**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 001-33777**




**SOUTH
      TEXAS OIL COMPANY**


(Exact
      Name of Registrant as Specified in its Charter)





**Nevada**
            
            **74-2949620**(State
                or Other Jurisdiction of
            
            (I.R.S.
                EmployerIncorporation
                or Organization)
            
            Identification
                No.)





**300
      E. Sonterra Blvd., Suite 1220**


**San
      Antonio, Texas**


(Address
      of Principal Executive Offices)





**78258**


(Zip
      Code)





**(210)
      545-5994**


(Registrant’s
      Telephone Number, Including Area Code)





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.


x Yes o No





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,” “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act.





Large
                accelerated filer o
            Accelerated
                filer oNon-accelerated
                filer o
            Smaller
                reporting company x





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


o Yes x No





The
      issuer had 16,797,862 shares of common stock outstanding as of November 19,
      2008.










TABLE
      OF
      CONTENTS




PagePART
                I - FINANCIAL INFORMATIONItem
                1. Financial Statements (Unaudited)
            
            1Consolidated
                Balance Sheets as of September 30, 2008 and December 31,
                2007
            
            2Consolidated
                Statements of Operations for the Three and Nine Months Ended September
                30,
                2008and
                2007
            
            3Consolidated
                Statements of Stockholders’ Equity for the Nine Months Ended September 30,
                2008
            
            4Consolidated
                Statements of Cash Flows for the Nine Months Ended September 30,
                2008and
                2007
            
            5Notes
                to Consolidated Financial Statements
            
            6Item
                2. Management's Discussion and Analysis of Financial Condition and
                Results
                of Operations
            
            12Item
                3. Quantitative and Qualitative Disclosures About Market
                Risk
            
            20Item
                4T. Controls and Procedures
            
            20PART
                II - OTHER INFORMATIONItem
                1. Legal Proceedings
            
            21Item
                1A. Risk Factors
            
            21Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            
            21Item
                3. Defaults Upon Senior Securities
            
            22Item
                4. Submission of Matters to a Vote of Security Holders
            
            22Item
                5. Other Information
            
            22Item
                6. Exhibits
            
            22









**PART
      I. FINANCIAL INFORMATION**





**Item
      1. Financial Statements.**





The
      consolidated financial statements of South Texas Oil Company (the “Company” or
“we”, “us” or “our”) included herein have been prepared in accordance with the
      instructions to quarterly reports for a smaller reporting company, as defined
      in
      Exchange Act Rule 12b-2, on Form 10-Q pursuant to the rules and regulations
      of
      the United States Securities and Exchange Commission (the “SEC”). Certain
      information and footnote data necessary for fair presentation of financial
      position and results of operations in conformity with accounting principles
      generally accepted in the United States of America (“GAAP”) have been condensed
      or omitted. We therefore suggest that these financial statements be read in
      conjunction with the summary of significant accounting policies and notes to
      financial statements included in our Annual Report on Form 10-KSB for the
      year ended December 31, 2007.





In
      the
      opinion of management, all adjustments necessary in order to make our
      financial position, results of operations and changes in financial position
      at
      September 30, 2008, and for all periods presented, not misleading, have been
      made. The results of operations for the period ended September 30, 2008 are
      not
      necessarily indicative of the Company’s actual operating results for the full
      year ending December 31, 2008.




1


**SOUTH
        TEXAS OIL COMPANY**
 **Consolidated
        Balance Sheets**
 
 **September**
                **30, 2008**
              
              **December**
                **31, 2007****(Unaudited)**
              
              **(Audited)****ASSETS**Current
                  AssetsCash
                  and equivalents
              
              $
              9,718,937
              
              $
              2,186,428Accounts
                  receivable
              
              
              1,488,267
              
              
              4,226,171Prepaid
                  expenses and other
              
              
              552,128
              
              
              4,249Total
                  current assets
              
              
              11,759,332
              
              
              6,416,848Property
                  and Equipment:Oil
                  and gas properties, successful efforts methodProved
                  properties
              
              
              29,506,937
              
              
              23,383,575Unproved
                  properties
              
              
              31,594,127
              
              
              30,757,344Less
                  accumulated depreciation, depletion and amortization
              
              
              (8,751,613
              )
              
              (5,727,612
              )Total
                  oil and gas properties, net
              
              
              52,349,451
              
              
              48,413,307Other
                  property and equipmentDrilling
                  equipment
              
              
              3,214,354
              
              
              3,138,258Vehicles
              
              
              202,037
              
              
              172,608Other
              
              
              169,811
              
              
              119,495Less
                  accumulated depreciation and amortization
              
              
              (259,341
              )
              
              (130,397
              )Total
                  other property and equipment, net
              
              
              3,326,861
              
              
              3,299,964Total
                  property and equipment, net
              
              
              55,676,312
              
              
              51,713,271Debt
                  issuance costs, net of amortization
              
              
              4,272,373
              
              
              5,298,274**Total
                  Assets**
              
              $
              71,708,017
              
              $
              63,428,393
  **LIABILITIES
                  AND SHAREHOLDERS’ EQUITY**Current
                  LiabilitiesAccounts
                  payable, trade
              
              $
              6,718,254
              
              $
              1,564,243Other
                  payables and accrued liabilities
              
              
              1,452,425
              
              
              3,349,067Participant
                  advances received
              
              
              272,400
              
              
              120,622Current
                  maturities of notes payable and long-term debt
              
              
              8,044,935
              
              
              1,404,185Current
                  maturities of notes payable and long-term debt, related
                  party
              
              
              9,412
              
              
              17,067Total
                  current liabilities
              
              
              16,497,426
              
              
              6,455,184Noncurrent
                  LiabilitiesNotes
                  payable and long-term debt
              
              
              35,329,757
              
              
              24,986,861Asset
                  retirement obligation
              
              
              851,009
              
              
              801,941Total
                  noncurrent liabilities
              
              
              36,180,766
              
              
              25,788,802Stockholders’
                  EquityPreferred
                  stock, $0.001 par value, 5,000,000 sharesauthorized,
                  none issued or outstanding
              
              
              -
              
              
              -Common
                  stock, $0.001 par value, 50,000,000 shares authorized,17,697,862
                  shares issued, 16,797,862 shares outstanding at September 30,
                  2008and
                  16,482,571 shares issued and outstanding at December 31,
                  2007
              
              
              17,773
              
              
              16,483Additional
                  paid-in capital
              
              
              42,774,112
              
              
              39,921,615Accumulated
                  deficit
              
              
              (22,860,050
              )
              
              (8,753,691
              )Less
                  treasury stock, at cost, 900,000 shares
              
              
              (902,010
              )
              
              -Total
                  stockholders’ equity
              
              
              19,029,825
              
              
              31,184,407**Total
                  Liabilities and Stockholders’ Equity**
              
              $
              71,708,017
              
              $
              63,428,393
 
 ***See
        notes to consolidated financial statements.***
  2
 
 **SOUTH
        TEXAS OIL COMPANY**
 **Consolidated
        Statements of Operations**
 **(Unaudited)**
 
 **Three**
                **Months**
              
              **Three**
                **Months**
              
              **Nine**
                **Months**
              
              **Nine**
                **Months****Ended**
              
              **Ended**
              
              **Ended**
              
              **Ended****September**
                **30, 2008**
              
              **September**
                **30, 2007**
              
              **September**
                **30, 2008**
              
              **September**
                **30, 2007****Revenues**Oil
                  and gas sales
              
              $
              2,153,255
              
              $
              1,575,010
              
              $
              7,877,500
              
              $
              2,466,906Drilling
                  services
              
              
              -
              
              
              397,811
              
              
              -
              
              
              920,312Total
                  revenues
              
              
              2,153,255
              
              
              1,972,821
              
              
              7,877,500
              
              
              3,387,218**Costs
                  and Expenses**Production
                  expenses
              
              
              1,035,250
              
              
              693,003
              
              
              2,716,093
              
              
              1,129,776Production
                  taxes
              
              
              92,721
              
              
              31,277
              
              
              296,388
              
              
              36,073Drilling
                  services costs
              
              
              58,699
              
              
              304,289
              
              
              100,710
              
              
              778,633General
                  and administrative expenses
              
              
              2,526,009
              
              
              314,931
              
              
              5,613,767
              
              
              781,246Depreciation,
                    depletion and amortization
              
              
              573,075
              
              
              354,187
              
              
              3,212,110
              
              
              771,347Total
                  costs and expenses
              
              
              4,285,754
              
              
              1,697,687
              
              
              11,939,068
              
              
              3,497,075**Income
                  (Loss) from Operations**
              
              
              (2,132,499
              )
              
              275,134
              
              
              (4,061,568
              )
              
              (109,857
              )**Other
                  Income (Expense)**Interest
                  income
              
              
              8,976
              
              
              3,197
              
              
              16,922
              
              
              23,381Loss
                  from derivatives
              
              
              30,614
              
              
              -
              
              
              (5,325,424
              )
              
              -Interest
                  expense
              
              
              (1,107,161
              )
              
              (773,475
              )
              
              (2,715,930
              )
              
              (1,741,055
              )Debt
                  issuance costs amortization
              
              
              (635,793
              )
              
              -
              
              
              (1,907,379
              )
              
              -Loss
                  on conversion of debt
              
              
              (112,980
              )
              
              -
              
              
              (112,980
              )
              
              -Other
                  income (expense), net
              
              
              (1,816,344
              )
              
              (770,278
              )
              
              (10,044,791
              )
              
