----

| UNITED      STATES                                         |
|------------------------------------------------------------|
| SECURITIES      AND EXCHANGE COMMISSION                    |
| Washington,      D.C. 20549                                |
|                                                       |
| FORM      10-Q                                             |
|                                                       |
| (Mark      One)                                            |
| [X]                                                        | QUARTERLY      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
| SECURITIES      EXCHANGE ACT OF 1934                       |
| For      the quarterly period ended September 30, 2008     |
| or                                                         |
| [  ]                                             | TRANSITION      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
| SECURITIES      EXCHANGE ACT OF 1934                       |
| For      the transition period from                        |   | to |
| Commission      File Number: 0-19989                       |
|                                                       |
|                                                            |
|                                                       |
| Stratus      Properties Inc.                               |
| (Exact      name of registrant as specified in itscharter) |

| Delaware                                                                | 72-1211572                                |
|-------------------------------------------------------------------------|-------------------------------------------|
| (State      or other jurisdiction ofincorporation      or organization) | (I.R.S.      Employer Identification No.) |
|                                                                    |                                      |
| 98      San Jacinto Blvd., Suite 220                                    |                                      |
| Austin,      Texas                                                      | 78701                                     |
| (Address      of principal executive offices)                           | (Zip      Code)                           |
|                                                                    |
|                                                                    |
| (512)      478-5788                                                     |
| (Registrant's      telephone number, including area code)               |
|                                                                    |

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| STRATUS      PROPERTIES INC.                                                              |   |
|-------------------------------------------------------------------------------------------|--------|
| TABLE OF CONTENTS                                                                         |   |
|                                                                                      |   |
|                                                                                      |   |
|                                                                                      | Page   |
| Part I.  Financial Information                                                  | 2      |
|                                                                                      |   |
| Item 1.  Financial Statements:                                                  |   |
|                                                                                      |   |
| Consolidated Balance Sheets      (Unaudited)                                              | 2      |
|                                                                                      |   |
| Consolidated Statements of Operations      (Unaudited)                                    | 3      |
|                                                                                      |   |
| Consolidated Statements of Cash Flows      (Unaudited)                                    | 4      |
|                                                                                      |   |
| Notes to Consolidated Financial Statements      (Unaudited)                               | 5      |
|                                                                                      |   |
| Item 2.  Management’s Discussion and Analysis of      Financial Condition |   |
|        and Results of Operations                                                     | 17     |
|                                                                                      |   |
| Item 3.  Quantitative and Qualitative Disclosures      About Market Risk        | 27     |
|                                                                                      |   |
| Item 4.  Controls and    Procedures                                             | 27     |
|                                                                                      |   |
| Part II.  Other Information                                                     | 27     |
|                                                                                      |   |
| Item 1A.  Risk Factors                                                          | 27     |
|                                                                                      |   |
| Item 2.  Unregistered Sales of Equity      Securities and Use of Proceeds       | 28     |
|                                                                                      |   |
| Item 6.  Exhibits                                                               | 28     |
|                                                                                      |   |
| Signature                                                                                 | 29     |
|                                                                                      |   |
| Exhibit Index                                                                             | E-1    |
|                                                                                      |   |

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Table of Contents

PART I

Item 1

STR

|                                                               | September      30, |    | December      31, |   |
|--------------------------------------------------------------------|--------------------|---------|-------------------|--------|
|                                                               | 2008               |    | 2007              |   |
| ASSETS                                                             |               |    |              |   |   |   |
| Cash      and cash equivalents                                     | $                  | 36,829  |              | $      | 40,873 |   |
| Restricted      cash                                               |               | 6       |              |   | 112 |   |
| Accounts      receivable                                           |               | 1,232   |              |   | 2,315 |   |
| Notes      receivable                                              |               | 293     |              |   | 311 |   |
| Deposits      and prepaid expenses                                 |               | 1,749   |              |   | 101 |   |
| Real      estate, commercial leasing assets and facilities, net:   |               |    |              |   |   |   |
| Property      held for sale – developed or under development |               | 110,139 |              |   | 121,966 |   |
| Property      held for sale – undeveloped                    |               | 28,388  |              |   | 16,521 |   |
| Property      held for use, net                                    |               | 52,430  |              |   | 38,569 |   |
| Investment      in unconsolidated affiliate                        |               | 2,086   |              |   | 4,720 |   |
| Deferred      tax asset                                            |               | 4,975   |              |   | 5,732 |   |
| Other      assets                                                  |               | 8,120   |              |   | 2,900 |   |
| Total      assets                                                  | $                  | 246,247 |              | $      | 234,120 |   |
|                                                               |               |    |              |   |   |   |
| LIABILITIES      AND STOCKHOLDERS’ EQUITY                    |               |    |              |   |   |   |
| Accounts      payable and accrued liabilities                      | $                  | 4,571   |              | $      | 6,324 |   |
| Accrued      interest and property taxes                           |               | 2,477   |              |   | 1,811 |   |
| Deposits                                                           |               | 1,499   |              |   | 2,996 |   |
| Debt                                                               |               | 63,380  |              |   | 61,500 |   |
| Other      liabilities                                             |               | 3,149   |              |   | 4,562 |   |
| Total      liabilities                                             |               | 75,076  |              |   | 77,193 |   |
|                                                               |               |    |              |   |   |   |
| Minority      interest in consolidated subsidiary                  |               | 16,490  |              |   | - |   |
|                                                               |               |    |              |   |   |   |
| Stockholders’      equity:                                   |               |    |              |   |   |   |
| Preferred      stock                                               |               | -       |              |   | - |   |
| Common      stock                                                  |               | 82      |              |   | 81 |   |
| Capital      in excess of par value of common stock                |               | 196,268 |              |   | 195,898 |   |
| Accumulated      deficit                                           |               | (26,277 | )                 |   | (24,773 | ) |
| Common      stock held in treasury                                 |               | (15,392 | )                 |   | (14,279 | ) |
| Total      stockholders’ equity                              |               | 154,681 |              |   | 156,927 |   |
| Total      liabilities and stockholders’ equity              | $                  | 246,247 |              | $      | 234,120 |   |
|                                                               |               |    |              |   |   |   |

