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Article by DailyStocks_admin    (02-25-09 05:37 AM)

Filed with the SEC from Feb 12 to Feb 18:

Forestar Group (FOR)
Shareholder Holland M. Ware is "no longer interested in acquiring the company," but wants to remain a passive shareholder. In January, Forestar said that it had received an unsolicited bid from Ware to buy it for $15 a share, or about $535.5 million. Forestar issued a press release in early February saying the board had unanimously rejected Ware's proposal. Ware holds 444,230 shares (1.2%).

BUSINESS OVERVIEW

Forestar Real Estate Group Inc. is a growth company committed to maximizing stockholder value. We own directly or through ventures about 373,000 acres of real estate located in ten states and 13 markets and about 622,000 net acres of oil and gas mineral interests. We invest primarily in strategic growth corridors, which we define as markets with significant growth characteristics for population, employment and household formation. In 2007, we generated revenues of $178 million and net income of $25 million. Unless the context otherwise requires, reference to “we,” “us,” “our” and “Forestar” mean Forestar Real Estate Group Inc. and its consolidated subsidiaries. Unless otherwise indicated, information is presented as of December 29, 2007, and references to acreage owned includes all acres owned by ventures regardless of our ownership interest in a venture.

We operate two business segments:


• Real estate, and

• Natural resources.

Our real estate segment secures entitlements and develops infrastructure on our lands, primarily for single-family residential and mixed-use communities. We own approximately 303,000 acres in a broad area around Atlanta, Georgia, with the balance located primarily in Texas. We also actively invest in new projects principally in our strategic growth corridors, regions of accelerated growth across the southern half of the United States that possess key demographic and growth characteristics that we believe make them attractive for long-term real estate investment.

Our real estate projects are located among the fastest growing markets in the United States. We have 24 real estate projects representing almost 29,000 acres in the entitlement process, and 78 entitled, developed or under development projects in eight states and 12 markets encompassing approximately 16,000 remaining acres, comprised of about 30,000 residential lots and about 1,900 commercial acres. We sell land for commercial uses to national retailers and local commercial developers. We own and manage projects both directly and through ventures. By using ventures, we achieve various business objectives including more efficient capital deployment, risk management, and leveraging a partner’s local market contacts and expertise.

Our natural resources segment is focused on maximizing the value from royalties and other lease revenues from our oil and gas mineral interests located in Texas, Louisiana, Alabama and Georgia. These operations have historically required low capital investment, and we use the cash flow generated by our mineral interests to accelerate real estate value creation activities. In addition, we sell wood fiber from our land, primarily in Georgia, and lease land for recreational uses.

Our origins date back to the 1955 incorporation of Lumbermen’s Investment Corporation, which in 2006 changed its name to Forestar (USA) Real Estate Group Inc. We have a decades-long legacy of residential and commercial real estate development operations, primarily in Texas. In 1991, we and Cousins Properties Incorporated formed Temco Associates, LLC as a venture to develop residential sites in Paulding County, Georgia, and in 2002 we and Cousins formed CL Realty, L.L.C. as a venture to develop residential and mixed-use communities in Texas and across the southeastern U.S. Those ventures continue today. In 2001, we opened an office in the Atlanta area to manage nearby land with a focus on its long-term real estate development potential. In 2006, Temple-Inland Inc. (“Temple-Inland”) began reporting Forestar Real Estate Group as a separate business segment. On December 28, 2007, Temple-Inland distributed 100% of the issued and outstanding shares of our common stock to the holders of record of Temple-Inland common stock as of the close of business on December 14, 2007, which we will refer to in this Annual Report on Form 10-K as the “spin-off” or the “separation.” Each Temple-Inland stockholder received one share of our common stock for every three shares of Temple-Inland common stock held. (Also on December 28, 2007, Temple-Inland distributed 100% of the issued and outstanding shares of Guaranty Financial Group Inc. (“Guaranty”), a wholly-owned subsidiary of Temple-Inland that operated Temple-Inland’s financial services business.)

Leveraging years of real estate experience, we believe our management team brings extensive knowledge and expertise to position us to maximize long-term value for our stockholders.

Strategy

Our strategy is to maximize and grow long-term stockholder value through:


• Entitlement and development of real estate,

• Realization of value from natural resources, and

• Accelerated growth through strategic and disciplined investment in real estate.

We are focused on maximizing real estate values through the entitlement and development of well-located residential and mixed-use communities. We secure entitlements on our lands by delivering thoughtful plans and balanced solutions that meet the needs of the communities where we operate. Moving land through the entitlement and development process creates significant real estate value. Residential development activities target lot sales to national and regional home builders who build quality products and have strong and effective marketing and sales programs. The lots we deliver in the majority of our communities are for mid-priced homes, predominantly in the first and second move-up categories, the largest segments of the new home market. Commercial tracts are either sold to or ventured with commercial developers that specialize in the construction and operation of income-producing properties.

We maximize value from our oil and gas mineral interests by increasing the acreage leased, lease rates and royalty interests. These operations have historically required low capital investment, and we use the cash flow generated by our mineral interests to accelerate real estate value creation activities. In addition, we realize value from our undeveloped land by selling fiber and by managing it for future real estate development and conservation uses. We also generate cash flow and create additional value through recreational leases.

We are committed to growing our business and will continue to reinvest our capital primarily in ten strategic growth corridors through disciplined investment in real estate opportunities that meet our investment criteria. In 2007, we invested over $54 million in nine new projects, representing nearly 3,700 acres located in four of our strategic growth corridors.

Our real estate and mineral assets in combination with our strategy, financial strength, management expertise, stewardship and continuous reinvestment in our business, position Forestar to maximize and grow long-term value for stockholders.

2007 Value Creation Highlights

Activities during 2007 include:


• Negotiating a 58% ownership interest in Ironstob, LLC, a venture controlling about 17,000 acres of undeveloped land near Atlanta, Georgia;

• Entering into an agreement with Marriott International, Inc., PGA Tour, Inc., and Miller Global for the development of a JW Marriott ® (a) resort hotel, spa and two PGA Tour ® Tournament Players Club ® (b) (TPC) golf facilities at our Cibolo Canyons mixed-use development near San Antonio, Texas;

• Entitling over 1,700 acres representing over 900 residential lots, and moving nearly 4,300 acres into entitlement;
• Investing in nearly 3,700 acres representing approximately 5,100 single-family residential lots, 400 multifamily units and about 140 commercial acres; and

• Leasing to oil and gas companies approximately 30,000 net mineral acres for exploration and production activities.


