Exterra Energy Inc. - FORM 10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[X] Annual Report Pursuant to Section 13 or 15(d) of The
Securities Exchange Act of 1934

For the Fiscal Year Ended May 31, 2009

[ ] Transition Report Pursuant to Section 13or 15(d) of
The Securities Exchange Act of 1934

Commission File Number: 000-52319

EXTERRA ENERGY INC.
-------------------
(Name of small business issuer in its charter)

Nevada 20-5086877
------ ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

701 South Taylor, Suite 440, Amarillo, Texas 79101
-----------------------------------------------------
(Address of principal executive offices) (Zip Code)

Issuer's telephone no.: (806) 373-7111

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

Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock, par value $0.001 per share

Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No

Indicate by check mark if disclosure of delinquent filers in pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]

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

Large accelerated filer [ ] Accelerated filer [ ]

Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined by
Rule 12b-2 of the Act) [ ] Yes [X] No

State the issuer's revenues for its most recent fiscal year. $ 437,968

State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and ask prices of such stock as of a specified date within 60 days.
$1,392,742 (Based on the price per share on September 30, 2009 of $0.95).
1,466,044 Shares.

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Outstanding Shares
Class as of October 14, 2009
---------------------------------------- ------------------------------------
Common Stock, Par Value $0.001 per share 12,058,779

DOCUMENTS INCORPORATED BY REFERENCE

A description of "Documents Incorporated by Reference" is contained in Part III,
Item 13.

EXTERRA ENERGY INC.

TABLE OF CONTENTS

PART I

Item 1. Description of Business 2
Item 1A. Risk Factors 6
Item 2. Description of Properties 14
Item 3. Legal Proceedings 17
Item 4. Submission of Matter to a Vote of Security Holders 18

PART II

Item 5. Market for Common Equity and Related Stockholders Matters 18
Item 6. Selected Financial Data 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 25
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 27
Item 9A. Controls and Procedures 27
Item 9B. Other Information 28
PART III

Item 10. Directors, Executive Officers, Promoters and Control persons;
Compliance with Section 16(a) of the Exchange Act 29
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain Beneficial Owners and Management 34
Item 13. Certain Relationships and Related Transactions 35
Item 14. Principal Accountant Fees and Services 36

PART IV

Item 15. Exhibits, Financial Statement Schedules 37

Signatures 38

Cautionary Statement
--------------------

This report on Form 10-K and the documents or information incorporated by
reference herein contain forward-looking statements within the meaning of the
federal securities laws. These forward-looking statements include, among others,
the following:

o our growth strategies;
o anticipated trends in our business;
o our ability to make or integrate acquisitions;
o our liquidity and ability to finance our exploration,
o acquisition and development strategies;
o market conditions in the oil and gas industry;
o the timing, cost and procedure for proposed acquisitions;
o the impact of government regulation;
o estimates regarding future net revenues from oil and natural gas
reserves and the present value thereof;
o planned capital expenditures (including the amount and nature
thereof);
o increases in oil and gas production; estimates, plans and projections
relating to acquired properties;
o the number of potential drilling locations; and
o our financial position, business strategy and other plans and
objectives for future operations.

We identify forward-looking statements by use of terms such as "may," "will,"
"expect," "anticipate," "estimate," "hope," "plan," "believe," "predict,"
"envision," "intend," "will," "continue," "potential," "should," "confident,"
"could" and similar words and expressions, although some forward-looking
statements may be expressed differently. You should be aware that our actual
results could differ materially from those contained in the forward-looking
statements. You should consider carefully the statements under the "Risk
Factors" section of this report and other sections of this report which describe
factors that could cause our actual results to differ from those set forth in
the forward-looking statements, and the following factors:

o the possibility that our acquisitions may involve unexpected costs;
o the volatility in commodity prices for oil and gas;
o the accuracy of internally estimated proved reserves;
o the presence or recoverability of estimated oil and gas reserves;
o the ability to replace oil and gas reserves;
o the availability and costs of drilling rigs and other oilfield
services;
o environmental risks;
o exploration and development risks;
o competition;
o the inability to realize expected value from acquisitions;
o the ability of our management team to execute its plans to meet its
goals;
o other economic, competitive, governmental, legislative, regulatory,
geopolitical and technological factors that may negatively impact our
businesses, operations and pricing.

Forward-looking statements speak only as of the date of this report or the date
of any document incorporated by reference in this report. Except to the extent
required by applicable law or regulation, we do not undertake any obligation to
update forward-looking statements to reflect events or circumstances after the
date of this report or to reflect the occurrence of unanticipated events.

PART I
------

ITEM 1. DESCRIPTION OF BUSINESS
-------------------------------

General

Exterra Energy Inc. was incorporated in the State of Nevada on February 3, 2006
as Green Gold Incorporated. On July 17, 2007, Green Gold Incorporated changed
its name to Exterra Energy Inc.

Exterra is an independent oil and gas exploration and development company
focused on building and revitalizing a diversified portfolio of oil and gas
assets located in the State of Texas. In addition to exploration, we seek to
acquire existing production, as well as underperforming oil and gas assets that
we believe we can revitalize in a short period of time. Acquisitions are a core
part of our growth strategy. The majority of the acquisition proposals and
candidates we review are sourced directly by our management or specialized
third-party consultants with local area knowledge. We focus on opportunistic
producing properties which also provide additional undeveloped locations for
drilling.

We utilize a variety of financing structures to acquire assets, including
payment of cash and/or stock, seller financing, and royalty fee arrangements.

Business Strategy

The Company strives to increase reserves, production and cash flow from
operations through a strategy of (i) focusing on development and exploitation
activities to maximize production and ultimate reserve recovery, (ii) acquiring
oil and natural gas properties with significant exploitation, development or
exploration potential, (iii) obtaining operational control of its properties,
(iv) maintaining a low operating cost structure, and (v) selectively exploring
and developing properties with significant reserve potential.

Property Acquisitions. The Company expects to generate future growth in reserves
and production both through development and exploratory drilling and seeking to
opportunistically acquire properties that complement and enhance its inventory
of development, exploitation and exploration projects. The Company expects to
focus on purchases of underdeveloped properties in its core areas of expertise
either through negotiated property acquisitions or acquisitions of companies
with oil and natural gas properties.

Operational Control. The Company's current plan is to build such infrastructure
to make it possible to assume operations of the majority of its producing
properties. The Company prefers to operate and to own a majority working
interest in its oil and natural gas properties. This operating philosophy will
enable the Company to control the nature, timing and costs of exploration and
development of its properties, as well as the marketing of the resulting
production.

Low Operating Cost Structure. The Company is unsatisfied with its historical
lease operating costs and seeks to increase cash flow by maintaining a low unit
operating cost structure through its focus on increasing production while
limiting its field operating and corporate overhead expenses.

History

As described in its original prospectus filed with the Securities and Exchange
Commission, the Company acquired the Green Gold Jade mineral claims located in
British Columbia, Canada in February 2006 for $10,000, which was subsequently
recorded as an impairment loss in the fiscal year ending May 31, 2006.

The Company's business direction was changed in 2006 in order to capitalize on
the increasing availability of opportunistic acquisitions in the energy sector.
We believe that the continuing divestiture of mature assets held by large
companies in the oil and gas sector has created an opportunity to acquire
undervalued properties with significant upside potential.

In December 2006, the Company acquired interests in four oil and gas assets, the
Burnett, Wuckowitsch and the University Lands leases, as well as a 9% Working
Interest in the Henry Dome prospect, all located in Texas. In December 2007, the
Company sold the Burnett and Wuckowitsch leases.

During the year, the Company's common stock was called to trade on the OTC
Bulletin Board under the symbol "GRGO". In July 2007, the Company received
approval to change its name to Exterra Energy Inc. and a new trading symbol EENR
was granted, effective August 12, 2007.

Our main source of revenue comes from the sale of natural gas. We anticipate we
will derive some revenue from oil sales from acquired oil production and our
natural gas wells. In addition, we plan to revitalize and further exploit
producing oil wells located on the University Lands lease later in 2008 and
2009. The main costs associated with our business are related to oil and gas
property acquisition, initial well revitalization and ongoing lease operating
expenses. The revitalization of wells allows short and long term cash increases,
while holding the lease for additional future development.

Our principal office is located at 701 South Taylor, Suite 440, Amarillo, Texas
77056. Our phone number is (806) 373-7111 and fax number is (806) 537-6910. Our
website address is www.exterraenergyinc.com. The Company has been granted a
Certificate of Authority to transact business in the state of Texas.

Recent Events

In October 2007, Exterra closed the acquisition of significant assets from Star
of Texas Energy Services, Inc. ("Star") and associated companies. This
acquisition of assets included Working Interests and Over-Riding Royalties in
various Barnett Shale wells producing on 17,500 acres. In addition, the Company
acquired interests in wells to be drilled, interests in wells being completed
and hard assets such as surface lands, as well as an ownership interest in an
intrastate natural gas pipeline and a commercial salt water disposal well.

Under the agreement with Star, there were working interests in various
additional wells and leases that were not transferred. The assignments of these
additional wells and leases were to be held in trust until Exterra chose to
satisfy liens and encumbrances against these leases. During 2009, Star of Texas
filed Chapter 7 and Exterra is considering buying the leases and wells from the
Trustee for a negotiated price. As of October 2009, none of the interests in the
additional wells and leases have been transferred to Exterra. In addition, the
lienholders for these additional wells have filed several cases against Star of
Texas for payment of the outstanding liens. Exterra has been named in several of
these cases, however it is management's opinion that the likelihood of a loss
outcome to Exterra is any of these cases is remote because Exterra never took
ownership of the wells and leases in question.

In December 2007, the Company sold the Burnett and Wuckowitsch leases that were
purchased in 2006. The Company retained the University Lands leases, as well as
a 9% Working Interest in the Henry Dome prospect, both located in Texas.

In February 2008, the Company increased its interest in numerous producing
Barnett Shale wells by offering Working Interests partners common shares of the
Company in exchange for their Working Interests.