              (1,717,674
              )**Net
                  Loss Before Tax**
              
              
              (3,948,843
              )
              
              (495,144
              )
              
              (14,106,359
              )
              
              (1,827,531
              )Income
                  tax expense (benefit)
              
              
              -
              
              
              -
              
              
              -
              
              
              -**Net
                  Loss**
              
              $
              (3,948,843
              )
              $
              (495,144
              )
              $
              (14,106,359
              )
              $
              (1,827,531
              )Loss
                  Per Common Share:Basic
                  and Diluted
              
              $
              (0.24
              )
              $
              (0.03
              )
              $
              (0.87
              )
              $
              (0.13
              )Weighted
                    average number of common shares outstanding Basic and
                    Diluted
              
              
              16,191,818
              
              
              15,558,214
              
              
              16,232,452
              
              
              14,072,084
 
 ***See
        notes to consolidated financial statements.***
  3
 
 **SOUTH
        TEXAS OIL COMPANY**
 **Consolidated
        Statements of Stockholders' Equity**
 **(Unaudited)**
 
 **Additional**
              
              
              
              
              
              **Total****Common Stock**
              
              **Paid-In**
              
              **Accumulated**
              
              **Treasury**
              
              **Stockholders'****Shares**
              
              **Amount**
              
              **Capital**
              
              **Deficit**
              
              **Stock**
              
              **Equity****Balance,
                  December 31, 2007**
              
              
              16,482,571
              
              $
              16,483
              
              $
              39,921,615
              
              $
              (8,753,691
              )
              $
              -
              
              $
              31,184,407Stock
                  grants
              
              
              774,792
              
              
              516
              
              
              1,441,318
              
              
              -
              
              
              -
              
              
              1,441,834Non-cash
                  stock compensation
              
              
              -
              
              
              -
              
              
              466,684
              
              
              -
              
              
              -
              
              
              466,684Shares
                  repurchased into treasury
              
              
              (900,000
              )
              
              -
              
              
              -
              
              
              -
              
              
              (902,010
              )
              
              (902,010
              )Shares
                  issued in exchange for debt
              
              
              403,499
              
              
              404
              
              
              774,315
              
              
              -
              
              
              -
              
              
              774,719Shares
                  issued in exchange for services
              
              
              37,000
              
              
              370
              
              
              170,180
              
              
              -
              
              
              -
              
              
              170,550Net
                    loss for the nine months ended September 30, 2008
              
              
              -
              
              
              -
              
              
              -
              
              
              (14,106,359
              )
              
              -
              
              
              (14,106,359
              )**Balance,
                  September 30, 2008**
              
              
              16,797,862
              
              $
              17,773
              
              $
              42,774,112
              
              $
              (22,860,050
              )
              $
              (902,010
              )
              $
              19,029,825
  ***See
        notes to consolidated financial statements.***
  4
  **SOUTH
        TEXAS OIL COMPANY**
 **Consolidated
        Statements of Cash Flows**
 **(Unaudited)**
 
 **Nine Months**
              
              **Nine Months****Ended**
              
              **Ended****September 30,**
                **2008**
              
              **September 30,**
                **2007****Operating
                  Activities**Net
                  loss
              
              $
              (14,106,359
              )
              $
              (1,827,531
              )Adjustments
                  to reconcile net loss tonet
                  cash used in operating activities:Depreciation,
                  depletion and amortization
              
              
              3,212,110
              
              
              750,947Debt
                  issuance costs amortization
              
              
              1,907,379
              
              
              852,323Amortization
                  of deferred stock compensation
              
              
              1,908,519
              
              
              -Amortization
                  of debt discount
              
              
              235,170
              
              
              -Compensatory
                  common stock and option issuances
              
              
              170,550
              
              
              40,377Accretion
                  of discount on asset retirement obligation
              
              
              49,068
              
              
              -Loss
                  on conversion of debt to equity
              
              
              112,980
              
              
              -Loss
                  on sale of other property and equipment
              
              
              90
              
              
              -Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              2,737,904
              
              
              (3,397,340
              )Prepaid
                  expenses and other
              
              
              (547,879
              )
              
              (49,891
              )Accounts
                  payable and accrued liabilities
              
              
              3,257,369
              
              
              3,447,131Participant
                  advances received
              
              
              151,778
              
              
              -Net
                  cash used in operating activities
              
              
              (911,321
              )
              
              (183,984
              )**Investing
                  Activities**Purchases
                    and development of oil and gas properties
              
              
              (6,989,340
              )
              
              (20,649,783
              )Proceeds
                  from disposition of other property and equipment
              
              
              81,933
              
              
              -Purchase
                  of other property and equipment
              
              
              (260,180
              )
              
              -Net
                  cash used in investing activities
              
              
              (7,167,587
              )
              
              (20,649,783
              )**Financing
                  Activities**Proceeds
                  from notes payable and long-term debt
              
              
              20,876,016
              
              
              19,998,454Payments
                  of notes payable and long-term debt
              
              
              (3,473,456
              )
              
              (24,216
              )Debt
                  issuance costs incurred
              
              
              (881,478
              )
              
              -Payments
                  of related party notes payable
              
              
              (7,655
              )
              
              -Purchase
                  of treasury shares
              
              
              (902,010
              )
              
              -Net
                  cash provided by financing activities
              
              
              15,611,417
              
              
              19,974,238**Net
                  Increase (Decrease) in Cash and Equivalents**
              
              
              7,532,509
              
              
              (859,529
              )Cash
                  and equivalents at beginning of period
              
              
              2,186,428
              
              
              1,273,150**Cash
                  and Equivalents at End of Period**
              
              $
              9,718,937
              
              $
              413,621
  ***See
        notes to consolidated financial statements.***
  5


**SOUTH
      TEXAS OIL COMPANY**


**Notes
      to Consolidated Financial Statements**


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





**Note
      1 – Basis of Presentation**





The
      accompanying unaudited consolidated financial statements report interim
      information for South Texas Oil Company, a Nevada corporation, and its wholly
      owned subsidiaries Southern Texas Oil Company, a Texas corporation, STO
      Operating Company, a Texas corporation, STO Drilling Company, a Texas
      corporation, and STO Properties LLC, a Texas limited liability company.
      References to “the Company” indicate South Texas Oil Company or South Texas Oil
      Company and its wholly owned subsidiaries.





These
      financial statements have been prepared in accordance with U.S. generally
      accepted accounting principle (“GAAP”) for interim financial information and
      with the instructions for Form 10-Q and Article 10 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 2 to the audited consolidated financial
      statements for the year ended December 31, 2007. These financial statements
      should be read in conjunction with the Company’s Annual Report on Form 10-KSB
      for the year ended December 31, 2007.





Certain
      reclassification entries have been reflected on the September 30, 2007 financial
      statements to conform to the September 30, 2008 presentation.





In
      the
      opinion of management, all normal, recurring adjustments considered necessary
      for the fair statement of the results for the interim period on a basis
      consistent with the annual audited financial statements have been
      included.





**Note
      2 – Notes Payable and Long-Term Debt**





As
      of
      September 30, 2008, the Company’s notes payable and long-term debt consisted of
      debt outstanding under the Company’s credit facility with The Longview Fund,
      L.P. (“Longview”) and Longview Marquis Master Fund, L.P. (“Marquis”) (the
“Longview/Marquis Facility”), the Marquis Senior Secured Debt, and various notes
      payable related to certain purchases of oil and gas properties and other
      property and equipment.





*Longview/Marquis
      Facility*





As
      of
      September 30, 2008, the Company had a $32.5 million senior credit facility
      with
      Longview and Marquis with a total of $34.3 million outstanding, which included
      $1,906,747 for interest accrued on the facility during the second and third
      quarters of 2008 added to the principal of the underlying notes in accordance
      with provisions of the borrowing agreement permitted such treatment of interest
      through December 31, 2008. Borrowings under the facility accrue interest at
      a
      rate equal to prime plus 4%, which was equal to 12.5% at September 30, 2008.
      The
      principal amount of the senior secured notes issued under the facility was
      increased during the three months ended September 30, 2008 by $1,000,000 for
      additional amounts borrowed during the period.





The
      Company originally obtained the credit facility in January 2007, at which time
      the facility had an initial borrowing limit of $15 million that was later
      increased to $30 million in September 2007. In connection with the increase
      in
      borrowing limit, the Company agreed to grant to Longview a perpetual overriding
      royalty interest in the oil and gas production of certain of the Company’s
      properties, and the Company granted security and pledge agreements that provided
      Longview with first priority security interests in substantially all of the
      Company’s assets.





In
      April
      2008, the Company amended and restated the credit facility with Longview and
      Marquis. By further amendment in April 2008, the Company agreed to grant to
      Longview and Marquis certain mortgages in the Company’s oil and gas producing
      properties and a perpetual overriding royalty interest in the oil and gas
      production of all of the Company’s current and future interests in the real
      property then owned by the Company.


6


**SOUTH
      TEXAS OIL COMPANY**


**Notes
      to Consolidated Financial Statements**


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





**Note
      2 – Notes Payable and Long-Term Debt** **(** **continued** **)**





On
      June
      30, 2008, the Company, Longview and Marquis entered into another amendment
      to
      the credit facility, which (i) increased the aggregate maximum amount of senior
      secured notes from $32 million to $32.5 million and (ii) amended the senior
      secured notes to provide that the interest amounts due and payable under the
      senior secured notes will be capitalized and added to the principal amount
      of
      the senior secured notes for all interest amounts payable prior to the earlier
      of (a) December 31, 2008 and (b) the date on which the Company has received
      an
      aggregate of at least $15 million in gross proceeds in one or more transactions
      occurring after June 30, 2008 from any sales of debt and/or equity securities
      of
      the Company, any other debt or equity financings, any farm-out financing
      transaction that does not include operating obligations of the financing party
      as a material term of the transaction, and any sales of the Company’s oil and
      gas assets.