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Table of Contents

STR

|                                                          | Three      Months Ended |   | Nine      Months Ended |   |
|---------------------------------------------------------------|-------------------------|--------|------------------------|--------|
|                                                          | September      30,      |   | September      30,     |   |
|                                                          | 2008                    |   | 2007                   |   | 2008 |   | 2007 |   |
| Revenues:                                                     |                    |   |                   |   |   |   |   |   |   |   |
| Real      estate                                              | $                       | 5,691  |                   | $      | 7,002 |   | $ | 11,994 |   | $ | 16,745 |   |
| Rental      income                                            |                    | 1,158  |                   |   | 766 |   |   | 3,278 |   |   | 2,146 |   |
| Commissions,      management fees and other                   |                    | 60     |                   |   | 268 |   |   | 792 |   |   | 1,249 |   |
| Total      revenues                                           |                    | 6,909  |                   |   | 8,036 |   |   | 16,064 |   |   | 20,140 |   |
| Cost      of sales:                                           |                    |   |                   |   |   |   |   |   |   |   |   |   |
| Real      estate, net                                         |                    | 4,805  |                   |   | 5,796 |   |   | 10,625 |   |   | 10,823 |   |
| Rental                                                        |                    | 944    |                   |   | 860 |   |   | 2,683 |   |   | 2,391 |   |
| Depreciation                                                  |                    | 435    |                   |   | 411 |   |   | 1,211 |   |   | 895 |   |
| Total      cost of sales                                      |                    | 6,184  |                   |   | 7,067 |   |   | 14,519 |   |   | 14,109 |   |
| General      and administrative expenses                      |                    | 1,723  |                   |   | 1,526 |   |   | 5,277 |   |   | 5,340 |   |
| Total      costs and expenses                                 |                    | 7,907  |                   |   | 8,593 |   |   | 19,796 |   |   | 19,449 |   |
| Operating      (loss) income                                  |                    | (998   | )                      |   | (557 | ) |   | (3,732 | ) |   | 691 |   |
| Interest      income                                          |                    | 330    |                   |   | 36 |   |   | 1,432 |   |   | 572 |   |
| Loss      on interest rate cap agreement                      |                    | (121   | )                      |   | - |   |   | (121 | ) |   | - |   |
| (Loss)      income from continuing operations                 |                    |   |                   |   |   |   |   |   |   |   |   |   |
| before      income taxes, minority interest and equity in     |                    |   |                   |   |   |   |   |   |   |   |   |   |
| unconsolidated      affiliate’s income             |                    | (789   | )                      |   | (521 | ) |   | (2,421 | ) |   | 1,263 |   |
| Benefit      from (provision for) income taxes                |                    | 216    |                   |   | 120 |   |   | 469 |   |   | (501 | ) |
| Minority      interest in net loss of consolidated subsidiary |                    | 124    |                   |   | - |   |   | 188 |   |   | - |   |
| Equity      in unconsolidated affiliate’s income   |                    | 99     |                   |   | - |   |   | 365 |   |   | - |   |
| (Loss)      income from continuing operations                 |                    | (350   | )                      |   | (401 | ) |   | (1,399 | ) |   | 762 |   |
| Income      (loss) from discontinued operations               |                    | -      |                   |   | 179 |   |   | (105 | ) |   | 400 |   |
| Net      (loss) income                                        | $                       | (350   | )                      | $      | (222 | ) | $ | (1,504 | ) | $ | 1,162 |   |
|                                                          |                    |   |                   |   |   |   |   |   |   |   |   |   |
| Basic      and diluted net (loss) income                      |                    |   |                   |   |   |   |   |   |   |   |   |   |
| per      share of common stock:                               |                    |   |                   |   |   |   |   |   |   |   |   |   |
| Continuing      operations                                    | $                       | (0.05  | )                      | $      | (0.05 | ) | $ | (0.19 | ) | $ | 0.10 |   |
| Discontinued      operations                                  |                    | -      |                   |   | 0.02 |   |   | (0.01 | ) |   | 0.05 |   |
| Basic      and diluted net (loss) income per                  |                    |   |                   |   |   |   |   |   |   |   |   |   |
| share      of common stock                                    | $                       | (0.05  | )                      | $      | (0.03 | ) | $ | (0.20 | ) | $ | 0.15 |   |
|                                                          |                    |   |                   |   |   |   |   |   |   |   |   |   |
| Weighted      average shares of common stock outstanding:     |                    |   |                   |   |   |   |   |   |   |   |   |   |
| Basic                                                         |                    | 7,641  |                   |   | 7,560 |   |   | 7,613 |   |   | 7,559 |   |
| Diluted                                                       |                    | 7,641  |                   |   | 7,560 |   |   | 7,613 |   |   | 7,640 |   |
|                                                          |                    |   |                   |   |   |   |   |   |   |   |   |   |

| The      accompanying notes are an integral part of these consolidated financial      statements. |
|---------------------------------------------------------------------------------------------------|

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Table of Contents

STR

|                                                                       | Nine      Months Ended September 30, |    |
|----------------------------------------------------------------------------|--------------------------------------|---------|
|                                                                       | 2008                                 |    | 2007 |   |
| Cash      flow from operating activities:                                  |                                 |    |   |   |   |
| Net      (loss) income                                                     | $                                    | (1,504  | ) | $ | 1,162 |   |
| Adjustments      to reconcile net (loss) income to net cash                |                                 |    |   |   |   |   |
| used      in operating activities:                                         |                                 |    |   |   |   |   |
| Loss      (income) from discontinued operations                            |                                 | 105     |   |   | (400 | ) |
| Depreciation                                                               |                                 | 1,211   |   |   | 895 |   |
| Loss      on interest rate cap agreement                                   |                                 | 121     |   |   | - |   |
| Minority      interest in net loss of consolidated subsidiary              |                                 | (188    | ) |   | - |   |
| Cost      of real estate sold                                              |                                 | 8,160   |   |   | 10,144 |   |
| Deferred      income taxes                                                 |                                 | (457    | ) |   | (33 | ) |
| Stock-based      compensation                                              |                                 | 761     |   |   | 1,020 |   |
| Equity      in unconsolidated affiliate’s income                     |                                 | (365    | ) |   | - |   |
| Distribution      of unconsolidated affiliate’s income               |                                 | 1,266   |   |   | - |   |
| Deposits                                                                   |                                 | (1,471  | ) |   | (1,045 | ) |
| Increase      in restricted cash                                           |                                 | -       |   |   | (1,495 | ) |
| Purchases      and development of real estate properties                   |                                 | (22,530 | ) |   | (23,449 | ) |
| Municipal      utility district reimbursements                             |                                 | 6,229   |   |   | 2,557 |   |
| (Increase)      decrease in accounts receivable, prepaid expenses andother |                                 | 495     |   |   | (658 | ) |
| (Increase)      decrease in accounts payable, accrued liabilities andother |                                 | (2,555  | ) |   | 2,336 |   |
| Net      cash used in continuing operations                                |                                 | (10,722 | ) |   | (8,966 | ) |
| Net      cash provided by discontinued operations                          |                                 | -       |   |   | 2,234 |   |
| Net      cash used in operating activities                                 |                                 | (10,722 | ) |   | (6,732 | ) |
|                                                                       |                                 |    |   |   |   |   |
| Cash      flow from investing activities:                                  |                                 |    |   |   |   |   |
| Development      of commercial leasing properties and other expenditures   |                                 | (10,337 | ) |   | (6,188 | ) |
| Return      of investment in unconsolidated affiliate                      |                                 | 2,374   |   |   | - |   |
| Investment      in interest rate cap agreement                             |                                 | (673    | ) |   | - |   |
| Other                                                                      |                                 | 25      |   |   | (125 | ) |
| Net      cash used in continuing operations                                |                                 | (8,611  | ) |   | (6,313 | ) |
| Net      cash used in discontinued operations                              |                                 | -       |   |   | (113 | ) |
| Net      cash used in investing activities                                 |                                 | (8,611  | ) |   | (6,426 | ) |
|                                                                       |                                 |    |   |   |   |   |
| Cash      flow from financing activities:                                  |                                 |    |   |   |   |   |
| Borrowings      from revolving credit facility                             |                                 | -       |   |   | 17,450 |   |
| Payments      on revolving credit facility                                 |                                 | -       |   |   | (18,450 | ) |
| Borrowings      from construction loan                                     |                                 | 2,054   |   |   | - |   |
| Repayments      on Lantana promissory note                                 |                                 | (175    | ) |   | - |   |
| Borrowings      from unsecured term loans                                  |                                 | -       |   |   | 15,000 |   |
| Minority      interest contributions                                       |                                 | 16,678  |   |   | - |   |
| Net      proceeds from exercised stock options                             |                                 | 94      |   |   | 13 |   |
| Excess      tax benefit from exercised stock options                       |                                 | -       |   |   | 642 |   |
| Purchases      of Stratus common shares                                    |                                 | (517    | ) |   | (1,118 | ) |
| Bank      financing costs                                                  |                                 | (2,845  | ) |   | - |   |
| Net      cash provided by continuing operations                            |                                 | 15,289  |   |   | 13,537 |   |
| Net      cash used in discontinued operations                              |                                 | -       |   |   | (232 | ) |
| Net      cash provided by financing activities                             |                                 | 15,289  |   |   | 13,305 |   |
| Net      (decrease) increase in cash and cash equivalents                  |                                 | (4,044  | ) |   | 147 |   |
| Cash      and cash equivalents at beginning of year                        |                                 | 40,873  |   |   | 1,839 |   |
| Cash      and cash equivalents at end of period                            |                                 | 36,829  |   |   | 1,986 |   |
| Less      cash at discontinued operations                                  |                                 | -       |   |   | (511 | ) |
| Cash      and cash equivalents at end of period                            | $                                    | 36,829  |   | $ | 1,475 |   |
|                                                                       |                                 |    |   |   |   |   |

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Table of Contents

ST

| 1.   | GENERAL |
|----------------|---------|

| 2.   | REVISIONS      OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL  STATEMENTS |
|----------------|------------------------------------------------------------------------|

