**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**  **June
      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 filero
            
            Accelerated
                fileroNon-accelerated
                filero
            
            Smaller
                reporting companyx





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 16,099,099 shares of common stock outstanding as of August 13, 2008.









TABLE
      OF
      CONTENTS




PagePART
                I - FINANCIAL INFORMATIONItem
                1. Financial Statements (Unaudited)
            
            
            1Consolidated
                Balance Sheets as of June 30, 2008 and December 31, 2007
            
            
            2Consolidated
                Statements of Operations for the Three and Six Months Ended June
                30, 2008and
                2007
            
            
            3Consolidated
                Statements of Stockholders’ Equity for the Six Months Ended June 30, 2008
                and 2007
            
            
            4Consolidated
                Statements of Cash Flows for the Six Months Ended June 30, 2008and
                2007
            
            
            5Notes
                to Consolidated Financial Statements
            
            
            6Item
                2. Management's Discussion and Analysis of Financial Condition and
                Results
                of Operations
            
            
            11Item
                3. Quantitative and Qualitative Disclosures About Market
                Risk
            
            
            18Item
                4T. Controls and Procedures
            
            
            18PART
                II - OTHER INFORMATION
            
            
            19Item
                1. Legal Proceedings
            
            
            19Item
                1A. Risk Factors
            
            
            19Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            
            
            19Item
                3. Defaults Upon Senior Securities
            
            
            19Item
                4. Submission of Matters to a Vote of Security Holders
            
            
            19Item
                5. Other Information
            
            
            20Item
                6. Exhibits
            
            
            20









**PART
      I. FINANCIAL INFORMATION**





**Item
      1. Financial Statements.**





The
      condensed financial statements of South Texas Oil Company 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. It is therefore suggested that
      these financial statements be read in conjunction with the summary of
      significant accounting policies and notes to financial statements included
      in
      South Texas Oil Company's 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 the financial
      position, results of operations and changes in financial position at June 30,
      2008, and for all periods presented, not misleading, have been made. The results
      of operations for the period ended June 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**
  **June
                  30, 2008**
              
              **December
                  31, 2007****(Unaudited)**
              
              **(Audited)****ASSETS**Current
                  AssetsCash
                  and equivalents
              
              $
              4,877,637
              
              $
              2,186,428Accounts
                  receivable
              
              
              1,541,163
              
              
              4,226,171Prepaid
                  expenses and other
              
              
              120,602
              
              
              4,249Total
                  current assets
              
              
              6,539,402
              
              
              6,416,848Property
                  and Equipment:Oil
                  and gas properties, successful efforts methodProved
                  properties
              
              
              28,293,185
              
              
              23,383,575Unproved
                  properties
              
              
              30,767,908
              
              
              30,757,344Less
                  accumulated depreciation, depletion and amortization
              
              
              (8,242,569
              )
              
              (5,727,612
              )Total
                  oil and gas properties, net
              
              
              50,818,524
              
              
              48,413,307Other
                  property and equipmentDrilling
                  equipment
              
              
              3,212,939
              
              
              3,138,258Vehicles
              
              
              161,664
              
              
              172,608Other
              
              
              167,863
              
              
              119,495Less
                  accumulated depreciation and amortization
              
              
              (209,807
              )
              
              (130,397
              )Total
                  other property and equipment, net
              
              
              3,332,659
              
              
              3,299,964Total
                  property and equipment, net
              
              
              54,151,183
              
              
              51,713,271Debt
                  issuance costs, net of amortization
              
              
              4,026,689
              
              
              5,298,274**Total
                  Assets**
              
              $
              64,717,274
              
              $
              63,428,393**LIABILITIES
                  AND SHAREHOLDER'S EQUITY**Current
                  LiabilitiesAccounts
                  payable, trade
              
              $
              4,107,509
              
              $
              1,564,243Other
                  payables and accrued liabilities
              
              
              1,417,613
              
              
              3,349,067Participant
                  advances received
              
              
              2,437,757
              
              
              120,622Current
                  maturities of notes payable and long-term debt
              
              
              1,257,026
              
              
              1,404,185Current
                  maturities of notes payable and long-term debt, related
                  party
              
