**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-Q**





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**





o
            **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: 000-29463**





**SONTERRA
      RESOURCES, INC.**


(Exact
      Name of Registrant as Specified in Its Charter)




**Delaware**
            
            **51-0392750**(State
                or Other Jurisdiction of
            
            (IR.
                Employer Identification No.)Incorporation
                or Organization)





**523
                N Sam Houston Pkwy E**
              **Suite
                175**
              **Houston,
                Texas 77060**
              (Address
                of Principal Executive Offices)




Registrant’s
      telephone number, including area code: **(713)
      741-0610**





Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.





YES x NO o




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting company.
      See
      the definitions of “large accelerated filer” and “smaller reporting company” in
      Rule 12b-2 of the Exchange Act. (Check one):




Large
                accelerated filero
            Accelerated
                fileroNon-accelerated
                filero
            Smaller
                reporting companyx




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).





YES o NO x





As
      of
      November 14, 2008 the Registrant had 26,347,359 shares of its common stock,
      par
      value $0.001 per share, issued and outstanding.







**PART
      I**


**FINANCIAL
      INFORMATION**




**Item
      1. Financial Statements**


**SONTERRA
      RESOURCES, INC.**


**Consolidated
      Balance Sheets**





**September 30,****2008**
            
            **December 31,****2007****(Unaudited)**
            
            **(Audited)****ASSETS**Current
                AssetsCash
                and equivalents
            
            $
            126,274
            
            $
            2,195,899Accounts
                receivable
            
            
            28,658
            
            
            2,901,502Prepaid
                expenses
            
            
            27,922
            
            
            151,998Total
                current assets
            
            
            182,854
            
            
            5,249,399Property
                and EquipmentOil
                and gas properties, full cost methodUnproved
                properties
            
            
            896,350
            
            
            848,894Proved
                properties
            
            
            4,548,469
            
            
            4,547,578Pipelines
                and facilities
            
            
            778,418
            
            
            778,418Total
                oil and gas properties
            
            
            6,223,237
            
            
            6,174,890Less
                accumulated depreciation, depletion and amortization
            
            
            (495,550
            )
            
            (348,198
            )5,727,687
            
            
            5,826,692Other
                property and equipment, net
            
            
            37,677
            
            
            30,000Total property and equipment, net
            
            
            5,765,364
            
            
            5,856,692Other
                AssetsGoodwill
            
            
            96,030
            
            
            -Debt
                issuance costs, net of amortization
            
            
            131,931
            
            
            285,353Total
                other assets
            
            
            227,961
            
            
            285,353**Total
                Assets**
            
            $
            6,176,179
            
            $
            11,391,444**LIABILITIES
                AND SHAREHOLDERS' EQUITY**Current
                LiabilitiesAccounts
                payable, trade
            
            $
            185,786
            
            $
            2,378,342Other
                payables and accrued liabilities
            
            
            643,286
            
            
            890,496Participant
                advances received
            
            
            966
            
            
            948,494Interest
                payable
            
            
            157,134
            
            
            268,527Total
                current liabilities
            
            
            987,172
            
            
            4,485,859Noncurrent
                LiabilitiesLong-term
                debt
            
            
            3,083,160
            
            
            7,990,010Asset
                retirement obligation
            
            
            124,224
            
            
            116,751Total
                noncurrent liabilities
            
            
            3,207,384
            
            
            8,106,761Shareholders'
                EquityCommon
                stock, par value $0.001 per share, authorized 50,000,000
                shares,issued
                and outstanding 26,347,359 and 38,552,749 shares
            
            
            26,347
            
            
            38,552Additional
                paid-in capital
            
            
            5,643,296
            
            
            (28,562
            )Retained
                earnings (deficit)
            
            
            (3,688,020
            )
            
            (1,211,166
            )Total
                shareholders’ equity (deficit)
            
            
            1,981,623
            
            
            (1,201,176
            )**Total
                Liabilities and Shareholders’ Equity**
            
            $
            6,176,179
            
            $
            11,391,444




***See
      notes to consolidated financial statements.***


2




**SONTERRA
      RESOURCES, INC.**


**Consolidated
      Statements of Operations**




**Three Months**
            
            **Nine Months****Ended**
            
            **Ended****September 30, 2008**
            
            **September 30, 2008****(Unaudited)**
            
            **(Unaudited)****Revenues**Oil
                and gas sales
            
            $
            43,508
            
            $
            281,654Contract
                operating income
            
            
            -
            
            
            261,234Operating
                overhead income
            
            
            -
            
            
            14,424Gas
                gathering operations
            
            
            -
            
            
            10,625Total revenues
            
            
            43,508
            
            
            567,937**Costs
                and Expenses**Lease
                operating expenses
            
            
            224,406
            
            
            683,388Production
                taxes
            
            
            1,448
            
            
            19,866Depreciation,
                depletion and amortization
            
            
            22,784
            
            
            147,352Accretion
                on asset retirement obligation
            
            
            879
            
            
            7,473General
                and administrative
            
            
            847,175
            
            
            1,916,655Total costs and expenses
            
            
            1,096,692
            
            
            2,774,734**Loss
                from Operations**
            
            
            (1,053,184
            )
            
            (2,206,797
            )**Other
                (Expense)**Interest
                expense
            
            
            (85,125
            )
            
            (225,366
            )Debt
                issuance costs amortization
            
            
            (17,364
            )
            
            (44,691
            )Other (expense)
            
            
            (102,489
            )
            
            (270,057
            )**Net
                Loss Before Tax**
            
            
            (1,155,673
            )
            
            (2,476,854
            )Income
                tax expense (benefit)
            
            
            -
            
            
            -**Net
                Loss**
            
            $
            (1,155,673
            )
            $
            (2,476,854
            )Loss
                Per Common Share:Basic
            
            $
            (0.04
            )
            $
            (0.09
            )Diluted
            
            $
            (0.04
            )
            $
            (0.09
            )Weighted
                average number of commonshares
                outstanding:Basic
            
            
            26,347,359
            
            
            26,241,402Diluted
            
            
            26,347,359
            
            
            26,241,402




***See
      notes to consolidated financial statements.***


3




**SONTERRA
      RESOURCES, INC.**


**Consolidated
      Statements of Cash Flows**





**Nine Months****Ended****September 30, 2008****(Unaudited)****Operating
                    Activities**Net
                    loss
                
                $
                (2,476,854
                )Adjustments
                    to reconcile net loss to net cash used by operating
                    activities:Depreciation, depletion and amortization
                
                
                147,352Accretion on asset retirement obligation
                
                
                7,473Non-cash compensation expense
                
                
                515,683Debt issuance costs amortization
                
                
                44,691Changes
                    in operating assets and liabilities:Accounts receivable
                
                
                2,872,844Prepaid expenses
                
                
                124,076Debt issuance costs
                
                
                (95,000
                )Accounts payable and accrued liabilities
                
                
                (2,409,766
                )Accounts payable acquired in acquisition of Sonterra Resources,
                    Inc.,
                    net
                
                
                (642,308
                )Participant advances received
                
                
                (947,528
                )Interest payable
                
                
                (114,263
                )Net
                    cash (used) by operating activities
                
                
                (2,973,600
                )**Investing
                    Activities**Purchases
                    and development of oil and gas properties
                
                
                (210,348
                )Proceeds
                    from sale of oil and gas properties
                