On March 13, 2009, the Company completed the acquisition of a 25% profit
interest in a saltwater disposal well and lease in the Newark East Field of
North Texas, in consideration of the payment of $2,660,607 payable in shares of
restricted common stock of the Company valued at $.06 a share for a total of
44,343,451 shares. The acquisition consisted of a profit interest in the
saltwater disposal well that was estimated at approximately $3,000,000, over a
five year period, by a third party consulting firm upon completion of
construction and being fully operational. The assets were acquired from ROYALCO
Oil & Gas Corporation, a privately held company controlled by Robert Royal, CEO,
and Director and Todd R. Royal, President, Secretary and Director of the
Company. In addition, ROYALCO is currently in litigation over its profit
interest in the saltwater disposal well. According to the purchase agreement, if
the litigation were to result in Royalco losing its development and management
rights to the saltwater disposal well, the assets transferred to Exterra would
be replaced with assets of equivalent value.

On April 15, 2009, the Company's Board of Directors approved an agreement for
the acquisition of certain mineral leases in Texas, with proven undeveloped
engineered gas reserves with undiscounted future cash flows of $20,172,877, in
consideration of the payment of 5,603,577 shares of restricted common stock of
the Company valued at $3.60 a share following the effective date of a reverse
stock split by the Company. The acquisition was completed May 18, 2009. The
acquisition consisted of undeveloped mineral leases in Parker and Jack Counties,
Texas. The assets were acquired from ROYALCO Oil & Gas Corporation, a privately
held company controlled by Robert Royal, CEO, and Director and Todd R. Royal,
President, Secretary and Director of the Company.

Description of Properties

The Barnett Shale. The Newark East Barnett Shale gas field is the largest
producing natural gas field in the State of Texas. It is a geological formation
consisting of sedimentary rocks of the Mississippian age in the state of Texas.
The formation is estimated to cover 5,000 square miles in at least 17 counties
in Texas. Some experts have suggested the Barnett Shale may be the largest
onshore natural gas field in the United States. It is widely estimated to
contain as much as 30 trillion cubic feet of natural gas.

In October 2007, Exterra acquired working interests in various producing wells
in the Barnett Shale from Star of Texas Energy Services, Inc. and associated
companies. This acquisition of assets included Working Interests and Over-Riding
Royalties located on 17,500 acres.

Under the Star acquisition, Exterra also acquired working interests carried
through first sales in approximately 3,979 acres of proven undeveloped leases
(PUDS) in Parker and Hood Counties, Texas. Currently, we have a carried Working
Interests in six (6) producing wells on these leases. The remainder of the
leases will be the subject of a continuous drilling program conducted and
operated by Carrizo Oil & Gas, Inc. (Nasdaq "CRZO") and Sauder Management.

Exterra also acquired in the Star transaction, a minority interest in an 80 mile
intrastate natural gas pipeline traversing portions of Bosque, Hamilton, Erath
and McLennan Counties, Texas operated by Panther Pipeline Company. This pipeline
is approved and awaiting production for natural gas transportation. Exterra also
acquired a minority interest in a commercial salt water disposal well situated
in Wise County, Texas.

In February 2008, Exterra increased its interest in numerous producing Barnett
Shale wells by offering Working Interests partners common shares of the Company
in exchange for their Working Interests.

On March 13, 2009, the Company completed the acquisition of a profits interest
in a saltwater disposal well and lease in the Newark East Field of North Texas.
The acquisition consisted of a 25% profit interest in the saltwater disposal
well that was estimated at approximately $3,000,000, over a five year period, by
a third party consulting firm upon completion of construction and being fully
operational. The assets were acquired from ROYALCO Oil & Gas Corporation, a
privately held company controlled by Robert Royal, CEO, and Director and Todd R.
Royal, President, Secretary and Director of the Company.

Finally, On May 18, 2009, the Company acquired undeveloped mineral leases in
Parker and Jack Counties, Texas. The assets were acquired from ROYALCO Oil & Gas
Corporation, a privately held company controlled by Robert Royal, CEO, and
Director and Todd R. Royal, President, Secretary and Director of the Company.

The Company constantly is evaluating new prospects in what is considered to be
peripheral areas in the Barnett Shale. There can be no assurance these
properties will be acquired or we will obtain funding to exploit them.

University Lands, Pecos County, Texas. In December 2006, Exterra purchased a 75%
Working Interest in 12 wells in the West Cardinal field located in Pecos County.
As part of the acquisition, we also acquired a 12-mile long pipeline on the
property. The Company has completed a 1,700' salt water disposal well in an
effort to reduce operating expenses. Our plan is to make efforts to enhance
production in the West Cardinal field.

Henry Dome Prospect, McMullen County, Texas. In December 2006, Exterra acquired
a 9% working interest in the Henry Dome gas project located in McMullen County.

Marketing of Crude Oil and Natural Gas

We plan to operate exclusively in the oil and gas industry going forward. Crude
oil and natural gas production from wells owned by us is generally sold direct
to oil purchasers and natural gas marketing companies. Sales are generally made
on the spot market. These prices often are tied to West Texas Intermediate
("WTI") crude and natural gas futures contracts as posted in national
publications. We have not entered into any agreements to hedge or sell forward
any of our oil and gas production at this time. However, hedging may be required
by a lender should we be successful in acquiring future financing.

Although management believes that we are not dependent upon any one customer,
our current marketing arrangement relies on one purchaser for 90% of our revenue
for the year ended May 31, 2009. In the event that our current purchaser is
unwilling or unable to purchase the production, management believes alternative
purchasers of its production are readily available.

Employees

As of the end of our fiscal year on May 31, 2009, we had two employees. We also
utilize certain outsourced third party consultants to provide operational,
technical and certain administrative services. As production levels increase, we
may find the need to hire additional personnel.

The Company currently does not have any employees subject to union collective
bargaining agreements. With the successful implementation of our business plan,
we may seek additional employees in the next year to handle potential growth.

Facilities

We currently occupy one location of approximately 1,316 square feet for our
headquarter office located at Suite 440, 701 South Taylor, in Amarillo, Texas
for $2,303 per month. For the fiscal year ended May 31, 2009, the Company
incurred $21,500 for office rental.

Industry Segments

We are presently engaged in one industry segment, which is the exploration and
production of natural gas and oil.

ITEM 1A. RISK FACTORS
---------------------

An investment in our Company involves a number of risks. You should carefully
consider the information about risks identified below, as well as the
information about risks stated in other parts of this document and in our
filings with the Commission that we have incorporated by reference in this
document. Any of the risks discussed below or elsewhere in this document or in
our Commission filings, and other risks we have not anticipated or discussed,
could have a material impact on our business, results of operations, and
financial condition. As a result, they could have an impact on our stock price.

Risks Relating to Our Business

We have generated negative cash flow from operations for the two most recent
fiscal years, have an accumulated deficit of $20,215,555 at May 31, 2009 and
incurred a net loss of $5,170,982 for the fiscal year ended May 31, 2009. We
have defaulted on certain note agreements.

Exterra's has recently closed on an initial $10,000,000 line of credit facility,
that Management believes will capitalize the Company to acquire certain Oil &
Gas Producing Mineral Leases, wells and equipment, using Management's model of a
three year pay back from the net received. Management has identified several
such possible acquisitions. Exterra is a E & P Company that plans to exploit
acquisitions leases, wells and Proven Oil and Gas Reserves to maximize
shareholder value.

Exterra's Board of Directors has authorized a corporate stock dividend policy
which the company is authorized to distribute 25% of the after tax net annual
earnings of Exterra to all stockholders of record by distributing quarterly cash
dividends to all Exterra Stockholders of record.

Our officers and directors have limited liability, and we are required in
certain instances to indemnify our officers and directors for breaches of their
fiduciary duties.

We have adopted provisions in our Articles of Incorporation and Bylaws which
limit the liability of our officers and directors and provide for
indemnification by us of our officers and directors to the full extent permitted
by Nevada corporate law. Our articles generally provide that our officers and
directors shall have no personal liability to us or our shareholders for
monetary damages for breaches of their fiduciary duties as directors, except for
breaches of their duties of loyalty, acts or omissions not in good faith or
which involve intentional misconduct or knowing violation of law, acts involving
unlawful payment of dividends or unlawful stock purchases or redemptions, or any
transaction from which a director derives an improper personal benefit. Such
provisions substantially limit our shareholders' ability to hold officers and
directors liable for breaches of fiduciary duty, and may require us to indemnify
our officers and directors. The Company carries Directors and Officers liability
insurance to further protect them from liability.

We depend significantly upon the continued involvement of our present
management.

Our success depends to a significant degree upon the involvement of our
management, who are in charge of our strategic planning and operations. We may
need to attract and retain additional talented individuals in order to carry out
our business objectives. The competition for such persons could be intense and
there are no assurances that these individuals will be available to us.

Our business is subject to extensive regulation.

As many of our activities are subject to federal, state and local regulation,
and as these rules are subject to constant change or amendment, there can be no
assurance that our operations will not be adversely affected by new or different
government regulations, laws or court decisions applicable to our operations.

Government regulation and liability for environmental matters may adversely
affect our business and results of operations.

Crude oil and natural gas operations are subject to extensive federal, state and
local government regulations, which may be changed from time to time. Matters
subject to regulation include discharge permits for drilling operations,
drilling bonds, reports concerning operations, the spacing of wells, unitization
and pooling of properties and taxation. From time to time, regulatory agencies
have imposed price controls and limitations on production by restricting the
rate of flow of crude oil and natural gas wells below actual production capacity
in order to conserve supplies of crude oil and natural gas. There are federal,
state and local laws and regulations primarily relating to protection of human
health and the environment applicable to the development, production, handling,
storage, transportation and disposal of crude oil and natural gas, byproducts
thereof and other substances and materials produced or used in connection with
crude oil and natural gas operations. In addition, we may inherit liability for
environmental damages caused by previous owners of property we purchase or
lease. As a result, we may incur substantial liabilities to third parties or
governmental entities. We are also subject to changing and extensive tax laws,
the effects of which cannot be predicted. The implementation of new, or the
modification of existing, laws or regulations could have a material adverse
effect on us.
7

The crude oil and natural gas reserves we report are estimates and may prove to
be inaccurate.