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Table of Contents

| Statements of Operations                                  |                                       |
|-----------------------------------------------------------|--------------------------------------------|
|                                                      |                                       |   |
|                                                      | Three      Months Ended September 30, 2007 |   |
|                                                      | As      Previously                         |   |   |   |   |   |
|                                                      | Reported                                   |   | Adjustments |   | As      Revised |   |
| Total      cost of sales                                  | $                                          | (6,933 | ) | $ | (134 | ) | $ | (7,067 | ) |
| Operating      loss                                       |                                       | (423 | ) |   | (134 | ) |   | (557 | ) |
| Interest      expense, net                                |                                       | - |   |   | - |   |   | - |   |
| Loss      from continuing operations                      |                                       |   |   |   |   |   |   |   |   |
| before      income taxes, minority interest and equity in |                                       |   |   |   |   |   |   |   |   |
| unconsolidated      affiliate’s income         |                                       | (387 | ) |   | (134 | ) |   | (521 | ) |
| Benefit      from income taxes                            |                                       | 74 |   |   | 46 |   |   | 120 |   |
| Loss      from continuing operations                      |                                       | (313 | ) |   | (88 | ) |   | (401 | ) |
| (Loss)      income from discontinued operations           |                                       | (32 | ) |   | 211 |   |   | 179 |   |
| Net      loss                                             |                                       | (345 | ) |   | 123 |   |   | (222 | ) |
|                                                      |                                       |   |   |   |   |   |   |   |   |
| Basic      and diluted net (loss) income                  |                                       |   |   |   |   |   |   |   |   |
| per      share of common stock:                           |                                       |   |   |   |   |   |   |   |   |
| Continuing      operations                                | $                                          | (0.04 | ) | $ | (0.01 | ) | $ | (0.05 | ) |
| Discontinued      operations                              |                                       | (0.01 | ) |   | 0.03 |   |   | 0.02 |   |
| Basic      and diluted net loss per share of common stock | $                                          | (0.05 | ) | $ | 0.02 |   | $ | (0.03 | ) |
|                                                      |                                       |   |   |   |   |   |   |   |   |
|                                                      |                                       |   |   |   |   |   |   |   |   |

|                                                        | Nine      Months Ended September 30, 2007 |    |
|-------------------------------------------------------------|-------------------------------------------|---------|
|                                                        | As      Previously                        |    |   |   |   |   |
|                                                        | Reported                                  |    | Adjustments |   | As      Revised |   |
| Total      cost of sales                                    | $                                         | (13,936 | ) | $ | (173 | ) | $ | (14,109 | ) |
| Operating      income                                       |                                      | 864     |   |   | (173 | ) |   | 691 |   |
| Interest      expense, net                                  |                                      | (13     | ) |   | 13 |   |   | - |   |
| Income      from continuing operations                      |                                      |    |   |   |   |   |   |   |   |
| before      income taxes, minority interest and equity in   |                                      |    |   |   |   |   |   |   |   |
| unconsolidated      affiliate’s income           |                                      | 1,423   |   |   | (160 | ) |   | 1,263 |   |
| Provision      for income taxes                             |                                      | (557    | ) |   | 56 |   |   | (501 | ) |
| Income      from continuing operations                      |                                      | 866     |   |   | (104 | ) |   | 762 |   |
| (Loss)      income from discontinued operations             |                                      | (232    | ) |   | 632 |   |   | 400 |   |
| Net      income                                             |                                      | 634     |   |   | 528 |   |   | 1,162 |   |
|                                                        |                                      |    |   |   |   |   |   |   |   |
| Basic      and diluted net income (loss)                    |                                      |    |   |   |   |   |   |   |   |
| per      share of common stock:                             |                                      |    |   |   |   |   |   |   |   |
| Continuing      operations                                  | $                                         | 0.11    |   | $ | (0.01 | ) | $ | 0.10 |   |
| Discontinued      operations                                |                                      | (0.03   | ) |   | 0.08 |   |   | 0.05 |   |
| Basic      and diluted net income per share of common stock | $                                         | 0.08    |   | $ | 0.07 |   | $ | 0.15 |   |
|                                                        |                                      |    |   |   |   |   |   |   |   |

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Table of Contents

| Balance Sheet                                                   |                   |
|-----------------------------------------------------------------|------------------------|
|                                                            |                   |   |
|                                                            | December      31, 2007 |   |
|                                                            | As      Previously     |   |   |   |   |   |
|                                                            | Reported               |   | Adjustments |   | As      Revised |   |
| ASSETS                                                          |                   |   |   |   |   |   |   |   |   |
| Real      estate, commercial leasing assets and facilities, net | $                      | 170,703 |   | $ | 6,353 |   | $ | 177,056 |   |
| Deferred      tax asset                                         |                   | 6,935 |   |   | (1,203 | ) |   | 5,732 |   |
| Other      assets                                               |                   | 2,781 | a |   | 119 |   |   | 2,900 |   |
| Total      assets                                               |                   | 228,357 |   |   | 5,763 |   |   | 234,120 |   |
| LIABILITIES AND STOCKHOLDERS’      EQUITY                 |                   |   |   |   |   |   |   |   |   |
| Other      liabilities                                          | $                      | 3,326 | b | $ | 1,236 | c | $ | 4,562 |   |
| Total      liabilities                                          |                   | 75,957 |   |   | 1,236 | c |   | 77,193 |   |
| Accumulated      deficit                                        |                   | (29,300 | ) |   | 4,527 | d |   | (24,773 | ) |
| Total      stockholders’ equity                           |                   | 152,400 |   |   | 4,527 | d |   | 156,927 |   |
| Total      liabilities and stockholders’ equity           |                   | 228,357 |   |   | 5,763 |   |   | 234,120 |   |

| a.   | Amounts      are adjusted for the reclassification from a classified to a      non-classified balance sheet (see Note 3). Stratus previously reported      $2,803 thousand of other assets in its 2007 Form 10-K consolidated balance      sheet prior to its adjustments for the reclassification from a classified      to a non-classified balance sheet. The other assets of $2,803 thousand      included $22 thousand of long-term deposits that are now classified in      deposits and prepaid expenses. |
|----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| b.   | Amounts      are adjusted for the reclassification from a classified to a      non-classified balance sheet (see Note 3). Stratus previously reported      $5,623 thousand of accrued interest, property taxes and other in current      liabilities and $2,510 thousand of other liabilities in its 2007 Form 10-K      consolidated balance sheet prior to its adjustments for the      reclassification from a classified to a non-classified balance sheet.      Prior to the reclassification, the $5,623 thousand of accrued interest,      property taxes and other included $1,714 thousand of other current      liabilities that are now classified in other liabilities; and the $2,510      thousand of other liabilities included $898 thousand of long-term deposits      that are now classified in deposits. Thus, the reclassified other      liabilities include $2,510 thousand of other liabilities as previously      reported at December 31, 2007, plus $1,714 thousand of other current      liabilities less $898 thousand of long-term  deposits. |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| c.   | Amounts      include an increase of taxes payable for $173 thousand related to the      understatement of Crestview Station’s net income for the fourth quarter of      2007. |
|----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| d.   | Amounts      include a reduction to accumulated deficit of $321 thousand related to the      understatement of Crestview Station’s net income for the fourth quarter of      2007. |
|----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3.   | RECLASSIFICATIONS |
|----------------|-------------------|

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Table of Contents

| 4.   | EARNINGS      PER SHARE |
|----------------|-------------------------|

|                                                      | Three      Months Ended |   | Nine      Months Ended |   |
|-----------------------------------------------------------|-------------------------|--------|------------------------|--------|
|                                                      | September      30,      |   | September      30,     |   |
|                                                      | 2008                    |   | 2007                   |   | 2008 |   | 2007 |   |
| (Loss)      income from continuing operations             | $                       | (350   | )                      | $      | (401 | ) | $ | (1,399 | ) | $ | 762 |   |
| Income      (loss) from discontinued operations           |                    | -      |                   |   | 179 |   |   | (105 | )a |   | 400 |   |
| Net      (loss) income                                    | $                       | (350   | )                      | $      | (222 | ) | $ | (1,504 | ) | $ | 1,162 |   |
|                                                      |                    |   |                   |   |   |   |   |   |   |   |   |   |
| Weighted      average common shares outstanding           |                    | 7,641  |                   |   | 7,560 |   |   | 7,613 |   |   | 7,559 |   |
| Add:  Dilutive      stock options               |                    | -      |                   |   | - |   |   | - |   |   | 67 |   |
|         Restricted stock units                  |                    | -      |                   |   | - |   |   | - |   |   | 14 |   |
| Weighted      average common shares outstanding for       |                    |   |                   |   |   |   |   |   |   |   |   |   |
| purposes      of calculating diluted net (loss) income    |                    |   |                   |   |   |   |   |   |   |   |   |   |
| per      share                                            |                    | 7,641  |                   |   | 7,560 |   |   | 7,613 |   |   | 7,640 |   |
|                                                      |                    |   |                   |   |   |   |   |   |   |   |   |   |
| Diluted      net (loss) income per share of common stock: |                    |   |                   |   |   |   |   |   |   |   |   |   |
| Continuing      operations                                | $                       | (0.05  | )                      | $      | (0.05 | ) | $ | (0.19 | ) | $ | 0.10 |   |
| Discontinued      operations                              |                    | -      |                   |   | 0.02 |   |   | (0.01 | )a |   | 0.05 |   |
| Diluted      net (loss) income per share of common stock  | $                       | (0.05  | )                      | $      | (0.03 | ) | $ | (0.20 | ) | $ | 0.15 |   |
|                                                      |                    |   |                   |   |   |   |   |   |   |   |   |   |

| a.   | Relates      to the revised amount of Texas margin tax accrued on Escarpment Village      income earned during 2007 (see Note11). |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------|

| 5.   | JOINT      VENTURE WITH CANYON-JOHNSON URBAN FUND II,L.P. |
|----------------|-----------------------------------------------------------|