              
              9,412
              
              
              17,067Total
                  current liabilities
              
              
              9,229,317
              
              
              6,455,184Noncurrent
                  LiabilitiesNotes
                  payable and long-term debt
              
              
              34,150,008
              
              
              24,986,861Asset
                  retirement obligation
              
              
              838,834
              
              
              801,941Total
                  noncurrent liabilities
              
              
              34,988,842
              
              
              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,16,999,099
                  shares issued, 16,099,099 shares outstanding (2008)and
                  16,482,571 shares issued and outstanding (2007)
              
              
              16,999
              
              
              16,483Additional
                  paid-in capital
              
              
              40,295,333
              
              
              39,921,615Accumulated
                  deficit
              
              
              (18,911,207
              )
              
              (8,753,691
              )Less
                  treasury stock, at cost, 900,000 shares
              
              
              (902,010
              )
              
              -Total
                  stockholders' equity
              
              
              20,499,115
              
              
              31,184,407**Total
                  Liabilities and Stockholders' Equity**
              
              $
              64,717,274
              
              $
              63,428,393






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




2




**SOUTH
        TEXAS OIL COMPANY**
 **Consolidated
        Statements of Operations**
 **(Unaudited)**
  **Three
                  Months**
              
              **Three
                  Months**
              
              **Six
                  Months**
              
              **Six
                  Months****Ended**
              
              **Ended**
              
              **Ended**
              
              **Ended****June
                  30, 2008**
              
              **June
                  30, 2007**
              
              **June
                  30, 2008**
              
              **June
                  30, 2007****Revenues**Oil
                  and gas sales
              
              $
              3,846,610
              
              $
              796,412
              
              $
              5,724,245
              
              $
              891,896Drilling
                  services
              
              
              -
              
              
              522,502
              
              
              -
              
              
              522,501Total
                  revenues
              
              
              3,846,610
              
              
              1,318,914
              
              
              5,724,245
              
              
              1,414,397**Costs
                  and Expenses**Production
                  expenses
              
              
              972,579
              
              
              408,564
              
              
              1,680,843
              
              
              436,773Production
                  taxes
              
              
              118,866
              
              
              2,194
              
              
              203,667
              
              
              4,796Drilling
                  services costs
              
              
              42,011
              
              
              474,344
              
              
              42,011
              
              
              474,344General
                  and administrative expenses
              
              
              1,843,693
              
              
              250,576
              
              
              3,087,758
              
              
              466,315Depreciation,
                  depletion andamortization
              
              
              1,554,667
              
              
              346,965
              
              
              2,639,035
              
              
              417,160Total
                  costs and expenses
              
              
              4,531,816
              
              
              1,482,643
              
              
              7,653,314
              
              
              1,799,388**Loss
                  from Operations**
              
              
              (685,206
              )
              
              (163,729
              )
              
              (1,929,069
              )
              
              (384,991
              )**Other
                  Income (Expense)**Interest
                  income
              
              
              3,572
              
              
              7,162
              
              
              7,946
              
              
              20,184Loss
                  from derivatives
              
              
              (4,306,038
              )
              
              -
              
              
              (5,356,038
              )
              
              -Interest
                  expense
              
              
              (1,171,706
              )
              
              (640,205
              )
              
              (1,608,769
              )
              
              (967,580
              )Debt
                  issuance costs amortization
              
              
              (635,793
              )
              
              -
              
              
              (1,271,586
              )
              
              -Other
                  income (expense), net
              
              
              (6,109,965
              )
              
              (633,043
              )
              
              (8,228,447
              )
              
              (947,396
              )**Net
                  Loss Before Tax**
              
              
              (6,795,171
              )
              
              (796,772
              )
              
              (10,157,516
              )
              
              (1,332,387
              )Income
                  tax expense (benefit)
              
              
              -
              
              
              -
              
              
              -
              
              
              -**Net
                  Loss**
              
              $
              (6,795,171
              )
              $
              (796,772
              )
              $
              (10,157,516
              )
              $
              (1,332,387
              )Loss
                  Per Common Share:Basic
                  and Diluted
              
              $
              (0.42
              )
              $
              (0.07
              )
              $
              (0.63
              )
              $
              (0.10
              )Weighted
                  average number of commonshares
                  outstanding:Basic
                  and Diluted
              
