þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

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

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

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

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

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

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

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

Title of Each Class		Number of Shares Outstanding as of May 1, 2009
Common Stock, par value $1.00 per share		35,856,419

 

 

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets		3
Consolidated Statements of Income		4
Consolidated Statements of Cash Flows		5
Notes to the Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3. Quantitative and Qualitative Disclosures About Market Risk		32
Item 4. Controls and Procedures		32
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		33
Item 1A. Risk Factors		33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		33
Item 3. Defaults Upon Senior Securities		33
Item 4. Submission of Matters to a Vote of Security Holders		33
Item 5. Other Information		33
Item 6. Exhibits		33
SIGNATURES		34
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

FORESTAR GROUP INC.

		(Unaudited)
		March 31,				December 31,
		2009				2008
		(In thousands)
ASSETS
Cash and cash equivalents		$	8,464			$	8,127
Real estate			559,588				610,586
Assets held for sale			76,139				—
Investment in unconsolidated ventures			116,107				117,554
Timber			25,194				50,989
Receivables, net			3,730				4,262
Prepaid expense			1,961				2,425
Property and equipment, net			6,103				6,211
Deferred tax asset			20,913				17,184
Other assets			16,240				17,238
TOTAL ASSETS		$	834,439			$	834,576
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable		$	4,945			$	7,438
Accrued employee compensation and benefits			1,034				3,389
Accrued property taxes			3,203				6,808
Accrued interest			1,033				1,199
Other accrued expenses			10,569				11,448
Other liabilities			14,001				12,940
Debt			349,183				337,402
TOTAL LIABILITIES			383,968				380,624
COMMITMENTS AND CONTINGENCIES
EQUITY
Forestar Group Inc. shareholders’ equity:
Preferred stock, par value $0.01 per share, 25,000,000 authorized shares, none issued			—				—
Common stock, par value $1.00 per share, 200,000,000 authorized shares, 35,950,127 issued at March 31, 2009 and 35,839,390 issued at December 31, 2008			35,950				35,839
Additional paid-in capital			378,628				377,810
Retained earnings			32,877				36,769
Accumulated other comprehensive loss			(1,099	)			(1,260	)
Treasury stock, at cost, 93,708 shares at March 31, 2009 and 90,819 at December 31, 2008			(1,884	)			(1,866	)
Total Forestar Group Inc. shareholders’ equity			444,472				447,292
Noncontrolling interests			5,999				6,660
TOTAL EQUITY			450,471				453,952
TOTAL LIABILITIES AND EQUITY		$	834,439			$	834,576

Please read the notes to the consolidated financial statements.

FORESTAR GROUP INC.

		First Quarter
		2009				2008
		(In thousands, except per share data)
REVENUES
Real estate sales		$	14,059			$	22,790
Commercial operating properties and other			4,728				5,653
Real estate			18,787				28,443
Mineral resources			5,921				6,268
Fiber resources and other			4,369				2,512
			29,077				37,223
EXPENSES
Cost of real estate sales			(4,742	)			(13,507	)
Cost of commercial operating properties and other			(3,816	)			(3,865	)
Cost of mineral resources			(76	)			—
Cost of fiber resources			(833	)			(546	)
Other operating			(10,472	)			(8,301	)
General and administrative			(8,815	)			(6,837	)
			(28,754	)			(33,056	)
OPERATING INCOME			323				4,167
Equity in (loss) earnings of unconsolidated ventures			(572	)			1,534
Interest expense			(5,166	)			(5,666	)
Other non-operating income			51				82
(LOSS) INCOME BEFORE TAXES			(5,364	)			117
Income tax benefit			2,315				145
CONSOLIDATED NET (LOSS) INCOME			(3,049	)			262
Less: Net income attributable to noncontrolling interests			(843	)			(500	)
NET LOSS ATTRIBUTABLE TO FORESTAR GROUP INC.		$	(3,892	)		$	(238	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic			35,681				35,362
Diluted			35,681				35,362
NET LOSS PER COMMON SHARE
Basic		$	(0.11	)		$	(0.01	)
Diluted		$	(0.11	)		$	(0.01	)

Please read the notes to the consolidated financial statements.

FORESTAR GROUP INC.

		First Quarter
		2009				2008
		(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Consolidated net (loss) income		$	(3,049	)		$	262
Adjustments:
Depreciation and amortization			2,111				1,793
Deferred income taxes			(3,816	)			3
Equity in loss (earnings) of unconsolidated ventures			572				(1,534	)
Distributions of earnings of unconsolidated ventures			23				784
Distributions of earnings to noncontrolling interests			(1,495	)			(2,318	)
Share-based compensation			1,706				2,681
Non-cash real estate cost of sales			4,770				12,852
Real estate development and acquisition expenditures			(7,602	)			(20,583	)
Reimbursements from utility or improvement districts			1,731				—
Other changes in real estate			280				(210	)
Gain on termination of timber lease			(185	)			(1,376	)
Cost of timber cut			796				547
Deferred income			930				569
Asset impairments			600				—
Other			28				(584	)
Changes in:
Receivables			(32	)			26
Prepaid and other			74				(1,829	)
Accounts payable and other accrued liabilities			(7,951	)			(5,133	)
Net cash used in operating activities			(10,509	)			(14,050	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, equipment, software and reforestation			(1,557	)			(529	)
Investment in unconsolidated ventures			(830	)			(4,263	)
Return of investment in unconsolidated ventures			1,614				2,650
Net cash used in investing activities			(773	)			(2,142	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of debt			(14,977	)			(14,665	)
Additions to debt			26,758				33,540
Deferred financing fees			—				(1,037	)
Return of investment to noncontrolling interests			(170	)			—
Exercise of stock options			1				812
Payroll taxes on restricted stock and stock options			(17	)			(1,816	)
Tax benefit from share-based compensation			—				77
Other			24				114
Net cash provided by financing activities			11,619				17,025
Net increase in cash and cash equivalents			337				833
Cash and cash equivalents at beginning of period			8,127				7,520
Cash and cash equivalents at end of period		$	8,464			$	8,353

Please read the notes to the consolidated financial statements.