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| 6.   | FAIR      VALUE MEASUREMENTS |
|----------------|------------------------------|

|                   |                    |   | Quoted      Prices in   |   |   |                   |   |   | Significant    |   |
|------------------------|-------------------------|--------|-------------------------|--------|--------|------------------------|--------|--------|----------------|--------|
|                   | Total      Fair Value   |   | Active      Markets for |   |   | Significant      Other |   |   | Unobservable   |   |
|                   | Measurement             |   | Identical      Assets   |   |   | Observable      Inputs |   |   | Inputs         |   |
|                   | September      30, 2008 |   | (Level      1)          |   |   | (Level      2)         |   |   | (Level      3) |   |
|                   |                    |   |                    |   |   |                   |   |   |           |   |   |   |
| Cash      equivalents  | $                       | 32,886 |                    | $      | 32,886 |                   | $      | -      |           | $      | - |   |
| Interest      rate cap |                    |   |                    |   |   |                   |   |   |           |   |   |   |
| agreement              |                    | 552    |                    |   | -      |                   |   | 552    |           |   | - |   |
|                   | $                       | 33,438 |                    | $      | 32,886 |                   | $      | 552    |           | $      | - |   |
|                   |                    |   |                    |   |   |                   |   |   |           |   |   |   |

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| 7.   | INVESTMENT      IN UNCONSOLIDATED AFFILIATE |
|----------------|---------------------------------------------|

|                |   | Three      Months Ended            |   |   | Nine      Months Ended             |
|---------------------|--------|------------------------------------|--------|--------|------------------------------------|
|                |   | September      30, 2008            |   |   | September      30, 2008            |
|                |   |                               |   |   |                               |
| Total      revenues |   | $  1,054                 |   |   | $  3,895                 |
| Net income     |   | $          198 |   |   | $          730 |

| 8.   | DEBT |
|----------------|------|

| ·   | $40.0      million of borrowings outstanding under seven unsecured term loans, which      include two $5.0 million loans, two $8.0 million loans, a $7.0 million      loan and two $3.5 million loans, all of which will mature in December      2011. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | $21.3      million of borrowings outstanding under the Lantana promissory note, which      matures in January 2018. |
|--------------------|---------------------------------------------------------------------------------------------------------------------|

| ·   | $2.1      million of borrowings outstanding under the W Austin Hotel &      Residences project construction loan, which matures in September 2011 and      has total remaining commitments available of approximately $163 million      (See Note 5). |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| 9.   | INTEREST      COST AND STOCK-BASED COMPENSATION |
|----------------|-------------------------------------------------|

|                                                          | Three      Months Ended |   | Nine      Months Ended |   |
|---------------------------------------------------------------|-------------------------|--------|------------------------|--------|
|                                                          | September      30,      |   | September      30,     |   |
|                                                          | 2008                    |   | 2007                   |   | 2008 |   | 2007 |   |
| Stock      options awarded to employees (including directors) | $                       | 127    |                   | $      | 153 |   | $ | 316 |   | $ | 388 |   |
| Restricted      stock units                                   |                    | 193    |                   |   | 156 |   |   | 579 |   |   | 821 |   |
| Less      capitalized amountsa                                |                    | (42    | )                      |   | (48 | ) |   | (134 | ) |   | (189 | ) |
| Impact      on (loss) income from continuing operations       |                    |   |                   |   |   |   |   |   |   |   |   |   |
| before      income taxes                                      | $                       | 278    |                   | $      | 261 |   | $ | 761 |   | $ | 1,020 |   |
|                                                          |                    |   |                   |   |   |   |   |   |   |   |   |   |

| a.   | Employee      compensation, including stock-based compensation, is eligible for      capitalization under Stratus’ accounting policy for the allocation of      overhead costs. See Note 1 of the Stratus 2007 Form  10-K. |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                          | 2008   |   | 2007   |   |
|-----------------------------------------------|--------|--------|--------|--------|
| Options      granted                          |   | 7,500  |   |   | 7,500 |   |
| Grant-date      fair value per stock option   | $      | 15.49  |   | $      | 16.30 |   |
| Expected      and weighted average volatility |   | 49.0   | %      |   | 41.8 | % |
| Expected      life of options (in years)      |   | 6.7    |   |   | 6.7 |   |
| Risk-free      interest rate                  |   | 3.5    | %      |   | 4.4 | % |

| 10.   | INCOME      TAXES |
|-----------------|-------------------|

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| 11.   | DISCONTINUED      OPERATIONS |
|-----------------|------------------------------|

|                                     | Three      Months Ended |   | Nine      Months Ended  |   |
|------------------------------------------|-------------------------|--------|-------------------------|--------|
|                                     | September      30, 2007 |   | September      30, 2007 |   |
| Rental      income                       | $                       | 825    |                    | $      | 2,582 |   |
| Rental      property costs               |                    | (375   | )                       |   | (1,271 | ) |
| Depreciation                             |                    | (158   | )                       |   | (696 | ) |
| General      and administrative expenses |                    | (38    | )                       |   | (71 | ) |
| Interest      income                     |                    | 21     |                    |   | 70 |   |
| Income      before income taxes          |                    | 275    |                    |   | 614 |   |
| Provision      for income taxes          |                    | (96    | )                       |   | (214 | ) |
| Income      from discontinued operations | $                       | 179    |                    | $      | 400 |   |
|                                     |                    |   |                    |   |   |   |

| 12.   | BUSINESS      SEGMENTS |
|-----------------|------------------------|

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|                                       | Real      Estate Operationsa |    | Commercial      Leasing |   | Other  |   | Total  |   |
|--------------------------------------------|------------------------------|---------|-------------------------|--------|--------|--------|--------|--------|
|                                       | (In      Thousands)          |    |
| Three Months Ended September 30,      2008 |                         |    |                    |   |   |   |   |   |   |   |   |   |
| Revenues                                   | $                            | 5,751   |                    | $      | 1,158  |   | $      | -      |   | $ | 6,909 |   |
| Cost      of sales, excluding depreciation |                         | (4,805  | )                       |   | (944   | )      |   | -      |   |   | (5,749 | ) |
| Depreciation                               |                         | (53     | )                       |   | (382   | )      |   | -      |   |   | (435 | ) |
| General      and administrative expenses   |                         | (1,482  | )                       |   | (241   | )      |   | -      |   |   | (1,723 | ) |
| Operating      loss                        | $                            | (589    | )                       | $      | (409   | )      | $      | -      |   | $ | (998 | ) |
|                                       |                         |    |                    |   |   |   |   |   |   |   |   |   |
| Capital      expenditures                  | $                            | 7,517   |                    | $      | 2,167  |   | $      | -      |   | $ | 9,684 |   |
| Total      assets                          | $                            | 176,078 |                    | $      | 64,763 |   | $      | 5,406  | b | $ | 246,247 |   |

