial liquidity needs over both the short term and the long
term.





We expect
to meet our short-term liquidity requirements generally through cash provided by
operations and, if necessary, by drawing upon our senior secured revolving
credit facility.  However, recent economic events have led to tighter
and more uncertain credit markets.  As a result, although we have been
successful in financings during 2008, disruptions in the credit markets could
impact the availability of credit in the future or could impact the rates of any
borrowings we do obtain.  At September 30, 2008, we had approximately
$89.2 million of principal payments under our senior secured revolving credit
facility maturing by the end of 2009. This credit facility contains two renewal
options of one year each. Subsequent
to the end of the quarter, as mentioned above, we completed the initial closing
of the Fund and a portion of that capital was used to reimburse us for a portion
of the value of the properties contributed.  We used this cash to
repay amounts outstanding on our revolving credit facility, reducing the amount
outstanding on that facility to approximately $40 million just prior to
filing this Quarterly Report on Form 10-Q.  We anticipate that cash
provided by operations and borrowings under our senior secured revolving credit
facility will be sufficient to meet our liquidity requirements for at least the
next 12 months.





Our
long-term liquidity needs consist primarily of funds necessary to pay for
acquisitions, redevelopment and repositioning of properties, non-recurring
capital expenditures, and repayment of indebtedness at maturity. We will seek to
satisfy these needs through cash flow from the Fund, as well as from operations,
long-term secured and unsecured indebtedness, the issuance of debt and equity
securities, including units in our operating partnership, property dispositions
and joint venture transactions.  We have historically financed our
operations, acquisitions and development, through the use of our revolving
credit facility or other short-term acquisition lines of credit, which we
subsequently repay with long-term secured floating rate mortgage
debt.  To mitigate the impact of fluctuations in short-term interest
rates on our cash flow from operations, we generally enter into interest rate
swap or interest rate cap agreements at the time we enter into term
borrowings.








Contractual
Obligations





During
the third quarter of 2008, there were no material changes outside the ordinary
course of business in the information regarding specified contractual
obligations contained in our 2007 Annual Report on Form 10-K.





Off-Balance
Sheet Arrangements





At
September 30, 2008, we did not have any off-balance sheet
arrangements.


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Cash
Flows





Net cash provided by operating activities increased $12.5 million to
$136.8 million for the nine months ended September 30, 2008, compared to
$124.3 million for the nine months ended September 30,
2007.  The increase reflects higher net cash flow from existing
properties that generated improved results, as well as incremental cash flow
from acquired properties.





Net cash
used in investing activities increased $584.2 million to $656.8 million for the
nine months ended September 30, 2008 compared to $72.6 million for the
nine months ended September 30, 2007.  The increase was primarily
due to a higher level of spending on property acquisitions in the 2008 period
compared to the 2007 period.  See Note 3 to our consolidated financial
statements included in this Report.





Net cash
provided by financing activities totaled $516.3 million for the nine months
ended September 30, 2008 compared to net cash used in financing activities
totaling $54.2 million for the nine months ended September 30,
2007.  The comparative difference was primarily due to the increased
level of borrowings associated with property acquisitions in 2008, as described
in Note 3 to our consolidated financial statements included in this Report, as
compared to the use of funds primarily for equity repurchases in
2007.





Item
3.  Quantitative and Qualitative Disclosures about Market
Risk





At
September 30, 2008, 97%, or $3.6 billion of our debt was hedged with derivative
instruments.  By using derivative instruments to hedge exposure to
changes in interest rates, we expose ourselves to credit risk and the potential
inability of our counterparties to perform under the terms of the
agreements.  We attempt to minimize this credit risk by contracting
with high-quality bank financial counterparties.








Item
4.  Controls and Procedures




We
maintain disclosure controls and procedures (as such term is defined in Rule
13a-15(e) and 15d-15(e) under the Exchange Act)  that are designed to
ensure that information required to be disclosed in our reports under the
Exchange Act is processed, recorded, summarized and reported within the time
periods specified in the SEC’s rules and regulations and that such information
is accumulated and communicated to management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.






As of
September 30, 2008, the end of the period covered by this Report, we carried out
an evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, regarding the
effectiveness in design and operation of our disclosure controls and procedures
at the end of the period covered by this Report.  Based on the
foregoing, our Chief Executive Officer and Chief Financial Officer concluded, as
of that time, that our disclosure controls and procedures were effective in
ensuring that information required to be disclosed by us in reports filed or
submitted under the Exchange Act (i) is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms and
(ii) is accumulated and communicated to our management including our
principal executive officer and our Chief Executive Officer and our Chief
Financial Officer, to allow timely decisions regarding required
disclosure.






There
have been no significant changes that occurred during the quarter covered by
this Report in our internal control over financial reporting identified in
connection with the evaluation referenced above that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.




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PART
II.  OTHER INFORMATION





Item
1.  Legal Proceedings





We are subject to various legal
proceedings and claims that arise in the ordinary course of
business.  Most of these matters are generally covered by insurance
and we do not believe that the ultimate outcome of these actions will have a
material adverse effect on our financial position, results of operations or cash
flows.





Item
1A.  Risk Factors





We are
not aware of any material changes to the risk factors included in Item 1A. “Risk
Factors” in our 2007 Annual Report on Form 10-K.





Item
2.  Unregistered Sales of Equity Securities and Use of
Proceeds





None.





Item
3.  Defaults Upon Senior Securities





None.





Item
4.  Submission of Matters to a Vote of Security
Holders





None.





Item
5.  Other Information







(a)                 Additional
Disclosures.None.






(b)                 Stockholder
Nominations.There have been no material changes to the
procedures by which stockholders may recommend nominees to our board of
directors during the quarter ended September 30, 2008.  Please see the
discussion of our procedures in our most recent proxy statement.







Item
6.  Exhibits





Exhibit
      Number
            
            Description10.1
            
            $365,000,000
      Loan Agreement dated as of August 18, 2008 among Douglas Emmett 2008, LLC,
      the lenders party thereto and EuroHypo AG.31.1
            
            Certificate
      of Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
            
            Certificate
      of Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
            
            Certificate
      of Chief Executive Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.(1)32.2
            
            Certificate
      of Chief Financial Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.(1)








(1)
            In
      accordance with SEC Release No. 33-8212, the following exhibit is being
      furnished, and is not being filed as part of this Report on Form 10-Q or
      as a separate disclosure document, and is not being incorporated by
      reference into any Securities Act of 1933 registration
      statement.


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Signatures




Pursuant
to the requirements of the Securities and Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.










DOUGLAS
      EMMETT, INC.Date:  November
      6, 2008
            By:
            /s/
      JORDAN L. KAPLANJordan
      L. KaplanPresident
      and Chief Executive OfficerDate:  November
      6, 2008
            By:
            /s/
      WILLIAM KAMERWilliam
      KamerChief
      Financial Officer








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