Management's discussion and analysis presented below should be read in conjunction with our discussion and analysis of financial results contained in our 2008 Annual Report on Form 10-K (2008 Form 10-K) filed with the Securities and Exchange Commission (SEC) and with "Note 2. Revisions of Previously Issued Consolidated Financial Statements" included in Notes to Consolidated Financial Statements (unaudited) contained elsewhere in this quarterly report on Form 10-Q. The operating results summarized in this report are not necessarily indicative of our future operating results. All subsequent references to "Notes" refer to Notes to Consolidated Financial Statements (unaudited), unless otherwise stated.

We are engaged in the acquisition, development, management, operations and sale of commercial, multi-family and residential real estate properties located primarily in the Austin, Texas area.

Our principal real estate holdings are in southwest Austin, Texas. The number of developed lots, developed or under development acreage and undeveloped acreage as of March 31, 2009, that comprise our principal development projects are presented in the following table.

                                                        Acreage
                              Developed or Under Development              Undeveloped
               Developed   Single   Multi-                        Single                         Total
                 Lots      Family   family   Commercial   Total   Family   Commercial   Total   Acreage
Austin
Barton Creek         125      358      249          368     975      510           28     538     1,513
Lantana                -        -        -            -       -        -          223     223       223
Circle C              95 a      -        -          265     265      148 a        122     270       535
W Austin Hotel
& Residences           -        -        -            2 b     2        -            -       -         2
San Antonio
Camino Real            -        -        -            -       -        -            2       2         2
Total                220      358      249          635   1,242      658          375   1,033     2,275

a. Relates to Meridian, an 800-lot residential development.

b. Represents a city block in downtown Austin planned for a mixture of hotel, residential, retail, office and entertainment uses.

Our other Austin holdings at March 31, 2009, consisted of two 75,000-square-foot office buildings at 7500 Rialto Boulevard (7500 Rialto) located in our Lantana development, a 22,000-square-foot retail complex representing phase one of Barton Creek Village and two retail buildings totaling 21,000 square feet at the 5700 Slaughter project in Circle C.

The sharp decline in the real estate market, among other factors, significantly impacted our consolidated financial results. In the first quarter of 2009, our revenues totaled $1.5 million and our net loss totaled $1.7 million, compared with revenues of $5.1 million and a net loss of $0.2 million for the first quarter of 2008. Our financial condition and results of operations are highly dependent upon market conditions for real estate activity in Austin, Texas. Our future operating cash flows and, ultimately, our ability to develop our properties and expand our business will be largely dependent on the level of our real estate sales. In turn, these sales will be significantly affected by future real estate market conditions in Austin, Texas, including development costs, interest rate levels, the availability of credit to finance real estate transactions, demand for residential and commercial real estate, and regulatory issues including our land use and development entitlements.

The current economic conditions have also resulted in a general decline in leasing activity across the United States (U.S.), and have caused vacancy rates to increase in most markets, including Austin, Texas. Investment sales activity in the U.S. declined sharply during 2008 because of, among other factors, limited availability and increased cost of financing, especially the absence of securitized debt, which was the source of recent heightened investment activity, and the resulting gap between buyer and seller expectations of value.

Periods of economic slowdown or recession, rising interest rates, tightening of the credit markets, declining demand for or increased supply of real estate, or the public perception that any of these events may occur can adversely affect our business. These conditions could result in a general decline in rents, which in turn would reduce revenue from leases. In addition, these conditions could lead to a decline in property values as well as a decline in funds invested in commercial real estate and related assets, which in turn may reduce revenues from leases and development fees.

The recovery of U.S. credit markets has yet to materialize, and this lingering problem is impacting the broader U.S. economy. Commercial real estate lenders have substantially tightened underwriting standards or have withdrawn from the lending market, materially impacting liquidity in the real estate debt markets, making financing terms for owners of retail properties less attractive, and in certain cases resulting in the unavailability of certain types of debt financing. Tighter lending standards and higher borrower costs have exerted downward pressure on the value and liquidity of real estate assets which will impact the values we could obtain from the sale of our properties. These factors may make it more difficult for us to sell properties or may adversely affect the price we receive for properties that we do sell, as prospective buyers may experience increased costs of debt financing or difficulties in obtaining debt financing. Our future performance will, in part, be dependent upon the recovery of the credit markets and the underlying strength of the U.S. economy.