(a) JW Marriott ® is a registered trademark of Marriott International, Inc.
(b) PGA Tour ® and Tournament Players Club ® are registered trademarks of PGA Tour, Inc.

In our real estate segment, we conduct a wide array of project planning and management activities related to the acquisition, entitlement, development and sale of real estate, primarily residential and mixed-use communities. We own and manage our projects either directly or through ventures, which we use to achieve a variety of business objectives, including more effective capital deployment, risk management, and leveraging a partner’s local market contacts and expertise.

We have real estate in ten states and 13 markets encompassing about 373,000 acres, including approximately 303,000 acres located in a broad area around Atlanta, Georgia, with the balance located primarily in Texas. We also have real estate in Florida, Colorado, California, Utah, Missouri, Tennessee, Alabama and Louisiana.

Our strategy for creating value in our real estate segment is to move acres up the value chain by moving land located in growth corridors but not yet entitled, through the entitlement process, and into development. The chart below depicts our real estate value chain, including real estate owned through ventures.

We have nearly 328,000 undeveloped acres located in the path of population growth. As markets grow and mature, we intend to secure the necessary entitlements, the timing for which varies depending upon the size, location, use and complexity of a project. We have about 29,000 acres in the entitlement process, which includes obtaining zoning, other governmental approvals, and access to utilities. We have about 16,000 acres entitled, developed, and under development, comprised of about 30,000 residential lots and about 1,900 commercial acres. We use return criteria, which include return on cost, internal rate of return, and return on cash, when determining whether to invest initially or make additional investment in a project. When investment in development meets our return criteria, we will initiate the development process with subsequent sale of lots to homebuilders or, for commercial parcels, sale to or venture with commercial developers. We will sell land at any point within the value chain when additional time required for entitlement or investment in development will not meet our return criteria. In 2007, we sold 2,617 acres of unentitled, undeveloped land at an average price of $6,700 per acre.

(a) A project is deemed to be in the entitlement process when customary steps necessary for the preparation and submittal of an application, like conducting pre-application meetings or similar discussions with governmental officials, have commenced, or an application has been filed. Projects listed may have significant steps remaining, and there is no assurance that entitlements ultimately will be received.

(b) Project acres, which are the total for the project regardless of our ownership interest, are approximate. The actual number of acres entitled may vary.

(c) We own a 50 percent interest in these projects.

Products

The majority of our projects are single-family residential and mixed-use communities. In some cases, commercial land uses within a project enhance the desirability of the community by providing convenient locations for resident support services. We sometimes undertake projects consisting exclusively of commercial tracts and, on occasion, we invest in a venture to develop a single commercial project.

We develop lots for single-family homes and commercial tracts that are substantially ready for construction of buildings for retail, multifamily, office, industrial or other commercial uses. We sell residential lots primarily to national and regional homebuilders and, to a lesser extent, local homebuilders. We have 78 entitled, developed or under development projects in eight states and 12 markets encompassing about 16,000 remaining acres, comprised of about 30,000 residential lots and about 1,900 commercial acres. We focus our lot sales on the first and second move-up primary housing categories, the largest segments of the new home market. First and second move-up segments are homes priced above entry-level products yet below the high-end and custom home segments.

Marketing and sales of residential lots to builders is usually conducted directly, without the need for outside real estate brokers. Although we may discuss potential interest with selected builders prior to commencement of a project, we typically do not receive a binding commitment to purchase lots prior to making our initial investment. Terms for these lot sale transactions follow industry norms, generally consisting of option contracts with prescribed takedown schedules. Prescribed takedown rates vary due to several factors, including builder profile, product type, market conditions, and the number of builders competing within a subdivision. Payment in full is typically received at the closing of each lot takedown.

Commercial tracts are either sold to or ventured with commercial developers that specialize in the construction and operation of income-producing properties, such as apartments, retail centers, or office buildings. We sell land designated for commercial uses to national retailers and to regional and local commercial developers. As is typical for the industry, marketing and sale of commercial tracts often involves outside real estate brokers. We have about 1,900 acres of entitled land designated for commercial use.

One of our current significant mixed-use projects is Cibolo Canyons in the San Antonio market area. Cibolo Canyons is a 2,800 acre mixed-use development planned to include 1,749 residential lots of which 466 have been sold as of year-end 2007 at an average price of $57,000 per lot. The residential component will include not only traditional single-family homes but also an active adult section and condominiums. Cibolo Canyons homebuilder customers include Highland Homes, Meritage Homes and Newmark Homes, as well as other builders. Our commercial component is planned to include 145 acres designated for multifamily and retail uses, of which 64 acres have been sold as of year-end 2007. Currently under construction at Cibolo Canyons is the JW Marriott ® San Antonio Hill Country Resort & Spa, planned to include a 1,002 room destination resort and two TPC golf courses to be designed by Pete Dye and Greg Norman. We have the right to receive revenues from hotel occupancy and sales taxes generated within the resort through 2034 and to reimbursement of certain infrastructure costs.

(a) A project is deemed entitled when all major discretionary land-use approvals have been received. Some projects may require additional permits for development.

(b) Interest owned reflects our net equity interest in the project, whether owned directly or indirectly. There are some projects that have multiple ownership structures within them. Accordingly, portions of these projects may appear as owned, consolidated, and/or accounted for on the equity method.

(c) Lots are for the total project, regardless of our ownership interest.

(d) Commercial acres are for the total project, regardless of our ownership interest, and are net developable acres, which may be fewer than the gross acres available in the project.

(e) The Lantana project consists of a series of 21 partnerships in which our voting interests range from 25 percent to 55 percent. We account for eight of these partnerships using the equity method and we consolidate the remaining partnerships.

Our strategy includes not only entitlement and development on our own lands but also accelerated growth through strategic and disciplined investment in acquisitions that meet our investment criteria. In 2007, we invested $54 million in nine real estate projects. These projects are planned to include approximately 5,100 single-family residential lots, 400 multifamily units and about 140 commercial acres.

Markets

We invest primarily in markets located within our strategic growth corridors, which we define as areas with significant growth characteristics for population, employment and household formation. We believe these factors are the most influential on the demand for new housing. We have identified ten strategic growth corridors, located generally across the southern half of the U.S., that we believe possess characteristics that make them attractive long-term real estate investment opportunities.