*Additional
      Marquis Debt*





During
      April and May 2008, the Company obtained an agreement from Marquis to provide
      funding for the payment of margin calls made on the Company related to its
      derivative trading activities, described in Note 5. Pursuant to this agreement,
      the Company received from Marquis a total of $1,571,921 in exchange for the
      issuance of subordinated demand promissory notes. As of June 30, 2008, Marquis
      had made demand payment of, and the Company paid two of the notes totaling
      $934,907. On September 19, 2008 in connection with entering into the Marquis
      Senior Secured Debt, the final note balance plus unpaid accrued interest, a
      total of $661,739, was converted into 403,499 shares of the Company’s common
      stock. The interest rate for these notes was 10%.





*Marquis
      Senior Secured Debt*





On
      September 19, 2008, the Company entered into a Securities Purchase
      Agreement (the “Securities Purchase Agreement”) with Marquis, pursuant to which
      on such date, among other things, the Company issued and sold to Marquis a
      senior secured note in an original principal amount of $7,000,000 (the “Senior
      Secured Note”), for gross proceeds of $6,750,000, prior to the Company’s payment
      of expenses incurred by the Company and Marquis in connection with the
      transactions under the Securities Purchase Agreement. The Senior Secured Note
      carries an interest rate of 12.5% per annum payable quarterly in cash and
      matures in September 2009. Upon the Company’s prepayment of all or any portion
      of the Senior Secured Note or at maturity, Marquis has the option to convert
      up
      to 50% of the principal (and interest relating thereto) to be paid by the
      Company on such date of prepayment or maturity, into shares of the Company’s
      common stock at a conversion rate of $4.00 per share (subject to adjustment
      for
      stock splits and other events).





The
      Senior Secured Note is secured by a general security interest in all of the
      tangible and intangible current and future assets owned or acquired by the
      Company and its subsidiaries (including mortgages on the Company’s and its
      subsidiaries’ real property interests), which have guaranteed the obligations of
      the Company under the Senior Secured Note and other transaction documents.
      Marquis’ secured position in this transaction is senior to the rights of all
      other secured parties, including the rights of Longview under that certain
      securities purchase agreement, as amended (the “April 2008 Purchase Agreement”)
      dated as of April 1, 2008, among the Company, Marquis and Longview, pursuant
      to
      which the Company has issued and sold secured notes in the aggregate principal
      amount of approximately $34,284,098 (the “Existing Notes”), except for the
      previously secured rights of Marquis, which will continue to rank pari passu
      with the rights granted to Marquis under the Senior Secured Note. In conjunction
      with the transactions described in the Securities Purchase Agreement, the
      Company entered into a September 2008 Waiver and Amendment with Marquis and
      Longview, pursuant to which the parties amended and waived certain provisions
      and covenants, including a financial covenant, contained in the Existing Notes
      issued to Longview and the April 2008 Purchase Agreement that conflicted with
      the terms and conditions of the Securities Purchase Agreement and the
      transactions contemplated thereby.


7


**SOUTH
      TEXAS OIL COMPANY**


**Notes
      to Consolidated Financial Statements**


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




Note
      2 – Notes Payable and Long-Term
      Debt(continued)


Under
      the
      Securities Purchase Agreement and Senior Secured Notes, the Company will be
      subject to certain covenants, including restrictions on incurring additional
      indebtedness, issuing equity securities, granting or incurring liens,
      transacting with affiliates, and entering into mergers, consolidations and
      sales
      of assets.  The Securities Purchase Agreement also requires that the
      Company comply with a financial covenant to maintain an average minimum daily
      production level. A breach of these covenants would give the holder of the
      Senior Secured Note the right to require immediate repayment of the entire
      principal amount of, and interest on, the Senior Secured Note prior to the
      scheduled maturity date of the Senior Secured Note.





Additionally,
      under the terms of the Securities Purchase Agreement, the Company
      retired the outstanding Marquis subordinated demand notes held by
      Marquis, which demand notes had an aggregate principal balance due of $637,615
      plus accrued interest, in exchange for 403,499 shares of the Company’s common
      stock. In addition, the Company conveyed to Marquis a 1.0% perpetual overriding
      royalty interest in the oil and gas production of all of the Company’s current
      and future interests in the real property then owned by the Company. Pursuant
      to
      the terms of the overriding royalty conveyance, the Company has the conditional
      option, beginning on September 19, 2009 and terminating on September 19, 2010,
      to repurchase the overriding royalty interests conveyed in exchange for a number
      of shares of the Company’s common stock equal to the adjusted fair market value
      of the conveyed overriding royalty interests, based upon an independent
      appraisal at the time the election is made by the Company, divided by a 20-day
      average trading price of the Company’s common stock at the time of repurchase,
      and subject to certain conditions, including without limitation, that (i) the
      Company’s average prior 20-day trading volume is at least 125,000 shares, (ii)
      the prior 20-day average price per share of its common stock is at least $3.00
      per share, and (iii) the shares to be exchanged are registered for public resale
      pursuant to an effective registration statement.





*Other
      Notes Payable*





The
      total
      of the Company’s other notes payable and long-term debt at September 30, 2008
      was $2.1 million and comprised of amounts due to various parties as a result
      of
      oil and gas and other property purchases. Repayment of these obligations is
      due
      over a period from October 1, 2008 ranging from less than one year to greater
      than five years. Effective annual interest rates for these obligations range
      from 4.9% to 12.25%.





The
      following table provides a schedule of estimated principal maturities under
      all
      of the Company’s notes payable and long-term debt as of September 30, 2008, and
      after giving consideration to the transactions described above:





As
                of September 30, 20082008
            
            $
            312,8232009
            
            
            8,089,8202010
            
            
            34,393,6892011
            
            
            51,6292012
            
            
            56,834Thereafter
            
            
            729,309Total
            
            $
            43,634,104





**Note
      3 – Settlement of Litigation**





On
      May
      15, 2008, the Company settled a lawsuit and counter-lawsuit between Leexus
      Oil
& Gas, LLP, Mark Jaehne, and Bennie Jaehne regarding disputes arising under
      a previously reported Agreement and Plan of Merger dated April 20, 2007 (the
      “Merger Agreement”). The Merger Agreement called for the Company to pay $4
      million over time based on a percentage of the production of certain oil and
      gas
      interests acquired under the Merger Agreement and issue of 2,000,000 shares
      of
      the Company’s common stock to the selling shareholders of Leexus, 1,333,333
      shares of which were delivered to the Jaehnes at closing.


8


**SOUTH
      TEXAS OIL COMPANY**


**Notes
      to Consolidated Financial Statements**


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




**Note
      3 – Settlement of Litigation (continued)**




The
      settlement provided for the Company’s payment on the settlement date of $2
      million and future payments totaling $2 million, payable in four future
      installments, which will extinguish all of the Company’s past, current and
      future obligations due to the Jaehnes as selling shareholders under the Merger
      Agreement. The settlement also provides for the return of 1,333,333 shares
      of
      the Company’s common stock previously issued to the Jaehnes, of which 900,000
      shares were previously returned in May 2008. The return of the remaining 433,333
      shares is based upon and contingent upon the Company’s payment of the future
      settlement agreement amounts. As a result of this settlement, the Company has
      no
      lawsuits or claims pending with regard to the Merger Agreement. In addition
      to
      resolving claims arising under the Merger Agreement, the settlement agreement
      fully and finally resolved all disputes between the Company and Leexus Oil
&
Gas, LLP arising outside the scope of the Merger Agreement. In addition to
      resolving claims arising under the Merger Agreement, the settlement agreement
      fully and finally resolved all disputes between the Company and Leexus Oil
&
Gas, LLP arising outside the scope of the Merger Agreement. Neither the lawsuit
      nor the settlement agreement involved the consideration under the Merger
      Agreement allocated to William Zeltwanger, the third selling shareholder who
      also served as one of the Company’s vice presidents, which remains payable under
      the applicable terms and conditions of the Merger Agreement .





**Note
      4 – Stock Based Compensation**





The
      Company has a stock-based employee compensation plan described in Note 6 to
      the
      audited financial statements contained in the Company’s Annual Report on Form
      10-KSB for the year ended December 31, 2007. Total stock compensation expense
      related to employee stock options was reported as part of the Company’s general
      and administrative expenses, and was $466,684 for the nine months ended
      September 30, 2008.





The
      following table presents stock option activity for the nine months ended
      September 30, 2008:





**Weighted****Weighted**
            
            **Average**
            
            ******Average**
            
            **Remaining**
            
            **Total****Number**
            
            **Exercise**
            
            **Contractual**
            
            **Intrinsic****Outstanding**
            
            **Price**
            
            **Term in Years**
            
            **Value**Outstanding,
                June 30, 2008
            
            
            265,500
            
            $
            9.45
            
            
            4.50
            
            $
            1,502,845Forfeited
            
            
            -
            
            $
            -
            
            
            -
            
            
            -Outstanding,
                unvested September 30, 2008
            
            
            265,500
            
            $
            9.45
            
            
            4.00
            
            $
            1,502,845





On
      June
      23, 2008, the Company appointed a new President and Chief Executive Officer,
      a
      Chief Operating Officer, and Chief Financial Officer in connection with a
      management transition, and the Company entered into employment agreements and
      granted to the officers stock award rights and performance option rights. The
      employment agreement for our Chief Executive Officer, who, prior to his
      appointment, served as and continues to be the Chairman of the Company’s Board
      of Directors, is contingent upon the approval of our stockholders under
      applicable NASDAQ rules. In addition, pursuant to the Bylaws of the Company,
      the
      terms of all three Employment Agreements are contingent upon stockholder
      ratification of the Board’s approval of the terms of each employment agreement.