     Prior to December 28, 2007, we were a wholly-owned subsidiary of Temple-Inland Inc. On December 28, 2007, Temple-Inland distributed all of the issued and outstanding shares of our common stock to its shareholders in a transaction commonly referred to as a spin-off.

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

     We prepare our unaudited interim financial statements in accordance with U.S. generally accepted accounting principles and Securities and Exchange Commission requirements for interim financial statements. As a result, they do not include all the information and disclosures required for complete financial statements. However, in our opinion, all adjustments considered necessary for a fair presentation have been included. Such adjustments consist only of normal recurring items unless otherwise noted. We make estimates and assumptions about future events. Actual results can, and probably will, differ from those we currently estimate including those related to allocating costs to real estate and measuring assets for impairment. These interim operating results are not necessarily indicative of the results that may be expected for the entire year. For further information, please read the financial statements included in our 2008 Annual Report on Form 10-K.

     Certain prior year items have been reclassified to conform to the current year’s presentation.

     Beginning January 2009, we adopted the following new accounting pronouncements:

	•		FASB Staff Position (FSP) FAS 157-2, Effective Date of FASB Statement 157 — This FSP delayed the effective date of Statement of Financial Accounting Standard (SFAS) No. 157, Fair Value Measurements, for certain nonfinancial assets and nonfinancial liabilities. Adoption of this FSP did not significantly affect how we determine fair value but has resulted in certain additional disclosures. Please read Note 10 for additional disclosures.
	•		FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities — This staff position specifies that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and should be included in the computation of earnings per share pursuant to the two-class method. Adoption of this FSP did not have an impact on our earnings per share.
	•		SFAS No. 141(R), Business Combinations — This standard requires most identifiable assets, liabilities, noncontrolling interests and goodwill acquired in a business combination to be recorded at full fair value. The standard also changes the approach to determining the purchase price; the accounting for acquisition cost; and several acquisition related accounting practices. Adoption of this pronouncement did not have a significant effect on our earnings or financial position.
	•		SFAS No. 160, Noncontrolling Interest in Consolidated Financial Statements — This standard specifies that noncontrolling interests be reported as a part of equity, not as a liability or other item outside of equity. Upon adoption, we reclassified $6,660,000 of noncontrolling interest to shareholders’ equity at year-end 2008 and we reclassified $500,000 of minority interest expense to net income attributable to noncontrolling interest for first three months 2008. The following table presents a reconciliation of the changes in shareholders’ equity during the quarter ended March 31, 2009 (in thousands):

	•		SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133 — This standard requires enhanced disclosures about derivative instruments including how and why they are used; how they are accounted for; and how they affect an entity’s financial position, financial performance and cash flows. Adoption of this pronouncement did not have a significant effect on our earnings or financial position.

     In April 2009, the FASB issued the following to provide additional guidance and disclosures regarding fair value measurements and impairments of securities:

•

FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, provides guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly decreased. Based on our current understanding, we do not expect that the adoption of this pronouncement will have a significant effect on our earnings or financial position.

	•		FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, which changes the requirements for recognizing other-than-temporary impairments for debt securities. Based on our current understanding, we do not expect that the adoption of this pronouncement will have a significant effect on our earnings or financial position.
	•		FSP FAS 107-1 and Accounting Principles Board (APB) Opinion 28-1, Interim Disclosures about Fair Value of Financial Instruments, which require an entity to provide disclosures about fair value of financial instruments in interim financial and summarized financial information. Based on our current understanding, we do not expect that the adoption of this pronouncement will have a significant effect on our earnings or financial position.
			These are effective for interim and annual periods ending after June 15, 2009.

Note 4 — Strategic Initiatives and Assets Held for Sale

     On February 11, 2009, we announced the following strategic initiatives to enhance shareholder value:

	•		Generate significant cash flow, principally from the sale of approximately 175,000 acres of higher and better use (HBU) timberland;
	•		Reduce debt by approximately $150 million; and
	•		Repurchase up to 20% of our common stock.

     Debt reduction and share repurchases will be funded by proceeds from the sale of the HBU timberland. Share repurchases will be accomplished from time to time through open market or privately negotiated transactions, subject to market conditions and other factors.

     In first quarter 2009, we have reclassified to assets held for sale about 171,000 acres of undeveloped land principally located in Alabama and Georgia with a carrying value of $51,390,000 and related timber with a carrying value of $24,749,000. These assets are being actively marketed.

Note 5 — Real Estate

     Real estate consists of:

		March 31,				December 31,
		2009				2008
		(In thousands)
Entitled, developed and under development projects		$	446,283			$	445,394
Undeveloped land			91,467				143,749
Commercial operating properties			44,828				43,987
			582,578				633,130
Accumulated depreciation			(22,990	)			(22,544	)
		$	559,588			$	610,586

     Included in entitled, developed and under development projects are the estimated costs of assets we expect to convey to utility or improvement districts of $75,388,000 at first quarter-end 2009 and $76,173,000 at year-end 2008, including $49,529,000 at first quarter-end 2009 and year-end 2008 related to our Cibolo Canyons project near San Antonio, Texas. These costs relate to water, sewer and other infrastructure assets for which the utility or improvement districts have agreed to reimburse us. In first three months 2009, we did not bill these districts. In first three months 2008, we billed these districts $12,011,000. In first three months 2009, we collected $1,731,000 from these districts. In first three months 2008, we did not collect from these districts. We expect to collect the remaining amounts billed when these districts achieve adequate tax bases to support payment.

     We recognized asset impairment charges of $600,000 in first three months 2009 related to a condominium project in Texas. We did not recognize any asset impairment charges in first three months 2008. Asset impairment charges are included in cost of real estate sales.

     Depreciation expense primarily related to commercial operating properties was $446,000 in first three months 2009 and $400,000 in first three months 2008 and is included in other operating expense.