Long-term demand for residential lots and commercial use land parcels is substantially influenced by demographics such as population growth, immigration, in-migration and household formation. Near-term demand for new single-family housing is primarily influenced by employment growth and affordability. Our strategy to invest primarily in our strategic growth corridors is designed to capitalize on opportunities afforded by both long-term and near-term demographic and growth influences. This strategy is also designed to reduce our exposure to localized market volatility.

Our ten strategic growth corridors encompass 165,000 square miles, or approximately 5% of the total land area in the U.S. According to 2005 census data, 85 million people, 29% of the U.S. total, reside in these corridors. The population density in these growth corridors is almost seven times the national average and is projected to grow at nine times the national average between 2000 and 2030. During that time, the corridors are projected to garner approximately 43% of the nation’s population growth and 38% of total employment growth. Estimated housing demand from these ten growth corridors from 2000 to 2030 exceeds 23 million new homes.

Competition

We face significant competition for the acquisition, entitlement and development of real estate in our markets. Many of our projects compete with other local developments that have similar products and locations. We compete with other land owners for the sale of our undeveloped land. In addition, we compete with many national, regional and local developers and builders in these markets. We may compete for investment opportunities, financing, available land, raw materials and labor with entities that possess greater financial, marketing and other resources than us. Competition may increase the bargaining power of property owners seeking to sell, and industry competition may increase if there is future consolidation in the real estate industry. These competitive market pressures sometimes make it difficult to acquire, entitle, develop or sell land at prices that meet our return criteria. Some of our real estate competitors are well established and financially strong, may have greater financial resources than we do, or may be larger than us and/or have lower cost of capital and operating costs than we have and expect to have.

The land acquisition and development business is highly fragmented. We are aware of no meaningful concentration of market share by any one competitor. Enterprises of varying sizes, from individuals or small companies to large corporations, actively engage in the real estate development business. Most competitors are local, privately-owned companies. We have a few regional competitors and virtually no national competitors other than national homebuilders that, depending on business cycles, may enter or exit the real estate development business in some locations to develop lots on which they construct and sell homes. There are few national homebuilders currently developing lots. During periods when access to capital is restricted, participants with weaker financial conditions tend to be less active. We believe the current environment is one where participants with stronger financial conditions will have a competitive advantage, and where fewer participants will be active.

CEO BACKGROUND

Nominees for Directors to be Elected at the 2008 Annual Meeting of Stockholders


Name and Month and Year

First Elected Director

Principal Occupation and Other Information

Kathleen Brown
December 2007
Ms. Brown, age 62, currently serves as Senior Advisor, Goldman, Sachs & Co., where she heads the Western Region of the Public Sector and Infrastructure Group. She joined Goldman, Sachs & Co. in 2001. Ms. Brown served as Treasurer of the State of California from 1991 through 1994. Her private sector experience includes work as an attorney with the law firm of O’Melveny & Myers and service as President of the Private Bank at Bank of America. Ms. Brown was the Democratic Party nominee for Governor of California in 1994, co-chair of the Presidential Commission on Capital Budgeting, and a board member of the Los Angeles Unified School District. She currently serves on the board of the Los Angeles Chamber of Commerce and Town Hall Los Angeles.
Michael E. Dougherty
February 2008
Mr. Dougherty, age 67, is the founder and Chairman of Dougherty Financial Group LLC, which was formed in 1977. He also controls and operates several asset management, securities and commercial lending businesses, including Galway Bay Investments, Dougherty Management Company, Inc., Segall Bryant & Hamill, Lakeside Investment Partners LLC, The Clifton Group Investment Management Company, Turnstone, LLC, Turnstone Calhoun, LLC and Dougherty Funding LLC. Mr. Dougherty was the Chairman of Public Securities Association in 1991 and 1992. He serves as a director of Definity Health Corporation, a private health benefits company, and as Chairman of Allina Hospitals and Clinics, a not-for-profit health care company. Mr. Dougherty is also a trustee of the University of St. Thomas, St. Paul, Minnesota.
Thomas H. McAuley
December 2007
Mr. McAuley, age 62, is the President of Inland Capital Markets Groups, Inc., a subsidiary of the Inland Real Estate Group, a Chicago, Illinois based real estate and financial services company, a position he has held since 2005. From 1995 to 2003, he was Chairman and Chief Executive Officer of IRT Property Company, an Atlanta, Georgia based Real Estate Investment Trust traded on the NYSE. Prior to this position, he was Regional Partner with Faison & Associates, a Charlotte, North Carolina real estate development and management company. He is a licensed real estate broker in Florida, Georgia and South Carolina and has been a member of the International Council of Shopping Centers since 1984 and the National Association of Real Estate Investment Trusts since 1995. He serves on the boards of directors of Inland Real Estate Corporation, The Westervelt Company (formerly Gulf States Paper Company), Feldman Mall Properties, Inc., Bank of Atlanta and RBC Centura Bank.
William Powers, Jr.
December 2007
Mr. Powers, age 61, has been President of the University of Texas at Austin since 2006. He is also a University Distinguished Teaching Professor and holds the Hines H. Baker and Thelma Kelley Baker Chair in Law at the University of Texas School of Law, where he served as Dean from 2000 to 2005. Other university appointments have been with the Southern Methodist University School of Law, the University of Michigan School of Law, and the University of Washington School of Law. He served as Chair of the Special Investigation Committee, Enron Corp., which in 2002 produced the “Powers Report.”

MANAGEMENT DISCUSSION FROM LATEST 10K

Forward-Looking Statements

This Annual Report on Form 10-K 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 risk 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;

• the opportunities (or lack thereof) that may be presented to us and that we may pursue;

• future residential or commercial entitlements;

• expected development timetables and projected timing for sales of lots or other parcels of land;

• development approvals and the ability to obtain such approvals;

• the anticipated price ranges of lots in our developments;

• the number, price, and timing of land sales or acquisitions;

• estimated land holdings for a particular use within a specified time frame;

• absorption rates and expected gains on land and lot sales;

• the levels of resale inventory in our development projects and the regions in which they are located;

• the development of relationships with strategic partners;

• the pace at which we release lots for sale;

• fluctuations in costs and expenses;

• demand for new housing;

• government energy policies;

• competitive actions by other companies;

• changes in laws or regulations and actions or restrictions of regulatory agencies;

• the results of financing efforts, including our ability to obtain financing on favorable terms, which can be affected by various factors, including our credit ratings and general economic conditions;

• the ability to complete merger, acquisition or divestiture plans; regulatory or other limitations imposed as a result of a merger, acquisition or divestiture; and the success of the business following a merger, acquisition or divestiture; and

• the final resolutions or outcomes with respect to our contingent and other corporate liabilities related to our business and any related actions for indemnification made pursuant to the separation and distribution agreement.