                
                162,000Purchases
                    of other property and equipment
                
                
                (37,677
                )Acquisition
                    of Velocity Offshore and Velocity Partners
                
                
                (10,000
                )Net
                    cash (used) by investing activities
                
                
                (210,348
                )**Financing
                    Activities**Proceeds
                    from issuance of long term debt
                
                
                1,000,000Net
                    cash provided by financing activities
                
                
                1,000,000**Net
                    Decrease in Cash and Equivalents**
                
                
                (2,069,625
                )Cash
                    and equivalents at beginning of period
                
                
                2,195,899**Cash
                    and Equivalents at End of Period**
                
                $
                126,274




***See
      notes to consolidated financial statements.***




4




**SONTERRA
      RESOURCES, INC.**


**Notes
      to Consolidated Financial Statements**


**Period
      Ended September 30, 2008 (Unaudited)**





**1.**
            **Basis
                of Presentation**





The
      accompanying unaudited consolidated financial statements report interim
      financial information for Sonterra Resources, Inc., a Delaware corporation
      (“Sonterra Resources”), and its wholly owned subsidiaries: Sonterra Oil &
Gas, Inc., a Delaware corporation (“Sonterra Oil & Gas”), Sonterra
      Operating, Inc., a Delaware corporation  (“Sonterra Operating”), Velocity
      Energy Offshore LP, a Delaware limited partnership (“Velocity Offshore”) and
      Velocity Energy Partners L.P., a Delaware limited partnership (“Velocity
      Partners”). Collectively, Sonterra Oil & Gas, Sonterra Operating, Velocity
      Offshore and Velocity Partners are referred to as the “Subsidiaries”. References
      to “the Company” refer to Sonterra Resources, or Sonterra Resources and its
      Subsidiaries, as of September 30, 2008.





Sonterra
      Resources was originally incorporated in Florida on June 17, 1997, as
      Permastoprust International, Inc. The name was changed to Greystone Credit
      Inc.
      in June 1999. On August 4, 1999, Greystone Credit Inc. acquired whOOdoo.com,
      Inc., a Florida corporation, in a share exchange. In connection with the share
      exchange, the state of incorporation was changed to Delaware and the name was
      changed to whOOdoo.com, Inc. On July 17, 2000, the name was changed to Ballistic
      Ventures, Inc. On June 5, 2004, the name was changed to River Capital Group,
      Inc. (“River Capital”). River Capital intended to establish and grow a core
      reinsurance business, but was unable to raise equity or debt capital and
      abandoned the efforts to establish a reinsurance business. Following the closing
      of the Securities Exchange discussed below, the name of the corporation was
      changed to Sonterra Resources, Inc.





On
      February 14, 2008, Sonterra Resources consummated the transactions (the
“Securities Exchange”) contemplated by a Securities Exchange and Additional Note
      Purchase Agreement entered into on August 3, 2007 with The Longview Fund, L.P.
      (“Longview”), together with an affiliated fund, of approximately 66.6% of the
      Company’s common stock. The Securities Exchange was comprised of a series
      of transactions that occurred as part of the closing including (i) Sonterra
      Resources’ 38,552,749 issued and outstanding shares of common stock were
      combined into 3,855,275 shares of common stock in a 1-for-10 reverse stock
      split; (ii) the Company’s name was changed from River Capital Group, Inc. to
      Sonterra Resources, Inc.; and (iii) Longview exchanged (a) all of its shares
      of
      common stock of Sonterra Oil & Gas, Inc., (b) a $5,990,010 equity note from
      Sonterra Oil & Gas, and (c) a warrant to purchase 50 shares of Sonterra Oil
& Gas common stock for (x) 21,846,558 shares of Sonterra Resources’ common
      stock and (y) a warrant to purchase 4,958,678 shares of Sonterra Resources’
common stock. Longview also exchanged its $2,000,000 non-equity note from
      Sonterra Oil & Gas for a senior secured note from Sonterra Resources in an
      equal principal amount.





As
      a
      result of the Securities Exchange, (i) 100% of the issued and outstanding
      capital stock of Sonterra Oil & Gas, which was formerly known as Sonterra
      Resources, Inc. prior to the Securities Exchange, is now owned by Sonterra
      Resources, which was formerly known as River Capital Group, Inc.; (ii) Sonterra
      Resources is engaged, through the Subsidiaries, in the operation and
      development of oil and gas properties and related assets; and (iii) the former
      stockholders of Sonterra Oil & Gas hold approximately 95% of the common
      stock of Sonterra Resources.





Although
      Sonterra Resources was the legal acquirer of Sonterra Oil & Gas and
      continues as a publicly traded entity, Sonterra Oil & Gas was the acquirer
      for financial reporting purposes. Accordingly, concurrent with the Securities
      Exchange, Sonterra Resources adopted the accounting methods of Sonterra Oil
      & Gas. For SEC reporting purposes, Sonterra Resources presents the
      consolidated historical financial statements of Sonterra Resources and the
      Subsidiaries through the effective date of the Securities Exchange, and the
      combined financial results thereafter. The consolidated financial statements
      for
      the interim period ended September 30, 2008 include the financial results of
      Sonterra Resources from the effective date of the Securities Exchange through
      September 30, 2008; the financial results of Sonterra Oil & Gas for the
      three and nine month periods ended September 30, 2008; and the financial results
      of Sonterra Operating for the three month period ended September 30, 2008.
      Because Sonterra Oil & Gas was not formed until April 2007, Sonterra
      Operating was not formed until March 2008, and their operations did not commence
      until August 2007 and April 2008, respectively, there is no meaningful
      comparative financial information available to present for the three and nine
      month periods ended September 30, 2007.





On
      July
      8, 2008, Sonterra Resources, Inc. acquired Velocity Energy Offshore LP and
      Velocity Energy Partners LP, both Delaware limited partnerships. Accordingly,
      the results of operations of these partnerships are included in the financial
      statements since that date. Sonterra paid $10,000 to members of management
      of
      Sonterra Resources, Donald E. Vandenberg, President and Chief Executive Officer,
      and Gary L. Lancaster, Vice President and Chief Legal Officer, in consideration
      for their partnership interests in Velocity Offshore and Velocity Partners.
      As
      part of the acquisition, Sonterra assumed a $75,000 promissory note and accrued
      interest of $11,463 owed to Donald E. Vandenberg.





5




**SONTERRA
      RESOURCES, INC.**


**Notes
      to Consolidated Financial Statements**


**Period
      Ended September 30, 2008 (Unaudited)**





Velocity
      Offshore is recognized by the Minerals Management Services as a qualified
      operator in the Outer Continental Shelf (OCS). Management believes this
      acquisition will enable Sonterra to be in a better position for potential
      offshore acquisition targets.





These
      financial statements have been prepared in accordance with U.S. generally
      accepted accounting principles (“GAAP”) for interim financial information and
      with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly,
      they do not include all of the information and footnotes required by GAAP for
      complete financial statements. The accounting policies followed by the Company
      are described in Note A to the audited consolidated financial statements for
      the
      period ended December 31, 2007, and reported on an exhibit to the Form 8-K/A
      filed May 13, 2008.





In
      the
      opinion of management, all normal recurring adjustments considered necessary
      for
      the fair statement of the results for the interim period presented have been
      included.





