UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

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

		For the transition period from                      to

Commission File Number: 001-33662

FORESTAR GROUP INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)		26-1336998 (I.R.S. Employer Identification No.)

6300 Bee Cave Road, Building Two, Suite 500, Austin, Texas 78746
(Address of Principal Executive Offices, Including Zip Code)

(512) 433-5200
(Registrant’s Telephone Number, Including Area Code)

     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. þ Yes o No

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o No

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o (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). o Yes þ No

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

		Number of Shares Outstanding as of
Title of Each Class		August 1, 2011
Common Stock, par value $1.00 per share		35,492,686

 

 

FORESTAR GROUP INC.
TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION			3
Item 1. Financial Statements			3
Consolidated Balance Sheets			3
Consolidated Statements of Income			4
Consolidated Statements of Cash Flows			5
Notes to Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3. Quantitative and Qualitative Disclosures About Market Risk			32
Item 4. Controls and Procedures			32
PART II — OTHER INFORMATION			33
Item 1. Legal Proceedings			33
Item 1A. Risk Factors			33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			34
Item 3. Defaults Upon Senior Securities			34
Item 4. (Removed and Reserved)			34
Item 5. Other Information			34
Item 6. Exhibits			34
SIGNATURES			35
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

FORESTAR GROUP INC.
Consolidated Balance Sheets

		(Unaudited)
		Second
		Quarter-End				Year-End
		2011				2010
		(In thousands)
ASSETS
Cash and cash equivalents		$	5,715			$	5,366
Real estate			568,139				562,192
Assets held for sale			25,588				21,122
Investment in unconsolidated ventures			98,909				101,166
Timber			15,998				17,959
Receivables, net			23,382				2,875
Prepaid expenses			2,824				2,034
Income taxes receivable			790				—
Property and equipment, net			5,423				5,577
Oil and gas properties and equipment, net			2,413				322
Deferred tax asset			54,141				47,141
Goodwill and other intangible assets			5,989				6,527
Other assets			15,844				17,043
TOTAL ASSETS		$	825,155			$	789,324
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable		$	4,281			$	4,214
Accrued employee compensation and benefits			463				994
Accrued property taxes			5,112				3,662
Accrued interest			1,293				1,061
Income taxes payable			—				3,293
Other accrued expenses			9,176				8,168
Other liabilities			35,054				32,064
Debt			260,825				221,589
TOTAL LIABILITIES			316,204				275,045
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY
Forestar Group Inc. shareholders’ equity:
Preferred stock, par value $0.01 per share, 25,000,000 authorized shares, none issued			—				—
Common stock, par value $1.00 per share, 200,000,000 authorized shares, 36,773,370 issued at June 30, 2011 and 36,667,210 issued at December 31, 2010			36,773				36,667
Additional paid-in capital			395,573				391,352
Retained earnings			94,607				101,001
Treasury stock, at cost, 1,281,084 shares at June 30, 2011 and 1,216,647 shares at December 31, 2010			(20,672	)			(19,456	)
Total Forestar Group Inc. shareholders’ equity			506,281				509,564
Noncontrolling interests			2,670				4,715
TOTAL SHAREHOLDERS’ EQUITY			508,951				514,279
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	825,155			$	789,324

Please read the Notes to Consolidated Financial Statements.

FORESTAR GROUP INC.
Consolidated Statements of Income
(Unaudited)

		Second Quarter								First Six Months
		2011				2010				2011				2010
						(In thousands, except per share amounts)
REVENUES
Real estate sales		$	12,576			$	16,145			$	26,533			$	26,895
Income producing properties and other			7,039				5,404				14,221				11,902
Real estate			19,615				21,549				40,754				38,797
Mineral resources			4,580				4,606				11,913				11,733
Fiber resources and other			1,290				1,982				2,658				3,965
			25,485				28,137				55,325				54,495
COSTS AND EXPENSES
Cost of real estate sales			(5,991	)			(7,462	)			(11,636	)			(13,129	)
Cost of income producing properties and other			(4,366	)			(3,945	)			(8,891	)			(8,749	)
Cost of mineral resources			(438	)			(307	)			(1,232	)			(629	)
Cost of fiber resources and other			(285	)			(391	)			(532	)			(742	)
Other operating			(10,483	)			(9,228	)			(22,157	)			(19,437	)
General and administrative			(6,849	)			(6,120	)			(12,820	)			(11,696	)
			(28,412	)			(27,453	)			(57,268	)			(54,382	)
OPERATING INCOME (LOSS)			(2,927	)			684				(1,943	)			113
Equity in earnings (loss) of unconsolidated ventures			402				287				984				658
Interest expense			(4,653	)			(4,103	)			(8,662	)			(8,649	)
Other non-operating income			24				246				51				444
INCOME (LOSS) BEFORE TAXES			(7,154	)			(2,886	)			(9,570	)			(7,434	)
Income tax benefit (expense)			2,828				(162	)			3,540				1,353
CONSOLIDATED NET INCOME (LOSS)			(4,326	)			(3,048	)			(6,030	)			(6,081	)
Less: Net (income) loss attributable to noncontrolling interests			405				(225	)			(364	)			(164	)
NET INCOME (LOSS) ATTRIBUTABLE TO FORESTAR GROUP INC.		$	(3,921	)		$	(3,273	)		$	(6,394	)		$	(6,245	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING — BASIC			35,448				36,155				35,389				36,117
NET INCOME (LOSS) PER COMMON SHARE — BASIC		$	(0.11	)		$	(0.09	)		$	(0.18	)		$	(0.17	)

Please read the Notes to Consolidated Financial Statements.