Other factors, including the risk factors described in Item 1A of this 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.

Introduction

Our spin-off from Temple-Inland occurred after the close of business on December 28, 2007, and our 2007 fiscal year ended December 29, 2007. Except for the last day of our fiscal year, the following discussion and analysis of our financial condition and results of operations covers periods prior to the spin-off and related transactions. It does not reflect the impact that the spin-off and related transactions will have on us, including leverage, debt service requirements, and differences between administrative costs allocated to us by Temple-Inland and actual administrative costs that we will incur as a separate public company.

Our historical results may not be indicative of our future performance and do not necessarily reflect what our financial condition and results of operations would have been had we operated as an independent, stand-alone entity during the periods presented, particularly because changes will occur in our operations and capitalization as a result of the spin-off.

In addition, the statements in the discussion and analysis regarding industry outlook, our expectations regarding the future performance of our business and the other non-historical statements in the discussion and analysis are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in Item 1A Risk Factors of this Annual Report on Form 10-K and “Forward-Looking Statements” above. Our actual results may differ materially from those contained in any forward-looking statements.

Significant aspects of our results of operations follow:

2007


• Net income decreased as a result of the overall decline in the housing industry and a reduction in activity within our natural resources segment.

• Expenses increased as a result of costs associated with the development of corporate functions as a stand-alone company.

• Interest expense increased principally as a result of higher debt levels.

2006


• Net income increased due to the continued strength for new housing in the markets in which we operate and increased activity within our natural resources segment.

• Expenses increased as a result of costs associated with the segmentation of the real estate business within Temple-Inland.

Current Market Conditions

Current conditions in the residential development industry are difficult due to an oversupply of housing, declining sales volume for existing and new homes, flat to declining sales prices, and a significant tightening of mortgage credit. A decline in consumer confidence is also evident. All geographic markets and products have not been affected to the same extent or with equal severity, but most have experienced declines. It is likely these conditions will continue throughout 2008.

Business Segments

We operate two business segments:


• Real estate, and

• Natural resources.

We evaluate performance based on earnings before unallocated items and income taxes. Segment earnings consist of operating income and equity in earnings of unconsolidated ventures, less minority interest expense in consolidated ventures. Unallocated items consist of general and administrative expense, share-based compensation, other non-operating income and expense, and interest expense. The accounting policies of the segments are the same as those described in the accounting policy note to the consolidated financial statements.

Our operations are affected to varying degrees by supply and demand factors and economic conditions including changes in interest rates, availability of mortgage credit, new housing starts, real estate values, employment levels, changes in the market prices for oil, gas, and timber, and the overall strength of the U.S. economy.

Real Estate

Our real estate segment conducts a wide array of project planning and management activities related to the acquisition, entitlement, development and sale of real estate, primarily residential and mixed-use communities. We own and manage our projects either directly or through ventures. Our real estate segment revenues are principally derived from the sales of residential and commercial real estate and to a lesser degree from the operation of commercial properties, primarily a hotel.

Beginning in 2006, we eliminated our historical one-month lag in accounting for our investment in our two largest real estate ventures as financial information became more readily available. The one-time effect of eliminating this one-month lag was to increase our equity in earnings of unconsolidated ventures in 2006 by about $1,104,000.

Residential real estate revenues principally consist of the sale of single-family lots to national, regional and local homebuilders. In 2007, residential real estate revenues decreased as a result of the overall decline in the housing industry.

Commercial real estate revenues in 2007 included $31,000,000 from three sales aggregating 91 acres on which we recognized income of $17,000,000. In 2006, commercial real estate revenues included $39,000,000 from two sales aggregating 131 acres on which we recognized income of $14,000,000.

Undeveloped land sales revenues decreased in 2007 as a result of significant tightening of credit standards.

Other revenues in 2006 included the sale of a country club property for $4,300,000.

Mineral revenues are principally derived from royalties and other lease revenue. Mineral revenues fluctuate based on changes in the market prices for oil and gas and the number of acres leased. We sold about 1,215,000 tons of timber in 2007, 1,115,000 tons in 2006, and 959,000 tons in 2005, the majority of which was sold to Temple-Inland based on an estimate of market prices at the time of delivery. Average price paid per ton was $11 in 2007, $13 in 2006, and $15 in 2005. Timber revenue fluctuates based on changes in tons sold and in the market prices of timber.

In 2007, Temple-Inland retained a greater portion of recreational lease revenues than in prior years. In 2008, we anticipate our recreational lease revenues will be about $2,000,000.

Items Not Allocated to Segments

Unallocated items represent income and expenses managed on a company-wide basis and include general and administrative expenses, share-based compensation, other non-operating income and expense, and interest expense.

The change in general and administrative expense in 2007 was principally due to increased compensation and benefits and other support costs associated with the development of corporate functions as a stand alone company. The change in general and administrative expense in 2006 was principally due to incremental support costs related to the segmentation of the real estate business within Temple-Inland.

Share-based compensation was allocated from Temple-Inland and represents the expense of Temple-Inland share-based awards granted to our employees. The changes in 2007 and in 2006 were primarily due to increases in Temple-Inland’s share price related to awards to be settled in cash.

The change in interest expense in 2007 is principally due to higher debt levels. The decline in 2006 as compared to 2005 was primarily related to the payoff of a senior bank credit facility at a weighted average rate of 6.04 percent, the funding for which came from borrowings under our credit facility with Temple-Inland at a weighted average rate of 4.20 percent.

Income Taxes

Our effective tax rate, which is income tax as a percentage of income before taxes, was 36 percent in 2007, 37 percent in 2006, and 37 percent in 2005. We anticipate that our effective tax rate in 2008 will be about 36 percent.

Capital Resources and Liquidity

Sources and Uses of Cash

Our principal operating cash requirements are for the acquisition and development of real estate, either directly or indirectly through ventures, taxes, interest, and compensation. Our principal sources of cash are proceeds from the sale of real estate and timber, the cash flow from minerals and commercial operating properties, and borrowings. Operating cash flows are also affected by the timing of the payment of real estate development expenditures and the collection of proceeds from the eventual sale of the real estate, the timing of which can vary substantially depending on many factors including the size of the project, state and local permitting requirements, and availability of utilities. Working capital is subject to operating needs, the timing of sales of real estate and timber, the timing of collection of mineral royalties or mineral lease payments, collection of receivables, reimbursement from utility or improvement districts, and the payment of payables and expenses.