Note 6 — Timber

     We have over 338,000 acres of timber, primarily in Georgia. The cost of timber cut was $796,000 in first three months 2009 and $547,000 in first three months 2008.

Note 7 — Investment in Unconsolidated Ventures

     At first quarter-end 2009, we had ownership interests ranging from 25 to 50 percent in 10 ventures that we account for using the equity method. We have no real estate ventures that are accounted for using the cost method. Our three largest ventures at first quarter-end 2009 are CL Realty, Temco and Palisades West. We own a 50 percent interest in both CL Realty and Temco, and Cousins Real Estate Corporation owns the other 50 percent interest. We own a 25 percent interest in Palisades West, Cousins Properties Incorporated owns a 50 percent interest and Dimensional Fund Advisors LP owns the remaining 25 percent interest. Information regarding these ventures follows:

	•		CL Realty, L.L.C. was formed in 2002 for the purpose of developing residential and mixed-use communities in Texas and across the southeastern United States. At first quarter-end 2009, the venture had 15 residential and mixed-use communities, of which 10 are in Texas, 3 are in Florida and 2 are in Georgia, representing about 7,600 residential lots and 560 commercial acres.
	•		Temco Associates, LLC was formed in 1991 for the purpose of acquiring and developing residential real estate sites in Georgia. At first quarter-end 2009, the venture had 5 residential and mixed-use communities, representing about 1,560 residential lots, all of which are located in Paulding County, Georgia. The venture also owns approximately 5,600 acres of undeveloped land in Paulding County, Georgia.
	•		Palisades West LLC was formed in 2006 for the purpose of constructing a commercial office park in Austin, Texas. The project includes two office buildings totaling approximately 375,000 square feet and an accompanying parking garage. Construction of the project was completed in fourth quarter 2008 and is approximately 68% leased. Our remaining commitment for investment in this venture as of first quarter-end 2009 is $2,686,000. We have entered into a 10-year operating lease for approximately 32,000 square feet that we occupy as our corporate headquarters effective in fourth quarter 2008.

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

		March 31, 2009																				December 31, 2008
		CL								Palisades				Other								CL								Palisades				Other
		Realty				Temco				West				Ventures				Total				Realty				Temco				West				Ventures				Total
		(in thousands)
Real estate		$	122,660			$	60,377			$	125,180			$	92,198			$	400,415			$	124,417			$	60,791			$	120,953			$	94,094			$	400,255
Total assets			125,234				61,852				128,815				102,114				418,015				126,726				61,832				123,290				102,930				414,778
Borrowings, principally non-recourse (a)			4,968				3,168				—				75,966				84,102				4,901				3,198				—				75,638				83,737
Total liabilities			7,077				3,853				54,687				88,124				153,741				8,683				3,570				50,548				89,580				152,381
Equity			118,157				57,999				74,128				13,990				264,274				118,043				58,262				72,742				13,350				262,397
Our investment in real estate ventures:
Our share of their equity(b)			59,078				29,000				18,148				17,554				123,780				59,022				29,131				18,779				18,295				125,227
Unrecognized deferred gain(c)			(7,059	)			—				—				(614	)			(7,673	)			(7,059	)			—				—				(614	)			(7,673	)
Investment in real estate ventures		$	52,019			$	29,000			$	18,148			$	16,940			$	116,107			$	51,963			$	29,131			$	18,779			$	17,681			$	117,554

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

		First Quarter
		2009				2008
		(In thousands)
Revenues:
CL Realty		$	1,600			$	3,085
Temco			857				677
Palisades West			1,729				54
Other ventures			2,163				3,196
Total		$	6,349			$	7,012
Earnings:
CL Realty		$	504			$	2,313
Temco			(420	)			(279	)
Palisades West			148				38
Other ventures			1,195				(299	)
Total		$	1,427			$	1,773
Our equity in their earnings:
CL Realty(c)		$	252			$	1,143
Temco			(210	)			(141	)
Palisades West			37				9
Other ventures(b)			(651	)			523
Recognition of deferred gain(c)			—				—
Total		$	(572	)		$	1,534

     In first three months 2009, we invested $830,000 in these ventures and received $1,637,000 in distributions; in first three months 2008, we invested $4,263,000 in these ventures and received $3,434,000 in distributions. Distributions include both return of investments and distributions of earnings.

     Debt consists of:

		March 31,				December 31,
		2009				2008
		(In thousands)
Term loan facility — average interest rate of 4.54% at first quarter-end 2009 and 4.77% at year-end 2008		$	175,000			$	175,000
Revolving loan facility — average interest rate of 4.56% at first quarter-end 2009 and 5.12% at year-end 2008			69,700				59,900
Secured promissory note — interest rate of 3.02% at first quarter-end 2009 and 3.01% at year-end 2008			19,716				16,000
Other indebtedness due through 2011 at variable interest rates based on prime (3.25% at first quarter-end 2009 and year-end 2008) and fixed interest rates ranging from 6.00% to 9.50%)			84,767				86,502
		$	349,183			$	337,402

     Our senior credit facility and other debt agreements contain terms, conditions and financial covenants customary for such agreements including minimum levels of interest coverage and limitations on leverage. At first quarter-end 2009, we were in compliance with the terms, conditions and financial covenants of these agreements.

     Our senior credit facility provides for a $175,000,000 term loan and a $290,000,000 revolving line of credit. The revolving line of

credit may be prepaid at any time without penalty. The term loan may be prepaid at any time; however, repayment prior to June 1, 2009 requires a fee of 1.00% of the principal amount. There is no prepayment fee for the term loan on or after June 1, 2009. The senior credit facility matures December 1, 2010. The revolving line of credit includes a $100,000,000 sublimit for letters of credit, of which $13,071,000 was outstanding at first quarter-end 2009. Total borrowings under our senior credit facility (including the face amount of letters of credit) may not exceed a borrowing base formula, and include a $35,000,000 minimum liquidity requirement at each quarter-end. At first quarter-end 2009, we had $172,000,000 in net unused borrowing capacity under our senior credit facility.

