1406587--3/4/2008--Forestar_Real_Estate_Group

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{loan, real, estate}

{stock, price, share}

{stock, price, operating}

{investment, property, distribution}

{control, financial, internal}

{provision, law, control}

{interest, director, officer}

{cost, operation, labor}

{tax, income, asset}

{competitive, industry, competition}

{cost, regulation, environmental}

{customer, product, revenue}

Both our real estate and natural resources businesses are cyclical in nature. Development of real estate entails a lengthy, uncertain, and costly entitlement process. The real estate and natural resource industries are highly competitive and a number of entities with which we compete are larger and have greater resources, and competitive conditions may adversely affect our results of operations. Our activities are subject to environmental regulations and liabilities that could have a negative effect on our operating results. Our real estate operations are currently concentrated in Georgia and Texas. As a result, our financial results are dependent on the economic growth and strength of those areas. If we are unable to retain or attract experienced real estate development or natural resources management personnel, our business may be adversely affected. Our real estate development operations are increasingly dependent upon national, regional, and local homebuilders, as well as other strategic partners, who may have interests that differ from ours and may take actions that adversely affect us. Significant reductions in cash flow from slowing real estate or natural resources market conditions could lead to higher levels of indebtedness, limiting our financial and operating flexibility. Risks Relating to the Spin-off We may be unable to achieve some or all of the benefits that we expected to achieve from our spin-off from Temple-Inland. We have only a limited operating history as an independent, publicly-traded company upon which you can evaluate our performance, and accordingly, our prospects must be considered in light of the risks that any newly independent company encounters. Our agreements with Temple-Inland and Guaranty may not reflect terms that would have resulted from arm s-length negotiations among unaffiliated third parties. Our historical financial information is not necessarily indicative of our results as a separate company and, therefore, may not be reliable as an indicator of our future financial results. If the spin-off is determined to be taxable for U.S. federal income tax purposes, we, our stockholders, and Temple-Inland could incur significant U.S. federal income tax liabilities. We must abide by certain restrictions to preserve the tax-free treatment of the spin-off and may not be able to engage in desirable acquisitions and other strategic transactions following the spin-off. The ownership by our chairman, our executive officers, and some of our other directors of common stock, options, or other equity awards of Temple-Inland or Guaranty may create actual or apparent conflicts of interest. We may be unable to make, on a timely or cost-effective basis, the changes necessary to operate as an independent, publicly-traded company, and we may experience increased costs after the spin-off or as a result of the spin-off. Risks Relating to Our Common Stock The market price of our shares may fluctuate widely. Your percentage ownership in our common stock may be diluted in the future. The terms of our spin-off from Temple-Inland, anti-takeover provisions of our charter and bylaws, as well as Delaware law and our stockholder rights agreement, may reduce the likelihood of any potential change of control or unsolicited acquisition proposal that you might consider favorable. We currently do not intend to pay any dividends on our common stock. Accordingly, investors in our common stock must rely upon subsequent sales after price appreciation as the sole method to realize a gain on an investment in our common stock.

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1406587--3/4/2008--Forestar_Real_Estate_Group_Inc.