U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

(Mark One)
[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
     1934

     For the fiscal year ended December 31, 2007

[ ]  TRANSITION REPORT UNDER 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
                  --------------------------------------------
                 (Name of small business issuer in its charter)


             Nevada                                         74-2949620
 ------------------------------                        ------------------
(State or other jurisdiction of                            (IRS Employer
incorporation or organization)                         Identification No.)


       769 Highway 95 N, Bastrop, TX                         78602
   --------------------------------------              	    --------
  (Address of principal executive offices)                 (Zip Code)


                  512-772-2474 (Telephone) 512-263-5046 (Fax)
                  -------------------------------------------
                          (Issuer's telephone number)


Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act:

                          Common Stock, par value $.001
                          -----------------------------
                                (Title of class)

      Check  whether  the  issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange  Act during the past 12 months (or for such
shorter period that the registrant was  required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No [
]

     Check if there is no disclosure of delinquent  filers  in response to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the  best  of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by reference in Part III of this Form 10-KSB  or  any
amendment to this Form 10-KSB. [X]

     The issuer had revenues  of  $5,351,595 for the fiscal year ended December
31, 2007.

      Based on the average of the closing  bid and asked prices of the issuer's
common stock on December 31, 2007, the aggregate  market  value  of  the voting
stock held by non-affiliates of the registrant on that date was $72,029,251.

      As  of  April 11, 2008, the issuer had 16,482,571 shares of common  stock
outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

None

     Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]









                               TABLE OF CONTENTS

                                                                       Page No.

                                     PART I

Item 1.       Description of Business....................................     5

Item 2.       Description of Properties..................................    16

Item 3.       Legal Proceedings..........................................    23

Item 4.       Submission of Matters to a Vote of Security Holders........    23

                                     PART II

Item 5.       Market for Common Equity and Related Stockholder Matters ..    23

Item 6.       Management's Discussion and Analysis of Financial
              Condition or Plan of Operation.............................    27

Item 7.       Financial Statements.......................................   F-1

Item 8.       Changes in and Disagreements with Accountants
              on Accounting and Financial Disclosure.....................    33

Item 8A.      Controls and Procedures....................................    33

Item 8B.      Other Information..........................................    38


                                    PART III

Item 9.       Directors and Executive Officers of the Registrant.........    41

Item 10.      Executive Compensation.....................................    47

Item 11.      Security Ownership of Certain Beneficial Owners
              and Management and Related Stockholder Matters.............    49

Item 12.      Certain Relationships and Related Transactions.............    52

Item 13.      Exhibits and Reports on Form 8-K...........................    53

Item 14.      Principal Accountant Fees and Services.....................    57

Signatures    ...........................................................    57













                                     PART I

Forward-Looking Statements

     References in this annual report to "the Company," "we," "us" or "our" are
intended to refer  to  the  Company.  This  report  contains numerous "forward-
looking  statements" that involve substantial risks and  uncertainties.   These
include,  without  limitation,  statements  relating  to  future  drilling  and
completion  of  wells, well operations, production, prices, costs and expenses,
cash flow, investments,  business  strategies and other plans and objectives of
our management for future operations  and  activities  and  other  such matters
including, but not limited to:

-    Failure to obtain, or a decline in, oil or gas production, or a decline in
     oil or gas prices,
-    Incorporate estimates of required capital expenditures,
-   Increase in the cost of drilling, completion and oil production or other
     costs of production and operations,
-    An inability to meet growth projections, and
-   Other risk factors set forth under "Risk Factors" in this annual report. In
     addition, the words "believe", "may", "could", "when", "estimate",
     "continue", "anticipate", "intend", "expect", and similar expressions, as
     they relate to the Company, our business or our management, are intended
     to identify forward-looking statements.

     These statements are based on our beliefs and the assurances we made using
information  currently  available  to us. Because these statements reflect  our
current  views  concerning  future  events,  these  statements  involve  risks,
uncertainties and assumptions. Our actual  results could differ materially from
the results discussed in the forward-looking  statements. Some, but not all, of
the  factors  that may cause these differences include  those  discussed  below
under the section entitled "Risk Factors" in this annual report. You should not
place undue reliance  on  these  forward-looking  statements.  You  should also
remember that these statements are made only as of the date of this report  and
future events may cause them to be less likely to prove to be true.

Glossary of Terms

      CONDENSATE  refers  to hydrocarbons associated with natural gas which are
liquid under surface conditions but gaseous in a reservoir before extraction.

      DEPLETION is the reduction in petroleum reserves due to production.

      FORMATION is a reference  to  a  group of rocks of the same age extending
over a substantial area of a basin.

      HYDROCARBONS refer to oil, gas, condensate and other petroleum products.

      PARTICIPATION  INTEREST  or  WORKING   INTEREST  is  an  equity  interest
(compared  with  a royalty interest) in an oil and  gas  property  whereby  the
participating interest  holder  pays  its  proportionate  percentage  share  of
development  and  operating  costs  and  receives  a  corresponding net revenue
interest  share  of  the  proceeds  of  hydrocarbon  sales after  deduction  of
royalties due on the gross income.

      PROSPECT  is  a potential hydrocarbon trap which has  been  confirmed  by
geological  and  geophysical   studies  to  the  degree  that  drilling  of  an
exploration well is warranted.

      PROVED RESERVES of crude oil,  natural  gas,  or  natural gas liquids are
estimated  quantities  that  geological and engineering data  demonstrate  with
reasonable certainty to be recoverable  in  future  years from known reservoirs
under existing economic and operating conditions, i.e.,  prices and costs as of
the  date  the estimate is made.  Prices include consideration  of  changes  in
existing  prices   provided  only  by  contractual  arrangements,  but  not  on
escalations based upon future conditions.

      Reservoirs are  considered  proved if economic producibility is supported
by either actual production or conclusive  formation  tests or if core analysis
and/or log interpretation demonstrates economic producibility  with  reasonable
certainty.  The area of a reservoir considered proved includes (1) that portion
delineated  by  drilling  and  defined  by fluid contacts, if any, and (2)  the
immediately adjoining portions not yet drilled that can be reasonably judged as
economically productive on the basis of available  geological  and  engineering
data.  In  the  absence  of data on fluid contacts, the lowest known structural
occurrence of hydrocarbons  controls  the  lower proved limit of the reservoir.
Proved reserves are estimates of hydrocarbons to be recovered from a given data
forward.  They  are expected to be revised as  hydrocarbons  are  produced  and
additional data become available.

      Reserves that  can  produced  economically  through  the  application  of
established   improved   recovery   techniques   are  included  in  the  proved
classification when these qualifications are met:  (1)  successful testing by a
pilot  project,  or  the operation of an installed program in  that  reservoir,
provides support for the  engineering  analysis on which the project or program
was based, and (2) it is reasonably certain the project will proceed. Estimates
of  proved  reserves do not include the following:  (1)  oil  that  may  become
available from  known  reservoirs  but  is  classified  separately as indicated
additional reserves; (2) crude oil, natural gas, and natural  gas  liquids, the
recovery of which is subject to reasonable doubt because of uncertainty  as  to
geology, reservoir characteristics, or economic factors; (3) crude oil, natural
gas,  and  natural  gas liquids, that may occur in undrilled prospects; and (4)
crude oil, natural gas, and natural gas liquids, that may be recovered from oil
shales, coal, gilsonite  and  other  such  sources. PROVED DEVELOPED RESERVES A
subcategory of proved reserves. They are those reserves that can be expected to
be  recovered  through  existing wells with existing  equipment  and  operating
methods. Additional oil and  gas expected to be obtained through application of
fluid injection or other improved  recovery  techniques  for  supplementing the
natural forces and mechanisms of primary recovery are considered developed only
after testing by a pilot project or after the operation of an installed program
has  confirmed  through  production  response that increased recovery  will  be
achieved.

      PROVED UNDEVELOPED RESERVES is a subcategory of proved reserves. They are
reserves that are expected to be recovered from new wells on undrilled acreage,
or from existing wells where a relatively  major  expenditure  is  required for
recompletion. Reserves on undrilled acreage are limited to those drilling units
offsetting  productive  units  that  are reasonably certain of production  when
drilled. Proved reserves for other undrilled  units  are  claimed only where it
can be demonstrated with certainty that there is continuity  of production from
the  existing  productive formation. Estimates for proved undeveloped  reserves
are not attributable to any acreage for which an application of fluid injection
or other improved  recovery  technique  is contemplated, unless such techniques
have  been  proved effective by actual tests  in  the  area  and  in  the  same
reservoir.

      RESERVOIR is a porous and permeable sedimentary rock formation containing
adequate pore space in the rock to provide storage space for oil, gas or water.

      TRAP is a geological structure in which hydrocarbons aggregate to form an
oil or gas field.







ITEM 1.  DESCRIPTION OF BUSINESS.

   (a) Business Development

Historical Corporate Development

      SOUTH TEXAS  OIL  COMPANY was incorporated under the laws of the State of
Nevada on July 31, 2001 as Nutek Oil, Inc., a wholly owned subsidiary of Nutek,
Inc., a Texas corporation.  The  Company's  Articles of Incorporation authorize
50,000,000 shares of Common Stock at $.001 Par  Value  and  5,000,000 preferred
shares  at  $.001  Par  Value.   On  August  1,  2001  and  January  8,   2004,
respectively,  Nutek,  Inc. distributed as a dividend a total of 703,012 shares
of Nutek Oil, Inc. (Nevada)  to  the shareholders of Nutek, Inc.  In a December
24, 2003 Form 8-K, Nutek, Inc. reported  that  it had distributed as a dividend
to its shareholders all of the shares of Nutek Oil's  common  stock  that Nutek
Inc. has an interest in.

      On  April  1, 2005, the Company changed its name from Nutek Oil, Inc.  to
South Texas Oil Company.

      Subsequent to  the  incorporation  of the Company and its "spin off" from
Nutek, Inc. as a wholly owned subsidiary,  the Company assumed control of a non
operating former subsidiary of Nutek, Inc. that  had been incorporated in Texas
as Nutek Oil, Inc in December 1998. On February 10,  2006,  the Nutek Oil, Inc.
incorporated  in  Texas  changed  its  name  to  Southern  Texas  Oil  Company.
Presently,  Southern  Texas  Oil  Company is a wholly owned subsidiary  if  the
Company.

      On April 4, 2007, the Company  formed  Leexus Operating Company, a wholly
owned subsidiary incorporated pursuant to the  laws  of Texas. Leexus Operating
Company  is the surviving entity of a merger between Leexus  Operating  Company
and Leexus  Properties  Corp.,  pursuant to which the Company gained control of
certain leasehold assets in South  Texas. Subsequent to the merger transaction,
Leexus Operating Company changed its name to STO Operating Company.

      On August 15, 2007, the Company  formed  STO  Drilling  Company, a wholly
owned  subsidiary  incorporated  pursuant  to  the laws of Texas. STO  Drilling
Company is responsible for all drilling operations which are conducted directly
by the Company.

      On September 18, 2007, the Company formed  STO  Properties  LLC, a wholly
owned subsidiary of STO Operating Company, as a limited liability company under
the laws of Texas.  STO Properties LLC owns certain oil and gas assets that are
part of the business of the Company.

   (b) Business of Issuer

   The Company.

      The  Company  was formed for the purpose of development and operation  of
oil and gas properties  with  proven  reserves.  Our  strategy  is  to focus in
domestic  areas where major oil and gas producing companies have reduced  their
exploration  efforts  to move offshore and overseas in search of larger reserve
targets. The Company's  initial  development  strategy has been to acquire such
proven fields and attempt to increase production  and  the exploration of other
proven  formations in the same fields. This process involves  consideration  of
the potential  marginal  output of wells measured against production costs that
are  higher  than  the  revenue  from  hydrocarbons  produced.  The  reasonable
possibility exists that such  marginal wells may have a material adverse affect
on earnings. See Item 1 (c) Risk  Factors  Relating to the Oil Industry and Our
Business.

				-6-

<PAGE>


      Our  primary  operational strategy includes  the  operation  of  our  own
projects, giving the  Company  substantial control over drilling and production
costs.

General Discussion of Operations

       On April 1, 2007, we had  an  interest  in 44 oil wells and on April 20,
2007, we entered into an Agreement and Plan of Merger  with  Leexus  Properties
Corp  for a merger with Leexus Operating Company, a newly formed subsidiary  of
the Company,  and  Leexus Properties Corp., which then held certain oil and gas
assets located in South  Texas. We issued 2,000,000 shares of restricted common
stock, valued at $18,980,000  or  $9.49  per share, provided $3 million in cash
and agreed to pay over time $4 million to the shareholders of Leexus Properties
Corp., with 10% interest payable only in the  event of default, in exchange for
their  stock  in  Leexus  Properties  Corp.   Prior  to   the  closing  of  the
transaction, the $4 million was increased to $4,485,241 based on the additional
improvements  made to the properties by Leexus Properties Corp.   Payments  are
made based on the  lesser of 75% of the current months net production or 75% of
the net production from  the  average  of  December  2006,  January  2007,  and
February 2007 production of the assets conveyed.

       On  April  4, 2007, we entered into an equipment purchase agreement with
Texana Drilling, LLC  and  CD Kirchner, an individual and sole member of Texana
Drilling, LLC to purchase an  oil well drilling rig and related equipment for a
total purchase price of $1,065,418.  This  purchase  was  part  of  our plan to
conduct  our own drilling operations in an effort to reduce costs and  increase
the efficiently of its oil and gas exploration process.

       On  June  18,  2007,  we entered into an agreement to acquire for a $1.8
million lump sum payment certain  oil  and  gas interests and certain assets of
Senora Resources, Inc. and James D. Dobos, II  (collectively  the  "Seller") in
south central Texas located in Brazos, Fayette, Gonzales and Lee Counties.

       On  September 17, 2007, we purchased a second drilling rig from  Granite
Energy, Inc. for $1,300,000.  We paid $300,000 in cash, issued 32,258 shares of
restricted stock valued at $300,000 and a two year $700,000 note.

       On September  25,  2007,  the  Company,  through its STO Properties, LLC
subsidiary,  purchased  all  of  the  right, title and  interest  of  Diversity
Petroleum,  LP,  including  interests  in  oil,   gas  and/or  mineral  leases,
overriding royalties, production payments and net profits  interests in many of
the same properties acquired in the merger with Leexus Properties  Corp. Of the
$10  million  consideration,  we paid $7.5 million in cash, issued a promissory
note for $1.5 million, and issued  restricted  shares  of  the Company's common
stock  valued  at $1 million.  The note bears 10% interest, payable  only  upon
default.

      We currently  have  five full time employees and contract the services of
consultants and contractors  in the various areas of expertise as required.  In
addition, we contract for approximately  twenty-one  workers  at  specific well
sites, on an as needed basis.

Operations

      Most  of  the  engineering  and geology for our projects is performed  by
consulting firms, while the actual  drilling, rework and other field operations
are performed on a project basis by contractors  who bid for the work.  This is
the  most cost-effective manner of operation, 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 operational
efficiencies.

       Our Chief Operating Officer is responsible  for  all  day  to  day field
operations, including

				-7-

<PAGE>

       -  overseeing exploratory efforts and drilling activities;

       -  overseeing   land   administration,   land,   regulatory  compliance,
          production  reporting, geoscience, technical, operational  and  other
          duties and responsibilities consistent with the above;

       -  overseeing marketing,  nominations,  gas  control,  and other similar
          services  under  existing  contracts  to  gather, transport,  market,
          store,  or  sell oil and gas production, to manage  i)  the  sale  of
          production  attributable   to   the   Properties;   (ii)   gathering,
          compressing, transporting, drilling, or other necessary services; and
          (iii) gas balancing payments in lieu of in kind volumes, payments  of
          AFEs, cash calls, insurance, taxes and the like;

       -  administering   the  books,  records  and  accounts  associated  with
          ownership of assets,  including  daily  drilling, workover and safety
          incident  reports;  preparing and filing all  appropriate  forms  and
          reports for governmental agencies; and preparing and sending reports,
          change of operator notices  or  designations to third party co-owners
          as necessary

       -  overseeing oil lease repairs to electrics,  maintaining the operation
          of  the  wells,  providing  production  reports to  the  Company  and
          communicating  with  the  oil  haulers  to  collect  production  when
          necessary.

       -  overseeing severance, production and similar  taxes,  lease  rentals,
          shut-in royalties, minimum royalties, payments in lieu of production,
          royalties,  overriding  royalties,  production  payments,  net profit
          payments  and other similar burdens associated with the ownership  of
          the assets

      Our website address is http://www.southtexasoil.com

   (c) Risk Factors Relating to the Oil Industry and Our Business.

1.  The Company must  increase its oil and gas production revenue or this could
adversely affect our oil and gas operations.

      Our long term success  is  ultimately  dependent on our ability to expand
its  revenue  base  through  the  acquisition  and  development   of  producing
properties.  We  have  made significant investments in producing properties  in
Texas. The acquisitions are not indicative of future success.

      If we are not successful  in  reducing costs as a percentage of increased
revenue, the Company may not be able  to generate sufficient cash flows to meet
its obligations as they come due.  This  inability  raises  the  question as to
whether the Company will be able to continue as a going concern.

      All  of  the  drilling  projects and producing property acquisitions  are
subject to the risk of failure and the loss of our investment.  In the event we
are  not  able to increase the revenues  from  our  properties,  or  unable  to
continue to  produce  oil  or  gas  from its properties, our oil and gas leases
could be subject to termination and the  Company  may  lose its rights to these
leases.

2. Prices of oil and gas fluctuate widely based on market  conditions  and  any
extended  decline  in  oil or gas prices, especially oil prices,  may adversely
affect our business, financial  condition  or the results of our operations and
our  ability  to  meet  our  capital  expenditure   obligations  and  financial
commitments.

      Our revenues, operating results, cash flow and  future rate of growth are
very  dependent  upon  prevailing  prices for oil. Historically,  oil  and  gas
markets have been volatile and not predictable, and they are likely to continue
to  be  volatile in the future. The price  we  receive  for  our  oil  and  gas
production heavily influences our revenue, profitability, access to capital and
future rate  of  growth.  Lower  oil  or  gas  prices may not only decrease our
revenues on a per unit basis but also may reduce  the amount of oil that we can
produce economically. A substantial or extended decline  in  oil  or gas prices
may  materially and adversely affect our future business, financial  condition,
results  of  operations,  liquidity  or  ability  to  finance  planned  capital
expenditures.  Prices  for  oil  and  gas  are  subject to wide fluctuations in
response  to relatively minor changes in the supply  of  and  demand  for  oil,
market uncertainty  and  a  variety  of  additional factors that are beyond our
control, including:
				-8-

<PAGE>

        - political conditions in the oil producing and exporting countries;

        - the supply and price of foreign oil;

        - the level of consumer product demand;

        - the price and availability of alternative fuels;

        - extreme weather conditions and acts of force majeure;

        - the  effect  of  federal  and  state  regulation   of  production and
          transportation; and

        - the proximity of our wells to pipelines and their capacity.

3.   Unless  we replace our oil and gas reserves, primarily oil  reserves,  our
reserves and production  will  decline,  which  would adversely affect our cash
flows and income.

      The following oil and gas leases contain proved  developed  producing oil
reserves:  Ann Burns A, Jane Burns B, Jane Burns, G. Davidson, Foster,  Talley,
and  E.  Wright.  The  following  leases  have  not been attributed with proved
developed producing reserves: Ann Burns, Jane Burns C, Jane Burns D, Jane Burns
E, Jane Burns F, Crowther, Hill, Tomblin, and Wright.   Successful  development
and  production  of  those  reserves cannot be assured. Additional drilling  or
workovers will be necessary in  future years both to maintain production levels
and to define the extent and recoverability  of  existing reserves. Our present
oil  wells  may  not  continue to produce at current or  anticipated  rates  of
production, development  drilling  may  not be successful, production of oil or
gas may not commence when expected, there  may  be  unfavorable markets for oil
and produced in the future or that prior production rates cannot be maintained.
If  we  are unable to develop or produce reserves for continued  production  at
current rates, the Company would become unprofitable or cease business.

4.  Drilling  for  and  producing oil and gas is a high risk activity with many
uncertainties that could  adversely affect our business, financial condition or
results of operations.

      Our future success will  depend  on  the  success  of  our  exploitation,
exploration, development and production activities. Our oil and gas exploration
and  production  activities  are subject to numerous risks beyond our  control,
including the risk that drilling  will not result in commercially viable oil or
gas  production.  Our  decisions to purchase,  explore,  develop  or  otherwise
exploit prospects or properties  will  depend in part on the evaluation of data
obtained  through  geophysical and geological  analyses,  production  data  and
engineering studies,  the results of which are often inconclusive or subject to
varying interpretations.  Our  cost of drilling, completing and operating wells
is often uncertain before drilling commences. Overruns in budgeted expenditures
are common industry risks that can  make a particular project uneconomical. The
cost of drilling, completing and operating wells is often uncertain.  Moreover,
drilling may be curtailed, delayed or  canceled  as  a  result of many factors,
including  title  problems,  weather  conditions, shortages of,  or  delays  in
delivery of equipment, as well as the financial  instability of well operators,
major working interest owners and well servicing companies.  Our  wells  may be
shut-in  for  lack  of  a  market  until  a  pipeline  or gathering system with
available capacity is extended into our area. Our oil and  gas  wells  may have
production curtailed until production facilities and delivery arrangements  are
acquired  or developed for them. The affect of one or more of the above factors
could result in the Company becoming unprofitable or ceasing business.

				-9-

<PAGE>

5. Competition  in  the  oil  and  gas industry is intense, which may adversely
affect our ability to compete.

      The oil and gas industry is highly  competitive.  We  compete  with other
companies  for  property  acquisitions  and for opportunities to explore or  to
develop and produce oil and gas. We face strong competition from many companies
and individuals with greater capital, financial  resources and larger technical
staffs. We also face strong competition in procuring  services  from  a limited
pool  of  laborers,  drilling  service  contractors  and equipment vendors. The
affect of one or more of the above factors could result in the Company becoming
unprofitable or ceasing business.

6.   The  Company  may  not carry sufficient insurance, which  could  adversely
affect our business, financial condition and future operations.

      The Company and well  operators maintain general liability insurance, but
it may not cover all future claims.  If  a large claim is successfully asserted
against the Company, it might not be covered  by  insurance,  or  it  might  be
covered  but cause the Company to pay much higher insurance premiums or a large
deductible  or  co-payment.  Furthermore, regardless of the outcome, litigation
involving  operations  or even insurance  companies  disputing  coverage  could
divert management's attentions and energies away from operations. The nature of
the oil and gas business involves a variety of operating hazards such as fires,
explosions, cratering, blow-outs,  adverse  weather  conditions,  pollution and
environmental risks, encountering formations with abnormal pressures,  and,  in
horizontal  wellbores,  the  increased risk of mechanical failure and collapsed
holes, the occurrence of any of which could result in substantial losses to the
Company.

7. Reserve estimates depend on  many  assumptions  that  may  turn  out  to  be
inaccurate.  Any material inaccuracies in these reserve estimates or underlying
assumptions will  materially  affect  the  quantities  and present value of our
reserves.

   Estimating  our  proved  reserves  involves  many  uncertainties,  including
factors  beyond  our  control. There are uncertainties inherent  in  estimating
quantities of proved oil  reserves  since petroleum engineering is not an exact
science. Estimates of commercially recoverable  oil and gas reserves and of the
future net cash flows from them are based upon a number of variable factors and
assumptions including:

   -  historical production from the properties compared  with  production from
      other producing properties;

   -  the effects of regulation by governmental agencies;

   -  future oil and prices; and

   -  future  operating  costs, severance and excise taxes, abandonment  costs,
      development costs, workover costs and remedial costs.

8. Governmental regulation,  environmental  risks  and  taxes  could  adversely
affect our oil and gas operations in the State of Texas or State of Colorado.

      Our  oil  and  gas  operations  in  Texas  and  Colorado  are  subject to
regulation  by federal and state governments, including environmental laws.  To
date, we have  not  had  to  expend  significant  resources in order to satisfy
environmental  laws  and regulations presently in effect.  However,  compliance
costs under any new laws  and regulations that might be enacted could adversely
affect our business and increase  the  costs  of planning, designing, drilling,
installing, operating and abandoning our oil wells.   Additional  matters  that
are, or have been from time to time, subject to governmental regulation include
land tenure, royalties, production rates, spacing, completion procedures, water
injection, utilization, the maximum price at which oil and production could  be
sold,   energy  taxes  and  the  discharge  of  hazardous  materials  into  the
environment.

      The Company is subject to laws and regulations that control the discharge
of materials  into  the  environment  require  removal  and  cleanup in certain
circumstances, require the proper handling and disposal of waste  materials  or
otherwise  relate to the protection of the environment. In operating and owning
petroleum interests,  the  Company  may  be liable for damages and the costs of
removing hydrocarbon spills for which it is  held responsible. Laws relating to
the  protection  of  the  environment have in many  jurisdictions  become  more
stringent in recent years and  may,  in  certain  circumstances,  impose strict
liability, rendering the Company liable for environmental damage without regard
to  negligence  of  fault on the part of the Company. Such laws and regulations
may expose the Company  to  liability  for the conduct of, or conditions caused
by,  others  or  for  acts of the Company that  were  in  compliance  with  all
applicable law at the time  such  acts were performed. The application of these
requirements or the adoption of new  requirements could have a material adverse
effect on the business of the Company.

				-10-

<PAGE>

9.   Properties that we buy may not produce  oil  and  gas  in  the  quantities
projected,  and  we  may  be unable to identify liabilities associated with the
properties or obtain adequate protection from sellers against such liabilities.

      Our business strategy  includes  a  continuing  acquisition  program. The
successful  acquisition  of producing properties requires assessments  of  many
factors, which are inherently  inexact  and  may  be  inaccurate, including the
following:

      -  the amount of recoverable reserves;

      -  future oil prices;

      -  estimates of operating costs;

      -  estimates of future development costs;

      -  estimates of the costs and timing of plugging and abandonment; and

      -  potential environmental and other liabilities.

      Our  assessment will not reveal all existing or potential  problems,  nor
will it permit us to become familiar enough with the properties to assess fully
their capabilities and deficiencies. In the course of our due diligence, we may
not inspect  every  well,  platform  or  pipeline.  Inspections  may not reveal
structural   and   environmental  problems,  such  as  pipeline  corrosion   or
groundwater contamination,  when  they  are  made. We may not be able to obtain
contractual indemnities from the seller for liabilities that it created. We may
be required to assume the risk of the physical  condition  of the properties in
addition to the risk that the properties may not perform in accordance with our
expectations.

10.  Indemnities  may be unenforceable or uncollectible which  could  adversely
affect our business, financial condition and future operations.

				-11-

<PAGE>

      The joint operating  agreements  with  participants  in  an  oil  and gas
venture  generally  provide  for  the  indemnification  of  the  Registrant  as
operator; however, joint operating agreements may not be in force and effect in
some  of  our  properties.  Such  indemnification  may  not be enforceable or a
participant may not be financially able in all circumstances to comply with its
indemnification obligations, or the Registrant may not be  able  to obtain such
indemnification  agreements  in  the  future. The failure to obtain enforceable
indemnification  agreements  or  a participant's  inability  to  indemnify  the
Registrant  may  cause the Registrant  to  assume  all  operating  costs  of  a
property.  Such  a  result  could  adversely  affect  our  business,  financial
condition and future  operations which additionally, could cause the Registrant
to become insolvent.

11. Dilution could have  an  adverse affect on the ownership of the stockholder
in the Registrant.

      The Company may issue more  common  shares  at  prices  determined by the
Board  of  Directors  in  any  private  placements  or offerings of securities,
possibly resulting in dilution of the value of common  shares, and, given there
is  no  preemptive right to purchase common shares, if a stockholder  does  not
purchase  additional  common  shares,  the  percentage  share  ownership of the
stockholder in the Registrant will be reduced.