Cash Flows from Operating Activities

Cash flows from real estate development activities are classified as operating cash flows. Cash flows related to the operation or sale of natural resources including minerals, timber, and recreational leases are also classified as operating cash flows.

Net cash (used for) provided by operations was $(66,284,000) in 2007, $(29,071,000) in 2006, and $21,094,000 in 2005. In 2007, expenditures for real estate development and acquisition significantly exceeded non-cash real estate cost of sales principally due to the investment of $47,000,000 in new real estate projects, an increase in the deferred tax asset of $19,544,000 due primarily to a tax gain resulting from our contractual right to receive hotel occupancy and sales taxes through 2034 at our Cibolo Canyons mixed-use development near San Antonio, Texas, and distributions to minority interests of $11,948,000. In 2006, expenditures for real estate development and acquisition significantly exceeded non-cash real estate cost of sales principally due to the investment in ten new real estate projects for $74,000,000. In 2005, real estate development and acquisition expenditures exceeded non-cash real estate cost of sales.

Cash Flows from Investing Activities

Capital contributions to and capital distributions from unconsolidated ventures are classified as investing activities. In addition, expenditures related to reforestation activities in our natural resources segment are classified as investing activities.

In 2007, net cash (used for) investing activities was $(10,828,000) as capital contributed to unconsolidated ventures exceeded distributions received. In 2006, net cash provided by investing activities was $7,410,000 as capital distributions we received from unconsolidated ventures exceeded contributions. Net cash (used for) investing activities was $(5,532,000) in 2005 as contributions to unconsolidated ventures exceeded the distributions we received.

Cash Flows from Financing Activities

Net cash provided by (used for) financing activities was $74,282,000 in 2007, $19,069,000 in 2006, and $(16,831,000) in 2005. In 2007, the increase in debt funded expenditures for real estate development and acquisition. In 2006, the increase in debt, including borrowings under our credit facility with Temple-Inland, funded expenditures for real estate development and acquisition in excess of the net distributions we received from ventures. In 2005, the increase in debt and cash flow from operations funded net contributions to ventures.



MANAGEMENT DISCUSSION FOR LATEST QUARTER

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 2007 Annual Report on Form 10-K.
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 risk 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;

• the opportunities (or lack thereof) that may be presented to us and that we may pursue;

• future residential or commercial entitlements;

• expected development timetables and projected timing for sales of lots or other parcels of land;

• development approvals and the ability to obtain such approvals;

• the anticipated price ranges of lots in our developments;

• the number, price and timing of land sales or acquisitions;

• absorption rates and expected gains on land and lot sales;

• the levels of resale inventory 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 the availability of mortgage credit;

• government energy policies;

• demand for oil and gas;

• fluctuations in oil and gas prices;

• competitive actions by other companies;

• changes in laws or regulations and actions or restrictions of regulatory agencies;

• the results of financing efforts, including our ability to obtain financing with favorable terms;

• the ability to complete merger, acquisition or divestiture plans; regulatory or other limitations imposed as a result of a merger, acquisition or divestiture; and the success of the business following a merger, acquisition or divestiture; and

• the final resolutions or outcomes with respect to our contingent and other corporate liabilities related to our business.

• our customers may be unwilling or unable to meet lot takedown commitments due to liquidity limitations or slowing market conditions.
Other factors, including the risk factors described in Part II, Item 1A of this Quarterly Report on Form 10-Q and in Item 1A of our 2007 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.
Introduction
In first quarter 2008, we changed our reportable segments to reflect our post-spin management of the operations transferred to us from Temple-Inland. All prior period segment information has been reclassified to conform to the current presentation. We manage our operations through three business segments:
• Real estate,

• Mineral resources, and

• Fiber resources.
Our strategy is to maximize and grow long-term stockholder value through:
• entitlement and development of real estate;

• realization of value from natural resources; and

• growth through strategic and disciplined investment in real estate.
Unless otherwise indicated, information is presented as of September 30, 2008, and references to acreage owned include all acres owned by ventures regardless of our ownership interest in a venture.
Our operations are affected to varying degrees by supply and demand factors and economic conditions including availability of mortgage credit; changes in interest rates; new housing starts; real estate values; employment levels; market prices for oil, gas and timber; and the overall strength of the U.S. economy.
Critical Accounting Policies and Estimates
There have been no significant changes in our critical accounting policies or estimates in first nine months 2008 from those disclosed in our 2007 Annual Report on Form 10-K.
Recent Accounting Standards
Please read Note 3 to the Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.

Results of Operations
Net income was $872,000, or $0.02 per diluted share, in third quarter 2008, compared with $9,596,000, or $0.27 per diluted share, for third quarter 2007. Net income for first nine months 2008 was $10,230,000, or $0.28 per diluted share, compared with $24,689,000, or $0.70 per diluted share, for first nine months 2007.
Current conditions in the residential development industry are difficult due to the oversupply of housing, declining sales volume for existing and new homes, flat to declining sales prices and a significant tightening of mortgage credit. A decline in consumer confidence is also evident. Some home builders are experiencing liquidity shortfalls and are unwilling or unable to close committed lot purchases. All geographic markets and products have not been affected to the same extent or with equal severity, but most have experienced declines. It is likely these conditions will continue throughout 2008 and into 2009.
Market conditions in the oil and gas industry have declined as oil and gas prices have decreased. Exploration and production companies have reduced capital expenditures for lease acquisition and production due to reduced oil and gas pricing and tightened credit markets. These conditions may impact the demand for new mineral leases.
Fiber demand from the pulp and paper industry is stable. Pulpwood prices in our market areas have increased modestly due to balanced demand for containerboard. Sawtimber prices have declined due to the decrease in demand for lumber products consistent with the decline in the housing industry.

Significant aspects of our results of operations follow:
Third Quarter and First Nine Months 2008 and 2007
• Mineral resources segment earnings increased in first nine months 2008 as a result of bonus payments received for leasing about 55,900 net mineral acres. This leasing activity was located principally in East Texas and was driven by our proximity to the Cotton Valley, James Lime and Haynesville natural gas formations. Mineral resources earnings also benefited from increased production volumes and higher oil and gas prices in first nine months 2008.

• Real estate segment earnings declined principally due to decreased commercial sales activity, a continued decrease in the sales of residential real estate and increased costs associated with environmental remediation activities. First nine months 2007 includes two sales aggregating 73 acres of undeveloped commercial real estate on which we recognized gains of $14,039,000.