FORESTAR GROUP INC.
Consolidated Statements of Cash Flows
(Unaudited)

		First Six Months
		2011				2010
		(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Consolidated net income (loss)		$	(6,030	)		$	(6,081	)
Adjustments:
Depreciation and amortization			4,864				5,293
Deferred income taxes			(7,000	)			(6,950	)
Tax benefits not recognized for book purposes			95				64
Equity in (earnings) loss of unconsolidated ventures			(984	)			(658	)
Distributions of earnings of unconsolidated ventures			4,102				99
Distributions of earnings to noncontrolling interests			(2,491	)			(238	)
Share-based compensation			3,952				5,553
Non-cash real estate cost of sales			10,525				11,470
Real estate development and acquisition expenditures			(23,529	)			(7,020	)
Acquisition of non-performing loan			(21,137	)			—
Reimbursements from utility and improvement districts			1,790				183
Other changes in real estate			(5	)			28
Gain on termination of timber lease			(181	)			(497	)
Cost of timber cut			524				692
Deferred income			947				1,421
Asset impairments			450				900
Loss on sale of assets held for sale			—				277
Other			74				(113	)
Changes in:
Notes and accounts receivable			530				(9,771	)
Prepaid expenses and other			(239	)			147
Accounts payable and other accrued liabilities			3,896				(8,154	)
Income taxes			(4,083	)			(5,518	)
Net cash (used for) provided by operating activities			(33,930	)			(18,873	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, equipment, software and reforestation			(899	)			(1,392	)
Oil and gas properties and equipment			(2,112	)			—
Investment in unconsolidated ventures			(1,135	)			(1,039	)
Return of investment in unconsolidated ventures			252				4,784
Proceeds from sale of assets held for sale			—				2,602
Proceeds from termination of timber lease			290				—
Proceeds from sale of property			103				—
Net cash (used for) provided by investing activities			(3,501	)			4,955
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of debt			(37,043	)			(19,750	)
Additions to debt			76,279				18,527
Deferred financing fees			(1,379	)			—
Return of investment to noncontrolling interest			(1	)			(598	)
Exercise of stock options			1,167				872
Payroll taxes on restricted stock and stock options			(1,216	)			(49	)
Tax benefit from share-based compensation			(110	)			121
Other			83				103
Net cash provided by (used for) financing activities			37,780				(774	)
Net increase (decrease) in cash and cash equivalents			349				(14,692	)
Cash and cash equivalents at beginning of period			5,366				21,051
Cash and cash equivalents at end of period		$	5,715			$	6,359

Please read the Notes to Consolidated Financial Statements.

FORESTAR GROUP INC.
Notes to Consolidated Financial Statements
(Unaudited)

Note 1 — Basis of Presentation

     Our consolidated financial statements include the accounts of Forestar Group Inc., all subsidiaries, ventures and other entities in which we have a controlling interest and variable interest entities of which we are the primary beneficiary. We eliminate all material intercompany accounts and transactions. Noncontrolling interests in consolidated pass-through entities are recognized before income taxes. We account for our investment in other entities in which we have significant influence over operations and financial policies using the equity method (we recognize our share of the entities’ income or loss and any preferential returns and treat distributions as a reduction of our investment). We account for our investment in other entities in which we do not have significant influence over operations and financial policies using the cost method (we recognize as income distributions of accumulated earnings).

     We prepare our unaudited interim financial statements in accordance with U.S. generally accepted accounting principles and Securities and Exchange Commission requirements for interim financial statements. As a result, they do not include all the information and disclosures required for complete financial statements. However, in our opinion, all adjustments considered necessary for a fair presentation have been included. Such adjustments consist only of normal recurring items unless otherwise noted. We make estimates and assumptions about future events. Actual results can, and probably will, differ from those we currently estimate including those related to allocating cost of sales to real estate, minerals and fiber and measuring assets for impairment. These interim operating results are not necessarily indicative of the results that may be expected for the entire year. For further information, please read the financial statements included in our 2010 Annual Report on Form 10-K.

     In 2011, we reclassified $199,000 and $397,000 from cost of income producing properties to operating expenses in second quarter and first six months 2010 to conform to the current year’s presentation.

Note 2 — New and Pending Accounting Pronouncements

      Accounting Standards Adopted in 2011

     In first quarter 2011, we adopted Accounting Standards Update (ASU) 2010-28 — When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts and ASU 2010-29 — Disclosure of Supplementary Pro Forma Information for Business Combinations. Adoption of these pronouncements did not affect our earnings or financial position.

      Pending Accounting Standards

     Pending ASU 2011-04 — Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs and ASU 2011-05 — Comprehensive Income: Presentation of Comprehensive Income will be effective first quarter 2012. Adoption is not anticipated to have a significant effect on our earnings or financial position but will likely result in certain additional disclosures.

Note 3 — Strategic Initiatives and Assets Held for Sale

     In 2009, we announced our near-term strategic initiatives to enhance shareholder value by generating significant cash flow, principally from the sale of 175,000 acres of higher and better use timberland; reducing debt by $150,000,000; and repurchasing up to 20 percent of our common stock.

     Since announcing these initiatives, we have sold 119,000 acres of timber and timberland in Georgia, Alabama and Texas for $197,381,000 generating combined net proceeds of $191,891,000, which were principally used to reduce debt, pay taxes, reinvest in qualifying real estate and repurchase our common stock. These transactions resulted in a combined gain on sale of assets of $132,654,000. In 2010, we repurchased 1,000,987 shares of our common stock at a cost of $15,178,000. The repurchased shares are classified as treasury stock.

     At second quarter-end 2011, assets held for sale includes 65,000 acres of undeveloped land with a carrying value of $18,024,000 and related timber with a carrying value of $7,564,000. We continue to actively market this land. Please read Note 19 for information regarding a sale of 50,000 acres of timberland subsequent to second quarter-end 2011.

Note 4 — Real Estate

     Real estate consists of:

		Second
		Quarter-End				Year-End
		2011				2010
		(In thousands)
Entitled, developed and under development projects		$	400,287			$	403,059
Undeveloped land			90,067				86,608
Income producing properties			102,983				95,963
			593,337				585,630
Accumulated depreciation			(25,198	)			(23,438	)
		$	568,139			$	562,192

     Included in entitled, developed and under development projects are the estimated costs of assets we expect to convey to utility and improvement districts of $62,030,000 at second quarter-end 2011 and $59,079,000 at year-end 2010, including $36,552,000 included in both second quarter-end 2011 and year-end 2010 related to our Cibolo Canyons project near San Antonio, Texas. These costs relate to water, sewer and other infrastructure assets we have submitted to utility or improvement districts for approval and reimbursement. We submitted for reimbursement to these districts $2,336,000 in first six months 2011 and $1,827,000 in first six months 2010. We collected $187,000 from these districts in first six months 2011 and $183,000 in first six months 2010. We expect to collect the remaining amounts billed when these districts achieve adequate tax bases to support payment.

     Also included in entitled, developed and under development projects is our investment in the resort development owned by third parties at our Cibolo Canyons project. In second quarter 2011, we received $1,603,000 from the Special Improvement District (SID) related to hotel occupancy revenues and other revenues from resort sales collected as taxes by the SID. We currently account for these collections as a reduction of our investment. At second-quarter-end 2011, we have $40,399,000 invested in the resort development.