**2.**
            **Earnings
                (Loss) Per Common Share**





Basic
      earnings (loss) per common share is calculated by dividing net income (loss)
      by
      the weighted average number of shares of common stock outstanding during the
      period. Diluted earnings per common share considers the dilutive effect of
      the
      average number of common stock equivalents, consisting of the Company’s common
      stock options and warrants, that were outstanding during the period. **** For the
      three month interim period presented, a net loss was incurred. Therefore,
      consideration of common stock equivalents in the calculation of the weighted
      average number of shares outstanding was not applicable because the effect
      would
      have been anti-dilutive.





For
      purposes of calculating the weighted average number of shares of common stock
      outstanding and earnings (loss) per share data, the number of common shares
      issued by Sonterra Resources in the Securities Exchange transaction is deemed
      to
      be included in the number of common shares of the Company outstanding during
      the
      interim period.





**3.**
            **Stock
                Based Compensation**





Concurrent
      with the consummation of the Securities Exchange, the Company adopted the 2007
      Non-Qualified Stock Option Plan to provide for the issuance of stock options
      as
      compensation to key employees, officers and non-employee directors. Immediately
      upon adoption, common stock options were issued to management employees of
      the
      Company pursuant to the 2007 Non-Qualified Stock Option Plan. All of these
      options were forfeited on June 23, 2008 as discussed below.





In
      accordance with Statement of Financial Accounting Standard No. 123, the Company
      determines the value of the stock based compensation granted to its employees
      by
      use of a Black-Scholes valuation model. That value is recognized as stock
      compensation expense over the expected life of the underlying options. Total
      stock-based compensation expense recognized for the nine months ended September
      30, 2008 was $515,683.





*Stock
      Options:*  ****** Stock
      options issued to employees under the 2007 Non-Qualified Stock Option Plan
      vest
      incrementally over a period of three years and have a ten-year life. On February
      14, 2008, a total of 5,140,359 common stock options were issued. These options
      had exercise prices that ranged from $0.332 to $0.453 per share, and were
      scheduled to expire in February 2018. These options were forfeited on June
      23,
      2008, when the then management team resigned from Sonterra Resources. A new
      management team was employed on June 23, 2008, and a total of 2,459,087 new
      common stock options were issued. An additional 1,141,719 new common stock
      options were issued on July 1 and an additional 30,000 new common stock options
      were issued in exchange for 4 month deferral of salary to a new member of the
      management team. These options have exercise prices that range from $1.35 to
      $2.025 per share and will expire in June 2018.




6




**SONTERRA
      RESOURCES, INC.**


**Notes
      to Consolidated Financial Statements**


**Period
      Ended September 30, 2008 (Unaudited)**





**Number
                Outstanding**
            
            **Weighted
                Average Exercise Price**
            
            **Weighted Average
                Contractual Termin Years**
            
            **Aggregate
                Intrinsic Value**Outstanding
                at December 31, 2007
            
            
            5,140,359
            
            $
            0.393
            
            
            10.0Issued
            
            
            3,630,806
            
            $
            1.707
            
            
            10.0Forfeited
            
            
            (5,140,359
            )
            $
            0.393
            
            
            9.9Exercised
            
            
            -
            
            
            -
            
            
            -Outstanding
                and exercisable at September 30, 2008
            
            
            3,630,806
            
            $
            1.707
            
            
            9.5
            
            $
            —





*Warrants:* As of
      September 30, 2008, the Company had outstanding warrants for the purchase of
      4,958,678 shares of common stock at $0.302 per share. The warrants expire in
      February 2013.





**4.**  **Related
      Party Transaction**





As
      discussed in Note 1, the company acquired Velocity Offshore and Velocity
      Partners from Mssrs. Vandenberg and Lancaster, executives of Sonterra Resources.





The
      operations of Velocity Partners and Velocity Offshore are included in the
      accompanying consolidate financial statements from date of acquisition. Pro
      forma information is not included because results of operations of the acquired
      entities would not have a material effect on the Company’s financial statements.
      The purchase price was allocated based on the fair values of the assets and
      liabilities at the date of acquisition as follows:





**Allocation
                of Purchase Price**Cash
            
            $
            433Goodwill
            
            
            96,030Accrued
                interest
            
            
            (11,463
            )Note
                payable
            
            
            (75,000
            )Total
            
            $
            10,000





The
      goodwill will not be amortized for tax purposes.





**5.**  **Long-Term
      Debt**




On
      August
      3, 2007, in connection with the closing of an oil and gas property acquisition
      and pursuant to a securities purchase agreement with Longview, Sonterra Oil
      & Gas received an advance of $5,990,010 in exchange for a senior secured
      note (the “Equity Note”) payable to Longview. The Equity Note was issued with a
      maturity date of August 31, 2010, with the principal balance being due in full
      at maturity. Interest payments under the Equity Note were due quarterly at
      a
      rate equal to a three-month LIBOR plus 8.25%, redetermined for each calendar
      quarter. Concurrent with the issuance of the Equity Note, Sonterra issued
      Longview a warrant to purchase 50 shares of the Sonterra Oil & Gas common
      stock. As part of the Securities Exchange, on February 14, 2008, Longview
      exchanged all its shares of Sonterra Oil & Gas common stock and the Equity
      Note for common shares of Sonterra Resources. Also as part of the Securities
      Exchange, Longview exchanged the warrant to purchase 50 shares of the Sonterra
      Oil & Gas common stock for a warrant to purchase 4,958,678 common shares of
      Sonterra Resources.




On
      August
      29, 2007, Sonterra Oil & Gas received $2,000,000 in exchange for a senior
      secured note (the “Non-Equity Note”) payable to Longview. A portion of these
      proceeds were used to provide funds for the acquisition of certain oil and
      gas
      properties. The Non-Equity note was issued with a maturity date of August 31,
      2010, with the principal balance being due in full at maturity. Interest
      payments are due quarterly at a rate equal to a three-month LIBOR plus 8.25%,
      redetermined for each calendar quarter. As part of the Securities Exchange,
      on
      February 14, 2008, Longview exchanged the Non-Equity Note for a $2,000,000
      senior secured note of Sonterra Resources (the “Initial Sonterra Note”) with the
      same terms as the Non-Equity Note.




7





**SONTERRA
      RESOURCES, INC.**


**Notes
      to Consolidated Financial Statements**


**Period
      Ended September 30, 2008 (Unaudited)**





Subject
      to certain terms and conditions through December 31, 2008, the Company has
      the
      option to obtain additional debt financing from Longview by issuing additional
      senior secured notes with a maturity date of August 31, 2010. The principal
      amounts of these additional notes, if the Company chooses to issue them, may
      not
      exceed $2 million in any fiscal quarter. Interest payments on these notes,
      if
      issued, are due quarterly at a rate equal to a three-month LIBOR plus 8.25%,
      redetermined for each calendar quarter. Pursuant to the option, the Company
      obtained $1 million in additional debt financing from Longview on May 22,
      2008.





In
      July
      2008, Sonterra assumed a $75,000 promissory note and $11,463 in accrued
      interest, owed to Donald E. Vandenberg, who is a related party as previously
      discussed. Interest payments under the promissory note are payable at a rate
      of
      8%, compounded annually; however, all principal and interest payments under
      said
      note will be deferred (and the underlying debt will be subordinated) until
      repayment of any senior and subordinated debt under any current and restructured
      working capital and project financing credit facilities.