There are numerous uncertainties inherent in estimating crude oil and natural
gas reserves and their estimated values. The reserves we report in our filings
with the SEC are only estimates and such estimates may prove to be inaccurate
because of these uncertainties. Reservoir engineering is a subjective and
inexact process of estimating underground accumulations of crude oil and natural
gas that cannot be measured in an exact manner. Estimates of economically
recoverable crude oil and natural gas reserves depend upon a number of variable
factors, such as historical production from the area compared with production
from other producing areas and assumptions concerning effects of regulations by
governmental agencies, future crude oil and natural gas prices, future operating
costs, severance and excise taxes, development costs and work-over and remedial
costs. Some or all of these assumptions may in fact vary considerably from
actual results. For these reasons, estimates of the economically recoverable
quantities of crude oil and natural gas attributable to any particular group of
properties, classifications of such reserves based on risk of recovery, and
estimates of the future net cash flows expected therefrom prepared by different
engineers or by the same engineers but at different times may vary
substantially. Accordingly, reserve estimates may be subject to downward or
upward adjustment. Actual production, revenue and expenditures with respect to
our reserves will likely vary from estimates, and such variances may be
material.

Crude oil and natural gas development, re-completion of wells from one reservoir
to another reservoir, restoring wells to production and drilling and completing
new wells are speculative activities and involve numerous risks and substantial
and uncertain costs.

Our growth will be materially dependent upon the success of our future
development program. Drilling for crude oil and natural gas and reworking
existing wells involves numerous risks, including the risk that no commercially
productive crude oil or natural gas reservoirs will be encountered. The cost of
drilling, completing and operating wells is substantial and uncertain, and
drilling operations may be curtailed, delayed or cancelled as a result of a
variety of factors beyond our control, including:

o unexpected drilling conditions;
o pressure or irregularities in formations;
o equipment failures or accidents;
o inability to obtain leases on economic terms, where applicable;
o adverse weather conditions;
o compliance with governmental requirements; and
o shortages or delays in the availability of drilling rigs or crews and
the delivery of equipment.

Drilling or reworking is a highly speculative activity. Even when fully and
correctly utilized, modern well completion techniques such as hydraulic
fracturing and horizontal drilling do not guarantee that we will find crude oil
and/or natural gas in our wells. Hydraulic fracturing involves pumping a fluid
with or without particulates into a formation at high pressure, thereby creating
fractures in the rock and leaving the particulates in the fractures to ensure
that the fractures remain open, thereby potentially increasing the ability of
the reservoir to produce oil or gas. Horizontal drilling involves drilling
horizontally out from an existing vertical well bore, thereby potentially
increasing the area and reach of the well bore that is in contact with the
reservoir. Our future drilling activities may not be successful and, if
unsuccessful, such failure would have an adverse effect on our future results of

operations and financial condition. We cannot assure you that our overall
drilling success rate or our drilling success rate for activities within a
particular geographic area will not decline. We may identify and develop
prospects through a number of methods, some of which do not include lateral
drilling or hydraulic fracturing, and some of which may be unproven. The
drilling and results for these prospects may be particularly uncertain. Our
drilling schedule may vary from our capital budget. The final determination with
respect to the drilling of any scheduled or budgeted prospects will be dependent
on a number of factors, including, but not limited to:

o the results of previous development efforts and the acquisition,
review and analysis of data;
o the availability of sufficient capital resources to us and the other
participants, if any, for the drilling of the prospects;
o the approval of the prospects by other participants, if any, after
additional data has been compiled;
o economic and industry conditions at the time of drilling, including
prevailing and anticipated prices for crude oil and natural gas and
the availability of drilling rigs and crews;
o our financial resources and results;
o the availability of leases and permits on reasonable terms for the
prospects; and
o the success of our drilling technology.

We cannot assure you that these projects can be successfully developed or that
the wells discussed will, if drilled, encounter reservoirs of commercially
productive crude oil or natural gas. There are numerous uncertainties in
estimating quantities of proved reserves, including many factors beyond our
control.

Crude oil and natural gas prices are highly volatile in general and low prices
will negatively affect our financial results.

Our revenues, operating results, profitability, cash flow, future rate of growth
and ability to borrow funds or obtain additional capital, as well as the
carrying value of our properties, are substantially dependent upon prevailing
prices of crude oil and natural gas. Lower crude oil and natural gas prices also

may reduce the amount of crude oil and natural gas that we can produce
economically. Historically, the markets for crude oil and natural gas have been
very volatile, and such markets are likely to continue to be volatile in the
future. Prices for crude oil and natural gas are subject to wide fluctuation in
response to relatively minor changes in the supply of and demand for crude oil
and natural gas, market uncertainty and a variety of additional factors that are
beyond our control, including:

o worldwide and domestic supplies of crude oil and natural gas;
o the level of consumer product demand;
o weather conditions;
o domestic and foreign governmental regulations;
o the price and availability of alternative fuels;
o political instability or armed conflict in oil producing regions;
o the price and level of foreign imports; and
o overall domestic and global economic conditions.

It is extremely difficult to predict future crude oil and natural gas price
movements with any certainty. Declines in crude oil and natural gas prices may
materially adversely affect our financial condition, liquidity, ability to
finance planned capital expenditures and results of operations. Further, oil and
gas prices do not move in tandem.

Risks Related To Share Ownership

The market price for our common stock may be volatile.
Many factors could cause the market price of our common stock to rise and fall,
including:

o actual or anticipated variations in our quarterly results of
operations;
o changes in market valuations of companies in our industry;
o changes in expectations of future financial performance;
o fluctuations in stock market prices and volumes;
o issuances of common stock or other securities in the future;
o the addition or departure of key personnel;
o announcements by us or our competitors of acquisitions, investments or
strategic alliances; and
o the increase or decline in the price of oil and natural gas.

Substantial sales of our common stock, or the perception that such sales might
occur, could depress the market price of our common stock.

We cannot predict whether future issuances of our common stock or resales in the
open market will decrease the market price of our common stock. The impact of
any such issuances or resales of our common stock on our market price may be
increased as a result of the fact that our common stock is thinly, or
infrequently, traded. The exercise of any options or the vesting of any
restricted stock that we may grant to directors, executive officers and other
employees in the future, the issuance of common stock in connection with

acquisitions and other issuances of our common stock could have an adverse
effect on the market price of our common stock. In addition, future issuances of
our common stock may be dilutive to existing shareholders. Any sales of
substantial amounts of our common stock in the public market, or the perception
that such sales might occur, could lower the market price of our common stock.

Our common stock is not considered "penny stock" securities under Exchange Act
rules.

Our securities are considered low-priced or "designated" securities under rules
promulgated under the Exchange Act. Under these rules, broker/dealers
participating in transactions in low-priced securities must first deliver a risk
disclosure document which describes the risks associated with such stocks, the
broker/dealer's duties, the customer's rights and remedies, certain market and
other information, and make a suitability determination approving the customer
for low-priced stock transactions based on the customer's financial situation,
investment experience and objectives. Broker/dealers must also disclose these
restrictions in writing to the customer and obtain specific written consent of
the customer, and provide monthly account statements to the customer. The likely
effect of these restrictions is a decrease in the willingness of broker/dealers
to make a market in the stock, decreased liquidity of the stock and increased
transaction costs for sales and purchases of the stock as compared to other
securities.

IN ADDITION TO THE RISK FACTORS SET FORTH ABOVE, THE COMPANY IS SUBJECT TO
NUMEROUS OTHER RISKS SPECIFIC TO THE PARTICULAR BUSINESS OF THE COMPANY, AS WELL
AS GENERAL BUSINESS RISK. INVESTORS ARE URGED TO CONSIDER ALL OF THE RISKS
INHERENT IN THE COMPANY'S SECURITIES PRIOR TO PURCHASING OR MAKING AN INVESTMENT
DECISION. THE COMPANY'S SECURITIES ARE HIGHLY SPECULATIVE AND INVOLVE A VERY
HIGH DEGREE OF RISK.

Competition

We are in direct competition with numerous oil and natural gas companies,
drilling and income programs and partnerships exploring various areas of Texas
and elsewhere competing for properties. Many competitors are large, well-known
oil and gas and/or energy companies, although no single entity dominates the
industry. Many of our competitors possess greater financial and personnel
resources enabling them to identify and acquire more economically desirable
energy producing properties and drilling prospects than us. Additionally, there
is competition from other fuel choices to supply the energy needs of consumers
and industry. Management believes that there exists a viable market place for
smaller producers of natural gas and oil.

Government Regulation

In the United States, legislation affecting the oil and gas industry has been
pervasive and is under constant review for amendment or expansion. Pursuant to
such legislation, numerous federal, state and local departments and agencies
have issued extensive rules and regulations binding on the oil and gas industry
and its individual members, some of which carry substantial penalties for
failure to comply. These laws and regulations have a significant impact on oil
and gas drilling, gas-processing plants and production activities, increasing
the cost of doing business and, consequently, affect profitability. Inasmuch as
new legislation affecting the oil and gas industry is commonplace and existing
laws and regulations are frequently amended or reinterpreted, we may be unable
to predict the future cost or impact of complying with these laws and
regulations. We consider the cost of environmental protection a necessary and
manageable part of our business. We have been able to plan for and comply with
new environmental initiatives without materially altering our operating
strategies.

Exploration and Production. Our operations are subject to various types of
regulation at the federal, state and local levels. These regulations include
requiring permits for the drilling wells; maintaining prevention plans;
submitting notification and receiving permits related to the presence, use and
release of certain materials incidental to oil and gas operations; and
regulating the location of wells, the method of drilling and casing wells, the
use, transportation, storage and disposal of fluids and materials used in
connection with drilling and production activities, surface plugging and
abandoning of wells and the transporting of production. Our operations are also
subject to various conservation matters, including the number of wells which may
be drilled in a unit, and the unitization or pooling of oil and gas properties.
In this regard, some states allow the forced pooling or integration of tracts to
facilitate exploration while other states rely on voluntary pooling of lands and
leases, which may make it more difficult to develop oil and gas properties. In
addition, state conservation laws establish maximum rates of production oil and
gas wells, generally limit the venting or flaring of gas, and impose certain
requirements regarding the ratable purchase of production. The effect of these
regulations is to limit the amounts of oil and gas we can produce from our wells
and to limit the number of wells or the locations at which we can drill.