     Income producing properties principally represents our investment in a 401 unit multifamily property in Houston, Texas and a 413 room hotel in Austin, Texas. In addition, in second quarter 2011, we reclassified $4,555,000 in land from entitled, developed and under development projects to income producing properties as result of commencing construction on a 289 unit multifamily project in Austin, Texas. At second-quarter end 2011, our investment in this project, including land and construction in progress is $5,961,000, with an estimated additional cost to complete construction of $24,579,000.

     We recognized asset impairment charges in second quarter 2011 of $450,000 related to a residential real estate project located near Dallas, Texas and $900,000 in second quarter 2010 related to a residential real estate project located near Salt Lake City, Utah.

     Depreciation expense, primarily related to income producing properties, was $1,760,000 in first six months 2011 and $1,465,000 in first six months 2010 and is included in other operating expenses.

Note 5 — Timber

     We own directly or through ventures approximately 201,000 acres of timber, primarily in Georgia. The cost of timber cut and sold was $524,000 in first six months 2011 and $692,000 in first six months 2010.

Note 6 — Shareholders’ Equity

     A reconciliation of changes in shareholders’ equity at second quarter-end 2011 follows:

		Forestar				Noncontrolling
		Group Inc.				Interests				Total
						(In thousands)
Balance at year-end 2010		$	509,564			$	4,715			$	514,279
Net income (loss)			(6,394	)			364				(6,030	)
Distributions to noncontrolling interests			—				(2,492	)			(2,492	)
Contributions from noncontrolling interests			—				83				83
Other (primarily share-based compensation)			3,111				—				3,111
Balance at second quarter-end 2011		$	506,281			$	2,670			$	508,951

     In first six months 2011, we issued 106,160 shares of our common stock as a result of stock option exercises and vesting of equity-settled restricted stock units.

Note 7 — Investment in Unconsolidated Ventures

     At second quarter-end 2011, we had ownership interests ranging from 25 to 50 percent in 10 ventures that we account for using the equity method. We have no real estate ventures that are accounted for using the cost method. Our three largest ventures at second quarter-end 2011 are CL Realty, Temco and Palisades West. We own a 50 percent interest in both CL Realty and Temco, and Cousins Real Estate Corporation owns the other 50 percent interest. We own a 25 percent interest in Palisades West, Cousins Properties Incorporated owns a 50 percent interest and Dimensional Fund Advisors LP owns the remaining 25 percent interest. Information regarding these ventures follows:

	•		CL Realty, L.L.C. was formed in 2002 for the purpose of developing residential and mixed-use communities in Texas and across the southeastern United States. At second quarter-end 2011, the venture has 14 residential and mixed-use communities, of which 10 are in Texas, 3 are in Florida and 1 is in Georgia, representing approximately 5,200 planned residential lots and 290 commercial acres.
	•		Temco Associates, LLC was formed in 1991 for the purpose of acquiring and developing residential real estate sites in Georgia. At second quarter-end 2011, the venture has 4 residential and mixed-use communities, representing approximately 1,550 planned residential lots, all of which are located in Paulding County, Georgia. The venture also owns 5,712 acres of undeveloped land in Paulding County, Georgia.
	•		Palisades West LLC was formed in 2006 for the purpose of constructing a commercial office park in Austin, Texas. The project includes two office buildings totaling approximately 375,000 square feet and an accompanying parking garage. At second quarter-end 2011, the buildings are approximately 97 percent leased. Our remaining commitment for investment in this venture as of second quarter-end 2011 is $1,532,000. Effective fourth quarter 2008, we entered into a 10-year operating lease for approximately 32,000 square feet that we occupy as our corporate headquarters. In second quarter and first six months 2011, rents paid under this operating lease were $256,000 and $560,000 and are included in general and administrative and other operating expenses.

     Combined summarized balance sheet information for our ventures accounted for using the equity method follows:

		Second Quarter-End 2011																				Year-End 2010
		CL								Palisades				Other								CL								Palisades				Other
		Realty				Temco				West				Ventures				Total				Realty				Temco				West				Ventures				Total
																		(In thousands)
Real estate		$	81,898			$	59,567			$	121,754			$	66,942			$	330,161			$	85,436			$	60,454			$	124,696			$	69,612			$	340,198
Total assets			82,838				60,232				125,907				76,782				345,759				86,657				60,609				129,378				78,060				354,704
Borrowings (a)			1,727				2,859				—				74,080				78,666				2,664				2,929				—				74,605				80,198
Total liabilities			3,478				3,270				45,227	(b)			88,150				140,125				4,124				3,133				48,612	(b)			87,145				143,014
Equity			79,360				56,962				80,680				(11,368	)			205,634				82,533				57,476				80,766				(9,085	)			211,690
Our investment in real estate ventures:
Our share of their equity (c)			39,680				28,481				20,170				13,726				102,057				41,267				28,738				20,191				14,075				104,271
Unrecognized deferred gain (d)			(2,190	)			—				—				(958	)			(3,148	)			(2,190	)			—				—				(915	)			(3,105	)
Investment in real estate ventures		$	37,490			$	28,481			$	20,170			$	12,768			$	98,909			$	39,077			$	28,738			$	20,191			$	13,160			$	101,166

     Combined summarized income statement information for our ventures accounted for using the equity method follows:

		Second Quarter								First Six Months
		2011				2010				2011				2010
						(In thousands)
Revenues:
CL Realty		$	1,649			$	2,485			$	3,518			$	4,212
Temco			288				89				346				1,877
Palisades West			4,084				3,416				8,114				6,731
Other ventures			4,116				6,355				5,665				8,220
Total		$	10,137			$	12,345			$	17,643			$	21,040
Earnings (Loss):
CL Realty		$	734			$	1,364			$	1,390			$	1,220
Temco			(212	)			(388	)			(416	)			812
Palisades West			1,455				1,158				2,911				2,282
Other ventures			(1,262	)			(15,190	)			(2,132	)			(16,283	)
Total		$	715			$	(13,056	)		$	1,753			$	(11,969	)
Our equity in their earnings (loss):
CL Realty		$	367			$	682			$	695			$	610
Temco			(106	)			(194	)			(208	)			406
Palisades West			364				290				728				569
Other ventures (c)			(223	)			(491	)			(231	)			(927	)
Total		$	402			$	287			$	984			$	658

     In first six months 2011, we invested $1,135,000 in these ventures and received $4,354,000 in distributions; in first six months 2010, we invested $1,039,000 in these ventures and received $4,883,000 in distributions. Distributions include both return of investments and distributions of earnings.