12. Defeasance of Title could adversely affect our oil and gas operations.

      Title  to  one or more properties of the Company may be lost  due  to  an
omission in the chain  of  title. We do not maintain title insurance, and title
insurance is not readily available  or  commonly  purchased  in the oil and gas
industry.  If  title  to  one or more properties is lost, this could  adversely
affect our business, financial condition and future operations.

13. A Limited Operating History  could adversely affect our business, financial
condition and future operations.

      Because of the limited operating history of the Company, stockholders and
the Company face an increased risk  that  future  acquisitions  of  oil and gas
wells  or  development  may be unsuccessful.  In that event, the Company  might
remain  unprofitable which  would  adversely  affect  our  business,  financial
condition and future operations.

14.  Liquidity

      We  have  incurred  significant  losses  and  negative  cash  flows  from
operations  in the past. For the fiscal years ended December 31, 2006 and 2007,
we  experienced  net  losses  of  $733,435  and  $6,601,224  respectively,  and
cash  flows  from  operations of a negative $283,913  and  positive $1,505,660,
respectively. These  results  have  had a  negative  impact  on  our  financial
condition.

      We believe that an as yet  undetermined amount of additional capital will
be needed in order to fund our planned  growth  and  current operations through
the end of calendar 2008. We plan to seek equity financing  to  provide funding
for  operations, but the current market for equity financing is in  a  weakened
condition  relative  to  recent  years.  If  we  are  not successful in raising
additional  equity  capital  to  generate  sufficient cash flows  to  meet  our
obligations  as  they  come due, we plan to continue  to  reduce  our  overhead
expenses by the reduction of head count and other available measures.  There is
no assurance, however, that these efforts would be successful.

				-12-

<PAGE>

15.  Securities Risk

      The National Association  of  Securities  Dealers,  Inc.  has established
certain standards for the continued listing of a security on the  Nasdaq Global
Market and the Nasdaq Small Cap Market. The standards for continued listing  on
either  market  require, among other things, that the minimum bid price for the
listed securities be at least $1.00 per share.

      If our common  stock  were  to be excluded from Nasdaq, the prices of our
common stock and the ability of holders  to  sell such stock would be adversely
affected,  and  we  would  be  required  to  comply with  the  initial  listing
requirements to be relisted on Nasdaq.

      We do not anticipate the payment of dividends.  We have never declared or
paid cash dividends on our common stock. We currently anticipate  that  we will
retain  all available funds for use in the operation of our business. Thus,  we
do not anticipate  paying  any  cash  dividends  on  our  common  stock  in the
foreseeable future.

   Environmental and Government Compliance and Costs.

      All  oil  and  gas  operations  are  subject  to  extensive environmental
permitting and governmental regulation. All drilling and  reworking  operations
are subject to inspection by local, state and federal regulators. Violation  of
these  requirements or environmentally damaging spills or accidents due to non-
compliance in these areas can result in fines and, depending on the severity of
the negligence  involved, criminal prosecution. We are not currently a party to
any  judicial  or  administrative   proceedings   which  involve  environmental
regulations or requirements, and management believes  that it is in substantial
compliance with all applicable environmental regulations.

GOVERNMENTAL REGULATION

       GENERAL. The Company is subject to federal, state  and  local  laws  and
regulations  governing  environmental  quality  and  pollution  control.  It is
anticipated  that,  absent the occurrence of an extraordinary event, compliance
with existing federal,  state  and local laws, rules and regulations concerning
the protection of the environment  and  human  health  will not have a material
effect upon the Company, capital expenditures, or earnings.   We cannot predict
the  effect  of  additional  regulation or legislation, changes in  enforcement
policy, and governmental or third party private claims for damages for injuries
to property, employees, other  persons  and  the environment resulting from the
Company's operations. Our operations related to  the  exploration,  development
and production of oil and gas are subject to stringent environmental regulation
by state and federal authorities including the Environmental Protection  Agency
("EPA").  This  regulation  has  increased  the  cost  of  planning, designing,
drilling,  operating  and  abandoning wells. Stringent regulatory  requirements
apply to the handling and disposal  of  drilling  and production waste products
and  other  hazardous  substances.  Although we believe  that  compliance  with
environmental  regulations will not have  a  material  adverse  effect  on  its
operations or results  of  these  operations,  risks  of  substantial costs and
liabilities  are  inherent  in  oil  and gas operations, and there  can  be  no
assurance that significant costs and liabilities, including criminal penalties,
will  not  be  incurred.  Moreover, it is  possible  that  other  developments,
including stricter environmental  laws  and regulations, and claims for damages
for injuries to property or persons resulting  from  Company  activities  could
result in substantial costs and liabilities.

       EXPLORATION  AND PRODUCTION. Our operations are subject to various types
of regulation of exploration  and  production  activities at the federal, state
and local levels. Such regulation includes requiring  permits  for the drilling
of wells, maintaining bonding requirements in order to drill or  operate  wells
and  regulating the location of wells, the method of drilling and casing wells,
the surface use and restoration of properties upon which wells are drilled, the
plugging and abandoning of wells and the disposal of fluids used or obtained in
connection with operations. The Company is also subject to various conservation
regulations.  These  include the regulation of the size of drilling and spacing
units and the density  of  wells  which  may  be drilled and the unitization or
pooling  of  oil  and  gas  properties. In addition,  state  conservation  laws
establish  maximum  rates of production  from  oil  and  gas  wells,  generally
prohibit  the venting  or  flaring  of  gas  and  impose  certain  requirements
regarding the  ratability  of production. These regulations limit the amount of
oil and gas that can be produce  from wells and to limit the number of wells or
the locations at which wells can be drill.

				-13-

<PAGE>

      WASTE DISPOSAL. The Company currently owns or leases, and has in the past
owned or leased, numerous properties that for many years have been used for the
exploration and production of oil.  Although  we  have  utilized  operating and
disposal practices that were standard in the industry at the time, hydrocarbons
or  other  wastes  may  have  been  disposed  of  or  released  on or under the
properties owned or leased by the Company or on or under other locations  where
these wastes have been taken for disposal. State and federal laws applicable to
oil and natural gas wastes and properties have gradually become stricter. Under
these  laws,  we  could  be required to remove or remediate previously disposed
wastes (including wastes disposed  of or released by prior owners or operators)
or property contamination (including  groundwater  contamination) or to perform
remedial  plugging operations to prevent future contamination.  Our  operations
and activities  may  generate  wastes,  including  hazardous  wastes,  that are
subject  to  the  federal  Resource  Conservation and Recovery Act ("RCRA") and
comparable state statutes. The EPA and  applicable  state agencies have limited
the  disposal  options for certain hazardous and nonhazardous  wastes  and  are
considering the  adoption  of  stricter  disposal  standards  for  nonhazardous
wastes.  Furthermore,  certain  wastes  that  may  be generated by the oil  and
natural gas operations that are currently exempt from  treatment  as  hazardous
wastes  may  in the future be designated as hazardous wastes, and therefore  be
subject  to considerably  more  rigorous  and  costly  operating  and  disposal
requirements.

       SUPERFUND.  The  Comprehensive  Environmental Response, Compensation and
Liability Act ("CERCLA"), also known as the "Superfund" law, imposes liability,
without regard to fault or the legality  of  the  original  conduct, on certain
classes of persons with respect to the release of a "hazardous  substance" into
the  environment.  These  persons  include  the owner and operator of  a  site,
persons  that  disposed  of  or  arranged for the  disposal  of  the  hazardous
substances found at a site, and prior  owners and operators of the site. CERCLA
also authorizes the EPA and, in some cases,  third  parties  to take actions in
response  to  threats to the public health or the environment and  to  seek  to
recover from responsible  classes  of  persons the costs of such action. In the
course of operations, our operations and  activities  may  generate wastes that
fall  within  CERCLA's  definition  of  "hazardous  substances."  We   may   be
responsible  under  CERCLA  for  all  or part of the costs to clean up sites at
which such wastes have been released. To  date,  however,  neither  the Company
nor,  to  its  knowledge,  its  predecessors  have  been  named  a  potentially
responsible  party  under CERCLA or similar state Superfund laws affecting  the
Leases on which our wells are located.

 AIR EMISSIONS. Our operations  and  activities are subject to local, state and
federal regulations for the control of  emissions  of  air pollution. Legal and
regulatory  requirements  in  this area are increasing, and  there  can  be  no
assurance that significant costs  and  liabilities  will not be incurred in the
future as a result of new regulatory developments. In  particular,  regulations
promulgated  under  the  Clean Air Act Amendments of 1990 may impose additional
compliance requirements that  could  affect  the  operations.  However,  it  is
currently impossible to predict accurately the effect, if any, of the Clean Air
Act  Amendments on our operations and activities. The Company may in the future
become  subject  to  civil or administrative enforcement actions for failure to
comply strictly with air  regulations or permits. These enforcement actions are
generally  resolved  by  payment  of  monetary  fines  and  correction  of  any
identified deficiencies. Alternatively,  regulatory  agencies could require the
Company to forego construction or operation of certain air emission sources.

				-14-

<PAGE>

      OSHA.  In the conduct of its activities the Company  and  its  operations
will be subject  to  the  requirements  of  the federal Occupational Safety and
Health   Act  ("OSHA")  and  comparable  state  statutes.   The   OSHA   hazard
communication standard, the EPA community right-to-know regulations under Title
III of the  federal  Superfund  Amendment  and  Reauthorization Act and similar
state  statutes require us to organize information  about  hazardous  materials
used, released  or produced in its operations. Certain of this information must
be provided to employees,  state  and  local governmental authorities and local
citizens. We are also subject to the requirements  and  reporting  set forth in
OSHA workplace standards.

      OPA  AND  CLEAN WATER ACT. Federal regulations require certain owners  or
operators of facilities  that  store  or  otherwise  handle  oil to prepare and
implement spill prevention control plans, countermeasure plans  and  facilities
response  plans relating to the possible discharge of oil into surface  waters.
The Oil Pollution  Act of 1990 ("OPA") amends certain provisions of the federal
Water Pollution Control  Act  of  1972, commonly referred to as the Clean Water
Act ("CWA"), and other statutes as  they  pertain  to  the  prevention  of  and
response  to  oil  spills  into  navigable  waters.  The OPA subjects owners of
facilities  to  strict  joint  and  several liability for all  containment  and
cleanup costs and certain other damages  arising  from  a spill, including, but
not limited to, the costs of responding to a release of oil  to surface waters.
The  CWA  provides  penalties  for  any  discharges  of  petroleum  product  in
reportable  quantities  and  imposes  substantial  liability  for the costs  of
removing  a spill. State laws for the control of water pollution  also  provide
varying civil and criminal penalties and liabilities in the case of releases of
petroleum  or   its  derivatives  into  surface  waters  or  into  the  ground.
Regulations are currently  being  developed under OPA and state laws concerning
oil  pollution  prevention  and  other   matters  that  may  impose  additional
regulatory burdens on the Company.

      SAFE  DRINKING  WATER  ACT. Our operations  and  activities  involve  the
disposal  of produced saltwater  and  other  nonhazardous  oilfield  wastes  by
reinjection  into  the  subsurface. Under the Safe Drinking Water Act ("SDWA"),
oil  and  gas operators, like  the  Company,  must  obtain  a  permit  for  the
construction  and operation of underground Class II injection wells. To protect
against contamination  of  drinking  water, periodic mechanical integrity tests
are often required to be performed by the well operator.

      TOXIC SUBSTANCES CONTROL ACT. The  Toxic  Substances Control Act ("TSCA")
was enacted to control the adverse effects of newly  manufactured  and existing
chemical  substances.  Under  the  TSCA, the EPA has issued specific rules  and
regulations governing the use, labeling,  maintenance, removal from service and
disposal of PCB items, including transformers  and  capacitors  used by oil and
gas companies. We believe the Company is in compliance with the TSCA  and  that
the  TSCA  will  not  have  a  material  adverse  effect  on our operations and
activities.

       In many cases there is a bond required of operators  to  ensure  that  a
prospective  well  is  properly  plugged  and abandoned when its useful life is
determined to be concluded.

       The Company has posted such a bond in  the  amount  of  $50,000 with the
Texas Rail Road Commission to cover its projects. Such bonds are  additions  to
the cost of our projects. The current bond of $50,000 covers the wells operated
by the Company as required by the Rail Road Commission of Texas under the Texas
Administrative  Code,  Title  16  Economic  Regulation,  Chapter  3 Oil and Gas
Division,  Rule  {section}3.78 Fees, Performance Bonds and Alternate  Forms  of
Financial Security Required To Be Filed.



				-15-

<PAGE>



ITEM 2.  DESCRIPTION OF PROPERTY.

    The corporate  offices of the Company are located in Bastrop, Texas, at 769
Highway 95 N., at a  monthly  rent cost of $7,000, pursuant to a written  lease
that expires December 31, 2010.

Current Oil and Gas Properties.

1.  BIG FOOT AND KYOTE FIELDS.

    Selected assets and leases  of  the Clipper Operating Company were acquired
on February 22, 2000 by the Company's  parent  at  that time, consisting of the
Big Foot and Kyote fields of Frio and Atascosa Counties, Texas

      Big Foot Field: This is a 3,605 acre oil field that the Company has under
lease and is made up of 15 leases consisting of 75 wells.

Big Foot Field, Frio County

Ann Burns            20 ac.
Ann Burns A      689.43 ac.
Burns            637.25 ac.
Davidson            300 ac.
Foster           331.062ac.
Jane Burns           80 ac.
Jane Burns 'A'       20 ac.
Jane Burns 'B'       80 ac.
Jane Burns 'C'       80 ac.
Jane Burns 'D'       80 ac.
Jane Burns 'E'       40 ac.
Jane Burns 'F'       20 ac.
Jane Burns 'G'       20 ac.


Talley              800 ac.

Total acreage in Big Foot field - Frio Co. = 3,605.222 ac.

      Kyote Field: This is a 944 acre oil field that we have under lease and is
made up of 5 leases consisting of 16 wells.  This  property  has  three   wells
that  are  candidates  for re-entry  so  as to workover and recomplete in zones
that  were not produced to their economic limits  and  were prematurely plugged
during   low  oil prices in the 1980s. There are also other possible productive
zones that have  never  been  produced.  One  of  the wells in the field can be
converted into a salt water disposal well.

Kyote Field, Atascosa County

Crowther         197.42 ac.
Hill              87.41 ac.

Tomblin          129.24 ac.
Wright          350.293 ac.

Total acreage in Kyote field - Atascosa Co. = 944.363 ac.

      The production from the fields for 2007 was 1,252   gross  bbls  for  the
Kyote  Field  and  3,401 gross barrels for the Big Foot Field and 2,070 for the
Somerset Field.  The Company currently has an interest in 122  wells; 14 in the
Kyote Field, 64 in the  Big Foot Field and 44 in the Somerset Field. The number
of gross wells The Company operates in each field are:

				-16-

<PAGE>

Big Foot Field, Frio County

Ann Burns          1
Ann Burns A        7
Burns              1
Davidson          11
Foster             8
Jane Burns         1
Jane Burns 'B'     2
Jane Burns 'C'     2
Jane Burns 'D'     1
Jane Burns 'E'     2
Jane Burns 'F'     1
Jane Burns 'G'     1
Talley            23

Total wells in Big Foot field - Frio Co. = 64

Kyote Field, Atascosa County

Crowther         3
Hill             1
Tomblin          2
Wright           8

Total wells in Kyote field - Atascosa County = 14

2.  SOMERSET FIELDS

      On April 1, 2005, we  completed the purchase of the leases, farm-outs and
mineral interests held by JGM  Oil  Investments,  LLC in Atascosa County, Texas
insofar as they cover the following minimum net revenue interests (NRI):

Minimum Net Revenue Interest (NRI)

      A. G.O. Davidson Lease, a minimum of a seventy and 4/10 percent (70.4%)
net revenue interest (NRI).

      B. Oldjamie Lease, a minimum of a sixty five and 925/1000 percent
(65.925%) net revenue interest (NRI).

      C. Diamond Head Lease, a minimum of a fifty seven percent (57%) net
revenue interest (NRI).

      D. Fowler A Lease, a minimum of a fifty eight and 1/8 percent (58.125%)
net revenue interest (NRI).

      E. Fowler C Lease, a minimum of a sixty three percent (63%) net revenue
interest (NRI).

      South  Texas  Oil Company additionally  purchased  all  of  the  personal
property associated with  the  oil wells on the lands described in the Purchase
Agreement attached as Exhibit 10.14  including,  but  not  limited to, all well
equipment, spare equipment and tank batteries. Equipment will be sold "as is".

Somerset Field: This is a 694.1 acre oil field that the Company has under lease
and is made up of 7 leases consisting of 44 wells.

SOMERSET FIELD - ATASCOSA COUNTY

G.O.Davidson        40 ac.
Fowler 'A'         140 ac.
Fowler 'C'         229 ac.
Oldjamie         105.1 ac.
Diamond Head        40 ac.
Diamond Head 'A'   120 ac.
Diamond Head 'B'    20 ac.

Total acreage in Somerset Field - Atascosa Co. = 694.1 ac.

Total acreage in Big Foot, Kyote and Somerset Fields = 5,243.685 ac.

The number of gross wells the Company operates in the Somerset Field are:

				-17-

<PAGE>

SOMERSET FIELD - ATASCOSA COUNTY

G.O. Davidson     2
Fowler 'A'        9
Fowler 'C'       22
Oldjamie          6
Diamond Head      1
Diamond Head 'A'  3
Diamond Head 'B'  1

Total wells Somerset = 44

Total of wells in Big Foot, Kyote and Somerset fields = 122

3.  GIDDINGS / BASTROP FIELDS

       On, June 18, 2007, we agreed to acquire certain  oil  and  gas interests
and certain related assets of Senora Resources, Inc., and James D.  Dobos,  II,
individually in the Giddings properties for $1.8 million in cash.

       On  September  26, 2007, we acquired additional interests in the Bastrop
Field  and  Giddings  properties  from  Diversity  Petroleum,  LP,  effectively
doubling the working interests  held  in most of these properties. We purchased
these working interests for an amount of  $10 million by providing $7.5 million
in cash, issuing a promissory note for $1.5  million,  and  issuing  restricted
shares valued at $1 million.

       As  a  result  of  these  series of acquisitions, we have increased  the
Company's  working  interests  in both  the  Giddings  properties  and  Bastrop
properties to the following:

             Property                   Average WI %       Average NRI%

             Giddings field             95%                75%
             Bastrop 1                  71%                57%
             Bastrop 2                  100%               83%

       Within the Bastrop field  we  make  a  distinction between the Bastrop 1
Field which is comprised of approximately 4,000  acres  and the Bastrop 2 Field
which is comprised of a further 4,500 contiguous acres. The distinction between
Bastrop  1 and Bastrop 2 is made solely due to the different  working  interest
held in each field by the Company.

       The production from the fields for 2007 was 98,239 gross bbls, and gross
342,772 MCF for the Giddings Field and 84,626 gross barrels and 0 gross MCF for
the Bastrop Field.


				-18-

<PAGE>

4. TEXAS GAS PARTNERS PROPERTIES

On August  21,  2007,  effective  as  of  June  1,  2007 we acquired additional
interests  in  properties  located  in  Bastrop, Brazos, Burleson  and  Fayette
Counties from Texas Gas Partners for $253,145, as follows:

Bastrop County

Property/Well Working Interest      Net Revenue Interest      ORRI

Graeco                0.375         0.028125
Maggie                0.15          0.112500                  0.450
Tyra #1               0.175         0.131250

Brazos County

Williams #1           0.150         0.11550
Williams #2           0.150         0.11550

Burlenson County

MacFarland            0.150         0.1170
Rubach/Lydia          0.150         0.1170

Fayette County

Elo#3                 0.700         0.0525                    0.241715
Susie #1              0.1125        0.0871875
Sisie #2              0.1125        0.0871875

Lee County

Krause                0.1125        0.860625
Zoch                  0.1125        0.085500


Development Plan

       Management believes that the Bastrop  properties  have the potential for
approximately 100 wells based on 80 acre spacing with potential production from
both the Austin Chalk and Buda formations in each well.

       Based upon and independent  engineering  report prepared  by  Netherland
Sewall and  Associates, Inc. the proved producing reserves  were  estimated  at
132,000  barrels  from  the  Austin Chalk and 120,000 barrels from the Buda.

       In addition to oil production, some of the wells are producing 1,500 BTU
gas  at  the  rate  of 150mcf to 200mcf  per  day.  South  Texas  Oil  recently
contracted with Duke Energy for the installation of a gas gathering system.


Operational Results

Bastrop Properties.

       Prior to June  1,  2007,  we  were  not  the operator of these wells and
believes  that  through  improvements  in drilling, completion  and  production
techniques, there have been significant improvements in drilling and completion
of the wells since then.

				-19-

<PAGE>

       Well               Date          Date         Producing    Cumulative
                          Drilled       Completed   Zone          Production*

       Bastrop 1, #1      Oct, 2006     Dec, 2006    Buda         53,825 BBls
       Bastrop 1, #2      Feb, 2007     Sep, 2007    Buda          1,331 BBls
       Bastrop 1, #3      Apr, 2007     Oct, 2007    Chalk         3,957 BBls
       Bastrop 1, #4      Jun, 2007     Sep, 2007    Buda          2,263 BBls
       Bastrop 1, #5      Jul, 2007     Oct, 2007    Buda          1,022 BBls
       Bastrop 1, #6      Aug, 2007     Sep, 2007    Buda          1,322 BBls
       Bastrop 1, #7      Sep, 2007     Nov, 2007    Chalk Stimulation 11/05

       Bastrop 2, #1      Oct, 2007     Nov, 2007    Buda  Stimulation 11/08
       Bastrop 2, #2      Nov, 2007     N/A          Buda        Not complete

       *Cumulative production is through October 31, 2007

Specific Well Details

Bastrop 1, #1.

       This first well in the Bastrop field was brought into production in late
December 2006 and was put on choke and initially flowed approximately 200 BOPD.
Cumulative production through October 31,  2007 is approximately 53,825 barrels
of oil.

Bastrop 1, #2

       This well was originally drilled by the  previous operator without using
a blow-out preventer.  When gas was encountered,  the  well  was  not lost, but
damaged  from  the  resulting  heavy mud that had to be used to bring the  well
under control.  On September 28,  2007,  a  high  rate acid frac was conducted.
The  well  was then allowed to flow intermittently through  October  10,  2007.
During this  period  the  well produced 261 barrels of oil and 1,834 barrels of
water.  On October 11, 2007,  the  well  was  put  on  rod  pump  and has since
produced 841 barrels of oil.

Bastrop 1, #3

       This  well  was completed in June 2007, and tested using  10/64,   11/64
and 12/64  chokes for  4-5  hours  each, the well flowed an average of 21  BOPH
(barrels of  oil per hour), the equivalent gross production of 504 BOPD and 188
MCFD. Wellhead pressure was recorded  at  an  average of 900 lbs. This well was
produced  for 17 days in June with cumulative production  through  June  30  at
2,793 barrels of oil.  This was the final well drilled by the previous operator
before South  Texas Oil took over as operator and the drilling of wells in this
field using their  own  rig.  Due to poor well completion, water began entering
through the Edwards and the  Buda  zone  was sealed off. This well was recently
perforated in the Austin Chalk formation and  an  acid  frac was carried out on
October 18, 2007. This well has since produced 1,075 barrels of oil.

Bastrop 1, #4

       This well was the first well drilled by South Texas  Oil  using  our own
drilling  rig.   Drilling was completed June 10, 2007. An acid stimulation  was
performed July 3,  2007,  and  the  well  was  put  on rod pump. Production was
evaluated  and  it  was  decided a further stimulation would  be  conducted  in
collaboration with our engineers  and  Weatherford.   A  second stimulation was
performed on September 24, 2007. The well was flowed back  up  the  casing  and
then put on rod pump.  The well has since produced 1,991 barrels of oil.

Bastrop 1, #5

       The  drilling  of  this  well  was  completed  July 8, 2007.  A frac was
performed  on  October  11,  2007,  after  evaluating several  stimulation  and
completion techniques for this field.  The well  has  produced 1,022 barrels of
oil.

				-20-

<PAGE>

Bastrop 1, #6

       The  drilling  of  this  well  was  completed on August  25,  2007.   On
September 25, 2007, an acid frac job was performed.   The  well  was put on rod
pump and has since produced 1,321 barrels of oil.

Bastrop 1, #7

       The  drilling  of  this  well  was  completed on September 24, 2007.   A
stimulation was performed on October 10, 2007, and on October 11, 2007 the well
started to flow back, chlorides began to increase  and  it  was  determined  to
instead  complete  this  well in the Austin Chalk.  This well was stimulated in
the Austin Chalk on November 5, 2007.

Bastrop 2 Drilling Results.

Bastrop 2, #1

       The  drilling  of this  was  well  completed  mid-October  2007  and  is
scheduled for stimulation November 8, 2007.


Bastrop 2, #2

       This well is currently being drilled with TD expected November 7, 2007.


4.  COLORADO FIELDS (Denver Julesburg Basin)

       We currently have  3  producing  wells  that  were drilled in the Denver
Julesburg  (DJ)  Basin  field which continue to average approximately  40  BOPD
(barrels of oil per day) and 250 MCFD (thousand cubic feet per day).

       The Company currently  owns a 37.5% WI (working interest) in this 20,000
acre field and has determined not  to  exercise  its  option  to  close  on the
purchase of the remaining 37.5% WI available. This decision is in line with our
focus on its South Central Texas properties.


OIL AND GAS OPERATIONS.

      With the exception of the Colorado properties, we serve as operator  with
respect to these properties acquired pursuant to association contracts in which
we have obtained a controlling interest or hold the largest ownership interest.
We  anticipate  that  the  Company  also will participate in the development of
properties operated by third parties  and in some cases may delegate operations
to a third party.

      The Company realized from the sale  of its production for the fiscal year
ended December 31, 2007, $91.25 per barrel of oil. Production was calculated as
3,401 barrels from the Big Foot Field, 1,252  barrels  from the Kyote Field and
2,070 barrels from the Somerset Field, 93,613 barrels and 347,386  MCF  of  gas
from the Giddings Field,84,626 barrels from the Bastrop field and 7,372 barrels
from the Colorado Field and 49,465 MCF  from the  Colorado  Field  for  a total
production of 192,334 barrels and 396,851 MCF in 2007.As of the end of December
31, 2007, we are currently producing  from seventy-two  wells in  the Big Foot,
Kyote and Somerset Fields, from a potential fifty further  wells  that could be
put back  into  production  through advanced stimulation  techniques,on a total
of approximately 5,244 acres as of December 31, 2007.  In the Giddings  area we
are currently producing from 44 wells, on a total of approximately 8,976 acres.
In the Bastrop area we are currently  producing from 10 wells, on  a  total  of
approximately 2,040 acres.

				-21-

<PAGE>

Productive Wells and Acreage

      We conduct  its  oil  and  gas  exploration  and production operations in
southern Texas. At December 31, 2007, we had interests  in 176 wells located in
Texas.

      All of our Producing Properties are leased for an indeterminate number of
years, as long as production is maintained. Therefore, it  is  not  possible to
provide  expiration  dates  of  the  Leases  on which Producing Properties  are
located.