     At our option, we can borrow at LIBOR plus 4 percent or Prime plus 2 percent. All borrowings under the senior credit facility are secured by (a) an initial pledge of approximately 250,000 acres of undeveloped land, (b) assignments of current and future leases, rents and contracts, including our mineral leases, (c) a security interest in our primary operating account, (d) pledge of the equity interests in current and future material operating subsidiaries or joint venture interests, or if such pledge is not permitted, a pledge of the right to distributions from such entities, and (e) negative pledge (without a mortgage) on all other wholly-owned assets. The senior credit facility provides for releases of real estate provided that borrowing base compliance is maintained.

     We incurred origination and other fees related to our credit facility of $10,573,000, of which $6,045,000 is unamortized at first quarter-end 2009 and is included in other assets. Amortization of deferred financing fees in connection with our senior credit facility was $883,000 in first three months 2009 and $855,000 in first three months 2008.

     At first quarter-end 2009, commercial operating properties having a book value of $21,476,000 were subject to liens in connection with $19,716,000 of debt.

     At first quarter-end 2009, entitled, developed and under development projects having a book value of $161,290,000 were subject to liens in connection with $84,767,000 of principally non-recourse debt.

Note 9 — Derivative Instruments

     We are exposed to certain risks arising from both our business operations and economic conditions. We principally manage exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks including interest rate, liquidity and credit risk by managing the amount, sources, and duration of our debt funding and through the use of derivative instruments. Specifically, we may enter into derivative instruments to mitigate the risk inherent in interest rate fluctuations.

Cash Flow Hedges

     Our objective for using interest rate derivatives is to manage exposure to significant movements in interest rates. To accomplish this objective, we use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for our fixed-rate payment over the life of the agreements without exchange of the underlying notional amount.

     As of March 31, 2009, our $100,000,000 notional amount interest rate swap agreement, which matures in 2010, requires that we pay a fixed interest rate of 6.57 percent and receive a floating interest rate of one month LIBOR plus 4 percent (4.50 percent at first quarter-end 2009).

     We defer and include in other comprehensive income the effective portion of changes in the fair value of our cash flow hedge. We recognize the ineffective portion of the hedge as income or loss. The effectiveness of the hedge relationship is periodically assessed by comparing the present value of the cumulative change in the expected future cash flows on the variable leg of the swap with the present value of the cumulative change in the expected future hedged cash flows. In first three months 2009 and 2008, there was no hedge ineffectiveness.

     The table below presents the fair value of our derivative instrument as well as its classification on the consolidated balance sheets as of March 31, 2009 and December 31, 2008:

Liability Derivatives

March 31, 2009

December 31, 2008

Balance Sheet

Fair

Balance Sheet

Fair

Location

Value

Location

Value

(in thousands)

Derivatives designated as hedging instruments under SFAS 133:

Interest Rate Swap

Other liabilities

$1,691

Other liabilities

$1,939

     The change in fair value of our interest rate swap recognized in other comprehensive income was a gain of $161,000 in first three months 2009 and a loss of $330,000 in first three months 2008. No amounts were reclassified from other comprehensive income into income in first three months 2009 or first three months 2008.

     See Note 10 — Fair Value for a description of how the above derivative instrument is valued in accordance with SFAS No. 157.

Note 10 — Fair Value

     SFAS 157, Fair Value Measurements, provides a framework for measuring fair value and expands disclosures required about fair value measurements. This pronouncement establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

	•		Level 1 Inputs — Unadjusted quoted prices for identical assets or liabilities in active markets;
	•		Level 2 Inputs — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in inactive markets, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
	•		Level 3 Inputs — Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Such inputs typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

		Fair Value Measurements
		Level 1				Level 2				Level 3				March 31,
		Inputs				Inputs				Inputs				2009
		(In thousands)
Financial Assets and Liabilities:
Interest Rate Swap Agreement		$	(1,691	)		$	—			$	—			$	(1,691	)
Non-Financial Assets and Liabilities:
Real estate		$	—			$	—			$	15,164			$	15,164

     Financial liabilities measured at fair value on a recurring basis include our interest rate swap agreement. The fair value of the interest rate swap agreement was determined using quoted prices in active markets for identical assets. In first three months 2009, the fair value of our interest rate swap increased, and as a result, we recognized an after-tax gain of $161,000 in accumulated other comprehensive income.

     Non-financial assets measured at fair value on a non-recurring basis include real estate assets measured for impairment. In first three months 2009, certain assets were remeasured and reported at fair value due to events or circumstances that indicated that the carrying value may not be recoverable. We determined estimated fair value based on the present value of future probability weighted cash flows expected from the sale of the long-lived assets. As a result, we recognized asset impairment of $600,000 in first three months 2009.

Note 11 — Capital Stock

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

     Please read Note 16 for information about additional shares of common stock that could be issued under terms of our share-based compensation plans.

     As a result of our spin-off from Temple-Inland, all of Temple-Inland’s outstanding share-based compensation awards were equitably adjusted into separate awards: one related to our common stock, one related to Temple-Inland common stock and one related to Guaranty Financial Group, Inc. common stock. Guaranty was another wholly-owned subsidiary of Temple-Inland that was spun off on December 28, 2007. All awards issued as part of this adjustment are subject to their original vesting schedules.

     At first quarter-end 2009, Temple-Inland and Guaranty directors and employees held 27,000 equity-settled restricted stock awards on our stock.