| Three Months Ended September 30,      2007 |   |    |   |   |   |   |   |   |   |   |    |   |
|--------------------------------------------|--------|---------|--------|--------|--------|--------|--------|--------|--------|--------|---------|--------|
| Revenues                                   | $      | 7,270   |   | $      | 766    |   | $      | -      |   | $      | 8,036   |   |
| Cost      of sales, excluding depreciation |   | (5,796  | )      |   | (860   | )      |   | -      |   |   | (6,656  | )      |
| Depreciation                               |   | (45     | )      |   | (366   | )      |   | -      |   |   | (411    | )      |
| General      and administrative expenses   |   | (1,345  | )      |   | (181   | )      |   | -      |   |   | (1,526  | )      |
| Operating      income (loss)               | $      | 84      |   | $      | (641   | )      | $      | -      |   | $      | (557    | )      |
|                                       |   |    |   |   |   |   |   |   |   |   |    |   |
| Income      from discontinued operations   | $      | -       |   | $      | 179    |   | $      | -      |   | $      | 179     |   |
| Capital      expenditures                  | $      | 8,093   |   | $      | 3,609  |   | $      | -      |   | $      | 11,702  |   |
| Total      assets                          | $      | 138,452 |   | $      | 80,201 | c      | $      | 7,509  | b      | $      | 226,162 |   |
|                                       |   |    |   |   |   |   |   |   |   |   |    |   |

| Nine Months Ended September 30,      2008  |   |    |   |   |   |   |   |   |   |   |    |   |
|--------------------------------------------|--------|---------|--------|--------|--------|--------|--------|--------|--------|--------|---------|--------|
| Revenues                                   | $      | 12,786  |   | $      | 3,278  |   | $      | -      |   | $      | 16,064  |   |
| Cost      of sales, excluding depreciation |   | (10,625 | )      |   | (2,683 | )      |   | -      |   |   | (13,308 | )      |
| Depreciation                               |   | (147    | )      |   | (1,064 | )      |   | -      |   |   | (1,211  | )      |
| General      and administrative expenses   |   | (4,538  | )      |   | (739   | )      |   | -      |   |   | (5,277  | )      |
| Operating      loss                        | $      | (2,524  | )      | $      | (1,208 | )      | $      | -      |   | $      | (3,732  | )      |
|                                       |   |    |   |   |   |   |   |   |   |   |    |   |
| Loss      from discontinued operations     | $      | -       |   | $      | (105   | )d     | $      | -      |   | $      | (105    | )d     |
| Capital      expenditures                  | $      | 22,530  |   | $      | 10,337 |   | $      | -      |   | $      | 32,867  |   |
|                                       |   |    |   |   |   |   |   |   |   |   |    |   |

| Nine Months Ended September 30,      2007  |   |    |   |   |   |   |   |   |   |   |    |   |
|--------------------------------------------|--------|---------|--------|--------|--------|--------|--------|--------|--------|--------|---------|--------|
| Revenues                                   | $      | 17,994  |   | $      | 2,146  |   | $      | -      |   | $      | 20,140  |   |
| Cost      of sales, excluding depreciation |   | (10,823 | )      |   | (2,391 | )      |   | -      |   |   | (13,214 | )      |
| Depreciation                               |   | (115    | )      |   | (780   | )      |   | -      |   |   | (895    | )      |
| General      and administrative expenses   |   | (4,653  | )      |   | (687   | )      |   | -      |   |   | (5,340  | )      |
| Operating      income (loss)               | $      | 2,403   |   | $      | (1,712 | )      | $      | -      |   | $      | 691     |   |
|                                       |   |    |   |   |   |   |   |   |   |   |    |   |
| Income      from discontinued operations   | $      | -       |   | $      | 400    |   | $      | -      |   | $      | 400     |   |
| Capital      expenditures                  | $      | 23,449  |   | $      | 6,301  |   | $      | -      |   | $      | 29,750  |   |
|                                       |   |    |   |   |   |   |   |   |   |   |    |   |

| a.   | Includes      sales commissions, management fees and other revenues together with      related expenses. |
|----------------|----------------------------------------------------------------------------------------------------------|

| b.   | Primarily      includes deferred tax assets. |
|----------------|----------------------------------------------|

| c.   | Includes      assets from the discontinued operations of Escarpment Village, which      Stratus sold on October 12, 2007, totaling $34.3 million, net of      accumulated depreciation of $1.4 million, at September 30,      2007. |
|----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| d.   | Relates      to the revised amount of Texas margin tax accrued on Escarpment Village      income earned during 2007 (see note11). |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------|

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|                                                        | Three      Months Ended |   | Nine      Months Ended |   |
|-------------------------------------------------------------|-------------------------|--------|------------------------|--------|
|                                                        | September      30,      |   | September      30,     |   |
|                                                        | 2008                    |   | 2007                   |   | 2008 |   | 2007 |   |
| Operating      (loss) income                                | $                       | (998   | )                      | $      | (557 | ) | $ | (3,732 | ) | $ | 691 |   |
| Interest      income                                        |                    | 330    |                   |   | 36 |   |   | 1,432 |   |   | 572 |   |
| Loss      on interest rate cap agreement                    |                    | (121   | )                      |   | - |   |   | (121 | ) |   | - |   |
| (Loss)      income from continuing operations               |                    |   |                   |   |   |   |   |   |   |   |   |   |
| before      income taxes, minority interest and             |                    |   |                   |   |   |   |   |   |   |   |   |   |
| equity      in unconsolidated affiliate’s income | $                       | (789   | )                      | $      | (521 | ) | $ | (2,421 | ) | $ | 1,263 |   |
|                                                        |                    |   |                   |   |   |   |   |   |   |   |   |   |

| 13.   | NEW      ACCOUNTING STANDARDS |
|-----------------|-------------------------------|

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| 14.   | SUBSEQUENT      EVENTS |
|-----------------|------------------------|

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Item 2

|                  |      |   | Acreage                             |   |        |
|-----------------------|-----------|--------|-------------------------------------|--------|-------------|
|                  |      |   | Developed      or Under Development |   | Undeveloped |   |   |
|                  | Developed |   | Single                              |   | Multi-      |   |   |   |   |   | Single |   |   |   |   |   | Total |
|                  | Lots      |   | Family                              |   | family      |   | Commercial |   | Total |   | Family |   | Commercial |   | Total |   | Acreage |
| Austin                |      |   |                                |   |        |   |   |   |   |   |   |   |   |   |   |   |   |
| Barton      Creek     | 90        |   | 409                                 |   | 249         |   | 376 |   | 1,034 |   | 510 |   | 20 |   | 530 |   | 1,564 |
| Lantana               | -         |   | -                                   |   | -           |   | - |   | - |   | - |   | 223 |   | 223 |   | 223 |
| Circle      C         | 115       | a      | 148                                 | a      | -           |   | 265 |   | 413 |   | - |   | 122 |   | 122 |   | 535 |
| W      Austin Hotel   |      |   |                                |   |        |   |   |   |   |   |   |   |   |   |   |   |   |
| &      Residences | -         |   | -                                   |   | -           |   | 2 | b | 2 |   | - |   | - |   | - |   | 2 |
| San Antonio           |      |   |                                |   |        |   |   |   |   |   |   |   |   |   |   |   |   |
| Camino      Real      | -         |   | -                                   |   | -           |   | - |   | - |   | - |   | 2 |   | 2 |   | 2 |
| Total                 | 205       |   | 557                                 |   | 249         |   | 643 |   | 1,449 |   | 510 |   | 367 |   | 877 |   | 2,326 |
|                  |      |   |                                |   |        |   |   |   |   |   |   |   |   |   |   |   |   |

| a.   | Relates      to Meridian, an 800-lot residentialdevelopment. |
|----------------|--------------------------------------------------------------|