The
      following is a schedule of principal maturities of debt as of September 30,
      2008, after giving consideration to the exchange of the $5,990,010 senior
      secured note for common stock of the Company as described above:




Due
                in calendar year:2008
            
            $
            -2009
            
            
            -2010
            
            
            3,083,160Total
            
            $
            3,083,160




The
      Non-Equity Note and the Initial Sonterra Note (collectively, the “Notes”)
      contain certain restrictive covenants which, among other things, limit the
      incurrence of additional debt, investments, liens, dividends, prepayments of
      indebtedness, asset dispositions, mergers and consolidations, and other matters
      customarily restricted in such agreements. The Notes require the Company to
      comply with certain financial covenants, including a minimum quarterly revenue
      amount, a minimum oil and gas reserves quantity amount, and a minimum
      proved reserve value ratio. The Notes also include customary events of default.
      The financial covenants are measured as of each calendar quarter. Upon the
      occurrence and continuation of an event of default, the holder of the Notes
      may
      declare all or any portion of the Notes to be due and payable immediately.
      The
      Company was not in compliance with all covenants of the outstanding Non-Equity
      Note at December 31, 2007. A waiver of requirement for compliance with the
      debt
      covenants at December 31, 2007 was received from Longview, and the financial
      covenants of the Initial Sonterra Note were amended through December 31, 2008.
      There are no restrictive covenants on the promissory note.





**6.**  **Securities
      Exchange**




As
      described in Note 1, on February 14, 2008, Sonterra Resources, Inc. completed
      the Securities Exchange with Sonterra Oil & Gas, Inc., effecting a change in
      control of Sonterra Resources. In exchange for all of their Sonterra Oil &
Gas common stock and the $5,990,010 Equity Note from Sonterra Oil & Gas, the
      Sonterra Oil & Gas shareholders received shares of the common stock of
      Sonterra Resources. The former shareholders of Sonterra Oil & Gas held 95.8%
      of the common stock of Sonterra Resources immediately following the Securities
      Exchange.




Prior
      to
      the Securities Exchange, Sonterra Resources was a “shell” company with no
      operations. Sonterra Oil & Gas is engaged in the exploration, development
      and operation of oil and gas properties in the United States. The Securities
      Exchange was consummated because management believes the combined public company
      will be better positioned to access capital markets and to acquire and develop
      oil and gas properties in the future, both of which are necessary for the
      long-term growth of the Company and its value.




For
      financial reporting purposes, Sonterra Oil & Gas acquired Sonterra
      Resources, though Sonterra Resources is the legal acquirer in the transaction.
      Sonterra Resources has conformed to the accounting methods of Sonterra Oil
&
Gas. The purchase price of the transaction was determined using the net asset
      value method. The following table summarizes the estimated fair values of the
      assets acquired and liabilities assumed at the date of the Securities
      Exchange:


8





**SONTERRA
      RESOURCES, INC.**


**Notes
      to Consolidated Financial Statements**


**Period
      Ended September 30, 2008 (Unaudited)**








**As
                of February 14, 2008**Current
                Assets:Cash
            
            $
            9,115Current
                Liabilities:Accounts
                Payable
            
            
            (651,423
            )Net
                Liabilities Acquired
            
            $
            (642,308
            )





The
      pro
      forma results of the combined operations of Sonterra Resources and Sonterra
      Oil
& Gas for the three and nine months ended September 30, 2008 and 2007 are
      presented below. The pro forma results include the limited operations of
      Sonterra Oil & Gas from the date of its incorporation, April 17,
      2007.





**Three Months Ended
                September 30,****2008**
            
            **2007**Revenues
            
            $
            43,508
            
            $
            -Costs
                and Expenses
            
            
            1,096,692
            
            
            54,793Income
                (Loss) from Operations
            
            
            (1,053,184
            )
            
            (54,793
            )Other
                Income (Expense)
            
            
            (102,489
            )
            
            130,010Net
                (Loss)
            
            $
            (1,155,673
            )
            $
            75,217Basic
                Earnings (Loss) Per Share
            
            $
            (0.044
            )
            $
            0.002Weighted
                Average Common Shares Outstanding
            
            
            26,347,359
            
            
            38,552,749





**Nine Months Ended
                September 30,****2008**
            
            **2007**Revenues
            
            $
            567,937
            
            $
            -Costs
                and Expenses
            
            
            2,774,734
            
            
            276,970Income
                (Loss) from Operations
            
            
            (2,206,797
            )
            
            (276,970
            )Other
                Income (Expense)
            
            
            (270,057
            )
            
            131,826Net
                (Loss)
            
            $
            (2,476,854
            )
            $
            (145,144
            )Basic
                Earnings (Loss) Per Share
            
            $
            (0.094
            )
            $
            (0.004
            )Weighted
                Average Common Shares Outstanding
            
            
            26,241,402
            
            
            38,517,381





**7.
      Income Taxes**




FASB
      Interpretation No. 48 (“FIN 48”) “Accounting for Uncertainty in Income Taxes, an
      interpretation of FASB Statement No. 109” prescribes a comprehensive model for
      how companies should recognize, measure, present and disclose in their financial
      statements uncertain tax position taken or expected to be taken on a tax return.
      Under FIN 48, tax positions are recognized in the Company’s financial statements
      as the largest amount of tax benefit that has a greater than 50% likelihood
      of
      being realized upon ultimate settlement with tax authorities assuming full
      knowledge of the position and all relevant facts. These amounts are subsequently
      reevaluated and changes are recognized as adjustments to current period tax
      expense. FIN 48 also revised disclosure requirement to include an annual tabular
      roll forward of unrecognized tax benefits.




9





**SONTERRA
      RESOURCES, INC.**


**Notes
      to Consolidated Financial Statements**


**Period
      Ended September 30, 2008 (Unaudited)**




The
      Company adopted the provisions of FIN 48 at its inception in April 2007. If
      applicable, the Company would recognize interest and penalties related to
      uncertain tax positions in interest expense. As of September 30, 2008, the
      Company had no accrued interest and penalties.




The
      Company has incurred net operating losses since its inception, resulting in
      a
      deferred tax asset. In assessing the realizability of deferred tax assets,
      management considers whether it is more likely than not that some portion or
      all
      of the deferred income tax assets will not be realized. The ultimate realization
      of deferred income tax assets is dependent upon the generation of future taxable
      income during the periods in which those temporary differences become
      deductible. Management considers the scheduled reversal of deferred income
      tax
      liabilities, projected future taxable income, and tax planning strategies in
      making this assessment. Based on consideration of these items, management has
      determined that enough uncertainty exists relative to the realization of the
      deferred income tax asset balances to warrant the application of a full
      valuation allowance as of September 30, 2008 and December 31, 2007.




**8.**  **Recent
      Accounting Pronouncements**




*FASB
      Statement of Accounting Standard No. 157, “Fair Value Measurement”(“SFAS
      157”):* SFAS
      157, issued in September 2006, defines fair value, establishes a framework
      for
      measuring fair value, and expands disclosures about fair value measurements.
      The
      standard applies whenever other standards require (or permit) assets or
      liabilities to be measured at fair value, but does not expand the use of fair
      value in any new circumstances. In February 2008, the FASB granted a one-year
      deferral of the effective date of this statement as it applies to non-financial
      assets and liabilities that are recognized or disclosed at fair value on a
      nonrecurring basis (e.g. those measured at fair value in a business combination
      and goodwill impairment). SFAS 157 is effective for all recurring measures
      of
      financial assets and liabilities (e.g. derivatives and investment securities)
      for financial statements issued for fiscal years beginning after November 15,
      2007, and interim periods within those years. The adoption of SFAS 157 did
      not
      have a material impact on the Company’s consolidated financial
      statements.