              
              16,017,736
              
              
              11,094,486
              
              
              16,250,153
              
              
              13,316,372


***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
              
              
              516,528
              
              
              516
              
              
              78,487
              
              
              -
              
              
              -
              
              
              79,003Non-cash
                  stock compensation
              
              
              -
              
              
              -
              
              
              295,231
              
              
              -
              
              
              -
              
              
              295,231Shares
                  repurchased into treasury
              
              
              (900,000
              )
              
              -
              
              
              -
              
              
              -
              
              
              (902,010
              )
              
              (902,010
              )Net
                  loss for the six months endedJune
                  30, 2008
              
              
              -
              
              
              -
              
              
              -
              
              
              (10,157,516
              )
              
              
              
              
              (10,157,516
              )**Balance,
                  June 30, 2008**
              
              
              16,099,099
              
              $
              16,999
              
              $
              40,295,333
              
              $
              (18,911,207
              )
              $
              (902,010
              )
              $
              20,499,115


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




4




**SOUTH
        TEXAS OIL COMPANY**


**Consolidated
        Statements of Cash Flows**
 **(Unaudited)**
  **Six
                  Months**
              
              **Six
                  Months****Ended**
              
              **Ended****June
                  30, 2008**
              
              **June
                  30, 2007****Operating
                  Activities**Net
                  loss
              
              $
              (10,157,516
              )
              $
              (1,332,387
              )Adjustments
                  to reconcile net loss tonet
                  cash used in operating activities:Depreciation,
                  depletion and amortization
              
              
              2,639,035
              
              
              417,160Debt
                  issuance costs amortization
              
              
              1,271,585
              
              
              791,800Amortization
                  of debt discount
              
              
              185,272
              
              
              -Compensatory
                  common stock and option issuances
              
              
              -
              
              
              26,125Amortization
                  of deferred stock compensation
              
              
              374,234
              
              
              -Loss
                  on sale of other property and equipment
              
              
              1,162
              
              
              -Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              2,685,008
              
              
              (1,876,637
              )Prepaid
                  expenses and other
              
              
              (116,353
              )
              
              (29,063
              )Accounts
                  payable and accrued liabilities
              
              
              624,030
              
              
              1,235,628Participant
                  advances received
              
              
              2,317,135
              
              
              -Net
                  cash used in operating activities
              
              
              (176,408
              )
              
              (767,374
              )**Investing
                  Activities**Purchases
                  and development of oil and gasproperties
              
              
              (4,920,174
              )
              
              (5,645,841
              )Proceeds
                  from disposition of other property and equipment
              
              
              83,182
              
              
              -Purchase
                  of other property and equipment
              
              
              (216,443
              )
              
              (1,656,956
              )Net
                  cash used in investing activities
              
              
              (5,053,435
              )
              
              (7,302,797
              )**Financing
                  Activities**Proceeds
                  from notes payable and long-term debt
              
              
              12,020,313
              
              
              7,460,177Payments
                  of notes payable and long-term debt
              
              
              (3,189,596
              )
              
              (24,216
              )Payments
                  of related party notes payable
              
              
              (7,655
              )
              
              -Purchase
                  of treasury shares
              
              
              (902,010
              )
              
              -Net
                  cash provided by financing activities
              
              
              7,921,052
              
              
              7,435,961**Net
                  Increase (Decrease) in Cash and Equivalents**
              
              
              2,691,209
              
              
              (634,210
              )Cash
                  and equivalents at beginning of period
              
              
              2,186,428
              
              
              1,273,150**Cash
                  and Equivalents at End of Period**
              
              $
              4,877,637
              
              $
              638,940


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




5




**SOUTH
      TEXAS OIL COMPANY**


**Notes
      to Consolidated Financial Statements**


**Period
      Ended June 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 principles (“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 March 31, 2008, June
        30,
        2007 and March 31, 2007 financial statements to conform to the June 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
      June 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”), additional borrowings from Marquis related to the
      Company’s derivative contract transactions during the second quarter 2008, and
      various notes payable related to certain purchases of oil and gas properties
      and
      other property and equipment.