     At second quarter-end 2011, other ventures include three partnerships we participate in that have total assets of $51,504,000 and total liabilities of $82,740,000, which includes $67,532,000 of borrowings classified as current maturities. These partnerships are managed by third parties who intend to extend or refinance these borrowings; however, there is no assurance that this can be done. Although these borrowings may be guaranteed by third parties, we may under certain circumstances elect or be required to provide additional equity to these partnerships. We do not believe that the ultimate resolution of these matters will have a significant effect on our earnings or financial position. Our investment in these partnerships is $2,751,000 at second quarter-end 2011. These three partnerships are variable interest entities. Please read Note 17 for additional information.

     In second quarter and first six months 2011, CL Realty’s earnings include an impairment charge of $500,000 related to a residential real estate project located in Tampa, Florida.

     In second quarter and first six months 2010, other ventures loss includes a $13,061,000 loss on sale of a golf course and country club property in Denton, Texas. This loss did not impact our equity in the earnings (loss) of this venture as we exclude losses that exceed our investment where we are not obligated to provide additional funding.

     We have provided performance bonds and letters of credit on behalf of certain ventures totaling $1,447,000 at second quarter-end 2011. Generally these performance bonds and letters of credit would be drawn on due to lack of performance by us or the ventures, such as failure to timely deliver streets and utilities in accordance with local codes and ordinances.

Note 8 — Receivables

     Receivables consist of:

		Second
		Quarter-End				Year-End
		2011				2010
		(In thousands)
Non-performing loan		$	21,137			$	—
Notes receivable, average interest rates of 7.56% at second quarter-end 2011 and 7.93% at year-end 2010			1,974				1,057
Due from qualified intermediary			—				1,347
Receivables and accrued interest			332				615
			23,443				3,019
Allowance for bad debts			(61	)			(144	)
		$	23,382			$	2,875

     In second quarter 2011, we acquired a non-performing loan from a financial institution for $21,137,000. The original loan commitment was $38,000,000 and the current principal balance outstanding is about $31,600,000. The loan matured in February 2010. The note is secured by a lien on 900 acres of developed and undeveloped real estate located near Houston, Texas designated for single-family residential and commercial development. We are not currently accruing interest and did not record any accretable yield at acquisition due to the non-performing status of the loan. We cannot estimate the anticipated future cash flows because the borrower is in bankruptcy.

     Notes receivable generally are secured by a deed of trust and generally due within three years.

     Receivables and accrued interest principally include miscellaneous operating receivables arising in the normal course of business.

Note 9 — Debt

     Debt consists of:

		Second
		Quarter-End				Year-End
		2011				2010
		(In thousands)
Term loan facility — average interest rate of 6.50% at second quarter-end 2011 and year-end 2010		$	130,000			$	125,000
Revolving loan facility — average interest rate of 6.51% at second quarter-end 2011			51,000				—
Secured promissory notes — average interest rate of 4.94% at second quarter-end 2011 and 4.51% at year-end 2010			26,500				41,716
Other indebtedness due through 2017 at variable and fixed interest rates ranging from 5.00% to 8.00%			53,325				54,873
		$	260,825			$	221,589

     Our senior credit facility and other debt agreements contain financial covenants customary for such agreements including minimum levels of interest coverage and limitations on leverage. At second quarter-end 2011, we were in compliance with the financial covenants of these agreements.

     On February 23, 2011, we supplemented our amended and restated senior credit facility to add a new lender to the revolving loan and to the term loan increasing the aggregate commitment by $30,000,000. We incurred fees of $270,000 related to this additional commitment. In addition, on May 6, 2011, we amended our senior secured credit facility to provide us with additional flexibility and to make certain technical and other changes. We incurred fees of $583,500 related to this amendment.

     At second quarter-end 2011, our senior credit facility provides for a $130,000,000 term loan and a $200,000,000 revolving line of credit. The term loan matures August 6, 2015, and the revolving line of credit matures August 6, 2013 (with a one-year extension option to August 6, 2014). The term loan includes a 2 percent prepayment penalty for payments in excess of $25,000,000 prior to August 6, 2011 and 1 percent prepayment penalty prior to February 6, 2012 and no prepayment penalty thereafter. The revolving line of credit may be prepaid at any time without penalty. The revolving line of credit includes a $100,000,000 sublimit for letters of credit, of which $3,467,000 is outstanding at second quarter-end 2011. Total borrowings under our senior credit facility (including the face amount of letters of credit) may not exceed a borrowing base formula. At second quarter-end 2011, we had $111,386,000 in net unused borrowing capacity under our senior credit facility.

     At our option, we can borrow at LIBOR plus 4.5 percent (subject to a 2 percent LIBOR floor) or prime plus 2.5 percent. Borrowings under the senior credit facility are secured by (a) all timberland and minerals, (b) assignments of current and future leases, rents and contracts, including our mineral leases, (c) a security interest in our primary operating account, (d) pledge of the equity interests in current and future material operating subsidiaries or joint venture interests, or if such pledge is not permitted, a pledge of the right to distributions from such entities, to the extent permitted, and (e) negative pledge (without a mortgage) on all other wholly- owned assets. The senior credit facility provides for releases of real estate to be delivered provided that borrowing base compliance is maintained.

     At second quarter-end 2011, directly and through consolidated ventures, we have $7,419,000 in unamortized deferred financing fees which are included in other assets. Amortization of deferred financing fees was $1,472,000 in first six months 2011 and $2,882,000 in first six months 2010 and is included in interest expense.

     At second quarter-end 2011, a 401 unit multifamily project located in Houston, Texas with current book value of $47,337,000 is pledged as collateral for and is subject to liens in connection with a $26,500,000 loan. In second quarter 2011, we paid in full a $15,216,000 loan with borrowings from our revolving loan facility. This loan was secured by a 413 guest room hotel located in Austin, Texas.

     At second quarter-end 2011, entitled, developed and under development projects having a book value of $116,492,000 are subject to liens in connection with $53,325,000 of principally non-recourse debt.