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

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|                              | Residential      Lots |
|-----------------------------------|-----------------------|
|                              | Developed             |   | Under      Development |   | Potential      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 Townhomes           | -                     |   | - |   | 97 |   | 97 |
| 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                          | 115                   |   | 57 |   | - |   | 172 |
| Total      Residential Lots       | 205                   |   | 92 |   | 2,200 |   | 2,497 |
|                              |                  |   |   |   |   |   |   |

| 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 thefuture. |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|                               | Commercial      Property |
|------------------------------------|--------------------------|
|                               | Developed                |   | Under      Development |   | Potential      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                  |   | 858,000 |   | 3,500,000 |   | 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 thefuture. |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|                                            | Third      Quarter |   | Nine      Months |   |
|-------------------------------------------------|--------------------|--------|------------------|--------|
|                                            | 2008               |   | 2007             |   | 2008 |   | 2007 |   |
| Revenues:                                       |               |   |             |   |   |   |   |   |
| Real      estate operations                     | $                  | 5,751  |             | $      | 7,270 |   | $ | 12,786 |   | $ | 17,994 |   |
| Commercial      leasing                         |               | 1,158  |             |   | 766 |   |   | 3,278 |   |   | 2,146 |   |
| Total      revenues                             | $                  | 6,909  |             | $      | 8,036 |   | $ | 16,064 |   | $ | 20,140 |   |
|                                            |               |   |             |   |   |   |   |   |   |   |   |   |
| Operating      (loss) income                    | $                  | (998   | )                | $      | (557 | ) | $ | (3,732 | ) | $ | 691 |   |
|                                            |               |   |             |   |   |   |   |   |   |   |   |   |
| Benefit      from (provision for) income taxes  | $                  | 216    |             | $      | 120 |   | $ | 469 |   | $ | (501 | ) |
|                                            |               |   |             |   |   |   |   |   |   |   |   |   |
| (Loss)      income from continuing operations   | $                  | (350   | )                | $      | (401 | ) | $ | (1,399 | ) | $ | 762 |   |
| Income      (loss) from discontinued operations |               | -      |             |   | 179 |   |   | (105 | )a |   | 400 |   |
| Net      (loss) income                          | $                  | (350   | )                | $      | (222 | ) | $ | (1,504 | ) | $ | 1,162 |   |
|                                            |               |   |             |   |   |   |   |   |   |   |   |   |

| a.   | Relates      to the revised amount of Texas margin tax accrued on Escarpment Village      income earned during 2007 (see Note11). |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------|

|                                        | Third      Quarter |   | Nine      Months |   |
|---------------------------------------------|--------------------|--------|------------------|--------|
|                                        | 2008               |   | 2007             |   | 2008 |   | 2007 |   |
| Revenues:                                   |               |   |             |   |   |   |   |   |
| Developed      property sales               | $                  | 5,691  |             | $      | 7,002 |   | $ | 11,953 |   | $ | 15,662 |   |
| Undeveloped      property sales             |               | -      |             |   | - |   |   | 41 |   |   | 1,083 |   |
| Commissions,      management fees and other |               | 60     |             |   | 268 |   |   | 792 |   |   | 1,249 |   |
| Total      revenues                         |               | 5,751  |             |   | 7,270 |   |   | 12,786 |   |   | 17,994 |   |
|                                        |               |   |             |   |   |   |   |   |   |   |   |   |
| Cost      of sales, including depreciation  |               | (4,858 | )                |   | (5,841 | ) |   | (10,772 | ) |   | (10,938 | ) |
| General      and administrative expenses    |               | (1,482 | )                |   | (1,345 | ) |   | (4,538 | ) |   | (4,653 | ) |
|                                        |               |   |             |   |   |   |   |   |   |   |   |   |
| Operating      (loss) income                | $                  | (589   | )                | $      | 84 |   | $ | (2,524 | ) | $ | 2,403 |   |
|                                        |               |   |             |   |   |   |   |   |   |   |   |   |

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|                              | Third      Quarter |   |
|-----------------------------------|--------------------|--------|
|                              | 2008               |   | 2007 |   |
|                              | Lots               |   | Revenues |   | Lots |   | Revenues |   |
| Barton      Creek                 |               |   |   |   |   |   |   |   |
| Calera      Court Courtyard Homes | 1                  |   | $             643 |   | 1 |   | $             657 |   |
| Wimberly      Lane Phase II       |               |   |   |   |   |   |   |   |
| Standard      Homebuilder         | -                  |   | - |   | 3 |   | 516 |   |
| Amarra      Drive Phase I         | -                  |   | - |   | 1 |   | 1,250 |   |
| Verano      Drive                 | 3                  |   | 1,875 |   | - |   | - |   |
|                              |               |   |   |   |   |   |   |   |
| Circle      C                     |               |   |   |   |   |   |   |   |
| Meridian                          | 48                 |   | 3,173 |   | 58 |   | 3,575 |   |
|                              |               |   |   |   |   |   |   |   |
| Deerfielda                        | -                  |   | - |   | 15 |   | 1,004 |   |
| Total      Residential            | 52                 |   | $          5,691 |   | 78 |   | $          7,002 |   |
|                              |               |   |   |   |   |   |   |   |

|                              | Nine      Months |   |
|-----------------------------------|------------------|--------|
|                              | 2008             |   | 2007 |   |
|                              | Lots             |   | Revenues |   | Lots |   | Revenues |   |
| Barton      Creek                 |             |   |   |   |   |   |   |   |
| Calera      Court Courtyard Homes | 2                |   | $          1,278 |   | 1 |   | $             657 |   |
| Calera      Drive                 | -                |   | - |   | 2 |   | 809 |   |
| Mirador      Estate               | -                |   | - |   | 2 |   | 1,559 |   |
| Wimberly      Lane Phase II       |             |   |   |   |   |   |   |   |
| Standard      Homebuilder         | 1                |   | 265 | b | 9 |   | 1,561 |   |
| Amarra      Drive Phase I         | -                |   | - |   | 1 |   | 1,250 |   |
| Verano      Drive                 | 3                |   | 1,875 |   | - |   | - |   |
|                              |             |   |   |   |   |   |   |   |
| Circle      C                     |             |   |   |   |   |   |   |   |
| Meridian                          | 103              |   | 7,125 |   | 106 |   | 6,814 |   |
|                              |             |   |   |   |   |   |   |   |
| Deerfielda                        | 21               |   | 1,410 |   | 45 |   | 3,012 |   |
| Total      Residential            | 130              |   | $        11,953 |   | 166 |   | $        15,662 |   |
|                              |             |   |   |   |   |   |   |   |

| a.   | 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. |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| b.   | Includes      $0.1 million for homebuilder contract termination  fee. |
|----------------|-----------------------------------------------------------------------|

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|                                     | Third      Quarter |   | Nine      Months |   |
|------------------------------------------|--------------------|--------|------------------|--------|
|                                     | 2008               |   | 2007             |   | 2008 |   | 2007 |   |
| Rental      income                       | $                  | 1,158  |             | $      | 766 |   | $ | 3,278 |   | $ | 2,146 |   |
| Rental      property costs               |               | (944   | )                |   | (860 | ) |   | (2,683 | ) |   | (2,391 | ) |
| Depreciation                             |               | (382   | )                |   | (366 | ) |   | (1,064 | ) |   | (780 | ) |
| General      and administrative expenses |               | (241   | )                |   | (181 | ) |   | (739 | ) |   | (687 | ) |
| Operating      loss                      | $                  | (409   | )                | $      | (641 | ) | $ | (1,208 | ) | $ | (1,712 | ) |
|                                     |               |   |             |   |   |   |   |   |   |   |   |   |

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| ·   | $40.0      million of borrowings outstanding under seven unsecured term loans, which      include two $5.0 million loans, two $8.0 million loans, a $7.0 million      loan and two $3.5 million loans, all of which will mature in December      2011. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | $21.3      million of borrowings outstanding under the Lantana promissory note, which      matures in January 2018. |
|--------------------|---------------------------------------------------------------------------------------------------------------------|

| ·   | $2.1      million of borrowings outstanding under the W Austin Hotel &      Residences project construction loan, which matures in September 2011 and      has total remaining commitments available of approximately $163      million. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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Item 3

Item 4

PART II

Item 1A

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Item 2

|                         |   | (a)      Total |   |             |   | (c)      Total Number of      |   | (d)      Maximum Number     |
|------------------------------|--------|----------------|--------|------------------|--------|-------------------------------|--------|-----------------------------|
|                         |   | Number         |   | (b)      Average |   | Shares      Purchased as Part |   | of      Shares That May     |
|                         |   | of      Shares |   | Price      Paid  |   | of      Publicly Announced    |   | Yet      Be Purchased Under |
| Period                       |   | Purchased      |   | Per      Share   |   | Plans      or Programsa       |   | the      Plans or Programsa |
| July      1 to 31, 2008      |   | 1,570          |   | $22.29           |   | 1,570                         |   | 407,406                     |
| August      1 to 31, 2008    |   | 633            |   | 27.09            |   | 633                           |   | 406,773                     |
| September      1 to 30, 2008 |   | 1,320          |   | 28.10            |   | 1,320                         |   | 405,453                     |
| Total                        |   | 3,523          |   | $25.33           |   | 3,523                         |   |                        |
|                         |   |           |   |             |   |                          |   |                        |

| a.   | In      February 2001, our Board of Directors approved an open market share      purchase program for up to 0.7 million shares of our common stock. The      program does not have an expiration date. Our loan agreement with Comerica      provides a limit of $6.5 million for common stock purchases after      September 30, 2005. At September 30, 2008, $3.4 million remained under the      Comerica agreement for purchases of common  stock. |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Item 6.