*Longview/Marquis
      Facility*





As
      of
      June 30, 2008, the Company had a $32.5 million senior credit facility with
      Longview and Marquis, of which $32.4 million was outstanding. Borrowings under
      the facility accrue interest at a rate equal to prime plus 4%, which was equal
      to 12.5% and June 30, 2008. The principal amount of the senior secured notes
      was
      increased during the three months ended June 30, 2008 by $7,500,000 for
      additional amounts borrowed during the period. The aggregate amount of interest
      that was capitalized and added to the principal amount of the senior secured
      notes for the three months ended and as of June 30, 2008, was $859,498.





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 the 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 in its entirety. 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 June 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. Demand has not been made for payment of the remaining notes due to
      Marquis. The interest rate for these notes is 10%.





*Other
      Notes Payable*





The
      total
      of the Company’s other notes payable and long-term debt at June 30, 2008 was
      $2.5 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 June 30, 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 June 30, 2008, and after
      giving consideration to the transactions described above:




As
                of June 30, 20082008
            
            $
            559,1322009
            
            
            1,089,3162010
            
            
            33,000,3432011
            
            
            59,6342012
            
            
            66,204Thereafter
            
            
            641,817Total
            
            $
            35,416,446




7




**SOUTH
        TEXAS OIL COMPANY**
 **Notes
        to Consolidated Financial Statements**
 **Period
        Ended June 30, 2008 (Unaudited)**
 
 **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.
 
 The
        settlement provides 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, which management does not believe the Company
        has
        an obligation to pay. 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 $295,231 for the six months ended June
        30,
        2008.
 
 The
        following table presents stock option activity for the six months ended June
        30,
        2008:
 
 **Weighted****Weighted**
              
              **Average**
              
              **Total****Average**
              
              **Remaining**
              
              **Total****Number**
              
              **Exercise**
              
              **Contractual**
              
              **Intrinsic****Outstanding**
              
              **Price**
              
              **Term
                  in Years**
              
              **Value**Outstanding,
                  December 31, 2007
              
              
              426,000
              
              $
              9.45
              
              
              4.75
              
              $
              2,435,074Forfeited
              
              
              (160,500
              )
              $
              9.45
              
              
              4.75
              
              
              (932,229
              )Outstanding,
                  unvested June 30, 2008
              
              
              265,500
              
              $
              9.45
              
              
              4.25
              
              $
              1,502,845
  8
  **SOUTH
        TEXAS OIL COMPANY**
 **Notes
        to Consolidated Financial Statements**
 **Period
        Ended June 30, 2008 (Unaudited)**
 
 **Note
        4 - Stock Based Compensation** **(** **continued** **)**
 
 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.
 
 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 restricted common
        stock
        were issued to two of the Company’s three new officers. The first tranche will
        be issued to the Chief Executive Officer when stockholder approval and
        ratification is obtained for both his employment agreement and the Equity
        Incentive Compensation Plan. The Company will hold a special meeting of
        stockholders on September 19, 2008 for stockholder approval of both
        contingencies. As of June 30, 2008, no stock options have been issued pursuant
        to the Performance Option Rights described above.
 
 In
        accordance with Statement of Financial Accounting Standards 123, 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 $118,506 for the six months ended June
        30,
        2008.
  The
        following table presents the stock grants awarded on June 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, 2009pending
                  stockholder approval
              
              
              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
                  issuence




9




**SOUTH
      TEXAS OIL COMPANY**


**Notes
      to Consolidated Financial Statements**


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





**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.





On
      April
      30, 2008, the Company wrote 8 call option contracts (8,000 barrels per month)
      and received proceeds of $979,000 which were used to purchase 8 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 8 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
      June 30, 2008, all call options have been covered, or offset. The remaining
      position is an asset derivative of $12,162 as follows:





*Put
      options:*


**Sept.
                30**
            
            **Dec.
                31****2008**
            
            **2008**Volume
            
            
            24,000
            
            
            24,000Average
                Price
            
            $
            85.00
            
            $
            85.00





**Note
      6 - Material Subsequent Event**





On
      July
      1, 2008, subsequent to entering into the June 2008 Amendment described in Note
      4, the Company issued to Longview an additional senior secured note in the
      original principal amount of $1,000,000 pursuant to the Securities Purchase
      Agreement, bringing the aggregate amount of senior secured notes outstanding
      to
      approximately $32.4 million, exclusive of related accrued interest capitalized
      and added to the principal amount of the notes, of the $32.5 million
      available.