9





**SOUTH
      TEXAS OIL COMPANY**


**Notes
      to Consolidated Financial Statements**


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





**Note
      4 – Stock Based Compensation** **(** **continued** **)**





On
      June
      30, 2008, the Company adopted the Equity Incentive Compensation Plan of South
      Texas Oil Company and granted Stock Award Rights and Performance Option Rights
      under the Equity Incentive Compensation Plan, to provide for the issuance of
      stock grants and incentive stock options as compensation to its new officers.
      The Stock Awards Rights provide for the granting of restricted shares of the
      Company’s common stock at specified intervals and in amounts equal to specified
      values on the issuance dates. The Performance Option Rights provide for the
      issuance of stock options pursuant to the terms of the Equity Incentive
      Compensation Plan, which provide for the issuance of stock options upon
      achievement of certain Company performance goals. Upon adoption of these plans
      and the granting of the Stock Award Rights and Performance Option Rights, on
      June 30, 2008, the first of three tranches of shares of common stock were issued
      to two of the Company’s three new officers. The first tranche was issued to the
      Chief Executive Officer when stockholder approval was obtained on September
      19,
      2008 for both his employment agreement and the Equity Incentive Compensation
      Plan.





In
      accordance with Statement of Financial Accounting Standards 123R, the Company
      measures the value of the stock based compensation granted to it employees
      by
      use of a Black-Scholes valuation model in the case of stock options, and in
      the
      case of stock grants, the value of the compensation is based on the number
      of
      shares issued and the per share value of the Company’s stock on the date of
      issuance. That value is recognized as stock compensation expense over the
      expected life of the underlying options, in the case of stock options, and
      over
      the period between the issuance of restricted shares and the lapse of the
      restrictions in the case of stock grants. Total stock-based compensation expense
      related to employee stock grants was reported as part of the Company’s general
      and administrative expenses, and was $1,481,337 for the nine months ended
      September 30, 2008.




The
      following table presents the stock grants awarded on September 30,
      2008:





**Total****Fair
                Value**
            
            **Date****Issuance**
            
            **Shares**
            
            **on
                Date**
            
            **Restrictions****Date**
            
            **Issued**
            
            **of
                Issuance**
            
            **Lapse**June
                30, 2008
            
            
            516,528
            
            $
            2,000,000
            
            
            January
                1, 2009September
                19, 2008
            
            
            258,264
            
            
            1,000,000
            
            
            January
                1, 2009June
                23, 2009
            
            
            
            *
            
            3,000,000
            
            
            January
                1, 2010June
                23, 2010
            
            
            
            *
            
            3,000,000
            
            
            January
                1, 2011Total
            
            
            774,792
            
            $
            9,000,000





*
      to be
      determined on date of issuance





**Note
      5 – Derivative Contracts**





The
      Company previously entered into a derivative instrument covering the period
      January 1, 2008 to December 31, 2008. During the second quarter 2008, the
      Company discontinued cash flow hedge treatment of this instrument based on
      the
      probability that the original forecasted oil production will not occur by the
      end of the originally specified time period. Cumulative production through
      May
      was less than the amount hedged. Under FASB 133, paragraph 33, this occurrence
      requires all gain or loss in accumulated other comprehensive income (AOCI)
      shall
      be reclassified to earnings immediately. Accordingly, the $615,000 recorded
      in
      AOCI at March 31, 2008 was reclassified to derivative loss in the other income
      section of the statement of operations.


10


**SOUTH
      TEXAS OIL COMPANY**


**Notes
      to Consolidated Financial Statements**


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





**Note
      5 – Derivative Contracts (continued)**





On
      April
      30, 2008, the Company wrote eight call option contracts (8,000 barrels per
      month) and received proceeds of $979,000, which were used to purchase eight
      call options covering the period May to December 2008. This purchase offset
      half
      of the Company’s 2008 short derivative position at March 31, 2008.





On
      May
      21, 2008 the Company purchased at a cost of $1,926,400 additional call options
      for the period May to December 2008, offsetting the remaining half of the
      Company’s 2008 short position. The cost of acquiring these calls was treated as
      a derivative loss in the other income section of the statement of
      operations.





On
      June
      5, 2008, the Company purchased eight call options (8,000 barrels per month)
      for the period January through December 2009, completely offsetting the call
      option contracts sold on April 30, 2008. The cost of $2,952,000 for acquiring
      these instruments was treated as a derivative loss in the other income section
      of the statement of operations.





As
      of
      September 30, 2008, all call options have been covered or offset. The remaining
      position is an asset derivative of $42,776 as follows:





*Put
      options:*





**December
                31,****2008**Volume
            
            
            
            
            
            24,000Average
                Price
            
            
            
            
            $
            85.00


11





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





SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS





This
      Quarterly Report on Form 10-Q contains forward-looking statements within the
      meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
      Securities Exchange Act of 1934. In some cases, forward-looking statements
      are
      identified by terms such as “may,” “will,” “should,” “could,” “would,”
“expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,”
“predicts,” “potential,” and similar expressions intended to identify
      forward-looking statements. Such statements include, without limitation,
      statements regarding:





• fluctuations in oil or gas production or in oil or gas prices;


• estimates of required capital expenditures;


• fluctuations in the cost of drilling, completion and oil production or other
      costs of production and operations;


•
our
      inability to meet growth projections;


• our
      plans and expectations with respect to future acquisitions of oil and gas rights
      leases;


• the
      expected benefits and results from our geophysical research and development
      efforts;


• our
      belief that we will have sufficient liquidity to finance operations into early
      2009;


• the
      amount of cash necessary to operate our business;


• our
      ability to raise additional capital when needed;


• general
      economic conditions; and


• the
      anticipated future financial performance and business operations of our
      company.





These
      forward-looking statements are only predictions and involve known and unknown
      risks, uncertainties, and other factors that may cause our actual results,
      levels of activity, performance, or achievements to be materially different
      from
      any future results, levels of activity, performance, or achievements expressed
      or implied by such forward-looking statements. Also, these forward-looking
      statements represent our estimates and assumptions only as of the date of this
      Report. Except as otherwise required by law, we expressly disclaim any
      obligation or undertaking to release publicly any updates or revisions to any
      forward-looking statement contained in this Report to reflect any change in
      our
      expectations or any change in events, conditions, or circumstances on which
      any
      of our forward-looking statements are based or to conform to actual results.
      Factors that could cause or contribute to differences in our future financial
      and operating results include those discussed in the risk factors set forth
      in
      our Annual Report on Form 10-KSB for the year ended December 31, 2007, as well
      as those discussed elsewhere in this Report. We qualify all of our
      forward-looking statements by these cautionary statements.





You
      should read this section in combination with the section entitled Management’s
      Discussion and Analysis of Financial Condition and Results of Operations for
      the
      year ended December 31, 2007 included in our Annual Report on Form 10-KSB for
      the year ended December 31, 2007.





**Overview**





We
      generate revenue primarily from our working interests in producing oil and
      gas
      properties, the majority of which are located in south and central Texas and
      a
      smaller acreage position located in Colorado. In the second and third quarters
      of 2007, we acquired additional working interests in south central Texas, which
      significantly increased our total leasehold acreage position and production
      capabilities. As of December 31, 2007, our average production base consisted
      of
      approximately 71% crude oil and 29% natural gas. We have obtained capital for
      investment in producing oil and gas properties primarily through the sale of
      our
      common stock to existing stockholders, and a $32.5 million credit facility
      and a
      $7 million senior secured note financing with affiliates of one of our
      significant stockholders.





Our
      strategy is to focus on the acquisition and development of onshore properties
      that have proved oil gas reserves and to attempt to acquire interests in proven
      fields and attempt to increase production by exploring other formations in
      the
      same fields where others have obtained production. Our primary operational
      strategy includes the operation of our own projects, which provides us
      substantial control over drilling and production costs. While much of the
      engineering and geology for our projects is performed by consulting firms,
      the
      actual drilling, rework and other field operations are performed on a project
      basis by contractors who bid for the work. We believe that operating our
      properties in this manner is cost-effective, as the range of expertise and
      services required varies by project and time duration. We have purchased two
      drilling rigs in an effort to further reduce costs and increase our operational
      efficiencies.


12


As
      of
      June 30, 2008, we had terminated a contract operating agreement with Sonterra
      Operating, Inc., (“Sonterra”)under
      which
      Sonterra was the contract operator for our oil and gas operations, managing
      our
      daily operations and providing accounting services for our operated and
      non-operated properties. Michael J. Pawelek, our serving Chairman of the Board
      was appointed as our President and Chief Executive Officer on June 23, 2008
      following the resignation of J. Scott Zimmerman from those positions. Mr.
      Pawelek had been the president and chief executive officer of Sonterra prior
      to
      joining us, and he remained a director of Sonterra until his resignation on
      November 6, 2008. Contemporaneously with the termination of the contract
      operating agreement with Sonterra and Mr. Pawelek’s appointment as our President
      and Chief Executive Officer, we entered into another contract operating
      agreement, under which we are providing contract operating services for Sonterra
      and overseeing certain of Sonterra’s operations in a manner similar to the
      services that Sonterra previously provided to us.