     The following table summarizes outstanding stock option awards on our stock held by Temple-Inland and Guaranty directors and employees at first quarter-end 2009:

Weighted

Aggregate

Weighted

Average

Intrinsic Value

Average

Remaining

(Current Value

Exercise Price

Contractual

Less Exercise

Shares

per Share

Term

Price)

(In thousands)

(In years)

(In thousands)

Outstanding

1,749

$

19.30

5

$

8

Exercisable

1,571

$

18.76

5

$

8

Note 12 — Other Comprehensive Loss

     Other comprehensive loss consists of:

		First Quarter
		2009				2008
		(In thousands)
Consolidated net (loss) income		$	(3,049	)		$	262
Change in fair value of interest rate swap agreement, net of taxes			161				(330	)
Other comprehensive loss			(2,888	)			(68	)
Less: Comprehensive income attributable to noncontrolling interest			(843	)			(500	)
Other comprehensive loss attributable to Forestar Group Inc.		$	(3,731	)		$	(568	)

Note 13 — Net Loss per Share

     Our basic and diluted weighted average common shares outstanding used to compute net loss per share are as follows:

		First Quarter
		2009				2008
		(In thousands)
Weighted average common shares outstanding — basic			35,681				35,362
Dilutive effect of stock options			—				—
Dilutive effect of restricted stock and restricted stock units			—				—
Weighted average common shares outstanding — diluted			35,681				35,362

     At first quarter-end 2009, the effect of 3,047,000 stock options and unvested shares of restricted stock were not included in the computation of diluted weighted average shares outstanding because their impact would have been anti-dilutive as a result of our net loss.

     At first quarter-end 2008, the effect of 2,664,000 stock options and unvested shares of restricted stock were not included in the computation of diluted weighted average shares outstanding because their impact would have been anti-dilutive as a result of our net loss.

Note 14— Commitments and Contingencies

     Litigation

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

     Environmental

     Environmental remediation liabilities arise from time to time in the ordinary course of doing business, and we believe we have established adequate reserves for any probable losses. We own 288 acres near Antioch, California, portions of which were sites of a Temple-Inland paper manufacturing operation that are in remediation. In 2008, we increased our reserves for environmental remediation by about $2,900,000. We estimate the cost to complete remediation activities will be about $3,200,000, which is included in other accrued expenses and will likely be paid in 2009. Our estimate requires us to make assumptions regarding the scope of required remediation, the effectiveness of planned remediation activities, and approvals by regulatory authorities. Our estimate is subject to revision as new information becomes available.

Note 15 — Segment Information

     We manage our operations through three segments: real estate, mineral resources and fiber resources. Real estate secures entitlements and develops infrastructure on our lands for single-family residential and mixed-use communities and manages our undeveloped land and commercial operating properties. Mineral resources manages our oil and gas mineral interests. Fiber resources manages our timber and recreational leases.

     Assets allocated by segment are as follows:

		March 31,				December 31,
		2009				2008
		(In thousands)
Real estate		$	730,815			$	732,401
Mineral resources			416				376
Fiber resources			50,262				51,321
Assets not allocated to segments			52,946				50,478
Total assets		$	834,439			$	834,576

     We evaluate performance based on segment earnings before unallocated items and income taxes. Segment earnings consist of operating income, equity in earnings of unconsolidated ventures and net income attributable to noncontrolling interest. Unallocated items consist of general and administrative expense, share-based compensation, other non-operating income and expense and interest expense. All our revenues are derived from U.S. operations and all our assets are located in the U.S. For first three months 2009, revenues from one customer of our real estate segment and one customer of our fiber resources segment exceeded 10% of our total revenues.

     Segment revenues and earnings are as follows:

		First Quarter
		2009				2008
		(In thousands)
Revenues:
Real estate		$	18,787			$	28,443
Mineral resources			5,921				6,268
Fiber resources			4,369				2,512
Total revenues		$	29,077			$	37,223
Segment earnings:
Real estate		$	542			$	3,543
Mineral resources			4,782				6,505
Fiber resources			2,909				2,840
Total segment earnings			8,233				12,888
Items not allocated to segments(a)			(14,440	)			(13,271	)
Income before taxes		$	(6,207	)		$	(383	)

		First Quarter
		2009				2008
		(In thousands)
General and administrative expense		$	(7,619	)		$	(5,006	)
Share-based compensation expense			(1,706	)			(2,681	)
Interest expense			(5,166	)			(5,666	)
Other non-operating income			51				82
		$	(14,440	)		$	(13,271	)

     In first three months 2009, general and administrative expense includes $3,180,000 paid to outside advisors regarding an evaluation by our Board of Directors of an unsolicited shareholder proposal.

Note 16 — Share-Based Compensation

Post-Spin Awards

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

Cash-settled awards

     Cash-settled awards granted to our employees in the form of restricted stock units or stock appreciation rights vest over two to four years from the date of grant and generally provide for accelerated vesting upon death, disability or if there is a change in control. Vesting for some awards is also conditioned upon achievement of a minimum one percent annualized return on assets over a three-year period.

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

     The following table summarizes the activity of awards granted under our plan for first three months 2009:

						Weighted
						Average
						Grant
		Equivalent				Date Fair
		Units				Value Per Unit
		(In thousands)
Non-vested as of December 31, 2008			5			$	28.85
Granted			1,106				5.72
Vested			(105	)			9.71
Forfeited			(1	)			28.85
Non-vested as of March 31, 2009			1,005			$	5.41

     In first three months 2009, we paid $22,000 to settle vested cash awards. The aggregate current value of non-vested awards as of March 31, 2009 is $2,055,000.

Equity-settled awards

     There were no equity-settled awards in the form of restricted stock units granted in first three months 2009, and there were no unvested equity-settled restricted stock unit awards at first quarter-end 2009.

Restricted stock

     Restricted stock awards vest after three years if we achieve a minimum one percent annualized return on assets over such three-year period. The following table summarizes the activity of awards granted under our plan for first three months 2009:

						Weighted
						Average
						Grant
		Restricted				Date Fair
		Shares				Value Per Share
		(In thousands)
Non-vested as of December 31, 2008			207			$	21.89
Granted			110				9.29
Vested			—				—
Forfeited			(1	)			28.85
Non-vested as of March 31, 2009			316			$	17.45

     The aggregate current value of non-vested awards as of first quarter-end 2009 is $2,416,000, or $7.65 per share.