       The following table sets forth, at December  31,  2007,  by  state,  our
producing  wells, Developed Acreage, and Undeveloped Acreage, excluding service
(injection and disposal) wells:


           Productive Wells (1)  Developed Acreage   Undeveloped Acreage (2)
             Gross  Net         Gross       Net      Gross          Net

Texas         37   37          1,350      1,350     3,893.69  3,893.69
              --   --          -----     -----     --------   --------
Totals        37   37          1,350      1,350     3,893.69  3,893.69


      The following  table  sets  forth,  at  December  31, 2006, by state, our
producing wells, Developed Acreage, and Undeveloped Acreage,  excluding service
(injection and disposal) wells:



           Productive Wells (1)  Developed   Acreage   Undeveloped  Acreage (2)
             Gross  Net          Gross       Net       Gross        Net

Texas         37    37           1,350       1,350     3,893.69     3,893.69
              --    --           -----       -----     --------     --------
Totals        37    37           1,350       1,350     3,893.69     3,893.69


       The  following  table  sets forth, at December 31, 2005, by  state,  Our
producing wells, Developed Acreage,  and Undeveloped Acreage, excluding service
(injection and disposal) wells:


           Productive Wells (1)  Developed   Acreage   Undeveloped  Acreage (2)
             Gross  Net          Gross       Net       Gross        Net

Texas         37    37           1,350       1,350     3,893.69     3,893.69
              --    --           -----       -----     --------     --------
Totals        37    37           1,350       1,350     3,893.69     3,893.69



      (1) The wells in Texas are oil wells.
      (2) "Undeveloped Acreage" includes leasehold  interests  on  whic h wells
          have not been drilled or completed to the point that would permit the
          production of commercial quantities of natural gas and oil regardless
          of whether the leasehold interest is classified as containing  proved
          undeveloped reserves.

				-22-

<PAGE>

      The basic terms of the oil and gas leases held by the Company
as of December 31, 2007 are shown in the following table.

                 Gross          Annual                  Lease
                 Acres          Rental (1)              Expiration

      Texas      5,243.685      Held By Production      N/A
                 --------
                 5,243.685

      The basic terms of the oil and gas leases held by the Company
as of December 31, 2006 are shown in the following table.

                 Gross          Annual                  Lease
                 Acres          Rental (1)              Expiration

      Texas      5,243.685      Held By Production      N/A
                 --------
                 5,243.685

      The basic terms of the oil and gas leases held by the Company
as of December 31, 2006 are shown in the following table.

                 Gross          Annual                  Lease
                 Acres          Rental (1)              Expiration

      Texas      5,243.685      Held By Production      N/A
                 --------
                 5,243.685



      (1)  Represents our share of the annual rental payment.

      Leased acres HBP (Held By Production)  remain  in force so long as oil is
produced from the well on the particular lease. Leased acres which are not Held
By Production require annual rental payments to maintain  the  lease  until the
first to occur of the following the expiration of the lease or the time  oil is
produced from one or more wells drilled on the lease acreage.  At the time  oil
is produced from wells drilled on the leased acreage the lease is considered to
be  Held  By  Production.  Although  some  of the leases do not contain  proved
developed  reserves, they are still held by production  so  long  as  there  is
production within   a  two  year period.  All of our leases currently meet this
requirement and no leases are currently at risk of being lost.

Production, Prices and Costs

      The Company is not obligated  to  provide a fixed and determined quantity
of oil or gas in the future.  During the  last  three fiscal years, the Company
has not had, nor does it now have, any long-term  supply  or  similar agreement
with any government or governmental authority.  The following table  sets forth
our  net production of oil and gas, average sales prices and average production
costs during the periods presented:

				-23-

<PAGE>

                                      Year Ended December 31,
                               -------------------------------------
                               2007           2006              2005
                               ----           ----              ----
Production Data:
Production, Net - Oil(Bbls) 121,096          10,010             5,258
Gas (Mcf)                   291,689            0.00              0.00
Average sales price -
Oil (Bbls)                   $91.27          $55.25            $53.03
Gas (Mcf)                    $ 9.05          $ 0.00            $ 0.00

Average production
costs per BOE
 (inclusive of taxes)        $41.71          $54.92            $27.16

Production Taxes             $ 1.62          $ 3.26            $ 2.76

Average production
costs per BOE
(exclusive of taxes)         $40.09          $ 51.66            $24.40

       The  components  of  production costs may vary substantially among wells
depending on the methods of recovery  employed and other factors, but generally
include severance taxes, administrative overhead, maintenance and repair, labor
and utilities.

Gas Operations.

As part of our evaluation of the DJ basin  in  Northeast Colorado, we committed
to a 75% working interest participation in the drilling  of  3  wells. Drilling
was undertaken on the Marilee State #11-16, 5,450 ft; the DOUD #43-5,  5,550 ft
and  the DOUD #11-4, 5,600 ft.  The Marilee State #11-16 showed an 18 foot  pay
zone in  the D and a 6 foot pay zone in the J.  The DOUD #43-5 showed a 42 foot
pay zone in  the D and an 8 foot pay zone in the J.  The DOUD #11-4 showed a 36
foot pay zone  in  the  D  and  a  7 foot pay zone in the J.  These wells where
placed on production in 1st quarter  of  2007 and are currently producing.  The
Company participated in the three producing  wells with a 75% WI in the initial
wells while retaining a 37.5% WI in the remaining  acreage  with  an  option to
increase  to  a 75% WI in the entire leasehold.  South Texas Oil 37.5% elected,
retaining not to exercise the option to acquire an additional 37.5% interest in
the properties.

ITEM 3.  LEGAL PROCEEDINGS.

      The Company  is  from time to time involved in litigation incident to the
conduct of its business,  which  litigation  could  potentially result in large
monetary awards for compensatory and, in some cases, punitive damages.

      The Company is currently the Plaintiff in a lawsuit  filed against Leexus
LLP, Mr. Mark Jaehne and Mr. Bennie Jaehne for failing to adhere  to  the terms
of the Agreement and Plan of Merger signed in April.

      Other  than  mentioned  above,  the Company is not a party to any pending
material legal proceeding. To the knowledge of management, no federal, state or
local governmental agency is presently contemplating any proceeding against the
Company. To the knowledge of management,  no  director,  executive  officer  or
affiliate of the Company or any owner of record or beneficially of more than 5%
of  our  common  stock  is  a  party  adverse  to the Company or has a material
interest adverse to the Company in any proceeding.

				-24-

<PAGE>

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

      No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2007.

                                PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Market Information

      Effective  October  31, 2007, the Company began  trading  on  the  NASDAQ
Global Market under its current  symbol  STXX.  The Company had been trading on
the OTCBB under the same symbol since 2005.

      Period                            High       Low

      Calendar Year 2006

      March 31, 2006                       0.51    0.17
      June 30, 2006                        2.74    0.25
      September 30, 2006                   2.27    1.25
      December 31, 2006                    8.85    1.81

      Calendar Year 2007

      March 31, 2007                     9.77      7.20
      June 30, 2007                      9.84      8.40
      September 30, 2007                 9.74      8.75
      December 31, 2007                 11.02      9.30


      These quotations were obtained from  QuoteMedia  and  NASDAQ.com  do  not
necessarily   reflect  actual  transactions,  retail  mark-ups,  mark-downs  or
commissions. The transactions include inter-dealer transactions.

      These quotations  reflect  inter  dealer  prices, without retail mark-up,
markdown or commission, and may not necessarily represent  actual transactions.
These bid quotations have not been adjusted retroactively by any stock split.




Shareholders of Record and Outstanding Shares

      The authorized capital stock of the Company consists of 50,000,000 shares
of  common  stock with a par value of $.001 and 5,000,000 shares  of  preferred
stock at a par value of $.001.

    Common Stock.  The holders of the common stock are entitled to one vote per
share on each matter  submitted  to  a vote at any meeting of the shareholders.
Shares of common stock do not carry cumulative  voting  rights, and therefore a
majority of the shares of outstanding common stock will be  able  to  elect the
entire  Board of Directors, and if they do so, minority stockholders would  not
be  able to  elect  any  persons  to   the   Board   of  Directors. Our Amended
By-laws  provide that a majority of the issued and outstanding  shares  of  the
Company shall constitute a quorum for shareholders' meeting except with respect
to certain matters for which a greater percentage quorum is required by statute
or our Articles of Incorporation or By-laws.

     Shareholders  of  The  Company  have  no  pre-emptive  rights  to  acquire
additional  shares of common stock or other securities. The common stock is not
subject to redemption and carries no subscription or conversion rights.

    Preferred  Stock.   As of December 31, 2007, there were no preferred shares
issued or outstanding. The Board  of Directors is authorized by the Articles of
Incorporation  to  prescribe by resolution  the  voting  powers,  designations,
preferences, limitations,   restrictions, reactive  rights  and  distinguishing
designations of the preferred shares if issued.

				-25-

<PAGE>

Shares Eligible for Future Sale

      As of December 31, 2007,  the  Company  has  issued  16,482,571 shares of
Common  Stock.  This amount includes 4,299,191 shares of common  stock  of  the
Company that  were  issued  in  settlement of debentures of $450,000 due to the
Longview  Equity  Fund,  LP, $1,700,000   to  the   Longview   Fund   LP,   and
$150,000  to the Longview International Equity Fund, LP in 2006.

      The total issued and outstanding common shares also includes the issuance
of 1,959,113 shares of common  stock  for the exercise of warrants resulting in
proceeds of $1,124,531. These warrant shares  are  related  to  the  debentures
issued above.

      Of  the  16,482,571  shares of common stock issued, 6,875,198 shares  are
restricted shares.

    There are no provisions  in the By-laws or Articles of Incorporation of the
Company which would delay, defer or prevent a change in control of the Company.

    The stock transfer agent for  the Company is Transfer Online, Inc., located
at 317 SW Alder Street, 2nd Floor, Portland, OR  97204. Their telephone and fax
numbers are respectively (503) 227-2950 and (503) 227-6874.

      As of April 8, 2008, the Company  had sixteen million four hundred eighty
two thousand five hundred and seventy-one  (16,482,571) shares of its $.001 par
value common voting stock issued and outstanding which are held by two thousand
four  hundred and sixty-four (2,464) shareholders  of  record.   There  are  no
preferred shares issued and outstanding.

Dividends

      We  have  not  paid  any  dividends  to  date.   In addition, it does not
anticipate paying dividends in the immediate foreseeable  future.  The Board of
Directors of the Company will review its dividend policy from  time  to time to
determine  the  desirability  and  feasibility of paying dividends after giving
consideration to Our earnings, financial  condition,  capital  requirements and
such other factors as the board may deem relevant.

Securities Authorized for Issuance under Equity Compensation Plans

      In March 2004 and October 2007, our  Board of  Directors  adopted a  stock
option  plan which has not been approved by our stockholders.

      The  following  table sets forth information  as  of  December  31,  2007
regarding outstanding options  granted  under the plan to each of the directors
and executive officers.

EQUITY COMPENSATION PLAN INFORMATION

<TABLE>
<CAPTION>
<S>				<C>			<C>

									Number of
									securities
									remaining available
			Number of					for future issuance
			securities to be				under equity
			issued upon		Weighted Average	compensation plane
			excercise of		exercise price of 	(excluding
			outstanding		outstanding		securities
			otions, warrants	options, warrants	reflected in column
			and rights		and rights		(a))
Plan Category		(a)			(b)			(c)
-------------------	-------------------	-----------------	-------------------
Equity compensation	none			n/a			n/a
plans approved by
shareholders

Equity compensation	Options for 651,000	$9.45			0
plans not approved	shares of common
by shareholders		stock

Total			651,000			$9.45			0

</TABLE>

				-26-

<PAGE>


      (a) Individual plans based upon ad hoc issuances of options in 2007.

Recent Sales of Unregistered Securities

During  the  three  months  ended  December  31,  2007,  we  issued  securities
using  the exceptions available  under  the  Securities Act of 1933,  including
unregistered   sales   made  pursuant  to  Section 4(2)  of  the Securities Act
of 1933 in the aggregate  amount  of  981,828  shares  of  our Common Stock, as
follows:

The Company issued 13,098 shares of common stock, valued at $74,159, to royalty
owners of a lease in order to obtain the assignment  of  all  rights, title and
interest in the production payment in lease.

      On October 1, 2007, the Company issued 8,230 shares of  its  Common Stock
to four sellers in connection with the Company's purchase of all rights, titles
and interests of Diversity Petroleum, LP, as part of a total transaction  price
from  various sellers of $10 million by paying $7.5 million in cash, issuing  a
promissory note for $1.5 million and issuing restricted shares.

      On October 24, 2007, the Company issued 97,590 shares of its Common Stock
to three  additional  sellers  in connection with the Company's purchase of all
rights, titles and interests of  Diversity  Petroleum,  LP,  as part of a total
transaction price from various sellers of $10 million by paying $7.5 million in
cash, issuing a promissory note for $1.5 million and issuing restricted shares.

      On  November  20,  2007, the Company issued 93,000 shares of  its  Common
Stock to an escrow account  in  the  name  of Franklin Griffith & Associates as
collateral for the payment obligations for the  $700,000  note  due  to Granite
Energy, Inc. for the purchase of a drilling rig.  The shares are to be returned
to  the  Company  once  the  cash  payment obligations under the note have been
satisfied.

      On December 4, 2007, the Company issued 21,233 shares of its Common Stock
to  a  former  director  of its wholly owned  subsidiary,  Southern  Texas  Oil
Company, in connection with  the  cashless  exercise  options  on  the basis of
25,000 shares at $0.46 per share.

      On  December  31,  2007, the Company issued 191,070 shares of its  Common
Stock  to  Jason Griffith, a  former  executive  officer  of  the  Company,  in
connection with the cashless exercise options on the basis of 100,000 shares at
$0.50 per share and 100,000 options at $0.46.

      On December  31,  2007,  the  Company issued 191,070 shares of its Common
Stock to Edward Shaw, an executive officer  of  the Company, in connection with
the  cashless  exercise options on the basis of 100,000  shares  at  $0.50  per
share and 100,000 options at $0.46.

      On December  31,  2007,  the  Company issued 334,279 shares of its Common
Stock  to  Murray  Conradie,  a  then executive  officer  of  the  Company,  in
connection with the cashless exercise options on the basis of 200,000 shares at
$0.50 per share and 150,000 options at $0.46.

				-27-

<PAGE>

      On December 31, 2007, the Company  issued  32,258  shares  of  its Common
Stock  to  Granite Energy Inc. as part of the purchase price of a drilling  rig
purchased from Granite Energy by the Company.

      These  transaction  were exempt from the registration requirements of the
Securities Act of 1933, as  amended, by virtue of the exemptions provided under
section 4(2) was available since

     -  The  transfer  or issuance did not involve underwriters,  underwriting
        discounts or commissions;
     -  A restriction on transfer legend was placed on all certificates issued;
     -  The   distributions   did    not    involve   general  solicitation  or
        advertising;
        and,
     -  The distributions were made only to insiders,  accredited investors  or
        investors who were sophisticated enough to evaluate  the  risks  of the
        investment.  Each shareholder was given access to all information about
        our business and the opportunity to ask questions and  receive  answers
        about our business from our management prior to making  any  investment
        decision.

Issuer Repurchases

      We did not make any repurchases of our equity securities  during the year
ending December 31, 2007.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

Introduction

      The following discussion and analysis should be read in conjunction  with
our  accompanying  financial  statements  and  the  notes  to  those  financial
statements  included  elsewhere in this Annual Report. The following discussion
includes forward-looking  statements  that  reflect  our  plans,  estimates and
beliefs.  Our  actual  results could differ materially from those discussed  in
these forward-looking statements.  Factors  that  could  cause or contribute to
such  differences  include, but are not limited to, those discussed  below  and
elsewhere in this Annual Report.

Overview

      The  Company  derives  its  revenues  from  its  producing  oil  and  gas
properties, of which the substantial majority are predominantly oil properties.
These properties consist  of  working  interests  in producing oil wells having
proved reserves.  Our capital for investment in producing  oil  properties  has
been provided by the sale of common stock to its shareholders.

Plan of Operation

 (a)  Workovers

 The  Company intends to continue with its current work-overs of existing wells
over the  next  12  months  by  way  of replacing any existing tubing which has
deteriorated  and/or  pumps  that  have failed  on  our  existing  wells.   The
estimated cost for this rework program is between $1,500 to $2,500 per well.

 (b) In-field Drilling

 An  independently  commissioned  engineering  report  has  identified  several
potential  low  risk  offset in-field  drilling  opportunities  on  our  leased
acreage.  We have not yet  made  a determination when the Company will drill in
these fields.

				-28-

<PAGE>

       The costs for the drilling  of  an  in-field  well  are  estimated to be
$250,000 - $300,000 per new well based on the depth of the well.

 (c) Cash Requirements

      We  intend to meet the Company's financial needs for the next  12  months
from funds  derived  from  revenue  and utilizing the recent funding and credit
line received, as well as an equity raise, if necessary.

 (d) Purchase of Additional Leases.

      We will continue to evaluate any  properties  as  the opportunities arise
and the potential of the property to produce oil and gas,  with  a  view toward
adding to our leasehold properties.


 (e) Expected Significant Changes in the Number of Employees

      We  anticipate  increasing  the  number  of  management personnel on  the
corporate and administrative level to improve the efficiency of our operations.
As  noted  previously,  we  currently  coordinate  all  operations,  oil  field
maintenance  and supervision activities using full time employees,  consultants
and contract labor.

Managements Discussion  and  Analysis  of  Financial  Condition  and Results of
Operations

      For the calendar year, ended December 31, 2007, The Company has generated
$5,351,595  in revenues and generated a loss of $6,601,224 for the same period.
This  compares to $553,058 in revenues and a loss of $733,435 for the  calendar
year ended  December  31, 2006.  For the calendar year ended December 31, 2007,
our working capital position  decreased  by  $1,294,125  from  $1,255,789 as of
December 31, 2006 to a negative $38,336 as of December 31, 2007.

      Analysis  of  the calendar year ended December 31, 2007 compared  to  the
calendar year ended December 31, 2006.

      Net loss was $6,601,224  for  the  calendar  year ended December 31, 2007
compared to a loss of $733,435 for the calendar year ended December 31, 2006, a
net loss increase of $5,867,789.

      Total  expenses  increased  to  $9,451,695 for the  calendar  year  ended
December 31, 2007 from $1,214,326 for the  calendar  year  ended  December  31,
2006,  an  increase  of  $8,237,369.  The  increase  was  primarily  due to the
acquisition  of  new properties and the increased production costs, G &  A  and
depreciation, depletion  and  amortization  associated  with the newly acquired
properties during the period.

      Depreciation, depletion, and amortization expense for  the  calendar year
ended  December  31, 2007 was $4,881,975 compared to $400,968 for the  calendar
year ended December 31, 2006, an increase of $4,481,007. The increase primarily
resulted from an increase  in assets  during  2007  due  to acquisitions of new
properties.

      Interest expense for the  calendar  year  ended  December  31,  2007  was
$2,870,365  compared to $159,302 for the calendar year ended December 31, 2006,
an increase of  $2,711,063,  primarily  due  to  increased financing to support
increased operations and acquisitions during the period.

				-29-

<PAGE>

Liquidity and Capital Resources

Liquidity

       Historically our revenues have been insufficient  to  cover  operations.
Consequently,  we  have  relied  in part on private placements of common  stock
securities, bank debt, and loans from  private  investors  to  meet operational
needs and expect to continue to do so in 2008. This evaluation is  based on the
opportunity  posed by the increased price of oil, which the Company intends  to
take advantage  of  by  additional  well workovers planned for the year and the
drilling of new wells. However, additional  funding will be needed to cover the
expenses over the next several months related to the drilling of new oil wells.

      On January 31, 2007, we entered into  a  funding  agreement  that   which
provided  the  Company  a  $15  million  credit  facility,  which  was recently
increased  on  April  1,  2008, to  $30  million.   In  connection  with  these
transactions, we have issued four Senior Notes having an aggregate principal of
$25,877,351.  These  notes are  secured by assignments and mortgages on our oil
and gas producing  properties, and have a maturity date of December 31, 2009, a
current annual interest rate of  12.50% and  a current default rate  of 17.50%.
We have the right to redeem part or all of  principal  at  a  20%  premium.  We
currently, have remaining credit of approximately $4,122,649.

     Given the need for, and costs associated with, additional  exploration and
development efforts, we  may  have  the need  to  raise  addiitonal  capital to
satisfy our capital needs over the next twelve 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.

      All assets are booked at historical cost.

      On December 31, 2007, the  Company  had Net  Drilling  Equipment,  Office
Equipment, and Vehicles of $3,299,964 compared to $52,239 on December 31, 2006,
or an increase  of $3,247,725 which is a result of the purchase of new drilling
equipment, office equipment, and vehicles.

      On December 31, 2007, the Company had net proved and unproved reserves of
$48,413,307 compared to $3,110,523  on  December  31,  2006,  or an increase of
$45,302,784 which is a primarily a result of acquisitions made  during 2007, as
well as additional improvements on current properties.

      For the calendar year ended December 31, 2007, the Company  has decreased
its  working  capital position by $1,294,125 from a positive $1,255,789  as  of
December 31, 2006 to a negative $38,336 as of December 31, 2007.




Capital Resources

       The Company's  capital  resources  are  comprised  primarily  of private
investors, including members of management, who are either existing contacts of
the Registrant's management or who come to the attention of the Company through
brokers, financial institutions and other intermediaries. Our access to capital
is always dependent upon general financial market conditions, especially  those
which  pertain  to  venture  capital situations such as oil and gas exploration
companies. Our capital resources  are  not  anticipated to change materially in
2008.

Material Commitments for Capital Expenditures.

      We have made no material commitments for  future  projects. Each drilling
and/or rework project is funded on a standalone basis and, although the Company
is 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  the  Company  has
received the funds  from  its  working  interest partners and the funds for its
portion of the working interest are committed. The leases the Company holds 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. When 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.

      The Registrant has no agreements with management, investors, shareholders
or anyone else respecting  additional  financing  at  this time. Because of the
nature of the Registrant's business, there are no trends  in  the nature of its
capital resources which could be considered predictable.

				-30-

<PAGE>

Inflation

      Our  results  of  operations  have  not  been  affected by inflation  and
management  does  not  expect  inflation  to  have  a material  impact  on  its
operations in the future.

Off-Balance Sheet Arrangements.

      The Company currently does not have any off-balance sheet arrangements.

CRITICAL ACCOUNTING POLICIES

Oil and Gas Producing Activities

Suspended well cost - Statement of Financial Accounting Standards Statement No.
19  "Financial  Accounting  and  Reporting  by Oil and Gas Producing Companies"
(SFAS 19)  as amended by Staff Position 19-1  "Accounting  for  Suspended  Well
Costs"  allows  suspended well costs to remain capitalized beyond one year from
drilling if certain  specific  criteria  are  met  and  additional  disclosures
provided.

Exploratory  costs,  excluding  the  cost  of  exploratory  wells  and acquired
exploration  rights,  are  charged  to expense as incurred. Drilling costs  for
exploratory wells are capitalized pending the determination of the existence of
proved reserves. If reserves are not  found,  the drilling costs are charged to
operating expense. Oil and gas lease acquisition  costs  are  capitalized  when
incurred.

Unproved   properties  with  individually  significant  acquisition  costs  are
assessed quarterly on a property-by-property basis, and any impairment in value
is  recognized.  Unproved  properties  with  acquisition  costs  that  are  not
individually  significant  are  aggregated,  and  the  portion  of  such  costs
estimated  to  be  nonproductive,  based on historical experience, is amortized
over the average holding period. If  the  unproved properties are determined to
be productive, the appropriate related costs  are transferred to proved oil and
gas properties.

Development  costs  incurred  to drill and equip development  wells,  including
unsuccessful development wells, are capitalized.


Revenue Recognition

Oil, gas and natural gas liquids  revenues are recognized when the products are
sold to a purchaser at a fixed or determinable price, delivery has occurred and
title has transferred, and collection  of the revenue is reasonably assured. At
times  the  Company  may sell more or less  than  our  entitled  share  of  gas
production. When this  happens,  the  Company  uses  the  entitlement method of
accounting  for  gas  sales, based on our net revenue interest  in  production.
Accordingly, revenue is  deferred  for  gas  deliveries  in  excess  of our net
revenue  interest,  while  revenue  is  accrued  for  the  undelivered volumes.
Production  imbalances and related values at December 31, 2007  and  2006  were
insignificant.

Accounts Receivable

Accounts receivable are stated at the amount management expects to collect from
outstanding balances.   Management  provides for probable uncollectible amounts
through a charge to earnings and a credit to a valuation allowance based on its
assessment of the current status of individual  accounts.  Balances outstanding
after management has used reasonable collection efforts are written off through
a charge to the valuation allowance and a credit to trade accounts  receivable.
Changes  in  the  valuation  allowance  have not been material to the financial
statements  and  at  December  31,  2007  and  2006,  the  Company's  financial
statements do not include an allowance for doubtful accounts because management
believes that no allowance is required at those dates. Accounts receivable that
are greater than 90 days past due at December 31,  2007  and  2006 were $45,616
and $-0-, respectively.

Stock Based Compensation

Effective  January 1,  2006,  the Company adopted SFAS No. 123 (Revised  2004),
Share-Based Payment, which requires  that  compensation  related  to all stock-
based   awards,  including  stock  options,  be  recognized  in  the  financial
statements  based  on  their  estimated  grant-date  fair  value.  The  Company
previously  recorded  stock compensation pursuant to the intrinsic value method
under  APB  Opinion  No. 25,  whereby  compensation  was  recorded  related  to
performance  share and  unrestricted  share  awards  and  no  compensation  was
recognized for  most  stock  option  awards.  The Company is using the modified
prospective application method of adopting SFAS No. 123R, whereby the estimated
fair  value  of  unvested stock awards granted prior  to  January 1,  2006  was
recognized as compensation  expense in periods subsequent to December 31, 2005,
based on the same valuation method  used  in  the  Company's  prior  pro  forma
disclosures.  The  Company  estimates expected forfeitures, as required by SFAS
No. 123R, and recognizes compensation expense only for those awards expected to
vest. Compensation expense is  amortized  over  the  estimated  service period,
which is the shorter of the award's time vesting period or the derived  service
period  as  implied by any accelerated vesting provisions when the common stock
price reaches specified levels. All compensation must be recognized by the time
the award vests.  The cumulative effect of initially adopting SFAS No. 123R was
immaterial.



Recent Accounting Pronouncements

      In September 2006, Statement of Financial Accounting Standards (SFAS) No.
157, Fair Value Measurements. was issued. SFAS No. 157  proVides  guidance  for
using  fair  value to measure assets and liabilities. It applies whenever other
standards require  or pennit 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,  SFAS  No.  159,  The Fair Value Option for Financial
Assets and Financial Liabilities-Including an  Amendment  Df FASB Statement No.
115,  was  issued.  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, the FASB issued SFAS 160,  "Noncontrolling 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
noncontrolling interests in subsidiaries  and  to  make  certain  consolidation
procedures  consistent  with  the  requirements  of  SFAS  141R.  It defines  a
noncontrolling  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  noncontrolling   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 noncontrolling
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.

				-31-

<PAGE>

      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

Safe Harbor

      The discussions of the results of operations and financial  condition  of
the  Company  should  be  read in conjunction with the financial statements and
notes pertaining to them that  appear elsewhere in this Form 10-KSB. Statements
made in this Form 10-KSB that are not historical or current facts are "forward-
looking statements" made pursuant  to the safe harbor provisions of Section 27A
of the Securities Act of 1933 (the "Act")  and  Section  21E  of the Securities
Exchange Act of 1934. These statements often can be identified  by  the  use of
terms  such  as  "may,"  "will," "expect," "believe," "anticipate," "estimate,"
"approximate" or "continue,"  or the negative thereof. The Company intends that
such forward-looking statements  be  subject  to  the  safe  harbors  for  such
statements.  The  Company wishes to caution readers not to place undue reliance
on any such forward-looking  statements,  which speak only as of the date made.
Any forward-looking statements represent management's  best judgment as to what
may  occur in the future. However, forward-looking statements  are  subject  to
risks,  uncertainties  and  important factors beyond the control of the Company
that could cause actual results and events to differ materially from historical
results of operations and events  and those presently anticipated or projected.
These  factors  include adverse economic  conditions,  the  highly  speculative
nature of oil and  gas  exploration  and development, entry of new and stronger
competitors in our operating area, inadequate capital and unexpected costs. The
Company disclaims any obligation subsequently  to  revise  any  forward-looking
statements to reflect events or circumstances after the date of such  statement
or to reflect the occurrence of anticipated or unanticipated events.



