
	Second Quarter						First Six Months						Third Quarter						First Nine Months
	2012			2011			2012			2011			2012			2011			2012			2011
	(In thousands, except per share amounts)												(In thousands, except per share amounts)
REVENUES
Real estate sales and other	$	19,349		$	12,803		$	29,993		$	27,007		$	18,310		$	12,407		$	48,303		$	39,414
Commercial and income producing properties		7,298			6,812			14,576			13,747			8,805			6,653			23,381			20,400

Real estate		26,647			19,615			44,569			40,754			27,115			19,060			71,684			59,814
Mineral resources		7,148			4,580			16,574			11,913			10,479			5,871			27,053			17,784
Fiber resources and other		1,517			1,290			2,261			2,658			3,016			1,310			5,277			3,968

		35,312			25,485			63,404			55,325			40,610			26,241			104,014			81,566

COSTS AND EXPENSES
Cost of real estate sales and other		(10,578	)		(5,991	)		(16,352	)		(11,649	)		(10,806	)		(7,760	)		(27,158	)		(19,409	)
Cost of commercial and income producing properties		(4,638	)		(4,366	)		(9,195	)		(8,878	)		(6,733	)		(4,607	)		(15,928	)		(13,485	)
Cost of mineral resources		(978	)		(438	)		(2,353	)		(1,232	)		(1,865	)		(597	)		(4,218	)		(1,829	)
Cost of fiber resources and other		(370	)		(285	)		(498	)		(532	)		(570	)		(349	)		(1,068	)		(881	)
Other operating		(11,441	)		(10,483	)		(24,191	)		(22,157	)		(14,691	)		(11,771	)		(39,116	)		(34,109	)
General and administrative		(6,749	)		(6,849	)		(13,712	)		(12,820	)		(11,298	)		(2,770	)		(25,010	)		(15,590	)
Gain on sale of assets		3,401			—			15,076			—

		(31,353	)		(28,412	)		(51,225	)		(57,268	)		(45,963	)		(27,854	)		(112,498	)		(85,303	)
OPERATING INCOME (LOSS)		3,959			(2,927	)		12,179			(1,943	)
Equtiy in earnings of unconsolidated ventures		768			402			1,492			984

GAIN ON SALE OF ASSETS														10,196			61,784			25,506			61,965

OPERATING INCOME														4,843			60,171			17,022			58,228
Equity in earnings of unconsolidated ventures														680			648			2,172			1,632
Interest expense		(3,664	)		(4,653	)		(7,555	)		(8,662	)		(8,094	)		(4,271	)		(15,649	)		(12,933	)
Other non-operating income		1,140			24			1,204			51			1,113			26			2,317			77

INCOME (LOSS) BEFORE TAXES		2,203			(7,154	)		7,320			(9,570	)		(1,458	)		56,574			5,862			47,004
Income tax (expense) benefit		(732	)		2,828			(2,352	)		3,540			1,078			(19,609	)		(1,274	)		(16,069	)

CONSOLIDATED NET INCOME (LOSS)		1,471			(4,326	)		4,968			(6,030	)		(380	)		36,965			4,588			30,935
Less: Net (income) loss attributable to noncontrolling interests		(660	)		405			(1,355	)		(364	)
Less: Net (income) attributable to noncontrolling interests														(323	)		(537	)		(1,678	)		(901	)

NET INCOME (LOSS) ATTRIBUTABLE TO FORESTAR GROUP INC.	$	811		$	(3,921	)	$	3,613		$	(6,394	)	$	(703	)	$	36,428		$	2,910		$	30,034


WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		35,235			35,524			35,190			35,466			35,233			35,514			35,204			35,482
Diluted		35,425			35,524			35,412			35,466			35,233			35,796			35,437			35,877
NET INCOME (LOSS) PER COMMON SHARE
Basic	$	0.02		$	(0.11	)	$	0.10		$	(0.18	)	$	(0.02	)	$	1.03		$	0.08		$	0.85
Diluted	$	0.02		$	(0.11	)	$	0.10		$	(0.18	)	$	(0.02	)	$	1.02		$	0.08		$	0.84

COMPREHENSIVE INCOME (LOSS)	$	811		$	(3,921	)	$	3,613		$	(6,394	)	$	(703	)	$	36,428		$	2,910		$	30,034


	First Six Months						First Nine Months
	2012			2011			2012			2011
	(In thousands)						(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Consolidated net income (loss)	$	4,968		$	(6,030	)
Consolidated net income							$	4,588		$	30,935
Adjustments:
Depreciation and amortization		4,511			4,864			12,084			7,335
Deferred income taxes		(2,909	)		(7,000	)		(2,971	)		(11,013	)
Tax benefits not recognized for book purposes		76			95			114			144
Equity in (earnings) loss of unconsolidated ventures		(1,492	)		(984	)
Equity in (earnings) of unconsolidated ventures								(2,172	)		(1,632	)
Distributions of earnings of unconsolidated ventures		356			4,102			516			5,307
Distributions of earnings to noncontrolling interests		(1,173	)		(2,491	)		(1,434	)		(2,899	)
Reimbursed costs from unconsolidated ventures		10,759			—
Proceeds from consolidated venture’s sale of assets, net		24,294			—
Proceeds from consolidated ventures’ sale of assets, net								24,294			—
Non-cash share-based compensation		5,164			3,952			11,491			399
Non-cash real estate cost of sales		15,964			10,525			25,998			17,149
Non-cash cost of assets sold								—			24,931
Real estate development and acquisition expenditures, net		(52,505	)		(23,529	)		(67,127	)		(49,530	)
Acquisition of loan secured by real estate		—			(21,137	)		—			(21,137	)
Reimbursements from utility and improvement districts		937			1,790			2,922			2,270
Other changes in real estate		733			(5	)		835			(237	)
Gain on termination of timber lease		(234	)		(181	)
Cost of timber cut		411			524			868			856
Deferred income		1,864			947			927			345
Asset impairments		—			450			—			450
Gain on sale of assets		(15,076	)		—			(25,506	)		(181	)
Other		458			74			(35	)		115
Changes in:
Notes and accounts receivable		(242	)		530			(645	)		(464	)
Prepaid expenses and other		751			(239	)		1,300			581
Accounts payable and other accrued liabilities		(3,530	)		3,896			452			9,962
Income taxes		(6,078	)		(4,083	)		(7,283	)		19,130

Net cash provided by (used for) operating activities		(11,993	)		(33,930	)		(20,784	)		32,816
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, equipment, software and reforestation		(1,341	)		(899	)		(1,577	)		(1,466	)
Oil and natural gas properties and equipment		(2,264	)		(2,112	)		(2,794	)		(3,414	)
Investment in unconsolidated ventures		(1,430	)		(1,135	)		(1,684	)		(1,350	)
Return of investment in unconsolidated ventures		736			252			985			688
Proceeds from termination of timber lease		—			290			—			290
Proceeds from sale of property		—			103
Proceeds from sale of multifamily property								29,474			—
Proceeds from sale of property and equipment								—			103
Business acquisition, net of cash acquired								(152,073	)		—
Proceeds from sale of venture interest		32,095			—			32,095			—

Net cash provided by (used for) investing activities		27,796			(3,501	)		(95,574	)		(5,149	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of debt		(36,047	)		(37,043	)		(46,374	)		(104,750	)
Additions to debt		47,394			76,279			158,929			106,858
Deferred financing fees		(343	)		(1,379	)		(5,209	)		(3,746	)
Return of investment to noncontrolling interest		(69	)		(1	)		(69	)		(2	)
Exercise of stock options		1,182			1,167			1,269			1,171
Repurchases of common stock								—			(2,126	)
Payroll taxes on restricted stock and stock options		(1,151	)		(1,216	)		(1,171	)		(1,290	)
Tax benefit from share-based compensation		370			(110	)		373			(110	)
Other		52			83			606			83

Net cash provided by (used for) financing activities		11,388			37,780			108,354			(3,912	)

Net increase (decrease) in cash and cash equivalents		27,191			349			(8,004	)		23,755
Cash and cash equivalents at beginning of period		18,283			5,366			18,283			5,366

Cash and cash equivalents at end of period	$	45,474		$	5,715		$	10,279		$	29,121

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

We prepare our unaudited interim financial statements in accordance with U.S. generally accepted accounting principles and Securities and Exchange Commission requirements for interim financial statements. As a result, they do not include all the information and disclosures required for complete financial statements. However, in our opinion, all adjustments considered necessary for a fair presentation have been included. Such adjustments consist only of normal recurring items unless otherwise noted. We make estimates and assumptions about future events. Actual results can, and probably will, differ from those we currently estimate including those related to allocating cost of sales to real estate, minerals and fiber and measuring assets for impairment. These interim operating results are not necessarily indicative of the results that may be expected for the entire year. For further information, please read the financial statements included in our 2011 Annual Report on Form 10-K.

In first quarter 2012, we adopted Accounting Standards Update (ASU) 2011-04 —-Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSsand ASU
2011-05 —- Comprehensive Income (Topic 220): Presentation of Comprehensive Income. Adoption of these pronouncements did not affect our earnings or financial position.

~~Pending~~ ASU 2011-10 –Property, Plant, and Equipment: Derecognition of in Substance Real Estatewill be effective first quarter 2013. Under ASU 2011-10, when a parent ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, the reporting entity would continue to include the real estate, debt and results of the subsidiary’s operations in its consolidated financial statements until legal title to the real estate is transferred to legally satisfy the debt. The amendment should be applied prospectively to deconsolidation events occurring after the effective date. Adoption is not anticipated to have a significant effect on our earnings or financial position but may result in certain additional disclosures.

ASU 2012-02–Intangibles-Goodwill and Otherwill be effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The amendment provides entities with the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test, which is equivalent to the impairment testing requirements for other long-lived assets. Adoption is not anticipated to have a significant effect on our earnings or financial position.

On September 28, 2012, pursuant to the terms of the previously announced Agreement and Plan of Merger dated June 3, 2012, we acquired 100 percent of the outstanding common stock of CREDO Petroleum Corporation (Credo) in an all cash transaction for $14.50 per share, representing an equity purchase price of approximately $146,445,000. In addition, we paid in full $8,770,000 of Credo’s outstanding debt. In first nine months 2012, we have incurred approximately $5,709,000 in costs to outside advisors related to this transaction, which are included in general and administrative expenses. Third quarter 2012 mineral resource segment earnings associated with this acquisition were not significant.

The following summarizes the preliminary allocation of the purchase price to the fair value of assets acquired and liabilities assumed as of September 28, 2012. Due to closing the transaction on the last business day of the quarterly reporting period, the preliminary allocation is subject to change as we obtain additional information during the acquisition measurement period, in particular, the estimated value assigned to oil and natural gas properties and equipment, goodwill and deferred tax liability.


	Preliminary Purchase Price Allocation
	(In thousands)
Cash and short-term investments		$	2,300
Receivables			9,213
Oil and natural gas properties and equipment			139,907
Other properties and equipment			1,375
Goodwill and other intangible assets			55,954
Other			676

Total assets acquired			209,425

Accounts payable and accrued liabilities			26,626
Deferred tax liability			26,276
Other liabilities			1,308

Total liabilities assumed			54,210

Estimated fair value of net assets acquired		$	155,215

The following unaudited pro forma information for the third quarter and first nine months ended 2012 and 2011 represents the results of our consolidated operations as if the acquisition of Credo had occurred on January 1, 2011. This information is based on historical results of operations, adjusted for certain estimated accounting adjustments and does not purport to represent our actual results of operations if the transaction would have occurred on January 1, 2011, nor is it necessarily indicative of future results.

In first quarter 2012, we acquired from CL Realty, L.L.C. and Temco Associates, LLC, the ventures’ interest in 17 residential and mixed-use real estate projects for $47,000,000. Subsequent to closing of these acquisitions, we received $23,370,000 from the ventures, representing our pro-rata share of distributable cash. The purchase price was allocated to the acquired assets and liabilities based on their estimated fair value: $31,891,000 to real estate; $14,236,000 to investment in unconsolidated ventures; $1,385,000 to other assets; and $512,000 to liabilities directly related to the real estate acquired. Transaction costs of about $463,000 are included in other operating expense in first ~~six~~nine months 2012.

The acquired assets and operating results are included within our real estate segment and represented approximately 1,130 fully developed lots, 4,900 planned lots and over 460 commercial acres on the date of acquisition, principally in the major markets of Texas. Pro forma consolidated operating income (loss) assuming these acquisitions had occurred at the beginning of 2011 would not be significantly different than ~~those~~ reported.

On June 3, 2012, we entered into a definitive agreement to acquire CREDO Petroleum Corporation (Credo) in an all cash transaction for $14.50 per share, representing an equity purchase price of approximately $146,000,000. Closing is subject to customary conditions, including approval by Credo’s stockholders and, if approved, is expected to close in second half of 2012. We obtained a commitment for bridge financing that, combined with available liquidity, is sufficient to fund the acquisition. However, we intend to pursue amendments to our senior secured credit facility to fund a significant portion of the purchase price.

In second quarter 2012, we incurred $2,461,000 in costs to outside advisors related to this proposed transaction, which are included in general and administrative expenses. We estimate remaining transaction costs will be approximately $4,500,000.


	Second Quarter-End 2012			Year-End 2011			Third Quarter-End 2012				Year-End 2011
	(In thousands)						(In thousands)
Entitled, developed and under development projects	$	358,399		$	383,026			$	357,673			$	383,026
Undeveloped land		83,403			80,076				84,006				80,076
Commercial and income producing properties
Carrying value		128,203			129,220				94,239				129,220
Accumulated depreciation		(28,767	)		(26,955	)			(27,315	)			(26,955	)

Net carrying value		99,436			102,265				66,924				102,265

	$	541,238		$	565,367			$	508,603			$	565,367

Included in entitled, developed and under development projects are the estimated costs of assets we expect to convey to utility and improvement districts of ~~$53,053,000~~$53,834,000 at ~~second~~third quarter-end 2012 and $61,526,000 at year-end 2011, including ~~$34,402,000 in second~~$34,252,000 at third quarter-end 2012 and $34,802,000 at year-end 2011 related to our Cibolo Canyons project near San Antonio, Texas. These costs relate to water, sewer and other infrastructure assets we have submitted to utility or improvement districts for approval and reimbursement. In second quarter 2012, these costs decreased by $11,065,000 as result of a consolidated venture’s sale of approximately 800 acres near Dallas. We submitted for reimbursement to these districts ~~$2,350,000~~$4,345,000 in first ~~six~~nine months 2012 and $2,336,000 in first ~~six~~nine months 2011. We received ~~$637,000~~$972,000 from these districts in first ~~six~~nine months 2012 and $187,000 in first ~~six~~nine months 2011. We expect to collect the remaining amounts billed ~~when~~as these districts achieve adequate tax bases to support payment.

Also included in entitled, developed and under development projects is our investment in the resort development owned by third parties at our Cibolo Canyons project. We received ~~$300,000~~$1,950,000 in ~~second quarter~~first nine months 2012 and ~~$1,603,000~~$2,083,000 in ~~second quarter~~first nine months 2011 from the Special Improvement District (SID) related to hotel occupancy revenues and other revenues from resort sales collected as taxes by the SID. We currently account for these receipts as a reduction of our investment. At ~~second-quarter-end~~third-quarter-end 2012, we have ~~$35,067,000~~$33,418,000 invested in the resort development.

In first quarter 2012, entitled, developed and under development projects increased by $31,891,000 as a result of our acquisition of certain residential and mixed-use projects from CL Realty and Temco. Please readNote 3 for additional information. In second quarter 2012, entitled, developed and under development projects decreased by $51,493,000 as result of a consolidated venture’s sale of approximately 800 acres (Light Farms Project) near Dallas. We received $24,294,000 in net proceeds, the buyer assumed the outstanding debt of $30,991,000 and we recognized a gain on sale of $3,401,000.