Environmental. Our exploration, development, and production of oil and gas,
including our operation of saltwater injection and disposal wells, are subject
to various federal, state and local environmental laws and regulations. Such
laws and regulations can increase the costs of planning, designing, installing
and operating oil and gas wells. Our domestic activities are subject to a
variety of environmental laws and regulations, including but not limited to, the
Oil Pollution Act of 1990 ("OPA"), the Clean Water Act ("CWA"), the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
the Resource Conservation and Recovery Act ("RCRA"), the Clean Air Act ("CAA"),
and the Safe Drinking Water Act ("SDWA"), as well as state regulations
promulgated under comparable state statutes. We are also subject to regulations
governing the handling, transportation, storage, and disposal of naturally
occurring radioactive materials that are found in our oil and gas operations.
Civil and criminal fines and penalties may be imposed for non-compliance with
these environmental laws and regulations. Additionally, these laws and
regulations require the acquisition of permits or other governmental
authorizations before undertaking certain activities, limit or prohibit other
activities because of protected areas or species, and impose substantial
liabilities for cleanup of pollution.

Under the OPA, a release of oil into water or other areas designated by the
statute could result in the company being held responsible for the costs of
remediating such a release, certain OPA specified damages, and natural resource
damages. The extent of that liability could be extensive, as set forth in the
statute, depending on the nature of the release. A release of oil in harmful
quantities or other materials into water or other specified areas could also
result in the company being held responsible under the CWA for the costs of
remediation, and civil and criminal fines and penalties.

CERCLA and comparable state statutes, also known as "Superfund" laws, can impose
joint and several and retroactive liability, without regard to fault or the
legality of the original conduct, on certain classes of persons for the release
of a "hazardous substance" into the environment. In practice, cleanup costs are
usually allocated among various responsible parties. Potentially liable parties
include site owners or operators, past owners or operators under certain
conditions, and entities that arrange for the disposal or treatment of, or
transport hazardous substances found at the site. Although CERCLA, as amended,
currently exempts petroleum, including but not limited to, crude oil, gas and
natural gas liquids from the definition of hazardous substance, our operations
may involve the use or handling of other materials that may be classified as
hazardous substances under CERCLA. Furthermore, there can be no assurance that
the exemption will be preserved in future amendments of the act, if any.

RCRA and comparable state and local requirements impose standards for the
management, including treatment, storage, and disposal of both hazardous and
non-hazardous solid wastes. From time to time, proposals have been made that
would reclassify certain oil and gas wastes, including wastes generated during
drilling, production and pipeline operations, as "hazardous wastes" under RCRA
which would make such solid wastes subject to much more stringent handling,
transportation, storage, disposal, and clean-up requirements. This development
could have a significant impact on our operating costs. While state laws vary on
this issue, state initiatives to further regulate oil and gas wastes could have
a similar impact. Because oil and gas exploration and production, and possibly
other activities, have been conducted at some of our properties by previous
owners and operators, materials from these operations remain on some of the
properties and in some instances require remediation. While we do not believe
that costs to be incurred by us for compliance and remediating previously or
currently owned or operated properties will be material, there can be no
guarantee that such costs will not result in material expenditures.

Additionally, in the course of our routine oil and gas operations, surface
spills and leaks, including casing leaks, of oil or other materials occur, and
we incur costs for waste handling and environmental compliance. Moreover, we are
able to control directly the operations of only those wells for which we act as
the operator. Management believes that the company is in substantial compliance
with applicable environmental laws and regulations.

We do not anticipate being required in the near future to expend amounts that
are material in relation to our total capital expenditures program by reason of
environmental laws and regulations, but inasmuch as such laws and regulations
are frequently changed, we are unable to predict the ultimate cost of
compliance. There can be no assurance that more stringent laws and regulations
protecting the environment will not be adopted or that we will not otherwise
incur material expenses in connection with environmental laws and regulations in
the future.

Occupational Health and Safety. We are also subject to laws and regulations
concerning occupational safety and health. Due to the continued changes in these
laws and regulations, and the judicial construction of many of them, we are
unable to predict with any reasonable degree of certainty its future costs of
complying with these laws and regulations. We consider the cost of safety and
health compliance a necessary and manageable part of our business. We have been
able to plan for and comply with new initiatives without materially altering its
operating strategies.

Taxation

Our operations, as is the case in the petroleum industry generally, are
significantly affected by federal tax laws. Federal, as well as state, tax laws
have many provisions applicable to corporations which could affect the future
tax liability of the Company.

Commitments and Contingencies

We are liable for future restoration and abandonment costs associated with our
oil and gas properties. These costs include future site restoration, post
closure and other environmental exit costs. The costs of future restoration and
well abandonment have not been determined in detail. Texas regulations require
operators to post bonds that assure that well sites will be properly plugged and
abandoned. Management views this as a necessary requirement for operations
within Texas and does not believe that these costs will have a material adverse
effect on our financial position as a result of this requirement.

ITEM 2. DESCRIPTION OF PROPERTIES
---------------------------------

Our properties consist essentially of working and royalty interests owned by us
in various oil and gas wells and leases located in Texas.

Oil and Gas Acreage

Under the Star acquisition, Exterra also acquired working interests carried
through first sales in approximately 3,979 acres of proven undeveloped leases
(PUDS) in Parker and Hood Counties, Texas. Currently, we have a carried Working
Interest in six (6) producing wells on these leases. The remainder of the leases
will be the subject of a continuous drilling program conducted and operated by
Carrizo Oil & Gas, Inc. (Nasdaq "CRZO") and Sauder Management.

In February 2008, Exterra increased its interest in numerous producing Barnett
Shale wells by offering Working Interests partners common shares of the Company
in exchange for their Working Interests.

The Company constantly is evaluating new prospects in what is considered to be
peripheral areas in the Barnett Shale and oil and gas in other areas of the
State of Texas, other states and offshore. There is no assurance these
properties can be acquired or will obtain funding to exploit.

Henry Dome Prospect, McMullen County, Texas. In December 2006, Exterra acquired
a 9% working interest in the Henry Dome gas project located in McMullen County.

Reserves

A Reserve Report from Harper & Associates provides a detailed calculation of our
proven and unproven reserves for our oil and gas properties.

Oil and Natural Gas Reserves
----------------------------

The net crude oil and gas reserves of the Company as of May 31st, 2009 were
215,750 barrels of oil and condensate and 6.842 BCFG (billion cubic feet) of
natural gas. Based on SEC guidelines, the reserves were classified as follows:

Proved Developed Producing 1,170 BO and 0.317 BCFG
Proved Developed Non-Producing 30,480 BO and 0.065 BCFG
Proved Undeveloped 184,100 BO and 6.459 BCFG
Total Proved Reserves 215,750 BO and 6.842 BCFG

Only reserves that fell within the Proved classification were considered. Other
categories such as Probable or Possible Reserves were not considered. No value
was given to the potential future development of behind pipe reserves, untested
fault blocks, or the potential for deeper reservoirs (other than Barnett Shale
proved undeveloped reserves directly offset by producing wells) underlying the
Company's properties. Shut-in uneconomic wells and insignificant non-operated
interests were excluded.

The following table sets forth pertinent data with respect to the Company-owned
oil and gas properties, all located within the continental United States, as
estimated by the Company:

Year ended May 31,
-------------------
Gas and Oil Properties, net: 2009 2008
---- ----

Proved developed gas reserves-Mcf (1) 382,430 767,690

Proved undeveloped gas reserves-Mcf (2) 6,459,120 1,443,360

Total proved gas reserves-Mcf 6,841,550 2,211,050

Proved developed crude oil and
Condensate reserves-Bbls (1) 31,650 1,070

Proved undeveloped crude oil and
Condensate reserves-Bbls (2) 184,100 18,900

Total proved crude oil and condensate
Reserves-Bbls 215,750 19,970

*deminimus amounts
(1) "Proved Developed Oil and Gas Reserves" are reserves that can be expected to
be recovered through existing wells with existing equipment and operating
methods.

(2) "Proved Undeveloped Reserves" 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.

Wells
-----

The Company did not drill any new wells during the fiscal year. The following
table summarizes the Company's Working Interests in productive and
non-productive oil and gas wells at May 31st, 2009. Productive wells are
producing wells and wells capable of production. Gross wells are the total
number of wells in which the company has an interest. Net wells are the sum of
the Company's fractional working interests owned in gross wells:

Year Ended May 31,
------------------------------------
2009 2008
--------------- --------------
Gross Net Gross Net
----- --- ----- ---

Total Wells:
Productive 16.000 6.24 54.000 5.15
Non-Productive 13.000 6.21 6.000 6.00
Total 29.000 12.45* 60.000 11.15*

*During the year, the Company sold -0- gross wells (-0- net wells).

Year Ended May 31,
------------------
2009 2008
------ ------

Average Sales Price per Unit
Produced:
Natural Gas ($Mcf) $ 6.26 $ 8.81
Crude Oil & Condensate ($/Bbl) $ 67.09 $ 74.06

Average Production Cost per
Equivalent Barrel (1) (2) $ 31.54 $ 49.58

(1) Includes severance taxes and ad valorem taxes.
(2) Gas production is converted to equivalent barrels at the rate of six Mcf per
barrel, representing relative energy content of natural gas to oil.

We do not anticipate investing in or purchasing assets and/or properties for the
purpose of capital gains. It is our intention to purchase assets and/or
properties for the purpose of enhancing our primary business operations. We are
not limited as to the percentage amount of our assets we may use to purchase any
additional assets or properties.

ITEM 3. LEGAL PROCEEDINGS
-------------------------

The Company is aware of the following pending litigation that could result in a
material loss:

At May 31, 2009, the following litigation is pending:

1. Cause No. 08-05-07052: Hope Drilling Company and Hope Workover Services,
Inc. vs Exterra Energy Inc.; in the District Court of Crockett County
Texas; 112th Judicial District
a. This is a suit on a debt in the amount of $21,331 plus attorney's
fees.
b. An answer has been filed on behalf of the Company.
c. Management's intends to attempt to resolve this matter.

As of May 31, 2009, Exterra had $21,331 recorded in accounts payable and accrued
expenses related to this claim.

2. Randall K. Boatright v. Exterra Energy, Inc., in the 55th District Court in
and for Harris County, Texas
a. Plaintiff is a former officer and director of the Company and has
claimed the amount of $97,200 plus attorney's fees and interest
for past compensation owed and severance.
b. An answer has been filed on behalf of the Company.
c. Management's intends to attempt to resolve this matter.