				-32-

<PAGE>



                  SOUTH TEXAS OIL COMPANY
                    FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                 DECEMBER 31, 2007 AND 2006

<TABLE>
<CAPTION>
<S>			<C>			<C>


                  SOUTH TEXAS OIL COMPANY
                      TABLE OF CONTENTS
                 DECEMBER 31, 2007 AND 2006


                                                                            PAGES

Report of Independent Registered Public Accounting Firm                       F-2

Consolidated Financial Statements

       Consolidated Balance Sheets at December 31, 2007 and 2006              F-3

       Consolidated Statements of Operations for the years ended
                    December 31, 2007 and 2006                                F-4

       Consolidated Statement of Changes in Stockholders' Equity for the
                   years ended December 31, 2007 and 2006                     F-5

       Consolidated Statements of Cash Flows for the years ended
                   December 31, 2007 and 2006                                 F-7

Notes to Consolidated Financial Statements                                    F-8



</TABLE>
                                         F-1
<PAGE>


            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
South Texas Oil Company

We have audited the accompanying consolidated balance sheets of South Texas Oil
Company  and  subsidiaries,  as  of December 31, 2007 and 2006, and the related
consolidated statements of operations,  changes  in  stockholders'  equity, and
cash  flows  for the years then ended.  These consolidated financial statements
are the responsibility  of  the   Company's   management. Our responsibility is
to express an opinion on these  consolidated  financial statements based on our
audits.

We  conducted our audits in accordance with standards  of  the  Public  Company
Accounting Oversight Board (United States).  Those standards  require  that  we
plan  and  perform  the  audit to obtain reasonable assurance about whether the
financial  statements are free  of  material  misstatement.  The Company is not
required to  have, nor  were  we  engaged  to perform, an audit of its internal
control over financial reporting. Our audit included  consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose  of expressing an
opinion  on the effectiveness of the Company's internal control over  financial
reporting.   Accordingly,  we  express  no  such  opinion.  An  audit  includes
examining, on  a test basis, evidence supporting the amounts and disclosures in
the financial statements.    An   audit  also includes assessing the accounting
principles  used and significant estimates  made  by  management,  as  well  as
evaluating the  overall  financial statement presentation.  We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the  financial  position  of  South Texas Oil
Company and subsidiaries, as of December 31, 2007 and 2006, and the  results of
their  operations  and  their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.


					CAUSEY DEMGEN & MOORE INC.

Denver, Colorado
April 14, 2008




                                      F-2


<PAGE>



<TABLE>
<CAPTION>
<S>					<C>					<C>

                                         SOUTH TEXAS OIL COMPANY
                                       CONSOLIDATED BALANCE SHEETS
                                     AS OF DECEMBER 31, 2007 AND 2006
						AUDITED

                                                                                    2007            2006
										------------	------------
                                     ASSETS

Current assets:
   Cash and cash equivalents                                                    $  2,186,428 	$  1,273,150
   Trade accounts receivables                                                      4,226,171          40,230
   Prepaid expenses and other                                                          4,249           9,749
										------------	------------
     Total current assets                                                          6,416,848       1,323,129
										------------	------------
Property and equipment:
   Oil and gas properties, at cost, based on successful efforts method:
    Proved properties                                                             23,383,575       2,892,358
    Unproved properties                                                           30,757,344       1,238,950
    Less accumulated depreciation, depletion and amortization                     (5,727,612)     (1,020,785)
										------------	------------
     Total oil and gas properties, net                              		  48,413.307       3,110,523
										------------	------------
   Other property and equipment
    Drilling equipment                                                             3,138,258               -
    Vehicles                                                                         172,608          22,753
    Other                                                                            119,495          31,433
    Less accumulated depreciation and amortization.                                 (130,397)         (1,947)
										------------	------------
     Total other property and equipment, net.                        		   3,299,964          52,239
										------------	------------
     Total property and equipment                      				  51,713.271       3,162,762
										------------	------------
Debt issuance costs                                                                5,298,274               -
										------------	------------
     Total assets            							$ 63,428,393 	$  4,485,891
										============	============
                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Current maturities of notes payable and long-term debt                       $  1,404,185 	$	   -
   Current maturities of long-term debt, related party                                17,067          21,805
   Accounts payable                                                                1,564,243          17,252
   Accrued liabilities                                                             3,469,689          28,283
										------------	------------
     Total current liabilities                                                     6,455,184          67,340

Notes payable and long-term debt                                                  24,986,861               -
Long-term debt, related party                                                              -          46,176
Asset retirement obligation                                                          801,941         430,777
										------------	------------
     Total liabilities                                              		  32,243,986         544,293

Commitments and contingencies

Stockholders' equity:
   Preferred stock;  $0.001 par value, 5,000,000
     shares authorized, none issued or outstanding                                        -               -
   Common stock: $0.001 par value, 50,000,000
     shares authorized, 16,482,571 and 13,444,743                   		      16,483          13,445
     shares issued and outstanding at December 31,
     2007 and 2006, respectively
   Additional paid-in capital                                                     39,921,615      13,580,620
   Subscription receivable                                                                 -      (7,500,000)
   Accumulated deficit                                                            (8,753,691)     (2,152,467)
										------------	------------
     Total stockholders' equity                                     		  31,184,407       3,941,598
										------------	------------
     Total liabilities and stockholders' equity    				$ 63,428,393 	$  4,485,891
										============	============


               The accompanying notes are an integral of these consolidated financial statements


                                             F-3
</TABLE>


<PAGE>


<TABLE>
<CAPTION>

<S>					<C>				<C>

                              SOUTH TEXAS OIL COMPANY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
				     AUDITED


                                                            2007            2006
							------------	------------
Revenue
       Oil and gas sales                              	$  5,351,595	$    553,058
       Drilling services                                     341,312               -
							------------	------------
         Total revenue                                     5,692,907         553,058
							------------	------------
Cost and expenses:
       Production expenses                                 1,850,716         123,222
       Drilling costs                                        281,051               -
       Work-over expenses				      70,375	     213,268
       General and administrative expenses                 2,092,243         444,262
       Depreciation, depletion and amortization            4,881,975         400,968
       Production and other taxes                            275,335          32,606
							------------	------------
         Total costs and expenses                          9,451,695       1,214,326
							------------	------------
          Loss from operations                            (3,758,788)       (661,268)
							------------	------------
Other income and expenses:
       Interest income                                        27,929          12,222
       Interest expense                                   (2,870,365)       (159,302)
       Gain from debt forgiveness                                  -          74,913
							------------	------------
         Total other income and expenses, net             (2,842,436)        (72,167)
							------------	------------
          Net loss                          		$ (6,601,224)	$   (733,435)
							============	============
Net loss per common share - basic and diluted           $      (0.45)   $      (0.09)
							============	============
Weighted average number of common shares
   outstanding - basic and diluted            		  14,679,659       8,461,420
							============	============


  The accompanying notes are an integral of these consolidated financial statements

                                             F-4

</TABLE>


<PAGE>




<TABLE>
<CAPTION>
<S>					<C>				<C>



						SOUTH TEXAS OIL COMPANY
				CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
				      FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
							AUDITED


                                   COMMON STOCK		ADDITIONAL
                         	--------------------    PAID-IN    	SUBSCRIPTION   	ACCUMULATED
                     		  SHARES     AMOUNT     CAPITAL      	RECEIVABLE  	DEFICIT        TOTAL
				----------   -------	-----------	------------	-----------    ----------
Balance at December
31, 2005                   	 4,893,677   $ 4,894    $ 2,400,280      $	   -    $(1,419,032)   $  986,142

Debt conversion			 4,299,191     4,299      2,531,279            	   -          	  -     2,535,578

Warrant exercises		 1,959,113     1,959      1,122,572                -           	  -     1,124,531

Cancellation of
unissued shares             	   (16,770)      (17)        (3,038)               -           	  -        (3,055)

Adjustment of shares issued
for debt settlement		  (115,868)     (116)           116                -           	  -             -

Deposit of common stock for
purchase of 37.5% working
interest in certain Colorado
oil and gas leases		 2,419,355     2,419      7,497,581   	  (7,500,000)             -             -

Common stock issued
for services			     6,045         7         31,830                -              -        31,837

Net loss				 -         -              -                -       (733,435)     (733,435)
				----------   -------	-----------	------------	-----------    ----------
Balance at December
31, 2006                        13,444,743   $13,445     13,580,620       (7,500,000)    (2,152,467)    3,941,598
				==========   =======	===========	============	===========    ==========




                         The accompanying notes are an integral of these consolidated financial statements

                                                                F-5

</TABLE>

<PAGE>

<TABLE>
<CAPTION>
<S>					<C>				<C>



						SOUTH TEXAS OIL COMPANY
				CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
				      FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006


                                   COMMON STOCK		ADDITIONAL
                         	--------------------    PAID-IN    	SUBSCRIPTION   	ACCUMULATED
                     		  SHARES     AMOUNT     CAPITAL      	RECEIVABLE  	DEFICIT        TOTAL
				----------   -------	-----------	------------	-----------    -----------

Balance at December 31, 2006	13,444,743   $13,445    $13,580,620  	$ (7,500,000)   $(2,152,467)   $ 3,941,598

Common stock issued in
payment of royalties                13,098        13         74,146                -               -         74,159

Cashless exercise of
stock options			   787,652       788           (788)               -               -              -

Warrants issued in
connection with loan agreement		 -         -      5,700,945	           - 	           -      5,700,945

Vehicle contributed by
related party				 -         -          2,151                -               -          2,151

Issuance of common
stock for asset acquisitions:
Colorado leases				 -         -              -        7,500,000               -      7,500,000
   Leexus Operating Company      2,000,000     2,000     18,978,000                -               -	 18,980,000
   Oil and gas interests of
     Diversity Petroleum, LLP      105,820       106        999,894                -               -      1,000,000
   Drilling rig from Granite
     Energy, Inc.		    32,258        32        299,968                -               -        300,000
   Issued to escrow for rig
     purchase			    93,000        93            (93)               -               -              -

Common stock issued for
services			     6,000         6         56,994                -               -         57,000

Stock options issued
for services				 -         -        229,778                -               -        229,778

Net loss				 -         -              -                -     (6,601,224)     (6,601,224)
				----------   -------	-----------	------------	-----------     -----------
Balance at December 31, 2007	16,482,571   $16,483    $39,921,615	$          -	$(8,753,691)    $31,184,407
				==========   =======	===========	============	===========     ===========


                           The accompanying notes are an integral of these consolidated financial statements

                                                                  F-6
</TABLE>




<PAGE>




<TABLE>
<CAPTION>

<S>					<C>				<C>

                                    SOUTH TEXAS OIL COMPANY
                             CONSOLIDATED STATEMENTS OF CASH FLOWS
                        FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
					  AUDITED


                                                                     2007                   2006
								-------------		-----------
Cash flows from operating activities:
    Net loss                                                    $  (6,601,224)		$  (733,435)
    Adjustments to reconcile net loss to net cash
      provided (used) by operating activities:
    Gain on debt forgiveness                                                -               (12,222)
                                                                                                  -
    Depreciation, depletion and amortization                        4,881,975               400,968
    Amortization of deferred loan costs                             1,902,670			  -
    Amortization of debt discount                                     205,345
    Compensatory common stock and option issuances                          -                28,782

    Common stock issued for royalties                                  74,159			  -
    Amortization of deferred compensation                             286,778                     -
    Changes in operating assets and liabilities:
      Trade accounts receivables                                   (4,185,941)              (13,560)
      Prepaid expenses and other                                        5,500                (5,248)
      Accounts payable                                              1,546,991                 4,226
      Accrued liabilities                                           3,389,407                46,576
								-------------		-----------
   Net cash provided (used) by operating activities                 1,505,660              (283,913)
								-------------		-----------
Cash flows from investing activities:
    Purchase of property, plant and equipment                     (22,145,848)           (1,332,713)
								-------------		-----------
   Net cash used by investing activities               		  (22,145,848)           (1,332,713)
								-------------		-----------
Cash flows from financing activities:
    Proceeds from notes payable and long-term debt                 21,877,350			  -
    Payments of notes payable and long-term debt                     (272,970)              (70,000)
    Payments of related party notes payable                           (50,914)              (39,617)
    Proceeds from sale of common stock                                      -             1,124,531
								-------------		-----------
   Net cash provided by financing activities              	   21,553,466             1,014,914
								-------------		-----------
Net increase (decrease) in cash and cash equivalents                  913,278              (601,712)

Cash and cash equivalents at beginning of year                      1,273,150             1,874,862
								-------------		-----------
Cash and cash equivalents at end of year                        $   2,186,428 		$ 1,273,150
								=============		===========

Supplemental disclosure of cash flow information

    Cash paid for interest expense                              $     207,361 		$    10,500

Non-cash investing and financing activities

    Purchase of property, plant and equipment
	with directly related debt        			$   4,581,321 		$	  -
    Purchase of property, plant and equipment
	with common stock                           		   27,780,000                     -

    Common stock issued to convert debt to
	stockholders' equity						    -             2,535,578

    Increase in property, plant and equipment
	for asset retirement obligation                		      424,165			  -
    Warrants issued for debt origination                            5,700,945                     -

    Vehicle contributed by a related party                              2,151			  -

    Overriding royalty granted for debt origination                 1,500,000			  -


       The accompanying notes are an integral of these consolidated financial statements

                                          	-7-
</TABLE>

<PAGE>

			   SOUTH TEXAS OIL COMPANY
			NOTES TO FINANCIAL STATEMENTS


NOTE 1 - HISTORY AND ORGANIZATION OF THE COMPANY

       SOUTH  TEXAS OIL COMPANY was incorporated under the laws of the State of
Nevada on July 31, 2001 as Nutek Oil, Inc., a wholly owned subsidiary of Nutek,
Inc., a Texas corporation.  The  Company's  Articles of Incorporation authorize
50,000,000 shares of Common Stock at $.001 Par  Value  and  5,000,000 preferred
shares  at  $.001  Par  Value.   On  August  1,  2001  and  January  8,   2004,
respectively,  Nutek,  Inc. distributed as a dividend a total of 703,012 shares
of Nutek Oil, Inc. (Nevada)  to  the shareholders of Nutek, Inc.  In a December
24, 2003 Form 8-K, Nutek, Inc. reported  that  it had distributed as a dividend
to its shareholders all of the shares of Nutek Oil's  common  stock  that Nutek
Inc. has an interest in.

       On April 1, 2005, the Company changed its name from Nutek Oil,  Inc.  to
South Texas Oil Company.

       Subsequent  to  the incorporation of the Company and its "spin off" from
Nutek, Inc. as a wholly  owned subsidiary, the Company assumed control of a non
operating former subsidiary  of Nutek, Inc. that had been incorporated in Texas
as Nutek Oil, Inc in December  1998.  On February 10, 2006, the Nutek Oil, Inc.
incorporated  in  Texas  changed  its  name  to  Southern  Texas  Oil  Company.
Presently, Southern Texas Oil Company is  a  wholly  owned  subsidiary  of  the
Company.

       On  April 4, 2007, the Company formed Leexus Operating Company, a wholly
owned subsidiary  incorporated  pursuant to the laws of Texas. Leexus Operating
Company is the surviving entity of  a  merger  between Leexus Operating Company
and Leexus Properties Corp., pursuant to which the  Company  gained  control of
certain  leasehold assets in South Texas. Subsequent to the merger transaction,
Leexus Operating Company changed its name to STO Operating Company.

       On  August  15,  2007, the Company formed STO Drilling Company, a wholly
owned subsidiary incorporated  pursuant  to  the  laws  of  Texas. STO Drilling
Company is responsible for all drilling operations which are conducted directly
by the Company.

       On September 18, 2007, the Company formed STO Properties  LLC,  a wholly
owned subsidiary of STO Operating Company, as a limited liability company under
the laws of Texas.  STO Properties LLC owns certain oil and gas assets that are
part of the business of the Company.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The attached  consolidated  financial  statements  include  the accounts of the
Company  and  its wholly owned subsidiaries, collectively referred  to  as  the
"Company".   All significant inter-company transactions have been eliminated in
consolidation.

USE OF ESTIMATES

The preparation  of  financial statements in conformity with generally accepted
accounting principles  requires  that management make estimates and assumptions
which affect the reported amounts  of  assets and liabilities as of the date of
the financial statements and revenues and  expenses  for  the  period reported.
Actual  results  may  differ  from  these  estimates.   The  estimates  include
amortization  and  depreciation  of  capitalized costs of oil wells and related
equipment. Management emphasizes that  amortization  and depreciation estimates
are  inherently imprecise. Actual results could materially  differ  from  these
estimates.

DIVIDEND POLICY

The Company has not yet adopted any policy regarding payment of dividends.

COMPREHENSIVE INCOME

Statement  of  Financial  Accounting Standards No 130, "Reporting Comprehensive
Income" ("SFAS 130")), requires  that total comprehensive income be reported in
the financial statements. SFAS 130  establishes  standards  for  reporting  and
display  of  comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements.  It requires
(a) classification  of  the  components  of other comprehensive income by their
nature in a financial statement and (b) the  display of the accumulated balance
of  the  other  comprehensive  income  separate  from   retained  earnings  and
additional  paid-in capital in the equity section of a statement  of  financial
position. The  Company's  financial  statements  do  not  include  any  of  the
components  of  other  comprehensive income during the years ended December 31,
2007 or 2006.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The  Company  includes  fair  value  information  in  the  notes  to  financial
statements when the fair  value  of its financial instruments is different from
the book value.  When the book value  approximates  fair  value,  no additional
disclosure is made.

CASH AND CASH EQUIVALENTS

The  Company  considers highly liquid investment securities with maturities  of
three months or less when purchased to be cash equivalents.

PROPERTY AND EQUIPMENT

The Company follows the "successful efforts" method of accounting for its costs
of acquisition,  exploration  and  development  of  oil  properties.   Costs to
acquire  mineral  interest  in  oil  and  gas  properties,  to  drill and equip
exploratory  wells  that  find  proved reserves, to drill and equip development
wells  and related asset retirement  costs  are  capitalized.  Costs  to  drill
exploratory  wells that do not find proved reserves, geological and geophysical
costs, and costs of carrying and retaining unproved properties are expensed.

Details of the  asset  retirement  account  are  as follows for the years ended
December 31, 2007 and 2006:


                       			   2007             2006
					----------	-----------
Balance at beginning of year		$  459,060	$   478,751

     Additions               		   349,183         	  -
     Accretion                		    46,698     	     29,213
     Payments                      		 -   	    (48,904)
					----------	-----------
Balance at end of year        		   854,941    	    459,060

Current portion               		    53,000     	     28,283
					----------	-----------
Long-term portion          		$  801,941	$   430,777
					==========	===========

                                      F-8

<PAGE>
			   SOUTH TEXAS OIL COMPANY
			NOTES TO FINANCIAL STATEMENTS

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

PROPERTY AND EQUIPMENT, CONTINUED

The current and long term portions were of the asset  retirement obligation was
estimated based on historical experience.

Unproved  oil  and  gas  properties  that  are  individually  significant   are
periodically  assessed  for impairment of value and a loss is recognized at the
time  of  impairment by providing  an  impairment  allowance.   Other  unproved
properties  are  amortized  based  on  the  Company's  experience of successful
drilling and average holding period.  Capitalized costs  of  producing  oil and
gas  properties,  after  considering  estimated  residual  salvage  values, are
depreciated  and  depleted by the unit-of-production method.  Support equipment
and other property  and  equipment  are depreciated over their estimated useful
lives.

On the sale or retirement of a complete unit of a proved property, the cost and
related accumulated depreciation, depletion,  and  amortization  are eliminated
from  the property accounts, and the resultant gain or loss is recognized.   On
the retirement  or  sale  of  a  partial  unit  of proved property, the cost is
charged  to  accumulated  depreciation,  depletion,  and  amortization  with  a
resulting gain or loss recognized in income.

On  the sale of an entire interest in an unproved property  for  cash  or  cash
equivalent,  gain  or loss on the sale is recognized, taking into consideration
the  amount of any recorded  impairment  if  the  property  has  been  assessed
individually.   If  a  partial  interest  in  an unproved property is sold, the
amount received is treated as a reduction of the cost of the interest retained.

Depreciation is computed primarily on the straight-line  method  for  financial
statements purposes over the following estimated useful lives:


                        ESTIMATED
   CATEGORY             LIFE
   ------------------	---------
   Drilling equipment    20 years
   Office equipment       5 years
   Vehicles               5 years


All assets are booked at historical cost. Management reviews on an annual basis
the  book  value,  along  with the prospective dismantlement, restoration,  and
abandonment costs and estimate  residual value for the assets, in comparison to
the carrying values on the financial statements.

OIL AND GAS PRODUCING ACTIVITIES

Suspended well cost - Statement if Financial Accounting Standards Statement No.
19 "Financial Accounting and Reporting  by  Oil  and  Gas  Producing Companies"
(SFAS  19)   as amended by Staff Position 19-1 "Accounting for  Suspended  Well
Costs" allows  suspended  well costs to remain capitalized beyond one year from
drilling  if certain specific  criteria  are  met  and  additional  disclosures
provided.

Exploratory  costs,  excluding  the  cost  of  exploratory  wells  and acquired
exploration  rights,  are  charged  to expense as incurred. Drilling costs  for
exploratory wells are capitalized pending the determination of the existence of
proved reserves. If reserves are not  found,  the drilling costs are charged to
operating expense. Oil and gas lease acquisition  costs  are  capitalized  when
incurred.

Unproved   properties  with  individually  significant  acquisition  costs  are
assessed quarterly on a property-by-property basis, and any impairment in value
is  recognized.  Unproved  properties  with  acquisition  costs  that  are  not
individually  significant  are  aggregated,  and  the  portion  of  such  costs
estimated  to  be  nonproductive,  based on historical experience, is amortized
over the average holding period. If  the  unproved properties are determined to
be productive, the appropriate related costs  are transferred to proved oil and
gas properties.

Development  costs  incurred  to drill and equip development  wells,  including
unsuccessful development wells, are capitalized.

EARNINGS PER SHARE

The Company's basic earnings per  share  (EPS) amounts have been computed based
on the average number of shares of common  stock  outstanding  for  the period.
Diluted   EPS  amounts  include  the  effects  of  outstanding  stock  options,
restricted  stock  and  performance-based stock awards under the treasury stock
method if including such potential shares of common stock is dilutive. However,
the effect of including such common stock equivalents was anti-dilutive for the
years ended December 31, 2007 and 2006.

REVENUE RECOGNITION

Oil, gas and natural gas  liquids revenues are recognized when the products are
sold to a purchaser at a fixed or determinable price, delivery has occurred and
title has transferred, and  collection of the revenue is reasonably assured. At
times  the Company may sell more  or  less  than  our  entitled  share  of  gas
production.  When  this  happens,  the  Company  uses the entitlement method of
accounting  for  gas sales, based on our net revenue  interest  in  production.
Accordingly, revenue  is  deferred  for  gas  deliveries  in  excess of our net
revenue  interest,  while  revenue  is  accrued  for  the undelivered  volumes.
Production imbalances and related values at December 31,  2007  and  2006  were
insignificant.



                                      F-9
<PAGE>

			   SOUTH TEXAS OIL COMPANY
			NOTES TO FINANCIAL STATEMENTS

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

CONCENTRATIONS OF CREDIT RISK

Credit  risk  represents  the  accounting  loss that would be recognized at the
reporting date if counter parties failed completely  to  perform as contracted.
Concentrations of credit risk (whether on or off balance sheet) that arise from
financial  instruments  exist for groups of customers or counter  parties  when
they have similar economic  characteristics  that  would cause their ability to
meet contractual obligations to be similarly affected by changes in economic or
other conditions described below.

The Company operates in one segment, the oil and gas  industry.   The Company's
customers   are  located  within  the  United  States  of  America.   Financial
instruments that  subject the Company to credit risk consist principally of oil
and gas sales which  are  based  on  a short-term purchase contracts from Shell
Trading (US) Company and various other  gatherers  in  the  area,  with related
accounts receivable subject to credit risk.

During  the  year  ended December 31, 2007 and 2006 the Company's main customer
accounted  for 69% and  88%,  respectively,  of  the  Company's  oil  revenues.
Management  does  not  believe   the   loss   of  our  main  customer(s)  would
materially affect the ability to sell the oil.

INCOME TAXES

The  Company  records deferred income tax assets and liabilities  to  recognize
timing differences  between  recognition  of income for financial statement and
income tax reporting purposes. Deferred income  tax assets are calculated using
enacted tax rates applicable to taxable income in  the years when we anticipate
these timing differences will reverse. The effect of  changes  in  tax rates is
recognized in the period of enactment.

Effective   January 1,  2007,  the  Company  adopted  the  provisions  of  FASB
Interpretation  (FIN)  No. 48,  Accounting for Uncertainty in Income Taxes - An
Interpretation  of  FASB Statement  No. 109.  FIN  No. 48  clarifies  financial
statement recognition  and  disclosure requirements for uncertain tax positions
taken or expected to be taken  in a tax return. Financial statement recognition
of  the  tax position is dependent  on  an  assessment  of  a  50%  or  greater
likelihood  that  the tax position will be sustained upon examination, based on
the technical merits  of  the  position.  Any interest and penalties related to
uncertain  tax  positions  are recorded as interest  expense  and  general  and
administrative expense, respectively.  The  adoption of FIN No. 48 did not have
any effect on our reported financial position or results of operations

ACCOUNTS RECEIVABLE

Accounts receivable are stated at the amount management expects to collect from
outstanding balances.  Management provides for  probable  uncollectible amounts
through a charge to earnings and a credit to a valuation allowance based on its
assessment  of the current status of individual accounts. Balances  outstanding
after management has used reasonable collection efforts are written off through
a charge to the  valuation allowance and a credit to trade accounts receivable.
Changes in the valuation  allowance  have  not  been  material to the financial
statements and at December 31, 2007 and 2006,the Companys  financial statements
do not include an allowance for doubtful  accounts  because management believes
that no  allowance is  required at  those dates. Accounts receivable  that  are
greater than 90 days past due at December 31,  2007 and  2006 were  $45,616 and
$-0-, respectively.

STOCK-BASED COMPENSATION

Effective  January 1,  2006, the Company adopted SFAS No. 123  (Revised  2004),
Share-Based Payment, which  requires  that  compensation  related to all stock-
based  awards,  including  stock  options,  be  recognized  in  the   financial
statements  based  on  their  estimated  grant-date  fair  value.  The  Company
previously  recorded  stock compensation pursuant to the intrinsic value method
under  APB  Opinion  No. 25,  whereby  compensation  was  recorded  related  to
performance  share and  unrestricted  share  awards  and  no  compensation  was
recognized for  most  stock  option  awards.  The Company is using the modified
prospective application method of adopting SFAS No. 123R, whereby the estimated
fair  value  of  unvested stock awards granted prior  to  January 1,  2006  was
recognized as compensation  expense in periods subsequent to December 31, 2005,
based on the same valuation method  used  in  the  Company's  prior  pro  forma
disclosures.  The  Company  estimates expected forfeitures, as required by SFAS
No. 123R, and recognizes compensation expense only for those awards expected to
vest. Compensation expense is  amortized  over  the  estimated  service period,
which is the shorter of the award's time vesting period or the derived  service
period  as  implied by any accelerated vesting provisions when the common stock
price reaches specified levels. All compensation must be recognized by the time
the award vests.  The cumulative effect of initially adopting SFAS No. 123R was
immaterial.

Reclassifications

Certain  prior year amounts  have been  reclassified  to conform to the current
year  presentation.  These  reclassifications had no  effect on the  results of
operations or stockholders equity.



NEW ACCOUNTING PRONOUNCEMENTS

In September 2006,  Statement of Financial Accounting Standards (SFAS) No. 157,
Fair Value Measurements,  was  issued. 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.





