Summary of FORESTAR REAL ESTATE GROUP INC.

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 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;

• 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, which can be affected by the availability of mortgage credit;

• government energy policies;

• demand for oil and gas;

• 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.

Other factors, including the risk factors described 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.

Table of Contents

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

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

Unless otherwise indicated, information is presented as of June 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 six 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.

Table of Contents

Results of Operations
Net income was $9,596,000, or $0.27 per diluted share, in second quarter 2008, compared with $14,432,000, or $0.41 per diluted share, for second quarter 2007. Net income for first six months 2008 was $9,358,000, or $0.26 per diluted share, compared with $15,093,000 or $0.43 per diluted share, for first six months 2007.
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.
Market conditions in the oil and gas industry are strong, with continued long-term growth in demand for oil and gas expected. As a result, oil and gas prices are at near record levels.
A summary of our consolidated results follows:

                                           Second Quarter            First Six Months
                                          2008         2007         2008          2007
                                                         (In thousands)
     Revenues:
     Real estate                        $ 24,118     $ 47,317     $  52,561     $ 74,883
     Mineral resources                    24,386        5,186        30,654        9,040
     Fiber resources                       3,093        3,782         5,605        6,818

     Total revenues                     $ 51,597     $ 56,285     $  88,820     $ 90,741

     Segment earnings:
     Real estate                        $    874     $ 23,040     $   4,417     $ 26,776
     Mineral resources                    23,247        4,693        29,752        8,072
     Fiber resources                       1,411        2,353         4,251        2,698

     Total segment earnings               25,532       30,086        38,420       37,546
     Items not allocated to segments:
     General and administrative           (5,348 )     (4,139 )     (10,354 )     (8,051 )
     Share-based compensation               (847 )       (684 )      (3,528 )     (1,542 )
     Interest expense                     (5,002 )     (2,534 )     (10,668 )     (4,241 )
     Other non-operating income               72           52           154          112

     Income before taxes                  14,407       22,781        14,024       23,824
     Income tax expense                   (4,811 )     (8,349 )      (4,666 )     (8,731 )

     Net income                         $  9,596     $ 14,432     $   9,358     $ 15,093

Significant aspects of our results of operations follow:
Second Quarter and First Six Months 2008 and 2007
• Mineral resources segment earnings increased as result of bonus payments received for leasing about 52,700 net mineral acres, of which over 47,000 acres were leased in second quarter 2008. 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.

• Real estate segment earnings declined principally due to decreased commercial sales activity, a decrease in the sales of residential real estate and increased costs associated with environmental remediation activities. First six months 2007 included the sale of 38 acres of undeveloped commercial real estate on which we recognized a gain of $9,945,000.

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

Table of Contents

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

• Share-based compensation 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 about 371,000 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 302,000 acres in a broad area around Atlanta, Georgia, with the balance located primarily in Texas. We also 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.
A summary of our real estate results follows:

                                                    Second Quarter                   First Six Months
                                                2008             2007             2008             2007
                                                                     (In thousands)
Revenues                                      $  24,118        $  47,317        $  52,561        $  74,883
Costs and expenses                              (24,481 )        (23,160 )        (49,631 )        (47,055 )

                                                   (363 )         24,157            2,930           27,828
Equity in earnings of unconsolidated
ventures                                          1,767            1,478            2,517            2,977
Minority interest expense in
consolidated ventures                              (530 )         (2,595 )         (1,030 )         (4,029 )

Segment earnings                              $     874        $  23,040        $   4,417        $  26,776

In second quarter 2008 and first six months 2008, costs and expenses include a $3,500,000 charge principally related to environmental remediation activities.
Revenues and units sold consist of:

                                              Second Quarter            First Six Months
                                            2008           2007         2008         2007
                                               (In thousands, except lots and acres)
   Residential real estate               $   10,261      $ 18,325     $ 24,931     $ 34,511
   Commercial real estate                     3,829        15,762        5,692       19,352
   Undeveloped land                           2,971         6,217        9,228        7,708
   Commercial operating properties            6,218         5,843       11,373       10,436
   Other                                        839         1,170        1,337        2,876

   Total revenues                        $   24,118      $ 47,317     $ 52,561     $ 74,883

   Residential real estate - lots sold          175           356          499          650
   Commercial real estate - acres sold           15            51           37           62
   Undeveloped land - acres sold                504           886        1,853        1,154

Residential real estate revenues principally consist of the sale of single-family lots to national, regional and local homebuilders. In first six 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. We expect this trend to continue throughout 2008.
In second quarter 2008, we sold 175 lots in our owned and consolidated projects for average revenue per lot of $58,600 as compared to 356 lots sold in second quarter 2007 for average revenue per lot of $50,400. In first six months 2008, we sold 499 lots in our owned and consolidated projects for average revenue per lot of $48,900 (primarily in the major markets of Texas), as compared to 650 lots sold in first six months 2007 for average revenue per lot of $52,500.