As of May 31, 2009, Exterra had $97,200 recorded in accounts payable and accrued
expenses related to this claim.

3. 0424864 BC, Ltd. and Gordon McDougall v. Exterra Energy, Inc., in the 151st
District Court in and for Harris County, Texas
a. Plaintiff is a former officer and director of the Company and has
claimed the amount of $132,800 plus attorney's fees and interest
for past compensation and severance.
b. An answer has been filed on behalf of the Company.
c. Management's intends to attempt to resolve this matter.

As of May 31, 2009, Exterra had $135,000 recorded in accounts payable and
accrued expenses related to this claim.

4. Planet United, Inc. v. Exterra Energy, Inc., in the 80th District Court in
and for Harris County, Texas
a. This is a suit on a debt in the amount of $250,000 originally due
July 17, 2008 and bearing interest at 10%. In addition, the
plaintiff claims they are owed a revenue sharing bonus of up to
$25,000 derived from the Company's University Lands in Pecos
County, TX.
b. An answer has been filed on behalf of the Company.
c. Management's intends to attempt to resolve this matter.

As of May 31, 2009, Exterra had $250,000 recorded in convertible notes payable
and $31,250 of accrued interest recorded in accounts payable and accrued
expenses related to this claim.

In addition to the above litigation, Exterra has been named in several cases
against Star of Texas Energy Services, Inc as mentioned in Note 4. The
lienholders for various wells and leases owned by Star of Texas have filed
several cases against Star of Texas for payment of the outstanding liens.
Exterra has been named in several of these cases, however it is management's
opinion that the likelihood of a loss outcome to Exterra is any of these cases
is remote because Exterra never took ownership of the wells and leases in
question.

Management efforts to resolve all these matters will include litigation and
settlement negotiation.

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

No matters were submitted to a vote of our stockholders during the fourth
quarter of the fiscal year ended May 31, 2008. During the year, stockholders
voted on the Change of Name for the corporation to Exterra Energy Inc.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
-----------------------------------------------------------------

Market Information

The Company's common stock was called to trade on the OTC Bulletin Board under
the symbol "GRGO". In July 2007, the Company received approval to change its
name to Exterra Energy Inc. and a new trading symbol, EENR, was granted
effective August 12, 2007. The trading symbol changed to EENI post reverse
split.
The following information is provided to show quarterly high and low prices of
our common stock for the fiscal year ended May 31, 2009.

Price Per Share
High Low
----- ---
Fiscal 2009
-----------
First Quarter 41.99 9.00
Second Quarter 21.00 2.40
Third Quarter 13.20 0.60
Fourth Quarter 6.00 2.40

During the First Quarter of 2010, subsequent to year end, the following high and
low prices were recorded for the Company's common stock.

Price Per Share
High Low
---- ---
Fiscal 2010
-----------
First Quarter 4.25 1.01

As of June 1, 2007 there were 15,833 warrants outstanding from a stock Private
Placement financing consummated on January 23, 2007. These warrants are
exercisable at $1.00 per share and expired on January 23, 2009.

During 2008, a total of 16,409 warrants were granted to third parties. 15,000 of
these were granted to one individual for services (see Note 7), 1,167 were
granted to private placement investors in accordance with terms in the above
paragraph and 242 were granted to a placement agent. No warrants were exercised
or forfeited during the year. As a result, a total of 32,242 warrants were
outstanding as of May 31, 2008.

On June 16, 2008, 8,333 cashless warrants were exercised, which resulted in the
issuance of 8,205 common shares.

On July 1, 2008, 6,667 cashless warrants were cancelled as a result of the
re-negotiation of a consulting agreement.

On July 15, 2008, 242 cashless warrants were exercised resulting in the issuance
of 99 common shares.

On August 28, 2008, 10,917 warrants were granted to Private Placement investors,
who subscribed to invest in our common stock. These warrants are either
exercisable in one year at $30 per share or in two years at $45 per share.

In September 2008, Exterra granted 2,250 warrants exercisable in one year at $30
per share or in two years at $45 per share for cash proceeds of $27,000 in a
private placement.

In January of 2009, 17,000 warrants associated with private placements mentioned
above expired unexercised.

As of May 31, 2009, there were 13,167 warrants outstanding with no intrinsic
value and an exercise price of $30. The warrants expire in August of 2010.

Holders

As of May 31, 2009, there were approximately 570 holders of record of our common
stock, which figure does not take into account those shareholders whose
certificates are held in the name of broker-dealers or other nominee accounts.

Dividend Policy

We have not declared, paid cash dividends, or made distributions in the past. On
April 28, 2009 the Company announced that Exterra's Board of Directors
authorized a corporate stock dividend policy in which the company is authorized
to distribute 25% of the after tax net annual earnings of Exterra to all
stockholders of record by distributing quarterly cash dividends to all Exterra
Stockholders of record. We currently intend to retain and reinvest future
earnings which exceed cash dividends paid to finance operations.

We have not declared, paid cash dividends, or made distributions in the past. We
do not anticipate that we will pay cash dividends or make distributions at this
time. Should the Board deem the company's earnings and future cash needs would
support dividends things could change. We currently intend to retain and
reinvest future earnings to finance operations.

ITEM 6. SELECTED FINANCIAL DATA
-------------------------------

N/A

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
-------------------------------------------------------------------------------

The following information should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this Form 10-K.

Results of Operations

The following table sets forth the percentage relationship to total revenues of
principal items contained in the statements of operations of the financial
statements included herewith for the two most recent fiscal years ended May 31,
2009 and 2008. It should be noted that percentages discussed throughout this
analysis are stated on an approximate basis.

Fiscal Years Ended May 31,
-----------------------------------------------
2009 2008
---------------------- ----------------------
Amount Percentage Amount Percentage
----------- ---------- ------------ ----------
Total Revenues $ 437,968 100% $ 460,966 100%
Total Expenses 5,468,784 1249% 14,639,991 3176%
Total Other Expenses (140,166) -32% (235,637) -20%
Income before income taxes $(5,170,982) -1181% $(14,414,662) -3127%
Net loss $(5,170,982) -1181% $(14,414,662) -3127%

Year Ended May 31, 2009 and 2008

Oil and Gas Revenues

Revenues for the year ended May 31, 2009 and 2008 were $437,968 and $460,966
respectively. The decrease is due to reduced production due to reduced oil and
gas commodity pricing. We expect our oil and gas revenues to increase in the
following year as our oil and natural gas properties are brought to greater
levels of production.

Lease Operating Expenses

Lease operating expenses for the year ended May 31, 2009 and 2008 were $298,508
and $428,267, respectively. The decrease in expenses was due to reduced
production due to reduced oil and gas commodity pricing. We expect our operating
expenses to grow as we repair and improve the wells we have purchased.

General and Administrative Expenses

General and administrative expenses for the year ended May 31, 2009 and 2008
were $1,425,722 and $8,430,203, respectively. The decrease is principally due to
non-cash expenses as they relate to stock issued for services in the amount of
$5,621,223 and warrants issued for services in the amount of $963,426 for the
year ended May 31, 2008. Our legal and accounting fees totaled $241,782 for the
year ended May 31, 2009 compared to $213,133 in 2008. We also incurred $25,547
in public company consulting fees in 2009 compared to $553,370 in 2008. We
expect our general and administrative expenses to decline in the current year as
the majority of non-cash consulting expenses are non-recurring.

Interest Expense

Interest expense for the year ended May 31, 2009 and 2008 were $140,166 and
$235,637, respectively. The decrease is due to the decrease in non-cash interest
expense during 2009.

Net Loss

Our net loss for the year ended May 31, 2009 and 2008 was $5,170,982 and
$14,414,662, respectively. The decrease is primarily attributable to a decrease
of oil and gas property impairment of $1,705,181 and a decrease in stock issued
for services and warrants issued for services of $5,961,666.

Liquidity and Capital Resources

As of May 31, 2009, Exterra had cash of $7,505 and negative working capital of
$2,051,932. This compares to $9,190 and negative working capital of $1,606,488
for the year ending May 31, 2008.

Debt outstanding at May 31, 2009 are as follows:

(1) Note payable to purchase oil and gas properties $ 200,000

(2) Convertible loans 367,500

(3) Note payable to Coventry Capital 462,125

(4) Note payable to RoyalCo Financial 30,000

$1,059,625

(1) Principal and interest (10% per annum) on the note are payable on the tenth
(10th) day of each calendar month, beginning on January 10, 2007, in monthly
installments equal to the difference between the prior month's (i) income and
(ii) the royalties, severance, ad valorem, lifting and transportation expenses
directly related to the operation of the Pecos County leases. Each monthly
installment will be applied first to any outstanding and accrued interest and,
thereafter, to principal on the note. The note payable is secured by the Pecos
County leases and 360,000 shares of the Company's restricted common stock. The
Company has accrued $40,000 and $60,000 in interest on the note payable as of
May 31, 2008 and 2009. The entire principal amount outstanding under the note
and all accrued interest thereon was due and payable on July 15, 2008. As the
Company is unable at present to pay the balances due, we are seeking an
extension from the Lender. There are no guarantees these discussions will be
successful.

(2) During the year ended May 31, 2007, the Company received $367,500 from the
sale of its Convertible Loans. The Convertible Loans were due June 30, 2008 and
bear interest at 10% per annum payable quarterly. In addition, 10% of the face
value of the Convertible Loans are due to the holders as a revenue sharing
bonus. This bonus is due from initial production revenue realized for the first
six months of net revenue from the University Lands, Pecos County, Texas.
Furthermore, 3,342 common shares in aggregate were issued as a bonus. These
bonus shares are restricted from sale for 2 years . The Convertible Loans are
convertible into common shares of the Company at $45 per share for a total of
8,167 common shares. The common shares from the conversion are subject to a
"pooling arrangement", whereby the shares will be released in equal installments
over a 6 month period, beginning May 31, 2008. The Company is currently
negotiating an extension with the Convertible Loan Holders. There are no
guarantees these negotiations will be successful. The Company has accrued
interest at May 31, 2008 and 2009 of $11,895 and $48,645.

Through May 31, 2009 a net revenue sharing bonus has not been paid as the
University Lands have yet to yield net revenue.

The Company may force conversion of the Convertible Loans into common shares.
This will only occur if the Company's common shares trade at $120 per share or
more for a period of 90 consecutive days, or if the Company completes a stock
offering for $3 million at a price of $90 per share or higher.