                                     F-10

<PAGE>
			   SOUTH TEXAS OIL COMPANY
			NOTES TO FINANCIAL STATEMENTS

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

NEW ACCOUNTING PRONOUNCEMENTS, CONTINUED

In February 2007, SFAS No. 159, The Fair Value Option for Financial Assets  and
Financial  Liabilities-Including an  Amendment  of  FASB Statement No. 115, was
issued.  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,  the  FASB issued SFAS 160,  "Noncontrolling  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
noncontrolling  interests  in  subsidiaries  and  to make certain consolidation
procedures  consistent  with  the  requirements  of SFAS  141R.  It  defines  a
noncontrolling  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   noncontrolling  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 noncontrolling
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.

NOTE 3 - AQUISITION OF ASSETS

On  April  20,  2007, the Company entered into a merger agreement  under  which
Leexus Operating  Company  was acquired from the selling shareholders of Leexus
Properties Corp (the "Sellers")  to create a new wholly-owned subsidiary of the
Company.  The following is an analysis  of  the  consideration given and assets
received in connection with this acquisition:


Assets acquired:

   Proved reserves                                     $ 6,127,375
   Unproved reserves                                    18,185,381
						       -----------
           Total assets acquired                       $24,312,756
						       ===========
Consideration given:
   Cash                                                $ 3,000,000
   Note payable (See Note 4)                             2,332,756
   Common stock (2,000,000 shares valued at
	$18,980,000 or $9.49 per share)   		18,980,000
						       -----------
           Total consideration given                   $24,312,756
						       ===========

On April 4, 2007, the Company entered into an equipment purchase agreement with
TeXana Drilling, LLC (TeXana), to acquire a drilling  rig and related equipment
for a total purchase price of $1,065,418. The purchase  price consisted of cash
payments totaling $885,418 and issuance of a $180,000 non interest bearing note
that was discounted to $152,794 to produce an interest rate  of 12.25% per year
over  the  term  of the loan. The Company believes the purchase price  will  be
adjusted downward  by $62,683 for amounts incurred for parts and repairs during
the 90 day warranty period specified in the purchase agreement.

On June 18, 2007, the Company acquired certain oil and gas reserves and related
assets of Senora Resources, Inc. and James D. Dobos, II for $1,800,000 in cash.
The entire purchase price was allocated to proven reserves.

On August 21, 2007, effective as of June 1, 2007 we acquired certain additional
wells and acreage located in Bastrop, Brazos,Burleson and Fayette Counties from
Texas Gas Partners for $253,145.  The entire  purchase price  was allocated  to
proven reserves.


                                     F-11

<PAGE>
			   SOUTH TEXAS OIL COMPANY
			NOTES TO FINANCIAL STATEMENTS

NOTE 3 - AQUISITION OF ASSETS, CONTINUED

On September 17, 2007,  the Company acquired a second drilling rig from Granite
Energy, Inc. for $1,300,000.  The purchase price consisted of $300,000 in cash,
32,258 shares of restricted stock  valued  at  $300,000,  and  a  $700,000 note
bearing interest of 7% per year and payable over two years.  The Company issued
93,000 shares of its common stock into escrow as collateral for the loan.

On  September  25,  2007,  the  Company  the  oil and gas interest of Diversity
Petroleum,  LLP  for  a  purchase  price  of $10,000,000.  The  purchase  price
consisted  of  a  cash payment of $7,500,000,  the  issuance  of  a  $1,500,000
promissory note bearing  interest  at  10%  per  year  (only  if the note is in
default)  and  the  issuance  of  105,820 shares of the Company's common  stock
valued at $1,000,000.  Because interest  on  the promissory note is due only in
the event of default, a situation deemed remote  by  the  Company,  the company
discounted  the  note  to  its  net  present value of $1,331,010 to produce  an
interest rate of 11.75% per year over the term of the loan.

NOTE 4 - NOTES PAYABLE AND LONG-TERM DEBT

At December 31, 2006, the Company had a $75,000 line of credit agreement with a
financial institution ("Line of Credit").  The  Line of Credit bore interest on
the outstanding balance at the banks prime plus 2%  per  year, payable monthly.
The Line of Credit expired in 2007 and was not renewed.

On January 31, 2007, the Company entered into a three year, $15,000,000 secured
revolving credit facility (the `Revolving Credit Facility")  with  the Longview
Fund,  L P ("Longview"). In consideration for the origination of the  Revolving
Credit Facility,  the  Company  issued Longview a five-year warrant to purchase
1,000,000 shares of the Company's  common  stock at an exercise price of $10.00
per share and granted Longview an overriding  royalty  interest,  as  described
below  .  The  revolving  Credit  Facility bears interest at the prime rate  as
published in the Wall Street Journal  (7.25% at December 31, 2007), plus 4% per
year, payable quarterly, in arrears. On September 25, 2007 the Revolving Credit
Facility was increased to $30 million.  The  interest rate on December 31, 2007
was  11.25%  and the outstanding balance was $21,877,351.  Accrued  and  unpaid
interest on December 31, 2007 was $554,988.

As stated in the  previous  paragraph, the Company and its subsidiaries granted
Longview  perpetual  overriding   royalty   interests  in  current  and  future
hydrocarbon production from all of their leases  in  the  Giddings  and Bastrop
properties  (the  "Override  Properties")  as follows: 1) 4% until the Override
Properties produce 1,000 barrels per day net  to  the subject working interests
for  90  consecutive  days;  2)  thereafter, 3% until the  Override  Properties
produce 2,000 barrels per day net  to  the  subject  working  interests  for 90
consecutive  days;  and  3) thereafter, 2%. Additionally, if Company repays the
Revolving  Credit Facility  in  full  and  the  agreement  is  terminated,  the
overriding royalty interests of Longview in the Override Properties will be 2%.

As described  in Note 3, on April 20, 2007, the Company entered into the Merger
Agreement under  which the Company issued a $4,000,000 note (the "Leexus Note")
to the selling shareholders  of  Leexus Properties Corp. (the "Sellers"), which
was  subsequently  increased  to  $4,485,241  based  on  the  Sellers'  use  of
additional funds on drilling and improvements  prior  to  closing.  This Leexus
note  is  non-interest  bearing but was discounted to $2,332,756 to produce  an
effective interest rate of 12.25% per year over the life of the loan. Under the
terms of the Merger Agreement, the Leexus note is to paid from production based
on the lesser of 75% of the  current  months  net  production or 75% of the net
average  production  from  December  2006,  January  2007,  and  February  2007
production. During the year ended December 31, 2007, $141,786  of  the discount
was amortized to expense.

As described in Note 3, on April 4, 2007, the Company purchased equipment  from
TeXana and issued a $180,000 non interest bearing note (the "TeXana Note") that
was  discounted to $152,794 to produce an interest rate of 12.25% per year over
the term of the loan. The TeXana Note is to be repaid in total monthly payments
of $5,000  per  month beginning in June 2007 and continuing for eighteen months
at which time the  payment increases to $22,500 for four months, with the final
payment due in March  2009. The Company has deferred making monthly payments on
the TeXana Note because  a  significant amount of unanticipated repair work was
required on the assets acquired.  The  Company anticipates that the TeXana Note
will be reduced by $62,683 for amounts incurred  by  the  Company for parts and
repairs  during  the  ninety  day  warranty  period specified in  the  purchase
agreement.

As  described  in  Note  3, the Company issued a $700,000  promissory  note  to
Granite Energy, Inc. (the  "Granite  Note") bearing interest of 7% per year and
payable  in  total  monthly payments of $31,341,  including  interest,  through
November 2009. The Granit  not  is  collateralized  by  a drilling rig acquired
through its issuance.

As described in Note 3 the issued a $1,500,000 promissory note bearing interest
at 10% per year (only if the note is in default) to acquire  the  oil  and  gas
interest  of  Diversity  Petroleum,  LLP  (the  "Diversity  Note"). Because the
interest is only due upon default, the company discounted  the  note to its net
present value of $1,331,010 to produce an interest rate of 11.75% over the term
of the loan. The Diversity Note is due in monthly payments of $62,500
through  October  2009  and is collateralized by the oil and gas interests  for
which it was issued to purchase.

In March 2007, the Company  purchased  two vehicles with directly related notes
totaling $64,761. These notes bear interest  of  4.9  % per year and are due in
total monthly payments of $1,492, including interest, through April 2011. These
notes are collateralized by vehicles.

The following is an analysis of notes payable and long-term  debt  at  December
31, 2007 and 2006:






                                     F-12

<PAGE>
			   SOUTH TEXAS OIL COMPANY
			NOTES TO FINANCIAL STATEMENTS


NOTE 4 - NOTES PAYABLE AND LONG-TERM DEBT


    DESCRIPTION                     	     2007       2006
-------------------------		 -----------	----
Line of Credit                           $         - 	$  -
Revolving Credit Facility                 21,877,351       -
The Leexus Note                            2,474,541       -
The TeXana Note                              102,566       -
The Granite Note                             700,000       -
The Diversity Note                         1,181,151       -
Vehicle notes                                 55,437       -
					 -----------	----
 Total notes payable and long-term debt   26,391,046       -
					 -----------	----
 Current portion                           1,404,185       -
					 -----------	----
 Non-current portion                     $24,986,861    $  -
					 ===========	====

The following is an annual of the future annual principal payments due under
note payable and long-term debt agreements:

                                       PRINCIPAL
YEAR ENDING DECEMBER 31,               BALANCE DUE
-----------------------		       -----------
        2008                           $ 1,404,185
        2009                             1,000,022
        2010                            22,016,059
        2011                               143,215
        2012                               155,111
        Thereafter                       1,672,454
				       -----------
Total notes payable and long-term debt $26,391,046
				       -----------


NOTE 5 - RELATED PARTY NOTES PAYABLE

The  Company  has  notes  payable to Murray Conradie and Jason Griffith, former
executive officers of the Company,  related  to  the  purchase  of wells during
2005, with a with a remaining principal balances totaling $17,067  at  December
31, 2007.  These notes bear interest at 7% per year is to be paid monthly for a
period  of  thirty  six  (36)  months  (from April 2005) with interest of seven
percent (7%) accruing on the outstanding balance. The monthly payment amount is
not to exceed the income from the minimum  net  revenue interest (NRI) from the
prior  month's  production.  Payment  will  be  adjusted  accordingly  and  the
remaining balance increased by the monthly shortfall should any occur.

The Company leases approx 4 acres in Bigfoot, Texas and uses these premises for
a  field  office  and storage  for all  the vehicles, oil field  equipment  and
supplies.  This property  is owned  by Murray  Conradie and the monthly  rental
amount is $750.

The Company utilizes a tractor and road maintainer for clearing and maintaining
eases, lease roads, oil well locations and preparing sites for workovers.  This
equipment is owned  by Murray Conradie  and the  Company pays a monthly  rental
amount of $1,286 for usage of this equipment.


NOTE 6 - STOCKHOLDERS' EQUITY

During the years ended December 31, 2007 and 2006, the Company issued common
stock, warrants and options as follows:

COMMON STOCK

DURING THE YEAR ENDED DECEMBER 31, 2006:

The  Company  issued  1,959,113 shares of common stock  upon  the  exercise  of
warrants by warrant holders.   The  company  received  $1,124,531  in cash from
these exercises.

The Company issued 4,299,191 shares of common stock in settlement of $2,535,578
of  convertible  debt  and  related  accrued  interest.   At  the  date  of the
conversion, the common stock issued represented 45% of the fully diluted shares
of the Company.

The Company's total issued and outstanding shares was reduced by 132,638 shares
related  to  shares  canceled  that  were to be issued to a former employee and
related to the settlement of debt from the first quarter of 2005.

The company issued 6,045 shares to consultants  for  services valued at $31,837
during the year.

The company signed a Letter of Intent on November 2, 2006,  for the purchase of
at least 50% and up to 75% working interest (WI) and 60% Royalty Interest (RI),
in approximately 20,000 acres in the DJ basin in Northeast Colorado  at  a cost
of  $15  million  if the full 75% working interest is acquired. Concurrent with
signing  this  letter  of  intent,  the  Company  issued  2,419,335  shares  of
restricted common  stock  for consideration of $7,500,000 based upon a five day
closing average of the South  Texas  Oil Company shares as agreed upon when the
original Letter of Intent was signed. This transaction was closed in the second
quarter of 2007 and at December 31, 2007,  the  Company has only acquired 37.5%
of the working interest in these leases.


                                     F-13

<PAGE>
			   SOUTH TEXAS OIL COMPANY
			NOTES TO FINANCIAL STATEMENTS


NOTE 6 - STOCKHOLDERS' EQUITY, CONTINUED

COMMON STOCK, CONTINUED

DURING THE YEAR ENDED DECEMBER 31, 2007:

The Company issued 13,098 shares of common stock, valued at $74,159, to royalty
owners of a lease in order to obtain the assignment  of  all  rights, title and
interest in the production payment in lease.

The Company issued 787,652 shares of common stock upon exercise of options,on a
cashless basis, at $0.46 and $0.50 per share.

The Company issued 6,000 shares of common stock valued at $57,000 in connection
with  a  12  month  services agreement entered into on January 15,  2007.   The
Company expensed $57,000 for services rendered under the agreement during 2007.

The Company issued 2,000,000  shares  of  restricted  common  stock  valued  as
$18,980,000  or $9.49 per share, the fair market value of the stock on the date
of acquisition,  in  connection  with  the agreement and plan of merger entered
into between Leexus Properties Corp. and the Company.

In June 2007, a related party contributed  a vehicle with the fair market value
of $2,151. Due to the related party nature of  the transaction, the contributed
capital was recorded to additional paid in capital.

In connection with the recent acquisition on September 25, 2007, by South Texas
Oil Company, through a subsidiary STO Properties,  LLC,  purchased  all rights,
titles  and  interests  (of  whatever  kind  or  character,  whether  legal  or
equitable,  and  whether  vested  or  contingent)  of  Diversity Petroleum, LLP
(including interests in oil, gas and/or mineral leases covering  such lands and
wells,  overriding royalties, production payments and net profits interests  in
such lands,  such  leases  and  wells,  and  fee mineral interests, fee royalty
interests and other interests in such oil, gas and other minerals)for an amount
of $10 million by paying $7.5 million in cash,  issuing  a  promissory note for
$1.5 million and issuing 105,820 restricted shares valued at $1 million.

The  company  issued  32,258  shares  of  restricted  common stock,  valued  at
$300,000, in connection with the purchase of the drilling rig.

STOCK WARRANTS

During  the  year  ended  December  31, 2007, the Company granted  warrants  to
purchase 1,000,000 shares of common stock in connection with the origination of
a $15,000,000 secured revolving credit  facility.  The  Company capitalized the
value of the warrants as debt issuance costs in the amount  of  $5,700,945, the
fair  value  of  the  warrants on the date of grant. Since these warrants  were
issued in connection with  the  line  of credit, the Company allocated the fair
value between the line of credit and the  warrants.  The difference between the
fair value of the warrants and the allocated fair value is being amortized over
the  term  of  the line of credit. Fair value was determined  using  the  Black
Scholes option pricing  model  based  on  the  following  assumptions: expected
dividends  $-0-;  volatility: 180%; risk free interest rate:  5.00%.  The  debt
issuance costs will  be  amortized on a straight line basis over the three year
term of the credit facility.  During 2007, the Company recognized $1,741,956 of
interest expense from amortization  of  the  debt issuance cost associated with
warrants.

The following is a schedule of the activity relating to the Company's stock
warrants:

                                              		       WEIGHTED
                                  		  EXERCISE     AVERAGE
                        	     SHARES       PRICE        EXERCISE PRICE
				     ---------	  --------     --------------
Balance at December 31, 2005           	     -           -                  -

     Granted                          	     -       	 -            	    -
				     ---------	  --------     --------------
Balance at December 31, 2006           	     -       	 -            	    -

     Granted                  	     1,000,000	  $  10.00     $        10.00
				     ---------	  --------     --------------
Balance at December 31, 2007         1,000,000	  $  10.00     $     	10.00
				     =========	  ========     ==============



The following table summarizes information about the Company's stock warrants
outstanding at December 31, 2006 and 2007, all of which are exercisable.







                                     F-14
<PAGE>

			   SOUTH TEXAS OIL COMPANY
			NOTES TO FINANCIAL STATEMENTS

NOTE 6 - STOCKHOLDERS' EQUITY, CONTINUED

STOCK WARRANTS, CONTINUED


  NUMBER OF     EXPIRATION      REMAINING    	EXERCISE
   SHARES          DATE      CONTRACTUAL LIFE     PRICE
  ---------    ------------  ----------------	--------
  1,000,000    January 2012         4.1 years   $  10.00


STOCK OPTIONS

The following is a schedule of the activity relating to the Company's stock
options:

<TABLE>
<CAPTION>
<S>					<C>				<C>

                                                           		WEIGHTED
                                            	       EXERCISE         AVERAGE
                               		SHARES         PRICE     	EXERCISE PRICE
					-------	       --------------   --------------
Balance at December 31, 2005            825,000	       $  0.46 - 0.50  	$         0.48

     Granted                                  -
					-------	       --------------   --------------
Balance at December 31, 2006            825,000	       $  0.46 - 0.50   $         0.48

     Granted, Directors                  60,000	       $         9.45   $         9.45
     Granted, Officers / Employees      621,000	       $         9.45   $         9.45
     Exercised                         (787,652)       $    0.46-0.50   $         0.48
     Surrendered in cashless exercise   (37,348)       $    0.46-0.50   $         0.48
     Cancelled				(30,000)       $    0.46-9.45   $         7.69
					-------	       --------------   --------------
Balance at December 31, 2007            651,000	       $  0.46 - 9.45   $         9.45
					=======	       ==============	==============
</TABLE>

The following table summarizes information about the Company's stock options
outstanding at December 31, 2006 and 2007, all of which are exercisable.


 NUMBER OF  	CURRENTLY       EXPIRATION        REMAINING           EXERCISE
 SHARES   	EXERCISABLE     DATE          	  CONTRACTUAL LIFE    PRICE
 ---------	-----------	---------------	  ----------------    --------
  651,000   	 	0    	   10/1/2012           4.75    	       $9.45
 =========	===========	===============	  ================    ========

NOTE 7 - INCOME TAXES

Deferred  income  taxes reflect the net tax effects  of  temporary  differences
between the carrying  amounts of assets and liabilities for financial statement
purposes and the amounts  used  for income tax purposes. Significant components
of the Company's deferred tax liabilities  and  assets  as of December 31, 2006
and 2007 are as follows:


          DESCRIPTION             		   2007		  2006
------------------------------------		   ----		  ----
Deferred tax assets
	Net operating loss carryforwards	$2,898,186	$ 621,144
	Valuation allowance			(1,881,040)	 (416,797)
						-----------     ----------
		Net deferred tax asset		 1,017,146	  204,347

Deferred tax liabilities
	Basis of oil and gas properties		 1,017,146	  204,347
						-----------     ----------
	Net deferred taxes			$	-	$      -


At December 31, 2007, the  Company had  unused  federal  net  operating  loss
carryforwards of approximately $9,140,000  which expire in 2021 through 2028.
Following is a reconciliation of the Companys  effective income  tax rate to
the federal statutory rate for the years ended December 31, 2007 and 2006:

                          			        2007                2006
						     ----------	        ----------
                      				     AMOUNT	 % 	AMOUNT      %
						     ------      --	------	    --													Amount		%		Amount		%

Income tax benefit at federal statutory rate	$  2,244,416	 34	$ 249,368   34
Non-deductible interest expense			    (646,908)	(10)	      -	    -
Other non-deductible expenses			      (1,932)	  -	      -	    -
Change in valuation allowance			  (1,595,576)	(24)	(249,368)  (34)
						-------------   ----    ---------  ----
   Provision for income taxes			$	-	  -	$     -     -



                                    F-15

<PAGE>
			   SOUTH TEXAS OIL COMPANY
			NOTES TO FINANCIAL STATEMENTS


NOTE 8 - COMMITMENTS AND CONTINGENCIES

Operating Lease

On December 31, 2007, the Company entered  into a 36 month operating lease for
its corporate offices in Bastrop, TX.The lease agreement provides for monthly
lease payments of $7,000  per month  plus the Companys proportional share of
utilities.Future annual minimum lease payments due under this operating lease
are as follows:

					Minimum
	Year ending December 31,	Lease Payments

		2008			$	84,000
		2009				84,000
		2010				84,000

The landlord can terminate the lease with ninety (90) days  written  notice and
after November 1, 2008, the  Company has a  similar  termination  right.   Rent
expense under operating leases was $18,250 for 2007 and $8,832 dueing the years
ended December 31, 2007 and 2006 respectively.

Legal Proceedings

South Texas Oil Company is currently the  Plaintiff  in a lawsuit filed against
Leexus LLP, Mr. Mark Jaehne and Mr. Bennie Jaehne for  failing to adhere to the
terms of the merger Agreement signed in April.

On August 29, 2007, South Texas Oil Company as plaintiff  filed  a  Petition as
Cause  No.  2007-51820 in Harris County District Court, TX, against Leexus  Oil
and Gas, LLP,  Mark  Jaehne  and  Bennie  Jaehne as defendants. South Texas Oil
Company is claiming, conversion, breach of  contract  and  breach  of fiduciary
duty. South Texas Oil Company is seeking the court to enforce the terms  of the
Merger  Agreement  which  have being breached, the repayment of misappropriated
funds and attorneys fees.

On September 25, 2007 Bennie  Jaehne  and Mark Jaehne filed a countersuit Cause
26,710 in Bastrop County Texas against  Murray  Conradie, STO Operating Company
(f/k/a Leexus Operating Company), and South Texas  Oil  Company (a/k/a Southern
Texas  Oil  Company)  as  defendants. The Jaehne's are claiming  South  Texas's
failure to comply with the  Merger Agreement and are claiming damages in excess
of $1,000,000.

South Texas Oil Company believes  the Jaehne's countersuit is without merit and
will continue to pursue all legal remedies  related to this matter. South Texas
Oil Company is also confident it will prevail in the outcome of this litigation
and therefore is not providing a reserve for this action.

NOTE 9 - ENVIRONMENTAL MATTERS

Various  federal  and  state  authorities  have  authority   to   regulate  the
exploration and developments of oil and gas and mineral properties with respect
to environmental matters. Such laws and regulations, presently in effect  or as
hereafter  promulgated,  may  significantly  affect the cost of its current oil
production and any exploration and development  activities  undertaken  by  the
Company  and could result in loss or liability to the Company in the event that
any such operations are subsequently deemed inadequate for purposes of any such
law or regulation.

NOTE 10 - SUBSEQUENT EVENTS

On January  22,  2008,  the  Company's Board of Directors executed a consent in
lieu of a special meeting, dated  January  16,  2008,  to  amend  the Company's
Bylaws. The amendments to the Bylaws were intended to remove any ambiguity with
respect  to  the  provisions  thereof, and to provide for a more effective  and
efficient management of the Company's  affairs  with respect to the increase in
the number of the Company's directors, as may be  determined  by  the  Board of
Directors from time to time to be in the best interest of the Company, and  the
filling  of  vacancies  in the members of the Board of Directors created by the
resignation,  removal  of such  members  or  other  cause,  resulting  in  such
vacancies.

Prior to the amendments, the Bylaws required (i) that vacancies on the Board of
Directors  be  filled  only  by  "a  special  election"  called  to  elect  all
directorships  including   those  not  currently  vacant;  (ii)  that  any  new
directorship created by an increase  in  the  authorized  number  of directors,
shall be filled by "voting stock at a special meeting called for such purpose;"
and (iii) that the voting of the Company's common stock be cumulative. Sections
3.2 and 3.3 of the prior Bylaws are attached as Exhibit 99.2.

The  amended  Bylaws  provide  (i) that vacancies on the Board of Directors  be
filled by an affirmative vote of  a  majority  of the remaining directors; (ii)
that any new directorship created by an increase  in  the  authorized number of
directors be filled by election by the Board of Directors and  (iii)  that  the
voting of the Company's common stock not be cumulative. Sections 3.2 and 3.3 of
the amended Bylaws are attached as Exhibit 99.3.







                                     F-16
<PAGE>

			   SOUTH TEXAS OIL COMPANY
			NOTES TO FINANCIAL STATEMENTS


NOTE 10 - SUBSEQUENT EVENTS, CONTINUED

The  Company has one class of voting securities. The amendment of the Company's
Bylaws  does  not  disparately reduce or restrict the voting rights of existing
shareholders of that class.

On  January 22, 2008,  the  Company's  Board  of  Directors  appointed  current
president  Scott Zimmerman as Chief Executive Officer of the Company, effective
upon the resignation  of  Mr.  Conradie  from that position. Mr. Zimmerman, who
will retain his position as president, also was elected as an additional member
of Company's Board of Directors, pursuant  to  a  contemporaneous  vote  of the
Directors  to enlarge the Board of Directors from 5 to 6 members. Mr. Zimmerman
has served as the Company's President since June 18, 2007.

On January 22,  2008, the Company's Board of Directors also elected Mr. Michael
Pawelek as its new  Chairman  and  outside director, effective immediately. Mr.
Pawelek, a geophysicist, has held senior  management  positions  throughout his
27-year  career  in  the  exploration  and  production  and  oilfield  services
industries.  After  working south Texas fields early in his career, Mr. Pawelek
later served as CEO of  Universal Seismic Associates, a seismic acquisition and
processing company that later  became  publicly traded and was ultimately sold.
He  also  held  the  position of President at  BOSS  Exploration  &  Production
Corporation, Inc. a privately  held Gulf Coast production company. He currently
is President of privately held San Antonio based Sonterra Resources, Inc. which
operates assets in the Texas State waters.

On January 22, 2008, the Company's  Board of Directors accepted the resignation
of  Mr.  Murray  N.  Conradie as its Chairman,  Director  and  Chief  Executive
Officer. Mr. Conradie's  resignation  marks  the  Company's  transition  from a
development  stage  company  to  that of an exploration and production company,
through the simultaneous appointment  of  a  seasoned, technically oriented oil
and gas management team with experience in growing  exploration and production.
Mr. Conradie's resignation letter is attached as Exhibit 99.1

Mr. Conradie has been retained by the Company as a consultant  for  a  one year
period to assist in the management transition and to offer guidance on specific
current or anticipated business opportunities and projects, which agreement can
be  terminated  by either party after the expiration of the initial 90 days  of
the contract term.  The  Company  has agreed to continue Mr. Conradie's current
compensation package, including benefits,  on  an  independent contractor basis
during the full consulting contract period.

GAS Purchase Contract

On February 15, 2008, the Company entered into an "Amendment  to  Gas  Contract
dated  October  1, 2007" with DCP Midstream, for the gathering, processing  and
marketing of the  Company's  Bastrop  Field  natural  gas  volumes.  Under  the
agreement,  as  amended,  the Company will begin to sell initial volumes of 150
thousand cubic feet per day  (Mcf/d) of natural gas to 200 Mcf/d, prior to July
31,  2008,. As part of the contract  terms,  the  Company  is  responsible  for
$186,000  of  capital  investment  in  the project, for which it will receive a
repayment over time if 220,000 Mcf of gas  is  produced  within  two  years of
first  sales at $0.25/Mcf. There are no minimum volume commitments and, as  gas
volumes  increase,  the  infrastructure  will  be  improved to meet the field's
throughput requirements.

NOTE 11 - UNAUDITED SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND
PRODUCTION ACTIVITIES

The  following supplemental information regarding the oil and gas activities of
the  South   Texas   Oil  Company  is  presented  pursuant  to  the  disclosure
requirements promulgated  by  the  SEC  and  Statement  of  Financial Standards
("SFAS") No. 69, Disclosures About Oil and Gas Producing Activities.

The following estimates of reserve quantities and related standardized  measure
of  discounted  net  cash  flows  are  estimates  only, and are not intended to
reflect realizable values or fair market values of  South  Texas  Oil Company's
reserves.  South  Texas  Oil  Company  emphasizes  that  reserve estimates  are
inherently imprecise and that estimates of new discoveries  are  more imprecise
than producing oil and gas properties. Additionally, the price of  oil has been
very   volatile  and  downward  changes  in  prices  can  significantly  affect
quantities  that are economically recoverable. Accordingly, these estimates are
expected to change  as  future  information becomes available and these changes
may be significant.