Note 10 — Fair Value

     Non-financial assets measured at fair value on a non-recurring basis principally include real estate assets and assets held for sale, which are measured for impairment. In second quarter 2011, a real estate asset was remeasured and reported at fair value due to events or circumstances that indicated the carrying value may not be recoverable. We determined estimated fair value based on the present value of future probability weighted cash flows expected from the sale of the long-lived asset. As a result, we recognized asset impairment of $450,000 in second quarter 2011. The carrying value of this asset may have subsequently increased or decreased from the fair value reflected due to activity that has occurred since the measurement date.

														Second
		Fair Value Measurements												Quarter-End
		Level 1				Level 2				Level 3				2011
						(In thousands)
Non-Financial Assets
Real estate		$	—			$	—			$	2,762			$	2,762

     We elected not to use the fair value option for cash and cash equivalents, accounts receivable, other current assets, variable debt, accounts payable and other current liabilities. The carrying amounts of these financial instruments approximate their fair values due to their short-term nature or variable interest rates. We determine the fair value of fixed rate financial instruments using quoted prices for similar instruments in active markets.

     Information about our fixed rate financial instruments not measured at fair value follows:

		Second Quarter-End 2011								Year-End 2010
		Carrying				Fair				Carrying				Fair				Valuation
		Amount				Value				Amount				Value				Technique
						(In thousands)
Fixed rate debt		$	(29,931	)		$	(30,412	)		$	(29,931	)	$	(30,164		)		Level 2

Note 11 — Capital Stock

     Pursuant to our shareholder rights plan, each share of common stock outstanding is coupled with one-quarter of a preferred stock purchase right (Right). Each Right entitles our shareholders to purchase, under certain conditions, one one-hundredth of a share of newly issued Series A Junior Participating Preferred Stock at an exercise price of $100. Rights will be exercisable only if someone acquires beneficial ownership of 20 percent or more of our common shares or commences a tender or exchange offer, upon consummation of which they would beneficially own 20 percent or more of our common shares. We will generally be entitled to redeem the Rights at $0.001 per Right at any time until the 10th business day following public announcement that a 20 percent position has been acquired. The Rights will expire on December 11, 2017.

     Please read Note 18 for information about additional shares of common stock that could be issued under terms of our share-based compensation plans.

     As a result of the 2007 spin-offs from Temple-Inland, at second quarter-end 2011, personnel of Temple-Inland and the other spin-off entity held 19,000 awards that will be settled in our common stock and options to purchase 1,130,000 shares of our common stock. Information about these stock options follows:

Weighted

Aggregate

Average

Intrinsic Value

Weighted

Remaining

(Current

Average

Contractual

Value Less

Shares

Exercise Price

Term

Exercise Price)

(In thousands)

(Per share)

(In years)

(In thousands)

Outstanding and exercisable

1,130

$

21.52

4

$

1,427

Note 12 — Other Comprehensive Income (Loss)

     Other comprehensive loss consists of:

		Second Quarter								First Six Months
		2011				2010				2011				2010
						(In thousands)
Consolidated net income (loss)		$	(4,326	)		$	(3,048	)		$	(6,030	)		$	(6,081	)
Change in fair value of interest rate swap agreement			—				—				—				393
Income tax effect of change in fair value			—				—				—				(137	)
Other comprehensive income (loss)			(4,326	)			(3,048	)			(6,030	)			(5,825	)
Less: Comprehensive (income) loss attributable to noncontrolling interests			405				(225	)			(364	)			(164	)
Other comprehensive income (loss) attributable to Forestar Group Inc.		$	(3,921	)		$	(3,273	)		$	(6,394	)		$	(5,989	)

Note 13 — Earnings (Loss) per Share

     Loss attributable to common shareholders and weighted average common shares outstanding used to compute net loss per share were:

		Second Quarter								First Six Months
		2011				2010				2011				2010
						(In thousands)
Earnings (loss) available to common shareholders:
Consolidated net income (loss)		$	(4,326	)		$	(3,048	)		$	(6,030	)		$	(6,081	)
Less: Net (income) loss attributable to noncontrolling interest			405				(225	)			(364	)			(164	)
Net income (loss) attributable to Forestar Group Inc.		$	(3,921	)		$	(3,273	)		$	(6,394	)		$	(6,245	)
Weighted average common shares outstanding — basic			35,448				36,155				35,389				36,117

     At second quarter-end 2011 and 2010, the effect of 3,182,000 and 3,041,000 stock options, equity-settled awards and unvested shares of restricted stock were not included in the computation of diluted weighted average shares outstanding because they were anti-dilutive.

Note 14 — Income Taxes

     Our effective tax rate was a 40 percent benefit in second quarter 2011 and a 37 percent benefit in first six months 2011, which includes a 2 percent non-cash charge for share-based compensation. Our effective tax rate was 6 percent in second quarter 2010 and an 18 percent benefit in first six months 2010, which included a 23 percent benefit attributable to noncontrolling interests. In addition, 2011 and 2010 effective tax rates include the effect of state income taxes, nondeductible items, noncontrolling interests and benefits of percentage depletion.

     We have not provided a valuation allowance for our deferred tax asset because we believe it is likely it will be recoverable in future periods.

     At second quarter-end 2011, our unrecognized tax benefits totaled $7,718,000, of which $6,343,000 would affect our effective tax rate if recognized.

Note 15 — Commitments and Contingencies

Litigation

     We are involved in various legal proceedings that arise from time to time in the ordinary course of doing business and believe that adequate reserves have been established for any probable losses. We do not believe that the outcome of any of these proceedings should have a significant adverse effect on our financial position, long-term results of operations or cash flows. It is possible; however, that charges related to these matters could be significant to our results or cash flows in any one accounting period.

Environmental

     Environmental remediation liabilities arise from time to time in the ordinary course of doing business, and we believe we have established adequate reserves for any probable losses. We own 288 acres near Antioch, California, portions of which were sites of a former Temple-Inland paper manufacturing operation that are in remediation. We estimate the cost to complete remediation activities will be approximately $1,940,000, which is included in other accrued expenses and will likely be paid in 2011 or 2012. Our estimate requires us to make assumptions regarding the scope of required remediation, the effectiveness of planned remediation activities, and approvals by regulatory authorities. Our estimate is subject to revision as new information becomes available.

Note 16 — Segment Information

     We manage our operations through three business segments: real estate, mineral resources and fiber resources. Real estate secures entitlements and develops infrastructure on our lands for single-family residential and mixed-use communities, and manages our undeveloped land and income producing properties, primarily a hotel and a multifamily property. Mineral resources manages our oil, natural gas and water interests. Fiber resources manages our timber and recreational leases.