(3) Principal and interest (18% per annum) due monthly in blended payments of
$20,000 commenced December 7, 2007. The loan is secured by certain oil and gas
properties and was due May 7, 2008. The Company has accrued $20,000 and $103,183
in interest as of May 31, 2008 and 2009. In September 2009, the Company
negotiated a preliminary settlement agreement for this note that would result in
the issuance of 5,000,000 shares of common stock for full settlement of the
amounts owed.

(4)Principal and interest (10% per annum) is un-secured and due April 15, 2010.
The Company has accrued $500 in interest as of May 31, 2009.

In an effort to explore and evaluate global financial opportunities, the Company
has engaged an Investment Bank, Coastal Securities Inc., to assist in these
efforts. Although there can be no assurances these efforts will be successful,
the Company contemplates securing a debt facility adequate to satisfy the Notes
Payable described above.

During the year ended May 31, 2009, the Company consummated the following common
stock transactions:

06/01/2008 Issued 583 common shares valued at $33 per share in payment for
services and fees to third parties

06/25/2008 Issued 8,205 common shares upon the cashless exercise of warrants

07/01/2008 Issued 8,333 common shares valued at $24 per share in payment for
services and fees to third parties

07/31/2008 Issued 5,000 common shares valued at $12 per share in payment for
services and fees that were accrued as of May 31, 2008

08/04/2008 Issued 99 common shares upon the exercise of cashless warrants

08/26/2008 Issued 10,917 common shares at $12 per share for cash in a
private placement

08/28/2008 Issued 333 common shares valued at $12 per share in payment for
services and fees to third parties

09/09/2008 Issued 167 common shares at $12 per share for cash in a private
placement

09/30/2008 Issued 2,083 common shares at $12 per share for cash in a private
placement

10/15/2008 Issued 5,000 common shares valued at $9 per share in payment for
services and fees to third parties

11/30/2008 Issued 1,667 common shares to a third party valued at an average
price of $34.03 per share in payment for current period services
of $16,733 and services included in accounts payable as of May
31, 2008 of $40,000.

01/15/2009 Issued 11,458 common shares to an officer of the company valued
at $12 per share for compensation. $100,000 of the compensation
was included in accrued liabilities as of May 31, 2008 and
$37,500 was for services rendered during year ended May 31, 2009

01/31/2009 Issued 8,333 shares valued at $1.50 per share for to an officer
of the company for services rendered during the period

03/13/2009 In a related party transaction issued 739,059 shares valued at
$3.60 per share to acquire a working interest in a salt water
disposal well from RoyalCo Oil and Gas Corporation

02/14/2009 Issued 100,000 common shares valued at $2.40 per share in payment
for services and fees to third parties

05/04/2009 Performed a 1 for 60 reverse stock split. All share and per share
amounts have been adjusted retroactively to reflect the effect of
this split as of the first day of the first period presented.

05/18/2009 In a related party transaction, issued 5,603,577 shares valued at
$3.60 per share to acquire oil and gas working interests from
RoyalCo Oil and Gas Corporation

05/18/2009 Issued 56,700 shares in a distribution of 100 shares to each
stockholder of record

05/26/2009 Issued 12,000 shares valued at $4.00 per share for to a former
officer of the company valued for services rendered during the
period

In September 2009, Exterra entered into a $10,000,000 bank line of credit. The
line of credit is subject to an initial borrowing base limitation of $1,475,000
and is secured by Exterra's interests in various oil and gas leases originally
acquired in October of 2007. The loan proceeds are to be used for oil and gas
investments, development of oil and gas properties and working capital
associated with operating oil and gas properties.

The Company has not yet established an ongoing source of revenues sufficient to
cover its operating costs and has defaulted on certain outstanding notes
payable, which raises substantial doubt about its ability to continue as a going
concern. The ability of the Company to continue as a going concern is dependent
on the Company obtaining adequate capital to fund operating losses until it
becomes profitable and to settle or restructure its outstanding past due notes
payable. If the Company is unable to obtain adequate capital, it could be forced
to cease operations.

In order to continue as a going concern, the Company will need, among other
things, additional capital resources. Management's plans to obtain such
resources for the Company include (1) obtaining capital from management and
significant shareholders sufficient to meet its minimal operating expenses, and
(2) securing a debt facility adequate to satisfy our funding deficit. However,
management cannot provide any assurances that the Company will be successful in
accomplishing any of its plans.

Cash flow from operating activities

For the year ended May 31, 2009, net cash used by operating activities was
$182,076 compared to net cash used by operating activities of $ 1,219,648 for
the year ended May 31, 2008. The $1,037,572 decrease in net cash used by
operating activities is primarily due to our decrease in our general and
administrative expenses, professional and consulting expenses.

Cash flow from investing activities

For the year ended May 31, 2009, net cash used in investing activities was
$0 compared to $650,175 for the year ended May 31, 2008. The $650,175 decrease
is primarily attributed to our acquisition of oil and gas interests through
stock purchases.

Our investing activities in fiscal 2008 were funded from the use of proceeds
from the private placement.

Cash flow from financing activities

For the year ended May 31, 2009, net cash flows from financing activities was
$180,391 compared to $1,618,314 for the year ended May 31, 2008. The $1,437,923
decrease is primarily attributable to our private placement in fiscal year 2008.

In the opinion of management, inflation has not had a material effect on the
operations of the Company.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------

N/A

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
---------------------------------------------------

EXTERRA ENERGY, INC.
INDEX TO THE FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of Exterra Energy, Inc.
Amarillo, Texas

We have audited the accompanying balance sheets of Exterra Energy, Inc. as of
May 31, 2009 and 2008 and the related statements of operations, stockholders'
equity, and cash flows for the two years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform an 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 also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 financial statements referred to above present fairly, in
all material respects, the financial position of Exterra Energy, Inc. as of May
31, 2009 and 2008 and the results of operations and cash flows for the two years
then ended, in conformity with accounting principles generally accepted in the
United States of America.

The accompanying financial statements have been prepared assuming that Exterra
Energy, Inc. will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has incurred losses since inception, which
raises substantial doubt about its ability to continue as a going concern.
Management's plans regarding those matters also are described in Note 3. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

Malone & Bailey PC
www.malone-bailey.com
Houston, Texas
October 14, 2009

F-2

EXTERRA ENERGY, INC.
BALANCE SHEETS

May 31, 2009 May 31, 2008
------------ ------------
CURRENT ASSETS:
Cash and equivalents $ 7,505 $ 9,190
Oil and gas receivable 42,326 148,114
Prepaid expenses 611 11,327
------------ ------------

TOTAL CURRENT ASSETS 50,442 168,631

OIL AND GAS PROPERTIES, net - successful efforts method 2,379,194 4,533,036
OIL AND GAS PROPERTIES, unevaluated -- 669,600
VEHICLES, FURNITURE AND EQUIPMENT, net 25,075 32,754
OTHER ASSETS 9,913 9,913
------------ ------------

TOTAL ASSETS $ 2,464,624 $ 5,413,934
============ ============

CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,042,749 $ 737,885
Oil and gas properties purchase note payable 200,000 200,000
Convertible notes payable 367,500 367,500
Related party note payable 30,000 -
Other current notes 462,125 469,734
------------ ------------

TOTAL CURRENT LIABILITIES 2,102,374 1,775,119

NON-CURRENT LIABILITIES:
Asset retirement obligation 120,271 62,872
------------ ------------

TOTAL LIABILITIES 2,222,645 1,837,991
------------ ------------

STOCKHOLDERS' EQUITY:
Common stock: $0.001 par value
75,000,000 shares authorized: 7,036,279 and
462,763 shares issued and outstanding, respectively 7,036 463
Additional paid-in capital 20,450,498 18,620,053
Accumulated deficit (20,215,555) (15,044,573)
------------ ------------

TOTAL STOCKHOLDERS' EQUITY 241,979 3,575,943
------------ ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,464,624 $ 5,413,934
============ ============

The accompanying notes are an integral part of these financial statements

F-4

EXTERRA ENERGY, INC.
STATEMENTS OF OPERATIONS

Years Ended
-----------------------------
May 31, 2009 May 31, 2008
------------ ------------
REVENUE:
Oil and gas sales $ 437,968 $ 460,966

OPERATING EXPENSES:

Lease operating expenses 298,508 428,267
Depreciation, depletion and accretion 223,931 405,522
Impairment 3,520,623 5,225,804
General and administrative 1,425,722 8,430,203
Loss on sale of oil and gas property -- 150,195
------------ ------------

Total Expenses 5,468,784 14,639,991
------------ ------------

LOSS FROM OPERATIONS (5,030,816) (14,179,025)
------------ ------------

OTHER EXPENSES:

Interest expense (140,166) (235,637)
------------ ------------

Total Other Expenses (140,166) (235,637)
------------ ------------

NET LOSS $ (5,170,982) $(14,414,662)

LOSS PER SHARE - BASIC AND DILUTED $ (5.80) $ (42.43)

WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC AND DILUTED 897,973 339,734

The accompanying notes are an integral part of these financial statements

F-5

EXTERRA ENERGY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- -----------

Balances at May 31, 2007 191,567 192 855,705 (629,911) 225,986

Issuance of common stock for:
Cash 25,525 26 1,148,601 1,148,627
Services 88,260 88 5,621,135 5,621,223
Oil & gas property - Star
of Texas 133,333 134 8,639,866 8,640,000
Oil & Gas property
working interests 12,255 12 661,783 661,795
Debt settlement 6,274 6 414,063 414,069
Debt issuance fees 3,380 3 192,373 192,376
Conversion of notes payable
and accrued interest 2,169 2 104,126 104,128

Stock options issued for services -- 963,426 963,426
Discount on notes payable from
beneficial conversion feature -- 18,975 18,975

Net loss (14,414,662) (14,414,662)
----------- ----------- ----------- ----------- ----------