10




**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**





The
      Company generates 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% 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 $30 million credit facility
      established 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 and gas reserves and 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.




11




As
      of
      June 30, 2008, we had terminated a contract operating agreement with Sonterra
      Operating, Inc., under which Sonterra was the contract operator for our oil
      and
      gas operations, including managing our daily operations and providing accounting
      services for our operated and non-operated properties. Michael J. Pawelek,
      our
      serving Chairman of the Board who was appointed as our President and Chief
      Executive Officer on June 23, 2008 following the resignation of J. Scott
      Zimmerman from those positions, had been the president and chief executive
      officer of Sonterra prior to joining us, and he is currently remains a director
      of Sonterra. 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 similar to the services
      described above 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 June 30, 2008, Compared with Three Months Ended June 30,
      2007***





*Revenues*





Oil
      and
      gas sales increased 383% from $796,412 to $3,846,610 for the second quarters
      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 $522,501 for the second quarter
      2007, compared to zero for the second quarter 2008. The drilling rigs owned
      by
      the Company were undergoing repair during the first two quarter 2008, and thus
      were not engaged in income generating activities.





*Production
      Expenses*





The
      138%
      increase in production expenses from $408,564 to $972,579 for the second
      quarters 2007 and 2008, respectively, resulted from an increase in the number
      of
      producing wells because of the property acquisitions completed in the second
      and
      third quarters of 2007.





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





General
      and administrative expenses were $1,843,693 for the second quarter 2008 compared
      to $250,576 for the second quarter 2007, an increase of 636%. 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 2007.
      Additionally, legal expenses are increased by approximately $300,000 due to
      costs recognized in the second quarter 2008 related to the settlement of
      litigation described in Note 3 to these financial statements. Also contributing
      to the increase in G&A was the stock compensation expense associated with
      the restricted stock granted to the new employees who joined the Company as
      officers during the second quarter 2008. Finally, G&A for the second quarter
      2008 included contract operating fees paid to a third party entity which
      provided management services to the Company during April through June 2008,
      including oversight of daily operational and administrative matters. Concurrent
      with the Company’s hiring of the new officers at the end of June, this contract
      operating arrangement with the third party was terminated. Certain
      components of the Company’s G&A for the second quarter 2008 are not expected
      to be recurring in nature. These include the significant legal expenses incurred
      in relation to the litigation settled during the period, fees paid for contract
      management services for the Company in the period preceding the addition of
      the
      Company’s new officers and consulting fees paid to third parties for the
      provision of certain professional services that will be performed by the
      Company’s 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 the new officers and other employees at the end of June 2008.
      Certain of the consulting arrangements that are not expected to be renewed
      will
      expire over the succeeding six month period.





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





The
      348%
      increase in DD&A to $1,554,667 for the second quarter 2008 from $346,965 for
      the second quarter 2007 is attributable to the effect of the oil and gas
      property acquisitions that occurred in the second and third quarters of 2007.
      The transactions 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 second quarter 2008 was $1,171,706, compared to
      $640,205 for the second quarter 2007, an increase of 83%. This increase is
      a
      direct result of increase in debt outstanding under the Longview and Marquis
      credit facility described in Note 2 to these financial statements. Borrowings
      under the facility were higher during the second quarter 2008 compared to the
      second quarter of 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 2008 to finance the $4.3 million loss incurred from derivative
      transactions.




12




*Loss
      from Derivatives*





A
      loss
      from derivatives of $4,306,038 was recognized in the second quarter 2008,
      compared to no loss for the same period in 2007. Losses were not recognized
      from
      the Company’s derivative trading activities until the first quarter 2008. The
      agreements which generated the losses during the second quarter 2008 were
      completely offset by additional contracts purchased at the end of the quarter.
      Because of the contracts’ covered status, the Company does not anticipate that
      future additional losses will be realized from the contracts that were
      outstanding during the second quarter 2008. The Company did not engage in
      derivative transactions during the second quarter 2007.