     Assets allocated by segment are as follows:

		Second
		Quarter-End				Year-End
		2011				2010
		(In thousands)
Real estate		$	694,686			$	669,363
Mineral resources			14,580				13,399
Fiber resources			16,201				18,258
Assets not allocated to segments			99,688				88,304
Total assets		$	825,155			$	789,324

     We evaluate performance based on segment earnings (loss) before unallocated items and income taxes. Segment earnings (loss) consist of operating income, equity in earnings (loss) of unconsolidated ventures and net (income) loss attributable to noncontrolling interests. Items not allocated to our business segments consist of general and administrative expense, share-based compensation, gain on sale of assets, interest expense and other non-operating income and expense. The accounting policies of the segments are the same as those described in the accounting policy note to the consolidated financial statements. Our revenues are derived from our U.S. operations and all of our assets are located in the U.S. In first six months 2011, no single customer accounted for more than 10 percent of our total revenues.

     Segment revenues and earnings are as follows:

		Second Quarter								First Six Months
		2011				2010				2011				2010
						(In thousands)
Revenues:
Real estate		$	19,615			$	21,549			$	40,754			$	38,797
Mineral resources			4,580				4,606				11,913				11,733
Fiber resources			1,290				1,982				2,658				3,965
Total revenues		$	25,485			$	28,137			$	55,325			$	54,495
Segment earnings:
Real estate		$	1,007			$	2,454			$	3,582			$	2,766
Mineral resources			3,102				4,266				8,700				10,444
Fiber resources			704				1,085				1,344				2,528
Total segment earnings			4,813				7,805				13,626				15,738
Items not allocated to segments (a)			(11,562	)			(10,916	)			(23,560	)			(23,336	)
Income (loss) before taxes attributable to Forestar Group Inc.		$	(6,749	)		$	(3,111	)		$	(9,934	)		$	(7,598	)

		Second Quarter								First Six Months
		2011				2010				2011				2010
						(In thousands)
General and administrative expense		$	(7,081	)		$	(5,040	)		$	(10,997	)		$	(9,578	)
Share-based compensation expense			148				(2,019	)			(3,952	)			(5,553	)
Interest expense			(4,653	)			(4,103	)			(8,662	)			(8,649	)
Other non-operating income			24				246				51				444
		$	(11,562	)		$	(10,916	)		$	(23,560	)		$	(23,336	)

     Second quarter and first six months 2011, general and administrative expense includes $2,730,000 associated with proposed private debt offerings that we withdrew as a result of deterioration of the terms available to us in the capital markets.

Note 17 — Variable Interest Entities

     At second quarter-end 2011, we are the primary beneficiary of two VIEs that we consolidate. We have provided the majority of equity to these VIEs, which absent our contributions or advances do not have sufficient equity to fund their operations. We have the

authority to approve project budgets and the issuance of additional debt. At second quarter-end 2011, our consolidated balance sheet includes $14,704,000 in assets, principally real estate and $5,002,000 in liabilities related to these two VIEs. In first six months 2011, we contributed or advanced $2,303,000 to these VIEs. In first six months 2010, real estate assets decreased by $11,865,000, debt decreased by $13,207,000 and other liabilities increased by $1,342,000 due to lender foreclosure of a lien on property owned by one of these VIEs. In second quarter 2011, our earnings benefited from a $1,342,000 reallocation of a previously recognized loss related to foreclosure of a lien on property in the above VIE. Based on our access to new information, we determined this loss and related liability should be allocated from us to the noncontrolling financial interests as we believe the likelihood we will be subject to any potential lender liabilities is remote. We have a nominal general partner interest in this VIE and could be held responsible for certain of its liabilities.

     Also at second quarter-end 2011, we are not the primary beneficiary of three VIEs that we account for using the equity method. The unrelated managing partners oversee the day-to-day operations and guarantee some of the debt of the VIEs while we have the authority to approve project budgets and the issuance of additional debt. Although some of the debt is guaranteed by the managing partners, we may under certain circumstances elect or be required to provide additional funds to these VIEs. At second quarter-end 2011, these three VIEs have total assets of $51,504,000, substantially all of which represent developed and undeveloped real estate and total liabilities of $82,740,000, which includes $67,532,000 of borrowings classified as current maturities. These amounts are included in other ventures in the combined summarized balance sheet information for ventures accounted for using the equity method in Note 7. At second quarter-end 2011, our investment in these three VIEs is $2,751,000 and is included in investment in unconsolidated ventures. In first six months 2011, we contributed or advanced $114,000 to these VIEs. Our maximum exposure to loss related to these VIEs is estimated at $36,295,000, which exceeds our investment as we have a nominal general partner interest in two of these VIEs and could be held responsible for their liabilities. The maximum exposure to loss represents the maximum loss that we could be required to recognize assuming all the ventures’ assets (principally real estate) are worthless, without consideration of the probability of a loss or of any actions we may take to mitigate any such loss.

Note 18 — Share-Based Compensation

     Share-based compensation expense consists of:

		Second Quarter								First Six Months
		2011				2010				2011				2010
						(In thousands)
Cash-settled awards		$	(1,488	)		$	640			$	681			$	2,765
Equity-settled awards			262				—				411				—
Restricted stock			607				912				1,270				1,615
Stock options			471				467				1,590				1,173
		$	(148	)		$	2,019			$	3,952			$	5,553

     Share-based compensation expense is included in:

		Second Quarter								First Six Months
		2011				2010				2011				2010
						(In thousands)
General and administrative expense		$	(232	)		$	1,080			$	1,823			$	2,118
Other operating expense			84				939				2,129				3,435
		$	(148	)		$	2,019			$	3,952			$	5,553

     In second quarter and first six months 2011, the decrease in share-based compensation expense is primarily due to the impact of stock price changes on vested cash-settled awards.

     The fair value of awards granted to retirement eligible employees and expensed at the date of grant was $654,000 in first six months 2011 and $286,000 in first six months 2010. Unrecognized share-based compensation expense related to non-vested equity-settled awards, restricted stock and stock options is $9,519,000 at second quarter-end 2011. The weighted average period over which this amount will be recognized is estimated to be two years. We did not capitalize any share-based compensation in first six months 2011 or 2010.

     In first six months 2011, we withheld 64,437 shares having a value of $1,216,000 in connection with vesting of restricted stock awards and exercises of stock options. In first six months 2010, we withheld 2,601 shares having a value of $49,000 in connection with vesting of restricted stock awards and exercises of stock options. These shares are included in treasury stock and are reflected in financing activities in our consolidated statement of cash flows.