**Results
      of Operations**





***Three
      Months Ended September 30, 2008, Compared with Three Months Ended September
      30,
      2007***





*Revenues*





Oil
      and
      gas sales increased 37% to $2,153,255 from $1,575,010 for the third
      quarters of 2008 and 2007, respectively, primarily as a result of higher average
      realized prices for crude oil and natural gas. Revenue generated by drilling
      services was $397,811 for the third quarter of 2007, compared to zero for the
      third quarter of 2008. Our drilling rigs were undergoing repair during the
      first
      three quarters of 2008, and were not engaged in income generating
      activities.





*Production
      Expenses*





The
      49%
      increase in production expenses from $693,003 to $1,035,250 for the third
      quarters of 2007 and 2008, respectively, resulted from an increase in the number
      of producing wells associated with our property acquisitions completed in the
      second and third quarters of 2007.





*General
      and Administrative Expenses (“G&A”)*





General
      and administrative expenses were $2,526,009 for the third quarter of 2008
      compared to $314,931 for the third quarter of 2007, an increase of 702%. This
      increase largely resulted from non-cash charges recognized during the third
      quarter of 2008 for stock compensation. These charges included approximately
      $1.5 million for employee stock compensation related to stock grants awarded
      in June of 2008 and stock options awarded in the fourth quarter of 2007.
      Also included was a $170,550 charge related to stock issued in exchange for
      third party consulting services received. Additional increases in general and
      administrative costs resulted from increased payroll and related costs
      associated with a growth in the number of employees compared to the third
      quarter of 2007. We continued to make payments pursuant to certain consulting
      contracts initiated in the first and second quarters of 2008 that will be
      terminating in the fourth quarter of 2008 and first quarter of
      2009.





*Depreciation,
      depletion and amortization (“DD&A”)*





The
      62%
      increase in DD&A to $573,075 for the third quarter of 2008 from $354,187 for
      the third quarter of 2007 was attributable to increased costs subject to
      DD&A, resulting from additional capital spending for drilling and capital
      workover projects.





*Interest
      Expense*





Interest
      expense recognized for the third quarter of 2008 was $1,107,161, compared
      to $773,465 for the third quarter of 2007, an increase of 43%. This
      increase is a direct result of increase in debt outstanding under the Longview
      and Marquis credit facility and the new senior secured debt issued to Marquis
      during the third quarter of 2008, described in Note 2 to the financial
      statements. Borrowings under the facility were higher during the third quarter
      of 2008 compared to the third quarter of 2007. We have used proceeds from the
      facility to finance property acquisitions and our property development programs
      in the periods since the third quarter of 2007. Additionally the facility
      was used to provide financing during the first and second quarters of 2008
      to
      finance the $5.3 million loss incurred from derivative
      transactions.


13


*Gain/Loss
      from Derivatives*





We
      recognized a $30,614 gain on remaining open long positions in the third quarter
      of 2008. Any losses generated by our derivative trading activities were
      completely offset by additional contracts purchased at the end of the quarter.
      Those uncovered contracts will expire and will be settled by year end.





*Net
      Loss*





During
      the third quarter of 2008, we realized a net loss of $3,948,843, compared
      to a net loss of $495,143 for the third quarter of 2007. The increase in net
      loss resulted mainly from the $1.7 million in non-cash stock compensation
      charges, an increase in other general and administrative expense components
      of
      approximately $500,000, current period amortization of debt issuance costs
      of
      $635,793, a $342,247 increase in production expenses, and a $333,686
      increase in interest expense. Continued increases in interest expense and
      production expenses may be realized. We intend to continue growth and
      development of our assets and administrative and operational
      infrastructure.





***Nine
      Months Ended September 30, 2008, Compared with Nine Months Ended September
      30,
      2007***





*Revenues*





Oil
      and
      gas sales increased 219% from $2,466,906 to $7,877,500 for the nine months
      ended
      September 30, 2007 and 2008, respectively, as a result of increased production
      volumes contributed by oil and gas properties acquired during the second and
      third quarters of 2007 and higher average realized prices for crude oil and
      natural gas. Revenue generated by drilling services was $920,312 for nine months
      ended September 30, 2007, compared to zero for the same period of 2008. Our
      drilling rigs were undergoing repair during the first three quarters of 2008
      and were not engaged in income generating activities.





*Production
      Expenses*





The
      140%
      increase in production expenses from $1,129,776 to $2,716,093 for the nine
      months ended September 30, 2007 and 2008, respectively, resulted from the
      increase in the number of producing wells associated with our property
      acquisitions completed in the second and third quarters of 2007.





*General
      and Administrative Expenses (“G&A”)*





General
      and administrative expenses were $5,613,767 for the nine months ended September
      30, 2008 compared to $781,246 for the same period in 2007, an increase of 619%.
      This increase resulted from an increase in payroll and related expense,
      consulting fees and travel costs for the increased administrative
      responsibilities associated with the oil and gas properties acquired in the
      first and second quarters of 2007. Additionally, legal expenses increased by
      approximately $300,000 due to costs recognized in the first and second quarters
      of 2008 related to the settlement of litigation described in Note 3 to the
      financial statements. Also contributing to the increase in G&A was the $1.95
      million of stock compensation expense associated with the restricted stock
      granted to the new employees who joined our management team as officers during
      the third quarter of 2008 and stock options issued during the first quarter
      of
      2008. Finally, G&A for the third quarter of 2008 included contract operating
      fees paid to a third party entity that provided management services to us
      during April through June of 2008, including oversight over daily operational
      and administrative matters. Concurrent with our hiring of our new officers
      at
      the end of June, this contract operating arrangement with the third party was
      terminated.





Certain
      components of our G&A for the nine months ended September 30, 2008 are not
      expected to be recurring in nature. These include (i) significant legal expenses
      incurred in relation to the litigation settled during the period, (ii) fees
      paid
      for contract management services for the period preceding the addition of our
      new officers, and (iii) consulting fees paid to third parties for the provision
      of certain professional services that will be performed by our own management
      and staff in future periods. Salary and related costs and stock compensation
      expense are expected to increase as a result of the addition of our new officers
      and other employees at the end of June 2008 and in the third and fourth quarters
      of 2008, and as may be required in future periods. Certain of the consulting
      arrangements that are not expected to be renewed will expire over the succeeding
      six month period.


14


*Depreciation,
      depletion and amortization (“DD&A”)*





The
      316%
      increase in DD&A to $3,212,110 for the nine months ended September 30, 2008
      from $771,347 for the same period in 2007 is attributable to the effect of
      the
      oil and gas property acquisitions that occurred in the second and third quarters
      of 2007. The acquisitions increased the costs subject to DD&A as the
      costs of the acquired properties were recognized, and increased the production
      volume used in the units of production calculation of the DD&A
      provision.





*Interest
      Expense*





Interest
      expense recognized for the nine months ended September 30, 2008 was $2,715,930,
      compared to $1,741,055 for the same period in 2007, an increase of 56%. This
      increase is a direct result of an increase in debt outstanding under the
      Longview and Marquis credit facility and the new senior secured note issued
      to Marquis during the third quarter of 2008 described in Note 2 to the financial
      statements. Borrowings were higher during the first three quarters of 2008
      compared to the same period in 2007 because the facility was used to finance
      oil
      and gas property acquisitions made during the second, third and fourth quarters
      of 2007. Additionally the facility was used to provide financing during the
      second quarter of 2008 to finance the net $5.3 million loss incurred from
      derivative transactions.





*Loss
      from Derivatives*





A
      net
      loss from derivatives of $5.3 million was recognized during the nine months
      ended September 30, 2008, compared to $0 for the same period in 2007.
      Losses were not recognized from our derivative trading activities until the
      first quarter of 2008. The agreements that generated the losses during the
      second quarter of 2008 were completely offset by additional contracts
      purchased at the end of the quarter. Because of the contracts’ covered status,
      we do not anticipate future additional losses to be realized from the contracts
      that were outstanding during the third quarter of 2008. We did not engage in
      derivative transactions during the nine months ended September 30,
      2007.





*Net
      Loss*





During
      the nine months ended September 30, 2008, we realized a net loss of $14,106,359,
      compared to a net loss of $1,827,531 for the nine months ended September 30,
      2007. The increase in net loss resulted predominately from the $5.3 million
      in
      net losses realized from derivative trading activities. Additionally the $4.8
      million increase in G&A contributed to the increased net loss, as did the
      $1.6 million increase in production expenses and the $974,875 increase in
      interest expense from increased debt. We are not currently subject to derivative
      contracts that are expected to yield additional losses for the year; however,
      continued increases in interest expense, G&A and production expenses may be
      realized. We intend to continue growth and development of our assets and
      administrative and operational infrastructure.