                                     F-17
<PAGE>



Proved reserves are estimated reserves  of  crude  oil  and  natural  gas  that
geological  and  engineering  data  demonstrate with reasonable certainty to be
recoverable in future years from known  reservoirs  under existing economic and
operating  conditions.  Proved  developed  reserves are those  expected  to  be
recovered through existing wells, equipment and operating methods.

The standardized measure of discounted future  net  cash  flows  is computed by
applying  year-end  prices of oil and gas (with consideration of price  changes
only to the extent provided  by  contractual  arrangements)  to  the  estimated
future  production  of  proved  oil  and  gas  reserves,  less estimated future
expenditures  (based  on  a  year-end costs) to be incurred in  developing  and
producing the proved reserves,  less  estimated future income tax expenses. The
estimated future net cash flows are then  discounted  using  a  rate of 10% per
year to reflect the estimated timing of the future cash flows.

CAPITALIZED COSTS RELATED TO OIL AND GAS ACTIVITIES

Aggregate capitalized costs relating to the Company's crude oil and natural gas
producing activities, including asset retirement costs and related  accumulated
DD&A are shown below:

<TABLE>
<CAPTION>
                           2007           2006
<S> <C> <C>                   <C> <C> <C>

Unproved properties   $  30,757,344 $   1,238,950
Proved properties        23,383,575     2,892,358
Oilfield equipment                -             -
			----------- -------------
                         54,140,919     4,131,308
Less accumulated DD&A   (5,727,612)   (1,020,785)
			----------- -------------
Net capitalized costs $  48,413,307 $   3,110,523
			=========== =============
</TABLE>


COSTS INCURRED IN OIL AND GAS ACTIVITIES

Costs  incurred  in  connection  with  the Company's crude oil and natural  gas
acquisition, exploration and development activities are shown below:

<TABLE>
<CAPTION>
                          2007         2006
<S> <C> <C>                  <C> <C> <C>

Property acquisition
    Unproved          $29,518,394  $        -
    Proved             11,933,621     433,225
Exploration                     -     849,581
Development             8,585,879           -
		      ----------- -----------
Total costs incurred $ 50,037,894 $ 1,282,806
		      =========== ===========
</TABLE>

RESULTS OF OPERATIONS FOR PRODUCING ACTIVITIES

The following schedule includes only the  revenues from the production and sale
of  gas, oil, condensate and NGLs. The income  tax  expense  is  calculated  by
applying the current statutory tax rates to the revenues after deducting costs,
which  include  DD&A  allowances, after giving effect to permanent differences.
Due  to significant net  operating  loss  carryforwards  related  to  producing
activities,  income  taxes  have not been provided for the years ended December
31, 2007 or 2006. The results of operations exclude general office overhead and
interest expense attributable to oil and gas activities.



                                     -18-


NOTE 11 - UNAUDITED SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND
PRODUCTION ACTIVITIES, CONTINUED

<TABLE>
<CAPTION>
                                       2007          2006
<S> <C>   <C>                          <C> <C> <C> <C> <C> <C>

Net revenues from production        $  5,351,595  $  553,058

Production costs
    Oil and gas operating              1,921,091     336,490
    Production related general and
         administrative expenses              -           -
    Other taxes                          275,335      32,606
				      ----------   ---------
         Total production costs        2,196,426     369,096

Depreciation, depletion and
     amortization                      4,881,975     400,968
				      ----------   ---------
         Total costs                   7,078,401     770,064

Loss before income taxes              (1,726,806)   (217,006)

Income tax expense                             -           -
				      ----------   ---------
Results of operations               $ (1,726,806)  $(217,006)

DD&A rate per net equivalent
     barrel                        $      27.99    $   66.63
				      ==========   =========
</TABLE>

PROVED RESERVES

The following reserve schedule summarizes the Company's net ownership interests
in estimated quantities of proved  oil  and  gas reserves and changes in proved
reserves, all of which are located in the continental  United  States.  Reserve
estimates  for crude oil contained below were prepared by Netherland, Sewell  &
Associates,  Inc.,  independent petroleum engineers. The Company emphasizes the
reserve  estimates  are   inherently   imprecise  and  that  estimates  of  new
discoveries are more imprecise than those  of  currently  producing oil and gas
properties.  Accordingly,  these  estimates  are expected to change  as  future
information becomes available. All of the Company's  reserves  are  located  in
southern Texas and Colorado.



                                     -19-


NOTE 11 - UNAUDITED SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND
PRODUCTION ACTIVITIES, CONTINUED


PROVED RESERVES, CONTINUED

                                              OIL                GAS
                                           (BARRELS)            (MCF)
					    -------	      ---------
PROVED RESERVES
   Balance - December 31, 2005               48,430                   -
      Revisions of previous
          Estimates                          21,774                   -
      Extensions, discoveries and
          other additions                         -                   -
      Production                            (11,557)                  -
      Purchase (sales) of minerals
          in place                                -                   -
					    -------	      ---------
   Balance - December 31, 2006               58,647                   -
      Revisions of previous
          estimates                           3,790                   -
      Extensions, discoveries and
          other additions                         -                   -
      Production                           (121,096)           (291,689)
      Purchase (sales) of minerals
          in place                          447,316           1,448,133
					    -------	      ---------
   Balance - December 31, 2007              388,657           1,156,444
					    =======	      =========



STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES

The  following table presents the standardized measure of future net cash flows
from proved  oil reserves in accordance with SFAS No. 69. All components of the
standardized measure  are from proved reserves, all of which are located within
the continent of the United  States.  As  prescribed  by  this  statement,  the
amounts  shown are based on prices and costs at December 31, 2007 and 2006, and
assume continuation  of  existing  economic conditions. Future income taxes are
based on year-end statutory rates, adjusted  for tax credits. A discount factor
of  10  percent  was  used  to reflect the timing of  future  net  cash  flows.
Extensive judgments are involved in estimating the timing of production and the
costs  that  will  be incurred through  the  remaining  lives  of  the  fields.
Accordingly, the estimates  of future net revenues from proved reserves and the
present value thereof may not  be materially correct when judged against actual
subsequent results. Further, since  prices  and costs do not remain static, and
no  price  or  cost changes have been considered,  and  future  production  and
development costs  are estimated to be incurred in developing and producing the
estimated proved oil  reserves,  the  results are not necessarily indicative of
the fair market value of estimate proved  reserves,  and the results may not be
comparable to estimates by other oil producers.




                                     -20-


NOTE 11 - UNAUDITED SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND
PRODUCTION ACTIVITIES, CONTINUED

STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES


                                      2007          2006
				 -------------	------------
Future cash inflows              $  45,940,000	$  3,097,500
Future production costs            (16,352,400)   (1,662,500)
Future development costs            (2,619,600)       (1,200)
Future income tax expenses          (8,591,000)     (216,000)
				 -------------	------------
Future net cash flows               18,377,000     1,217,800
Effect of 10% discount factor       (5,712,000)     (357,600)
				 -------------	------------
Standardized measure of
   discounted future cash flows
   at the end of the year        $  12,665,000  $    860,200
				 =============	============

The standardized measure of discounted future net cash flows as of December 31,
2007  and  2006  was calculated using prices the following  average  prices  in
effect as of that date:


                           	 	    2007     	  2006
					  --------	--------
Average crude oil price per barrel        $  91.27	$  52.82

Average gas price per MCF      		      9.05             -


SOURCES OF CHANGES IN DISCOUNTED FUTURE NET CASH FLOWS

Principal changes  in  the  aggregate standardized measure of discounted future
net cash flows attributable to  the  Company's  proved  crude  oil reserves, as
required by SFAS No. 69, are set forth in the table below.


<TABLE>
<CAPTION>
<S>			<C>					<C>


                                                	    2007          2006
							-----------    ---------

Standardized measure of discounted future net
       cash flows at the beginning of the year		$   860,200    $ 791,000

Net changes in prices and production costs                   68,700    	(383,400)
Changes in estimated future development costs                      	  (1,200)
Sales of oil and gas, net of production costs            (3,155,200) 	  (3,300)
Extensions, discoveries and improved recovery
       less related costs                                14,701,100            -
Purchases (sales) of minerals in place                                         -
Revisions of previous quantity estimates                    200,200      457,100
Previously estimated development costs incurred
Net change in income taxes                                            	       -
Accretion of discount                                                 	       -
							-----------    ---------
Standardized measure of discounted future net
       cash flows at the end of the year       		$12,675,000    $ 860,200
							===========    =========

</TABLE>


                                     F-21
<PAGE>



ITEM  8.   CHANGES  IN  AND  DISAGREEMENTS WITH ACCOUNTANTS ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE.

      None

ITEM 8A(T).  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
Principal  Accounting  and  Financial  Officer (collectively,  the  "Certifying
Officers")  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 Commission's rules and forms.

      As required  by  Rule  13a-15  under  the  Exchange  Act, our management,
including,  our  Chief  Executive Officer, evaluated the effectiveness  of  the
design and operation of our  disclosure  controls and procedures as of December
31, 2007. Based on that evaluation, management  concluded  that  as of December
31,  2007, 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

Management's Annual Report on Internal Control over Financial Reporting.

      Section  404  of the Sarbanes-Oxley Act of 2002 requires that  management
document and test our  internal control over financial reporting and include in
this Annual Report on Form 10-KSB  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 December 31, 2007.  In
that  regard,  we identified the following material weaknesses in our  internal
control over financial reporting as of December 31, 2007.

      				-33-

<PAGE>

      1.Lack of Effective Corporate Governance Policies and Procedures.

      Independent  Directors.   We  failed  to  require  that  a majority of or
directors  be independent or to define the requirements for independence  until
August 2007.  Three independent directors were elected by the existing Board on
August 27, 2007,  through an expansion of the number of the Company's directors
to five.  The independent  directors  did not hold any separate meetings during
their tenure in 2007.

      Committees of the Board.  We failed  to  create  and  appoint  member  to
essential board committees to oversee the managerial, operational and financial
aspect of the Company's business.

                 We  did  not  establish an Audit Committee to (i)  appoint the
      independent registered public accounting firm for the Company and monitor
      the performance of such firm,  (ii) review  and  approve  the  scope  and
      results  of  the  annual  audits,  (iii) evaluate,  with  the independent
      registered  public  accounting  firm, the Company's annual audit  of  the
      financial  statements  and  audit  of  internal  control  over  financial
      reporting, (iv) monitor the performance  of  the Company's internal audit
      function, (v) review, with management, the annual and quarterly financial
      statements, (vi) review, with management, the  status of internal control
      over financial reporting, (vii) review and maintain  procedures  for  the
      anonymous  submission  of  complaints  concerning accounting and auditing
      irregularities, (viii) review problem areas  having a potential financial
      impact  on  the  Company,  which  may  be  brought to  its  attention  by
      management,  the independent registered public  accounting  firm  or  the
      Board, and (ix)  to preapprove all non-audit related services provided by
      the independent registered  public  accounting  firm  and the independent
      registered  public  accounting firm's fees for services rendered  to  the
      Company.

                 We did not  establish  a  Compensation Committee to (i) review
      and make determinations with respect to  matters  having  to  do with the
      compensation  of  executive  officers  and  Directors of the Company  and
      (ii) administer certain plans relating to the  compensation  of  officers
      and Directors.

                 We  did  not  establish  a Nominating and Corporate Governance
      Committee to (i)identify persons for  future  nomination  for election to
      the  Board  of  Directors,  (ii)  approve  and adopt corporate governance
      guidelines, including qualifications of potential directors (iii) oversee
      an annual self-evaluation conducted by the Board  in  order  to determine
      whether  the  Board and its Committees are functioning effectively,  (iv)
      oversee individual  Director  self-assessments  in  connection  with  the
      evaluation  of  such  Director for purposes of making a recommendation to
      the Board as to the persons  who  should be nominated for election or re-
      election.

      Conflicts of Interest.  We failed to  adopt a conflict of interest policy
to insure that (i) officers and directors are,  so long as they are officers or
directors  of the Company, subject to the restriction  that  all  opportunities
contemplated  by our plan of operation which come to their attention, either in
the performance  of  their  duties  or  in any other manner, will be considered
opportunities of, and be made available to  the  Company, (ii) a breach of this
requirement  will  be  a  breach  of the fiduciary duties  of  the  officer  or
director, and that (iii) officers and  directors shall abstain from negotiating
and voting upon the opportunity.

      2.  Lack of Accounting Personnel.  We  failed to hire or train accounting
personnel that had the appropriate knowledge of  Generally  Accepted Accounting
Principles and accounting principles specific to the oil and  gas industry.  As
a  result,  the input and categorization of certain entries required  extensive
review to assure  accuracy  and  year-end financial statements submitted to the
SEC had to be restated for the year 2005.  Financial statements for fiscal year
2006 were filed on April 18, 2007  and  financial  statements  for  the periods
ending  June  30,  2007 and September 30, 2007, as well as for the fiscal  year
2007 were filed during  the extension periods following the respective required
filing dates.
      				-34-

<PAGE>

      3.   Lack  of  Effective   Utilization   of  General  Accounting  System.
Documented processes do not exist for the input  and  creation of effective and
accurate  reports  on  a  short  term  periodic basis.  The present  accounting
software, which is geared to oil and gas production and sales, was installed in
mid-2007 and has not been fully utilized for generic financial reporting tasks.
In addition, documented processes do not  exist  for several key processes such
as  a  closing checklist, budget-to-actual analyses,  balance  sheet  variation
analysis,  pro  forma  financial statements, and the usage of key spreadsheets.
Reconciliations are performed on an ad hoc basis.

      4.  Lack of Effective Control in Certain Accounting Areas. There were not
effective financial reporting  controls  in  certain  areas  that could lead to
inaccurate  financial  reporting, including: (i) financial personnel  have  the
ability to change account  structures  without  approval  (ii)  general  ledger
journal  entries  are not always approved or reviewed prior to entry, and (iii)
accounting staff employees  with  payable  responsibilities also have access to
vendor maintenance controls.

      5.  Lack of Effective Control in Certain  Operational  Areas.   We do not
have  formal  guidelines  for authorization levels for entering into agreements
(oil  and  gas  leases,  joint  operating  agreements,  orders,  non-disclosure
agreements, sales and other contracts) or distributing cash (signing checks and
creating authorizing wire  transfers).   We do not have a monitoring process to
insure  that  all  oil  and gas leases and material  contracts  are  documented
appropriately and represent  the  transfer  of  valid leasehold rights prior to
execution.

      6.   Lack  of  an  effective Employee Handbook  or  Training  on  Company
Policies.  We do not distribute an Employee Handbook to employees and employees
have not received any training on Company policies such as the Code of Conduct,
Sexual Harassment, Diversity,  Usage of Company Computers, and Insider Trading.
In addition, we do not have a Whistleblower program in place, and do not have a
process for making issues affecting  employees  in  the  workplace known to the
appropriate person(s) without fear of retribution.

      7.  Lack of Employee Performance Criteria or Evaluation.   We do not have
documented  job  descriptions  for  each  position in the Company.  Performance
appraisals have not been performed and, as a result, our employees may not have
a  clear understanding of their responsibilities  or  performance  compared  to
these responsibilities.

      8.  Lack of Adequate Documentation of Equity Transactions. We do not have
an internal  centralized  reporting  system to record changes in our issued and
outstanding  securities or our equity that  is  beneficially  owned.   In  that
regard, we do  not maintain a short term periodic equity roll-forward record or
companion fully diluted analysis reports

      9.  Lack of  Sufficient Segregation of Authority and Duties.  We have not
maintained sufficient  segregation  of duties or responsibilities, as evidenced
by executive officers (i) having the  ability  to  purchase  and receive goods,
(ii) assuming payables activities without verification or maintenance of vendor
controls by others, (iii) holding multiple executive positions  simultaneously,
and (iv) having the ability to negotiate contracts with third parties  in which
they have an interest, without conflict of interest or oversight control by the
Board  of  Directors.   In addition, for a period in excess of seven months  in
2007, the Company lacked  a  Board  of Directors with a majority of independent
directors.

      10.  Lack of Centralized, Indexed Filing System and Protocol for Critical
Operative  Documents of  the  Company.   We  do  not  have a centralized, index
filing   system  for   critical  operative   documents,   including:   executed
contracts,   leases,  assignments,  royalties  and   other  material  documents
dealing  with  the operation of the Company's business  day  to  day  and  long
term.  In  addition,  we  do not have a control protocol  for  the  handling of
such paperwork to  document  effectively  the  existence,  duration,  execution
and important functional events of such documents.

        				-35-

<PAGE>

Remediation of Material Weaknesses

      1.   Implementation  of  Effective  Corporate  Governance   Policies  and
      Procedures.

      Independent  Directors. Each of our new Chairman and three new  directors
is an "independent director", as defined in Rule 4200(a)(15) of the Marketplace
Rules of the NASDAQ  Stock  Market. The three new directors were elected by the
existing Board on August 27,  2007,  and  the new Chairman on January 22, 2008,
through an expansion of the number of the Company's directors.  The Chairman of
the full Board will serve as Lead Independent  Director  for  such  term as the
independent directors may determine.

      Committees of the Board. The Board has established an Audit Committee,  a
Compensation  Committee and a Nominating and Corporate Governance Committee, to
devote  attention   to  specific  charter  subjects.  The  functions  of  these
committees were determined  in  August  2007.  The  Committees did not hold any
meetings during 2007.  The Board established an Executive Committee on February
4, 2008.

      Conflicts of Interest. The Board has established  a Conflicts of Interest
policy,  which  effectively  addresses the identification of  and  process  for
conflicts  prohibition and resolution  thereof  in  an  effective  and  orderly
fashion.

      2.  Addition of Accounting and Executive Personnel.  We have entered into
a Contract Operating  Agreement  with  Sonterra Operating, Inc., an oil and gas
production  company, to retain certain of  its  executive  level  personnel  to
assist us in  our  day  to  day  business  functions  in  both  operations  and
accounting.   The key retainees include personnel functioning at the equivalent
level of chief  executive  officer, chief financial officer and chief operating
officer.

      3.  Effective Utilization  of  Accounting Systems. In connection with our
new Contract Operating Agreement, we have  begun  the  process  of transferring
data  to  a  more  robust  accounting  system  that  will  provide  for  easier
integration  of  oil  and  gas  specific tasks with generic financial reporting
tasks, including, documentation for  key processes such as a closing checklist,
budget-to-actual  analyses,  balance  sheet   variation   analysis,  pro  forma
financial statements, the usage of key spreadsheets and regular reconciliations
of accounts.

      4. Effective Control in Certain Accounting Areas.  In connection with our
new Contact Operating Agreement, we are implementing appropriate  controls over
documentation  of  accounting  protocols  and  separation  of responsibilities,
including  payables,  cash utilization, account structures and  general  ledger
journal entries. We are  improving  our  financial  reporting  controls  by (i)
establishing  a  procedure  for changing account structures and restrict system
access accordingly, (ii) implementing  a  process to review all journal entries
prior to entry into the General Ledger, (iii)  documenting  all  key  financial
reporting  processes,  and (iv) establishing an effective document control  and
retention procedure

      5.  Effective Control  in  Certain Operational Areas.  In connection with
our  new  Contact Operating Agreement,  we  are  implementing  (i)  appropriate
controls over  documentation  of  operating protocols, including guidelines for
authorization levels for entering into  agreements, such as oil and gas leases,
joint operating agreements, orders, non-disclosure  agreements, sales and other
contracts and (ii) a monitoring process to insure that  all leases and material
contracts  are  documented appropriately and represent the  transfer  of  valid
leasehold rights prior to execution.

      				-36-

<PAGE>

      6.  Employee  Handbook or Training on Company Policies.  With anticipated
additional management  resources, we will (i) create and distribute an employee
handbook to employees, (ii)  implement  employee  training on Company policies,
including  Code  of  Conduct, Sexual Harassment, Diversity,  Usage  of  Company
Computers, and Insider  Trading,  and  (iii)  adopt  existing proposed policies
incorporating a Whistleblower program and processes for making issues affecting
employees in the workplace known to the appropriate person(s)  without  fear of
retribution.

      7.   Employee  Performance  Criteria  or  Evaluation.   With  anticipated
additional  management  resources,  we will document job descriptions for  each
position in the Company and conduct periodic employee performance appraisals.

      8.  Documentation of Equity Transactions.   With  anticipated  additional
management resources, in addition to our retention of outsourced legal  counsel
on  a  consultant  basis to perform those duties traditionally performed by  in
house General Counsel,  we  have  commenced  the  preparation  of  an  internal
centralized  reporting  system  to record changes in our issued and outstanding
securities or our equity that is  beneficially owned, in addition to short term
periodic  equity  roll-forward record  and  companion  fully  diluted  analysis
reports.  This legal  counsel  also  serves  as our liaison with our Registered
Transfer Agent.

      9.   Segregation  of  Authority  and Duties.   We  have  taken  steps  to
implement appropriate internal control at  the highest executive and management
levels of the Company, through the segregation  of  authority  and  duties,  as
follows:

           Each  of our new Chairman and three new directors is an "independent
      director", as defined in Rule 4200(a)(15) of the Marketplace Rules of the
      NASDAQ Stock Market. The three new directors were elected by the existing
      Board on August  27,  2007  and  the  new  Chairman  on January 22, 2008,
      through an expansion of the number of the Company's directors.

           We  have  entered into a Contact Operating Agreement  with  Sonterra
      Operating Inc.,  an  oil and gas production company, to retain certain of
      its executive level personnel to assist us in the operation of our day to
      day business.  The key  retainees include personnel at the level of chief
      executive officer, chief financial officer and chief operating officer

           The positions of Company  Chairman  and  Chief Executive Officer are
      held by separate persons.

           All material acquisitions and contracts are  monitored  and approved
      by the Executive committee of the Company's Board of Directors.

           The Board, made up of a majority if independent directors,  has  the
      responsibility  to  oversee  and implement the Company's new Conflicts of
      Interest Policy

      10.  Creation of Centralized,  Indexed  Filing  System  and  Protocol for
Critical  Operative  Documents  of  the  Company.   With  additional management
personnel  resources,  we  anticipate  creating a system and protocol  for  the
effective documentation of critical operative  documents,  including:  executed
contracts,  leases, assignments, royalties and other material documents dealing
with the operation  of  the  Company's business day to day and long term.  This
system will be designed to balance the needs of personnel on various management
levels to access important documents as appropriate, with the need for security
appurtenant to the handling and exanimation of such documents.

      				-37-

<PAGE>

      We believe the foregoing  efforts  will enable us to improve our internal
control over financial reporting. Management is committed to continuing efforts
aimed at improving the design adequacy and  operational  effectiveness  of  its
system  of  internal  controls.  The  remediation  efforts  noted above will be
subject to our continuing internal control assessment, testing  and  evaluation
process.

Attestation

      This  annual  report  does  not  include  an  attestation  report  of our
registered  public  accounting  firm  regarding internal control over financial
reporting. Management's report was not subject to attestation by our registered
public  accounting  firm pursuant to temporary  rules  of  the  Securities  and
Exchange Commission that permit the Company to provide only management's report
in this annual report.


ITEM 8B.  OTHER INFORMATION.

Subsequent Events

      On January 22,  2008,  our Board of Directors appointed current president
Scott Zimmerman as Chief Executive  Officer  of the Company, effective upon the
resignation of Mr. Conradie from that position.  Mr. Zimmerman, who will retain
his  position  as  President,  also  was  elected as an  additional  member  of
Company's  Board  of  Directors,  pursuant to a  contemporaneous  vote  of  the
Directors to enlarge the Board of Directors  from 5 to 6 members. Mr. Zimmerman
has served as our President since June 18, 2007.

      On  January 22, 2008, our Board of Directors  also  elected  Mr.  Michael
Pawelek as  its  new  Chairman and outside director, effective immediately. Mr.
Pawelek, a geophysicist,  has  held  senior management positions throughout his
27-year  career  in  the  exploration  and  production  and  oilfield  services
industries. After working south Texas fields  early  in his career, Mr. Pawelek
later served as CEO of Universal Seismic Associates, a  seismic acquisition and
processing company that later became publicly traded and  was  ultimately sold.
He  also  held  the  position  of  President  at  BOSS Exploration & Production
Corporation, Inc. a privately held Gulf Coast production  company. He currently
is President of privately held San Antonio based Sonterra Resources, Inc. which
operates assets in the Texas State waters.

      On January 22, 2008, our Board of Directors accepted  the  resignation of
Mr.  Murray N. Conradie as its Chairman, Director and Chief Executive  Officer.
Mr. Conradie's  resignation  marks  our  transition  from  a  development stage
company  to  that  of  an  exploration  and  production  company,  through  the
simultaneous  appointment  of  a  seasoned,  technically  oriented oil and  gas
management team with experience in growing exploration and production.

      Mr. Conradie has been retained by the Company as a consultant  for  a one
year  period  to  assist  in the management transition and to offer guidance on
specific current or anticipated  business  opportunities  and  projects,  which
agreement can be terminated by either party after the expiration of the initial
90 days of the contract term. We have agreed to continue Mr. Conradie's current
compensation  package,  including  benefits, on an independent contractor basis
during the full consulting contract period.

      On January 22, 2008, our Board of Directors executed a consent in lieu of
special meeting, dated January 16, 2008,  to  amend Sections 3.2 and 3.3 of our
Bylaws. The amendments to the Bylaws were implemented  to  remove any ambiguity
with respect to the provisions thereof, and to provide for a more effective and
efficient management of our affairs with respect to the increase  in the number
of our directors, as may be determined by the Board of Directors from  time  to
time to be in the best interest of the Company, and the filling of vacancies in
the  members  of  the Board of Directors created by the resignation, removal of
such members or other cause, resulting in such vacancies.

      				-38-

<PAGE>

      Prior to the  amendments,  the  Bylaws required (i) that vacancies on the
Board of Directors be filled only by "a  special  election" called to elect all
directorships  including  those  not  currently  vacant;   (ii)  that  any  new
directorship  created  by  an increase in the authorized number  of  directors,
shall be filled by "voting stock at a special meeting called for such purpose;"
and (iii) that the voting of our common stock be cumulative.

      The amended Bylaws provide  (i)  that vacancies on the Board of Directors
be filled by an affirmative vote of a majority of the remaining directors; (ii)
that any new directorship created by an  increase  in  the authorized number of
directors be filled by election by the Board of Directors  and  (iii)  that the
voting of our common stock not be cumulative.

      The  Company  has  one  class  of voting securities. The amendment of our
Bylaws does not disparately reduce or  restrict  the  voting rights of existing
shareholders of that class.

      On February 15, 2008, we entered into an "Amendment to Gas Contract dated
October  1,  2007"  with  DCP  Midstream,  for  the gathering,  processing  and
marketing of our Bastrop Field natural gas volumes. The contract allows for the
first  time  for  sales  of  our  natural  gas  in Bastrop  County,  Texas.  At
approximately  1,500  BTU/cf,  Bastrop Field associated  gas  is  high-BTU  and
liquids-rich, allowing for further  revenue  by  stripping the liquids from the
natural gas. High-BTU gas commands a substantial premium  to  NYMEX natural gas
prices  due  to  the  high  propane, ethane,butane and methane content  of  the
natural gas as these natural  gas  liquids  ("NGLs")  can  be  sold  at  prices
approaching  crude  oil  prices,  less  a  discount, rather than at natural gas
prices. With this recent arrangement, the Company  is  able to convert what was
essentially a stranded-gas asset into a new source of revenue.

      According to the agreement, as amended, the Company  will  begin  to sell
initial  volumes  of 150 thousand cubic feet per day (Mcf/d) of natural gas  to
200 Mcf/d, prior to  July  31, 2008. As part of the contract terms, the Company
is responsible for $186,000  of capital investment in the project, for which it
will receive a repayment of $0.25/Mcf  over  time  if  220,000  Mcf  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.