     A summary of the awards granted under our 2007 Stock Incentive Plan follows:

Cash-settled awards

     Cash-settled awards granted to our employees in the form of restricted stock units or stock appreciation rights generally vest over three to four years from the date of grant and generally provide for accelerated vesting upon death, disability or if there is a change in

control. Vesting for some restricted stock unit awards is also conditioned upon achievement of a minimum one percent annualized return on assets over a three-year period. Cash-settled stock appreciation rights have a ten-year term, generally become exercisable ratably over three to four years and provide for accelerated or continued vesting upon retirement, death, disability or if there is a change in control. Stock appreciation rights were granted with an exercise price equal to the market value of our stock on the date of grant.

     Cash-settled awards granted to our directors in the form of restricted stock units are fully vested at the time of grant and payable upon retirement.

     The following table summarizes the activity of cash-settled restricted stock unit awards in first six months 2011:

						Weighted
		Equivalent				Average Grant
		Units				Date Fair Value
		(In thousands)				(Per unit)
Non-vested at beginning of period			376			$	11.88
Granted			146				17.49
Vested			(64	)			16.02
Forfeited			—				—
Non-vested at end of period			458			$	13.10

     The following table summarizes the activity of cash-settled stock appreciation rights in first six months 2011:

										Weighted				Aggregate
										Average				Intrinsic Value
						Weighted				Remaining				(Current
		Rights				Average				Contractual				Value Less
		Outstanding				Exercise Price				Term				Exercise Price)
		(In thousands)				(Per share)				(In years)				(In thousands)
Balance at beginning of period			909			$	11.28				8			$	7,289
Granted			—				—
Exercised			(12	)			9.29
Forfeited			—				—
Balance at end of period			897			$	11.30				8			$	4,888
Exercisable at end of period			380			$	10.48				8			$	2,333

     The fair value of awards settled in cash was $184,000 in first six months 2011 and $731,000 in first six months 2010. At second quarter-end 2011, the fair value of vested cash-settled awards is $14,296,000 and is included in other liabilities. The aggregate current value of non-vested cash-settled awards is $10,082,000 at second quarter-end 2011 based on a quarter-end stock price of $16.43.

Equity-settled awards

     Equity-settled awards granted to our employees include restricted stock units (RSU), which vest ratably over three years from the date of grant, and beginning first quarter 2011, market-leveraged stock units (MSU), which vest after three years. The following table summarizes the activity of equity-settled awards in first six months 2011:

						Weighted
		Equivalent				Average Grant
		Units				Date Fair Value
		(In thousands)				(Per share)
Non-vested at beginning of period			—			$	—
Granted			160				20.73
Vested			—				—
Forfeited			—				—
Non-vested at end of period			160			$	20.73

     In first quarter 2011, we granted 124,700 MSU awards. These awards will be settled in common stock based upon our stock price performance over three years from the date of grant. The number of shares to be issued could range from a high of 187,050 shares if our stock price increases by 50 percent or more, to a low of 62,350 shares if our stock price decreases by 50 percent, or could be zero if our stock price decreases by more than 50 percent, the minimum threshold performance. MSU awards are valued using a Monte Carlo simulation pricing model, which includes expected stock price volatility and risk-free interest rate assumptions. Compensation expense is recognized regardless of achievement of performance conditions, provided the requisite service period is satisfied.

     Unrecognized share-based compensation expense related to non-vested equity-settled awards is $2,745,000 at second quarter-end 2011. The weighted average period over which this amount will be recognized is estimated to be three years.

Restricted stock

     Restricted stock awards vest either ratably over or after three years, generally if we achieve a minimum one percent annualized return on assets over such three-year period. The following table summarizes the activity of restricted stock awards in first six months 2011:

						Weighted
		Restricted				Average Grant
		Shares				Date Fair Value
		(In thousands)				(Per share)
Non-vested at beginning of period			636			$	17.56
Granted			—				—
Vested			(199	)			24.77
Forfeited			—				—
Non-vested at end of period			437			$	14.27

     Unrecognized share-based compensation expense related to non-vested restricted stock awards is $3,204,000 at second quarter-end 2011. The weighted average period over which this amount will be recognized is estimated to be two years.

Stock options

     Stock options have a ten-year term, generally become exercisable ratably over three to four years and provide for accelerated or continued vesting upon retirement, death, disability or if there is a change in control. Options were granted with an exercise price equal to the market value of our stock on the date of grant. The following table summarizes the activity of stock option awards in first six months 2011:

										Weighted				Aggregate
										Average				Intrinsic Value
						Weighted				Remaining				(Current
		Options				Average				Contractual				Value Less
		Outstanding				Exercise Price				Term				Exercise Price)
		(In thousands)				(Per share)				(In years)				(In thousands)
Balance at beginning of period			957			$	23.45				8			$	1,890
Granted			327				18.59
Exercised			—				—
Forfeited			—				—
Balance at end of period			1,284			$	22.22				8			$	1,154
Exercisable at end of period			642			$	25.61				7			$	577

     We estimate the fair value of stock options using the Black-Scholes option pricing model and the following assumptions:

		First Six Months
		2011				2010
Expected dividend yield			0.0	%			0.0	%
Expected stock price volatility			56.2	%			51.0	%
Risk-free interest rate			2.4	%			2.3	%
Expected life of options (years)			6				6
Weighted average estimated fair value of options granted		$	10.11			$	8.98

     We have limited historical experience as a stand-alone company so we utilized alternative methods in determining our valuation assumptions. The expected life was based on the simplified method utilizing the midpoint between the vesting period and the contractual life of the awards. In 2011, the expected stock price volatility was based on a blended rate utilizing our historical volatility and historical prices of our peers’ common stock for a period corresponding to the expected life of the options. In 2010, the expected stock price volatility was based on historical prices of our peers’ common stock for a period corresponding to the expected life of the options. Pre-vesting forfeitures are estimated based upon the pool of participants and their expected activity and historical trends.

     Unrecognized share-based compensation expense related to non-vested stock options is $3,570,000 at second quarter-end 2011. The weighted average period over which this amount will be recognized is estimated to be three years.

Pre-Spin Awards

     Certain of our employees participated in Temple-Inland’s share-based compensation plans. In conjunction with the 2007 spin-off, these awards were equitably adjusted into separate awards of the common stock of Temple-Inland and the spin-off entities.