Stock options

     Stock options have a ten-year term, generally become exercisable ratably over three to four years and provide for accelerated or continued vesting upon retirement, death, disability or if there is a change in control. Options were granted with an exercise price equal to the market value of our stock on the date of grant. The following table summarizes the activity of awards granted under our plan for first three months 2009:

						Weighted				Weighted
						Average				Average
						Exercise				Remaining
		Options				Price per				Contractual
		Outstanding				Share				Term
		(In thousands)								(In years)
Balance as of December 31, 2008			622			$	28.85				9
Granted			161				9.29
Exercised			—				—
Forfeited			(3	)			28.85
Balance as of March 31, 2009			780			$	24.80				9
Options Exercisable as of March 31, 2009			183			$	28.85				9

     There was no aggregate intrinsic value for stock options outstanding or exercisable at first quarter-end 2009.

     Stock options are valued based upon the Black-Scholes option pricing model. Awards granted in first three months 2009 were valued based upon the following assumptions:

Expected dividend yield			0.0	%
Expected stock price volatility			41.8	%
Risk-free interest rate			1.8	%
Expected life of options (years)			6
Weighted average estimated fair value of options granted		$	3.94

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

Pre-Spin Awards

     Prior to the spin-off, we participated in Temple-Inland’s share-based compensation plans, and as a result, certain of our directors and employees received share-based compensation in the form of restricted or performance stock units, restricted stock, or options to purchase shares of Temple-Inland’s common stock. Concurrent with Temple-Inland’s distribution of our common stock, all outstanding Temple-Inland awards were adjusted into three separate awards: one related to Forestar common stock, one related to Guaranty common stock and one related to Temple-Inland common stock.

Cash-settled awards

     Cash-settled awards generally vest and are paid after three years from the date of grant or the attainment of defined performance goals, generally measured over a three-year period. A summary of cash-settled awards outstanding to our directors and employees at first quarter-end 2009, following the adjustments described previously, follows:

						Aggregate
		Equivalent				Current
		Units				Value
		(In thousands)
Awards on Forestar stock			24			$	182
Awards on Guaranty stock			24				25
Awards on Temple-Inland stock			72				384
						$	591

     In first three months 2009, we paid $394,000 to settle vested cash awards.

     Stock options have a ten-year term, generally become exercisable ratably over four years and provide for accelerated or continued vesting upon retirement, death, disability or if there is a change in control. Options were granted with an exercise price equal to the market value of Temple-Inland common stock on the date of grant. A summary of stock option awards outstanding to our directors and employees at first quarter-end 2009, following the adjustments described previously, follows:

														Aggregate
						Weighted				Weighted				Value
						Average				Average				(Current
						Exercise				Remaining				Value Less
						Price				Contractual				Exercise
		Shares				per Share				Term				Price)
		(In thousands)								(In years)				(In thousands)
Outstanding on Forestar stock			86			$	21.12				6			$	—
Outstanding on Guaranty stock			86				13.55				6				—
Outstanding on Temple-Inland stock			255				16.89				6				—
														$	—
Exercisable on Forestar stock			70			$	19.34				5			$	—
Exercisable on Guaranty stock			70				12.41				5				—
Exercisable on Temple-Inland stock			209				15.47				5				—
														$	—

     No options were exercised in first three months 2009.

     Share-based compensation expense for post-spin and pre-spin awards consists of:

		First Quarter
		2009				2008
		(In thousands)
Cash-settled awards		$	780			$	140
Equity-settled awards			—				750
Restricted stock			344				189
Stock options			582				1,602
Pre-tax share-based compensation expense			1,706				2,681
Income tax benefit			(631	)			(1,019	)
		$	1,075			$	1,662

     The fair value of awards granted to retirement-eligible employees and expensed at the date of grant was $135,000 in first three months 2009 and $1,321,000 in first three months 2008.

     Pre-tax share-based compensation expense is included in:

		First Quarter
		2009				2008
		(In thousands)
General and administrative expense		$	1,196			$	1,831
Other operating expense			510				850
		$	1,706			$	2,681

     We did not capitalize any share-based compensation in first three months 2009 or 2008.

     Unrecognized share-based compensation for post-spin awards not vested was $7,953,000 at first quarter-end 2009. The weighted average period over which this amount will be recognized is estimated to be 2.5 years. Unrecognized share-based compensation for pre-spin awards not vested was $396,000 at first quarter-end 2009. The weighted average period over which this amount will be recognized is estimated to be 1.3 years.

     In connection with restricted stock vested and stock options exercised, we withheld shares having a value of $17,000 for payment of payroll taxes in first three months 2009. These shares are accounted for as treasury stock. Payroll taxes on restricted stock and stock options are reflected in financing activities in our consolidated statement of cash flows.

     Our effective tax rate was a benefit of 43% in the first three months 2009 of which 6% is attributable to noncontrolling interests, and a benefit of 124% in the first three months 2008 of which 86% is attributable to noncontrolling interests. As a result of our adoption of SFAS No. 160, income (loss) before income taxes includes income from pass-through entities allocable to noncontrolling interests for which there is no income tax provided.

     We anticipate that our effective tax rate in 2009 will be about 37% of which less than one percent will be attributable to noncontrolling interests.

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

     In accordance with our strategic initiatives, effective May 2, 2009, we entered into a definitive agreement with the Hancock Timber Resource Group division of Hancock Natural Resource Group, Inc., acting on behalf of its investor clients, to sell about 75,000 acres of timberland in Georgia and Alabama for $120,000,000 in a cash transaction. The transaction is expected to close in second quarter 2009, subject to customary closing conditions. We intend to use the after-tax cash proceeds from this sale to reduce our outstanding debt.

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 2008 Annual Report on Form 10-K. Unless otherwise indicated, information is presented as of March 31, 2009, and references to acreage owned include all acres owned by ventures regardless of our ownership interest in a venture.

Forward-Looking Statements

     This Quarterly Report on Form 10-Q and other materials we have filed or may file with the Securities and Exchange Commission contain “forward-looking statements” within the meaning of the federal securities laws. These forward-looking statements are identified by their use of terms and phrases such as “believe,” “anticipate,” “could,” “estimate,” “likely,” “intend,” “may,” “plan,” “expect,” and similar expressions, including references to assumptions. These statements reflect our current views with respect to future events and are subject to 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;
	•		economic, market or business conditions in Texas or Georgia, where our real estate activities are concentrated;
	•		the opportunities (or lack thereof) that may be presented to us and that we may pursue;
	•		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;
	•		our partners’ ability to fund their capital commitments;
	•		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;

	•		the final resolutions or outcomes with respect to our contingent and other corporate liabilities related to our business; and
	•		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 Item 1A of our 2008 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.

Background

     Prior to December 28, 2007, we were a wholly-owned subsidiary of Temple-Inland Inc. On December 28, 2007, Temple-Inland distributed all our issued and outstanding shares of common stock to its shareholders in a transaction commonly referred to as a spin-off. In 2008, we operated our first full year as a stand-alone public company and the following discussion and analysis reflect the post-spin results of operations and the effect on our financial condition.

Strategy

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

	•		Entitlement and development of real estate;
	•		Realization of value from minerals, water and fiber resources; and
	•		Strategic and disciplined investment in our business.

     On February 11, 2009, we announced the following strategic initiatives to enhance shareholder value:

	•		Generate significant cash flow, principally from the sale of approximately 175,000 acres of higher and better use (HBU) timberland;
	•		Reduce debt by approximately $150 million; and
	•		Repurchase up to 20% of our common stock.

     Debt reduction and share repurchases will be funded by proceeds from the sale of the HBU timberland. Share repurchases will be accomplished from time to time through open market or privately negotiated transactions, subject to market conditions and other factors.

     In first quarter 2009, we have reclassified to assets held for sale about 171,000 acres of undeveloped land principally located in Alabama and Georgia with a carrying value of $51,390,000 and related timber with a carrying value of $24,749,000. These assets are being actively marketed.

     In accordance with our strategic initiatives, effective May 2, 2009, we entered into a definitive agreement with the Hancock Timber Resource Group division of Hancock Natural Resource Group, Inc., acting on behalf of its investor clients, to sell about 75,000 acres of timberland in Georgia and Alabama for $120,000,000 in a cash transaction. The transaction is expected to close in second quarter 2009, subject to customary closing conditions. We intend to use the after-tax cash proceeds from this sale to reduce our outstanding debt.

Results of Operations

     Net loss was $(3,892,000) or $(0.11) per basic and diluted share, in first three months 2009, compared with $(238,000), or $(0.01) per basic and diluted share, in first three months 2008.

     A summary of our consolidated results follows:

		First Quarter
		2009				2008
		(In thousands)
Revenues:
Real estate		$	18,787			$	28,443
Mineral resources			5,921				6,268
Fiber resources			4,369				2,512
Total revenues		$	29,077			$	37,223
Segment earnings:
Real estate		$	542			$	3,543
Mineral resources			4,782				6,505
Fiber resources			2,909				2,840
Total segment earnings			8,233				12,888
Items not allocated to segments:
General and administrative expense			(7,619	)			(5,006	)
Share-based compensation expense			(1,706	)			(2,681	)
Interest expense			(5,166	)			(5,666	)
Other non-operating income			51				82
Loss before taxes			(6,207	)			(383	)
Income tax benefit			2,315				145
Net loss attributable to Forestar Group Inc.		$	(3,892	)		$	(238	)

     Significant aspects of our results of operations follow:

	•		Real Estate segment earnings declined principally due to a continued decrease in the sales of residential real estate, decreased commercial sales activity and increased costs associated with asset impairments and legal reserves.
	•		Mineral Resources segment earnings declined principally due to lower lease bonus revenues, lower oil prices and increased costs associated with developing and staffing our mineral resources organization.
	•		Fiber Resources segment revenues increased as result of increased prices related to a higher mix of larger pine sawtimber sold. In first three months 2008, segment earnings included a gain from partial termination of a timber lease.
	•		In first three months 2009, general and administrative expense includes $3,180,000 paid to outside advisors regarding an evaluation by our Board of Directors of an unsolicited shareholder proposal.
	•		In first three months 2009, share-based compensation included $135,000 related to accelerated expense recognition in conjunction with awards granted to retirement-eligible employees compared to $1,321,000 in first three months 2008.

     Current market conditions in the residential development industry are extremely difficult due to the oversupply of housing, diminished sales volume and sales prices for existing and new homes and a significant tightening of mortgage credit. Consumer confidence is near or at an all time low. Many home builders are experiencing liquidity shortfalls and are unwilling or unable to close 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 2009.

     Current market conditions in the oil and gas industry have declined as oil and gas commodity prices have decreased from recent highs. Exploration and production companies have reduced capital expenditures for lease acquisition and production due to lower world wide demand and higher inventories resulting in lower oil and gas commodity prices. These conditions may impact the demand for new mineral leases, new exploration activity and the amount of royalty revenues we receive.

     Pulpwood demand in our markets has declined as a result of weak demand for these products due to temporary mill curtailments. Sawtimber prices have declined due to the decrease in demand for lumber products consistent with the decline in the housing industry.

Business Segments

     We manage our operations through three business segments:

	•		Real estate,
	•		Mineral resources, and
	•		Fiber 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 net income attributable to noncontrolling interest. 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.

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

Real Estate

     We own directly or through ventures over 363,000 acres of real estate located in nine states and 12 markets. Our real estate segment secures entitlements and develops infrastructure on our lands, primarily for single-family residential and mixed-use communities. We own about 297,000 acres in a broad area around Atlanta, Georgia, with the balance located primarily in Texas. We target investments 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. We own and manage our projects either directly or through ventures. Our real estate segment revenues are principally derived from the sales of residential single-family lots, undeveloped land sales and commercial real estate and to a lesser degree from the operation of commercial properties, primarily a hotel.