Over the past several years, we have successfully worked cooperatively with the City of Austin (the City) to obtain approvals that allow the development of our properties to proceed in a timely manner while protecting the environment. We believe the desirable location and overall quality of our properties, in combination with the land use and development entitlements we have obtained, will under normal market conditions command a premium over the value of other Austin-area properties.

Our long-term success will depend on our ability to maximize the value of our real estate through obtaining required approvals that permit us to develop and sell our properties in a timely manner at a reasonable cost. We must incur significant development expenditures and secure additional permits prior to the development and sale of certain properties. In addition, we continue to pursue additional development opportunities, and currently believe we can obtain bank financing necessary for developing our properties, although our ability to obtain bank financing in the future may be impacted by the current U.S. economic conditions. See "Risk Factors" located in Item 1A of our 2008 Form 10-K.

As discussed in Note 2, certain accounting matters were identified in the third quarter of 2008 and in connection with the preparation of our financial results for the year ended December 31, 2008 that required revisions of our consolidated financial statements for the three-month period ended March 31, 2008. Management's discussion and analysis has been updated to discuss changes in comparative results of operations and cash flows after considering the impacts of the items discussed in detail in Notes 2 and 3.

W Austin Hotel & Residences. In 2005, the City selected our proposal to develop a mixed-use project in downtown Austin immediately north of the new City Hall complex. The W Austin Hotel & Residences project includes an entire city block and is planned for a mixture of hotel, residential, retail, office and entertainment uses. In December 2006, we acquired the property for $15.1 million. We have executed agreements with Starwood Hotels & Resorts Worldwide, Inc. for the development of a W Hotel & Residences on the site. In May 2007, we announced our proposed partnership with Canyon-Johnson Urban Fund II, L.P. (Canyon-Johnson) for the development of the W Austin Hotel & Residences project. The grand opening for the onsite sales center was held in conjunction with the groundbreaking ceremony in October 2007. Effective May 1, 2008, we entered into a joint venture with Canyon-Johnson for the development of the project (see Note
5). At March 31, 2009, we had $2.1 million of borrowings outstanding under the W Austin Hotel & Residences project construction loan (see Notes 5 and 12 and "Credit Facility and Other Financing Arrangements" in our discussion of Capital Resources and Liquidity).

Construction of the $300 million project commenced in the second quarter of 2008 and is proceeding as scheduled.

Crestview Station. In 2005, we formed a joint venture with Trammell Crow to acquire an approximate 74-acre tract at the intersection of Airport Boulevard and Lamar Boulevard in Austin, Texas, for $7.7 million. The property, known as Crestview Station, is a single-family, multi-family, retail and office development, which is located on the site of a future commuter rail line approved by City of Austin voters. With Trammell Crow, we have completed environmental remediation, which the State of Texas certified as complete in September 2007, and permitting of the property. Infrastructure development of Crestview Station is progressing. The initial phase of utility and roadway infrastructure is under construction and expected to be completed by year-end 2009. Crestview Station sold substantially all of its multi-family and commercial properties in 2007 and one commercial site in the first quarter of 2008. The joint venture retained the single-family component of Crestview Station and two commercial sites. The joint venture is currently processing permits to develop Crestview Station as a 450-unit transit-oriented neighborhood. At March 31, 2009, our investment in the Crestview Station project totaled $2.5 million and the joint venture partnership had $9.2 million of outstanding debt, of which we guarantee $1.9 million (see Notes 7 and 12).