• Fiber resources segment earnings for first nine months 2008 increased primarily as a result of gain from partial termination of a timber lease.

• Interest expense increased as a result of higher debt levels and higher borrowing costs.

• Share-based compensation expense increased primarily due to accelerated expense recognition in conjunction with awards granted to retirement-eligible employees, and an increase in the number of participants in our plan.

• General and administrative expenses increased as a result of costs associated with the continued development of corporate functions necessary as a stand alone public company.
Real Estate
We own directly or through ventures over 368,000 acres of real estate located in ten states and 13 markets. Our real estate segment secures entitlements and develops infrastructure on our lands, primarily for single-family residential and mixed-use communities. We own approximately 300,000 acres in a broad area around Atlanta, Georgia, with the balance located primarily in Texas. We invest in new projects principally in our strategic growth corridors, regions of accelerated growth across the southern half of the United States that possess key demographic and growth characteristics that we believe make them attractive for long-term real estate investment.

Residential real estate revenues principally consist of the sale of single-family lots to national, regional and local homebuilders. In third quarter and first nine months 2008, residential real estate revenues declined as a result of decreased demand for single-family lots due to the overall decline in the housing industry and significant tightening of mortgage credit availability. We expect this trend to continue throughout the remainder of 2008 and into 2009.
In first nine months 2007, commercial real estate revenue includes $22,992,000 from two sales aggregating 73 acres on which we recognized gains of $14,039,000.
In first nine months 2008, the Ironstob venture, in which we own a 58 percent interest, sold about 409 acres of undeveloped land for about $6,100 per acre.

Capital Resources and Liquidity
Sources and Uses of Cash
Our principal operating cash requirements are for the acquisition and development of real estate, either directly or indirectly through ventures, and taxes, interest and compensation. Our principal sources of cash are proceeds from the sale of real estate and timber, the cash flow from minerals and commercial operating properties and borrowings. Operating cash flows are also affected by the timing of the payment of real estate development and acquisition expenditures and the collection of proceeds from the eventual sale of the real estate, the timing of which can vary substantially depending on many factors including the size of the project, state and local permitting requirements and availability of utilities. Working capital is subject to operating needs, the timing of sales of real estate and timber, the timing of collection of mineral royalties or mineral lease payments, collection of receivables, reimbursement from utility or improvement districts and the payment of payables and expenses.
Cash Flows from Operating Activities
Cash flows from our real estate development activities, minerals, fiber and recreational leases are classified as operating cash flows. In first nine months 2008, net cash used for operating activities was $36,369,000 as expenditures for real estate development and acquisitions exceeded non-cash cost of sales due to our continued development of existing real estate projects, principally in the major markets of Texas. In first nine months 2008, we invested $24,362,000 in our Cibolo Canyons mixed-use project located near San Antonio, Texas. In first nine months 2007, net cash used for operating activities was $40,383,000 as expenditures for real estate development and acquisitions exceeded our non-cash cost of sales due to the investment in four new real estate projects for $44,971,000.
Cash Flows from Investing Activities
Capital contributions to and capital distributions from unconsolidated ventures are classified as investing activities. In addition, expenditures related to reforestation activities in our fiber resources segment are classified as investing activities.
In first nine months 2008, net cash used in investing activities was $10,636,000 because capital contributions to our unconsolidated ventures exceeded our capital distributions. In first nine months 2008, we contributed $7,458,000 to our Palisades West LLC venture. In first nine months 2007, net cash used in investing activities was $9,466,000 because capital contributions to our unconsolidated ventures exceeded our capital distributions.
Cash Flows from Financing Activities
In first nine months 2008, net cash provided by financing activities was $46,739,000. In first nine months 2007, net cash provided by financing activities was $47,361,000. In first nine months 2008, the increase in our debt partially funded our expenditures for real estate development, principally in the major markets of Texas. In first nine months 2007, the increase in our debt and note payable to Temple-Inland funded our net expenditures for real estate development and acquisitions.

CONF CALL

Christopher L. Nines

Thank you and good morning. This is Chris Nines, Chief Financial Officer of Forestar. I’d like to welcome each of you who have joined us by conference call or webcast this morning to discuss the results for fourth quarter and full year 2008.

Joining me this morning is Jim DeCosmo, President and CEO of Forestar. Let me remind you to please review the warning statements in our press release and our slides concerning forward-looking statements as we will make forward-looking statements during this presentation.

This morning Jim and I will provide an update on our value creation activities and financial results for fourth quarter and full year 2008. At the completion of our presentation, we will be happy to take your questions.

Thanks again for your interest in Forestar. I’d now like to turn the call over to Jim.

James DeCosmo

Thank you Chris and good morning. Welcome, and thank you for joining us on the call and the webcast. Before Chris reviews the financials I want to make a few comments relevant to the markets 2008 as well as our near term focus.

The housing markets continue to battle through a rough storm. As a result we’ll continue to reduce costs and investments in development. As resources continue to perform well, lease bonus acreage and oil and gas production were up significantly, offset lower oil and gas prices and difficult real estate market conditions.

For the quarter and the year we did not acquire any new real estate project. Unlike many, Forestar has a strong mix of low basis assets, active real estate projects principally located in the major markets of Texas, productive natural resources and a lean organization, led by a proven and experienced management team navigating our business through this phase of the cycle.

The team is very focused on creating shareholder value, generating positive cash flow, and continuing to strengthen our balance sheet. In the next few slides I want to briefly comment on our 2008 performance.

In 2008 we sold over 6,000 undeveloped acres at an average price for approximately $4800 per acre, generating about $29 million in sales. We continue creating value through entitlement. Entitlement activities were initiated on additional $7300 acres and now total 25 projects and 33,700 acres in the entitlement process. Five projects were seasoned entitlement totaling 2500 acres yielding approximately 1050 lots and 580 commercial acres. We focus our entitlement activities on acreage having the greatest commercial potential and locations expected to benefit from economic investment and expansion.

Real estate sales: 1060 lots at an average price of $48,500 per lot. Including in these sales are 117 lots sold in a fault transaction at a price of $11,000 per lot. These were the last remaining lots at an entry level project called Parks of Deer Creek. Without the bulk sale, lot sales for the year would have averaged $53,200 per lot.

In addition, we sold 120 commercial acres at an average price of $232,400 per acre. Our single largest investment in 2008 was in our [Siblaking] project in San Antonio. For the year we invested $34.9 million in Cibolo Canyon. We believe Cibolo is one of our business defining projects that will create and deliver value for years to come. In 2008 we sold 71 lots at Cibolo at an average price of 91,400 per lot. That’s up considerably from the first sales in 2005 that averaged approximately $52,000 per lot.