      On  January  31,  2007  the Company entered into a certain Loan Agreement
(the "Loan Agreement"), pursuant  to  which the Company had the right to borrow
from The Longview Fund, L.P., a California  limited partnership ("Longview") an
aggregate amount not to exceed $15,000,000, which obligation was represented by
a certain Revolving Credit Note (the "Revolving Note"), dated January 31, 2007,
issued  by  the  Company  in  favor  of Longview.   Contemporaneous  with  this
transaction, the Company and Longview entered into a certain Security Agreement
(the "Original Security Agreement"), dated  as of January 31, 2007, pursuant to
which  the  Company  granted  to  Longview  a  security   interest  in  certain
collateral,  and the Company issued warrants to Longview for  the  purchase  of
1,000,000 shares of the Company's common stock at the price of $10.00 per share
(the "Warrants").

      On September  25,  2007,  the  Company  and Longview entered into a First
Amendment  to Loan Agreement and Revolving Note,  pursuant  to  which  (i)  the
Company and Longview agreed to amend and restate the Revolving Note to increase
the aggregate amount that the Company was entitled to borrow from Longview, and
the principal  amount  of  the Revolving Note, to $30,000,000; (ii) the Company
agreed to, among other things,  grant to, and cause each of its Subsidiaries to
grant to, Longview perpetual overriding  royalty  interests  in the hydrocarbon
production  of  all of the Company's and its Subsidiaries' current  and  future
interest in their  then  current  Real  Property, except for the Southern Texas
Properties (the "Original Override Conveyances");  and (iii) the Company agreed
to  enter into, and to cause each of its Subsidiaries  to  enter  into,  (a)  a
guaranty  for those certain obligations under the Loan Agreement, the Revolving
Note and each  of  the  transaction  documents contemplated thereby and entered
into in connection therewith, and (b)  security  and pledge agreements and such
other documents and instruments as are necessary to  provide  Longview  with  a
valid,  perfected, first priority security interest in substantially all of the
assets of the Company and each of its Subsidiaries.

      The  Company,  Longview  and  Marquis Master Fund, L.P., a British Virgin
Islands limited partnership ("Marquis"), to which Longview transferred a twenty
five  percent  (25%) interest in its rights  and  obligations  under  the  Loan
Agreement,  the Revolving  Note  and  the  Warrants,  entered  into  a  certain
Securities Purchase  Agreement  (the  "Securities  Purchase  Agreement"), dated
April 4, 2008 (the "Amendment Date"), to, among other things, amend and restate
in  its  entirety  all  terms,  conditions  and  provisions  of the appropriate
operative documents of the January 31, 2007 transaction, as amended on or about
September 25, 2007, as described above, including, without limitation, the Loan
Agreement, the Original Security Agreement and the Revolving Credit  Note.   In
connection  with  the  Securities  Purchase  Agreement,  the  Company issued to
Longview and Marquis Senior Secured Notes, in the aggregate principal amount of
$23,877,350.82,  which represented the aggregate outstanding principal  balance
of the Advances represented  by  the  Revolving  Note as of the Amendment Date.
Subject  to  the  terms  and  conditions more specifically  set  forth  in  the
Securities Purchase Agreement,  the  Company  has the option to sell to each of
Longview  and  Marquis  additional notes (each, an  "Additional  Note")  in  an
original aggregate principal  amount  of  up  to  $6,122,649.18.   Each  of the
Company's  Subsidiaries'  is  party  to  a  guaranty  pursuant  to  which  such
Subsidiaries'  have  guaranteed  all  of  the  Company's  obligations under the
Securities  Purchase Agreement, the Notes and the other transaction  documents.
All of the Company's  and  its  Subsidiaries'  obligations under the Securities
Purchase Agreement, the notes, the guaranty and the other transaction documents
are secured by a first priority perfected security  interest  in  substantially
all of the assets, including real property interests, of the Company  and  each
of  its  Subsidiaries.   Without limiting the foregoing, the Company agreed to,
among other things, grant  to, and cause each of its Subsidiaries to, grant to,
Longview and Marquis certain  mortgages in the oil and gas producing properties
held by Company and its Subsidiaries  and  an  aggregate  of three percent (3%)
perpetual overriding royalty interests in the hydrocarbon production  of all of
the Company's and the Subsidiaries' current and future interests in their  then
current Real Property, including the Southern Texas Properties.

      On  April  8, 2008, the Company sold, and Longview and Marquis purchased,
an aggregate of $2,000,000  principal  amount  of Additional Notes, pursuant to
the terms of the Securities Purchase Agreement.   After  giving  effect to such
sale  and  purchase of Additional Notes, and after payment of accrued  interest
under each of  the  notes then outstanding, the Company received the net amount
of $1,369,665.83.


      				-39-

<PAGE>


      On  April  9, 2008,  the Company, Longview and Marquis, finalized  a  new
Amended Agreement,  dated  April  3,  2008,  to,  among other things, amend and
restate in its entirety all terms, conditions and provisions of the appropriate
operative documents of the January 31, 2007 transaction, as amended on or about
September  25,  2007,  as  described above, as set forth  in  the  new  Amended
Agreement, and to amend and  restate  to  read  in their entirety the operative
documents of the January 31, 2007 transaction, as  amended on or about April 1,
2008,  including  without limitation the Company's agreement  to,  among  other
things, grant to, and cause each of each Subsidiaries, including Southern Texas
Oil Company, to grant to, Longview and Marquis certain mortgages in the oil and
gas producing properties held by Company and its Subsidiaries and the perpetual
overriding royalty  interests  in  the  hydrocarbon  production  of  all of the
Company's  and  the  Subsidiaries'  current and future interests in their  then
current Real Property, including the Southern Texas Properties, as set forth in
the  new  Amended Agreement, effective  as  of  the  Amendment  Date  contained
therein.

      On April  9,  2008,  the  Company  signed a definitive Contract Operating
Agreement with Sonterra Operating, Inc. As  of  the  effective  date,  April 1,
2008, Sonterra began overseeing daily operations, in the name of, on behalf of,
and  for  the benefit of the Company, of both operating services and accounting
services for  the  operated  and  non-operated  properties  as  an  independent
contractor  acting  in the role of contract operator. The initial contact  term
shall be 90 days, with  a month-to-month extension as approved by both parties,
going forward. Compensation  for  services  rendered  under  Contract Operating
Agreement  will  be  competitive  with industry standards for similar  services
provided  by  third party contact operators.  Sonterra  senior  management  has
experience providing  similar  services  at  predecessor  companies.  Under the
terms of the agreement, the Company will continue to lead the  operation of its
Colorado assets with the assistance of the existing Colorado contract operator.



      				-40-

<PAGE>



                                    PART III

ITEM  9.   DIRECTORS,  EXECUTIVE  OFFICERS,  PROMOTERS AND CONTROL PERSONS  AND
CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

Directors and Executive Officers

      The  following  table  sets  forth information  regarding  our  executive
officers, certain other officers and directors as of December 31, 2007:

      Name                  Age   Position/Office        Served Since

      Murray N. Conradie    40    Chairman/CEO           April 1999
      Scott zimmerman	    ??	  President		 June 2007
      Edward Shaw           45    COO                    December 2005
      Stanley Hirschman     61    Director               August 2007
      Owen M. Naccarato     58    Director               August 2007
      David Lieberman       63    Director               August 2007

      The following is a brief description  of  the  business background of the
directors and executive officers of The Company:

Murray N. Conradie - CEO and Chairman of the Board

      Mr. Conradie has been the CEO and Chairman of the Board and a Director of
the Company since April 1999.  He was also the CEO and  Chairman  of  the Board
and  a  Director  of Datascension, Inc., a public company trading on the OTCBB,
since April 1999, the parent company of The Company, prior to the spin-off.  He
resigned from Datascension Inc. on April 1, 2005 to focus more attention on The
Company.   Mr. Conradie  has  several  years  of  experience  in  creating  and
developing start-up enterprises and has a background in Law and Accounting.

      Subsequent  to  December  31,  2007,  our Board of Directors appointed J.
Scott Zimmerman as Chief Executive Officer, President,  and  Director. (See the
Company's report on Form 8-K dated January 23, 2008.)


Scott Zimmerman - President

On June 18, 2007, South Texas  Oil named Scott Zimmerman, the former President,
CEO, and Founder of Storm Cat Energy,  as  President.   Scott Zimmerman holds a
Bachelor of Science  in Petroleum  Engineering.  Mr.  Zimmerman's  professional
experience includes  an  extensive  background  in  the  oil  and  gas industry
including working at Huber Corporation  for 20 years  where he was instrumental
in the sale of Huber's Fruitland Coal  CBM  field  for $100 +MM in profit.   In
2002  he  was  Vice-President  of  Operations and  Engineering   for  Evergreen
Resources  and  responsible  for  over  1,000+  producing  wells  and   800,000
prospective  acres.   Evergreen  was  acquired  by  Pioneer  Resources for $2.1
billion in 2004.

      Subsequent  to  December  31,  2007,  our Board of Directors appointed J.
Scott Zimmerman as Chief Executive Officer, President,  and  Director.



Edward Shaw - COO/Director

       Effective  December  1,  2005,  Mr. Edward Shaw was appointed  as  Chief
Operating Officer of The Company to head  field  operations in Texas.  Mr. Shaw
is qualified as both a mechanical and electrical engineer with over 10 years of
experience in Saudi Arabia and has spent the prior 4 years in New Zealand where
he was researching and developing methods of monitoring  oil  wells to optimize
production,   including   using  existing  products  integrated  with  emerging
telemetry technologies.

Stanley Hirschman - Director

      Mr. Hirschman is President  of  CPointe  Associates, Inc., a Plano, Texas
executive management and retail operations consulting firm. He is an investment
due diligence specialist and works regularly with public companies dealing with
the difficulties of the balance between increased  regulatory  requirements and
reasonable corporate governance. He is a director of Axion Power  International
and  Longview Fund International and former chairman of Mustang Software,  Inc.
While  at  Mustang Software, Mr. Hirschman took a hands-on role in the planning
and execution  of  the  strategic  initiatives  to  increase shareholder value,
resulting in the successful acquisition of the company by Quintus Corporation.

      His client list has included GameStop, Nortel,  SBC  Wireless (now AT&T),
Dalrada  Financial  Corp,  Oxford Media Corporation, Earthlink  Inc.,   Airmesh
Communications,  Bravo  Foods   International  and  Retail  Highway.  Prior  to
establishing CPointe Associates,  he  was  Vice  President Operations, Software
Etc., Inc., a 396 retail store software chain, from  1989  until  1996. He also
held  senior  executive  management  positions  with T.J. Maxx, Gap Stores  and
Banana  Republic.  Mr.  Hirschman is a member of the  National  Association  of
Corporate Directors, the  KMPG  Audit  Committee Institute and is a graduate of
the Harvard Business School Audit Committees  in  the  New  Era  of  Governance
symposium.  He is active in community affairs and serves on the Advisory  Board
of the Salvation Army Adult Rehabilitation Centers.

      				-41-

<PAGE>

Owen M. Naccarato - Director

      Owen M.  Naccarato,  Esq.,  CPA and MBA has for the last ten years been a
practicing attorney specializing in  corporate  and  securities  law.  Prior to
practicing  law,  Mr. Naccarato held various high level financial and operating
positions with Fortune  50 firms. Mr. Naccarato is a member of the American Bar
Association, the California  State  Bar  Association, the Orange County and the
Los  Angeles  County  Bar  Associations  and  their  respective  corporate  law
sections.  In addition to having a JD in law, Mr.  Naccarato  earned  a  BS  in
Accounting from  Northern  Illinois  University,  an MBA from DePaul University
(Chicago) and is a certified public accountant, having articulated in the State
of Illinois.

David Lieberman - Director

      Mr. Lieberman is the Chief Financial Officer  of  Datascension,  Inc.,  a
telephone  market  research  company  that  provides  both outbound and inbound
services  to  corporate  customers, including telephone research  interviewing,
data collection and processing,  and customer service.  He has over forty years
of financial experience beginning  with  five years as an accountant with Price
Waterhouse,  from  1967  through  1972.   Mr.  Lieberman   has  held  executive
management positions with both public and private companies.

      Mr. Lieberman's experience includes serving in various  senior  executive
positions with a strong financial and operations background.  Most recently, he
served   as   Chief  Operating  and  Financial  Officer  of  Dalrada  Financial
Corporation, a  publicly traded payroll processing company, based in San Diego.
Prior to that position,  he  had  been Chief Financial Officer for John Goyak &
Associates, Inc., a Las Vegas-based  aerospace  consulting  firm. In the 1990s,
Mr.  Lieberman  served  as President and Chief Operating Officer  of  both  JLS
Services, Inc. and International  Purity,  and  also  served as Chief Financial
Officer for California Athletic Clubs, Inc.

Mr. Lieberman attended the University of Cincinnati, where he received his B.A.
in Business, and is a licensed CPA in the State of California.  He  resides  in
Las Vegas, Nevada.

Significant Employees

       We  have  not  identified  any  employee  who is not an executive who is
expected to make a significant contribution to the business.

Family Relationships

      There are no family relationships among the directors, executive officers
or persons nominated or chosen by the Company to become  directors or executive
officers.

Legal Proceedings

      The Company is currently the Plaintiff in a lawsuit  filed Harris County,
Texas against Leexus LLP, Mr. Mark Jaehne and Mr. Bennie Jaehne  for failing to
adhere  to  the  terms  of  the  Leexus Merger Agreement signed in April  2007.
Defendants in this action have brought  subsequent  separate counter-complaints
in  both  Lee and Bastrop County, Texas, against the Company  for  its  alleged
failure to  make  certain  payments under the Merger Agreement.  The parties in
the actions have agreed in writing to mediate their disputes on April 15, 2008,
and the lawsuits are in the  midst of a moratorium that will last through April
21, 2008.  The Company anticipates  that, if these matters are not settled, the
lawsuits will be consolidated for discovery  and  trial.  We have evaluated the
prospects of the outcome of these lawsuits with our attorneys  and believe that
the Company will be successful in all actions.

      				-42-

<PAGE>

      To  the knowledge of management, no federal, state or local  governmental
agency is presently contemplating any proceeding against the Company.

      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 the knowledge  of  the Company,
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.


INFORMATION REGARDING BOARD OF DIRECTORS AND COMMITTEES

    The business of the Company is managed under the direction  of  the  Board.
The  Board  meets  on  a  regularly scheduled basis four times a year to review
significant developments affecting  the Company and to act on matters requiring
Board approval. It also holds special meetings and acts by written consent when
important matters require Board action between scheduled meetings.


Attendance at Annual Meetings

    Each member of the Board of Directors  is  required  to attend all meetings
(whether  special or annual) of the stockholders of the Company.  In  the  case
where a Company  Director  is unable to attend a special or annual stockholders
meeting, such absence shall  be  publicly  disclosed  in  the  subsequent Proxy
Statement on Schedule 14A filed with the Securities and Exchange Commission and
an  explanation for such absence shall be provided to the Company's  Nominating
and Corporate Governance Committee.


      				-43-

<PAGE>

Attendance at Board Meetings

    During the 2007 fiscal year, the Board held eleven Special Meetings and did
not act  by  unanimous  written  consent.  During  the  2007  fiscal year, each
Director attended 75% or more of the total number of meetings of  the Board and
each committee of the Board on which such Director serves.


Independent Directors

      Each of Michael Pawelek (Chairman) Stanley Hirschman, David Lieberman and
Owen Naccarato is an "independent director", as defined in Rule 4200(a)(15)  of
the  Marketplace  Rules  of  the  NASDAQ  Stock  Market  (such  Directors  are,
collectively,  the  "Independent  Directors"). Messrs. Hirschman, Lieberman and
Naccarato were elected by the existing Board on August 27, 2007 and Mr. Pawelek
on  January 22, 2008, through an expansion  of  the  number  of  the  Company's
directors.  The Independent directors did not hold any separate meetings during
their  tenure  in  2007.   Mr. Pawelek, who is Chairman of the full Board, will
serve as Lead Independent Director  for  such term as the Independent Directors
may determine.


Committees of the Board

    The Board has established an Audit Committee,  a Compensation Committee and
a  Nominating  and  Corporate  Governance  Committee, to  devote  attention  to
specific subjects. The functions of those committees  were determined in August
2007.  The  Committees  did  not  hold  any  meetings during 2007.   The  Board
established an Executive Committee on February 4, 2008.


Audit Committee

    The members of the Audit Committee are Stanley  Hirschman,  David Lieberman
and Owen Naccarato, each an Independent Director.

    The   Audit   Committee  (i) appoints  the  independent  registered  public
accounting firm for  the  Company  and  monitors  the performance of such firm,
(ii) reviews  and  approves  the  scope  and  results  of  the  annual  audits,
(iii) evaluates  with  the  independent registered public accounting  firm  the
Company's  annual audit of the  financial  statements  and  audit  of  internal
control  over   financial  reporting,  (iv) monitors  the  performance  of  the
Company's internal  audit  function, (v) reviews with management the annual and
quarterly financial statements,  (vi) reviews  with management and the internal
auditors the status of internal control over financial reporting, (vii) reviews
and maintains procedures for the anonymous submission  of complaints concerning
accounting and auditing irregularities and (viii) reviews  problem areas having
a  potential  financial  impact  on  the  Company which may be brought  to  its
attention  by  management, the internal auditors,  the  independent  registered
public  accounting  firm  or  the  Board.  In  addition,  the  Audit  Committee
preapproves   all  non-audit  related  services  provided  by  the  independent
registered public  accounting  firm  and  approves  the  independent registered
public accounting firm's fees for services rendered to the Company.

    The charter of the Audit Committee was approved and adopted by the Board of
Directors  at  the  August 27,  2007 Board Meeting. The Charter  of  the  Audit
Committee  more  fully  describes  the   purposes,   membership,   duties   and
responsibilities of the Audit Committee described herein.

      				-44-

<PAGE>


Compensation Committee

    The  members  of  the  Compensation  Committee are Michael Pawelek, Owen M.
Naccarato and David Lieberman, each of whom is an Independent Director.

    The  Compensation  Committee  functions include  (i) reviewing  and  making
determinations with respect to matters  having  to  do with the compensation of
executive officers and Directors of the Company and (ii) administering  certain
plans  relating to the compensation of officers and Directors. During the  2007
fiscal year, the Compensation Committee did not meet.

    The  Compensation  Committee  has full and complete discretion to establish
the compensation payable to the Company's  Chief Executive Officer, and that of
other executive officers. With regard to such  other  executive  officers,  the
Compensation  Committee  considers  the  recommendations of the Chief Executive
Officer. The Compensation Committee following  authorization  by  the Company's
Board  of  Directors  has  delegated  to  the Company's Chief Executive Officer
authority with respect to management annual salary decisions up to $150,000 per
employee upon consultation with the Chairman  of the Compensation Committee and
the  authority  to grant up to 1,000 stock options  per  new  employee  at  the
director  level or  below  of  the  Company.  The  Compensation  Committee  has
otherwise not  delegated to management any of its responsibilities with respect
to the compensation of the executive officers of the Company, except in respect
to the day to day operations of the Company's compensation plans.

    The charter  of  the Compensation Committee was approved and adopted by the
Board of Directors at  the  August 27,  2007 Board Meeting.  The Charter of the
Compensation Committee more fully describes  the  purposes,  membership, duties
and responsibilities of the Compensation Committee described herein.


Nominating and Corporate Governance Committee

    The  members  of  the  Nominating  and  Corporate Governance Committee  are
Stanley  Hirschman,  David Lieberman and Owen Naccarato,  each  an  Independent
Director.

The Nominating and Corporate Governance Committee functions include identifying
persons for future nomination  for  election  to  the  Board of Directors.  The
Nominating  and  Corporate Governance Committee approves and  adopts  Corporate
Governance Guidelines.

    The Nominating  and Corporate Governance Committee oversees an annual self-
evaluation conducted  by  the Board in order to determine whether the Board and
its  Committees  are functioning  effectively.  The  Nominating  and  Corporate
Governance Committee  also  oversees  individual  Director  self-assessments in
connection  with  the  evaluation  of such Director for purposes  of  making  a
recommendation to the Board as to the  persons  who  should  be  nominated  for
election  or re-election, as the case may be, at the upcoming annual meeting of
stockholders.

    The Nominating  and Corporate Governance Committee considers candidates for
Board Membership suggested  by  its members and other Board members, as well as
management and stockholders. There  are  no  differences in the manner in which
the Nominating and Corporate Governance Committee  evaluates  nominees  for the
Board  of  Directors  based  on whether or not the nominee is recommended by  a
stockholder.  The  Nominating  and  Corporate  Governance  Committee  evaluates
prospective nominees against a number  of minimum standards and qualifications,
including  business  experience  and financial  literacy.  The  Nominating  and
Corporate Governance Committee also  considers  such  other factors as it deems
appropriate,  including the current composition of the Board,  the  balance  of
management and  Independent  Directors,  the  need for Audit Committee or other
relevant  expertise  and  the evaluations of other  prospective  nominees.  The
Committee then determines whether  to  interview the prospective nominees, and,
if  warranted,  one or more of the members  of  the  Nominating  and  Corporate
Governance Committee, and others as appropriate, may interview such prospective
nominees in person  or  by  telephone.  After  completing  this  evaluation and
interview,  the  Nominating  and  Corporate  Governance Committee will  make  a
recommendation to the full Board of Directors  as  to the persons who should be
nominated by the Board of Directors. The Board of Directors then determines the
nominees after considering the recommendation and report  of the Nominating and
Corporate Governance Committee.

      				-45-

<PAGE>


Conflicts of Interest

      The officers and directors of the Company are now and  may  in the future
become  shareholders,  officers  or directors of other companies which  may  be
engaged in business activities similar  to  those  conducted  by  the  Company.
Accordingly,  additional  direct  conflicts of interest may arise in the future
with respect to such individuals acting  on  behalf  of  the  Company  or other
entities. Moreover, additional conflicts of interest may arise with respect  to
opportunities   which  come  to  the  attention  of  such  individuals  in  the
performance of their duties or otherwise. The Company does not currently have a
right of first refusal  pertaining  to  opportunities that come to management's
attention insofar as such opportunities may  relate  to  our  proposed business
operations.

      The officers and directors are, so long as they are officers or directors
of the Company, subject to the restriction that all opportunities  contemplated
by  our  plan  of  operation  which  come  to  their  attention,  either in the
performance  of  their  duties  or  in  any  other  manner,  will be considered
opportunities of, and be made available to the Company and the  companies  that
they  are  affiliated with on an equal basis. A breach of this requirement will
be a breach  of the fiduciary duties of the officer or director. If the Company
or the companies  in  which the officers and directors are affiliated with both
desire to take advantage  of  an  opportunity, then said officers and directors
would abstain from negotiating and  voting  upon  the opportunity. However, all
directors may still individually take advantage of opportunities if the Company
should decline to do so. Except as set forth above,  We  have  not  adopted any
other conflict of interest policy with respect to such transactions.

Compliance with Section 16(a) of the Exchange Act

      Section  16(a)  of  the  Securities  Exchange  Act  of  1934 requires our
directors and executive officers, and persons who beneficially  own  more  than
ten percent of a
registered class of our equity securities (referred to as "reporting persons"),
to  file  with  the  Securities  and  Exchange  Commission  initial  reports of
ownership  and  reports  of  changes  in  ownership of common stock.  Reporting
persons are required by Commission regulations to furnish us with copies of all
Section 16(a) forms they file.

      Based solely upon a review of Forms 3,  4  and  5 furnished to us, we are
not aware of any person who at any time during the fiscal  year  ended December
31, 2007, was a director, officer, or beneficial owner of more than ten percent
of our common stock, who failed to file, on a timely basis, reports required by
Section 16(a) of the Securities Exchange Act of 1934 during such fiscal year.

Code of Ethics

      We have adopted a code of ethics that applies to our executive  officers,
including our Chief Executive Officer and Chief Financial Officer.

      				-46-

<PAGE>

Indemnification of Directors and Officers.

The  By-laws  of the Company state that, to the extent allowed by Nevada  State
law, as same may  now  or  hereafter  be  amended,  and subject to the required
procedure thereof, the corporation shall indemnify any  person  who was or is a
party  of  is  threatened  to  be  made  a party to any threatened, pending  or
completed action, suit or proceeding, whether  civil,  criminal, administrative
or investigative (other than an action by or in the right  of  the corporation)
by reason of the fact that he is or was a director, officer, employee  or agent
of the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture,  trust  or  other  enterprise,  against expenses (including attorneys'
fees), judgments, fines and amounts paid in  settlement actually and reasonably
incurred by him in connection with such action,  suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and with respect  to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement or
conviction, or upon a plea of nolo contendere or its
equivalent, shall not of itself, create a presumption that  the  person did not
act in good faith and in a manner which he reasonably believed to  be in or not
opposed  to  the  best  interests  of the corporation, and with respect to  any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.

ITEM 10.  EXECUTIVE COMPENSATION.

Compensation of Executive Officers

      The following table sets forth  the aggregate cash compensation or booked
value paid by the Company for services rendered during the periods indicated to
its directors and executive officers:


<TABLE>
<CAPTION>

<S>					<C>				<C>

                                                       Non-
                                                       Equity	   Non-
                                                       Incentive   qualified	All
Name & Position       	Salary 	Bonus	Stock  Option  Plan        Deferred     Other    Total
                   Year	($)    	($)  	Awards Awards  Comp        Earnings     Comp 	 ($)
(a)                               	(4)    ($)     ($)
                   (b) 	(c)    	(d)  	(e)    (f)     (g)         (h)          (i)      (j)
---------------	   ---- ------- -----	------ ------  ---------   ---------	-----	 -------
Murray Conradie    2005 150,000	0                      0           0            0        150,000
CEO                2006 165,000	0                                               5,000(1) 170,000
                   2007 207,000                1,306,863                        5,000(1) 1,332,563

Edward Shaw        2005 4,000           16,000                                  0        20,000
COO                2006 72,000         (2)                                      8,300(3) 80,300
                   2007 90,750                 1,045,490                        8,300(3) 1,144,540

J. Scott Zimmerman 2007 124,285                261,373                                   385,658
                        (4)
</TABLE>



      (1)  Mr. Conradie received a $500 per month vehicle allowance and received
	  options for 225,000 shares of common stock in 2007

      (2) Mr. Shaw received 100,000 shares  of  restricted  common stock of the
          Company as an incentive payment as part of his Employment  Agreement,
          valued at $0.16 per share, and received options for 180,000 shares of
     	  common stock in 2007.

      (3) Mr.  Shaw received a $445 per month vehicle allowance and a $245  per
          month allowance for expenses as part of his Employment Agreement.

      (4) Annualized  amount;  Mr. Zimmerman does not have a written employment
          contract.  Mr. Zimmerman received options for 45,000 shares of common
 	  stock in 2007.

Employee options vest over 3 years and the director's option vest over 1  year,
with such options exercisable at the stock's market price as of October 1, 2007
or $9.45 per share, and expire October 1, 2012.

      Other  than as set forth in  the  above  table,  the  Officers  have  not
received any common  stock  in  compensation for their services, other than the
unpaid salary they have converted to common stock.

Options			Year 1  Year 2	Year 3	Sale Bonus	 Total
---------------		------  ------  ------  ----------  	-------
Murray Conradie  CEO	25,000  25,000  25,000  150,000		225,000

Edward Shaw	 COO    20,000	20,000	20,000	120,000		180,000

Scott Zimmerman  PRES	15,000	15,000	15,000			 45,000


      				-47-

<PAGE>

Employment Agreements

      On April 1, 2004, we entered  into  an  employment  agreement with Murray
Conradie.  The  term  of employment is five (5) years. Mr. Conradie  serves  as
President, CEO, Chairman  and  Director.  We  agreed to pay Mr. Conradie a base
salary of $24,000 per annum for the first year  of employment, increasing based
on  performance  of  the Company and time devoted solely  to  the  Company.  In
addition to the cash compensation  earned  by  Mr.  Conradie,  we  granted  Mr.
Conradie  an  option  to  purchase  shares of our common stock according to the
Executive Stock Option Plan.