Residential. As of March 31, 2009, the number of our residential developed lots, lots under development and development potential by area are shown below (excluding lots and units associated with our Canyon-Johnson and Crestview joint ventures):

                                     Residential Lots
                                                Potential
                                    Under      Development
                     Developed   Development        a         Total
Barton Creek:
Calera:
Calera Court
Courtyard Homes              4             -             -          4
Calera Drive                 8             -             -          8
Verano Drive                68             -             -         68
Amarra Drive:
Phase I Lots                 7             -             -          7
Phase II Lots               35             -             -         35
Phase II and III
Townhomes                    -             -           221        221
Phase III                    -            89             -         89
Mirador Estate               2             -             -          2
Wimberly Lane Phase
II                           1             -             -          1
Section N
Multi-family                 -             -         1,860      1,860
Other Barton Creek
Sections                     -             -           154        154

Circle C:
Meridian                    95             -            57        152
Total Residential
Lots                       220            89         2,292      2,601

a. Our development of the properties identified under the heading "Potential Development" is dependent upon the approval of our development plans and permits by governmental agencies, including the City. Those governmental agencies may either not approve one or more development plans and permit applications related to such properties or require us to modify our development plans. Accordingly, our development strategy with respect to those properties may change in the future.

Calera. In 2002, we secured subdivision plat approval for a new residential subdivision called Calera, which consists of 155 lots. During 2004, we began construction of 16 courtyard homes at Calera Court, the 16-acre initial phase of the Calera subdivision. The second phase of Calera, Calera Drive, consisting of 53 single-family lots, many of which adjoin the Fazio Canyons Golf Course, received final plat and construction permit approval in 2005. As of March 31, 2009, four courtyard homes at Calera Court and eight lots at Calera Drive remained unsold. Construction of the final phase, known as Verano Drive, began in the first quarter of 2007 and was completed in July 2008. Verano Drive includes 71 single-family lots, three of which were sold in July 2008.

Amarra Drive. During 2007, we completed development of Amarra Drive Phase I, the initial phase of the Amarra Drive subdivision. Amarra Drive Phase I includes eight lots, one of which was sold in September 2007, with sizes ranging from approximately one to four acres, some of which are course-side lots on the Fazio Canyons Golf Course and others are secluded lots adjacent to the Nature Conservancy of Texas. In January 2008, we commenced development of Amarra Drive Phase II, which consists of 35 lots on 51 acres. Development was substantially completed in October 2008.

Mirador Estate. We completed construction of the Mirador subdivision, which included the development of 34 estate lots with each lot averaging approximately 3.5 acres in size, and have sold 32 of these lots. As of March 31, 2009, we owned two Mirador estate lots.

Wimberly Lane Phase II. In 2004, we entered into a contract with a national homebuilder to sell 41 lots within the Wimberly Lane Phase II subdivision. The average purchase price for each of the 41 lots was $150,400, subject to a six percent annual escalator. We sold the last homebuilder lot in January 2008 and have one Wimberly Lane lot remaining for sale.

Circle C. We are developing the Circle C community based on the entitlements secured in our Circle C settlement with the City. Our Circle C settlement, as amended in 2004, permits development of 1.16 million square feet of commercial space, 504 multi-family units and 830 single family residential lots. Meridian is an 800-lot residential development at the Circle C community. In 2005, we commenced the first phase of construction and contracted to sell a total of 494 lots in our Meridian project to three national homebuilders in four phases. Sales for each of the four phases commence upon substantial completion of development for that phase, and continue every quarter until all of the lots have been sold. The first and second phases each consisted of 134 lots. The first phase was substantially completed at the end of 2005. Development of the second phase was substantially completed in March 2006. Development of the 108-lot third phase of Meridian was completed in September 2007. The 118-lot fourth phase commenced in early 2008 and was completed in June 2008.

In 2006, we signed another contract with a national homebuilder for 42 additional lots. Development of those lots commenced in April 2007 and substantial completion occurred in April 2008. In June 2009, this contract was terminated by the homebuilder. As of the date the contract was terminated, there were 30 remaining unclosed lots. In connection with the termination, the homebuilder forfeited a deposit of $0.6 million. Construction of the final phase of Meridian, which consists of 57 one-acre lots, is expected to commence in 2010.