*Net
      Loss*





During
      the second quarter 2008, the Company realized a net loss of $6,795,171, compared
      to a net loss of $796,772 for the second quarter 2007. The increase in net
      loss
      resulted predominately from the $4.3 million in losses realized from derivative
      trading activities. Additionally the $531,501 increase in interest expense
      from
      increased debt contributed to the increased net loss, as did the $1.6 million
      increase in G&A and the $564,015 increase in production expenses. The
      Company is not currently subject to derivative contracts that are expected
      to
      yield additional losses for the year. But continued increases in interest
      expense and production expenses may be realized. The Company intends to continue
      growth and development of its assets and operational
      infrastructure.





***Six
      Months Ended June 30, 2008, Compared with Six Months Ended June 30,
      2007***





*Revenues*





Oil
      and
      gas sales increased 542% from $891,896 to $5,724,245 for the six months ended
      June 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 $522,501 for six months
      ended June 30, 2007, compared to zero for the same period of 2008. The drilling
      rigs owned by the Company were undergoing repair during the first two quarter
      2008, and thus were not engaged in income generating activities.





*Production
      Expenses*





The
      285%
      increase in production expenses from $436,773 to $1,680,843 for the six months
      ended June 30, 2007 and 2008, respectively, resulted from an increase in the
      number of producing wells because of the property acquisitions completed in
      the
      second and third quarters of 2007.





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





General
      and administrative expenses were $3,087,758 for the six months ended June 30,
      2008 compared to $466,315 for the same period in 2007, an increase of 562%.
      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 2007. Additionally, legal expenses increased approximately $300,000
      due
      to costs recognized in the first and second quarters 2008 related to the
      settlement of litigation described in Note 3 to these financial statements.
      Also
      contributing to the increase in G&A was the stock compensation expense
      associated with the restricted stock granted to the new employees who joined
      the
      Company as officers during the second quarter 2008. Finally, G&A for the
      second quarter 2008 included contract operating fees paid to a third party
      entity which provided management services to the Company during April through
      June 2008, including oversight over daily operational and administrative
      matters. Concurrent with the Company’s hiring of the new officers at the end of
      June, this contract operating arrangement with the third party was terminated.
      Certain
      components of the Company’s G&A for the six months ended June 30, 2008 are
      not expected to be recurring in nature. These include the significant legal
      expenses incurred in relation to the litigation settled during the period,
      fees
      paid for contract management services for the Company in the period preceding
      the addition of the Company’s new officers and consulting fees paid to third
      parties for the provision of certain professional services that will be
      performed by the Company’s 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 the new officers and other employees at the end of
      June 2008. Certain of the consulting arrangements that are not expected to
      be
      renewed will expire over the succeeding six month period.




13




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





The
      533%
      increase in DD&A to $2,639,035 for the six months ended June 30, 2008 from
      $417,160 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 transactions 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 six months ended June 30, 2008 was $1,608,796,
      compared to $967,580 for the same period in 2007, an increase of 66%. This
      increase is a direct result of increase in debt outstanding under the Longview
      and Marquis credit facility described in Note 4 to the financial statements.
      Borrowings under the facility were higher during the first and second quarters
      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 2008 to finance the $4.3 million loss incurred from
      derivative transactions.





*Loss
      from Derivatives*





A
      loss
      from derivatives of $5,356,038 was recognized during the six months ended June
      30, 2008, compared to none for the same period in 2007. Losses were not
      recognized from the company’s derivative trading activities until the first
      quarter 2008. The agreements which generated the losses during the second
      quarter 2008 were completely offset by additional contracts purchased at the
      end
      of the quarter. Because of the contracts’ covered status, the Company does not
      anticipate that future additional losses will be realized from the contracts
      that were outstanding during the second quarter 2008. The Company did not engage
      in derivative transactions during the six months ended June 30,
      2007.





*Net
      Loss*





During
      the six months ended June 30, 2008, the Company realized a net loss of
      $10,157,516, compared to a net loss of $1,332,387 for the six months ended
      June
      30, 2007. The increase in net loss resulted predominately from the $5.4 million
      in losses realized from derivative trading activities. Additionally the $641,189
      increase in interest expense from increased debt contributed to the increased
      net loss, as did the $2,621,443 increase in G&A and the $1.2 million
      increase in production expenses. The Company is not currently subject to
      derivative contracts that are expected to yield additional losses for the year.
      But continued increases in interest expense and production expenses may be
      realized. The Company intends to continue growth and development of its assets
      and operational infrastructure.