In third quarter 2012, commercial and income producing properties decreased by $45,794,000 as result of selling Broadstone Memorial, a 401 unit multifamily project in Houston for $56,400,000. We received $29,474,000 in net proceeds, the buyer assumed outstanding debt of $26,500,000, and we recognized a gain on sale of $10,180,000. At ~~second~~third quarter-end 2012, commercial and income producing properties primarily represents our investment in a ~~401 unit multifamily property in Houston with a carrying value of $46,001,000, a~~ 413 room hotel in Austin with a carrying value of ~~$20,480,000~~$20,098,000 and a 289 unit multifamily project in Austin, currently under construction, with a carrying value of ~~$29,011,000.~~$30,014,000. In first ~~six~~nine months 2012, we invested ~~$14,341,000~~$16,809,000 in construction costs associated with this multifamily property and the estimated cost to complete construction is approximately ~~$4,854,000.~~$1,643,000.

Depreciation expense, primarily related to commercial and income producing properties, was ~~$1,812,000~~$2,736,000 in first ~~six~~nine months 2012 and ~~$1,760,000~~$2,650,000 in first ~~six~~nine months 2011 and is included in other operating expenses.

We own directly or through ventures about 129,000 acres of timber, primarily in Georgia, and about 17,000 acres of timber under lease. The non-cash cost of timber cut and sold was ~~$411,000~~$868,000 in first ~~six~~nine months 2012 and ~~$524,000~~$856,000 in first ~~six~~nine months 2011.

A reconciliation of changes in shareholders’ equity at ~~second~~third quarter-end 2012 follows:


	Forestar Group Inc.		Noncontrolling Interests			Total			Forestar Group Inc.		Noncontrolling Interests			Total
	(In thousands)								(In thousands)
Balance at year-end 2011	$	509,526	$	1,686		$	511,212		$	509,526	$	1,686		$	511,212
Net income		3,613		1,355			4,968			2,910		1,678			4,588
Distributions to noncontrolling interests		—		(1,243	)		(1,243	)		—		(1,504	)		(1,504	)
Contributions from noncontrolling interests		—		225			225			—		779			779
Other (primarily share-based compensation)		4,433		—			4,433			6,540		(354	)		6,186
													��
Balance at second quarter-end 2012	$	517,572	$	2,023		$	519,595
Balance at third quarter-end 2012									$	518,976	$	2,285		$	521,261

In first ~~six~~nine months 2012, we issued ~~110,871~~66,320 shares of our common stock as a result of stock option exercises and vesting of equity-settled restricted stock ~~units.~~units, net of shares withheld for taxes.

At ~~second~~third quarter-end 2012, we had ownership interests in 13 ventures that we account for using the equity method. We have no real estate ventures that are accounted for using the cost method.

Ÿ• CJUF III, RH Holdings, LP was formed with Canyon-Johnson Urban Funds (CJUF) to develop a 257 unit multifamily property overlooking downtown Austin. We own a 25 percent interest and CJUF owns the remaining 75 percent interest. We contributed land and pre-development costs to the venture and received reimbursements of $3,718,000 from the ~~venture, which represents CJUF’s pro-rata share and is included in operating activities in the statement of cash flows.~~venture. The venture obtained a senior secured construction loan in the amount of $23,936,000 that bears interest at LIBOR plus 2 percent with no significant balance outstanding at ~~second~~third quarter-end 2012. The loan has an initial term of 36 months and may be extended for two additional 12-month periods if certain conditions are met. We have a guaranty of completion of the improvements, a repayment ~~guaranty~~guarantee for 20 percent of principal balance and unpaid accrued interest and a standard non-recourse carve-out guaranty. The repayment ~~guaranty~~guarantee will reduce from 20 percent to 0 percent upon achievement of certain conditions. At ~~second~~third quarter-end 2012, our investment in this venture is $4,077,000.

Ÿ• FMF Peakview, LLC was formed with Guggenheim Real Estate, LLC (Guggenheim) to develop a 304 unit multifamily property in Denver. We own a 20 percent interest and Guggenheim owns the remaining 80 percent interest. We contributed land and pre-development costs to the venture and received reimbursements of $7,243,000 from the ~~venture, which represents Guggenheim’s pro-rata share and is included in operating activities in the statement of cash flows.~~venture. The venture obtained a senior secured construction loan in the amount of $31,550,000 that bears interest at LIBOR plus 2.25 percent with no balance outstanding at ~~second~~third quarter-end 2012. The loan has an initial term of 36 months and may be extended for two additional 12-month periods if certain conditions are met. We have a guaranty of completion of the improvements, a repayment ~~guaranty~~guarantee for 25 percent of principal and unpaid accrued interest and a standard non-recourse carve-out guaranty. At ~~second~~third quarter-end 2012, our investment in this venture is ~~$1,926,000.~~$2,143,000.

In first quarter 2012, we acquired from CL Realty and Temco their interest in 17 residential and mixed-use projects for $47,000,000, principally representing $31,891,000 in real estate and $14,236,000 in investment in unconsolidated ventures. Please readNote 3 for additional information. Also in first quarter 2012, we sold our 25 percent interest in Palisades West LLC, which owns two office buildings and an accompanying parking garage in Austin for $32,095,000, resulting in a gain on sale of $11,675,000.

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


	Venture Assets				Venture Borrowings^(a)				Venture Equity						Our Investment						Venture Assets				Venture Borrowings^(a)				Venture Equity						Our Investment
	Second Quarter-End 2012		Year-End 2011		Second Quarter-End 2012		Year-End 2011		Second Quarter-End 2012			Year-End 2011			Second Quarter-End 2012			Year-End 2011			Third Quarter- End 2012		Year-End 2011		Third Quarter- End 2012		Year-End 2011		Third Quarter- End 2012			Year-End 2011			Third Quarter-End 2012			Year-End 2011
	(In thousands)																				(In thousands)
242, LLC^(b)	$	21,799	$	23,688	$	2,221	$	4,429	$	18,725		$	18,536		$	8,447		$	8,332		$	21,356	$	23,688	$	1,512	$	4,429	$	18,888		$	18,536		$	8,540		$	8,332
CJUF III, RH Holdings		9,096		—		1		—		8,582			—			4,077			—			11,336		—		1		—		10,175			—			4,077			—
CL Ashton Woods^(c)		17,036		—		—		—		16,833			—			6,675			—			17,530		—		—		—		17,030			—			7,024			—
CL Realty		7,761		51,096		—		1,056		7,519			48,608			3,760			24,304			7,970		51,096		—		1,056		7,624			48,608			3,812			24,304
FMF Peakview		9,629		—		—		—		9,629			—			1,926			—			10,883		—		—		—		10,716			—			2,143			—
HM Stonewall Estates^(c)		5,561		—		617		—		4,945			—			2,457			—			5,243		—		316		—		4,932			—			2,354			—
LM Land Holdings^(c)		17,649		—		2,090		—		12,422			—			5,955			—			18,645		—		2,668		—		12,943			—			5,938			—
Palisades West		—		124,588		—		—		—			81,635			—			20,412			—		124,588		—		—		—			81,635			—			20,412
Round Rock Luxury Apartments		33,448		34,434		28,382		28,544		4,403			4,865			2,992			3,312			33,247		34,434		28,301		28,544		4,207			4,865			2,856			3,312
Temco		13,192		18,922		—		2,787		12,921			15,896			6,460			7,948			13,250		18,922		—		2,787		12,902			15,896			6,451			7,948
Other ventures (4)^{(b) (d)}		17,520		16,938		38,222		38,002		(33,914	)		(34,045	)		(422	)		(85	)		17,278		16,938		37,923		38,002		(34,090	)		(34,045	)		(154	)		(85	)

	$	152,691	$	269,666	$	71,533	$	74,818	$	62,065		$	135,495		$	42,327		$	64,223		$	156,738	$	269,666	$	70,721	$	74,818	$	65,327		$	135,495		$	43,041		$	64,223

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


	Revenues								Earnings (Loss)												Our share of earnings (loss)												Revenues								Earnings (Loss)												Our share of earnings (loss)
	Second Quarter				First Six Months				Second Quarter						First Six Months						Second Quarter						First Six Months						Third Quarter				First Nine Months				Third Quarter						First Nine Months						Third Quarter						First Nine Months
	2012		2011		2012		2011		2012			2011			2012			2011			2012			2011			2012			2011			2012		2011		2012		2011		2012			2011			2012			2011			2012			2011			2012			2011
	(In thousands)																																(In thousands)
242, LLC^(b)	$	942	$	463	$	1,853	$	463	$	131		$	61		$	189		$	(4	)	$	76		$	31		$	115		$	(2	)	$	1,072	$	957	$	2,925	$	1,420	$	163		$	128		$	352		$	124		$	93		$	64		$	208		$	62
CJUF III, RH Holdings		—		—		—		—		—			—			—			—			—			—			—			—			—		—		—		—		—			—			—			—			—			—			—			—
CL Ashton Woods^(c)		794		—		1,349		—		113			—			261			—			277			—			524			—			740		—		2,089		—		197			—			458						350			—			874			—
CL Realty		329		1,649		1,996		3,518		184			734			736			1,390			92			367			368			695			298		2,290		2,294		5,808		104			1,091			840			2,481			52			571			420			1,266
FMF Peakview		—		—		—		—		—			—			—			—			—			—			—			—			—		—		—		—		—			—			—			—			—			—			—			—
HM Stonewall Estates^(c)		1,170		—		1,170		—		410			—			397			—			167			—			159			—			526		—		1,696		—		146			—			543			—			57			—			216			—
LM Land Holdings^(c)		1,428		—		3,270		—		172			—			867			—			(18	)		—			167			—			1,700		—		4,970		—		340			—			1,207			—			(16	)		—			151			—
Palisades West		—		4,084		—		8,114		—			1,455			—			2,911			—			364			—			728			—		4,142		—		12,256		—			1,461			—			4,372			—			365			—			1,093
Round Rock Luxury Apartments		1,158		959		2,282		1,968		19			(143	)		32			(210	)		18			(142	)		32			(119	)		1,179		1,420		3,461		3,388		50			(157	)		82			(367	)		25			(90	)		57			(209	)
Temco		60		288		500		346		(64	)		(212	)		(122	)		(416	)		(32	)		(106	)		(61	)		(208	)		60		89		560		435		(18	)		(366	)		(142	)		(782	)		(9	)		(183	)		(71	)		(391	)
Other ventures (4)		351		2,694		597		3,234		(79	)		(1,180	)		(439	)		(1,918	)		188			(112	)		188			(110	)		467		301		1,064		3,535		(224	)		(583	)		(661	)		(2,501	)		128			(79	)		317			(189	)

	$	6,232	$	10,137	$	13,017	$	17,643	$	886		$	715		$	1,921		$	1,753		$	768		$	402		$	1,492		$	984		$	6,042	$	9,199	$	19,059	$	26,842	$	758		$	1,574		$	2,679		$	3,327		$	680		$	648		$	2,172		$	1,632

In first ~~six~~nine months 2012, we invested ~~$1,430,000~~$1,684,000 in these ventures and received ~~$1,092,000~~$1,501,000 in distributions; in first ~~six~~nine months 2011, we invested ~~$1,135,000~~$1,350,000 in these ventures and received ~~$4,354,000~~$5,995,000 in distributions. Distributions include both return of investments and distributions of earnings.

We may provide performance bonds and letters of credit on behalf of certain ventures that would be drawn on due to failure to satisfy construction obligations as general contractor or for failure to timely deliver streets and utilities in accordance with local codes and ordinances. At ~~second~~third quarter-end 2012, we have ~~$26,929,000~~$26,888,000 outstanding, of which $26,577,000 is related to the development and construction of a 257 unit multifamily property in Austin.


	Second Quarter-End 2012			Year-End 2011			Third Quarter-End 2012				Year-End 2011
	(In thousands)						(In thousands)
Loan secured by real estate and accrued interest	$	19,074		$	20,666
Notes receivable, average interest rates of 7.34% at second quarter-end 2012 and 7.16% at year-end 2011		2,593			1,817
Loan secured by real estate								$	19,063			$	20,666
Notes receivable, average interest rates of 5.65% at third quarter-end 2012 and 7.16% at year-end 2011									668				1,817
Receivables and accrued interest		1,975			860				13,536				860

		23,642			23,343				33,267				23,343
Allowance for bad debts		(62	)		(62	)			(62	)			(62	)

	$	23,580		$	23,281			$	33,205			$	23,281

At ~~second~~third quarter-end 2012, we have ~~$19,074,000~~$19,063,000 invested in a loan secured by real estate. The loan was acquired from a financial institution in 2011 when it was non-performing and is secured by a lien on developed and undeveloped real estate located near Houston designated for single-family residential and commercial development. In second quarter 2012, an approved bankruptcy plan of reorganization of the borrower became effective establishing a principal amount of $33,900,000 maturing in April 2017. Per the terms of the agreement, interest accrues at 9 percent the first three years escalating to 10 percent in year four and 12 percent in year five, with interest above 6.25 percent to be forgiven if the loan is prepaid by certain dates. Commencing with the reorganization, we estimate future cash flows and calculate accretable yield to be recognized over the term of the loan, which is included in other non-operating income. In ~~second quarter~~first nine months 2012, we received principal payments of ~~$2,133,000~~$2,704,000 and interest payments of ~~$653,000.~~$1,148,000. At ~~second~~third quarter-end 2012, the outstanding principal balance was ~~$31,767,000.~~$31,196,000.

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

Receivables and accrued interest principally include miscellaneous operating receivables arising in the normal course of business. In third quarter 2012, receivables increased by approximately $9,213,000 as a result of our acquisition of Credo.


	Second Quarter-End 2012		Year-End 2011		Third Quarter-End 2012			Year-End 2011
	(In thousands)				(In thousands)
Senior secured credit facility
Term loan facility — average interest rate of 6.50% at second quarter-end 2012 and year-end 2011	$	130,000	$	130,000
Secured promissory notes — average interest rate of 3.95% at second quarter-end 2012 and 4.34% at year-end 2011		52,507		41,900
Term loan facility — average interest rate of 4.22% at third quarter-end 2012 and 6.50% at year-end 2011						$	200,000		$	130,000
Revolving line of credit — average interest rate of 6.25% at third quarter-end 2012							27,000			—
Secured promissory notes — average interest rate of 2.85% at third quarter-end 2012 and 4.34% at year-end 2011							31,390			41,900
Other indebtedness due through 2017 at variable and fixed interest rates ranging from 5.00% to 8.00%		19,436		49,687			18,261			49,687

	$	201,943	$	221,587		$	276,651		$	221,587

Our debt agreements contain financial covenants customary for such agreements including minimum levels of interest coverage and limitations on leverage. At ~~second~~third quarter-end 2012, we were in compliance with the financial covenants of these agreements.

On September 14, 2012, we entered into a Second Amended and Restated Revolving and Term Credit Agreement in order to consolidate previous amendments and to effect the following principal amendments to: increase the term loan commitment from $130,000,000 to $200,000,000; extend the maturity date of the revolving loan to September 14, 2015 (with a one-year extension option) and of the term loan to September 14, 2017; reduce the interest rate spread over LIBOR from 4.5 percent to 4.0 percent, and eliminate the LIBOR rate floor of 2 percent; increase the minimum interest coverage ratio from 1.05x to 1.50x; reduce the unused fee rate from 0.45 percent per annum to 0.25 percent – 0.35 percent per annum based on usage; and eliminate the minimum value to commitment ratio covenant and replace it with a reduction to the borrowing base to the extent the ratio of the value of assets in the borrowing base to the aggregate commitments under the facility is less than 1.50x.We incurred fees of $5,059,000 related to this amendment. The amendment and restatement of the term loan was an extinguishment of debt under the accounting guidance and, as result, we recognized a $4,448,000 loss in third quarter 2012 which is included in interest expense.

On September 28, 2012 we acquired 100 percent of the outstanding stock of Credo in an all cash transaction for $14.50 per share, representing an equity purchase price of approximately $146,445,000. In addition, we paid in full $8,770,000 of Credo’s outstanding debt. This transaction was funded with approximately $70,000,000 in borrowings from our term loan, $35,000,000 in borrowings from our revolving line of credit, and the remaining paid from our existing balance of cash and short-term investments.