Balances at May 31, 2008 462,763 463 18,620,053 (15,044,573) 3,575,943

Issuance of common stock for:
Cash 13,168 13 157,987 158,000
Services 138,708 139 622,844 622,983
Services - prior year accrual 14,000 14 199,986 200,000
Oil & gas property - saltwater
disposal well 739,059 739 2,659,873 2,660,612
Oil & gas property - proved
undeveloped leases 5,603,577 5,603 20,167,274 20,172,877
Deemed distribution to directors -- -- (21,977,454) (21,977,454)
Cashless warrant exercise 8,304 8 (8) --
Stock dividend distribution 56,700 57 (57) --
Net loss -- -- -- (5,170,982) (5,170,982)
----------- ----------- ----------- ------------ -----------

Balances at May 31, 2009 7,036,279 $ 7,036 $20,450,498 $(20,215,555) $ 241,979

The accompanying notes are an integral part of these financial statements

F-6

EXTERRA ENERGY, INC.
STATEMENTS OF CASH FLOWS

For the Year Ended For the Year Ended
May 31, 2009 May 31, 2008
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (5,170,982) $(14,414,662)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, depletion and amortization 223,931 405,522
Impairment 3,520,623 5,225,804
Amortization of debt discount -- 124,589
Stock issued for services 622,983 5,621,223
Stock issued for debt service fees -- 192,376
Loss on sale of oil and gas property -- 150,195
Warrant expense -- 963,426
Changes in operating assets and liabilities
Oil and gas receivables 105,788 (130,559)
Prepaid expenses and other current assets 10,716 (11,327)
Other assets -- (9,913)
Accounts payable and accrued expenses 504,865 663,678
------------ ------------
Net Cash Used in Operating Activities (182,076) (1,219,648)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of oil and gas property -- (71,089)
Sale of oil and gas property -- 100,000
Star of Texas Well Completions -- (642,476)
Purchase of fixed assets -- (36,610)
------------ ------------
Net Cash Used in Investing Activities -- (650,175)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of stock 158,000 1,148,627
Borrowings on debt 30,000 612,128
Payments on debt (7,609) (142,441)
------------ ------------
Net Cash Provided by Financing Activities 180,391 1,618,314
------------ ------------

NET INCREASE IN CASH (1,685) (251,509)

CASH AT BEGINNING OF PERIOD 9,190 260,699
------------ ------------
CASH AT END OF PERIOD $ 7,505 $ 9,190

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest $ -- $ 82,837
Income taxes -- --

NON-CASH INVESTING AND FINANCING ACTIVITIES
Stock issued for oil and gas properties $ 22,833,490 $ 8,640,000
Stock issued for oil and gas property working interests -- 661,795
Deemed distribution to directors (21,977,454) --
Stock issued for accounts payable and accrued expenses 200,000 --
Change in estimate on asset retirement obligations 39,713 --
Stock issued for conversion of notes payable and accrued interest -- 104,128
Discount on notes payable from beneficial conversion feature -- 18,975

The accompanying notes are an integral part of these financial statements

F-7

EXTERRA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND HISTORY

Exterra Energy, Inc. (the "Company") was incorporated on February 3, 2006 in the
State of Nevada as Green Gold Inc. The Company was engaged in the exploration
for jade. Initial efforts focused on the Green Gold Jade Property in British
Columbia, Canada.

The Company's business direction was changed in 2006 in order to capitalize on
the increasing availability of opportunistic acquisitions in the energy sector.
In December 2006, the Company acquired interests in four oil and gas assets, the
Burnett, Wuckowitsch and the University Lands leases, as well as a 9% Working
Interest in the Henry Dome prospect, all located in Texas, USA. In December
2007, the Company sold the Burnett and Wuckowitsch leases.

In July 2007, the Company changed its name to Exterra Energy, Inc.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

The Company's financial statements are based on a number of significant
estimates, including oil and gas reserve quantities which are the basis for the
calculation of depreciation, depletion and impairment of oil and gas properties,
and timing and costs associated with its retirement obligations.

Cash and Cash Equivalents

Cash and cash equivalents include cash in banks and financial instruments which
mature within three months of the date of purchase.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of
credit risk consist of cash. The Company had no cash in excess of federally
insured limits for the periods ending May 31, 2009 and 2008, respectively. The
Company maintains cash accounts only at large high quality financial
institutions and Exterra believes the credit risk associated with cash is
remote.

The Company's receivables primarily consist of accounts receivable from oil and
gas sales. Accounts receivable are recorded at invoice amount and do not bear
interest. Any allowance for doubtful accounts is based on management's estimate
of the amount of probable losses due to the inability to collect from customers.
As of May 31, 2009 and 2008, $31,000 and $0 allowance for doubtful accounts has
been recorded and none of the accounts receivable have been collateralized.

During the years ended May 31, 2009 and 2008, one purchaser accounted for 90% of
our oil and gas sales revenue.

Although the Company is directly affected by the well-being of the oil and gas
production industry, management does not believe a significant credit risk
exists at May 31, 2009 and 2008.

Fair Value of Financial Instruments

As at May 31, 2009 and 2008, the fair value of cash, accounts receivable, notes
payable and accounts payable, approximate carrying values because of the
short-term maturity of these instruments.

Oil and Gas Properties, Successful Efforts Method

The Company uses the successful efforts method of accounting for oil and gas
property acquisition, exploration, development, and production activities. Costs
to acquire mineral interests in oil and gas properties, to drill and equip
exploratory wells that find proved reserves, and to drill and equip development
wells are capitalized as incurred. Costs to drill exploratory wells that are
unsuccessful in finding proved reserves are expensed as incurred. In addition,
the geological and geophysical costs, and costs of carrying and retaining
unproved properties (i.e. delay rentals) are expensed as incurred. Costs to
operate and maintain wells and field equipment are expensed as incurred.

Capitalized proved property acquisition costs are amortized by lease using the
unit-of-production method based on total proved reserves. Capitalized
exploration well costs and development costs (plus estimated future
dismantlement, surface restoration, and property abandonment costs, net of
equipment salvage values) are amortized in a similar fashion based on their
proved developed reserves. Support equipment and other property and equipment
are depreciated over their estimated useful lives. As of May 31, 2009 and 2008,
accumulated depletion, depreciation and amortization was $629,453 and $405,522
respectively. Depletion, depreciation and amortization expense for the years
ended May 31, 2009 and 2008 was $223,931 and $405,522 respectively.

Pursuant to SFAS No. 144, "Impairment or Disposal of Long-Lived Assets", the
Company reviews proved oil and natural gas properties and other long-lived
assets for impairment. These reviews are performed at least annually and more
frequently if events and circumstances, (such as downward revision of the
reserve estimates or commodity prices) indicate a decline in the recoverability
of the carrying value of such properties. The Company estimates the undiscounted
future cash flows expected in connection with the properties and compares such
future cash flows to the carrying amount of the properties to determine if the
carrying amount is recoverable. When the carrying amounts of the properties
exceed their estimated undiscounted future cash flows, the carrying amounts of
the properties are reduced to their estimated fair value. The factors used to
determine fair value include, but are not limited to, estimates of proved
reserves, future commodity prices, the timing of future production, future
capital expenditures and a risk-adjusted discount rate. See Note 9 for details
on impairment recorded during the years ended May 31, 2008 and 2009.

Unproved oil and gas properties that are individually significant are also
periodically assessed for impairment of value. An impairment loss for unproved
oil and gas properties is recognized at the time of impairment by providing an
impairment allowance.

On the retirement or sale of a partial unit of proved property, the cost is
charged to accumulated depreciation, depletion, and amortization with any
resulting gain or loss recognized in income.

Deposits and advances for services expected to be provided for exploration and
development or for the acquisition of oil and gas properties are classified as
long term other assets.

Vehicles, Furniture and Equipment

Vehicles, furniture and equipment are stated at cost. Depreciation is computed
on a straight-line basis over the estimated useful lives of three to five years.

Asset Retirement Obligations

The Company follows the provisions of Financial Accounting Standards Board
Statement No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143).
The fair value of an asset retirement obligation is recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
present value of the estimated asset retirement costs is capitalized as part of
the carrying amount of the long-lived asset. For the Company, asset retirement
obligations relate to the abandonment of oil and gas producing facilities. The
amounts recognized are based upon numerous estimates and assumptions, including
future retirement costs, future recoverable quantities of oil and gas, future
inflation rates and the credit-adjusted risk-free interest rate.

Income Taxes

The Company uses the asset and liability method in accounting for income taxes.
Deferred tax assets and liabilities are recognized for temporary differences
between financial statement carrying amounts and the tax bases of assets and
liabilities, and are measured using the tax rates expected to be in effect when
the differences reverse. Deferred tax assets are also recognized for operating
loss and tax credit carry-forwards. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the results of operations
in the period that includes the enactment date. A valuation allowance is used to
reduce deferred tax assets when uncertainty exists regarding their realization.

Revenue and Cost Recognition

The Company recognizes oil and natural gas revenue under the sales method of
accounting for its interests in producing wells as oil and natural gas is
produced and sold from those wells. The volumes sold may differ from the volumes
to which the Company is entitled based on its interests in the properties. These
differences create imbalances which are recognized as a liability only when the
imbalance exceeds the estimate of remaining reserves. The Company had no
significant imbalances as of May 31, 2009 and 2008.

Stock-based compensation

The Company follows SFAS No. 123(R), "Share Based Payment" to account for any
options or common stock granted to employees. SFAS 123(R) replaced SFAS No. 123
and supersedes APB Opinion No. 25. SFAS 123(R) requires all share-based payments
to employees, including grants of employee stock options, to be recognized in
the financial statements based on their fair values.

The Company accounts for stock-based compensation issued to non-employees in
accordance with the provisions of SFAS No. 123(R) and EITF No. 96-18,
"Accounting for Equity Investments That Are Issued to Non-Employees for
Acquiring, or in Conjunction with Selling Goods or Services". For expensing
purposes, the value of common stock issued to non-employees and consultants is
determined based on the fair value of the equity instruments issued and charged
to expense for the nature of the service for which the stock compensation is
paid.

Basic and Diluted Income per Share of Common Stock

Basic and diluted net income per share calculations are presented in accordance
with Financial Accounting Standards Board Statement Number 128 and are
calculated on the basis of the weighted average number of common shares
outstanding during the year. Common stock equivalents such as stock options and
warrants, are excluded from the calculation when a loss is incurred as their
effect would be anti-dilutive. At May 31, 2009 and May 31, 2008, the potential
dilutive effect of converting notes payable and related interest to shares was
determined to be anti-dilutive, and therefore their effect is excluded from the
calculation of diluted weighted average shares.