     Stock options have a ten-year term, generally become exercisable ratably over four years and provide for accelerated or continued vesting upon retirement, death, disability or if there is a change in control. A summary of stock option awards outstanding at second quarter-end 2011 follows:

Weighted

Aggregate

Average

Intrinsic Value

Weighted

Remaining

(Current

Options

Average

Contractual

Value Less

Outstanding

Exercise Price

Term

Exercise Price)

(In thousands)

(Per share)

(In years)

(In thousands)

Outstanding and exercisable on Forestar stock

77

$

22.08

4

$

114

Outstanding and exercisable on Temple-Inland stock

145

21.30

5

1,224

$

1,338

     The intrinsic value of options exercised was $337,000 in first six months 2011 and $553,000 in first six months 2010.

Note 19 — Subsequent Events

     On August 5, 2011, we completed our previously announced sale of 50,000 acres of timber and timberland in Georgia and Alabama to Plum Creek Timber Company, Inc. for $75,000,000 in a cash transaction.

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

     Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2010 Annual Report on Form 10-K. Unless otherwise indicated, information is presented as of second quarter-end 2011, and references to acreage owned includes all acres owned by ventures regardless of our ownership interest in a venture.

Forward-Looking Statements

     This Quarterly Report on Form 10-Q and other materials we have filed or may file with the Securities and Exchange Commission contain “forward-looking statements” within the meaning of the federal securities laws. These forward-looking statements are identified by their use of terms and phrases such as “believe,” “anticipate,” “could,” “estimate,” “likely,” “intend,” “may,” “plan,” “expect,” and similar expressions, including references to assumptions. These statements reflect our current views with respect to future events and are subject to risks and uncertainties. We note that a variety of factors and uncertainties could cause our actual results to differ significantly from the results discussed in the forward-looking statements. Factors and uncertainties that might cause such differences include, but are not limited to:

	•		general economic, market or business conditions in Texas or Georgia, where our real estate activities are concentrated;
	•		the opportunities (or lack thereof) that may be presented to us and that we may pursue;
	•		significant customer concentration;
	•		future residential or commercial entitlements, development approvals and the ability to obtain such approvals;
	•		accuracy of estimates and other assumptions related to investment in real estate, the expected timing and pricing of land and lot sales and related cost of real estate sales, impairment of long-lived assets, income taxes, share-based compensation and oil and natural gas reserves;
	•		the levels of resale housing inventory and potential impact of foreclosures in our development projects and the regions in which they are located;
	•		the development of relationships with strategic partners;
	•		fluctuations in costs and expenses;
	•		demand for new housing, which can be affected by a number of factors including the availability of mortgage credit;
	•		supply of and demand for oil and natural gas and fluctuations in oil and natural gas prices;
	•		competitive actions by other companies;

	•		changes in governmental policies, laws or regulations and actions or restrictions of regulatory agencies;
	•		government regulation of exploration and production technology, including hydraulic fracturing;
	•		the results of financing efforts, including our ability to obtain financing with favorable terms;
	•		our partners’ ability to fund their capital commitments and otherwise fulfill their operating and financial obligations;
	•		the effect of limitations, restrictions and natural events on our ability to harvest and deliver timber;
	•		water withdrawal or usage may be subject to state and local laws, regulations or permit requirements, and there is no assurance that all our water interests or rights will be available for withdrawal or use; and
	•		the final resolutions or outcomes with respect to our contingent and other liabilities related to our business.

     Other factors, including the risk factors described in Item 1A of our 2010 Annual Report on Form 10-K, may also cause actual results to differ materially from those projected by our forward-looking statements. New factors emerge from time to time and it is not possible for us to predict all such factors, nor can we assess the impact of any such factor on our business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement.

     Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by law, we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

Strategy

     Our strategy is:

	•		Recognizing and responsibly delivering the greatest value from every acre; and
	•		Growing through strategic and disciplined investments.

     In 2009, we announced our near-term strategic initiatives to enhance shareholder value by generating significant cash flow, principally from the sale of 175,000 acres of higher and better use (HBU) timberland; reducing debt by $150,000,000; and repurchasing up to 20 percent of our common stock.

     Since announcing these initiatives, we have sold 119,000 acres of timber and timberland in Georgia, Alabama and Texas for $197,381,000 generating combined net proceeds of $191,891,000, which were principally used to reduce debt, pay taxes, reinvest in qualifying real estate and repurchase our common stock. These transactions resulted in a combined gain on sale of assets of $132,654,000. In addition, in 2010, we repurchased 1,000,987 shares of our common stock at a cost of $15,178,000. The repurchased shares are classified as treasury stock.

     At second quarter-end 2011, assets held for sale under these strategic initiatives includes 65,000 acres of undeveloped land with a carrying value of $18,024,000 and related timber with a carrying value of $7,564,000. We continue to actively market this land.

     On August 5, 2011, we completed our previously announced sale of 50,000 acres of timber and timberland in Georgia and Alabama to Plum Creek Timber Company, Inc. for $75,000,000 in a cash transaction.

Results of Operations

     A summary of our consolidated results by business segment follows:

		Second Quarter								First Six Months
		2011				2010				2011				2010
		(In thousands)
Revenues:
Real estate		$	19,615			$	21,549			$	40,754			$	38,797
Mineral resources			4,580				4,606				11,913				11,733
Fiber resources			1,290				1,982				2,658				3,965
Total revenues		$	25,485			$	28,137			$	55,325			$	54,495
Segment earnings:
Real estate		$	1,007			$	2,454			$	3,582			$	2,766
Mineral resources			3,102				4,266				8,700				10,444
Fiber resources			704				1,085				1,344				2,528
Total segment earnings			4,813				7,805				13,626				15,738
Items not allocated to segments:
General and administrative expense			(7,081	)			(5,040	)			(10,997	)			(9,578	)
Share-based compensation expense			148				(2,019	)			(3,952	)			(5,553	)
Interest expense			(4,653	)			(4,103	)			(8,662	)			(8,649	)
Other non-operating income			24				246				51				444
Income (loss) before taxes			(6,749	)			(3,111	)			(9,934	)			(7,598	)
Income tax benefit (expense)			2,828				(162	)			3,540				1,353
Net income (loss) attributable to Forestar Group Inc.		$	(3,921	)		$	(3,273	)		$	(6,394	)		$	(6,245	)