**Liquidity
      and Financial Condition**





As
      of
      September 30, 2008, we had a working capital deficit of $4.7 million, the
      primary components of which were cash and cash equivalents, accounts receivable
      and prepaid expenses offset by accounts payable, current notes payable,
      long-term debt and other accrued expenses. The entire $7 million in principal
      due under the Marquis Senior Secured Debt agreement entered into in September
      of
      2008, less the $250,000 discount recorded at issuance, is included in current
      liabilities as of September 30, 2008. As of December 31, 2007, our working
      capital balance was a negative $38,336, the primary components of which were
      cash and cash equivalents, trade accounts receivable and prepaid
      expenses. We expect to fund operations for the succeeding 12 months with
      existing cash and additional sources of financing as may be
      required. Given
      the
      need for, and costs associated with, additional exploration and development
      efforts, we will need to raise additional capital to satisfy our capital
      needs over the next 12 months.


15


On
      September 30, 2008, we had assets of $71,708,017 compared to $63,428,393 on
      December 31, 2007, an increase of $8,279,624. We had total stockholders’ equity
      of $19,029,825 on September 30, 2008 compared to $31,184,407 on December 31,
      2007, a decrease in equity of $12,154,582 resulting from the net losses
      generated through the third quarter of 2008.





Net
      cash
      used in operating activities for the nine months ended September 30, 2008 was
      $911,321 as compared to net cash used by operating activities of $183,984 for
      same period in 2007.





Net
      cash
      used by investing activities for the nine months ended September 30, 2008 was
      $7,167,587 as compared to $20,649,783 cash used for investing activities for
      the
      same period in the prior year. The cash used in the first nine months of 2008
      was primarily the result of capital expenditures made for the development of
      the
      Company’s oil and gas properties and related production facilities.





Net
      cash
      provided by financing activities for the nine months ended September 30, 2008
      was $15,611,417 compared to $19,974,328 cash provided by financing activities
      for the same period in the prior year. This increase is the result of additional
      debt issued, net of debt repayments and debt converted to equity during the
      period. Additionally, the increase in cash provided by issuance of new debt
      was
      partially offset by the use of $902,010 for the repurchase of shares of our
      common stock into treasury.





**Commitments
      and Contingencies**





*Hedge
      Agreement*





On
      February 19, 2008, we announced 2008 risk management activities with respect
      to
      the entry into hedge contracts with MF Global Ltd. Hedged production benchmark
      volumes were initially set at 16,000 barrels of oil per month, current net
      production. The underlying risk management agreement, which has an initial
      term
      ending December 31, 2008, was intended to deliver predictable cash flow for
      2008, by using hedge transaction contacts with a “collar” floor price of $85 per
      barrel and a ceiling of $100 per barrel. On April 30, 2008, the parties agreed
      in principle to amend the risk management agreement to extend the term for
      an
      additional year and reduce the benchmark volumes by half to 8,000 barrels per
      month (approximately 263 barrels of oil per day) and to raise the collar ceiling
      to $109.75 per barrel for the calendar year 2009. As a result of the collar
      ceiling, we did not benefit from the price of oil exceeding $100.00 per
      barrel, since we are obligated to pay a call on the hedge contracts representing
      the differential between the average monthly price per barrel of oil in excess
      of the collar ceiling, based upon the stated benchmark production of 8,000
      barrels per month.





On
      or
      about June 27, 2008, MF Global Ltd. orally agreed with us to terminate the
      financial effect of the hedge agreement by entering into offsetting hedge
      positions with respect to future trades pursuant to the hedge agreement,
      conditioned upon our settling all positions resulting from the differential
      between the average monthly price per barrel of oil in excess of the collar
      ceiling, based upon the stated benchmark production of 8,000 barrels per
      month.





*Capital
      Commitment*





On
      February 15, 2008, we entered into an amendment to a gas contract that we had
      previously entered into with DCP Midstream in October 2007, for the gathering,
      processing and marketing of our Bastrop Field natural gas volumes. The contract
      allows us to sell our natural gas in Bastrop County, Texas at a premium to
      NYMEX
      natural gas prices due to the high propane, ethane, butane and methane content
      of the natural gas. We began transporting this gas production on August 15,
      2008, and will sell initial natural gas volumes of 150 to 200 thousand cubic
      feet per day (Mcf/d). As part of the contract terms, we were responsible for
      $186,000 of capital investment in the project, which we have fulfilled and
      for
      which we will receive a repayment of $0.25/Mcf over time if 220,000 MMcf of
      gas
      is produced within two years of first sales. There are no minimum volume
      commitments and, as gas volumes increase, the infrastructure will be improved
      to
      meet the field's throughput requirements.


16


*Amended
      Credit Facility*





We
      have a
      $32.5 million senior credit facility with Longview and Marquis. As
      of September 30, 2008, $34.3 million was outstanding, which included $1.9
      million for interest accrued on the facility added to the principal of the
      underlying notes during the second and third quarters of 2008, in
      accordance with provisions of the borrowing agreement that permitted the
      capitalization of interest through December 31, 2008. Borrowings under the
      facility accrue interest at a rate equal to prime plus 4%, which was equal
      to
      12.5% at June 30, 2008. The principal amount of the senior secured notes
      issued under the facility was increased during the three months ended September
      30, 2008 by $1,000,000 for additional amounts borrowed during the period. On
      July 1, 2008, subsequent to entering into a June 2008 Amendment, we issued
      to Longview an additional senior secured note in the original principal amount
      of $1 million pursuant to the credit facility, bringing the aggregate amount
      of
      senior secured notes outstanding, before accrued interest added to the notes,
      to
      approximately $32.4 million of the $32.5 million available.





We
      originally obtained the credit facility in January 2007, at which time the
      facility had an initial borrowing limit of $15 million that was increased to
      $30
      million in September 2007. In connection with the increase in borrowing limit,
      we agreed to grant to Longview a perpetual overriding royalty interest in the
      oil and gas production of certain of our properties, and we granted security
      and
      pledge agreements that provided Longview with first priority security interests
      in substantially all of our assets.





In
      April
      2008, we amended and restated the credit facility with Longview and Marquis
      in
      its entirety. By further amendment in April 2008, we agreed to grant to Longview
      and Marquis certain mortgages in our oil and gas producing properties and a
      perpetual overriding royalty interest in the oil and gas production of all
      of
      our current and future interests in the real property then owned by
      us.





On
      June
      30, 2008, we, Longview and Marquis entered into another amendment to the credit
      facility, which (i) increased the aggregate maximum amount of senior secured
      notes from $32 million to $32.5 million and (ii) amended the senior secured
      notes to provide that the interest amounts due and payable under the senior
      secured notes will be capitalized and added to the principal amount of the
      senior secured notes for all interest amounts payable prior to the earlier
      of
      (a) December 31, 2008 and (b) the date on which we receive an aggregate of
      at
      least $15 million in gross proceeds in one or more transactions occurring after
      June 30, 2008 from any sales of our debt and/or equity securities, any other
      debt or equity financings, any farm-out financing transaction that does not
      include operating obligations of the financing party as a material term of
      the
      transaction, and any sales of our oil and gas assets.





*Marquis
      Senior Secured Note*





On
      September 19, 2008, we entered into a Securities Purchase Agreement with
      Marquis, pursuant to which on such date, among other things, we issued and
      sold
      to Marquis a Senior Secured Note in an original principal amount of $7,000,000,
      for gross proceeds of $6,750,000, prior to our payment of expenses incurred
      by
      the parties in connection with the transactions under the Securities Purchase
      Agreement. The Senior Secured Note carries an interest rate of 12.5% per annum
      payable quarterly in cash and matures in September of 2009. Upon our prepayment
      of all or any portion of the Senior Secured Note or at maturity, Marquis has
      the
      option to convert up to 50% of the principal (and interest relating thereto)
      to
      be paid by us on such date of prepayment or maturity, into shares of our common
      stock at a conversion rate of $4.00 per share (subject to adjustment for stock
      splits and other events).





The
      Senior Secured Note is secured by a general security interest in all tangible
      and intangible current and future assets owned or acquired by us and our
      subsidiaries (including mortgages on our and our subsidiaries’ real property
      interests), which have guaranteed our obligations under the Senior Secured
      Note
      and other transaction documents. Marquis’ secured position in this transaction
      is senior to the rights of all other secured parties, including the rights
      of
      Longview under that certain securities purchase agreement, as amended (the
      “April 2008 Purchase Agreement”) dated as of April 1, 2008, among Marquis,
      Longview and us, pursuant to which we issued and sold secured notes in the
      aggregate principal amount of approximately $34,284,098 (the “Existing Notes”),
      except for the previously secured rights of Marquis, which will continue to
      rank
      pari passu with the rights granted to Marquis under the Senior Secured Note.
      In
      conjunction with the transactions described in the Securities Purchase
      Agreement, we entered into a September 2008 Waiver and Amendment with Marquis
      and Longview, pursuant to which the parties amended and waived certain
      provisions and covenants, including a financial covenant, contained in the
      Existing Notes issued to Longview and the April 2008 Purchase Agreement that
      conflicted with the terms and conditions of the Securities Purchase Agreement
      and the transactions contemplated thereby.


17





Under
      the
      Securities Purchase Agreement and Senior Secured Notes we will be subject to
      certain covenants, including restrictions on incurring additional indebtedness,
      issuing equity securities, granting or incurring liens, transacting with
      affiliates, and entering into mergers, consolidations and sales of assets. 
The Securities Purchase Agreement also requires that we comply with a financial
      covenant to maintain an average minimum daily production level. A breach of
      these covenants would give the holder of the Senior Secured Note the right
      to
      require immediate repayment of the entire principal amount of, and interest
      on,
      the Senior Secured Note prior to the scheduled maturity date of the Senior
      Secured Note.