*FASB
      Statement of Accounting Standards No. 159, “The Fair Value Option for Financial
      Assets and Financial Liabilities” (“SFAS 159”):* SFAS
      159, issued in February 2007, allows entities the option to measure the eligible
      financial instruments at fair value as of specified dates. Such election, which
      may be applied on an instrument by instrument basis, is typically irrevocable
      once elected. SFAS 159 is effective fiscal years beginning after November 15,
      2007, and early application is allowed under certain circumstances. The Company
      did not elect the fair value option for any of its existing financial
      instruments.





*FASB
      Statement of Accounting Standards No. 141 (R), “Business Combinations” (“SFAS
      141 (R)”):* SFAS 141
      (R) was issued in December 2007 to replace SFAS 141. SFAS 141 (R) establishes
      principles and requirements for how an acquirer recognizes and measures in
      its
      financial statements the identifiable assets acquired, the liabilities assumed,
      any non-controlling interest in the acquire and the goodwill acquired. SFAS
      141 (R) also establishes disclosure requirements, which will enable users
      to evaluate the nature and financial effects of the business combination. SFAS
      141 (R) is effective for fiscal years beginning after December 15, 2008. The
      adoption of SFAS 141 (R) will have an impact on accounting for business
      combinations once adopted, but the effect is dependent upon acquisitions at
      that
      time.




*FASB
      Statement of Accounting Standards No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements - an amendment of Accounting Research Bulletin
      No. 51” (“SFAS 160”):* SFAS
      160, issued in December 2007, establishes accounting and reporting standards
      for
      ownership interests in subsidiaries held by parties other than the parent,
      the
      amount of consolidated net income attributable to the parent and to the
      non-controlling interest, changes in a parent’s ownership interest and the
      valuation of retained noncontrolling equity investments when a subsidiary is
      deconsolidated. SFAS 160 also establishes reporting requirements that provide
      sufficient disclosures that clearly identify and distinguish between the
      interests of the parent and the interests of the non-controlling owners. SFAS
      160 is effective for fiscal years beginning after December 15, 2008. The Company
      does not currently have any non-controlling interests in its subsidiaries and
      thus does not expect the adoption of SFAS 160 to impact its consolidated
      financial statements.


10





**SONTERRA
      RESOURCES, INC.**


**Notes
      to Consolidated Financial Statements**


**Period
      Ended September 30, 2008 (Unaudited)**




*FASB
      Statement of Accounting Standards No. 161, “Disclosures about Derivative
      Instruments and Hedging Activities - an amendment of FASB Statement No. 133”
(“SFAS 161”):* SFAS
      161, issued in March 2008, requires new and expanded disclosures regarding
      hedging activities. These disclosures include, but are not limited to, a tabular
      presentation of derivative data; financial statement presentation of fair values
      on a gross basis, including those that currently qualify for netting under
      FASB
      Interpretation No. 39; and specific footnote narrative regarding how and
      why derivatives are used. The disclosures are required in all interim and annual
      reports. SFAS 161 is effective for fiscal and interim periods beginning after
      November 15, 2008. The Company is not currently engaged in any hedging
      activities and thus does not expect the application of SFAS 161 to impact its
      consolidated financial statements.





**Item
      2. Management's Discussion and Analysis of Financial Condition and Results
      of
      Operations**





**Forward-Looking
      Information**





This
      Form
      10-Q quarterly report of Sonterra Resources, Inc. (the “Company”) for the three
      and nine months ended September 30, 2008, may contain certain forward-looking
      statements within the meaning of Section 27A of the Securities Act of 1933,
      as
      amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
      which are intended to be covered by the safe harbors created thereby.  To
      the extent that there are statements that are not recitations of historical
      fact, such statements constitute forward-looking statements that, by definition,
      involve risks and uncertainties.  In any forward-looking statement, where
      the Company expresses an expectation or belief as to future results or events,
      such expectation or belief is expressed in good faith and believed to have
      a
      reasonable basis, but there can be no assurance that the statement of
      expectation or belief will be achieved or accomplished.





The
      following are factors that could cause actual results or events to differ
      materially from those anticipated, and include, but are not limited to: general
      economic, financial and business conditions; the Company’s ability to minimize
      expenses; the Company’s ability to attract and retain key personnel to support
      its present and planned operations; the Company’s ability to acquire additional
      oil and gas properties and/or operations on acceptable terms, or at all; the
      Company’s ability to obtain additional necessary financing from outside
      investors and/or bank and mezzanine lenders; and the ability of the Company
      to
      generate sufficient revenues to cover operating expenses and position it to
      achieve positive cash flow.





Readers
      are cautioned not to place undue reliance on the forward-looking statements
      contained herein, which speak only as of the date hereof. The Company believes
      the information contained in this Form 10-Q to be accurate as of the date
      hereof.  Changes may occur after that date, and the Company will not update
      that information except as required by law in the normal course of its public
      disclosure practices.





Additionally,
      the following discussion regarding the Company’s financial condition and results
      of operations should be read in conjunction with the financial statements and
      related notes contained in Item 1 of Part 1 of this Form 10-Q, as well as the
      financial statements for the fiscal year ended December 31, 2007, as set forth
      in the Company’s Form 8-K/A filed with the U.S. Securities and Exchange
      Commission on May 13, 2008.





*Critical
      Accounting Policies*


The
      Company’s discussion and analysis of its financial condition and results of
      operations are based upon its financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the United States
      of
      America.  The Company believes certain significant accounting policies
      affect its more significant judgments and estimates used in the preparation
      of
      its financial statements.  We believe the following accounting policies to
      be critical to our operations:





*Full
      Cost Method of Accounting*


Oil
      and
      gas properties are stated at historical cost using the full cost method of
      accounting. Under this method, all costs associated with acquisition,
      exploration, and development of oil and gas properties are capitalized. Costs
      capitalized include acquisition costs, geological and geophysical expenditures,
      lease rentals on undeveloped properties and costs of drilling and equipping
      productive and non-productive wells. Capitalized costs are categorized either
      as
      being subject to amortization or not subject to amortization.


11





All
      capitalized costs of oil and gas properties, including the estimated future
      costs to develop proved reserves and estimated future costs to plug and abandon
      wells and costs of site restoration, are amortized on the unit-of-production
      method using estimates of proved reserves as determined by independent
      engineers. Investments in unproved properties and major development projects
      are
      not amortized until proved reserves associated with the projects can be
      determined or until impairment occurs. If the results of an assessment indicate
      that the properties are impaired, the amount of the impairment is added to
      the
      capitalized costs to be amortized.





In
      addition, capitalized costs, less accumulated amortization and related deferred
      income taxes, shall not exceed an amount (the full cost ceiling) equal to the
      sum of:





1)
            The
                present value of estimated futures net revenues computed by applying
                current prices of oil and gas reserves toestimated
                future production of proved oil and gas reserves, less estimated
                future
                expenditures (based on current costs) to be incurred in developing
                and
                producing the proved reserves computed using a discount factor of
                ten
                percent and assuming continuation of existing economic conditions;





2)
            plus
                the cost of properties not being
                amortized;





3)
            plus
                the lower cost of estimated fair value of unproven properties included
                in
                the costs being amortized;





4)
            less
                income tax effects related to the differences between the book and
                tax
                basis of the properties.