At ~~second~~third quarter-end 2012, our senior secured credit facility provides for a ~~$130,000,000~~$200,000,000 term loan ~~maturing August 6, 2015~~ and a $200,000,000 revolving line of ~~credit maturing August 6, 2014.~~credit. The ~~term loan and the~~ revolving line of credit may be prepaid at any time without penalty. The term loan includes a prepayment fee of one percent if prepaid prior to March 14, 2013. The revolving line of credit includes a $100,000,000 sublimit for letters of credit, of which ~~$2,558,000~~$2,604,000 is outstanding at ~~second~~third quarter-end 2012. Total borrowings under our senior secured credit facility (including the face amount of letters of credit) may not exceed a borrowing base formula. At ~~second~~third quarter-end 2012, we had ~~$145,507,000~~$170,396,000 in net unused borrowing capacity under our senior secured credit facility.

AtUnder the terms of the amended and restated credit agreement, at our option, we can borrow at LIBOR plus ~~4.5~~4.0 percent ~~(subject to a 2~~or at the alternate base rate plus 3.0 percent. The alternate base rate is the highest of (i) KeyBank National Association’s base rate, (ii) the federal funds effective rate plus 0.5 percent or (iii) 30 day LIBOR ~~floor) or prime~~ plus ~~2.5~~1 percent. Borrowings under the senior secured credit facility are or may be secured by (a) ~~all~~mortgages on the timberland, ~~land in entitlement process, minerals~~high value timberland and ~~certain~~ raw entitled land, as well as pledges of other rights including certain oil and gas properties, (b) assignments of current and future leases, rents and contracts, ~~including our mineral leases,~~ (c) a security interest in our primary operating account, (d) a pledge of the equity interests in current and future material operating subsidiaries or majority-owned joint venture interests, or if such pledge is not permitted, a pledge of the right to distributions from such entities, (e) a pledge of reimbursements, hotel occupancy and other revenues payable to ~~the extent permitted,~~us from special improvement district tax collections in connection with our Cibolo Canyons project, and ~~(e)~~(f) a negative pledge (without a mortgage) on ~~all~~ other ~~wholly-owned~~ assets. The senior secured credit facility provides for releases of real estate provided that borrowing base compliance is maintained.

At ~~second~~third quarter-end 2012, secured promissory notes ~~include a $26,500,000 non-recourse loan collateralized by a 401 unit multifamily project located in Houston with a carrying value of $46,001,000. This secured promissory note~~ includes a prepayment penalty for payments prior to July 1, 2017 and no prepayment penalty thereafter. The prepayment penalty is based on the difference between the fixed annual note rate of 4.94 percent and the assumed reinvestment rate based on the five-year treasury constant maturity rate. Secured promissory notes also include a $15,400,000 loan collateralized by a 413 guest room hotel located in Austin with a carrying value of ~~$20,480,000~~$20,098,000 and a ~~$10,607,000~~$15,990,000 construction loan collateralized by a 289 unit multifamily project (currently under construction) located in Austin with a carrying value of ~~$29,011,000. The multifamily~~$30,014,000. This loan will provide up to $19,550,000 in construction ~~financing.~~financing for this project.

At ~~second~~third quarter-end 2012, other indebtedness, principally non-recourse, is collateralized by entitled, developed and under development projects with a carrying value of ~~$61,241,000.~~$64,781,000. In third quarter 2012, other indebtedness decreased by $26,500,000 as result of selling of Broadstone Memorial, a 401 unit multifamily project in Houston. We received $29,474,000 in net proceeds, the buyer assumed the outstanding debt, and we recognized a gain on sale of $10,180,000. In second quarter 2012, other indebtedness decreased by $30,991,000 as result of a consolidated venture’s sale of approximately 800 acres (Light Farms Project) near Dallas. We received $24,294,000 in net ~~proceeds,~~proceeds; the buyer assumed the outstanding debt and we recognized a gain on sale of $3,401,000.

At ~~second~~third quarter-end 2012, we have ~~$6,902,000~~$6,471,000 in unamortized deferred financing fees which are included in other assets. Amortization of deferred financing fees, excluding loss on extinguishment of debt, was ~~$1,441,000~~$2,290,000 in first ~~six~~nine months 2012 and ~~$1,472,000~~$2,161,000 in first ~~six~~nine months 2011 and is included in interest expense.

Non-financial assets measured at fair value on a non-recurring basis principally include real estate assets, assets held for sale, goodwill and other intangible assets, which are measured for impairment. In ~~second~~third quarter 2012 and 2011, no non-financial assets were remeasured at fair value.

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

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


	Second Quarter-End 2012						Year-End 2011
	Carrying			Fair			Carrying			Fair			Valuation		Third Quarter-End 2012						Year-End 2011
	Amount			Value			Amount			Value			Technique		Carrying Amount			Fair Value			Carrying Amount			Fair Value			Valuation Technique
	(In thousands)														(In thousands)
Loan secured by real estate	$	19,074		$	37,782		$	20,666		$	—	^(a)		Level 2	$	19,063		$	37,713		$	20,666		$	—	^(a)		Level 2
Fixed rate debt	$	(29,931	)	$	(32,477	)	$	(29,931	)	$	(32,478	)		Level 2	$	(3,431	)	$	(3,557	)	$	(29,931	)	$	(32,478	)		Level 2

Pursuant to our stockholder rights plan, each share of common stock outstanding is coupled with one-quarter of a preferred stock purchase right (Right). Each Right entitles our stockholders 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 readNote 17 for information about additional shares of common stock that could be issued under terms of our share-based compensation plans.

As a result of the 2007 spin-offs from Temple-Inland, at ~~second~~third quarter-end 2012, personnel of Temple-Inland and the other spin-off entity held options to purchase ~~980,000~~969,000 shares of our common stock. The options have a weighted average exercise price of ~~$22.50~~$22.59 per share and a weighted average remaining contractual term of three years. At ~~second~~third quarter-end 2012, the options have an aggregate intrinsic value of ~~$418,000.~~$1,042,000.

Earnings attributable to common shareholders and weighted average common shares outstanding used to compute earnings per share were:


	Second Quarter						First Six Months						Third Quarter						First Nine Months
	2012			2011			2012			2011			2012			2011			2012			2011
	(In thousands)												(In thousands)
Earnings (loss) available to common shareholders:
Consolidated net income (loss)	$	1,471		$	(4,326	)	$	4,968		$	(6,030	)	$	(380	)	$	36,965		$	4,588		$	30,935
Less: Net (income) loss attributable to noncontrolling interest		(660	)		405			(1,355	)		(364	)		(323	)		(537	)		(1,678	)		(901	)

Net income (loss) attributable to Forestar Group Inc.	$	811		$	(3,921	)	$	3,613		$	(6,394	)	$	(703	)	$	36,428		$	2,910		$	30,034

Weighted average common shares outstanding — basic		35,235			35,524			35,190			35,466			35,233			35,514			35,204			35,482
Dilutive effect of stock options, restricted stock and equity-settled awards		190			—			222			—			—			282			233			395

Weighted average common shares outstanding — diluted		35,425			35,524			35,412			35,466			35,233			35,796			35,437			35,877

Anti-dilutive awards excluded from diluted weighted average shares outstanding		2,712			3,182			2,530			3,182			2,661			2,250			2,582			1,998

Our effective tax rate was 33a 74 percent benefit in ~~second~~third quarter 2012 and 3222 percent expense in first ~~six~~nine months 2012, which includes a 310 percent benefit for noncontrolling interests. In addition, our third quarter and first nine months 2012 effective tax rates included a non-cash benefit of 38 percent and nine percent respectively associated with state deferred tax rate changes due to our acquisition of Credo and operating in more states. Our effective tax rate was ~~a benefit of 40~~35 percent in ~~second~~third quarter 2011 and ~~a 37~~34 percent ~~benefit~~ in first ~~six~~nine months 2011, which includes a 2one percent benefit for noncontrolling interests and one percent non-cash charge for share-based compensation. In addition, 2012 and 2011 effective tax rates include the effect of state income taxes, nondeductible items and benefits of percentage ~~depletion.~~depletion while the 2011 effective tax rate also includes the benefits of charitable contributions related to timberlands.

We acquired Credo in third quarter 2012 and as a result, we recorded an estimated deferred tax liability of $26,276,000 principally representing the excess of the fair value allocated to oil and gas properties at closing over the carry-over tax basis received at our estimated effective tax rate. Goodwill associated with our acquisition of Credo is not deductible for income tax purposes.

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

At ~~second~~third quarter-end 2012, our unrecognized tax benefits totaled ~~$6,175,000,~~$6,213,000, all of which would affect our effective tax rate if recognized.

In connection with our definitive agreement to acquire Credo, four purported class action lawsuits and one lawsuit that seeks certification as a class action have been filed against Credo, its board of directors and us. These actions generally allege that Credo and its board of directors breached fiduciary duties to Credo stockholders with respect to the ~~proposed~~ transaction. The five actions also allege that we aided and abetted the alleged breaches. The plaintiffs’ allegations include that the consideration ~~to be~~ paid ~~pursuant to the definitive agreement~~ to acquire Credo is inadequate. ~~They seek remedies~~Two of the five cases were voluntarily dismissed. On September 14, 2012, parties to the Delaware actions entered into a memorandum of understanding (MOU) to settle those actions. The MOU is contingent on confirmatory discovery and court approval of the settlement. The MOU provides that in consideration of supplemental disclosures filed by Credo with the SEC on September 14, 2012, the final settlement will include ~~enjoining~~a release of all asserted claims. The MOU does not include one case pending in Colorado, but the ~~defendants from consummating~~settlement, if approved by the ~~proposed transaction and directing Credo’s directors to exercise their fiduciary duties to obtain a transaction that is~~Delaware Court of Chancery, would release the claims asserted in the ~~best interests of the Credo stockholders.~~Colorado action. We believe that the claims in all cases are ~~entirely~~ without merit and intend to defend the actions vigorously.

Credo has filed a lawsuit for declaratory judgment regarding its contract rights under two agreements with a third party that in the aggregate involve five to ten percent of Credo’s participating interest in most of its leases in North Dakota. The third party has asserted certain counterclaims. We believe that the counterclaims are without merit and intend to defend them vigorously.

We are involved in various other 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 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 that we can reasonably estimate. We own 288 acres near Antioch, California, portions of which were sites of a former Temple-Inland paper manufacturing operation that are in remediation. We have received certificates of completion on all but one 80 acre tract, a portion of which includes subsurface contamination. We estimate the cost to complete remediation activities will be approximately ~~$2,211,000,~~$2,199,000, which is included in other accrued expenses. It is possible that remediation or monitoring activities could be required in addition to those included within our estimate, but we are unable to determine the scope, timing or extent of such activities.

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

On September 28, 2012, we acquired Credo and as a result, we allocated approximately $209,425,000 in assets to our mineral resources segment related to this transaction. Third quarter 2012 mineral resources segment earnings associated with this acquisition were not significant.

We evaluate performance based on segment earnings (loss) before unallocated items and income taxes. Segment earnings (loss) consist of operating income, equity in earnings (loss) of unconsolidated ventures, gain on sale of assets, ~~yield accretion~~interest income on loans secured by real estate and net (income) loss attributable to noncontrolling interests. Items not allocated to our business segments consist of general and administrative expense, share-based compensation, gain on sale of strategic timberland, interest expense and other corporate non-operating income and expense. The accounting policies of the segments are the same as those described in the accounting policy note to the consolidated financial statements. Our revenues are derived from our U.S. operations and all of our assets are located in the U.S. In ~~second~~third quarter 2012, no single customer accounted for more than 10 percent of our total revenues.


	Second Quarter						First Six Months						Third Quarter						First Nine Months
	2012			2011			2012			2011			2012			2011			2012			2011
	(In thousands)												(In thousands)
Revenues:
Real estate	$	26,647		$	19,615		$	44,569		$	40,754		$	27,115		$	19,060		$	71,684		$	59,814
Mineral resources		7,148			4,580			16,574			11,913			10,479			5,871			27,053			17,784
Fiber resources		1,517			1,290			2,261			2,658			3,016			1,310			5,277			3,968

Total revenues	$	35,312		$	25,485		$	63,404		$	55,325		$	40,610		$	26,241		$	104,014		$	81,566

Segment earnings:
Real estate	$	7,666		$	1,007		$	19,243		$	3,582		$	12,688		$	(4,266	)	$	31,931		$	(684	)
Mineral resources		3,953			3,102			9,828			8,700			6,091			3,592			15,919			12,292
Fiber resources		594			704			984			1,344			1,798			446			2,782			1,790

Total segment earnings		12,213			4,813			30,055			13,626			20,577			(228	)		50,632			13,398
Items not allocated to segments^(a)		(10,670	)		(11,562	)		(24,090	)		(23,560	)		(22,358	)		56,265			(46,448	)		32,705

Income (loss) before taxes attributable to Forestar Group Inc.	$	1,543		$	(6,749	)	$	5,965		$	(9,934	)	$	(1,781	)	$	56,037		$	4,184		$	46,103

In third quarter and first nine months 2012, general and administrative expense includes $3,248,000 and $5,709,000 in transaction costs associated with our September 28, 2012 acquisition of Credo. In third quarter and first nine months 2011, general and administrative expense includes $459,000 and $3,187,000 associated with proposed private debt offerings that we withdrew as a result of deterioration of the terms available to us in the capital markets.

Third quarter and first nine months 2012 share-based compensation expense increased as a result of increase in our stock price and the impact on cash-settled awards.

In third quarter 2011, gain on sale of assets represents the gain from selling 57,000 acres of timberland in Georgia, Alabama and Texas for $87,061,000.

In third quarter 2012, interest expense includes a $4,448,000 loss on extinguishment of debt associated with the amendment and restatement of our term loan on September 14, 2012.

At ~~second quarter-end~~third quarter 2012, we are the primary beneficiary of ~~two VIEs~~one VIE that we consolidate. We have provided the majority of equity to ~~these VIEs,~~this VIE, which absent our contributions or advances dodoes not have sufficient equity to fund ~~their~~its operations. We have the authority to approve project budgets and the issuance of additional debt. At ~~second~~third quarter-end 2012, our consolidated balance sheet includes ~~$14,805,000 in assets, principally real estate, and $2,240,000~~$1,342,000 in liabilities related to ~~these two VIEs.~~this VIE. In ~~second quarter~~first nine months 2012, we contributed or advanced ~~$628,000~~$1,000 to ~~these VIEs.~~this VIE.

Also at ~~second~~third quarter-end 2012, we are not the primary beneficiary of three VIEs that we account for using the equity method. The unrelated managing partners oversee day-to-day operations and guarantee some of the debt of the VIEs while we have the authority to approve project budgets and the issuance of additional debt. Although some of the debt is guaranteed by the managing partners, we may under certain circumstances elect or be required to provide additional funds to these VIEs. At ~~second~~third quarter-end 2012, these three VIEs have total assets of ~~$48,885,000,~~$48,849,000, substantially all of which represent developed and undeveloped real estate and total liabilities of ~~$79,764,000,~~$80,283,000, which includes ~~$63,481,000~~$63,624,000 of borrowings classified as current maturities. These amounts are included in unconsolidated ventures in the combined summarized balance sheet information accounted for using the equity ~~method. Please read~~method inNote 7. At ~~second~~third quarter-end 2012, our investment in these three VIEs is ~~$1,678,000~~$1,497,000 and is included in investment in unconsolidated ventures. In first ~~six~~nine months 2012, we contributed or advanced ~~$74,000~~$111,000 to these VIEs. Our maximum exposure to loss related to these VIEs is estimated at ~~$34,600,000,~~$34,400,000, which exceeds our investment as we have a nominal general partner interest in two of these VIEs and could be held responsible for their liabilities. The maximum exposure to loss represents the maximum loss that we could be required to recognize assuming all the ventures’ assets (principally real estate) are worthless, without consideration of the probability of a loss or of any actions we may take to mitigate any such loss.