     A summary of our real estate results follows:

		First Quarter
		2009				2008
		(In thousands)
Revenues		$	18,787			$	28,443
Cost of sales			(8,558	)			(17,372	)
Operating expenses			(8,165	)			(7,778	)
			2,064				3,293
Equity in earnings of unconsolidated ventures			(679	)			750
Less: Net income attributable to noncontrolling interest			(843	)			(500	)
Segment earnings		$	542			$	3,543

     In first three months 2009, operating expenses principally consist of $2,826,000 in property taxes, $1,802,000 in employee compensation and benefits, $650,000 related to legal reserves for probable losses, $639,000 in professional services, $528,000 in depreciation expense and $191,000 related to marketing and advertising. In first three months 2008, operating expenses principally consist of $2,733,000 in property taxes, $1,967,000 in employee compensation and benefits, $944,000 in professional services, $459,000 in depreciation expense and $416,000 related to marketing and advertising.

     Revenues in our owned and consolidated ventures consist of:

		First Quarter
		2009				2008
		(In thousands)
Residential real estate		$	5,612			$	14,670
Commercial real estate			143				1,863
Undeveloped land			8,304				6,257
Commercial operating properties			4,592				5,155
Other			136				498
Total revenues		$	18,787			$	28,443

     Units sold in our owned and consolidated ventures consist of:

		First Quarter
		2009				2008
Residential real estate:
Lots sold			78				324
Revenue per lot sold		$	71,928			$	43,593
Commercial real estate:
Acres sold			0.3				22
Revenue per acre sold		$	424,696			$	85,000
Undeveloped land:
Acres sold			2,192				1,349
Revenue per acre sold		$	3,789			$	4,639

     Residential real estate revenues principally consist of the sale of single-family lots to national, regional and local homebuilders. In first three months 2009, residential real estate revenues continued to decline as result of decreased demand for single-family lots due to the overall decline in the housing industry. We expect difficult housing markets and credit conditions throughout 2009. In first three months 2008, residential lots sold includes the sale of 192 high density lots for approximately $24,300 per lot at a mixed-use venture located near Houston, Texas.

     In first three months 2009, we sold 2,192 acres of undeveloped land from our owned and consolidated ventures at an average price of $3,789 per acre, generating $8,304,000 in revenue. In first three months 2008, we sold 1,349 acres from our owned and consolidated ventures at an average price of $4,639 per acre, generating $6,257,000 in revenue.

     Information about our real estate projects and our real estate ventures follows:

		First Quarter-End
		2009				2008
Owned and consolidated ventures:
Entitled, developed and under development projects
Number of projects			54				54
Residential lots remaining			20,467				19,985
Commercial acres remaining			1,704				1,385
Undeveloped land and land in the entitlement process
Number of projects			22				21
Acres in entitlement process			32,520				30,200
Acres undeveloped (a)			307,093				320,749
Ventures accounted for using the equity method:
Ventures’ lot sales (for first three months)
Lots sold			29				64
Revenue per lot sold		$	73,647			$	59,242
Ventures’ entitled, developed and under development projects
Number of projects			21				21
Residential lots remaining			9,298				9,319
Commercial acres sold (for first three months)			4				22
Revenue per acre sold		$	196,996			$	85,000
Commercial acres remaining			645				697
Ventures’ undeveloped land and land in the entitlement process
Number of projects			2				2
Acres in entitlement process			1,080				870
Acres sold (for first three months)			—				—
Revenue per acre sold		$	—			$	—
Acres undeveloped			5,641				6,127

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. At first quarter-end 2009, we have about 120,000 net acres under lease and about 26,000 net acres held by production.

     A summary of our mineral resources results follows:

		First Quarter
		2009				2008
		(In thousands)
Revenues		$	5,921			$	6,268
Cost of sales			(76	)			—
Operating expenses			(1,170	)			(547	)
			4,675				5,721
Equity in earnings of unconsolidated ventures			107				784
Segment earnings		$	4,782			$	6,505

     In first three months 2009, operating expenses principally consist of $443,000 in employee compensation and benefits, $268,000 related to oil and gas production severance taxes, $188,000 in professional services and $66,000 in property taxes. Cost of sales represents our share of costs related to our non-operating working interests. In first three months 2008, operating expenses principally consist of $343,000 in professional services as we resourced our operations with a contract workforce while recruiting our mineral resources team.

     In first three months 2009, equity in earnings of unconsolidated ventures includes our share of royalty revenue as a result of new production activity from a new well in a venture located within the Barnett Shale natural gas formation. In first three months 2008, equity in earnings of consolidated ventures includes our share of a lease bonus payment as a result of leasing 241 net mineral acres for $1,568,000.

     Revenues consist of:

		First Quarter
		2009				2008
		(In thousands)
Royalties		$	3,478			$	3,338
Other lease revenues			2,443				2,930
Total revenues		$	5,921			$	6,268

     Additional information about our royalties ^(a) follows:

		First Quarter
		2009				2008
Oil production (barrels)			26,200				19,400
Average price per barrel		$	47.24			$	83.57
Natural gas production (millions of cubic feet)			394.7				255.9
Average price per thousand cubic feet		$	6.16			$	6.38

     In first three months 2009, other lease revenues include $2,121,000 in lease bonus payments as a result of leasing over 6,100 net mineral acres and $322,000 related to delay rental payments. In first three months 2008, other lease revenues include $2,021,000 in lease bonus payments as a result of leasing over 5,000 net mineral acres and $695,000 related to delay rental payments.

     A summary of our oil and gas mineral interests ^(a) at first quarter-end 2009 follows:

										Held By
State		Unleased(b)				Leased(c)				Production(d)				Total(e)
		(Net acres)
Texas			124,000				101,000				19,000				244,000
Louisiana			104,000				10,000				7,000				121,000
Alabama			48,000				9,000				—				57,000
Georgia			200,000				—				—				200,000
			476,000				120,000				26,000				622,000