*Revenue
      Recognition*


We
      recognize oil and gas revenue from our interest in producing wells as the oil
      and gas is sold to third parties. Gas gathering revenues are recognized upon
      delivery of the product to third parties.





*Reserve
      Estimates*


Our
      estimates of oil and gas reserves, by necessity, are projections based on
      geological and engineering data, and there are uncertainties inherent in the
      interpretation of such data as well as the projection of future rates of
      production and the timing of development expenditures. Reserve engineering
      is a
      subjective process of estimating underground accumulations of oil and gas that
      are difficult to measure. The accuracy of any reserve estimate is a function
      of
      the quality of available data, engineering and geological interpretation and
      judgment. Estimates of economically recoverable oil and gas reserves and future
      net cash flows depend upon a number of variable factors and assumptions, all
      of
      which may in fact vary considerably from actual results. These factors and
      assumptions include historical production from the area compared with production
      from other producing areas, the assumed effects of regulations by governmental
      agencies and assumptions governing future oil and gas prices, future operating
      costs, severance taxes, development costs and workover costs. The future
      drilling costs associated with reserves assigned to proved undeveloped locations
      may ultimately increase to an extent that these reserves may be later determined
      to be uneconomical. For these reasons, estimates of economically recoverable
      quantities of oil and gas attributable to any particular group of properties,
      classifications of such reserves based on risk of recovery, and estimates of
      future net cash flows expected therefrom may vary substantially. Any significant
      variance in the assumptions could materially affect the estimated quantity
      and
      value of the reserves, which could affect the carrying value of our oil and
      gas
      properties and/or the rate of depletion of the oil and gas properties. Actual
      production, revenues and expenditures, with respect to our reserves, will likely
      vary from estimates and such variances may be material. We contract with
      independent engineering firms on an annual basis to provide reserve estimates
      for reporting purposes.





*Impairment
      of Oil and Gas Properties*


We
      review
      our oil and gas properties for impairment at least annually and whenever events
      and circumstances indicate a decline in the recoverability of their carrying
      value. We estimate the expected future cash flows of our oil and gas properties
      and compare such future cash flows to the carrying amount of the properties
      to
      determine if the carrying amount is recoverable. If the carrying amount exceeds
      the estimated undiscounted future cash flows, we will adjust the carrying amount
      of the oil and gas properties to their fair value. The factors used to determine
      fair value include, but are not limited to, estimates of proved reserves, future
      commodity pricing, future production estimates, anticipated capital
      expenditures, and a discount rate commensurate with the risk associated with
      realizing the expected cash flows projected.





Given
      the
      complexities associated with oil and gas reserve estimates and the history
      of
      price volatility in the oil and gas markets, events may arise that would require
      us to record an impairment of the recorded book values associated with oil
      and
      gas properties. We have recognized impairments in both the current and prior
      years and there can be no assurance that impairments will not be required in
      the
      future.


12





*Income
      Taxes*


Significant
      management judgment is required to determine the provisions for income taxes
      and
      to determine whether deferred tax assets will be realized in full or in part.
      Deferred income tax assets and liabilities are measured using enacted tax rates
      expected to apply to taxable income in the years in which those temporary
      differences are expected to be recovered or settled. When it is more likely
      than
      not that all or some portion of specific deferred income tax assets will not
      be
      realized, a valuation allowance must be established for the amount of deferred
      income tax asset that are determined not to be realizable.





Additionally,
      despite our belief that our tax return positions are consistent with applicable
      tax law, we believe that certain positions may be challenged by taxing
      authorities. Settlement of any challenge can result in no change, a complete
      disallowance, or some partial adjustment reached through negotiations.





In
      July
      2006, the FASB issued FASB interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes, and interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48
      clarifies the accounting for uncertainty in income taxes recognized in a
      company’s financial statements in accordance with SFAS No. 109, “Accounting for
      Income Taxes.” FIN 48 clarified the accounting for uncertainty in income taxes
      recognized in the financial statements by prescribing a recognition threshold
      and measurement attribute to a tax position taken or expected to be taken in
      a
      tax return. FIN 48 prescribes how a company should recognize, measure, present,
      and disclose uncertain tax positions that the company has taken or expects
      to
      take in its income tax returns. FIN 48 requires that only income tax benefits
      that meet the “more likely than not” recognition threshold be recognized or
      continue to be recognized on its effective date.





**General
      Overview of Operations and Current Year Developments**





Sonterra
      Resources, Inc., formerly known as River Capital Group, Inc., is an oil and
      gas
      exploration and production company. On February 14, 2008, we consummated the
      transactions (the “Securities Exchange”) contemplated by the Securities Exchange
      and Additional Note Purchase Agreement entered into on August 3, 2007 with
      The
      Longview Fund, L.P. Longview, together with affiliated funds, own approximately
      95.8% of our common stock.





The
      following events occurred prior to or at the closing of the Securities
      Exchange:




·
            our
                38,552,749 issued and outstanding shares of common stock were combined
                into 3,855,275 shares of common stock in a 1-for-10 reverse stock
                split;·
            our
                name was changed to “Sonterra Resources, Inc.”;·
            Longview
                exchanged all of its shares of common stock of our now wholly owned
                subsidiary, Sonterra Oil & Gas, Inc., formerly known as Sonterra
                Resources, Inc. (“Sonterra Oil & Gas”), a $5,990,010 equity note from
                Sonterra Oil & Gas and a warrant to purchase 50 shares of Sonterra Oil
                & Gas common stock for 21,846,558 shares of our common stock and a
                warrant to purchase 4,958,678 shares of our common stock;
                and·
            Longview
                exchanged its $2,000,000 non-equity note from Sonterra Oil & Gas for a
                senior secured note made by us in an equal principal
                amount.




As
      a
      result of the Securities Exchange:




·
            we
                own 100% of the issued and outstanding capital stock of Sonterra
                Oil &
                Gas;·
            we
                are engaged, through Sonterra Oil & Gas, in the operation and
                development of the oil and gas properties and related assets;
                and·
            although
                we were the legal acquirer of Sonterra Oil & Gas and continue as a
                publicly traded entity, Sonterra Oil & Gas was the accounting acquirer
                for financial reporting purposes, and, accordingly, we have adopted
                the
                accounting methods of Sonterra Oil & Gas and, for SEC reporting
                purposes, our historical financial statements are those of Sonterra
                Oil
                & Gas through the effective date of the Securities Exchange on
                February 14, 2008 and our combined financial results
                thereafter.





On
      June
      23, 2008, our management team resigned and was replaced by a new management
      team, consisting of Donald E. Vandenberg, Chief Executive Officer, and Gary
      L.
      Lancaster, VP and Chief Legal Officer, both of whom were also named as
      directors. Doyle Valdez resigned as a director on the same date. Donald J.
      Sebastian, VP and Chief Financial Officer joined Sonterra effective as of July
      1, 2008.


13





On
      July
      8, 2008 Sonterra Resources acquired Velocity Partners and Velocity Offshore,
      previously owned by certain executive officers of Sonterra (See Note 1 and
      4 to
      the interim consolidated financial statements). Both Velocity entities are
      recognized in the industry as employing growth strategy through acquisition
      of
      oil and gas properties. Additionally, Velocity Offshore is recognized by the
      Minerals Management Services as a qualified operator in the Outer Continental
      Shelf (OCS). This recognition will facilitate the timely acquisition any
      potential offshore acquisition targets and streamline assumption of operations
      upon closing of any such transaction.