      As  of April 1, 2007, Mr. Conradie  devoted  100%  of  his  time  to  the
management  and  control  of the Company and per Section 3(j) of his Employment
Agreement with Datascension Inc.(f/k/s Nutek Inc., the former parent company of
the Company, and per Section  5.2(f)  of  his  Employment  Agreement  with  the
Company, his Base Salary has been increased to $150,000 per annum and the items
in Section 5.2(a-f) have been eliminated.

      (See   Exhibit   10.30   Employment   Agreement  Murray  N.  Conradie  of
Datascension Inc, and Exhibit 10.3 Employment  Agreement  Murray N. Conradie of
the Company.)

      On December 1, 2005, we entered into an employment agreement  with Edward
Shaw.  The  term  of  employment  is  five  (5) years. Mr. Shaw serves as Chief
Operational Officer. We agreed to pay Mr. Shaw  a  base  salary  of $48,000 per
annum for the first year of employment, increasing based on performance  of the
Company  and  time  devoted  solely  to  the  Company.  In addition to the cash
compensation earned by Mr. Shaw, we granted Mr. Conradie  an option to purchase
shares of our common stock according to the Executive Stock Option Plan.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END

<TABLE>
<CAPTION>
<S>		<C>		<C>		<C>	<C>		<C>		<C>		<C>		<C>		<C>		<C>

																  Equity
																  Incentive
															Market	  Plan		Equity
															Value	  Awards:	Incentive
															of	  Number	Plan
							Equity								Shares	  of		Awards:
							Incentive							or	  Unearned	Market or
							Plan								Units	  Shares,	Payout
				Number of		Awards:						Number of	of	  Units		Value
		Number of	Securities		Number of					Shares or	Stock	  or		of Unearned
		Securities	Underlying		Securities					Units of	that	  other		Shares, Units
		Underlying	Unexercised		Underlying	Option				Stock that	Have	  Rights	or Other
		Unexercised	Options (#)		Unexercised	Exercise	Option		Have not	Not	  That		Rights that
Name &		Options (#)	Not			Unearned	Price		Expiration	Vested		Vested	  Have Not	Have Not
Title		Exercisable	Exercisable		Options (#)	($)		Date		(#)		($)	  Vested (#)	Vested (#)
(a)		(b)		(c)			(d)		(e)		(f)		(g)		(h)	  (i)		(j)


Murray
Conradie			150,000 (1)		150,000         $9.45       	10/01/2012	150,000   	n/a   	  none     	n/a
CEO				 75,000 (2)		 75,000		$9.45		10/01/2012	 75,000		n/a	  none		n/a


Edward Shaw                      180,000 (1)		120,000         $9.45       	10/01/2012	120,000     	n/a   	  none     	n/a
COO				 60,000 (2)		 60,000		$9.45		10/01/2012	 75,000		n/a	  none		n/a

Scott
Zimmerman			 45,000 (2)		 45,000		$9.45		10/01/2012	 45,000		n/a	  none		n/a
PRES

</TABLE>

      (1) Exercisable on sale of Company
      (2) Vests over 3 years

      				-48-

<PAGE>

Compensation of Directors

The  following  table sets forth the aggregate cash compensation  paid  by  the
Company for services rendered during the periods indicated to its directors and
executive officers:

DIRECTOR COMPENSATION

<TABLE>
<CAPTION>
<S>			<C>					<C>

	                                                   	Non
                                                   	    Non-       	Qualified
               		Fees		                    Equity	Deferred
               		Earned or  	Stock 	 Option     Incentive	Comp		All other
Name & Title   		Paid in Cash    Awards	 Awards     Plan 	Earnings        Compensation	Total
					($)	 ($)	    ($)		($)		($)		($)
(a)			(b)		(c)	 (d)	    (e)		(f)		(g)		(h)

Murray Conradie
CEO
Stan Hirschman 		3,000(1)            	 103,081 (2)                                            106,081
David Lieberman		3,000(1)            	 103,081 (2)                                            106,081
Owen Naccarato 		3,000(1)            	 103,081 (2)                                            106,081

Edward Shaw

</TABLE>

      (1)Paid to independent directors.
      (2)Based on options for 20,000 shares of common stock.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership of Management and Certain Beneficial Owners

      The following  table  sets  forth  information  as April **,2008, certain
information with respect to the beneficial ownership of the Common Stock of the
Company concerning stock ownership by (i) each director,  (ii)  each  executive
officer,  (iii) the directors and officers of the Company as a group, (iv)  and
each person known by the Company to own beneficially more than five (5%) of the
Common Stock.   Unless  otherwise  indicated,  the  owners have sole voting and
investment power with respect to their respective shares.   The mailing address
for each of the persons indicated is our corporate headquarters.

      Beneficial ownership is determined under the rules of the  Securities and
Exchange Commission. In general, these rules attribute beneficial  ownership of
securities to persons who possess sole or shared voting power and/or investment
power  with  respect  to  those  securities  and  includes, among other things,
securities that an individual has the right to acquire  within  60 days. Unless
otherwise  indicated, the stockholders identified in the following  table  have
sole  voting  and  investment  power  with  respect  to  all  shares  shown  as
beneficially owned by them.

      				-49-

<PAGE>

      a. Security ownership of certain beneficial owners (more than 5%)

<TABLE>
<CAPTION>

<S>			<C>			<C>

Title of 	Name & address of beneficial owner	Amount & nature of 	Percent of Class
Class							beneficial ownership

Common        	Longview Fund and affiliates      	7,315,005 common stock  46.74%
              	600 Montgomery Street, 44th Floor
              	San Francisco, CA 94111

Common        	Doud Oil & Gas Company LLC        	2,419,355               14.68%
              	25528 Genesee Trail Road
              	Golden CO 80401


Common        	Murray Conradie                  	846,380 common stock      7.8%
              	101 Hensley Circle               	484,279 options
              	Austin, TX 78738

</TABLE>

      b. Security ownership of management

<TABLE>
<CAPTION>
<S>			<C>			<C>


Title of 	Name & address of beneficial owner	Amount & nature of 	Percent of Class
Class							beneficial ownership

Common       	Edward Shaw, COO & Director      	98,800 common stock     2.78%
                                               		371,070 options
Common        	Owen Naccarato, Director         	20,000 common stock     0.24%
                                               		20,000 options
Common        	Stanley Hirschman, Director      	20,000 options          0.12%
Common        	David Lieberman, Director        	20,000 options          0.12%
							--------------------	------
Common        	Officers and Directors as a group	118,800 common stock    3.26%
                                              		431,070 options
</TABLE>


      The  percentage  ownership  calculations  listed  above  are  based  upon
16,482,571 shares of common stock being outstanding as of April 11, 2008, plus,
for  each  person  or  group,  any securities that such person or group has the
right  to acquire within 60 days  pursuant  to  options,  warrants,  conversion
privileges or rights.

      c. Change in control.

      Pursuant  to  the  terms  of  a certain Loan Agreement, dated January 31,
2007, the Company had the right to borrow  from  The  Longview  Fund,  L.P.,  a
California  limited partnership, an aggregate amount not to exceed $15,000,000,
which obligation  was represented by a certain Revolving Credit Note, issued by
the Company in favor  of Longview. Contemporaneous with the Loan Agreement, the
parties entered into a  certain  Security  Agreement,  pursuant  to  which  the
Company granted to Longview a security interest in certain Collateral;

      On  September  25,  2007,  the  Company and Longview entered into a First
Amendment to Loan Agreement and Revolving  Credit  Note,  pursuant to which the
principal  amount of the Revolving Note was increased to $30,000,000,  and  the
Company agreed  to  enter  into, and to cause each of the Subsidiaries to enter
into, (a) a guaranty for the  certain  defined  obligations, and (b) a security
and pledge agreements and such other documents and instruments as are necessary
to provide Longview with a valid, perfected, first  priority  security interest
in  substantially  all  of  the  assets  of  the  Corporation and each  of  the
Subsidiaries.

      				-50-

<PAGE>

      In consideration  for  the  increase  in the credit facility, the Company
executed a certain Pledge Agreement, which granted to  Viking Asset Management,
LLC as  collateral  agent  for  each  of  Longview  and  Marquis, the  right to
vote the shares of common stock held by the Company in its subsidiaries, in the
event of the occurrence of certain defined events of default of the Company, as
follows:


DESCRIPTION  OF CAPITAL STOCK OR MEMBERSHIP INTERESTS OF PLEDGED ENTITIES  HELD
BY SOUTH TEXAS OIL COMPANY

<TABLE>
<CAPTION>

<S>		<C>		<C>		<C>	<C>		<C>		<C>		<C>		<C>		<C>		<C>

Issuer                     Owner  	Class of	Authorized 	Stock 	    No. of 		Issued and	Percentage of
                                  	Stock or	No. of          Cert.	    Shares Represented	Outstanding 	Shares  Held  by
                                	Membership      Shares          No.         By Certificate      Shares      	Pledgor
					Interests

STO  Operating  Company,    South  	Common          50,000,000 	#1          1,000,000           1,000,000	100%
a Texas corporation         Texas
                            Oil
                            Company

STO  Drilling   Company,    South  	Common          50,000,000	#1          1,000,000           1,000,000	100%
a Texas corporation         Texas
                            Oil
                            Company

Southern Texas Oil Company, South  	Common          50,000,000	#2          1,000,000           1,000,000	100%
a Texas corporation         Texas
                            Oil
                            Company

</TABLE>


DESCRIPTION OF  CAPITAL  STOCK OR MEMBERSHIP INTERESTS OF PLEDGED ENTITIES HELD
BY STO OPERATING COMPANY

<TABLE>
<CAPTION>
<S>		<C>		<C>		<C>	<C>		<C>		<C>		<C>		<C>		<C>		<C>


Issuer                     Owner  	Class of	Authorized 	Stock 	    No. of 		Issued and	Percentage of
                                  	Stock or	No. of          Cert.	    Shares Represented	Outstanding 	Shares  Held  by
                                	Membership      Shares          No.         By Certificate      Shares      	Pledgor
					Interests

STO Properties LLC, a	   STO       	Sole       	n/a             #1          n/a          	n/a         	100%
Texas limited liability	   Operating 	membership
company                    Company   	interest

</TABLE>





      				-51-

<PAGE>


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    Mr. Conradie received  100,000  shares  of  restricted  common stock of the
Company, in 2002, per Section 3(g) of his employment contract  with Nutek Inc.,
the  parent  company,  upon  the spin-off of the Company as a separate  trading
entity.  (See Exhibit 10.16 Employment  Agreement  Murray  N. Conradie of Nutek
Inc.)

     The  Company also has a note payable to Murray Conradie,  related  to  the
purchase of  wells  during  the 2nd quarter of 2005 with a balance of $7,918 at
December 31, 2007.  This note  is  paid only from a percentage of production of
the related wells. This note is to be  paid  monthly for a period of thirty six
(36) months (from April 2005) with interest of  seven  percent (7%) accruing on
the  outstanding  balance.  The monthly payment amount is  not  to  exceed  the
income from the minimum  net  revenue  interest  (NRI)  from  the prior month's
production.   Payment  will  be adjusted accordingly and the remaining  balance
increased by the monthly shortfall should any occur.

       The Company has an outstanding  note  payable  to  Jason  Griffith,  our
former  CFO,  related  to the purchase of wells during the 2nd quarter of 2005,
with a balance owed as of December 31, 2007 of $9,149.  This note is to be paid
monthly for a period of  thirty six (36) months (from April 2005) with interest
of seven percent (7%) accruing on the outstanding balance.  The monthly payment
amount is not to exceed the  income from the minimum net revenue interest (NRI)
from the prior month's production.   Payment  will  be adjusted accordingly and
the remaining balance increased by the monthly shortfall should any occur.

      We lease approx 4 acres in Bigfoot, Texas and uses  these  premises for a
field  office  and  storage  for  all  the  vehicles,  oil field equipment  and
supplies.  This property is owned by Mr. Conradie. The monthly rental amount is
$750.

      We  utilize  a tractor and road maintainer for clearing  and  maintaining
leases, lease roads,  oil  well  locations  and  preparing sites for workovers.
This  equipment is owned by Mr. Conradie. We pay a  monthly  rental  amount  of
$1,286 for usage of this equipment.

      A  material  relationship  exists  between  JGM Oil Investments, LLC from
which the Somerset leases were purchased by the Company  on  April 1, 2005, and
Mr. Conradie, the President/CEO and Director of the Company at  the time of the
transaction,  and  Mr.  Jason  Griffith,  the  CFO of the Company at the  time,
insofar as Messrs. Conradie and Griffith hold a  majority ownership interest in
JGM Oil Investments, LLC, and received payments in  excess of $145,000 directly
from the Company in connection with the transaction

      A material relationship exists between Horizon  Ridge  Oil  Company,  the
operator  of record with the Texas Rail Road Commission for the Somerset leases
which were  purchased  by  the  Company  on April 1, 2005 and Mr. Conradie, the
President/CEO  and Director of the Company  at  the  time  of  the  transaction
insofar as Mr. Conradie has an ownership interest in Horizon Ridge Oil Company.
A nominal amount  is  paid to Horizon Ridge Oil Company each month to cover the
Rail Road Commission Surety  bond  for  these  leases  as well as the reporting
requirements  with the Rail Road Commission. The amount to  date  has  averaged
less than $1,100 per month.

    Other Material Transactions.

      With  the   exception  of  the above mentioned transactions,  there  have
been no material transactions,  series   of  similar transactions  or currently
proposed  transactions  to  which  the Company or any  officer, director, their
immediate families or other beneficial owner  is  a party  or  has  a  material
interest  in  which  the amount exceeds $50,000.


      				-52-

<PAGE>

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.

(a)  Exhibits.

      The  following  documents are included or incorporated  by  reference  as
exhibits
to this report:

Exhibit 3. Articles of Incorporation and Bylaws.

    3.1 Articles of Incorporation*
    3.2 Bylaws*

Exhibit 10.Material Contracts

   10.1 not used
   10.2 not used
   10.3 Executive Compensation Agreement (Murray N. Conradie)(1)
   10.4 Executive Compensation Agreement (David Cummings)(1)
   10.5 Executive Compensation Agreement (Jason F. Griffith)(1)
   10.6 Executive Stock Option Agreement (Murray N. Conradie)(1)
   10.7 Executive Stock Option Agreement (David Cummings)(1)
   10.8 Executive Stock Option Agreement (Jason F. Griffith)(1)
   10.9 Executive Stock Option Agreement (Charles Snipes)(1)
   10.10 Qualified Equity Incentive Stock Option Plan(1)
   10.11 Contract for Services (Peter R. Maupin)(2)
   10.12 Contract for Services (Smitty's Pumping)(2)
   10.13 Executive Stock Option Agreement (Conrad Humbke)(3)
   10.14 Purchase Agreement - Mineral Acres(3)
   10.15 Executive Compensation Agreement (Edward B. Shaw)(4)
   10.16 Executive Stock Option Agreement (Edward B. Shaw)(4)
   10.18 Agreement for $15 Million Line of Credit (5)
   10.19 Executive Compensation Agreement (Marlene Hutchinson)(6)
   10.20 Securities Purchase Agreement, dated April 4, 2008
   10.21 Longview Initial Note;
   10.22 Marquis Initial Note;
   10.23 Longview Warrant;
   10.24 Marquis Warrant;
   10.25 Amended and Restated Security Agreement;
   10.26 Pledge Agreement;
   10.27 Guaranty;
   10.28 Side Letter, dated April 1, 2008;
   10.29 Side Letter, dated April 8, 2008;
   10.30 Form of Texas Mortgage;
   10.31 Form of Colorado Mortgage;
   10.32 Form of Conveyance of ORRI for Longview;
   10.33 Form of Conveyance of ORRI for Marquis;
   10.34 Corrected Conveyance of ORRI for Longview (Logan County, CO)
   10.35 Longview Additional Note
   10.36 Marquis Additional Note
   10.37 Form of Deposit Account Control Agreement
   10.38 Sonterra Operations Contract Operating Agreement

   (1) Previously filed as an exhibit to the Company's Form 10-SB,
       filed April 30, 2004.

   (2) Previously filed as an exhibit to the Company's Amendment
       No. 2 to Form 10-SB, filed September 3, 2004.

   (3) Previously filed as an exhibit to the Company's Current
       Report to Form 8-K, filed April 7, 2005.

      				-53-

<PAGE>

   (4) Previously filed as an exhibit to the Company's
       Form 10-SB, filed March 31, 2006

   (5) Previously filed as an exhibit to the Company's Current
       Report to Form 8-K, filed February 8, 2007.

   (6) Previously filed as an exhibit to the Company's Current
       Report to Form 8-K, filed March 6, 2007.

Exhibit 31.Certifications required by Rule 13a-14(a) or Rule 15d-14(a)

   31.1 Certification  of  Chief  Executive  Officer  and  Principal  Financial
Officer pursuant to 18 U.S.C.ss.1850 as adopted pursuant to Section  302 of the
Sarbanes-Oxley Act of 2002.

Exhibit 32. Certifications required  by  Rule  13a-14(b) or Rule 15d-14(b)  and
section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350

   32.1 Certification  of  Chief  Executive  Officer  and  Principal  Financial
Officer pursuant to 18 U.S.C.ss.1850  as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.


(b)  Reports on Form 8-K

The Company's report on Form 8-K dated  February  8,  2007 items 1.01, 8.01 and
9.01

       On February 8, 2007, the Company filed a Current  Report  on  Form  8-K,
stating  that  the  company had received a 3 year, $15 million revolving credit
facility. The credit  facility  will  be used to further the Company's business
strategy.  The credit facility of prime  plus 4% will be used for acquisitions,
additional  well workovers and expanded drilling  programs.   The  lender  will
receive 1,000,000  warrants  at $10.00 per share of the Company common stock as
part of the funding commitment.

The Company's report on Form 8-K dated March 6, 2007 items 4.01, 5.02 and 9.01.

       On March 6, 2007, the Company  filed  a  Current  Report  on  Form  8-K,
relating  to  the  dismissal  of Larry O'Donnell, CPA, P.C. as the Registrant's
independent auditor, the engagement  of  Causey  Demgen  &  Moore,  Inc. as its
independent  auditors  to provide the requisite audit services for the  Company
and the appointment of Marlene Hutcheson as Chief Financial Officer.

      				-54-

<PAGE>

The Company's report on  Form  8-K  dated  March  14, 2007 items 2.01, 8.01 and
9.01.

       On  March  14, 2007, the Company filed a Current  Report  on  Form  8-K,
stating that the Company  has  agreed  to acquire all the oil and gas interests
and certain related assets of Leexus Properties  Corp.   The Company intends to
issue 2,000,000 shares of restricted common stock, provide  $3  million in cash
and cash payments in the amount $4 million, payable periodically at the rate of
75%  of  net revenues from the purchased properties, as consideration  for  the
purchase.

The Company's report on Form 8-K dated April 24, 2007 items 2.01 and 9.01.

      On April  24,  2007,  the  Company  filed  a  Current Report on Form 8-K,
stating  that  the  Company  merged  with Leexus Properties  Corp  into  Leexus
Operating Company, a newly formed subsidiary of the Company.

The Company's report on Form 8-K dated March 13, 2007 item 4.02.

      On May 3, 2007, the Company filed  a  Current Report on Form 8-K, stating
that as of April 17, 1007, the Company concluded that the Annual Report on FORM
10-KSB for the years ended December 31, 2005  and  2004  should  no  longer  be
relied upon because the financial statements needed to be restated with respect
to  the  accounting  treatment  of the certain items. Such financial statements
have since been amended and may be replied upon.

The Company's report on Form 8-K dated June 18, 2007 items 2.01 and 9.01.

      On June 20, 2007, the Company filed a Current Report on Form 8-K, stating
that the Company named Scott Zimmerman,  the former President, CEO, and Founder
of  Storm Cat Energy, as President of the Company.  In  addition,  the  Company
named Bill Zeltwanger as Vice-President.

The Company's report on Form 8-K dated July 17, 2007 items 2.01 and 8.01.

      On  July  19, 2007 the Company filed a Current Report on Form 8-K stating
that the Company  agreed  to  acquire certain oil and gas interests and certain
related assets of Senora Resources,  Inc. and James D. Dobos, II, individually.
The Company provided $1.8 million as consideration  for  the  purchase  of  the
additional mineral interests.

The Company's report on Form 8-K dated July 31, 2007 items 2.01 and 9.01.

      On  July 31, 2007, the Company filed a Current Report on Form 8-K stating
that the Company  provided  a  Corporate  update  to  the  shareholders  of the
Company.  The  purpose  of  this  Regulation  FD  Disclosure, is to provide the
shareholders of the Company a comprehensive overview  of operations to date and
provide disclosure on items the Company intends to discuss  with the investment
community.

The Company's report on Form 8-K dated August 28, 2007 items 2.01 and 9.01.

      On  August  28,  2007,  the Company filed a Current Report  on  Form  8-K
stating that effective August 27,  2007,  Mr.  Conrad  Humbke has resigned as a
member of our Board. Mr. Humbke will be replaced by Mr. Stanley Hirschman as an
independent Director. Mr. Hirschman will be joined by Mr.  Owen  Naccarato  and
Mr.  David  Lieberman as independent Directors bringing the total Board members
to 5.

The Company's  report on Form 8-K dated September 26, 2007 items 1.01, 8.01 and
9.01.

      On September  26,  2007,  the Company filed a Current Report on Form 8-K,
stating  that  the  Company, on September  25,  2007,  issued  a  news  release
announcing that the Company  had  received  an  increase  of $15 million to the
company's  existing revolving line of credit. A copy of which  is  attached  as
Exhibit 99.3 hereto and incorporated herein by this reference.

Additionally,  in  the  September  26, 2007 news release, the Company announced
that the company, through a subsidiary  STO  Properties, LLC, had purchased all
rights, titles and interests (of whatever kind  or  character, whether legal or
equitable,  and  whether  vested  or  contingent)  of Diversity  Petroleum,  LP
(including interests in oil, gas and/or mineral leases  covering such lands and
wells, overriding royalties, production payments and net  profits  interests in
such  lands,  such  leases  and  wells,  and fee mineral interests, fee royalty
interests and other interests in such oil, gas and other minerals)for an amount
of $10 million by paying $7.5 million in cash,  issuing  a  promissory note for
$1.5 million and issuing restricted shares valued at $1 million.

      				-55-

<PAGE>

The Company's report on Form 8-K dated October 2, 2007 items 5.01 and 9.01.

      On  October  2,  2007,  the Company filed a Current Report  on  Form  8-K
stating that Marlene Hutcheson  resigned  as Chief Financial Officer and Rickey
Cooksey  was  appointed to the position of Chief  Financial  Officer  effective
October 31, 2007.

The Company's report on Form 8-K dated November 7, 2007 items 7.02 and 9.01.

      On October  2,  2007,  the  Company  filed  a  Current Report on Form 8-K
stating that the Company provided a Corporate update to the shareholders of the
Company.  The  purpose  of this Regulation FD Disclosure,  is  to  provide  the
shareholders of the Company  a comprehensive overview of operations to date and
provide disclosure on items the  Company intends to discuss with the investment
community.

The Company's report on Form 8-K dated  January  3,  2008  items 1.02, 5.02 and
9.01.

      On  March  14,  2007,  the Company filed a Current Report  on  Form  8-K,
stating that on November 7, 2007,  the  Company  disclosed in a Form 8-K filing
that it was selling its interests in oil, gas and  mineral  leases in Atascosa,
Frio and Somerset Counties properties. While the purchase and  sale transaction
closed in October 2007, by agreement of the parties the payment of the purchase
price  was  deferred.  On  December  29 2007, the parties agreed to cancel  the
purchase and sale transaction, without  recourse.  The Company has not and will
not record a gain, loss or other charge in connection  with this transaction or
its cancellation.

      In addition, the Company stated that Rickey Cooksey had resigned as Chief
Financial Officer effective December 31, 2007.

The Company's report on Form 8-K dated January 22, 2008 items 3.03, 5.02, 5.03,
and 9.01.

      On  January  23, 2008, the Company filed a Current Report  on  Form  8-K,
stating that the Company's  Board  of  Directors  executed a consent in lieu of
special meeting, dated January 16, 2008, to amend Sections  3.2  and 3.3 of the
Company's Bylaws. The amendments to the Bylaws were implemented to  remove  any
ambiguity  with  respect  to  the provisions thereof, and to provide for a more
effective and efficient management of the Company's affairs with respect to the
increase in the number of the Company's  directors, as may be determined by the
Board of Directors from time to time to be in the best interest of the Company,
and the filling of vacancies in the members  of  the Board of Directors created
by the resignation, removal of such members or other  cause,  resulting in such
vacancies.

      The Company's Board appointed current President, J. Scott  Zimmerman,  as
Chief Executive Officer in addition to retaining his position as President, and
was also elected to the Board of Directors. Also elected was Michael Pawelek as
new  Chairman  and  outside  director  effective  immediately.  The  Board also
accepted  the resignation of Murray N. Conradie as its Chairman, Director,  and
Chief Executive  Officer. Mr. Conradie has been retained as a consultant to the
Company.

The Company's report on Form 8-K dated February 20, 2008 items 1.01 and 9.01.

      On February  25,  2008  the  Company  filed  a Current Report on Form 8-K
stating  that  the Company entered into an "Amendment  to  Gas  Contract  dated
October  1, 2007"  with  DCP  Midstream,  for  the  gathering,  processing  and
marketing  of  the  Company's  Bastrop  Field  natural  gas  volumes. With this
arrangement, the Company is able to convert what was essentially a stranded-gas
asset into a new source of revenue. According to the agreement, as amended, the
Company will begin to sell initial volumes of 150 thousand cubic  feet  per day
(Mcf/d)  of  natural  gas  to 200 Mcf/d, prior to July 31, 2008. As part of the
contract terms, the Company  is  responsible for $186,000 of capital investment
in the project, for which it will receive a repayment over time if 220,000 MMcf
of gas is produced within two years  of  first sales at $0.25/Mcf. There are no
minimum  volume commitments and, as gas volumes  increase,  the  infrastructure
will be improved to meet the field's throughput requirements.

      				-56-

<PAGE>


ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees

      For  the  fiscal  year  ended December 31, 2007, our principal accountant
billed $39,480,for the audit of  the  Company's annual financial statements and
review of financial statements included  in  our  Form 10-QSB filings.  For the
fiscal year ended December 31, 2006, our principal accountant billed $5,300,for
the audit of the Company's annual financial statements  and review of financial
statements included in our Form 10-QSB filings.

Audit-Related Fees

      For  the  fiscal  years ended December 31, 2007 and 2006,  our  principal
accountant billed $915 and $0, respectively, for assurance and related services
that were reasonably related to  the  performance of the audit or review of our
financial statements outside of those fees disclosed above under "Audit Fees".

Tax Fees

      For the fiscal years ended December  31,  2007  and  2006,  our principal
accountant billed $0 and $0, respectively, for tax compliance, tax  advice, and
tax planning services.

All Other Fees

      For  the  fiscal  years  ended  December 31, 2007 and 2006, our principal
accountant billed $0 and $0, respectively, for products and services other than
those described above.

Pre-approval Policies and Procedures

      Prior  to  engaging the Company's accountants  to  perform  a  particular
service, our board  of  directors  obtains  an  estimate  for the service to be
performed.  The  board  of  directors,  in accordance with procedures  for  the
Company, approved all of the services described  above  prior  to  the services
being performed.

SIGNATURES

      In  accordance  with  Section  13  or  15(d)  of  the  Exchange  Act, the
registrant  caused  this  report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                                  South Texas Oil Company

                                  /s/ J. Scott Zimmerman
                                  ----------------------
                                  J, Scott Zimmerman,
                                  President, CEO and Director
                                  (Principal Executive Officer and
                                  Principal Financial Officer)
Date: April 15, 2008

      Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has  duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

                                  /s/ J. Scott Zimmerman
                                  ----------------------
                                  J. Scott Zimmerman,
                                  President, CEO , and Director
                                  (Principal Executive Officer and
                                  Principal Financial Officer)

Date: April 15, 2008


      				-57-

<PAGE>