Third quarter and first nine months 2012 share-based compensation expense increased principally as a result of an increase in our stock price and the impact on cash-settled vested awards.


	Second Quarter						First Six Months				Third Quarter					First Nine Months
	2012			2011			2012		2011		2012		2011			2012		2011
	(In thousands)										(In thousands)
General and administrative expense	$	(371	)	$	(232	)	$	2,230	$	1,823	$	3,298	$	(2,057	)	$	5,528	$	(234	)
Other operating expense		304			84			2,934		2,129		3,029		(1,496	)		5,963		633

	$	(67	)	$	(148	)	$	5,164	$	3,952	$	6,327	$	(3,553	)	$	11,491	$	399

The fair value of awards granted to retirement eligible employees and expensed at the date of grant was $595,000 in first ~~six~~nine months 2012 and $654,000 in first ~~six~~nine months 2011. Unrecognized share-based compensation expense related to non-vested equity-settled awards, restricted stock and stock options is ~~$10,968,000~~$9,530,000 at ~~second~~third quarter-end 2012. The weighted average period over which this amount will be recognized is estimated to be two years. We did not capitalize any share-based compensation in first ~~six~~nine months 2012 or 2011.

In first ~~six~~nine months 2012, we withheld ~~71,082~~72,199 shares having a value of ~~$1,151,000~~$1,171,000 in connection with vesting of restricted stock awards and exercises of stock options. In first ~~six~~nine months 2011, we withheld ~~64,437~~70,539 shares having a value of ~~$1,216,000~~$1,290,000 in connection with vesting of restricted stock awards and exercises of stock options. These shares are included in treasury stock and are reflected in financing activities in our consolidated statement of cash flows.

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

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

The following table summarizes the activity of cash-settled restricted stock unit awards in first ~~six~~nine months 2012:

The following table summarizes the activity of cash-settled stock appreciation rights in first ~~six~~nine months 2012:


	Rights Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value (Current Value Less Exercise Price)		Rights Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value (Current Value Less Exercise Price)
	(In thousands)			(Per share)		(In years)		(In thousands)		(In thousands)			(Per share)		(In years)		(In thousands)
Balance at beginning of year		895		$	11.31		7	$	3,986		895		$	11.31		7	$	3,986
Granted		—			—						—			—
Exercised		(11	)		9.29						(22	)		9.29
Forfeited		—			—						—			—

Balance at end of period		884		$	11.33		7	$	2,365		873		$	11.36		7	$	4,870

Exercisable at end of period		607		$	10.80		7	$	1,757		625		$	10.88		7	$	3,744

The fair value of awards settled in cash was ~~$4,710,000~~$5,254,000 in first ~~six~~nine months 2012 and $184,000 in first ~~six~~nine months 2011. At ~~second~~third quarter-end 2012, the fair value of vested cash-settled awards is ~~$13,291,000~~$17,239,000 and is included in other liabilities. The aggregate current value of non-vested cash-settled awards is ~~$5,081,000~~$9,559,000 at ~~second~~third quarter-end 2012 based on a quarter-end stock price of ~~$12.81.~~$16.66.

Equity-settled awards granted to our employees include restricted stock units (RSU), which vest ratably over three years from the date of grant, and market-leveraged stock units (MSU), which vest after three years. Equity settled awards in the form of restricted stock units granted to our directors are fully vested at time of grant and payable upon retirement. The following table summarizes the activity of equity-settled awards in first ~~six~~nine months 2012:

In first quarter 2012, we granted 154,900 MSU awards. These awards will be settled in common stock based upon our stock price performance over three years from the date of grant. The number of shares to be issued could range from a high of 232,370 shares if our stock price increases by 50 percent or more, to a low of 77,460 shares if our stock price decreases by 50 percent, or could be zero if our stock price decreases by more than 50 percent, the minimum threshold performance. MSU awards are valued using a Monte Carlo simulation pricing model, which includes expected stock price volatility and risk-free interest rate assumptions. Compensation expense is recognized regardless of achievement of performance conditions, provided the requisite service period is satisfied.

Unrecognized share-based compensation expense related to non-vested equity-settled awards is ~~$4,838,000~~$4,272,000 at ~~second~~third quarter-end 2012. The weighted average period over which this amount will be recognized is estimated to be two years.

Restricted stock awards vest either ratably over or after three years, generally if we achieve a minimum one percent annualized return on assets over such three-year period. The following table summarizes the activity of restricted stock awards in first ~~six~~nine months 2012:


				Weighted
	Restricted			Average Grant
	Shares			Date Fair Value		Restricted Shares			Weighted Average Grant Date Fair Value
	(In thousands)			(Per share)		(In thousands)			(Per share)
Non-vested at beginning of year		399		$	15.02		399		$	15.02
Granted		—			—		—			—
Vested		(183	)		12.65		(183	)		12.65
Forfeited		—			—		—			—

Non-vested at end of period		216		$	17.03		216		$	17.03

Unrecognized share-based compensation expense related to non-vested restricted stock awards is ~~$1,466,000~~$952,000 at ~~second~~third quarter-end 2012. The weighted average period over which this amount will be recognized is estimated to be one year.

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 our stock on the date of grant. The following table summarizes the activity of stock option awards in first ~~six~~nine months 2012:

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


	First Six Months						First Nine Months
	2012			2011			2012			2011
Expected dividend yield		—	%		—	%		—	%		—	%
Expected stock price volatility		61.8	%		56.2	%		60.2	%		56.2	%
Risk-free interest rate		1.4	%		2.4	%		1.3	%		2.4	%
Expected life of options (years)		6			6			6			6
Weighted average estimated fair value of options granted	$	9.32		$	10.11		$	9.22		$	10.11

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. Our expected stock price volatility is based on a blended rate utilizing our historical volatility and historical prices of our peers’ common stock for a period corresponding to the expected life of the options. Pre-vesting forfeitures are estimated based upon the pool of participants and their expected activity and historical trends.

Unrecognized share-based compensation expense related to non-vested stock options is ~~$4,664,000~~$4,306,000 at ~~second~~third quarter-end 2012. The weighted average period over which this amount will be recognized is estimated to be two years.

Certain of our employees participated in Temple-Inland’s share-based compensation plans. In conjunction with the 2007 spin-off, these awards were equitably adjusted into separate awards of the common stock of Temple-Inland and the spin-off entities. As result of Temple-Inland’s merger with International Paper in first quarter 2012, all outstanding awards on Temple-Inland stock were settled with an intrinsic value of $1,132,000.

Pre-Spin stock option awards to our employees to purchase our common stock 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. At ~~second~~third quarter-end 2012, there were ~~69,000~~65,000 pre-spin awards outstanding and exercisable on our stock with a weighted average exercise price of ~~$23.17,~~$24.10, weighted average remaining term of three years and aggregate intrinsic value of ~~$40,000.~~$56,000.

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 2011 Annual Report on Form 10-K. Unless otherwise indicated, information is presented as of ~~second~~third quarter-end 2012, and references to acreage owned includes all acres owned by ventures regardless of our ownership interest in a venture.

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

Other factors, including the risk factors described in Item 1A of our 2011 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.

In 2012, we announced Triple in FOR, new strategic initiatives designed to further enhance shareholder value by:

On September 28, 2012, pursuant to the terms of the previously announced Agreement and Plan of Merger dated June 3, 2012, we ~~entered into a definitive agreement to acquire~~acquired 100 percent of the outstanding common stock of CREDO Petroleum Corporation (Credo) in an all cash transaction for $14.50 per share, representing an equity purchase price of approximately ~~$146,000,000. Closing is subject to customary conditions, including approval by~~$146,445,000. In addition, we paid in full $8,770,000 of Credo’s ~~stockholders and, if approved, is expected to close in second half of 2012. We obtained a commitment for bridge financing that, combined~~outstanding debt. Third quarter 2012 mineral resources segment earnings associated with ~~available liquidity, is sufficient to fund the acquisition. However, we intend to pursue amendments to our existing senior secured credit facility to fund a significant portion of the purchase price.~~this acquisition were not significant.


	Second Quarter						First Six Months						Third Quarter						First Nine Months
	2012			2011			2012			2011			2012			2011			2012			2011
	(In thousands)												(In thousands)
Revenues:
Real estate	$	26,647		$	19,615		$	44,569		$	40,754		$	27,115		$	19,060		$	71,684		$	59,814
Mineral resources		7,148			4,580			16,574			11,913			10,479			5,871			27,053			17,784
Fiber resources		1,517			1,290			2,261			2,658			3,016			1,310			5,277			3,968

Total revenues	$	35,312		$	25,485		$	63,404		$	55,325		$	40,610		$	26,241		$	104,014		$	81,566

Segment earnings:
Real estate	$	7,666		$	1,007		$	19,243		$	3,582		$	12,688		$	(4,266	)	$	31,931		$	(684	)
Mineral resources		3,953			3,102			9,828			8,700			6,091			3,592			15,919			12,292
Fiber resources		594			704			984			1,344			1,798			446			2,782			1,790

Total segment earnings		12,213			4,813			30,055			13,626
Total segment earnings (loss)														20,577			(228	)		50,632			13,398
Items not allocated to segments:
General and administrative expense		(7,120	)		(7,081	)		(11,482	)		(10,997	)		(8,000	)		(4,827	)		(19,482	)		(15,824	)
Share-based compensation expense		67			148			(5,164	)		(3,952	)
Share-based compensation income (expense)														(6,327	)		3,553			(11,491	)		(399	)
Gain on sale of assets														16			61,784			16			61,784
Interest expense		(3,664	)		(4,653	)		(7,555	)		(8,662	)		(8,094	)		(4,271	)		(15,649	)		(12,933	)
Other corporate non-operating income and expense		47			24			111			51			47			26			158			77

Income (loss) before taxes		1,543			(6,749	)		5,965			(9,934	)		(1,781	)		56,037			4,184			46,103
Income tax benefit (expense)		(732	)		2,828			(2,352	)		3,540			1,078			(19,609	)		(1,274	)		(16,069	)

Net income (loss) attributable to Forestar Group Inc.	$	811		$	(3,921	)	$	3,613		$	(6,394	)	$	(703	)	$	36,428		$	2,910		$	30,034

Current U.S. single-family residential market conditions are showing signs of stability; however, high unemployment rates, depressed sales volumes and prices, difficult financing environment for purchasers and competition from foreclosure inventory continue to negatively influence housing markets. It is difficult to predict when and at what rate these broader negative conditions will improve. ~~We have seen signs of stability in certain markets, where declining~~Declining finished lot inventories and lack of real estate development is increasing demand for our developed lots, principally in the Texas markets. Multifamily market conditions continue to be strong, with many markets experiencing healthy occupancy levels and positive rent growth. This improvement has been driven primarily by limited new construction activity, reduced single-family mortgage credit availability, and the increased propensity to rent among the 18 to 34 year old demographic of the U.S. population.

Oil prices have weakened recently reflecting market concerns about world ~~economic~~economies and oil ~~demand growth.~~demand. Natural gas prices have remained atnear low historical levels due to abundant supplies and high ~~inventories due to a warm winter.~~inventories. Shale resource drilling and production remains strong and working natural gas inventories are expected to remain relatively high. In the East Texas Basin, exploration and production companies continue to focus drilling on high liquid rich gas prospects due to relatively high condensate and natural gas ~~liquids~~liquid prices. In the Gulf Coast Basin, in Louisiana, activity has increased as operators have shifted exploration efforts to oil and high liquid natural gas plays. These conditions may impact the demand for new mineral leases, new exploration activity and the amount of royalty revenues we receive.

Pine sawtimber prices continue to be depressed due to weak demand driven by the overall slowdown in residential construction activity, while pine pulpwood demand remains steady and pricing is relatively flat.

We evaluate performance based on earnings (loss) before unallocated items and income taxes. Segment earnings (loss) consist of operating income, equity in earnings (loss) of unconsolidated ventures’, gain on sale of assets, ~~yield accretion~~interest income on loans secured by real estate and net (income) loss attributable to noncontrolling interests. Items not allocated to our business segments consist of general and administrative expenses, share-based compensation, gain on sale of strategic timberland, interest expense and other corporate non-operating income and expense. The accounting policies of the segments are the same as those described in the accounting policy note to the consolidated financial statements.

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 and home builder sentiment, new housing starts, real estate values, employment levels, changes in the market prices for oil, natural gas, and timber, and the overall strength or weakness of the U.S. economy.

We own directly or through ventures about ~~145,000~~143,000 acres of real estate located in ~~eight~~nine states and 1213 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 104,000~~103,000 acres in a broad area around Atlanta, Georgia, with the balance located primarily in Texas. We target investments principally in regions 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 and tracts, undeveloped land and commercial real estate and from the operation of commercial and income producing properties, primarily a hotel and our multifamily investments.


	Second Quarter						First Six Months						Third Quarter						First Nine Months
	2012			2011			2012			2011			2012			2011			2012			2011
	(In thousands)												(In thousands)
Revenues	$	26,647		$	19,615		$	44,569		$	40,754		$	27,115		$	19,060		$	71,684		$	59,814
Cost of sales		(15,216	)		(10,357	)		(25,547	)		(20,527	)		(17,539	)		(12,367	)		(43,086	)		(32,894	)
Operating expenses		(8,243	)		(8,633	)		(15,787	)		(16,347	)		(8,421	)		(10,717	)		(24,208	)		(27,064	)

		3,188			625			3,235			3,880			1,155			(4,024	)		4,390			(144	)
Yield accretion on loan secured by real estate		1,093			—			1,093			—
Interest income on loans secured by real estate														1,066			—			2,159			—
Gain on sale of assets		3,401			—			15,076			—			10,197			—			25,273			—
Equity in earnings (loss) of unconsolidated ventures		644			(23	)		1,194			66			593			295			1,787			361
Less: Net (income) loss attributable to noncontrolling interests		(660	)		405			(1,355	)		(364	)		(323	)		(537	)		(1,678	)		(901	)

Segment earnings	$	7,666		$	1,007		$	19,243		$	3,582		$	12,688		$	(4,266	)	$	31,931		$	(684	)

~~Second~~Third quarter and first ~~six~~nine months 2012, segment earnings include ~~$1,093,000~~$1,066,000 and $2,159,000 in interest income primarily related to ~~yield accretion on~~ a loan secured by ~~real estate.~~a mixed-use community in Houston.

In ~~second~~third quarter and first ~~six~~nine months 2012, gain on sale of assets includes $10,180,000 resulting from the sale of Broadstone Memorial, a 401 unit multifamily project in Houston. In addition, first nine months 2012 includes a $3,401,000 gain from a consolidated venture’s sale of 800 acres in ~~Dallas. In addition, in first six months 2012,~~Dallas and $11,675,000 gain ~~on sale of assets includes $11,675,000~~ from the sale of our 25 percent interest in Palisades West LLC for $32,095,000.


	Second Quarter				First Six Months				Third Quarter				First Nine Months
	2012		2011		2012		2011		2012		2011		2012		2011
	(In thousands)								(In thousands)
Residential real estate	$	14,830	$	9,360	$	23,328	$	17,227	$	13,564	$	10,276	$	36,892	$	27,503
Commercial real estate		1,765		736		1,765		736		2,405		—		4,170		736
Undeveloped land		2,581		2,480		3,314		8,570		1,604		1,526		4,918		10,096
Commercial and income producing properties		7,298		6,812		14,576		13,747		8,805		6,653		23,381		20,400
Other		173		227		1,586		474		737		605		2,323		1,079

Total revenues	$	26,647	$	19,615	$	44,569	$	40,754	$	27,115	$	19,060	$	71,684	$	59,814

Residential real estate revenues principally consist of the sale of single-family lots to national, regional and local homebuilders. In ~~second~~third quarter and first ~~six~~nine months 2012, residential real estate revenues increased principally as a result of increased lot sales volume due to demand for finished lot inventory by homebuilders in markets where supply has diminished. In ~~second quarter~~first nine months 2012, we sold the remaining 109 fully developed lots from our River Plantation project located in Tampa for $2,145,000 or about $19,675 per lot, resulting in about ~~$533,000~~$478,000 in segment earnings.