Our
      oil
      and gas assets consist of certain oil and gas properties and related assets
      that
      we acquired in August 2007 from Cinco Natural Resources Corporation (“Cinco”)
      and Flash Gas & Oil Southwest, Inc. (“Flash”) in two separate transactions
      for an aggregate amount of approximately $5.9 million. Our wholly owned
      subsidiary, Sonterra Operating, Inc., is the named operator of our oil and
      gas
      properties, which are located in Matagorda Bay in Texas State Waters lying
      offshore of the Texas coastal counties of Calhoun and Matagorda. In the Cinco
      acquisition, for approximately $5.0 million, we purchased 60% of the interests
      held by Cinco in the Texas State Tract 150 Wells No. 1 and No. 2 located in
      Matagorda Bay, Texas, as well as a 320-acre oil and gas lease related to those
      wells and certain other leases covering approximately 3,200 additional acres
      located in Matagorda Bay. In the Flash acquisition, for approximately $1.2
      million cash, we purchased all of the interests held by Flash in the Texas
      State
      Tract 150 Wells No. 1 and No. 2 as well as a seven-mile pipeline connecting
      the
      wells to the Keller Bay onshore facility located in Calhoun County, Texas.
      As
      discussed below, the Texas State Tract 150 Well No. 2 has been shut-in as a
      result of sand production and the Texas State Tract 150 Well No. 1 only produced
      marginally in the 3 rd quarter.





In
      December 2007, we acquired an additional 1,920 gross (960 net) offset acres
      for
      one of the undrilled Matagorda Bay prospects, giving us combined total acreage
      of approximately 5,500 gross (2,100 net) acres. On December 18, 2007, the Texas
      State Tract 150 Well No. 2 was shut-in because it was producing sand. During
      the
      first quarter of 2008, we worked over this well in an attempt to clean the
      sand
      out of the wellbore. Following the workover, sand production again caused the
      well to shut-in, and the well remains shut-in pending evaluation for future
      utility. We have identified four additional drilling locations on our acquired
      acreage, and the first well location, State Tract 127 No. 1 Unit Well #1, was
      spud on July 9, 2008, and reached total depth of 12,494’ in early September when
      the well was cased, logged and temporarily suspended, awaiting completion.
      Results of the logs indicate the well encountered productive pay in the Bol
      Mex
      sands and the Nodasaria #1 and Nodasaria #2 sands. The well will be completed
      in
      the 4 th quarter
      and is expected to be on production by the end of 2008.





Under
      the
      terms of the contract operating agreement with South Texas Oil Company,
      described below, South Texas exercised its option to take an undivided 50%
      of
      Sonterra’s working interest, subject to a 25% reversionary interest after
      payout, in the State Tract 127-1 Unit Well.





Additionally,
      Sonterra sold a 10.00% working interest to Vinland Energy Capital I LLP on
      a
      promoted basis, plus a proportionate share of the leasehold and geological
      and
      geophysical costs. The net results of the above transactions resulted in
      Sonterra having approximately a 3.56% working interest before casing point
      and
      an 11.36% working interest after well payout.





On
      April
      8, 2008, Sonterra Operating, Inc. entered into a definitive contract operating
      agreement with South Texas Oil Company, to be effective as of April 1, 2008,
      pursuant to which Sonterra Operating began overseeing daily operations of both
      operating services and accounting services for the operated and non-operated
      properties of South Texas Oil Company as an independent contractor acting
      in the role of contract operator for a fee of $75,000 per month. Michael J.
      Pawelek, one of our current directors, who was our Chairman and Chief Executive
      Officer at the time we entered into the contract operating agreement with South
      Texas Oil Company, was also and is currently the Chairman of South Texas
      Oil Company. Our board of directors, with Mr. Pawelek recused from voting as
      a
      potentially interested party, reviewed and evaluated the terms of the contract
      operating agreement and determined that the terms were commercially reasonable
      prior to authorizing our entry into and performance of the contract operating
      agreement. The contract operating agreement was terminated in July 2008, as
      a result of the management team changes at both Sonterra Operating and South
      Texas Oil Company.





Immediately
      after terminating the prior contract operating agreement, Sonterra Resources
      entered into another contract operating agreement with South Texas Oil
      Company effective June 23, 2008, pursuant to which South Texas began overseeing
      the daily operations of the Matagorda Bay 150 field and commenced the drilling
      of the Matagorda Bay State Tract 127-1 Unit Well. Pursuant to the contract
      operating agreement, South Texas will be entitled to receive the applicable
      Council of Petroleum Accountants Society (COPAS) fees for the daily operations
      and drilling as well as be entitled to participate in up to 50% in all of
      the Matagorda Bay exploratory prospects.


14





**Results
      of Operations for the Three Months and Nine Months Ended September 30,
      2008**





*Revenues.* During
      the three months and nine months ended September 30, 2008, we reported
      total revenues of $43,508 and $567,937, respectively, primarily from oil and
      gas
      sales. As described above, only one of the two productive wells was producing
      in
      the three months and nine months ending September 30, 2008. No contract
      operating income or operating overhead income was recorded in the 3 rd quarter
      as a result of the cancellation of the Contract Operating Agreement with South
      Texas Oil Company. The initial contract operating agreement whereby we
      acted as contract operator of the South Texas Oil Company assets was terminated
      June 23, 2008, contemporaneously with the resignation of our former management
      team who were simultaneously appointed as officers of South Texas Oil Company.





*Lease
      Operating Expenses.* During
      the three months and nine months ended September 30, 2008, our lease operating
      expenses were $224,406 and $683,388, respectively. Water disposal costs were
      the
      most significant expense incurred. No other unusual operating expenses were
      incurred during the period.





*General
      and Administrative Expense.* General
      and administrative expense for the three months and nine months ended
      September 30, 2008 was $847,175 and $1,916,655, respectively. Non-cash stock
      compensation expense was $485,250 for the three months ended September 30,
      2008
      and $515,683 for the nine month period. All prior expenses related to the prior
      management team were reversed in the 2 nd quarter.
      Our 2008 non-cash stock compensation expense relates to the common stock options
      of the current management. Accrued salary expense for the quarter was $165,600,
      which represents the salary deferrals of the three member management team.
      Our
      corporate structure is to maintain as few employees as needed and to outsource
      all administrative functions. Currently, we used PetroAcct L.P. for contract
      accounting services; Akin, Doherty Klein and Feuge, P.C. for audit and tax
      services; and Thompson and Knight LLP for legal services. Collectively, the
      combined expenses for the quarter were $141,504.




*Other
      (Expense)* .
       During the three months ended September 30, 2008, we had other expenses of
      $102,489 consisting of interest expense in the amount of $85,125 and debt
      issuance costs amortization of $17,364. During the nine months ended
      September 30, 2008, we had other expenses of $270,057 consisting of interest
      expense in the amount of $225,366 and debt issuance costs amortization of
      $44,691. The interest expense relates to the $3,000,000 senior secured notes
      described in Note 4 to the financial statements.