Commercial. As of March 31, 2009, the number of square feet of our commercial property developed, under development and our remaining entitlements are shown below (excluding property associated with our Canyon-Johnson and Crestview joint ventures):

                                    Commercial Property
                                                Potential
                                    Under      Development
                     Developed   Development        a          Total
Barton Creek:
Barton Creek Village
Phase I                 22,000             -             -      22,000
Barton Creek Village
Phase II                     -             -        18,000      18,000
Entry Corner                 -             -         5,000       5,000
Amarra Retail/Office         -             -        90,000      90,000
Section N                    -             -     1,500,000   1,500,000

Circle C:
Chase Ground Lease       4,000             -             -       4,000
Tract 106               21,000             -             -      21,000
Tract 110                    -       760,000             -     760,000
Tract 107                    -        80,000             -      80,000
Tract 101                    -             -        90,000      90,000
Tract 102                    -             -        25,000      25,000
Tract 114                    -             -         5,000       5,000

Lantana:
7500 Rialto            150,000             -             -     150,000
Advanced Micro
Devices
Option Tracts                -             -       760,000     760,000
Tract GR1                    -             -       325,000     325,000
Tract G07                    -             -       210,000     210,000
Tract CS5                    -             -       175,000     175,000
Tract CS1-CS3                -             -       150,000     150,000
Tract LR1                    -             -        75,000      75,000
Tract L04                    -             -        70,000      70,000

Austin 290 Tract             -             -        20,000      20,000
Total Square Feet      197,000       840,000     3,518,000   4,555,000

a. Our development of the properties identified under the heading "Potential Development" is dependent upon the approval of our development plans and permits by governmental agencies, including the City. Those governmental agencies may either not approve one or more development plans and permit applications related to such properties or require us to modify our development plans. Accordingly, our development strategy with respect to those properties may change in the future.

Barton Creek. In the second quarter of 2007, we completed the first phase of the Barton Creek Village, which is a 22,000-square-foot retail complex. In July 2007, we began construction of a 3,300-square-foot bank building within this 22,000-square-foot retail complex, and it was completed in early 2008. As of March 31, 2009, the first retail complex was 58 percent leased and the bank building is leased through 2022. Construction of the second retail complex is expected to begin during 2010.

Circle C. During the third quarter of 2008, Stratus completed the construction of two retail buildings, totaling 21,000 square feet, at the 5700 Slaughter project. This retail project also includes a 4,000-square-foot bank building on an existing ground lease. Leasing for the two retail buildings is under way with 22 percent of the 21,000-square-foot retail complex leased as of March 31, 2009. We expect the 21,000-square-foot retail complex to be fully leased by the end of 2009.

The Circle C community also includes Parkside Village, an 80,000-square-foot planned retail project. The project will be developed in two phases. The first phase will consist of a 34,000-square-foot building to accommodate a full-service restaurant and theater. The second phase will consist of three tilt-wall retail buildings at 14,775 square feet, 8,075 square feet and 7,600 square feet, and two pads available for ground leases. We are pursuing final permits and entitlements to position the project for commencement of construction when appropriate.

Lantana. Lantana is a partially developed, mixed-use project with remaining entitlements for approximately 1.0 million square feet of office and retail use on 223 acres as of March 31, 2009. Regional utility and road infrastructure is in place with capacity to serve Lantana at full build-out permitted under our existing entitlements.

In Lantana, we also own two 75,000-square-foot office buildings at 7500 Rialto. As of March 31, 2009, occupancy was 72 percent for the original office building and 94 percent for the second office building.

                             RESULTS OF OPERATIONS

We are continually evaluating the development potential of our properties and
will continue to consider opportunities to enter into transactions involving our
properties. As a result, and because of numerous other factors affecting our
business activities as described herein, our past operating results are not
necessarily indicative of our future results.

Summary operating results follow (in thousands):

                             First Quarter
                            2009       2008
Revenues:
Real estate operations    $    359   $  4,116
Commercial leasing           1,173        951
Total revenues            $  1,532   $  5,067

Operating loss            $ (2,879 ) $ (1,274 )

Benefit from income taxes $    897   $     52

Net loss                  $ (1,737 ) $   (156 )

We have two operating segments, "Real Estate Operations" and "Commercial Leasing" (see Note 10). The following is a discussion of our operating results by segment.