Additionally,
      under the terms of the Securities Purchase Agreement, we retired certain
      existing demand notes held by Marquis, which demand notes had an aggregate
      principal balance due of $637,614.51 plus accrued interest, in exchange for
      403,499 shares of our common stock. In addition, we conveyed to Marquis a 1.0%
      perpetual overriding royalty interest in the oil and gas production of all
      of
      our current and future interests in the real property then owned by us. Pursuant
      to the terms of the overriding royalty conveyance, we have the conditional
      option, beginning on September 19, 2009 and terminating on September 19, 2010,
      to repurchase the overriding royalty interests conveyed in exchange for a number
      of our shares of common stock equal to the adjusted fair market value of the
      conveyed overriding royalty interests, based upon an independent appraisal
      at
      the time the election is made by us, divided by a 20-day average trading price
      of our common stock at the time of repurchase, and subject to certain
      conditions, including without limitation, that (i) our average prior 20-day
      trading volume is at least 125,000 shares, (ii) the prior 20-day average price
      per share of our common stock is at least $3.00 per share, and (iii) the shares
      to be exchanged are registered for public resale pursuant to an effective
      registration statement.





*Lawsuit
      Settlement re: Merger Agreement (Leexus Properties)*





On
      May
      15, 2008, we settled a lawsuit and counter-lawsuit between Leexus Oil & Gas,
      LLP, Mark Jaehne, and Bennie Jaehne regarding disputes arising under a Agreement
      and Plan of Merger dated April 20, 2007 (the “Merger Agreement”). The Merger
      Agreement called for us to pay $4 million over time based on a percentage of
      the
      production of certain oil and gas interests acquired under the Merger Agreement
      and issue 2,000,000 shares of our common stock to the selling shareholders
      of
      Leexus, 1,333,333 shares of which were delivered to the Jaehnes at closing.





The
      settlement provided for our payment on the settlement date of $2 million and
      future payments totaling $2 million, payable in four future installments, and
      which will extinguish all of our past, current and future obligations due to
      the
      Jaehnes as selling shareholders under the Merger Agreement. The settlement
      also
      provides for the return of 1,333,333 shares of our common stock previously
      issued to the Jaehnes, of which 900,000 shares were previously returned in
      May
      2008. The return of the remaining 433,333 shares is based upon and contingent
      upon our payment of the future settlement agreement amounts. As a result of
      this
      settlement, we have no lawsuits or claims pending with regard to the Merger
      Agreement. In addition to resolving claims arising under the Merger Agreement,
      the settlement agreement fully and finally resolved all disputes between us
      and
      Leexus Oil & Gas, LLP arising outside the scope of the Merger Agreement. In
      addition to resolving claims arising under the Merger Agreement, the settlement
      agreement fully and finally resolved all disputes between us and Leexus Oil
      & Gas, LLP arising outside the scope of the Merger Agreement. Neither the
      lawsuit nor the settlement agreement involved the consideration under the Merger
      Agreement allocated to William Zeltwanger, the third selling shareholder, which
      remains payable under the applicable terms and conditions of the Merger
      Agreement. Neither we nor Mr. Zeltwanger, who was our vice president, asserted
      any claims against each other in the lawsuits, and Mr. Zeltwanger owns 666,666
      of our shares issued to him under the Merger Agreement.





*Future
      Development*





We
      have
      made no material commitments for future projects. Each drilling and/or rework
      project is funded on a standalone basis, and, although we are in constant
      discussion with prospective working interest partners on each potential project,
      commitments for the actual drilling or rework and site preparation operations
      are not made for each project until we have received the funds from our working
      interest partners and the funds for its portion of the working interest are
      committed. The leases that we hold are either in their primary term, as may
      be
      extended or renewed by the payment of certain extension or renewal payments,
      or
      are "held by production". If the leased property has a producing well that
      is
      providing royalty payments to the leaseholders, then annual lease payments
      and
      renewals are not required. We strive to accomplish the drilling or rework
      planned for each property within the year first leased. If that does not occur
      however, management reviews the potential of each property as its leases come
      up
      for renewal and makes a decision whether or not to renew each lease in light
      of
      our business planning at that time.


18


**Recent
      Accounting Pronouncements**





In
      September 2006, FASB issued Statement of Financial Accounting Standards (SFAS)
      No. 157, “Fair Value
      Measurements”. SFAS
      No. 157
      provides guidance for using fair value to measure assets and liabilities. It
      applies whenever other standards require or permit assets or liabilities to
      be
      measured at fair value but it does not expand the use of fair value in any
      new
      circumstances. In November 2007, the effective date was deferred for all
      non-financial assets and liabilities, except those that are recognized or
      disclosed at fair value on a recurring basis. The provisions of SFAS No. 157
      that were not deferred are effective for financial statements issued for fiscal
      years beginning after November 15, 2007. The adoption of SFAS No. 157, effective
      January 1, 2008, did not have a significant effect on our financial position
      or
      results of operations.





In
      February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial
      Assets and Financial Liabilities-Including an Amendment of FASB Statement No.
      115”. SFAS No. 159 permits an entity to choose to measure many financial
      instruments and certain other items at fair value. The fair value option
      established by SFAS No. 159 permits all entities to choose to measure eligible
      items at fair value at specified election dates. Unrealized gains and losses
      on
      items for which the fair value option has been elected are to be recognized
      in
      earnings at each subsequent reporting date. SFAS No. 159 is effective for
      financial statements issued for fiscal years beginning after November 15, 2007.
      The adoption of SFAS No. 159, effective January 1, 2008, did not have a
      significant effect on our financial position or results of
      operations.





In
      December 2007, FASB issued SFAS No. 160, "Non-Controlling Interests in
      Consolidated Financial Statements--an amendment of ARB No. 51" to improve the
      relevance, comparability, and transparency of the financial information a
      reporting entity provides in its consolidated financial statements. SFAS No.
      160
      amends ARB 51 to establish accounting and reporting standards for non
      controlling interests in subsidiaries and to make certain consolidation
      procedures consistent with the requirements of SFAS No. 141R. It defines a
      non
      controlling interest in a Subsidiary as an ownership interest in the
      consolidated entity that should be reported as equity in the consolidated
      financial statements. SFAS No. 160 changes the way the consolidated income
      statement is presented by requiring consolidated net income to include amounts
      attributable to the parent and the non-controlling interest. SFAS No. 160
      establishes a single method of accounting for changes in a parent's ownership
      interest in a subsidiary which does not result in deconsolidation. SFAS No.
      160
      also requires expanded disclosures that clearly identify and distinguish between
      the interests of the parent and the interests of the non controlling owners
      of a
      subsidiary. SFAS No. 160 is effective for financial statements issued for fiscal
      years beginning on or after December 15, 2008, and interim periods within those
      fiscal years. Early adoption is prohibited. SFAS No. 160 shall be applied
      prospectively, with the exception of the presentation and disclosure
      requirements which shall be applied retrospectively for all periods presented.
      The Company does not believe that the adoption of SFAS No. 160 will have a
      material effect on its consolidated financial position, results of operations
      or
      cash flows.





In
      December 2007, SFAS No. 141R, “Business Combinations”, was issued. Under SFAS
      No. 141R, a company is required to recognize the assets acquired, liabilities
      assumed, contractual contingencies, and any contingent consideration measured
      at
      their fair value at the acquisition date. It further requires that research
      and
      development assets acquired in a business combination that have no alternative
      future use to be measured at their acquisition-date fair value and then
      immediately charged to expense, and that acquisition-related costs are to be
      recognized separately from the acquisition and expensed as incurred. Among
      other
      changes, this statement also requires that "negative goodwill" be recognized
      in
      earnings as a gain attributable to the acquisition, and any deferred tax
      benefits resultant in a business combination are recognized in income from
      continuing operations in the period of the combination. SFAS No. 141R is
      effective for business combinations for which the acquisition date is on or
      after the beginning of the first annual reporting period beginning after
      December 15, 2008. We do not expect the adoption of SFAS No. 141R to have a
      significant effect our financial position or results of
      operations.


19


In
      March
      2008, FASB issued SFAS No. 161, “Disclosures About Derivative Instruments and
      Hedging Activities—an amendment of FASB Statement No. 133.” SFAS No. 161
      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 No. 161 is effective for fiscal and interim periods beginning
      after November 15, 2008. We have not completed its evaluation of the impact
      of
      SFAS No. 161 on our financial reporting.




In
      May 2008, FASB issued SFAS No. 162, "The Hierarchy of
      Generally Accepted Accounting Principles." The statement is intended to improve
      financial reporting by identifying a consistent hierarchy for selecting
      accounting principles to be used in preparing financial statements that are
      presented in conformity with U.S. generally accepted accounting principles.
      SFAS
      No. 162 is effective 60 days following the Security Exchange Commission's
      approval of the Public Company Accounting Oversight Board Auditing amendments
      to
      AU Section 411, The Meaning of "Present Fairly in Comformity with Generally
      Accepted Accounting Principles." We have not completed our evaluation of the
      effects, if any, that SFAS No. 162 may have on its consolidated financial
      position, results of operations and cash flows.





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





Not
      applicable.





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





*Disclosure
      Controls and Procedures*





We
      maintain disclosure controls and procedures designed to ensure that information
      required to be disclosed in reports filed under the Securities Exchange Act
      of
      1934 (“Exchange Act”) is recorded, processed, summarized and reported within the
      specified time periods. Our Chief Executive Officer and our Chief Financial
      Officer are responsible for maintaining our disclosure controls and procedures.
      The controls and procedures established by us are designed to provide reasonable
      assurance that information required to be disclosed by the issuer in the reports
      that it files or submits under the Exchange Act is recorded, processed,
      summarized and reported within the time periods specified in the SEC’s rules and
      forms.