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SIG

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STR

|    |                                                                                                                                                                                                                                                                                                                                                                           | Filed          |                           |          |            |   |
|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------|--------------------------------|---------------|-----------------|--------|
| Exhibit |                                                                                                                                                                                                                                                                                                                                                                           | with      this | Incorporated      by Reference |
| Number  | Exhibit      Title                                                                                                                                                                                                                                                                                                                                                             | Form      10-Q | Form                           | File      No. | Date      Filed |
| 3.1     | Amended      and Restated Certificate of Incorporation of Stratus.                                                                                                                                                                                                                                                                                                             |           | 10-Q                           | 000-19989     | 05/17/2004      |
|    |                                                                                                                                                                                                                                                                                                                                                                           |           |                           |          |            |
| 3.2     | Certificate      of Amendment to the Amended and Restated Certificate of Incorporation of      Stratus, dated May 14, 1998.                                                                                                                                                                                                                                                    |           | 10-Q                           | 000-19989     | 05/17/2004      |
|    |                                                                                                                                                                                                                                                                                                                                                                           |           |                           |          |            |
| 3.3     | Certificate      of Amendment to the Amended and Restated Certificate of Incorporation of      Stratus, dated May 25, 2001.                                                                                                                                                                                                                                                    |           | 10-K                           | 000-19989     | 03/22/2002      |
|    |                                                                                                                                                                                                                                                                                                                                                                           |           |                           |          |            |
| 3.4     | By-laws      of Stratus, as amended as of November 6, 2007.                                                                                                                                                                                                                                                                                                                    |           | 10-Q                           | 000-19989     | 08/11/2008      |
|    |                                                                                                                                                                                                                                                                                                                                                                           |           |                           |          |            |
| 4.1     | Rights      Agreement dated as of May 16, 2002, between Stratus Properties Inc. and      Mellon Investor Services LLC, as Rights Agent, which includes the      Certificates of Designation of Series C Participating Preferred Stock; the      Forms of Rights Certificate Assignment, and Election to Purchase; and the      Summary of Rights to Purchase Preferred Shares. |           | 8-A                            | 000-19989     | 05/23/2002      |
|    |                                                                                                                                                                                                                                                                                                                                                                           |           |                           |          |            |
| 4.2     | Amendment      No. 1 to Rights Agreement between Stratus Properties Inc. and Mellon      Investor Services LLC, as Rights Agent, dated as of November 7,      2003.                                                                                                                                                                                                            |           | 8-K                            | 000-19989     | 11/14/2003      |
|    |                                                                                                                                                                                                                                                                                                                                                                           |           |                           |          |            |
| 10.1    | Third      Modification and Extension Agreement by and between Stratus Properties      Inc., Stratus Properties Operating Co., L.P., Circle C Land, L.P., Austin      290 Properties, Inc., Calera Court, L.P., Oly Stratus Barton Creek I Joint      Venture and Comerica Bank effective May 30, 2008.                                                                        |           | 8-K                            | 000-19989     | 07/17/2008      |
|    |                                                                                                                                                                                                                                                                                                                                                                           |           |                           |          |            |
| 10.2    | Second      Modification and Extension Agreement by and between Stratus Properties      Inc., Stratus Properties Operating Co., L.P., Circle C Land, L.P., Austin      290 Properties, Inc., Calera Court, L.P., and Comerica Bank effective May      30, 2007.                                                                                                                |           | 8-K                            | 000-19989     | 02/08/2008      |
|    |                                                                                                                                                                                                                                                                                                                                                                           |           |                           |          |            |
| 10.3    | Loan      Agreement by and between Stratus Properties Inc., Stratus Properties      Operating Co., L.P., Circle C Land, L.P., Austin 290 Properties, Inc.,      Calera Court, L.P., and Comerica Bank dated as of September 30,      2005.                                                                                                                                     |           | 8-K                            | 000-19989     | 10/05/2005      |
|    |                                                                                                                                                                                                                                                                                                                                                                           |           |                           |          |            |
| 10.4    | Construction      Loan Agreement dated May 2, 2008, by and between CJUF II Stratus Block 21      LLC and Corus Bank, N.A.                                                                                                                                                                                                                                                      |           | 10-Q                           | 000-19989     | 08/11/2008      |
|    |                                                                                                                                                                                                                                                                                                                                                                           |           |                           |          |            |
| 10.5    | Promissory      Note dated May 2, 2008, by and between CJUF II Stratus Block 21 LLC and      Corus Bank, N.A.                                                                                                                                                                                                                                                                  |           | 10-Q                           | 000-19989     | 08/11/2008      |
|    |                                                                                                                                                                                                                                                                                                                                                                           |           |                           |          |            |
| 10.6    | Revolving      Promissory Note by and between Stratus Properties Inc., Stratus Properties      Operating Co., L.P., Circle C Land, L.P., Austin 290 Properties, Inc.,      Calera Court, L.P., and Comerica Bank dated as of September 30,      2005.                                                                                                                          |           | 8-K                            | 000-19989     | 10/05/2005      |
|    |                                                                                                                                                                                                                                                                                                                                                                           |           |                           |          |            |
| 10.7    | Loan      Agreement dated December 28, 2000, by and between Stratus Properties Inc.      and Holliday Fenoglio Fowler, L.P., subsequently assigned to an affiliate      of First American Asset Management.                                                                                                                                                                    |           | 10-K                           | 000-19989     | 03/28/2001      |

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|    |                                                                                                                                                                                                                                                                                               | Filed          |                           |          |            |   |
|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------|--------------------------------|---------------|-----------------|--------|
| Exhibit |                                                                                                                                                                                                                                                                                               | with      this | Incorporated      by Reference |
| Number  | Exhibit      Title                                                                                                                                                                                                                                                                                 | Form      10-Q | Form                           | File      No. | Date      Filed |
| 10.8    | Loan      Agreement dated June 14, 2001, by and between Stratus Properties Inc. and      Holliday Fenoglio Fowler, L.P., subsequently assigned to an affiliate of      First American Asset Management.                                                                                            |           | 10-Q                           | 000-19989     | 11/13/2001      |
|    |                                                                                                                                                                                                                                                                                               |           |                           |          |            |
| 10.9    | Second      Modification Agreement dated as of December 29, 2003, to be effective as      of January 31, 2004, by and between Lantana Office Properties I, L.P., a      Texas limited partnership (formerly known as 7500 Rialto Boulevard, L.P.),      as borrower, and Comerica Bank, as lender. |           | 10-K                           | 000-19989     | 3/30/2004       |
|    |                                                                                                                                                                                                                                                                                               |           |                           |          |            |
| 10.10   | Modification      Agreement dated January 31, 2003, by and between Lantana Office Properties      I, L.P., formerly 7500 Rialto Boulevard, L.P., and Comerica      Bank-Texas.                                                                                                                     |           | 10-Q                           | 000-19989     | 05/15/2003      |
|    |                                                                                                                                                                                                                                                                                               |           |                           |          |            |
| 10.11   | Construction      Loan Agreement dated June 11, 2001, between 7500 Rialto Boulevard, L.P.      and Comerica Bank-Texas.                                                                                                                                                                            |           | 10-K                           | 000-19989     | 3/22/2002       |
|    |                                                                                                                                                                                                                                                                                               |           |                           |          |            |
| 10.12   | Guaranty      Agreement dated June 11, 2001, by Stratus Properties Inc. in favor of      Comerica Bank-Texas.                                                                                                                                                                                      |           | 10-K                           | 000-19989     | 03/22/2002      |
|    |                                                                                                                                                                                                                                                                                               |           |                           |          |            |
| 10.13   | Loan      Agreement dated September 22, 2003, by and between Calera Court, L.P., as      borrower, and Comerica Bank, as lender.                                                                                                                                                                   |           | 10-Q                           | 000-19989     | 11/14/2003      |
|    |                                                                                                                                                                                                                                                                                               |           |                           |          |            |
| 10.14   | Development      Agreement dated August 15, 2002, between Circle C Land Corp. and City of      Austin.                                                                                                                                                                                             |           | 10-Q                           | 000-19989     | 11/14/2002      |
|    |                                                                                                                                                                                                                                                                                               |           |                           |          |            |
| 10.15   | First      Amendment to Agreement of Sale and Purchase dated April 26, 2006, by and      between Stratus Properties Operating Co., L.P., as Seller, and Advanced      Micro Devices, Inc., as Purchaser.                                                                                           |           | 10-Q                           | 000-19989     | 05/10/2006      |
|    |                                                                                                                                                                                                                                                                                               |           |                           |          |            |
| 10.16   | Agreement      of Sale and Purchase dated November 23, 2005, by and between Stratus      Properties Operating Co., L.P., as Seller, and Advanced Micro Devices,      Inc., as Purchaser.                                                                                                           |           | 10-Q                           | 000-19989     | 05/10/2006      |
|    |                                                                                                                                                                                                                                                                                               |           |                           |          |            |
| 10.17   | Amended      and Restated Loan Agreement between Stratus Properties Inc. and American      Strategic Income Portfolio Inc.-II dated as of December 12,      2006.                                                                                                                                  |           | 10-K                           | 000-19989     | 03/16/2007      |
|    |                                                                                                                                                                                                                                                                                               |           |                           |          |            |
| 10.18   | Amended      and Restated Loan Agreement between Stratus Properties Inc. and American      Select Portfolio Inc. dated as of December 12, 2006.                                                                                                                                                    |           | 10-K                           | 000-19989     | 03/16/2007      |
|    |                                                                                                                                                                                                                                                                                               |           |                           |          |            |
| 10.19   | Loan      Agreement between Stratus Properties Inc. and Holliday Fenoglio Fowler,      L.P. dated as of December 12, 2006.                                                                                                                                                                         |           | 10-K                           | 000-19989     | 03/16/2007      |
|    |                                                                                                                                                                                                                                                                                               |           |                           |          |            |
| 10.20   | Letter      Agreement between Stratus Properties Inc. and Canyon-Johnson Urban Fund      II, L.P., dated as of May 4, 2007.                                                                                                                                                                        |           | 10-Q                           | 000-19989     | 08/09/2007      |
|    |                                                                                                                                                                                                                                                                                               |           |                           |          |            |
| 10.21   | Loan      Agreement between Stratus Properties Inc. and Holliday Fenoglio Fowler,      L.P. dated as of June 1, 2007, subsequently assigned to American Select      Portfolio Inc., an affiliate of First American Asset      Management.                                                          |           | 10-Q                           | 000-19989     | 08/09/2007      |