Real Estate Operations
Summary results for our real estate operations follow (in thousands):

                                          First Quarter
                                         2009       2008
Revenues:
Developed property sales               $    191   $  3,904
Commissions, management fees and other      168        212
Total revenues                              359      4,116

Cost of sales, including depreciation    (1,128 )   (3,531 )
General and administrative expenses      (1,296 )   (1,425 )

Operating loss                         $ (2,065 ) $   (840 )

Developed Property Sales. Residential property sales for the first-quarter of 2009 and 2008 included the following (revenues in thousands):

                                            First Quarter
                                  2009                         2008
                       Lots        Revenues         Lots        Revenues
Barton Creek
Wimberly Lane Phase II
Standard Homebuilder      -   $                 -      1    $              265 a

Circle C
Meridian                  3                   191     33                 2,229

Deerfieldb                -                     -     21                 1,410
Total Residential         3   $               191     55   $             3,904

a. Includes $0.1 million for homebuilder contract termination fee.

b. In 2004, we acquired the Deerfield property in Plano, Texas, for $7.0 million. We executed agreements with a national homebuilder, whereby the homebuilder paid us $1.4 million for an option to purchase all 234 lots over 36 monthly take-downs. In 2005, we executed a revised agreement with the homebuilder, increasing the lot sizes and average purchase price to $67,150 based on a new total of 224 lots. In January 2008, we sold the final 21 lots for $1.4 million.

Cost of Sales. Cost of sales totaled $1.1 million for the first quarter of 2009 and $3.5 million for the first quarter of 2008 and include cost of property sold, ongoing project expenses and allocated overhead costs, partially offset by reductions for certain Municipal Utility District (MUD) reimbursements. Accordingly, while profit margins on developed property sales remain positive, the inclusion of ongoing project expenses and allocated overhead costs in cost of sales results in a negative gross margin in the 2009 period. All of the sales for the 2009 period and most of the sales for the 2008 period were Circle C lots, which have lower profit margins than Barton Creek lots. Cost of sales also included reductions for Barton Creek MUD reimbursements totaling $0.1 million for the first quarter of 2008.

We are projecting continued lower levels of lot sales in the next several quarters because of the continued weakness in the U.S. real estate market.

General and Administrative Expenses. Consolidated general and administrative expenses increased to $2.1 million for the first quarter of 2009 from $1.7 million for the first quarter of 2008 primarily because of higher business development costs. General and administrative expenses allocated to real estate operations decreased to $1.3 million for the first quarter of 2009 from $1.4 million for the first quarter of 2008 primarily as a result of a lower allocation of general and administrative expenses to the real estate operations segment in 2009 because of decreased real estate operations activity and increased commercial leasing activity.

Commercial Leasing
Summary commercial leasing operating results follow (in thousands):

                                      First Quarter
                                      2009      2008
Rental income                       $  1,173   $  951
Rental property costs                   (831 )   (816 )
Depreciation                            (373 )   (337 )
General and administrative expenses     (783 )   (232 )
Operating loss                      $   (814 ) $ (434 )

Rental Income. Rental income increased to $1.2 million for the first quarter of 2009 from $1.0 million for the first quarter of 2008, primarily because of $0.1 million related to 5700 Slaughter, which includes two retail buildings completed in the third quarter of 2008. As of March 31, 2009, we have leased 22 percent of 5700 Slaughter and expect to lease the remaining space during 2009.

General and Administrative Expenses. Consolidated general and administrative expenses increased to $2.1 million for the first quarter of 2009 from $1.7 million for the first quarter of 2008 primarily because of higher business development costs. General and administrative expenses from commercial leasing increased to $0.8 million for the first quarter of 2009 from $0.2 million for the first quarter of 2008 primarily as a result of a higher allocation of general and administrative expenses to the commercial leasing segment in 2009 because of increased commercial leasing activity and decreased real estate operations activity.

Non-Operating Results
Interest Income. Interest income totaled $0.2 million in the first quarter of 2009, compared with $0.9 million in the first quarter of 2008. The decrease in interest income primarily reflects the decrease in Barton Creek MUD . . .