As you would expect, sales velocity is down. Nonetheless, 71 lots equate to 1.4 sales per week. The average 2008 home sales per community for national builders is less than .5 according to Zellman and Associates.

With regards to the resort, I recently attended an onsite topping out event where Marriott Miller Global announced target completion by year end and an opening early in the first quarter of next year. You can see the design statistics on the charts. Marriott claims this to be their largest JW resort in the world.

Our economics are as follows: to date we’ve contributed 700 acres and approximately $26.5 million. From the time the resort opened and for each year thereafter through 2034 we will receive the equivalent of 9% of the hotel room revenues, 0.5% sales and use tax generated from the sales of all food, beverage, conference, golf, and spa. At year end 2008 we billed a municipal utility district $49.5 million to be reimbursed to Forestar for major infrastructure costs. Payment will be made at the time adequate [inaudible] support the issuance of bonds by the district.

We believe Cibolo Canyon demonstrates the value we can create in other projects and markets. At year end we had 476,000 net mineral acres available for lease. In 2008 we leased about 61,000 net mineral acres for approximately $25 million in revenue. We optioned 17,000 acres for $1.6 million and billed and received $2 million in delayed rental.

Our share of natural gas production for the year is 1363 MMCF which generated revenue of $11.9 million. Our share of oil produced was 88,000 barrels and revenue of $9.4 million.

We had a strong year mineral resources and I’ll tell you our most significant accomplishment was established in our mineral, oil, and gas team. Our team was recruited from an expiration production sector, establishing the foundation and capabilities, skill sets and the experience required to further develop the business and create significant value. The first initiative is to develop and provide the disclosures necessary for the market to fully understand and assess the value of our strategy in our mineral, oil, and gas assets.

We have approximately 340,000 timbered acres owned and 18,000 acres leased, all being managed for optimum timber yield and enhanced real estate value. In addition, almost 300,00 acres are leased for recreation, generating approximately $2 million in revenue and cash.

Our fiber resources segment sold 917,000 tons of pulp wood at an average price of $8.50 to a ton and almost 164,000 tons of soft timber at an average price of $19.51 per ton. Fiber resource revenue for 2008 was approximately $13 million.

Now let me turn it back over to Chris who will review finances for the quarter and for the year.

Christopher L. Nines

Thanks, Jim. Net income for fourth quarter 2008 was $1.7 million or $0.05 per diluted share outstanding compared with essentially breakeven results for fourth quarter 2007. For the year 2008 Forestar reported net income of $12 million or $0.33 per diluted share, compared with net income of $24.8 million or $0.70 per diluted share.

Despite challenging market conditions, fourth quarter and full year 2008 financial results reflect the benefit of our leasing and royalty income related to our oil and gas minerals, a low cost operation, and our value creation strategy for our real estate and natural resources assets. Full year 2008 weighted average diluted shares outstanding were 35.9 million shares.

Now let me turn to our segment results. We manage our operations through three business segments: real estate, mineral resources, and fiber resources. Our real estate operation reported segment earnings of $3 million in fourth quarter 2008 compared with a segment loss of $0.2 million in fourth quarter 2007. The year-over-year improvement in segment earnings was principally due to increased sales of undeveloped land.

Our real estate segment results were negatively impacted by impairment expense of $3.3. million in fourth quarter 2008 and $3.9 million in fourth quarter 2007. Full year 2008 real estate segment earnings were $9.1 million compared with $39.5 million in 2007. This decline was primarily due to residential lot sales and commercial track sales due to the continued slowdown in new home construction activity. Jim will walk you through our real estate sales and entitlement activity for fourth quarter and full year 2008 in a few slides.

Mineral resources reported segment earnings of $6.1 million in fourth quarter 2008 compared with $3.7 million in fourth quarter 2007. Full year 2008 mineral resources segment earnings were $44.1 million compared with $18.6 million in 2007. These improvements were driven by increased leasing activity and royalties from increased natural gas production and higher average oil and natural gas prices.

Including ventures, during 2008 we leased over 61,500 mineral acres, generating $24.9 million in bonus payments. In addition, during 2008, we retained a new mineral team led by Flavius Smith located in Ft. Worth, Texas. This team brings extensive experience and a proven track record of maximizing value of minerals to increase leasing, royalties, and additional participation and production revenue.

Fiber resources reported segment earnings of $2.7 million in fourth quarter 2008 compared with $3.8 million in fourth quarter 2007. Fourth quarter 2007 segment earnings benefited from a $2.2 million gain on the termination of a timber lease with the Jones Company in connection with the formation of the Ironstob Venture. Full year 2008 fiber resources earnings were $8.9 million compared with $7.9 million in 2007.

In summary, total segment earnings for fourth quarter 2008 were $11.8 million compared with $7.3 million in fourth quarter 2007. For the year 2007, total segment earnings were $66 million and despite challenging market conditions for our business in 2008, total segment earnings were $62.1 million.

Now let me turn the call back over to Jim who will walk you through our real estate pipeline and the key performance indicators for our business.

James DeCosmo

Our real estate pipeline is comprised of four distinct value categories with the strategy being to create value by moving acreage through the value chain from left to right. At the end of 2008 we had approximately 315,000 low basis undeveloped acres of real estate principally located in and around Atlanta. The majority of this segment is comprised of acreage we selected from the 2 million acre timberland portfolio once owned by Temple Inland

We have just under 34,000 acres in entitlement process, just over 14,000 acres in titles, and just under 2800 acres in the development category, [inaudible] our real estate portfolio of just over 365,000 acres.

In addition we have about 25,000 lots in the title category, many originating from our low basis land with minimal investment. We have 4,421 lots in some phase of development defined as engineered with no physical platework [inaudible] for sale.

Not reflected in the acreage is a 58% ownership interest in Ironstob Venture which controls over 2000 acres in North Georgia. This acreage is principally located in Paulding, Holt and Harrellson Counties.

This next series of slides are our real estate key performance indicators a reconciliation of our progress in creating value by moving acreage through the pipeline.

Revenue and earnings were down year-over-year principally due to reduced residential and commercial sales. Land sales, we sold over 6,000 acres for the year in 36 transactions at an average price of $4800 an acre. We have an upcoming slide providing additional detail in transparency.