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|    |                                                                                                                                                                                                                                                    | Filed          |                           |          |            |   |
|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------|--------------------------------|---------------|-----------------|--------|
| Exhibit |                                                                                                                                                                                                                                                    | with      this | Incorporated      by Reference |
| Number  | Exhibit      Title                                                                                                                                                                                                                                      | Form      10-Q | Form                           | File      No. | Date      Filed |
| 10.22   | Loan      Agreement between Stratus Properties Inc. and Holliday Fenoglio Fowler,      L.P. dated as of June 1, 2007, subsequently assigned to American Strategic      Income Portfolio Inc., an affiliate of First American Asset      Management.     |           | 10-Q                           | 000-19989     | 08/09/2007      |
|    |                                                                                                                                                                                                                                                    |           |                           |          |            |
| 10.23   | Loan      Agreement between Stratus Properties Inc. and Holliday Fenoglio Fowler,      L.P. dated as of June 1, 2007, subsequently assigned to American Strategic      Income Portfolio Inc.-III, an affiliate of First American Asset      Management. |           | 10-Q                           | 000-19989     | 08/09/2007      |
|    |                                                                                                                                                                                                                                                    |           |                           |          |            |
| 10.24   | Promissory      Note dated as of December 14, 2007, between Lantana Office Properties I,      L.P., as borrower, and The Lincoln National Life Insurance Company, as      lender.                                                                       |           | 8-K                            | 000-19989     | 12/14/2007      |
|    |                                                                                                                                                                                                                                                    |           |                           |          |            |
| 10.25*  | Stratus’      Performance Incentive Awards Program, as amended, effective December 30,      2008.                                                                                                                                                 | X              |                           |          |            |
|    |                                                                                                                                                                                                                                                    |           |                           |          |            |
| 10.26*  | Stratus      Properties Inc. Stock Option Plan, as amended andrestated.                                                                                                                                                                                 |           | 10-Q                           | 000-19989     | 05/10/2007      |
|    |                                                                                                                                                                                                                                                    |           |                           |          |            |
| 10.27*  | Stratus      Properties Inc. 1996 Stock Option Plan for Non-Employee Directors, as      amended and restated.                                                                                                                                           |           | 10-Q                           | 000-19989     | 05/10/2007      |
|    |                                                                                                                                                                                                                                                    |           |                           |          |            |
| 10.28*  | Stratus      Properties Inc. 1998 Stock Option Plan, as amended and      restated.                                                                                                                                                                      |           | 10-Q                           | 000-19989     | 05/10/2007      |
|    |                                                                                                                                                                                                                                                    |           |                           |          |            |
| 10.29*  | Form      of Notice of Grant of Nonqualified Stock Options under the 1998 Stock      Option Plan.                                                                                                                                                       |           | 10-Q                           | 000-19989     | 8/12/2005       |
|    |                                                                                                                                                                                                                                                    |           |                           |          |            |
| 10.30*  | Form      of Restricted Stock Unit Agreement under the 1998 Stock Option      Plan.                                                                                                                                                                     |           | 10-Q                           | 000-19989     | 05/10/2007      |
|    |                                                                                                                                                                                                                                                    |           |                           |          |            |
| 10.31*  | Stratus      Properties Inc. 2002 Stock Incentive Plan, as amended and      restated.                                                                                                                                                                   |           | 10-Q                           | 000-19989     | 05/10/2007      |
|    |                                                                                                                                                                                                                                                    |           |                           |          |            |
| 10.32*  | Form      of Notice of Grant of Nonqualified Stock Options under the 2002 Stock      Incentive Plan.                                                                                                                                                    |           | 10-Q                           | 000-19989     | 08/12/2005      |
|    |                                                                                                                                                                                                                                                    |           |                           |          |            |
| 10.33*  | Form      of Restricted Stock Unit Agreement under the 2002 Stock Incentive      Plan.                                                                                                                                                                  |           | 10-Q                           | 000-19989     | 05/10/2007      |
|    |                                                                                                                                                                                                                                                    |           |                           |          |            |
| 10.34*  | Stratus      Director Compensation.                                                                                                                                                                                                                     |           | 10-K                           | 000-19989     | 03/16/2006      |
|    |                                                                                                                                                                                                                                                    |           |                           |          |            |
| 10.35*  | Amended      and Restated Change of Control Agreement between Stratus Properties Inc.      and William H. Armstrong III, effective as of December 30,      2008.                                                                                        | X              |                           |          |            |
|    |                                                                                                                                                                                                                                                    |           |                           |          |            |
| 10.36*  | Amended      and Restated Change of Control Agreement between Stratus Properties Inc.      and John E. Baker, effective as of December 30, 2008.                                                                                                        | X              |                           |          |            |

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|    |                                                                                         | Filed          |                           |          |            |   |
|---------|----------------------------------------------------------------------------------------------|----------------|--------------------------------|---------------|-----------------|--------|
| Exhibit |                                                                                         | with      this | Incorporated      by Reference |
| Number  | Exhibit      Title                                                                           | Form      10-Q | Form                           | File      No. | Date      Filed |
|    |                                                                                         |           |                           |          |            |
| 31.1    | Certification      of Principal Executive Officer pursuant to Rule      13a-14(a)/15d-14(a). | X              |                           |          |            |
|    |                                                                                         |           |                           |          |            |
| 31.2    | Certification      of Principal Financial Officer pursuant to Rule      13a-14(a)/15d-14(a). | X              |                           |          |            |
|    |                                                                                         |           |                           |          |            |
| 32.1    | Certification      of Principal Executive Officer pursuant to 18 U.S.C. Section      1350.   | X              |                           |          |            |
|    |                                                                                         |           |                           |          |            |
| 32.2    | Certification      of Principal Financial Officer pursuant to 18 U.S.C. Section      1350.   | X              |                           |          |            |
|    |                                                                                         |           |                           |          |            |

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