Table of Contents

In second quarter 2007 and in first six months 2007, commercial real estate revenues include $12,400,000 related to the sale of 38 acres of undeveloped real estate on which we recognized a gain of $9,945,000.
In second quarter 2008, undeveloped land revenues decreased as a result of selling 504 acres for an average price of $5,900 per acre as compared to 886 acres sold in second quarter 2007 at an average price of $7,000 per acre. In first six months 2008, undeveloped land revenues increased as a result of selling 1,853 acres for an average price of $5,000 per acre as compared to 1,154 acres sold in first six months 2007 at an average price of $6,700 per acre.
Information about our real estate projects and our real estate ventures follows:

                                                                           Second Quarter-End
                                                                        2008               2007
Owned and consolidated ventures:
Entitled, developed and under development land
Number of projects                                                          56                 52
Residential lots remaining                                              20,737             20,434
Commercial acres remaining                                               1,604              1,224
Undeveloped land and land in the entitlement process
Number of projects                                                          24                 22
Acres in entitlement process                                            32,680             26,100
Acres sold (for first six months)                                        1,853              1,154
Acres undeveloped                                                      312,880            325,115
Ventures accounted for using the equity method:
Ventures' lot sales (for first six months)
Lots sold                                                                  153                416
Revenue per lot sold                                                 $  52,549          $  54,505
Ventures' entitled, developed and under development land
Number of projects                                                          21                 22
Residential lots remaining                                               9,086              9,734
Commercial acres remaining                                                 654                721
Ventures' undeveloped land and land in the entitlement process
Number of projects                                                           2                  2
Acres in entitlement process                                               920                860
Acres sold (for first six months)                                            -                  -
Acres undeveloped                                                        6,127              6,258

The increase in acres in the entitlement process at second quarter-end 2008 is primarily due to the movement of about 10,000 acres into the entitlement process from undeveloped land which was partially offset by the movement of about 3,600 acres into entitled, developed and under development land. Mineral Resources
We own directly or through ventures about 622,000 net acres of oil and gas mineral interests. Our mineral 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. We have about 122,000 net acres under lease and about 26,000 net acres held by production.

Table of Contents

A summary of our mineral resources results follows:

                                                       Second Quarter                 First Six Months
                                                     2008           2007            2008            2007
                                                                       (In thousands)
Revenues                                           $ 24,386        $ 5,186        $  30,654        $ 9,040
Operating expenses                                   (1,390 )         (493 )         (1,937 )         (968 )

                                                     22,996          4,693           28,717          8,072
Equity in earnings of unconsolidated ventures           251              -            1,035              -

Segment earnings                                   $ 23,247        $ 4,693        $  29,752        $ 8,072

In first six months 2008, equity in earnings of unconsolidated ventures includes our share of a lease bonus payment as a result of leasing 241 net mineral acres for $1,568,000. In first six months 2008, costs and expenses include $678,000 related to oil and gas production severance taxes which were previously reflected as a reduction of revenues.
Revenues consist of:

                                      Second Quarter          First Six Months
                                     2008        2007         2008         2007
                                                   (In thousands)
            Royalties              $  5,102     $ 2,743     $   8,440     $ 5,974
            Other lease revenues     19,284       2,443        22,214       3,066

            Total revenues         $ 24,386     $ 5,186     $  30,654     $ 9,040

In second quarter 2008, other lease revenues include $18,546,000 in lease bonus payments as result of leasing over 47,000 net mineral acres. In first six months 2008, other lease revenues include $20,567,000 in lease bonus payments as result of leasing about 52,700 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.
In second quarter 2008, royalty revenue includes our share of over 23,000 barrels of oil and approximately 277 million cubic feet (mmcf) of natural gas production related to our royalty interests. In first six months 2008, royalty revenue includes our share of over 42,700 barrels of oil and approximately 533 mmcf of natural gas production related to our royalty interests.
A summary of our oil and gas mineral interests unleased, leased and held by production at second quarter-end 2008 follows:

                                                       Net Acres
                     Net Acres       Net Acres          Held By          Net Acres
             State    Unleased      Leased (b)       Production (c)      Total (a)
          Texas         115,000         110,000               19,000        244,000
          Louisana      111,000           3,000                7,000        121,000
          Alabama        48,000           9,000                    -         57,000
          Georgia       200,000               -                    -        200,000

                        474,000         122,000               26,000        622,000

(a) Texas and Louisiana net acres are calculated as the gross number of surface acres multiplied by our percentage ownership of the mineral interest. Alabama and
Georgia net
acres are
calculated
as the gross
number of
surface
acres
multiplied
by our
estimated
percentage
ownership of
the mineral
interest
based on
county
sampling.

(b) Includes leases in primary lease term only.

Fiber Resources
   Our fiber resources segment principally focuses on the management of our
timber holdings. We have about 345,000 acres of timber on our undeveloped land
and over 18,000 acres of timber under lease. We sell wood fiber from our land,
primarily in Georgia, and lease land for hunting and other recreational uses.
   A summary of our fiber resources results follows:

                                       Second Quarter           First Six Months
                                      2008         2007         2008         2007
                                                    (In thousands)
           Revenues                 $  3,093     $  3,782     $  5,605     $  6,818
           Costs and expenses         (1,682 )     (1,429 )     (2,730 )     (4,120 )

                                       1,411        2,353        2,875        2,698
           Other operating income          -            -        1,376            -

           Segment earnings         $  1,411     $  2,353     $  4,251     $  2,698

In first six months 2008, other operating income represents a gain from partial termination of a timber lease related to 409 acres of land sold from a venture. In first six months 2008, cost and expenses decreased as result of establishing our post-spin operating structure. In first six months 2007, costs and expenses were allocated to us from Temple-Inland.

Table of Contents

Revenues consist of:

                                          Second Quarter          First Six Months
                                         2008        2007         2008         2007
                                                       (In thousands)
        Timber                          $ 2,629     $ 3,735     $   4,666     $ 6,713
        Recreational leases and other       464          47           939         105

        Total revenues                  $ 3,093     $ 3,782     $   5,605     $ 6,818

In second quarter 2008, we sold about 262,000 tons of fiber at an average price of $10 per ton as compared to 326,000 tons in second quarter 2007 at an average price of $11 per ton, the majority of which was sold to Temple-Inland at market prices. In first six months 2008, we sold about 471,000 tons of fiber at an average price of $10 per ton as compared to 606,000 tons in first six months 2007 at an average price of $11 per ton, the majority of which was sold to Temple-Inland at market prices.
In first six months 2007, Temple-Inland retained a greater portion of recreational lease revenue than in prior years. In 2008, we anticipate our recreational lease revenues will be about $2,000,000. Items Not Allocated to Segments
The increase in interest expense was due to a higher average debt balance and higher borrowing costs.
The increase in share-based compensation was a result of recognizing accelerated expense for retirement eligible employees and fully vested awards to members of our board, and from an increase in the number of participants in our plan.
The increase in general and administrative expenses in second quarter 2008 and first six months 2008 was due to increased costs associated with our corporate functions now that we are a stand alone public company. Income Taxes
Our effective tax rate was 33 percent in second quarter 2008 and first six months 2008 and 37 percent in second quarter 2007 and first six months 2007. We anticipate that our effective tax rate in 2008 will be about 34 percent.
The 2008 rate primarily reflects a one-time tax benefit for the adjustment of deferred taxes resulting from a federal income tax rate change for qualified timber gains due to the Heartland, Habitat, Harvest and Horticulture Act of 2008.
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 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.

Table of Contents

Cash Flows from Operating Activities
Cash flows from our real estate development activities are classified as operating cash flows. Cash flows related to minerals, timber and recreational leases are also classified as operating cash flows.
In first six months 2008, net cash used for operating activities was $20,716,000. In first six months 2007, net cash used for operating activities was $38,371,000. In first six months 2008, 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 six months 2007, expenditures for real estate development and acquisitions significantly exceeded our non-cash cost of sales due to the investment in four new real estate projects for $34,577,000. Cash Flows from Investing Activities
Capital contributions to and capital distributions from unconsolidated ventures are classified as investing activities. In addition, expenditures . . .