In 2008 we sold 120 acres of commercial property at an average price of $232,400 per acre. We sold 259 lots in the fourth quarter of 2008 including 117 lots at $11,000 in the bulk sales at Parks at Deer Creek, once again an entry level project in South Ft. Worth experiencing school district issues, a deterrent to demand.

Net of the bulk sales we sold 142 lots at an average price of approximately $59,000 per lot. For the year we sold 1060 lots at an average price of $48,500 per lot. Net Parks of Deer Creek, that price was $53,500 per lot. The next slide provides additional insight on historical pricing trends.

As I mentioned previously, our real estate portfolio is heavily influenced by the major market in Texas. You can see from the chart on the left our sales velocity has declined in all markets but the Texas markets continue to outperform on a relative basis. From a pricing standpoint you can see by the chart on the right, the sales prices have not only held up but have steadily increased. 2008 average lot price is net of the Parks of Deer Creek bulk sale.

A legitimate question – why are the Texas markets different from other markets today? First, home prices did not overheat in the first half of the decade. There was very little [inaudible] activity. The markets have continued to maintain fairly balanced housing and lot inventories and to date, Texas has continued to lead the nation in job growth.

However, I must say the Texas markets are not exempt from the recession and the poor sentiment that exists throughout the housing sector. Nonetheless, Texas has held up well. These are the basic underpinnings of our portfolio of real estate projects.

Next I’ll provide additional color on our retail and small tract land sales. As part of Temple Inland is a standalone company. Since 2001 we’ve sold approximately $173 million in undeveloped small tract retail land sales. We’ve executed over 220 transactions representing approximately 40,000 acres at an average price in excess of $4400 per acre. These sales include properties that were classified as timberlands or higher and better use.

In 2008, 36 transactions generated approximately $29 million in undeveloped land sales, a little over $6,000 acres at an average price of $4800 per acre. For the price per acre arrangement from the low of just over $2000 per acre to a high of $14,000 per acre. The chart provides additional details relevant to state and ownership structure. The bars represent price per acre on the left axis and the acreage is denoted by the triangles and sales on the right.

For example, sale number 27 is an East Texas sale of approximately 450 acres at a price roughly $4800 per acre. Sale number 3 is a Georgia special use/conservation sale of approximately 470 acres at a little over $10,600 per acre. Even though this is an orderly looking chart, keep in mind that land sales are lumpy.

In the latter half of the year we allocated additional human resources to our retail small track land sales initiative, expanded the network of retail brokers, and enhanced the marketing activity with the objective of generating additional retail or small tract land. [inaudible] as I previously mentioned were accomplished with essentially one person and minimal marketing.

In addition to adding resource to our land sales initiative, this week we’re launching our improved retail small tract land sales website with many of the notable upgrades and attributes on the right. It can be viewed at www.landforsale.forestargroup.com and I encourage you to visit the site.

Moving on to entitlements in 2008, Georgia entitlement progress in 2008 we initiated an entitlement process on five additional projects or 7300 acres. At year end we had a total of 19 projects and just over 28,000 acres in the entitlement process. We also secured entitlement from 5 projects with an estimated yield of 1050 lots and 500 commercial acres for various uses and in locations expected to benefit from development and job creation.

As we’ve discussed before, we’re equally focused on economic development and commercial use. The next two slides are examples of two of our commercial use projects through securing entitlement in 2008.

Coweta Industrial Park is located at the intersection of Highway 29 and I-85 with the [inaudible] adjoining the southern border. The site is located approximately 35 miles from the Atlanta airport or the [Kea] plant at West Point, Georgia scheduled to open this quarter to begin production later this year.

The 195 acre industrial park is owned for 2 million square feet for industrial and/or distribution uses. [South Callway] is a good example of creating multiples of value through multiple use entitlement of low basis land with minimal investment.

Our project currently entitled Pickens School in Pickens County, Georgia received entitlement in 2008. This project is located northeast of Atlanta, intersected by Highway 515, a four lane divided highway essentially an extension of 575 which originates just above Marietta off of I-75.

In addition to zoning for residential communities, the 414 acres owned as highway business allows us the flexibility to mix retail, office, and multifamily in a way that optimizes use and value. Given the location of existing infrastructure and zoning, this project is one of our sites earmarked for economic development at the regional and state level.

The mineral resources segment generated almost $48 million in revenue for the year. We leased approximately 61,500 net mineral acres for the year and ended the year with approximately 121,000 acres under lease. That’s up 44,000 acres from year end ’07. Even though oil and natural gas prices have come down from the peak in 2008, we continue to experience leasing activity evident by the 5687 acres leased in the fourth quarter. Gas production is up year-over-year with oil down marginally. At year end 2008 there were an additional 31 wells producing royalty revenues compared to year end 2007.

We ended 2008 with our minerals, oil, and gas team in place with a top priority of providing transparency and disclosures required for net asset value assessment. Disclosures will include reserve and are targeted for release in our second quarter filing.

[Officer] sales volume for 2008 was less than 2007 and is skewed toward pulpwood given the fast falling timber prices. Nonetheless, our fiber resources segment earnings of $8.9 million was up year-over-year and is principally due to a reduction in cost. We’ll continue to operate our fiber resources segment in a way that maximizes the value of both our real estate and our fiber resources.

Business generated $12 million in earnings or $0.33 per diluted share in a very challenging year. Our 2008 segment earnings of $62.5 million were down less than $4 million from 2007. That’s a tribute to the hard and diligent work of our employees and a solid foundation of real estate and natural resource assets.

We currently have a very lean organization of approximately 92 people who are very focused on creating and delivering value from a strong mix of both real estate and natural resource assets.

In closing, we expect 2009 to be a challenging year. Our near term initiatives are to generate sales across all lines of business with the previous slide providing an overview of assets and segments from which we sell.

Number two, continue to reduce investments in development, by far our largest use of cash. The run rate over the last three years has been approximately $80 million a year. We expect our ongoing efforts to significantly reduce development spend in 2009.

Number three, continue to reduce both G&A and off rating expense. This free cash that’s generated will continue to strengthen our balance sheet and use cash in a way that best benefits our shareholders.

Once again, let me thank you for your interest in Forestar and joining us this morning.

Before I open up the call for questions, let me state that we are not prepared to respond to any questions concerning Mr. Ware’s proposal and we will not speak on behalf of the Board. We have a very experienced Board of Directors who will consider Mr. Ware’s proposal and in accordance with its fiduciary responsibilities and respond as appropriate in due course.

Now I’d like to open up the call for questions.

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