**Liquidity
      and Financial Condition**





As
      of
      June 30, 2008, we had a working capital deficit of $2,689,915, the primary
      components of which were cash and cash equivalents, accounts receivable and
      prepaid expenses offset by accounts payable, current notes payable and long-term
      debt, and other accrued expenses. 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
      continue to fund our operations from our credit facility and obtain new
      financing, if appropriate. We believe that we have sufficient cash and credit
      facility availability to fund our operations for the succeeding 12 months. Given
      the
      need for, and costs associated with, additional exploration and development
      efforts, however, we will need to raise additional capital to satisfy our
      capital needs over the next 12 months.





On
      December 31, 2007, the Company had assets of $63,428,393 compared to $4,485,891
      on December 31, 2006, an increase of $58,942,502. The Company had a total
      stockholders’ equity of $31,184,407 on December 31, 2007 compared to $3,941,598
      on December 31, 2006, an increase in equity of $27,242,809.





On
      June
      30, 2008, the Company had assets of $64,717,274 compared to $47,667,277 on
      June
      30, 2007, an increase of $17,049,997. The Company had a total stockholders’
equity of $20,499,115 on June 30, 2008 compared to $34,892,592 on June 30,
      2007,
      a decrease in equity of $14,393,477.





Net
      cash
      used in operating activities for the six months ended June 30, 2008 was $176,408
      as compared to net cash used by operating activities of $767,374 for the six
      months ended June 30, 2007.




14




Net
      cash
      used in investing activities for the six months ended June 30, 2008 was
      $5,053,435 as compared to $7,302,797 cash used for investing activities for
      the
      same period in the prior year. The cash used in the first six 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.





**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 currently have not benefited 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, the Company and MF Global Ltd. orally agreed 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 the Company 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 volumes of 150 thousand cubic feet per day (Mcf/d) of
      natural gas to 200 Mcf/d. As part of the contract terms, the Company was
      responsible for $186,000 of capital investment in the project, which we have
      fulfilled and for which the Company 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.





*Amended
      Credit Facility*





As
      of
      June 30, 2008, the Company had a $32.5 million senior credit facility with
      Longview and Marquis, of which $31.4 million was outstanding. Borrowings under
      the facility accrue interest at a rate equal to prime plus 4%, which was equal
      to 12.5% and June 30, 2008. The principal amount of the senior secured notes
      was
      increased during the three months ended June 30, 2008 by $7,500,000 for
      additional amounts borrowed during the period. The aggregate amount of interest
      that was capitalized and added to the principal amount of the senior secured
      notes for the three months ended and as of June 30, 2008, was $859,498.  On
      July 1, 2008, subsequent to entering into the June 2008 Amendment, the Company
      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 to approximately $32.4 million of
      the
      $32.5 million available, leaving approximately $100,000 available for future
      borrowings under the facility.





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 the provided
      Lo ngview
      with first priority security interests in substantially all of the Company’s
      assets.




15




In
      April
      2008, the Company amended and restated the credit facility with Longview and
      Marquis in its entirety. 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.





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.




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





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 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 2,000,000 shares of Company common stock to the
      selling shareholders of Leexus, 1,333,333 shares of which were delivered to
      the
      Jaehnes at closing.





The
      settlement provides 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, which management does not believe the Company
      has
      an obligation to pay. 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, which
      remains payable under the applicable terms and conditions of the Merger
      Agreement. Neither we nor Mr. Zeltwanger, who was a vice president of the
      Company, asserted any claims against each other in the lawsuits, and Mr.
      Zeltwanger owns 666,666 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
      "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.




16




**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 the Company's 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 the Company's financial position or results of
      operations.





In
      December 2007, FASB issued SFAS 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 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 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 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 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 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 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
      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 160 would
      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. The effect of adopting SFAS No. 141R is not expected to
      have
      a significant effect the Company’s financial position or results of
      operations.





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




17




**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
      June
      30, 2008. Based on that evaluation, management concluded that as of June 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.