**Financial
      Condition**





*Liquidity
      and Capital Resources*  ****





Our
      primary source of liquidity is cash flow from operations. As part of the
      Securities Exchange, we issued a senior secured note in the principal amount
      of
      $2,000,000 in exchange for a note in an equal amount that had been issued by
      Sonterra Oil & Gas to Longview. We also have the right, subject to
      satisfaction of various conditions, in our discretion to require Longview to
      purchase additional secured notes in the principal amount of up to $2,000,000
      per fiscal quarter, up to an aggregate principal amount that may not exceed
      an
      aggregate of $10,000,000. The Securities Exchange agreement significantly
      restricts our ability to incur indebtedness other than by issuing additional
      notes to Longview. Accordingly, if we are unable to satisfy the conditions
      precedent to Longview’s obligation to purchase additional notes and Longview is
      unwilling to waive or modify such conditions or subordinate the notes to allow
      us to obtain working capital and project financing for future
      acquisitions, we would likely be unable to raise the funds required to make
      acquisitions in the future through the Longview facility.





We
      believe that we will have sufficient sources of capital through access to
      proceeds of additional notes issued by us (subject to various conditions),
      to
      fund our operations for the next 12 months if Longview is willing to waive
      or
      modify such conditions or subordinate the notes to new financing. Our future
      funding requirements will depend on numerous factors, including ongoing costs
      associated with investigating and acquiring potential oil and gas prospects,
      exploration and other development costs of acquired oil and gas leases, and
      costs to recruit and train qualified personnel.




We
      are
      the named operator of the wells acquired in the Cinco and Flash acquisitions,
      which are currently operated by South Texas Oil Company under a contract
      operating agreement, and we intend to drill wells in the exploratory prospects
      that we acquired through those acquisitions. In addition to drilling the
      exploratory prospects, we intend to make at least one acquisition of producing
      properties within the next six months, which would require additional funds
      to
      be raised. We do not presently have any agreements or commitments to make any
      such additional acquisitions, and there is no assurance that we will have
      available the funds necessary to complete any acquisition, that Longview will
      agree to subordinate their notes to allow us to obtain financing for future
      acquisitions, or that we will be able to reach an agreement to acquire
      additional prospects on acceptable terms, if at all.


15





Our
      business model is based on growing the company by completing one or more
      acquisitions of producing properties with upside proven locations to be drilled
      and by participating in drilling prospects generated in-house and by third
      parties. Acquisitions of producing properties will typically have associated
      production equipment. We have three employees. The number of acquisitions we
      complete and number of prospects in which we participate, if any, will determine
      whether we will hire additional employees. There is the potential for a
      significant increase in the number of employees in the event that we acquire
      or
      develop additional oil and gas properties and related assets.





*Senior
      Secured Notes*





At
      September 30, 2008, we had senior secured notes outstanding in an amount of
      $3,000,000 to the Company’s principal shareholder, Longview. The loans bear
      interest at the sum the 3-month London Interbank Offered Rate (LIBOR) then
      in
      effect plus 8.25%, recalculated each quarter.





*Other
      Notes*





As
      part
      of the acquisition of the Velocity entities, Sonterra assumed a $75,000
      promissory note, plus accrued interest of $11,463. The note bears interest
      at
      8%, compounded annually.





*Capital
      Expenditures and Commitments*





Our
      commitment to drill an additional well in one of our Matagorda Bay prospects
      by
      July 1, 2008, was met by the commencement of drilling operations of the
      Matagorda Bay ST 127 No. 1 Unit Well in late June 2008. The well was drilled,
      cased and temporarily suspended, awaiting completion. Completion operations
      commenced on November 1, 2008 and the well is expected to be on production
      by
      year-end.




*Off-Balance
      Sheet Arrangements*





We
      have
      no off-balance sheet arrangements or guarantees of third party obligations
      at
      September 30, 2008.




**Inflation**




We
      believe that inflation has not had a significant impact on our operations since
      inception.




**Item
      3. Quantitative and Qualitative Disclosures about Market
      Risk.**





*Interest
      Rate Risk*




We
      are
      exposed to changes in interest rates. Changes in interest rates affect the
      interest earned on our cash and equivalents and the amount of interest that
      accrues on our outstanding senior secured notes.  Under our current
      policies, we do not use interest rate derivative instruments to manage exposure
      to interest rate changes.





*Commodity
      Price Risk*




Our
      revenues, profitability and future growth depend substantially on prevailing
      prices for oil and natural gas. Prices also affect the amount of cash flow
      available for capital expenditures and our ability to borrow and raise
      additional capital, as, if and when needed. Lower prices may also reduce the
      amount of oil and natural gas that we can economically produce. We may
      periodically use derivative instruments to hedge our commodity price risk,
      although we do not currently have any derivative instruments in
      place.


16





**Item
      4T. Controls and Procedures.**





*Evaluation
      of Disclosure Controls and Procedures*





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





*Changes
      in Internal Control Over Financial Reporting*





There
      have been no significant changes in our internal control over financial
      reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under
      the Exchange Act) during the fiscal quarter to which this report relates that
      have materially affected, or are reasonably likely to materially affect, the
      Company’s internal control over financial reporting.





**Part
      II**


**OTHER
      INFORMATION**





**Item
      1. Legal Proceedings**





We
      currently are not aware of, or a party to, any legal proceedings. Additionally,
      our officers and directors, in their capacity as such, are not a part to any
      legal proceedings.




**Item
      1A. Risk Factors**





Because
      we are a smaller reporting company, we need not provide the information required
      by this Item.




**Item 2.
      Unregistered Sales of Equity Securities and Use of Proceeds**




Not
      Applicable.




**Item
      3. Default upon Senior Securities**





Not
      Applicable.





**Item
      4. Submission of Matters to a Vote of Securities Holders**





Not
      Applicable.





**Item
      5. Other Information**





Not
      Applicable


17


.


**Item
      6. Exhibits**




Exhibit
            
            Description10.1
            
            Contract
                Operating Agreement, dated April 8, 2008 to be effective as of April
                1,
                2008, among South Texas Oil Company and its subsidiaries and Sonterra
                Operating, Inc. (Incorporated by reference to Exhibit 10.1 of our
                Quarterly Report on Form 10-Q filed on May 15, 2008.) The termination
                of
                Contract Operating Agreement, dated July 21, 2008, effective June
                23,
                2008, terminated this agreement upon the replacement of the Sonterra
                management team.10.2
            
            Contract
                Operating Agreement, dated July 21, 2008 to be effective as of June
                23,
                3008, between Sonterra Resources and South Texas Oil Company.
                (Incorporated by reference to Exhibit 99.2 of our Current Report
                on Form
                8-K filed on July 23, 2008.)31.1
            
            Certification
                of Chief Executive Officer pursuant to Securities Exchange Act of
                1934
                Rule 13a-14(a) or 15d-14(a).31.2
            
            Certification
                of Chief Financial Officer pursuant to Securities Exchange Act of
                1934
                Rule 13a-14(a) or 15d-14(a).32.1
            
            Joint
                Certification of Chief Executive Officer and Chief Financial Officer
                pursuant to Securities Exchange Act of 1934 Rule 13a-14(b) or 15d-14(b)
                and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
                the
                Sarbanes-Oxley Act of 2002.





**SIGNATURES**




In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




Dated:
        November 14, 2008




SONTERRA
                RESOURCES, INC.





By:
            /s/ Donald E. VandenbergDonald
                E. VandenbergChief
                Executive Officer
              (Principal
                Executive Officer)By:
            /s/ Donald J. SebastianDonald
                J. SebastianChief
                Financial Officer
              (Principal
                Financial and Accounting Officer)




18