In ~~second~~third quarter ~~and first six months~~ 2012, commercial real estate revenues increased ~~primarily~~ as result of selling 35approximately 18 commercial acres from ~~our Summer Creek Ranch~~projects located in Houston and Dallas for $2,405,000 generating combined segment earnings of $1,288,000. In addition, first nine months 2012 includes the sale of approximately 35 commercial acres from a project ~~located~~ in Fort Worth for $1,295,000 which generated about $822,000 in segment earnings.

In first ~~six~~nine months 2012, undeveloped land sales decreased due to lower volume from our retail land sales program as a result of challenging market conditions including limited credit availability and alternate investment options to buyers in the marketplace.

In ~~second~~third quarter and first ~~six~~nine months 2012, commercial and income producing properties revenue increased as a result of ~~higher occupancy levels and revenue per available room from our 413 guest room hotel in Austin and~~ rent growth from our 401 unit multifamily property located in ~~Houston.~~Houston, which we sold in third quarter 2012.

In third quarter and first ~~six~~nine months 2012, other revenues include ~~$1,047,000~~$564,000 and $1,611,000, as a result of selling ~~seven~~four acres and eleven acres, respectively, of impervious cover entitlement credits to ~~a national homebuilder. This sale~~homebuilders. These sales generated segment earnings of approximately ~~$920,000.~~$496,000 in third quarter 2012 and $1,416,000 in first nine months 2012.


	Second Quarter				First Six Months				Third Quarter				First Nine Months
	2012		2011		2012		2011		2012		2011		2012		2011
Residential real estate:
Lots sold		345		158		482		303		193		155		675		458
Revenue per lot sold	$	42,725	$	59,235	$	48,210	$	56,853	$	54,206	$	52,197	$	49,925	$	55,277
Commercial real estate:
Acres sold		38		4		38		4		18		—		56		4
Revenue per acre sold	$	47,040	$	185,344	$	47,040	$	185,344	$	133,882	$	—	$	75,147	$	185,344
Undeveloped land:
Acres sold		933		762		1,253		3,390		564		548		1,817		3,938
Revenue per acre sold	$	2,765	$	3,258	$	2,645	$	2,528	$	2,846	$	2,786	$	2,707	$	2,564


	Second Quarter				First Six Months				Third Quarter				First Nine Months
	2012		2011		2012		2011		2012		2011		2012		2011
	(In thousands)								(In thousands)
Employee compensation and benefits	$	1,929	$	1,896	$	4,054	$	3,837	$	2,530	$	1,893	$	6,584	$	5,730
Property taxes		2,398		2,277		4,341		4,461		1,964		2,023		6,305		6,484
Professional services		821		1,265		2,078		2,231		992		1,174		3,070		3,405
Depreciation and amortization		1,103		1,314		2,150		2,594		1,101		1,344		3,251		3,938
Environmental										38		2,527		131		2,607
Other		1,992		1,881		3,164		3,224		1,796		1,756		4,867		4,900

Total operating expenses	$	8,243	$	8,633	$	15,787	$	16,347	$	8,421	$	10,717	$	24,208	$	27,064

In third quarter 2011, environmental costs increased as a result of a $2,500,000 charge related to environmental remediation activities at our Antioch, California project.

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


	Second Quarter-End				Third Quarter-End
	2012		2011		2012		2011
Owned and consolidated ventures:
Entitled, developed and under development projects
Number of projects		65		53		65		54
Residential lots remaining		19,979		18,763		20,019		18,679
Commercial acres remaining		2,085		1,811		2,067		1,808
Undeveloped land and land in the entitlement process
Number of projects		16		17		16		16
Acres in entitlement process		27,590		28,650		27,580		27,590
Acres undeveloped		95,901		166,626		95,357		110,115
Ventures accounted for using the equity method:
Ventures’ lot sales (for first six months)
Ventures’ lot sales (for first nine months)
Lots sold		230		194		306		350
Average price per lot sold	$	47,568	$	40,882	$	49,125	$	40,592
Ventures’ entitled, developed and under development projects
Number of projects		7		21		7		21
Residential lots remaining		3,954		9,440		3,845		9,295
Commercial acres sold (for first six months)		—		20
Commercial acres sold (for first nine months)						—		20
Average price per acre sold	$	—	$	152,460	$	—	$	152,460
Commercial acres remaining		333		538		333		538
Ventures’ undeveloped land and land in the entitlement process
Acres sold (for first six months)		135		19
Acres sold (for first nine months)						135		19
Average price per acre sold	$	2,600	$	3,000	$	2,600	$	3,000
Acres undeveloped		5,655		5,712		5,655		5,712

In first quarter 2012, we acquired from CL Realty and Temco, 14 entitled, developed and under development projects and interests in three ventures accounted for using the equity method. The acquired assets represented approximately 1,130 fully developed lots, 4,900 planned lots, and over 460 commercial acres at time of acquisition, principally in the major markets of Texas.

We underwrite development projects based on a variety of assumptions incorporated into our development plans, including the timing and pricing of sales and leasing and costs to complete development. Our development plans are periodically reviewed in comparison to our return projections and expectations, and we may revise our plans as business conditions warrant. If as a result of changes to our development plans the anticipated future net cash flows are reduced such that our basis in a project is not fully recoverable, we may be required to recognize a non-cash impairment charge for such project.

At second quarter-end 2012, Broadstone Memorial, a 401unit multifamily property in Houston with a carrying value of $46,001,000, is being marketed for sale with a targeted close in the second half of 2012. Las Brisas, a 414 unit (unconsolidated venture) multifamily property located near Austin with a carrying value of $31,739,000, also is being marketed for sale with a targeted close in the second half of 2012. We hold a 59 percent interest in the venture that owns Las Brisas.

Our net investment in owned and consolidated real estate by geographic location follows:


State	Entitled, Developed, and Under Development Projects		Undeveloped Land		Commercial and Income Producing Properties		Total		Entitled, Developed, and Under Development Projects			Undeveloped Land			Commercial and Income Producing Properties			Total
	(In thousands)								(In thousands)
Texas	$	299,122	$	9,626	$	99,436	$	408,184		$	298,418		$	9,570		$	55,335		$	363,323
Georgia		21,916		58,433		—		80,349			22,125			58,592			—			80,717
Colorado		21,937		—		—		21,937			21,475			—			—			21,475
California		8,915		14,771		—		23,686			8,915			14,997			—			23,912
Other		6,509		573		—		7,082			6,740			847			11,589			19,176

Total	$	358,399	$	83,403	$	99,436	$	541,238		$	357,673		$	84,006		$	66,924		$	508,603

We own directly or through ventures about ~~594,000~~593,000 net acres of mineral interests. Our mineral resources segment revenues are principally derived from oil and natural gas royalties, non-operating working interests and other lease revenues from our mineral interests located principally in Texas, Louisiana, Georgia and Alabama. At ~~second~~third quarter-end 2012, we have about ~~45,000~~37,000 net acres under lease and about ~~35,000~~38,000 net acres held by production.

On September 28, 2012, we acquired 100 percent of the outstanding common stock of Credo in an all cash transaction for $14.50 per share, representing an equity purchase price of approximately $146,445,000. In addition, we paid in full approximately $8,770,000 of Credo’s outstanding debt. The acquired assets represent approximately 142,000 net mineral acres leased from others, of which over 36,000 are held by production at third quarter-end 2012. The principal areas of operations are in Oklahoma, Kansas, Nebraska, North Dakota and Texas and includes 382 gross oil and natural gas wells with working interest ownership of which 132 are operated by the Company, and nearly 1,200 wells with overriding royalty interests. Third quarter 2012 mineral resources segment earnings associated with this acquisition were not significant.


	Second Quarter						First Six Months						Third Quarter						First Nine Months
	2012			2011			2012			2011			2012			2011			2012			2011
	(In thousands)												(In thousands)
Revenues	$	7,148		$	4,580		$	16,574		$	11,913		$	10,479		$	5,871		$	27,053		$	17,784
Cost of sales		(978	)		(438	)		(2,353	)		(1,232	)		(1,865	)		(597	)		(4,218	)		(1,829	)
Operating expenses		(2,337	)		(1,459	)		(4,681	)		(2,888	)		(2,604	)		(2,030	)		(7,285	)		(4,918	)

		3,833			2,683			9,540			7,793			6,010			3,244			15,550			11,037
Equity in earnings of unconsolidated ventures		120			419			288			907			81			348			369			1,255

Segment earnings	$	3,953		$	3,102		$	9,828		$	8,700		$	6,091		$	3,592		$	15,919		$	12,292

Cost of sales represents our share of oil and natural gas production severance taxes, which are calculated based on a percentage of oil and natural gas produced, costs related to our oil and natural gas non-operating working interests, geological and geophysical costs and delay rental payments related to ground water leases in central Texas. In third quarter and first nine months 2012, cost of sales increased primarily due to higher depletion costs related to working interest wells that began producing in late 2011 and early 2012, exploration costs and higher production severance taxes as a result of increased oil production.

Equity in earnings of unconsolidated ventures includes our share of royalty revenue from 23 producing wells in the Barnett Shale natural gas formation.


	Third Quarter				First Nine Months
	2012		2011		2012		2011
	(In thousands)
Royalties	$	5,435	$	5,325	$	18,503	$	12,699
Working interests		604		99		2,112		357
Other revenues		4,440		447		6,438		4,728

Total revenues	$	10,479	$	5,871	$	27,053	$	17,784

In ~~second~~third quarter 2012, royalty revenues increased principally as result of increased oil production partially offset by decreased oil prices in our owned and consolidated properties and decreased natural gas prices. Increased oil production contributed about ~~$3,441,000~~$2,612,000 which was offset by ~~$467,000~~$1,520,000 from decreased oil prices as compared with ~~second~~third quarter 2011. Increased natural gas production contributed about ~~$366,000~~$241,000 which was offset by ~~$533,000~~$717,000 from decreased natural gas prices as compared with ~~second~~third quarter 2011. In first ~~six~~nine months 2012, royalty revenues increased principally as result of increased oil production in our owned and consolidated properties. Increased oil production contributed about ~~$6,500,000~~$9,195,000 as compared with first ~~six~~nine months 2011. ~~In first six months 2012, increased natural gas production contributed about $566,000 which was more than offset by $711,000 from decreased natural gas prices as compared with second quarter 2011.~~

In ~~second~~third quarter and first ~~six~~nine months 2012, ~~non-operating~~ working ~~interests revenue~~interest revenues increased principally as result of our investment in new producing wells within the West Gordon ~~Field~~field located in Beauregard Parish, Louisiana.

In ~~second~~third quarter 2012, other revenues include ~~$447,000~~$3,543,000 in lease bonuses received from leasing approximately 3,124 net mineral acres owned in Texas and Louisiana for over $1,100 average per acre and $593,000 in delay rentals received on approximately ~~1,300~~9,500 net mineral acres owned in Louisiana. ~~There was no leasing activity in second quarter 2012.~~ In ~~second~~third quarter 2011, other revenues ~~include $475,000~~principally includes $100,000 in lease bonuses received ~~as a result of~~from leasing ~~over 2,500~~about 380 net mineral acres owned for an average of ~~$187~~$266 per acre ~~of which 1,500~~and $253,000 related to delay rental payments received on approximately 8,600 net mineral acres ~~had no lease bonus payment in return for a short-term drilling commitment from the operator. In addition, other revenues include delay rentals received of $70,000 in second quarter 2011.~~owned.

In first ~~six~~nine months 2012, other revenues include ~~$1,562,000~~$2,155,000 in delay rentals received on approximately ~~5,600~~15,100 net mineral acres in Louisiana and ~~$287,000~~$3,830,000 in lease bonuses received ~~as a result of~~from leasing ~~about 800~~approximately 3,900 net mineral acres owned in Texas and Louisiana for an average of about ~~$360~~$975 per acre. In first ~~six~~nine months 2011, other revenues include ~~$2,132,000~~$2,232,000 in lease bonuses received ~~as a result of~~from leasing ~~nearly 7,400~~over 7,700 net mineral acres owned for an average of ~~$289~~$288 per acre, $1,555,000 related to mineral seismic exploration agreement associated with 31,100 acres in Louisiana and ~~$226,000~~$479,000 related to delay ~~rentals received.~~rental payments received on approximately 9,200 net mineral acres owned.

Oil and natural gas produced and average unit prices related to our royalty and working interests follows:


	Second Quarter				First Six Months				Third Quarter				First Nine Months
	2012		2011		2012		2011		2012		2011		2012		2011
Consolidated entities:
Oil production (barrels)		61,600		27,900		130,700		59,900		69,000		42,300		199,800		102,200
Average price per barrel	$	94.64	$	102.23	$	96.19	$	91.69	$	75.81	$	97.83	$	89.15	$	94.23
Natural gas production (millions of cubic feet)		338.3		246.0		700.5		554.1		351.5		295.9		1,052.0		850.1
Average price per thousand cubic feet	$	2.39	$	3.96	$	2.85	$	3.87	$	2.29	$	4.33	$	2.66	$	4.03
Our share of ventures accounted for using the equity method:
Natural gas production (millions of cubic feet)		82.1		127.6		172.2		286.2		74.9		112.1		247.1		398.3
Average price per thousand cubic feet	$	2.01	$	3.84	$	2.52	$	3.69	$	1.99	$	4.10	$	2.36	$	3.80
Total consolidated and our share of equity method ventures:
Oil production (barrels)		61,600		27,900		130,700		59,900		69,000		42,300		199,800		102,200
Average price per barrel	$	94.64	$	102.23	$	96.19	$	91.69	$	75.81	$	97.83	$	89.15	$	94.23
Natural gas production (millions of cubic feet)		420.4		373.6		872.7		840.3		426.4		408		1,299.1		1,248.4
Average price per thousand cubic feet	$	2.31	$	3.92	$	2.79	$	3.81	$	2.24	$	4.27	$	2.61	$	3.96
Total BOE (barrels of oil equivalent)		131,629		90,157		276,197		199,922
Average price per barrel	$	51.65	$	47.88	$	54.34	$	43.46
Total BOE										140,105		110,346		416,302		310,268
Average price per barrel equivalent									$	44.17	$	53.31	$	50.92	$	46.96

At ~~second~~third quarter-end 2012, there were ~~541~~542 gross productive wells operated by others on our leased owned mineral acres compared to ~~501~~510 gross productive wells at ~~second~~third quarter-end 2011. The above production and well information excludes any results associated with our September 28, 2012 acquisition of Credo.


	Third Quarter				First Nine Months
	2012		2011		2012		2011
	(In thousands)
Professional and consulting services	$	801	$	792	$	2,330	$	2,086
Employee compensation and benefits		1,173		614		3,184		1,495
Property taxes		89		78		239		228
Other		541		546		1,532		1,109

Total operating expenses	$	2,604	$	2,030	$	7,285	$	4,918

Professional and consulting services include $429,000 in ~~second~~third quarter 2012 and 2011 and ~~$857,000~~$1,286,000 in first ~~six~~nine months 2012 and 2011 due to non-cash amortization of contingent consideration paid to the seller of a water resources company acquired in 2010. These costs are being amortized ratably over the performance period assuming certain milestones are achieved by July 2014. In ~~second~~third quarter and first ~~six~~nine months 2012, employee compensation and benefits increased principally as result of incremental staffing to support our oil, natural gas and water interests.

In addition, we have water interests in 1,550,000 acres, including a 45 percent nonparticipating royalty interest in groundwater produced or withdrawn for commercial purposes or sold from approximately 1,400,000 acres in Texas, Louisiana, Georgia and Alabama and 17,800 acres of ground water leases in central Texas. We have not received significant revenue or earnings from these interests.

