Production

Our share of oil and gas produced and average unit price related to our royalty interests follows:

Estimate of Year End 2010 Proved Developed Reserves and Value(Unaudited)

Proved developed reserves are those expected to be recovered through existing wells, with existing equipment and operating methods. These estimates were prepared in accordance with the definitions and guidelines of the U.S. Securities and Exchange Commission and, with the exception of exclusion of future income taxes, conform to the Financial Accounting Standards Board Codification Topic 932. Our proved developed reserve estimates were prepared by Netherland, Sewell & Associates, Inc., a third-party petroleum engineering firm. A summary of these estimates related to our consolidated and our share of equity ventures follows:

Year End 2010 Proved Developed Producing Reserves*

* Reserve information was prepared using constant oil and gas prices and costs throughout the lives of the properties. Oil prices are based on year-end 2010 West Texas Intermediate posted price of $75.96 per barrel and natural gas prices are based on year-end 2010 Henry Hub spot market price of $4.38 per MMBTU. All prices were adjusted for quality, transportation fees and regional price differentials. PV-10 represents the present value of future net cash flows (excluding income taxes) discounted at an annual rate of 10% and indicates the effect of time on the value of money and should not be construed as being the fair value of the properties. A reconciliation of future net cash flows before income taxes to the standardized measure of discounted future net cash flows as computed under GAAP can be found below. Includes Forestar's share of joint ventures accounted for by the equity method.

The estimates of proved developed reserves and value are derived from Forestar’s net royalty interest in 494 producing wells, resulting from leasing 30,000 net mineral acres, less than 5% of our mineral ownership. This information does not include estimates of reserves and value associated with proved undeveloped (PUD) reserves, probable reserves or possible reserves or any potential value related to our more than 576,000 undeveloped mineral acres.

Reconciliation of Non-GAAP Financial Measures (Unaudited)

The following table shows a reconciliation of PV-10 (discounted future net cash flows before income taxes) to the standardized measure of discounted future net cash flows (the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles, or GAAP). PV-10 is an estimate of the present value of future net cash flows from proved developed reserves after deducting estimated severance and ad valorem taxes, but before deducting any estimates of future income taxes. The estimated future net cash flows are discounted at an annual rate of 10%. A reconciliation of PV-10 to the standardized measure of discounted future net cash flows as computed under GAAP is illustrated below:

The undiscounted value represents an estimate of future net cash flows from proved developed reserves after deducting estimated severance and ad valorem taxes, but before deducting estimates of future income taxes. A reconciliation of undiscounted future net cash flows before income taxes to the undiscounted future net cash flows after income taxes is illustrated below:

We believe both PV-10 and undiscounted values are important for evaluating the relative significance of our oil and gas interests and that the presentation of the non-GAAP financial measures provides useful information to investors because they are widely used by professional analysts and sophisticated investors in evaluating oil and gas companies. Because there are many unique factors that can impact an individual company when estimating the amount of future income taxes to be paid, we believe the use of a pre-tax measure is valuable for evaluating our mineral assets.

Important Information About Reserve Estimates

The process of estimating oil and gas reserves is complex involving decisions and assumptions in evaluating the available geological, geophysical, engineering and economic data. Accordingly, these estimates are imprecise. Actual future production, oil and gas prices, revenues, taxes, and quantities of recoverable oil and gas reserves will vary from those estimated. Any variance could materially affect the estimated quantities and present value of reserves. In addition, we may adjust estimates of reserves to reflect production history, results of exploration and development, prevailing oil and gas prices and other factors, many of which are beyond our control.

As required by SEC regulations, we based the estimated discounted future net cash flows from our reserves on average prices and costs for the period presented. However, actual future net cash flows from our properties will be affected by factors such as:

• supply of and demand for oil and gas;
• actual prices we receive for oil and gas;
• actual operating costs;
• the amount and timing of actual production; and
• changes in governmental regulations or taxation.

The timing of both the production and the incurrence of expenses in connection with the development and production of our properties will affect the timing of actual future net cash flows from reserves, and thus their actual present value. In addition, the 10% discount factor we use when calculating discounted future net cash flows, which is required by the SEC, may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with us or the oil and gas industry in general. Any material inaccuracies in our reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves, which could adversely affect our business, results of operations and financial condition.