As
      required by Rule 13a-15 under the Exchange Act, our management, including,
      our
      Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness
      of the design and operation of our disclosure controls and procedures as of
      September 30, 2008. Based on that evaluation, management concluded that as
      of
      September 30, 2008, and as of the date that the evaluation of the effectiveness
      of our disclosure controls and procedures was completed, our disclosure controls
      and procedures were not effective to satisfy the objectives for which they
      are
      intended.





*Changes
      in Internal Control Over Financial Reporting*




There
        was
        no change in our internal control over financial reporting during the period
        ended September 30, 2008, that has affected materially, or is reasonably
        likely
        to affect materially, our internal control over financial
        reporting.


20





**PART
      II – OTHER INFORMATION**





**Item
      1. Legal Proceedings.**





On
      May
      15, 2008, we settled a lawsuit and counter-lawsuit with Leexus Oil & Gas,
      LLP and Mark Jaehne and Bennie Jaehne, two of the selling shareholders of
      Leexus, regarding disputes arising under a Agreement and Plan of Merger dated
      April 20, 2007. The Merger Agreement called for our payment of $4 million over
      time based upon a percentage of the production of certain oil and gas interests
      acquired by us under the Merger Agreement, plus the issuance of 1,333,333 shares
      of our common stock to the Jaehnes at closing. For additional detail regarding
      this settlement, see “Part I—Financial Information, Item 2. Management’s
      Discussion and Analysis of Financial Condition and Results of Operations—Lawsuit
      Settlement re: Merger Agreement (Leexus Properties)”.





With
      the
      settlement disclosed above, we have no lawsuits or claims pending by or against
      us that require disclosure. In addition, to the knowledge of management, no
      federal, state or local governmental agency is presently contemplating any
      proceeding against us.





None
      of
      our directors, executive officers or nominees for such office have been involved
      in any legal proceedings related to bankruptcy of an entity where they held
      such
      positions; nor charged or convicted in any criminal proceedings; nor subject
      to
      any order, judgment, or decree permanently or temporarily enjoining, barring,
      suspending or otherwise limiting their involvement in any type of business,
      securities or banking activities; nor found in any manner whatsoever to have
      violated a federal or state securities or commodities law.





None
      of
      our officers or directors, or to our knowledge, any of our control persons,
      has:





• had
      any
      bankruptcy petition filed by or against any business of which such person was
      a
      general partner or executive officer either at the time of the bankruptcy or
      within two years prior to that time;





• been
      convicted in a criminal proceeding or is subject to a pending criminal
      proceeding (excluding traffic violations and other minor offenses);





• been
      subject to any order, judgment, or decree, not subsequently reversed, suspended
      or vacated, of any court of competent jurisdiction, permanently or temporarily
      enjoining, barring, suspending or otherwise limiting his involvement in any
      type
      of business, securities or banking activities; or





• been
      found by a court of competent jurisdiction (in a civil action), the Securities
      and Exchange Commission or the Commodity Futures Trading Commission to have
      violated a federal or state securities or commodities law, where the judgment
      has not been reversed, suspended or vacated.





**Item
      1A. Risk Factors.**





There
      have been no material changes with respect to the risk factors disclosed in
      our
      Annual Report on Form 10-KSB for the fiscal year ended December 31,
      2007.





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





On
      September 26, 2008, we retired certain existing demand notes held by Marquis,
      which demand notes had an aggregate principal balance due of $637,615 plus
      accrued interest, in exchange for 403,499 shares of our common stock, in a
      transaction not involving a public offering, pursuant to Section 4(2) of the
      Securities Act of 1933.





On
      July
      8, 2008, we issued the aggregate of 516,528 shares of common stock to two of
      our
      executive officers pursuant to employment agreements and our Equity Incentive
      Compensation Plan (the “Plan”), in a transaction not involving a public
      offering, pursuant to Section 4(2) of the Securities Act of 1933. Both of
      there employment agreements, plus an employment agreement to a third
      executive officer and the Plan were approved by our stockholders at a
      Special Meeting of Stockholders held on September 19, 2008, resulting in the
      issuance of an additional 258,264 shares of our common stock to the third
      executive officer.


21


In
      the
      period ending September 30, 2008, we issued 37,000 shares of our common stock
      to
      two non-affiliated individual for services rendered to us under consulting
      agreements, in a transaction not involving a public offering, pursuant to
      Section 4(2) of the Securities Act of 1933.





**Item
      3.**  **Defaults
      Upon Senior Securities.**





None.





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





On
      September 19, 2008, we held a Special Meeting of Stockholders to approve an
      Equity Incentive Compensation Plan to, among other things, preserve our ability
      to utilize corporate income tax deductions that may otherwise be disallowed
      pursuant to Internal Revenue Code Section 162(m); and to approve and ratify
      employment agreements for our Chief Executive Officer, Chief Operating Officer
      and Chief Financial Officer, respectively, and the grants of equity awards
      to
      each respective officer. Votes of stockholders, present or voting by proxy,
      representing sixty one (61%) percent of our issued and outstanding shares of
      common stock were cast in favor of the approval of Equity Incentive Compensation
      Plan. Votes of stockholders representing ninety nine (99%) percent of the
      holders of our shares of common stock present or voting by proxy stock were
      cast
      in favor of the approval and ratification of employment agreements for our
      Chief
      Executive Officer, Chief Operating Officer and Chief Financial Officer,
      respectively, and the grants of equity awards to each respective
      officer.





**Item
      5. Other Information.**





*Nominating
      Committee Procedures*





We
      have
      not implemented any material change to the procedures by which stockholders
      may
      recommend nominees to our Board of Directors for evaluation, as set forth in
      the
      Charter of our Nominating Committee, filed with the SEC as an exhibit to our
      Form 8-K on August 28, 2007.





**Item
      6. Exhibits.**





10.1
            
            Securities
                Purchase Agreement, dated April 1, 2008, among the Registrant, The
                Longview Fund, L.P. and Longview Marquis Master Fund, L.P. (incorporated
                by reference to Exhibit 10.20 of Form 10-KSB filed with the Commission
                on
                April 15, 2008)10.2
            
            Amendment
                to Senior Notes and Purchase Agreement, dated June 30, 2008, among
                the
                Registrant, The Longview Fund, L.P. and Longview Marquis Master Fund,
                L.P.
                (incorporated by reference to Exhibit 99.1 of Form 8-K filed with
                the
                Commission on July 2, 2008)10.3
            
            Securities
                Purchase Agreement between South Texas Oil Company and Longview Marquis
                Master Fund, L.P, dated as of September 19, 2008(incorporated by
                reference
                to Exhibit 99.1 of Form 8-K filed with the Commission on September 24,
                2008).31.1
            
            Principal
                Executive Officer Certification Pursuant to Item 601(b)(31) of Regulation
                S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
                of
                200231.2
            
            Principal
                Financial Officer Certification Pursuant to Item 601(b)(31) of Regulation
                S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
                of
                200232.1
            
            Principal
                Executive Officer Certification Pursuant to Item 601(b)(32) of Regulation
                S-K, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
                of
                200232.2
            
            Principal
                Financial Officer Certification Pursuant to Item 601(b)(32) of Regulation
                S-K, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
                of
                2002


22


**SIGNATURES**
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        caused this report to be signed on its behalf by the undersigned thereunto
        duly
        authorized.
  **SOUTH
                  TEXAS OIL COMPANY**Date: November
                  19, 2008
              By:
              */s/*Michael J. PawelekMichael
                  J. PawelekPresident
                  and Chief Executive Officer (duly authorized
                  officer)
 
 **Exhibit
                    Index**
              
              
              
              **Exhibit
                  Page**10.1
              
              Securities
                  Purchase Agreement, dated April 1, 2008, among the Registrant,
                  The
                  Longview Fund, L.P. and Longview Marquis Master Fund, L.P. (incorporated
                  by reference to Exhibit 10.20 of Form 10-KSB filed with the Commission
                  on
                  April 15, 2008)
              
              -10.2
              
              Amendment
                  to Senior Notes and Purchase Agreement, dated June 30, 2008, among
                  the
                  Registrant, The Longview Fund, L.P. and Longview Marquis Master
                  Fund, L.P.
                  (incorporated by reference to Exhibit 99.1 of Form 8-K filed with
                  the
                  Commission on July 2, 2008)
              
              -10.3
              
              Securities
                  Purchase Agreement between South Texas Oil Company and Longview
                  Marquis
                  Master Fund, L.P, dated as of September 19, 2008(incorporated by
                  reference
                  to Exhibit 99.1 of Form 8-K filed with the Commission on September
                  24,
                  2008).
              
              -31.1
              
              Principal
                  Executive Officer Certification Pursuant to Item 601(b)(31) of
                  Regulation
                  S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
                  of
                  2002
              
              131.2
              
              Principal
                  Financial Officer Certification Pursuant to Item 601(b)(31) of
                  Regulation
                  S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
                  of
                  2002
              
              232.1
              
              Principal
                  Executive Officer Certification Pursuant to Item 601(b)(32) of
                  Regulation
                  S-K, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
                  of
                  2002
              
              332.2
              
              Principal
                  Financial Officer Certification Pursuant to Item 601(b)(32) of
                  Regulation
                  S-K, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
                  of
                  2002
              
              4
 
 23