Our fiber resources segment focuses principally on the management of our timber holdings and recreational leases. We have about 129,000 acres of timber we own directly or through ventures, primarily in Georgia, and about 17,000 acres of timber under lease. Our fiber resources segment revenues are principally derived from the sales of wood fiber from our land and leases for recreational uses. ~~We have sold about 219,000 acres of timberland since year-end 2008. As a result of the reduced acreage from land sales, future segment revenues and earnings are anticipated to be lower.~~


	Second Quarter						First Six Months						Third Quarter						First Nine Months
	2012			2011			2012			2011			2012			2011			2012			2011
	(In thousands)												(In thousands)
Revenues	$	1,517		$	1,290		$	2,261		$	2,658		$	3,016		$	1,310		$	5,277		$	3,968
Cost of sales		(370	)		(285	)		(498	)		(532	)		(570	)		(349	)		(1,068	)		(881	)
Operating expenses		(557	)		(488	)		(1,023	)		(974	)		(637	)		(520	)		(1,660	)		(1,494	)

		590			517			740			1,152			1,809			441			2,549			1,593
Other operating income, principally gain on termination of timber leases		—			181			234			181
Gain on sale of assets														(17	)		—			217			181
Equity in earnings of unconsolidated ventures		4			6			10			11			6			5			16			16

Segment earnings	$	594		$	704		$	984		$	1,344		$	1,798		$	446		$	2,782		$	1,790

Fiber resources segment earnings increased principally as a result of higher levels of harvesting activity which was primarily driven by accelerated customer demand.


	Second Quarter				First Six Months				Third Quarter				First Nine Months
	2012		2011		2012		2011		2012		2011		2012		2011
	(In thousands)								(In thousands)
Fiber	$	1,232	$	852	$	1,566	$	1,717	$	2,282	$	978	$	3,848	$	2,695
Recreational leases and other		285		438		695		941		734		332		1,429		1,273

Total revenues	$	1,517	$	1,290	$	2,261	$	2,658	$	3,016	$	1,310	$	5,277	$	3,968


	Second Quarter				First Six Months				Third Quarter				First Nine Months
	2012		2011		2012		2011		2012		2011		2012		2011
Pulpwood tons sold		80,800		70,700		105,200		136,300		160,000		85,800		265,200		222,100
Average pulpwood price per ton	$	9.24	$	9.22	$	9.46	$	9.20	$	9.54	$	7.57	$	9.51	$	8.57
Sawtimber tons sold		24,900		12,700		29,300		28,200		37,400		22,900		66,700		51,200
Average sawtimber price per ton	$	19.46	$	15.69	$	19.47	$	16.40	$	20.21	$	14.33	$	19.88	$	15.47
Total tons sold		105,700		83,400		134,500		164,500		197,400		108,700		331,900		273,300
Average price per ton	$	11.66	$	10.21	$	11.64	$	10.44	$	11.56	$	8.99	$	11.59	$	9.86

In ~~first six months~~third quarter 2012, total fiber tons sold ~~decreased~~increased principally ~~due~~as a result of accelerated harvesting levels to ~~the sale of about 74,000 acres of timberland in 2011.~~meet customer demand, primarily International Paper’s Rome, Georgia mill. The majority of our fiber sales were to International Paper at market prices.


	Second Quarter				First Six Months				Third Quarter				First Nine Months
	2012		2011		2012		2011		2012		2011		2012		2011
Average recreational acres leased		131,800		197,000		131,400		199,000		129,200		164,600		130,500			185,300
Average price per leased acre	$	8.84	$	8.96	$	8.82	$	8.93	$	8.84	$	8.28	$	8.84		$	8.84


	Second Quarter				First Six Months				Third Quarter				First Nine Months
	2012		2011		2012		2011		2012		2011		2012		2011
	(In thousands)								(In thousands)
Employee compensation and benefits	$	273	$	231	$	517	$	468	$	266	$	229	$	783	$	696
Facility and long-term timber lease costs		116		109		237		227		117		109		354		337
Other		168		148		269		279		254		182		523		461

Total operating expenses	$	557	$	488	$	1,023	$	974	$	637	$	520	$	1,660	$	1,494

Unallocated items represent income and expenses managed on a company-wide basis and include general and administrative expenses, share-based compensation, gain on sale of strategic timberland, interest expense and other corporate non-operating income and expense. General and administrative expenses principally consist of accounting and finance, tax, legal, human resources, internal audit, information technology and our board of directors. These functions support all of our business segments and are not allocated.


	Second Quarter				First Six Months				Third Quarter				First Nine Months
	2012		2011		2012		2011		2012		2011		2012		2011
	(In thousands)								(In thousands)
Professional services	$	3,123	$	3,686	$	3,965	$	4,425	$	4,020	$	1,600	$	7,985	$	6,025
Employee compensation and benefits		1,770		1,372		3,346		2,827		1,986		1,394		5,332		4,221
Depreciation and amortization		274		351		573		702		268		347		841		1,050
Insurance costs		242		289		511		533		238		276		749		809
Facility costs		180		173		378		384		195		210		573		594
Other		1,531		1,210		2,709		2,126		1,293		1,000		4,002		3,125

Total general and administrative expenses	$	7,120	$	7,081	$	11,482	$	10,997	$	8,000	$	4,827	$	19,482	$	15,824

~~Second~~In third quarter and first ~~six~~nine months 2012 ~~general and administrative~~professional services expense includes ~~$2,461,000~~$3,248,000 and $5,709,000 in transaction costs to outside advisors ~~related to entering into a definitive agreement to acquire CREDO Petroleum Corporation.~~associated with our acquisition of Credo.

~~Second~~In third quarter and first ~~six~~nine months 2011, ~~general~~professional services includes $459,000 and ~~administrative expense includes $2,730,000 in costs~~$3,187,000 of expenses associated with a proposed private debt offerings that we withdrew as a result of deterioration ofin terms available to us in the ~~credit~~capital markets.

Our effective tax rate was 33a 74 percent benefit in ~~second~~third quarter 2012 and ~~was 32~~22 percent expense in first ~~six~~nine months 2012, which includes a 310 percent benefit for noncontrolling interests. In addition, our third quarter and first nine months 2012 effective tax rates included a non-cash benefit of 38 percent and nine percent respectively associated with state deferred tax rate changes due to our acquisition of Credo and operating in more states. Our effective tax rate was ~~a benefit of 40~~35 percent in ~~second~~third quarter 2011 and ~~a 37~~34 percent ~~benefit~~ in first ~~six~~nine months 2011, which ~~included~~includes a 2one percent benefit for noncontrolling interests and one percent non-cash charge for ~~share–based~~share-based compensation. In addition, 2012 and 2011 effective tax rates include the effect of state income taxes, nondeductible items and benefits of percentage ~~depletion.~~depletion while the 2011 effective tax rate includes the benefits of charitable contributions related to timberlands.

We acquired Credo on September 28, 2012, and as a result, we recorded an estimated deferred tax liability of $26,276,000 principally representing the excess of the fair value allocated to oil and gas properties at closing over the carry-over tax basis received at our estimated effective tax rate.

We have not provided a valuation allowance for our federal deferred tax asset because we believe it is likely it will be recoverable in future periods based on considerations including taxable income in prior carryback years, future reversals of existing temporary differences, tax planning strategies and future taxable income. If these sources of income are not sufficient in future periods, we may be required to provide a valuation allowance for our federal deferred tax asset.

We operate in cyclical industries and our cash flows fluctuate accordingly. Our principal operating cash requirements are for the acquisition and development of real estate, either directly or indirectly through ventures, taxes, interest and compensation. Our principal sources of cash are proceeds from the sale of real estate and timber, the cash flow from minerals and income producing properties, borrowings, and reimbursements from utility and improvement districts. Operating cash flows are 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, and by the timing of oil and natural gas leasing and production activities. 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 and improvement districts and the payment of payables and expenses.

Cash flows from our real estate development activities, undeveloped land sales, commercial and income producing properties, timber sales, mineral and recreational leases and reimbursements from utility and improvement districts are classified as operating cash flows.

In first ~~six~~nine months 2012, net cash (used for) operating activities was ($~~11,993,000)~~20,784,000) as expenditures for real estate development and acquisitions significantly exceeded non-cash real estate cost of sales, principally as result of acquiring real estate assets from CL Realty and Temco for $47,000,000. Subsequent to closing of this acquisition, we received $23,370,000 from the ventures, representing our pro-rata share of distributable cash. Also, we invested ~~an additional~~ $14,341,000 in a 289 unit multifamily property currently under construction in Austin, acquired a multifamily development site in Nashville for $11,081,000 and we paid ~~$10,895,000~~$11,041,000 in federal and state taxes, net of refunds. We received $24,294,000 in net proceeds from a consolidated venture’s sale of 800 acres in Dallas and $10,934,000 in reimbursements from two new multifamily ventures which represents our venture partners’ pro-rata share of the costs. In first ~~six~~nine months 2011, net cash ~~(used for)~~provided by operating activities was ~~($33,930,000) which is~~$32,816,000 as proceeds from the sale of 57,000 acres of timberland in accordance with our strategic initiatives generated net proceeds of $86,018,000. Expenditures for development and acquisitions exceeded non-cash real estate cost of sales principally due to our acquisition ~~from a financial institution~~ of a non-performing loan secured by a lien on 900 acres of developed and undeveloped land near Houston, Texas for $21,137,000, ~~our investment~~$25,481,000 in ~~undeveloped land~~four real estate acquisitions located in ~~San Antonio,~~various Texas ~~for $7,900,000~~markets and ~~our~~ payment of ~~$7,596,000~~$7,956,000 in federal and state income taxes, net of refunds.

Capital contributions to and capital distributions from unconsolidated ventures, business acquisitions and investment in oil and natural gas properties and equipment are classified as investing activities. In addition, proceeds from the sale of property and equipment, software costs and expenditures related to reforestation activities are also classified as investing activities.

In first ~~six~~nine months 2012, net cash ~~provided by~~(used for) investing activities was ~~$27,796,000~~($95,574,000) principally due to our acquisition of Credo for ($152,073,000) purchase price, net of cash acquired. Partially offsetting our investment in Credo were proceeds received from the sale of our 25 percent interest in Palisades West LLC for ~~$32,095,000.~~$32,095,000 and $29,474,000 in net proceeds from the sale of Broadstone Memorial, a 401unit multifamily project in Houston. In addition, we invested ~~$2,264,000~~$2,794,000 in oil and natural gas properties and equipment associated with our non-operating working interests and ~~$1,341,000~~$1,577,000 in property and equipment, software and reforestation and ~~$694,000~~$699,000 in net contributions to unconsolidated ventures. In first ~~six~~nine months 2011, net cash (used for) investing activities was ($~~3,501,000)~~5,149,000) and is principally related to ~~$2,112,000~~$3,414,000 invested in oil and gas properties as non-operating working interests, ~~$883,000~~$662,000 in net contributions to unconsolidated ventures and ~~$899,000~~$1,466,000 in property, equipment, software and reforestation.

In first ~~six~~nine months 2012, net cash provided by financing activities was ~~$11,388,000.~~$108,354,000. Our net increase in borrowings of ~~$11,347,000~~$112,555,000 was principally used to fund our acquisition of Credo and our real estate development ~~activities.~~and acquisition expenditures. We paid $5,209,000 in financing fees primarily related to the amendment and restatement of our senior secured credit facility in third quarter 2012. Also, in third quarter 2012, our outstanding debt decreased by $26,500,000 as a result of selling Broadstone Memorial, a 401 unit multifamily property in Houston and the buyer’s assumption of the debt. In second ~~quarter-end~~quarter 2012, our outstanding debt decreased by $30,991,000 as a result of a consolidated venture’s sale of 800 acres in Dallas and the buyer’s assumption of the debt.

Also, in second quarter 2012, we secured project level financing on a 289 unit multifamily property in Austin with ~~$10,607,000~~$15,990,000 outstanding at ~~second~~third quarter-end 2012. In first ~~six~~nine months 2011, net cash ~~provided by~~(used for) financing activities was ~~$37,780,000 due~~($3,912,000) and is principally related to the payment of $3,746,000 in deferred financing fees primarily related to supplementing and amending our senior secured credit facility and $2,126,000 related to repurchasing 172,435 shares of our common stock. This was partially offset by a net increase in our debt of ~~$39,236,000 principally to fund our expenditures for acquisitions and development.~~$2,108,000.

On September 14, 2012, we entered into a Second Amended and Restated Revolving and Term Credit Agreement in order to consolidate previous amendments and to effect the following principal amendments to: increase the term loan commitment from $130,000,000 to $200,000,000; extend the maturity date of the revolving loan to September 14, 2015 (with a one-year extension option) and of the term loan to September 14, 2017; reduce the interest rate spread over LIBOR from 4.5 percent to 4.0 percent, and eliminate the LIBOR rate floor of 2 percent; increase the minimum interest coverage ratio from 1.05x to 1.50x; reduce the unused fee rate from 0.45 percent per annum to 0.25 percent – 0.35 percent per annum based on usage; and eliminate the minimum value to commitment ratio covenant and replace it with a reduction to the borrowing base to the extent the ratio of the value of assets in the borrowing base to the aggregate commitments under the facility is less than 1.50x.We incurred fees of $5,059,000 related to this amendment. The amendment and restatement of the term loan was an extinguishment of debt under the accounting guidance and as result, we recognized a $4,448,000 loss in third quarter 2012 which is included in interest expense.

On September 28, 2012 we acquired 100 percent of outstanding stock of Credo in an all cash transaction for $14.50 per share, representing an equity purchase price of approximately $146,445,000. In addition, we paid in full $8,770,000 of Credo’s outstanding debt. This transaction was funded with approximately $70,000,000 in borrowings from our term loan, $35,000,000 in borrowings from our revolving line of credit, the balance of which was paid from cash and short-term investments.

At ~~second~~third quarter-end 2012, our senior secured credit facility provides for a ~~$130,000,000~~$200,000,000 term loan ~~maturing August 6, 2015~~ and a $200,000,000 revolving line of ~~credit maturing August 6, 2014.~~credit. The ~~term loan and the~~ revolving line of credit may be prepaid at any time without penalty. The term loan includes a prepayment fee of one percent if prepaid prior to March 14, 2013. The revolving line of credit includes a $100,000,000 sublimit for letters of credit, of which ~~$2,558,000~~$2,604,000 is outstanding at ~~second~~third quarter-end 2012. Total borrowings under our senior secured credit facility (including the face amount of letters of credit) may not exceed a borrowing base formula. Our borrowing base availability is calculated on a monthly basis by applying advance rates of between 35 – 60 percent against base asset values which include timberland, high-value timberland (land in the entitlement process), raw entitled land, land under development, and minerals. All assets included in the borrowing base must be wholly-owned and unencumbered. At ~~second~~third quarter-end 2012, net unused borrowing capacity under our senior secured credit facility is calculated as follows:


	(In thousands)			(In thousands)
Borrowing base availability	$	278,065		$	400,000
Less: borrowings		(130,000	)		(227,000	)
Less: letters of credit		(2,558	)		(2,604	)

Unused borrowing capacity	$	145,507		$	170,396

Our unused borrowing capacity in ~~second~~third quarter 2012 ranged from a high of ~~$162,147,000~~$170,396,000 to a low of ~~$145,507,000.~~$146,389,000. This facility is used primarily to fund our operating cash needs, which fluctuate due to timing of residential real estate sales, undeveloped land sales, mineral lease bonus payments, timber sales, payment of payables and expenses and capital expenditures.

Our senior secured credit facility and other debt agreements contain financial covenants customary for such agreements including minimum levels of interest coverage and limitations on leverage. At ~~second~~third quarter-end 2012, we were in compliance with the financial covenants of these agreements.

The following table details our compliance with the financial covenants calculated as provided in the senior credit facility:

To make additional investments, acquisitions, or distributions, we must maintain available liquidity equal to ~~the lesser of $35,000,000 or~~ 10% of the aggregate commitments in place. At ~~second~~third quarter-end 2012, the minimum liquidity requirement was ~~$33,000,000,~~$40,000,000, compared with ~~$188,821,000~~$176,170,000 in actual available liquidity based on the unused borrowing capacity under our senior secured credit facility plus unrestricted cash and cash equivalents. As of third quarter 2012, we were in compliance with these requirements. The failure to maintain such minimum liquidity does not constitute a default or event of default of our senior secured credit facility. In addition, we may elect to make distributions so long as the total leverage ratio is less than 30%, the interest coverage is greater than 3.0:1.0, the revenues / capital expenditures ratio exceeds 3.0:1.0, and available liquidity is not less than $125,000,000.

In second quarter 2012, we obtained a loan for construction of a 289 unit multifamily project located in Austin which provides up to $19,550,000 in financing. ~~We have two~~The interest rate ~~options~~ on the ~~loan: (i) Base-Rate Option or (ii) LIBOR Option subject to the provisions of construction~~ loan ~~agreement. The Base-Rate Option is a fluctuating rate per annum equal to the sum of the Base-Rate plus 175 basis points. The Base-Rate~~ is equal to the highest of (i) the lender’s prime rate, (ii) the Federal Funds Open Rate plus 50 basis points, and (iii) the Daily LIBOR Rate plus 100 basis points. The ~~LIBOR Option is a rate per annum fixed for the applicable LIBOR interest period equal to the LIBOR plus 225 basis points. The~~ loan has an initial term of 36 months and may be extended for two additional 12-month periods based on certain specified conditions. At ~~second~~third quarter-end 2012, we have ~~$10,607,000~~$15,990,000 outstanding on this loan.

In 2011, we began construction on a 289 unit multifamily project in Austin, Texas in which the estimated cost at completion, including land, is approximately ~~$33,865,000.~~$31,657,000. At ~~second-quarter~~third-quarter end 2012, our investment in this project including land and construction in progress is ~~$29,011,000~~$30,014,000 with an estimated cost to complete construction of ~~$4,854,000.~~$1,643,000.

In second quarter 2012, CJUF III RH Holdings, an equity method venture in which we own a 25 percent interest, obtained a senior secured construction loan in the amount of $23,936,000 to develop a 257 unit multifamily property in downtown Austin. There is no significant balance outstanding at ~~second~~third quarter-end 2012. We have a construction completion guaranty, a repayment guaranty for 20 percent of the principal balance and unpaid accrued interest, and a standard non-recourse carve-out guaranty. The repayment guaranty will reduce from 20 percent to 0 percent upon achievement of certain conditions.

In second quarter 2012, FMF Peakview, an equity method venture in which we own a 20 percent interest, obtained a senior secured construction loan in the amount of $31,550,000 to develop a 304 unit multifamily property in Denver. There is no balance outstanding at ~~second~~third quarter-end 2012. We have a construction completion guaranty, a repayment guaranty for 25 percent of the principal and unpaid accrued interest, and a standard non-recourse carve-out guaranty.

At ~~second~~third quarter-end 2012, we participate in three partnerships that have total assets of ~~$48,885,000~~$48,849,000 and total liabilities of ~~$79,764,000,~~$80,283,000, which includes ~~$63,481,000~~$63,624,000 of borrowings classified as current maturities. These partnerships are managed by third parties who intend to extend or refinance these borrowings; however, there is no assurance that this can be done. Although these borrowings are guaranteed by third parties, we may under certain circumstances elect or be required to provide additional equity to these partnerships. We do not believe that the ultimate resolution of these matters will have a significant effect on our earnings or financial position. Our investment in these partnerships is ~~$1,678,000~~$1,497,000 at ~~second~~third quarter-end 2012. These three partnerships are variable interest entities.

Cibolo Canyons consists of the JW Marriott^® San Antonio Hill Country Resort & Spa development owned by third parties and a mixed-use development we own. We have ~~$80,561,000~~$79,557,000 invested in Cibolo Canyons at ~~second~~third quarter-end 2012.

In 2007, we entered into agreements to facilitate third party construction and ownership of the JW Marriott^® San Antonio Hill Country Resort & Spa, which includes a 1,002 room destination resort and two PGA Tour^® Tournament Players Club^® (TPC) golf courses. Under these agreements, we agreed to transfer to third party owners 700 acres of undeveloped land, to provide $30,000,000 cash and to provide $12,700,000 of other consideration principally consisting of golf course construction materials, substantially all of which has been provided.

In exchange for our commitment to the resort, the third party owners assigned to us certain rights under an agreement between the third party owners and a legislatively created Special Improvement District (SID). This agreement includes the right to receive from the SID 9 percent of hotel occupancy revenues and 1.5 percent of other resort sales revenues collected as taxes by the SID through 2034. The amount we receive will be net of annual ad valorem tax reimbursements by the SID to the third party owners of the resort through 2020. In addition, these payments will be net of debt service, if any, on bonds issued by the SID collateralized by hotel occupancy tax and other resort sales tax through 2034.

The amounts we collect under this agreement are dependent on several factors including the amount of revenues generated by and ad valorem taxes imposed on the resort and the amount of any applicable debt service incurred by the SID. As a result, there is significant uncertainty as to the amount and timing of collections under this agreement. Until these uncertainties are clarified, amounts collected under the agreement will be accounted for as a reduction of our investment in the resort development. The resort began operations on January 22, 2010.

In ~~second quarter~~first nine months 2012, we received ~~$300,000~~$1,950,000 in reimbursements from the SID. Since inception, we have received ~~$8,206,000~~$9,856,000 in reimbursements and have accounted for this as a reduction of our investment. At ~~second~~third quarter-end 2012, we have ~~$35,067,000~~$33,418,000 invested in the resort development.

The mixed-use development we own consists of 2,100 acres planned to include approximately 1,475 residential lots and 150 commercial acres designated for multifamily and retail uses, of which ~~705~~713 lots and 68 commercial acres have been sold through ~~second~~third quarter-end 2012.

In 2007, we entered into an agreement with the SID providing for reimbursement of certain infrastructure costs related to the mixed-use development. Reimbursements are subject to review and approval by the SID and unreimbursed amounts accrue interest at 9.75 percent. The SID’s funding for reimbursements is principally derived from its ad valorem tax collections and bond proceeds collateralized by ad valorem taxes, less debt service on these bonds and annual administrative and public service expenses. Through ~~second~~third quarter-end 2012, we have submitted and received approval for reimbursement of approximately $57,322,000 of infrastructure costs and have received reimbursements totaling ~~$22,920,000.~~$23,070,000. In ~~second quarter~~first nine months 2012, we received ~~$400,000~~$550,000 in reimbursements from the SID. At ~~second~~third quarter-end 2012, we have ~~$34,402,000~~$34,252,000 in approved and pending reimbursements, excluding interest.

Since the amount of each reimbursement is dependent on several factors, including timing of SID approval and the SID having an adequate tax base to generate funds that can be used to reimburse us, there is uncertainty as to the amount and timing of reimbursements under this agreement. We expect to recover our investment from lot and tract sales and reimbursement of approved infrastructure costs from the SID. We have not recognized income from interest due, but not collected. As these uncertainties are clarified, we will modify our accounting accordingly.

At ~~second~~third quarter-end 2012, we have ~~$45,494,000~~$46,139,000 invested in the mixed-use development.

There have been no significant changes in our critical accounting policies or estimates from those disclosed in our 2011 Annual Report on Form 10-K.

Please readNote 2 to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

A summary of our real estate projects in the entitlement process^(a) at ~~second~~third quarter-end 2012 follows:

A summary of activity within our projects in the development process, which includes entitled^(a), developed and under development real estate projects, at ~~second~~third quarter-end 2012 follows:


						Residential Lots^(c)				Commercial Acres^(d)									Residential Lots^(c)				Commercial Acres^(d)
Project	County	Market	Interest Owned ^(b)			Lots Sold Since Inception		Lots Remaining		Acres Sold Since Inception		Acres Remaining ^(f)		County	Market	Interest Owned ^(b)			Lots Sold Since Inception		Lots Remaining		Acres Sold Since Inception		Acres Remaining ^(f)
Projects we own

California
San Joaquin River	Contra Costa/Sacramento	Oakland		100	%		—		—		—		288	Contra Costa/Sacramento	Oakland		100	%		—		—		—		288

Colorado
Buffalo Highlands	Weld	Denver		100	%		—		164		—		—	Weld	Denver		100	%		—		164		—		—
Johnstown Farms	Weld	Denver		100	%		140		472		2		7	Weld	Denver		100	%		162		451		2		7
Pinery West	Douglas	Denver		100	%		—		—		—		111	Douglas	Denver		100	%		—		—		—		111
Stonebraker	Weld	Denver		100	%		—		603		—		—	Weld	Denver		100	%		—		603		—		—

Texas
Arrowhead Ranch	Hays	Austin		100	%		—		259		—		6	Hays	Austin		100	%		—		259		—		6
Bar C Ranch	Tarrant	Dallas/Fort Worth		100	%		292		907		—		—	Tarrant	Dallas/Fort Worth		100	%		292		907		—		—
Barrington Kingwood	Harris	Houston		100	%		23		157		—		—	Harris	Houston		100	%		35		145		—		—
Cibolo Canyons	Bexar	San Antonio		100	%		705		770		68		82	Bexar	San Antonio		100	%		713		762		68		82
Harbor Lakes	Hood	Dallas/Fort Worth		100	%		203		246		2		19	Hood	Dallas/Fort Worth		100	%		203		246		2		19
Hunter’s Crossing	Bastrop	Austin		100	%		390		100		38		71	Bastrop	Austin		100	%		390		100		38		71
La Conterra	Williamson	Austin		100	%		93		407		—		58	Williamson	Austin		100	%		103		397		—		58
Maxwell Creek	Collin	Dallas/Fort Worth		100	%		769		230		10		—	Collin	Dallas/Fort Worth		100	%		781		218		10		—
Oak Creek Estates	Comal	San Antonio		100	%		116		531		13		—	Comal	San Antonio		100	%		131		516		13		—
Stoney Creek														Dallas	Dallas/Fort Worth		100	%		141		613		—		—
Summer Creek Ranch	Tarrant	Dallas/Fort Worth		100	%		807		467		35		44	Tarrant	Dallas/Fort Worth		100	%		819		455		35		44
Summer Lakes	Fort Bend	Houston		100	%		446		684		56		—	Fort Bend	Houston		100	%		462		668		56		—
Summer Park^(g)	Fort Bend	Houston		100	%		—		210		13		77	Fort Bend	Houston		100	%		—		210		27		63
The Colony	Bastrop	Austin		100	%		431		718		22		31	Bastrop	Austin		100	%		432		717		22		31
The Preserve at Pecan Creek	Denton	Dallas/Fort Worth		100	%		356		438		—		7	Denton	Dallas/Fort Worth		100	%		356		438		—		7
Village Park	Collin	Dallas/Fort Worth		100	%		472		288		3		2	Collin	Dallas/Fort Worth		100	%		408		163		3		2
Village Park North														Collin	Dallas/Fort Worth		100	%		75		114		—		—
Westside at Buttercup Creek	Williamson	Austin		100	%		1,387		109		66		—	Williamson	Austin		100	%		1,398		98		66		—
Other projects (11)	Various	Various		100	%		2,493		170		207		23

Other projects (10)														Various	Various		100	%		2,493		171		211		19
Georgia
Seven Hills	Paulding	Atlanta		100	%		646		441		26		113	Paulding	Atlanta		100	%		646		441		26		113
The Villages at Burt Creek	Dawson	Atlanta		100	%		—		1,715		—		57	Dawson	Atlanta		100	%		—		1,715		—		57
Towne West	Bartow	Atlanta		100	%		—		2,674		—		121	Bartow	Atlanta		100	%		—		2,674		—		121
Other projects (17)	Various	Atlanta		100	%		1,718		2,976		3		705	Various	Atlanta		100	%		1,724		2,970		3		705

Florida
Other projects (3)	Various	Tampa		100	%		708		137		—		—	Various	Tampa		100	%		708		137		—		—

Missouri and Utah
Other projects (2)	Various	Various		100	%		476		78		—		—	Various	Various		100	%		477		77		—		—

							12,671		15,951		564		1,822							12,949		16,429		582		1,804


Projects in entities we consolidate

Texas
City Park	Harris	Houston	75	%	1,193	118	50	115	Harris	Houston	75	%	1,201	110	50	115
Lantana	Denton	Dallas/Fort Worth	55	%^(e)	876	1,416	—	—	Denton	Dallas/Fort Worth	55	%^(e)	911	1,381	—	—
Stoney Creek	Dallas	Dallas/Fort Worth	90	%	129	625	—	—
Timber Creek	Collin	Dallas/Fort Worth	88	%	—	614	—	—	Collin	Dallas/Fort Worth	88	%	—	614	—	—
Willow Creek									Walter/Fort Bend	Houston	90	%	—	231	—	—
Other projects (3)	Various	Various	Various		6	203	16	148	Various	Various	Various		7	202	16	148

Georgia
The Georgian	Paulding	Atlanta	75	%	289	1,052	—	—	Paulding	Atlanta	75	%	289	1,052	—	—

					2,493	4,028	66	263					2,408	3,590	66	263

Total owned and consolidated					15,164	19,979	630	2,085					15,357	20,019	648	2,067

Projects in ventures that we account for using the equity method

Texas
Entrada	Travis	Austin	50	%	—	821	—	—	Travis	Austin	50	%	—	821	—	—
Fannin Farms West	Tarrant	Dallas/Fort Worth	50	%	323	58	—	12	Tarrant	Dallas/Fort Worth	50	%	324	24	—	12
Harper’s Preserve	Montgomery	Houston	50	%	123	1,602	—	72	Montgomery	Houston	50	%	153	1,572	—	72
Lantana	Denton	Dallas/Fort Worth	Various	^(e)	1,450	82	16	42	Denton	Dallas/Fort Worth	Various	^(e)	1,451	81	16	42
Long Meadow Farms	Fort Bend	Houston	37	%	942	853	107	192	Fort Bend	Houston	37	%	967	828	107	192
Southern Trails	Brazoria	Houston	80	%	538	445	—	—	Brazoria	Houston	80	%	553	430	—	—
Stonewall Estates	Bexar	San Antonio	50	%	295	93	—	—	Bexar	San Antonio	50	%	299	89	—	—
Other projects (1)	Nueces	Corpus Christi	50	%	—	—	—	15	Nueces	Corpus Christi	50	%	—	—	—	15

					3,671	3,954	123	333
Total in ventures													3,747	3,845	123	333

Combined total					18,835	23,933	753	2,418					19,104	23,864	771	2,400

A summary of our significant commercial and income producing properties at ~~second~~third quarter-end 2012 follows:

Project

County

Market

Interest
Owned ^(a)

Type

Acres

Description

County

Market

Interest
Owned ^(a)

Type

Acres

Description

Broadstone Memorial

Harris

Houston

100%

Multifamily

401 unit luxury apartment

Radisson Hotel

Travis

Austin

100%

Hotel

413 guest rooms and suites

Travis

Austin

100

Hotel

413 guest rooms and suites

Las Brisas

Williamson

Austin

59%

Multifamily

414 unit luxury apartment

Williamson

Austin

Multifamily

414 unit luxury apartment

Promesa^{(b) (c)}

Travis

Austin

100%

Multifamily

289 unit luxury apartment

Travis

Austin

100

Multifamily

289 unit luxury apartment

Eleven^(c)

Travis

Austin

25%

Multifamily

257 unit luxury apartment

Travis

Austin

Multifamily

257 unit luxury apartment

360°^(c)

Arapahoe

Denver

20%

Multifamily

304 unit luxury apartment

Arapahoe

Denver

Multifamily

304 unit luxury apartment

Please see page 35 for information regarding the resort hotel, spa and golf development at Cibolo Canyons.

A summary of our oil and natural gas mineral interests^(a) owned at ~~second~~third quarter-end 2012 follows:


State	Unleased		Leased ^(b)		Held By Production ^(c)		Total^(d)		Unleased		Leased ^(b)		Held By Production ^(c)		Total ^(d)
	(Net acres)								(Net acres)
Texas		196,000		30,000		26,000		252,000		201,000		25,000		26,000		252,000
Louisiana		120,000		15,000		9,000		144,000		120,000		12,000		12,000		144,000
Georgia		156,000		—		—		156,000		155,000		—		—		155,000
Alabama		40,000		—		—		40,000		40,000		—		—		40,000
California		1,000		—		—		1,000		1,000		—		—		1,000
Indiana		1,000		—		—		1,000		1,000		—		—		1,000

		514,000		45,000		35,000		594,000		518,000		37,000		38,000		593,000

A summary of our Texas and Louisiana mineral acres owned^(a) by county or parish at ~~second~~third quarter-end 2012 follows:

A summary of our net mineral acres leased from others and net leased acres held by production principally as a result of our September 28, 2012 acquisition of Credo follows:

Our interest rate risk is principally related to our variable-rate debt. Interest rate changes impact earnings due to the resulting increase or decrease in the cost of our variable-rate debt, which is ~~$172,012,000~~$273,220,000 at ~~second~~third quarter-end 2012 and $191,656,000 at year-end 2011.

The following table illustrates the estimated effect on our pre-tax income of immediate, parallel, and sustained shifts in interest rates for the next 12 months on our variable-rate debt at ~~second~~third quarter-end 2012, with comparative year-end 2011 information. This estimate assumes that debt reductions from contractual payments will be replaced with short-term, variable-rate debt; however, that may not be the financing alternative we choose.


Change in Interest Rates	Second Quarter-End 2012			Year-End 2011			Third Quarter-End 2012			Year-End 2011
	(In thousands)						(In thousands)
+2%	$	(3,279	)	$	(3,296	)	$	(5,821	)	$	(3,296	)
+1%		(1,720	)		(1,917	)		(2,732	)		(1,917	)
-1%		1,720			1,917			2,732			1,917
-2%		3,440			3,833			5,464			3,833

~~We have~~In third quarter 2012, we had no ~~significant exposure to commodity price fluctuations.~~derivative or hedging contracts.

Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (or the Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure

controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

~~There~~Except as described below, there have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There are no material changes from the risk factors disclosed in our 2011 Annual Report on Form ~~10-K.~~10-K, other than the addition of the following risk factors.

We may be unable to realize the expected benefits of acquiring CREDO Petroleum Corporation (Credo), and the Credo acquisition may adversely affect our business, financial condition or results of operations.

The success of the Credo acquisition will depend, in part, on our ability to achieve the synergies and value creation from combining our existing business with that of Credo. It will also depend, in part, on our ability to promptly and effectively integrate Credo’s operations into our existing operations and integrate Credo’s employees into our Company. The integration of Credo’s business may result in unforeseen expenses. In addition, our increased indebtedness and higher debt-to-equity ratio following the Credo acquisition may have the effect, among other things, of reducing our flexibility to respond to changing business or economic conditions and will increase interest costs. In addition, it is possible that, in connection with the Credo acquisition, our capital expenditures could be higher than we anticipated and that we may not realize the expected benefits of such capital expenditures. Credo’s leased acreage is subject to expiration in the ordinary course of business and as a result the gross and net acres acquired could decrease materially in subsequent reporting periods if delay rentals are not paid or if the acreage is not held by production. As a result of the Credo acquisition, based on the preliminary purchase price allocation, we recorded goodwill and other intangibles of approximately $55,954,000. If we are unable to successfully integrate the Credo operations, there can be no assurance that such changes would not materially impact the carrying value of our goodwill.

Our operations are subject to the numerous risks of oil and gas drilling and production activities.

Our oil and gas drilling and production activities are subject to numerous risks, many of which are beyond our control. These risks include the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured formations and environmental hazards. Environmental hazards include oil spills, gas leaks, ruptures, discharges of toxic gases, underground migration and surface spills or mishandling of any toxic fracture fluids, including chemical additives. In addition, title problems, weather conditions and mechanical difficulties or shortages or delays in delivery of drilling rigs and other equipment could negatively affect our operations. If any of these or other similar industry operating risks occur, we could have substantial losses. Substantial losses also may result from injury or loss of life, severe damage to or destruction of property, clean-up responsibilities, environmental damage, regulatory investigation and penalties and suspension of operations. In accordance with industry practice, we maintain insurance against some, but not all, of the risks described above. We cannot assure you that our insurance will be adequate to cover losses or liabilities. Also, we cannot predict the continued availability of insurance at premium levels that justify its purchase.

There is no assurance that new wells we drill will be productive or that we will recover all or any portion of our capital investment in the wells. In addition, drilling for oil and gas may be unprofitable. Wells that are productive but do not produce sufficient net revenues after drilling, operating and other costs are unprofitable.

Expenditures related to drilling activities could lead to higher levels of indebtedness.

We expect increasing drilling expenditures that we plan to pay for with cash flow from operations and borrowings under our senior secured credit facility. We cannot assure you that we will have sufficient capital resources in the future to finance all of our planned drilling expenditures. If cash flows from operations decrease for any reason, our ability to undertake exploration and development activities could be adversely affected and we may have to borrow additional capital under our credit facility to finance such activities. Such borrowings, if available, could lead to higher levels of indebtedness, limiting our financial and operating flexibility and limiting our ability to comply with the debt covenants under our credit facility.

The lack of availability or high cost of drilling rigs, equipment, supplies, personnel and oil field services could adversely affect our ability to execute our exploitation and development plans on a timely basis and within our budget.

From time to time, there are shortages of drilling rigs, equipment, supplies, oil field services or qualified personnel. During these periods, the costs and delivery times of rigs, equipment and supplies are substantially greater. In addition, the demand for, and wage rates of, qualified drilling rig crews rise as the number of active rigs in service increases. During times and in areas of increased activity, the demand for oilfield services will also likely rise, and the costs of these services will likely increase, while the quality of these services may suffer. If the lack of availability or high cost of drilling rigs, equipment, supplies, oil field services or qualified personnel were particularly severe in any of our areas of operation, we could be materially and adversely affected. Delays could also have an adverse effect on our results of operations, including the timing of the initiation of production from new wells.

Our drilling operations may be curtailed, delayed or cancelled as a result of a variety of factors that are beyond our control.

The occurrence of any of these events could adversely affect our ability to conduct operations or cause substantial losses, including personal injury or loss of life, damage to or destruction of property, natural resources and equipment, pollution or other environmental contamination, loss of wells, regulatory penalties, suspension of operations, and attorney’s fees and other expenses incurred in the prosecution or defense of litigation.


Period	Total Number of Shares Purchased ^(b)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares That May Yet be Purchased Under the Plans or Programs
Month 1 (7/1/2012 — 7/31/2012)		—	$	—		—		5,092,305
Month 2 (8/1/2012 — 8/31/2012)		—	$	—		—		5,092,305
Month 3 (9/1/2012 — 9/30/2012)		1,117	$	18.05		—		5,092,305

Total		1,117	$	18.05		—

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


Title of Each Class		Number of Shares Outstanding as of ~~August 6,~~ November 5, 2012
Common Stock, par value $1.00 per share		~~34,680,795~~34,692,106


PART I — FINANCIAL INFORMATION			3
Item 1. Financial Statements			3
Consolidated Balance Sheets			3
Consolidated Statements of Income			4
Consolidated Statements of Cash Flows			5
Notes to Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			1921
Item 3. Quantitative and Qualitative Disclosures About Market Risk			3840
Item 4. Controls and Procedures			3841
PART II — OTHER INFORMATION			3941
Item 1. Legal Proceedings			3941
Item 1A. Risk Factors			3942
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			3943
Item 3. Defaults Upon Senior Securities			4043
Item 4. Mine Safety Disclosures			4043
Item 5. Other Information			4043
Item 6. Exhibits			4044

SIGNATURES			4145


	(Unaudited)
	Second
	Quarter-End			Year-End
	2012			2011
	(In thousands)
ASSETS
Cash and cash equivalents	$	45,474		$	18,283
Real estate		541,238			565,367
Investment in unconsolidated ventures		42,327			64,223
Timber		13,806			14,240
Receivables, net		23,580			23,281
Prepaid expenses		3,340			2,931
Property and equipment, net		4,906			5,178
Oil and natural gas properties and equipment, net		6,349			4,561
Deferred tax asset		75,851			72,942
Goodwill and other intangible assets		5,451			5,451
Other assets		15,658			18,400

TOTAL ASSETS	$	777,980		$	794,857

LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable	$	4,955		$	5,044
Accrued employee compensation and benefits		1,295			1,421
Accrued property taxes		4,993			4,986
Accrued interest		844			1,086
Income taxes payable		2,422			8,501
Other accrued expenses		11,673			7,716
Other liabilities		30,260			33,304
Debt		201,943			221,587

TOTAL LIABILITIES		258,385			283,645

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS’ EQUITY
Forestar Group Inc. shareholders’ equity:
Common stock, par value $1.00 per share, 200,000,000 authorized shares, 36,946,603 issued at second quarter-end 2012 and 36,835,732 issued at year-end 2011		36,947			36,836
Additional paid-in capital		403,990			398,517
Retained earnings		111,768			108,155
Treasury stock, at cost, 2,283,958 shares at second quarter-end 2012 and 2,212,876 shares at year-end 2011		(35,133	)		(33,982	)

Total Forestar Group Inc. shareholders’ equity		517,572			509,526
Noncontrolling interests		2,023			1,686

TOTAL SHAREHOLDERS’ EQUITY		519,595			511,212


TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	777,980		$	794,857


	Third Quarter-End 2012				Year-End 2011
	(In thousands)
ASSETS
Cash and cash equivalents		$	10,279			$	18,283
Real estate			508,603				565,367
Investment in unconsolidated ventures			43,041				64,223
Timber			13,303				14,240
Receivables, net			33,205				23,281
Prepaid expenses			3,009				2,931
Property and equipment, net			4,777				5,178
Oil and natural gas properties and equipment, net			147,268				4,561
Deferred tax asset, net			49,637				72,942
Goodwill and other intangible assets			61,406				5,451
Other assets			15,411				18,400

TOTAL ASSETS		$	889,939			$	794,857

LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable		$	29,863			$	5,044
Accrued employee compensation and benefits			2,955				1,421
Accrued property taxes			6,215				4,986
Accrued interest			845				1,086
Income taxes payable			1,323				8,501
Other accrued expenses			15,835				7,716
Other liabilities			34,991				33,304
Debt			276,651				221,587

TOTAL LIABILITIES			368,678				283,645

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS’ EQUITY
Forestar Group Inc. shareholders’ equity:
Common stock, par value $1.00 per share, 200,000,000 authorized shares, 36,946,603 issued at third quarter-end 2012 and 36,835,732 issued at year-end 2011			36,947				36,836
Additional paid-in capital			405,692				398,517
Retained earnings			111,065				108,155
Treasury stock, at cost, 2,257,427 shares at third quarter-end 2012 and 2,212,876 shares at year-end 2011			(34,728	)			(33,982	)

Total Forestar Group Inc. shareholders’ equity			518,976				509,526
Noncontrolling interests			2,285				1,686

TOTAL SHAREHOLDERS’ EQUITY			521,261				511,212

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	889,939			$	794,857


	(In thousands)
Beginning of period (first quarter-end 2012)	$	28,926
Yield accretion recognized		(1,093	)

End of period	$	27,833


	(In thousands)
Beginning of period (Second Quarter-End 2012)	$	27,833
Interest income recognized		(1,056	)

End of period	$	26,777


	Equivalent Units			Weighted Average Grant Date Fair Value
	(In thousands)			(Per unit)
Non-vested at beginning of year		449		$	13.13
Granted		187			16.11
Vested		(286	)		10.32
Forfeited		—			—

Non-vested at end of period		350		$	17.03


				Weighted
	Equivalent			Average Grant
	Units			Date Fair Value
	(In thousands)			(Per share)
Non-vested at beginning of year		159		$	20.74
Granted		291			17.48
Vested		(81	)		16.05
Forfeited		—			—

Non-vested at end of period		369		$	19.20


	Options Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value (Current Value Less Exercise Price)
	(In thousands)			(Per share)		(In years)		(In thousands)
Balance at beginning of year		1,284		$	22.22		7	$	944
Granted		473			15.94
Exercised		—			—
Forfeited		(1	)		16.89

Balance at end of period		1,756		$	20.53		7	$	1,532

Exercisable at end of period		975		$	23.66		6	$	974


					Weighted		Aggregate
					Average		Intrinsic Value
			Weighted		Remaining		(Current
	Options		Average		Contractual		Value Less
	Outstanding		Exercise Price		Term		Exercise Price)
	(In thousands)		(Per share)		(In years)		(In thousands)
Balance at beginning of year		1,284	$	22.22		7	$	944
Granted		453		16.11
Exercised		—		—
Forfeited		—		—

Balance at end of period		1,737	$	20.62		8	$	569

Exercisable at end of period		910	$	24.20		6	$	427


	Requirement			Second Quarter-End 2012
Financial Covenant
Interest Coverage Ratio^(a)	³	1.05:1.0			7.87:1.0
Revenues/Capital Expenditures Ratio^(b)	³	1.00:1.0			1.59:1.0
Total Leverage Ratio^{(c )}	£	40	%		27	%
Net Worth^(d)	> $	441 million		$	512 million
Collateral Value to Loan Commitment Ratio^{(e )}	³	1.50:1.0			1.55 :1.0


				~~Project~~
Project	County		Market	Project Acres^(b)
California
Hidden Creek Estates	Los Angeles		Los Angeles		700
Terrace at Hidden Hills	Los Angeles		Los Angeles		30
Georgia
Ball Ground	Cherokee		Atlanta		500
Crossing	Coweta		Atlanta		230
Fincher Road	Cherokee		Atlanta		3,890
Fox Hall	Coweta		Atlanta		960
Garland Mountain	Cherokee/Bartow		Atlanta		350
Home Place	Coweta		Atlanta		1,510
Martin’s Bridge	Banks		Atlanta		970
Mill Creek	Coweta		Atlanta		770
Serenity	Carroll		Atlanta		440
Waleska	Cherokee		Atlanta		~~100~~ 90
Wolf Creek	Carroll/Douglas		Atlanta		12,230
Yellow Creek	Cherokee		Atlanta		1,060
Texas
Lake Houston	Harris/Liberty		Houston		3,700
San Jacinto	Montgomery		Houston		150

Total					~~27,590~~ 27,580

		��


			Held By
State	Undeveloped		Production		Total
	(Net Acres)
Nebraska		53,000		2,000		55,000
Kansas		43,000		3,000		46,000
Oklahoma		—		17,000		17,000
North Dakota		4,000		2,000		6,000
Texas		1,000		2,000		3,000
Other^(a)		5,000		10,000		15,000

		106,000		36,000		142,000



10.1	~~Guaranty~~	Second Amended and Restated Revolving and Term Credit Agreement dated ~~June 28,~~September 14, 2012, by and among the Company; Forestar (USA) Real Estate ~~Group. in favor~~Group Inc. and certain of ~~Wells Fargo Bank,~~its wholly-owned subsidiaries signatory thereto; KeyBank National Association, as lender, swing line lender and agent, the lenders party thereto; and the other parties thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on ~~June 29,~~September 17, 2012).


10.2		Consulting Agreement, ~~and Plan~~dated effective as of ~~Merger, dated June 3,~~October 1, 2012, by and among CREDO Petroleum Corporation, Forestar Group Inc. and Longhorn Acquisition Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Commission on June 4, 2012).


31.1		Certification of Chief Executive Officer pursuant to Exchange Act rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


31.2		Certification of Chief Financial Officer pursuant to Exchange Act rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


101.1		The following materials from Forestar’s Quarterly Report on Form 10-Q for the quarter ended ~~June~~September 30, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements.

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