*Internal
      Controls Over Financial Reporting*




Section
      404 of the Sarbanes-Oxley Act of 2002 requires that our management document
      and
      test our internal control over financial reporting and include in this Quarterly
      Report on Form 10-Q a report on management’s assessment of the
      effectiveness of our internal control over financial reporting, and to delineate
      any material weakness in our internal control. A material weakness is a
      deficiency, or a combination of deficiencies, in internal control over financial
      reporting, such that there is a reasonable possibility that a material
      misstatement of our annual or interim financial statements will not be prevented
      or detected on a timely basis.




Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting, as such term is defined in Rule 13a-15(f)
      of the Exchange Act. Under the supervision and with the participation of our
      management, including our Chief Executive Officer, we conducted an evaluation
      of
      the effectiveness of our internal control over financial reporting based upon
      the framework in Internal Control—Integrated Framework issued by the Committee
      of Sponsoring Organizations of the Treadway Commission (COSO). Based on that
      evaluation, our management concluded that our internal control over financial
      reporting is not effective, as of June 30, 2008. In that regard, we identified
      the certain material weaknesses in our internal control over financial reporting
      as of December 31, 2007 that are detailed on our Form 10-KSB for the year ended
      December 31, 2007, filed with the SEC on April 15, 2008.




18




**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
      this
      settlement, 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, nor 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.**





None.





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





None.





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





None.





19




**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.


*Special
        Meeting of Stockholders*
 
 We
        are
        holding a special meeting of our stockholders on September 19, 2008 for the
        purpose of allowing our stockholders to approve and ratify (i) the Equity
        Incentive Compensation Plan, which has been approved by our board of directors
        and will provide for the issuance of stock grants and incentive stock options
        to
        our officers and employees, and (ii) the terms and conditions of the employment
        agreements for our Chief Executive Officer, Chief Operating Officer and Chief
        Financial Officer, respectively, and the grants of restricted stock and
        incentive stock options to the officers. Proxy materials will be mailed to
        our
        stockholders on or about August 28, 2008.




*Stockholder
      Proposals*




If
      a
      stockholder wishes to present a proposal to be included in our Proxy Statement
      for the 2009 Annual Meeting of Stockholders, the proponent and the proposal
      must
      comply with the proxy proposal submission rules of the SEC. We anticipate
      holding our 2009 Annual Meeting on or about May 1, 2009. One of the requirements
      is that the proposal be received by the Corporate Secretary within a reasonable
      time before we begin to print and send our proxy materials for the Annual
      Meeting. In light of the time required to prepare our proxy materials for
      printing and distribution, the proposals should be sent to us no later than
      December 31, 2008. Proposals we receive after that date will not be included
      in
      the Proxy Statement. We urge stockholders to submit proposals by Certified
      Mail—Return Receipt Requested.





A
      stockholder proposal not included in our proxy statement for the 2009 Annual
      Meeting of Stockholders will be ineligible for presentation at the 2009 Annual
      Meeting of Stockholders unless the stockholder gives timely notice of the
      proposal in writing to the Corporate Secretary of South Texas Oil Company at
      the
      principal executive offices of the Company, as described above. The
      stockholder’s notice must set forth, as to each proposed matter, the following:
      (a) a brief description of the business desired to be brought before the meeting
      and reasons for conducting such business at the meeting; (b) the name and
      address, as they appear on our books, of the stockholder proposing such
      business; (c) the class and number of shares of our securities that are
      beneficially owned by the stockholder; (d) any material interest of the
      stockholder in such business; and (e) any other information that is required
      to
      be provided by such stockholder pursuant to proxy proposal submission rules
      of
      the SEC. The presiding officer of the meeting may refuse to acknowledge any
      matter not made in compliance with the foregoing procedure.





You
      may
      obtain a copy of the current rules for submitting stockholder proposals from
      the
      SEC at:





U.S.
      Securities and Exchange Commission


Division
      of Corporation Finance


100
      F
      Street, N.E.


Washington,
      DC 20549





or
      through the Commission’s Internet web site: www.sec.gov. Request SEC Release
      No. 34-40018, May 21, 1998.





**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)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




20




**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: August
                19, 2008
            By:
            */s/*Michael
                J. PawelekMichael
                J. PawelekPresident
                and Chief Executive Officer (duly authorized
                officer)




21