Stock Splits

Effective May 4, 2009, Exterra approved a 1 for 60 reverse stock split. All
share and per share amounts have been adjusted retroactively to reflect the
effect of this split as of the first day of the first period presented.

Recent Accounting Pronouncements

The Company does not expect a significant impact to its financial statements as
a result of any recent accounting pronouncements.

Reclassifications

Certain amounts in prior periods have been reclassified to conform to the
current period presentation.

NOTE 3 - GOING CONCERN

The Company's financial statements are prepared using accounting principles
generally accepted in the United States of America applicable to a going concern
which contemplates the realization of assets and liquidation of liabilities in
the normal course of business. The Company has not yet established an ongoing
source of revenues sufficient to cover its operating costs and has defaulted on
certain outstanding notes payable, which raises substantial doubt about its
ability to continue as a going concern. The ability of the Company to continue
as a going concern is dependent on the Company obtaining adequate capital to
fund operating losses until it becomes profitable and to settle or restructure
its outstanding past due notes payable. If the Company is unable to obtain
adequate capital, it could be forced to cease operations.

The ability of the Company to continue as a going concern is dependent upon its
ability to successfully accomplish the plans described in the preceding
paragraph and eventually secure other sources of financing and attain profitable
operations. The accompanying financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern.

NOTE 4 - ACQUISITIONS AND DISPOSITIONS OF OIL AND GAS PROPERTIES

On October 17, 2007, the Company purchased oil & gas properties from Star of
Texas Energy Services, Inc., Star of Texas Minerals Resources LLC, Hydro-FX,
Inc., and Barnett Holding, LLC ("Seller"). These companies were owned or
controlled by a Director of the Company at the time of acquisition. The purchase
price of the properties was 133,333 shares of common stock valued at $8,640,000
based upon the closing price of the common stock on the date the sales agreement
was signed. These shares were issued to Star of Texas Minerals Resources LLC as
to 10,333 common shares, Hydro-FX Inc. as to 2,250 common shares, SMLL Trust as
to 117,417 common shares and the Director as to 3,333 common shares. SMLL Trust
is the owner of Star of Texas Energy Services, Inc. Of the total $8,640,000
purchase price $7,608,600 was allocated to proved properties, which was based on
the proportionate estimated reserve value, $669,600 was allocated to unproved
properties and the remainder to other assets. The acquisition consists of oil
and gas working interests and overriding royalty interests in various wells
primarily in North Central Texas(Denton, Wise, Hood, Parker, Jack, Hill and
Tarrant Counties) and producing out of the Barnett Shale. The acquisition also
includes interests in gathering systems, undeveloped leases, vehicles and office
furniture.

Under the agreement with Star, there were working interests in various
additional wells and leases that were not transferred. The assignments of these
additional wells and leases were to be held in trust until Exterra chose to
satisfy liens and encumbrances against these leases. During 2009, Star of Texas
filed Chapter 7 and Exterra is considering buying these additional leases and
wells from the Trustee for a negotiated price. As of October 2009, none of the
interests in the additional wells and leases have been transferred to Exterra.
In addition, the lienholders for these additional wells have filed several cases
against Star of Texas for payment of the outstanding liens. Exterra has been
named in several of these cases, however it is management's opinion that the
likelihood of a loss outcome to Exterra is any of these cases is remote because
Exterra never took ownership of the wells and leases in question.

The following Table reflects selected unaudited Proforma financial information
as if the Star transaction had occurred June 1, 2007.

For the Fiscal Year Ended
May 31, 2008
------------
Revenues $ 545,077
Operating Expense $14,689,202
Operating Loss ($14,144,125)
Net Loss ($14,379,762)
Net Loss Share ($0.71)

During the fiscal year end May 31, 2008, the Company sold its Working Interest
in approximately 24 Barnett Shale wells for $31,335 and the Burnett and
Wuckowitsch leases for $100,000. The sale resulted in a loss of $150,195.

On February 15, 2008, the Company issued 12,255 common shares valued at $661,795
in exchange for additional oil and gas working interests in several of the wells
originally acquired in the Star of Texas acquisition described above.

On March 13, 2009, Exterra issued 739,059 shares of common stock valued at
$2,660,612 for a 25% profit interest in a saltwater disposal well and lease in
the Newark East Field of North Texas. The profit interest was acquired from
ROYALCO Oil & Gas Corporation, a privately held company controlled by Robert
Royal, CEO, and Director of Exterra and Todd R. Royal, President, Secretary and
Director of the Company. Because the transaction occurred between two entities
under common control, the profit interest was transferred to Exterra at
ROYALCO's basis of $191,445. The difference between the fair value of the common
stock issued and ROYALCO's basis in the profit interest is recorded as a deemed
distribution in the statement of changes in stockholders' equity. In addition,
ROYALCO is currently in litigation over its profit interest in the saltwater
disposal well. According to the purchase agreement, if the litigation were to
result in Royalco losing its development and management rights to the saltwater
disposal well, the assets transferred to Exterra would be replaced with assets
of equivalent value.

On May 18, 2009, Exterra issued 5,603,577 shares of common stock valued at
$20,172,877 for various proved undeveloped mineral leases in Parker and Jack
Counties, Texas. The assets were acquired from ROYALCO Oil & Gas Corporation, a
privately held company controlled by Robert Royal, CEO, and Director of Exterra
and Todd R. Royal, President, Secretary and Director of the Company. Because the
transaction occurred between two entities under common control, the properties
were transferred to Exterra at ROYALCO's basis of $664,590. The difference
between the fair value of the common stock issued and ROYALCO's basis in the
properties is recorded as a deemed distribution in the statement of changes in
stockholders' equity.

NOTE 5 - ASSET RETIREMENT OBLIGATIONS

In accordance with SFAS 143, "Accounting for Asset Retirement Obligations" the
Company records the fair value of a liability for asset retirement obligations
("ARO") in the period in which it is incurred and records a corresponding
increase in the carrying amount of the related long-lived asset. The present
value of the estimated asset retirement cost is capitalized as part of the
carrying amount of the long-lived asset and is depreciated over the useful life
of the asset. The Company accrues an abandonment liability associated with its
oil and gas wells when those assets are placed in service. The ARO is recorded
at its estimated fair value and accretion is recognized over time as the
discounted liability is accreted to its expected settlement value. Fair value is
determined by using the expected future cash outflows discounted at the
Company's credit-adjusted risk-free interest rate. No market risk premium has
been included in Exterra's calculation of the ARO balance. The Company recorded
$120,271 and $62,872 of asset retirement obligations for the years ending May
31, 2009 and 2008, respectively.

The following is a description of the changes to the Company's asset retirement
obligations for the years ended May 31,

2009 2008
-------- --------

Asset retirement obligations at beginning of year $ 62,872 $ --
Additions for exploratory and development drilling -- 59,014
Additions due to changes in estimates 39,713 --
Accretion expense 17,686 3,858
-------- --------

Asset retirement obligations at end of year $120,271 $ 62,872
======== ========

NOTE 6 - NOTES PAYABLE

Debts outstanding at May 31, 2009 and 2008 are as follows:

2009 2008
---------- ----------
(1) Note payable to purchase oil and gas properties $ 200,000 $ 200,000
(2) Note payable to finance insurance premium -- 7,609
(3) Convertible loans 367,500 367,500
(4) Note payable to Coventry Capital 462,125 462,125
(5) Note payable to RoyalCo Finance 30,000 --
---------- ----------

$1,059,625 $1,037,234

(2) The Company financed the annual directors and officers liability insurance
premium. Principal and interest (8.30% per annum) payments are due monthly in
the amount of $1,442. The note payments are unsecured.

(3) During the year ended May 31, 2007, the Company received $367,500 from the
sale of its Convertible Loans. The Convertible Loans were due June 30, 2008 and
bear interest at 10% per annum payable quarterly. In addition, 10% of the face
value of the Convertible Loans are due to the holders as a revenue sharing
bonus. This bonus is due from initial production revenue realized for the first
six months of net revenue from the University Lands, Pecos County, Texas.
Furthermore, 3,342 common shares in aggregate were issued as a bonus. These
bonus shares are restricted from sale for 2 years. The Convertible Loans are
convertible into common shares of the Company at $45 per share for a total of
8,167 common shares. The Company is currently negotiating an extension with the
Convertible Loan Holders. There are no guarantees these negotiations will be
successful. The Company analyzed the conversion feature under FAS 133 and EITF
00-19 and determined that equity classification was appropriate. The Company
also analyzed the conversion feature under EITF 98-5 and determined it contained
a beneficial conversion feature with an intrinsic value of $94,367. The entire
amount was treated as a discount to the Convertible Loans and was amortized to
interest expense during the year ended May 31, 2008. The Company has accrued
interest at May 31, 2008 and 2009 of $11,895 and $48,645.

Through May 31, 2009 a net revenue sharing bonus has not been paid as the
University Lands have yet to yield net revenue.

(4) Principal and interest (18% per annum) due monthly in blended payments of
$20,000 commenced December 7, 2007. The loan is secured by certain oil and gas
properties and was due May 7, 2008. The Company has accrued $20,000 and $103,183
in interest as of May 31, 2008 and 2009. In September 2009, the Company
negotiated a preliminary settlement agreement for this note that would result in
the issuance of 5,000,000 shares of common stock for full settlement of the
amounts owed. See Note 13.

(5) Principal and interest (10% per annum) is un-secured and due April 15, 2010.
The Company has accrued $500 in interest as of May 31, 2009.

In addition to the above, during the year ended May 31, 2008, the Company issued
a $101,200 unsecured convertible note due in August of 2009, convertible at $45
per share and bearing interest at 12%. The Company analyzed the conversion
feature under FAS 133 and EITF 00-19 and determined that equity classification
was appropriate. The note was analyzed under EITF 98-5 and determined to have a
beneficial conversion feature with an intrinsic value of $18,975, which was
treated as a discount against the note. The principal of $101,200 plus accrued
interest of $2,928 was converted during the period into 2,169 shares of stock.
At the date of conversion, the remaining balance of the unamortized discount
resulting from the beneficial conversion feature was amortized to interest
expense.

NOTE 7 - STOCKHOLDERS' EQUITY

Common Stock

During fiscal year May 31, 2009, the Company consummated the following
transactions: