TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. - FORM 10-Q

Attached files

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EX-31 - PFO CERTIFICATION - TERRA ENERGY & RESOURCE TECHNOLOGIES, INC.	fex312.htm
EX-31 - CEO CERTIFICATION - TERRA ENERGY & RESOURCE TECHNOLOGIES, INC.	fex311.htm
EX-32 - CEO CERTIFICATION - TERRA ENERGY & RESOURCE TECHNOLOGIES, INC.	fex321.htm
EX-32 - PFO CERTIFICATION - TERRA ENERGY & RESOURCE TECHNOLOGIES, INC.	fex322.htm
EX-10 - EXHIBIT 10.1 - TERRA ENERGY & RESOURCE TECHNOLOGIES, INC.	fexhibit101.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

o	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ________ to ___________.

Commission file number: 333-90272

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

DELAWARE		56-1940918
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

99 Park Avenue, 16th Floor, New York, NY		10016
(Address of principal executive offices)		(Zip Code)

(212) 286-9197
(Registrant's telephone number, including area code)

Not applicable
(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorted period that the registrant was required to submit and post such files). o Yes o No

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

	Large accelerated filer o	Accelerated filer o
	Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No

As of November 2, 2009, we had 97,533,338 shares of common stock issued and outstanding.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC.

FORM 10-Q

TABLE OF CONTENTS

	Page
PART I – FINANCIAL INFORMATION

Item 1. Financial Statements	3
Consolidated Balance Sheets
As of September 30, 2009 (Unaudited) and December 31, 2008	3
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2009 and 2008 (Unaudited)	4
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2009 and 2008 (Unaudited)	5
Notes to Consolidated Financial Statements	6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3. Quantitative and Qualitative Disclosures About Market Risk	39
Item 4. Controls and Procedures	39

PART II – OTHER INFORMATION

Item 1. Legal Proceedings	40
Item 1A. Risk Factors	40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3. Defaults Upon Senior Securities	40
Item 4. Submission of Matters to a Vote of Security Holders	40
Item 5. Other Information	41
Item 6. Exhibits	41

Signatures	42

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	September 30,	December 31,
	2009	2008
	(Unaudited)
ASSETS

CASH	$ 117,000	$ 700,001
ACCOUNTS RECEIVABLE	572,364	–
DEFERRED COSTS	–	600,000
PREPAID EXPENSES AND OTHER CURRENT ASSETS	1,121	–

TOTAL CURRENT ASSETS	690,485	1,300,001

OIL AND GAS PROPERTIES UNPROVED, FULL COST METHOD (NOTE 5)	603,456	603,456
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION (NOTE 6)	86,341	120,606
OTHER ASSETS	28,909	10,670
MINORITY INTEREST	7,466	–

TOTAL ASSETS	$ 1,416,657	$ 2,034,733

LIABILITIES AND SHAREHOLDERS' DEFICIT

CURRENT LIABILITIES

ACCOUNTS PAYABLE AND ACCRUED EXPENSES	$ 1,372,407	$ 1,043,982
PROMISSORY NOTE PAYABLE	178,920	178,920
LOANS PAYABLE - RELATED PARTIES (NOTE 7)	446,265	446,265
DEFERRED REVENUE	60,000	1,455,900

TOTAL CURRENT LIABILITIES	2,057,592	3,125,067

SHAREHOLDERS' DEFICIT

PREFERRED STOCK: $.0001 PAR VALUE, SHARES AUTHORIZED 25,000,000 SHARES ISSUED AND OUTSTANDING: 0 AT SEPTEMBER 30, 2009 AND 5,000,000 AT DECEMBER 31, 2008 (NOTE 10)	–	500
COMMON STOCK; $.0001 PAR VALUE SHARES AUTHORIZED 250,000,000 SHARES ISSUED AND OUTSTANDING: 97,533,338 AT SEPTEMBER 30, 2009 AND 58,358,338 AT DECEMBER 31, 2008	9,753	5,836
ADDITIONAL PAID IN CAPITAL	21,763,497	20,943,955
STOCK OPTIONS OUTSTANDING (NOTE 4)	1,428,950	1,428,950
DEFERRED COMPENSATION (CONSULTANTS) (NOTE 4)	(90,598)	(61,795)
DEFERRED COMPENSATION (EMPLOYEES) (NOTE 4)	(153,262)	(2,508,859)
ACCUMULATED DEFICIT	(23,599,275)	(20,898,921)

TOTAL SHAREHOLDERS' DEFICIT	(640,935)	(1,090,334)

TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT	$ 1,416,657	$ 2,034,733

See notes to consolidated financial statements.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months	Three Months	Nine Months	Nine Months
	Ended	Ended	Ended	Ended
	September 30,	September 30,	September 30,	September 30,
	2009	2008	2009	2008

REVENUES	$ 54,704	$ 13,000	$ 2,054,704	$ 13,000

COST OF REVENUES	–	–	1,355,000	–

GROSS PROFIT	54,704	13,000	699,704	13,000

OPERATING EXPENSES

DEFERRED COMPENSATION (CONSULTANTS) (NOTE 4)	–	–	63,598	–
DEFERRED COMPENSATION (EMPLOYEES) (NOTE 4)	–	–	2,355,597	–
WRITE-OFFS OF OIL AND GAS PROPERTIES	–	–	–	484,623
OPERATING COSTS AND EXPENSES	406,850	994,269	998,798	1,707,715
TOTAL OPERATING EXPENSES	406,850	994,269	3,417,993	2,192,338

OPERATING LOSS BEFORE OTHER INCOME (EXPENSE) AND PROVISION FOR INCOME TAXES	(352,146)	(981,269)	(2,718,289)	(2,179,338)

OTHER INCOME (EXPENSE):

INTEREST EXPENSE	(4,860)	–	(8,090)	(10,529)
INTEREST INCOME	–	1,156	320	1,156
FORGIVENESS OF DEBT	–	16,000	–	16,000
NET INTEREST INCOME (EXPENSE)	(4,860)	17,156	(7,770)	6,627

LOSS BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST	(357,006)	(964,113)	(2,726,059)	(2,172,711)

PROVISION FOR INCOME TAXES	18,239	–	18,239	–
MINORITY INTEREST	7,466	–	7,466	–

NET LOSS	$ (331,301)	$ (964,113)	$ (2,700,354)	$(2,172,711)

NET LOSS PER COMMON SHARE – BASIC AND DILUTED	$ (0.00)	$ (0.02)	$ (0.03)	$ (0.04)

WEIGHTED AVERAGE PER COMMON SHARES OUTSTANDING – BASIC AND DILUTED	95,052,903	58,358,338	83,287,093	58,088,447

See notes to consolidated financial statements.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended September 30,
	2009	2008

NET LOSS	$ (2,700,354)	$ (2,172,711)

ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:

NON CASH ITEMS:
MINORITY INTEREST	(7,466)	–
DEPRECIATION	35,351	29,992
COMMON STOCK ISSUED FOR SERVICES	153,000	101,250
AMORTIZATION OF CONSULTING FEES	41,196	95,270
AMORTIZATION OF DEFERRED COMPENSATION (EMPLOYEES)	2,355,597	532,006
WRITE-OFF OF OIL AND GAS PROPERTIES	–	484,623
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS :
(INCREASE) DECREASE IN PROPERTY & EQUIPMENT	(1,052)	–
ACCOUNTS RECEIVABLE	(572,364)	–
DEFERRED COSTS	600,000	–
PREPAID EXPENSES AND OTHER CURRENT ASSETS	(1,636)	–
OTHER ASSETS	42,551	(4,071)
INCREASE (DECREASE) IN LIABILITIES:
ACCOUNTS PAYABLE AND ACCRUED EXPENSES	328,077	(137,941)
PROMISSORY NOTE	–	178,920
DEFERRED REVENUES	(1,455,900)	–

NET CASH (USED IN) OPERATING ACTIVITES	(1,183,001)	(892,662)

CASH FLOWS FROM INVESTING ACTIVITIES:

ACQUISITION OF OIL AND GAS PROPERTIES	–	(12,996)
NET CASH (USED IN) INVESTING ACTIVITIES	–	(12,996)

NET CASH FROM FINANCING ACTIVITIES:

ISSUANCE OF PREFERRED STOCK	–	500,000
ISSUANCE OF COMMON STOCK	600,000	–
LOANS (REPAYMENTS) FROM RELATED PARTIES	–	(1,112)
NET CASH PROVIDED BY FINANCING ACTIVITIES	600,000	498,888

NET CHANGE IN CASH	(583,001)	(406,770)

CASH - BEGINNING OF YEAR	700,001	505,018

CASH – END OF PERIOD	$ 117,000	$ 98,248

See notes to consolidated financial statements.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

(UNAUDITED)

1.	NATURE OF BUSINESS AND BASIS OF PRESENTATION

Unaudited Interim Financial Information

The consolidated balance sheet of Terra Energy & Resource Technologies, Inc. ("Terra"), a Delaware corporation, formerly CompuPrint, Inc. (see below) and Subsidiaries (collectively, the "Company"), and the related statements of operations and cash flows have been prepared by the Company, without audit, with the exception of the consolidated balance sheet dated as of December 31, 2008, pursuant to the rules and regulations of the Securities and Exchange Commission (the "Commission"). In the opinion of management, the accompanying consolidated financial statements include all adjustments (consisting of normal, recurring adjustments) necessary to summarize fairly the Company's financial position and results of operations. The results of operations for the three and nine months ended September 30, 2009 are not necessarily indicative of the results of operations for the full year or any other interim period. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2008, filed on April 15, 2009 with the Commission.

Principal Business Activities

The Company, through its wholly owned subsidiary, Terra Insight Services, Inc., a New York corporation ("TISI"), provides mapping, surveying, and analytical services to exploration, drilling, and mining companies. Prior to September 2008, the Company offered similar services through Terra Insight Corporation, a Delaware corporation ("TIC") formed January 7, 2005. The Company interprets geologic and satellite data to improve the assessment of natural resources. The Company provides these services (1) to its customers for a cash fee and (2) pursuant to joint venture arrangements in exchange for oil or mineral rights, licenses for oil and mineral rights, or royalties and working interests in exploration projects. Prior to April 27, 2009, the Company provided these services to its customers utilizing services provided to the Company through an outsourcing relationship with the Institute of Geoinformational Analysis of the Earth (the "Institute"), a related foreign entity controlled by an affiliate of the Company.

On July 5, 2009, the Company acquired a 90% in Terra Services, LLC, a company formed under the laws of the Russian Federation on April 23, 2009, for $300. The Company utilizes the Moscow-based company for technology and analysis purposes.

On December 5, 2007, the Company formed Terra Resource Technologies, Inc. a wholly-owned New York corporation, now known as Terra Insight Services, Inc. ("TISI"). TISI was inactive through August 30, 2008.

On August 31, 2006, the Company formed Terra Energy & Resource Technologies, Inc. for purposes of the Company's reincorporation. (See below).

On August 24, 2006, the Company formed Terra Insight Technologies Corporation ("TITC"), a wholly-owned Delaware corporation. TITC was inactive through December 31, 2008.

On March 20, 2006, the Company formed Terra Resources Operations Co., Inc. ("TRO"), a Texas corporation. The Company's wholly-owned subsidiary, Terra Resources, Inc. ("TRI"), a Delaware corporation, is the sole shareholder of the entity. TRO has been inactive since inception.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

(UNAUDITED)

1.	NATURE OF BUSINESS AND BASIS OF PRESENTATION (CONTINUED)

On January 17, 2006, the Company acquired through TRI a 95% interest in NamTerra Mineral Resources (Proprietary) Limited ("NamTerra"), a Namibia company. In 2006, NamTerra was awarded six licenses by Namibia to explore for diamonds. NamTerra did not commence any exploration activities. In 2008, NamTerra applied for deregistration of its charter.

On January 4, 2006, the Company formed TexTerra Exploration Partners, LP ("TexTerra") a Delaware limited partnership, in contemplation of an exploration project. TRI is the general partner of TexTerra with an initial 100% interest. In 2006, an initial well was drilled in connection with the Bellows Lease. Enficon Establishment ("Enficon"), a Liechtenstein company, provided funding covering 80% of TexTerra's costs in connection with the initial well and was entitled to 80% of the cash distributed until it received back its capital contribution. Further, Enficon was entitled to 65% of the profits on the initial well.

On July 12, 2005, the Company formed New Found Oil Partners, LP ("NFOP"), a Delaware limited partnership, in contemplation of an exploration project. The Company's wholly-owned subsidiary, TRI, was the general partner of this entity with an initial 100% interest. NFOP was dissolved in April 2008.

On July 6, 2005, the Company formed Tierra Nevada Exploration Partners, LP ("Tierra Nevada"), a Delaware limited partnership, in furtherance of an exploration agreement with Enficon. TRI is the general partner of Tierra Nevada with an initial 100% interest. As of September 30, 2006, the Company advanced approximately $2.5 million into the limited partnership in furtherance of the exploration project. In 2006, Kiev Investment Group ("KIG"), an affiliate of Enficon, also agreed to fund certain Tierra Nevada projects.

On April 4, 2005, the Company formed Terra Resources, Inc. ("TRI"), a Delaware corporation wholly-owned by Terra Insight Corporation.

Reincorporation

Effective November 13, 2006, CompuPrint, Inc. was reincorporated under the laws of the State of Delaware, pursuant to a Plan and Agreement of Merger, dated as of November 3, 2006 (the "Plan"), by merging into CompuPrint, Inc. into its wholly-owned subsidiary, Terra Energy & Resource Technologies, Inc., a corporation formed for the purpose of reincorporation. Pursuant to the Plan, each share of CompuPrint, Inc. was exchanged for one share of Terra Energy & Resource Technologies, Inc., and all shares previously outstanding of Terra Energy & Resource Technologies, Inc. that were previously outstanding were cancelled. Pursuant to the Plan, the Company changed its corporate name to Terra Energy & Resource Technologies, Inc. The Plan was approved by the holders of a majority of the Company's shares at a special meeting of stockholders held on November 3, 2006. At the special meeting, the stockholders also approved an increase in the Company's authorized capital to 275,000,000 shares, consisting of 250,000,000 shares of common stock, and 25,000,000 shares of preferred stock, each with a par value of $0.0001.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

(UNAUDITED)

1.	NATURE OF BUSINESS AND BASIS OF PRESENTATION (CONTINUED)

Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred substantial losses from operations, sustained substantial cash outflows from operating activities, and has both a significant working capital deficiency and accumulated deficit at September 30, 2009 and at December 31, 2008. The above factors raise substantial doubt about the Company's ability to continue as a going concern. The Company's continued existence depends on its ability to obtain additional equity and/or debt financing to fund its operations and ultimately to achieve profitable operations. The Company is attempting to raise additional financing and has initiated a cost reduction strategy. Given the Company's tight cash position, its ability to continue as a going concern is dependent on the Company (1) raising additional equity or debt financing or (2) the Company obtaining sufficient fee revenue from service business to support the operations of the Company. There can be no assurance that the Company will be successful in either effort.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation

The consolidated financial statements include the accounts of Terra and its wholly owned subsidiaries, Terra Insight Corporation, Terra Resources, Inc., Terra Resources Operations Co., Inc., Terra Insight Technologies Corporation, Terra Insight Services, Inc., and New Found Oil Partners, LP through April 2008. Also included are the accounts of Tierra Nevada Exploration Partners, LP and TexTerra Exploration Partners, LP, drilling partnerships in which a significant stockholder has an economic interest, and NamTerra Mineral Resources (Proprietary) Limited, a 95% owned subsidiary by Terra Resources, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company has evaluated subsequent events through the date that the financial statements were issued, which was November 18, 2009, the date of the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2009.

Revenue Recognition

Service revenue is recognized when the survey is delivered to the customer and collectibility of the fee is reasonably assured. Amounts received in advance of performance and/or completions of such services are recorded as deferred revenue.

Oil and Gas Properties, Unproved, Full Cost Method

The Company uses the "full cost" method of accounting for oil and gas properties. Accordingly, all costs associated with acquisition, exploration, and development of oil and gas reserves, including directly related overhead costs, are capitalized.

All capitalized costs of oil and gas properties, including the estimated future costs to develop proved reserves, are amortized. In addition, the capitalized costs are subject to a "ceiling test" which basically limits such costs to the aggregate of the estimated present value of future net revenues from proved reserves, based on current economic and operational conditions, plus the lower of cost or estimated fair value of unproved properties.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

(UNAUDITED)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Sales of proved and unproved properties are accounted for as adjustments of capitalized costs to the full cost pool with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case, a gain or loss is recognized.

Deferred Costs

Deferred costs represent costs incurred in connection with mapping services yet to be completed.

Accounts Receivable

Accounts receivable are reported as amounts expected to be collected, net of allowance for non-collection due to the financial position of customers. It is the Company's policy to regularly review accounts receivable for specific accounts past due and set up an allowance when collection is uncertain.

Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. The Company places its cash with high quality financial institutions and limits the amount of credit exposure to any single financial institution or instrument. As to accounts receivable, the Company performs credit evaluations of customers before services are rendered and generally requires no collateral.

Significant Customers

The Company derived all of its revenue for the nine month period ended September 30, 2009 from three customers. The Company derived all of its revenue for the nine month period ended September 30, 2008 from one customer. The Company derived all of its revenue for the year ended December 31, 2008 from two customers.

Property, Equipment and Depreciation

Other property and equipment, consisting of office and transportation equipment, are stated at cost. Depreciation is computed utilizing the straight-line method over the estimated useful lives of the assets. (See Note 6).

Income Taxes

According to the standard "Accounting for Income Taxes,” codified within ASC 740, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred income tax provisions are based on the changes to the respective assets and liabilities from period to period. A valuation allowance is recorded to reduce deferred tax assets when uncertainty regarding realization of the deferred tax assets exists.

The Company adopted the standard, which prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the Company expects to take on a tax return (including a decision whether to file or not to file a return in a particular jurisdiction).

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

(UNAUDITED)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Stock Options

Prior to 2006, as permitted under the standard, "Accounting for Stock-Based Compensation", codified within ASC 718, the Company elected to continue to follow the intrinsic value method in accounting for its stock-based compensation arrangements as defined by the standard "Accounting for Stock Issued to Employees". Under this standard, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the stock at the date of grant over the option price. However, companies that did not adopt the standard must provide additional pro forma disclosure as if they had adopted the standard for valuing stock based compensation to employees. (See Note 4). Effective for the first quarter of fiscal 2006, the Company adopted the standard.

Segments

The Company follows the standard, "Disclosures about Segments of an Enterprise and Related Information," codified within ASC 280. The standard requires that a business enterprise report a measure of segment profit or loss and certain specific revenue and expense items. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company reports three operating segments.

Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the year. Dilutive earnings per share reflect, in periods in which they have a dilutive effect, the effect of the common shares issuable upon exercise of stock options. For the three and nine months ended September 30, 2009 and 2008, the effect of stock options has been excluded from the dilutive calculation, as the impact of the stock options would be anti-dilutive. There were conversion features included in the 2,500,000 shares of Series A Preferred Stock issued on December 27, 2007 and the 2,500,000 shares of Series A Preferred Stock issued on April 23, 2008, which preferred shares were converted into shares of common stock on March 27, 2009. For the three and nine month period ended September 30, 2009, the effect of the conversion could be anti-dilutive.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, if any, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

(UNAUDITED)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Fair Value of Financial Instruments

Financial instruments are recorded at fair value in accordance with the standard for "Fair Value Measurements codified within ASC 820", which defines fair values, establishes a three level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measurements:

•	Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical asset or liabilities in active markets.

•	Level 2 – inputs to the valuation methodology include closing prices for similar assets and liabilities in active markets, and inputs that are observable for the assets and liabilities, either directly, for substantially the full term of the financial instruments.

•	Level 3 – inputs to the valuation methodology are observable and significant to the fair value.

Recent Accounting Pronouncements

In December 2007, the FASB issued and, in April 2009, amended a new business combinations standard codified within ASC 805, which changed the accounting for business acquisitions. Accounting for business combinations under this standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain provisions of this standard impact the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration); exclude transaction costs from acquisition accounting; and change accounting practices for acquisition-related restructuring costs, in-process research and development, indemnification assets, and tax benefits. The Company adopted the standard for business combinations and adjustments to an acquired entity’s deferred tax asset and liability balances and it had no immediate impact on the Company’s consolidated financial position or results of operations.

In April 2009, the FASB issued an accounting standard which provides guidance on (1) estimating the fair value of an asset or liability when the volume and level of activity for the asset or liability have significantly declined and (2) identifying transactions that are not orderly. The standard also amended certain disclosure provisions for fair value measurements and disclosures in ASC 820 to require, among other things, disclosures in interim periods of the inputs and valuation techniques used to measure fair value as well as disclosure of the hierarchy of the source of underlying fair value information on a disaggregated basis by specific major category of investment. This standard was effective prospectively beginning April 1, 2009. The adoption of this standard did not have a material impact on the Company’s consolidated results of operations or financial condition.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

(UNAUDITED)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

In April 2009, the FASB issued an accounting standard which modifies the requirements for recognizing other-than-temporarily impaired debt securities and changes the existing impairment model for such securities. The standard also requires additional disclosures for both annual and interim periods with respect to both debt and equity securities. Under the standard, impairment of debt securities will be considered other-than-temporary if an entity (1) intends to sell the security, (2) more likely than not will be required to sell the security before recovering its cost, or (3) does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell). The standard further indicates that, depending on which of the above factor(s) causes the impairment to be considered other-than-temporary, (1) the entire shortfall of the security’s fair value versus its amortized cost basis or (2) only the credit loss portion would be recognized in earnings while the remaining shortfall (if any) would be recorded in other comprehensive income. The standard requires entities to initially apply its provisions to previously other-than-temporarily impaired debt securities existing as of the date of initial adoption by making a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The cumulative-effect adjustment potentially reclassifies the noncredit portion of a previously other-than-temporarily impaired debt security held as of the date of initial adoption from retained earnings to accumulate other comprehensive income. The adoption of this standard did not have a material impact on the Company’s consolidated results of operations or financial condition.

In April 2009, the FASB issued an accounting standard regarding interim disclosures about fair value of financial instruments. The standard essentially expands the disclosure about fair value of financial instruments that were previously required only annually to also be required for interim period reporting. In addition, the standard requires certain additional disclosures regarding the methods and significant assumptions used to estimate the fair value of financial instruments. The adoption of this standard did not have a material impact on the Company’s consolidated results of operations or financial condition.

In May 2009, the FASB issued a new accounting standard regarding subsequent events. This standard incorporates into authoritative accounting literature certain guidance that already existed within generally accepted auditing standards, with the requirements concerning recognition and disclosure of subsequent events remaining essentially unchanged. This guidance addresses events which occur after the balance sheet date but before the issuance of financial statements. Under the new standard, as under previous practice, an entity must record the effects of subsequent events that provide evidence about conditions that existed at the balance sheet date and must disclose but not record the effects of subsequent events which provide evidence about conditions that did not exist at the balance sheet date. This standard added an additional required disclosure relative to the date through which subsequent events have been evaluated and whether that is the date on which the financial statements were issued. For the Company, this standard was effective beginning April 1, 2009.

In June 2009, the FASB issued a new standard regarding the accounting for transfers of financial assets amending the existing guidance on transfers of financial assets to, among other things, eliminate the qualifying special-purpose entity concept, include a new unit of account definition that must be met for transfers of portions of financial assets to be eligible for sale accounting, clarify and change the derecognition criteria for a transfer to be accounted for as a sale, and require significant additional disclosure. The standard is effective for new transfers of financial assets beginning January 1, 2010. The adoption of this standard is not expected to have a material impact on the Company’s consolidated results of operations or financial condition.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

(UNAUDITED)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

In June 2009, the FASB issued an accounting standard that revised the consolidation guidance for variable-interest entities. The modifications include the elimination of the exemption for qualifying special purpose entities, a new approach for determining who should consolidate a variable-interest entity, and changes to when it is necessary to reassess who should consolidate a variable-interest entity. The standard is effective January 1, 2010. The Company is currently evaluating the impact of this standard, but would not expect it to have a material impact on the Company’s consolidated results of operations or financial condition.

In June 2009, the Financial Accounting Standards Board (FASB) issued a standard that established the FASB Accounting Standards Codification (ASC) and amended the hierarchy of generally accepted accounting principles (ASC) and amended the hierarchy of generally accepted accounting principles (GAAP) such that the ASC became the single source of authoritative nongovernmental U.S. GAAP. The ASC did not change current U.S. GAAP, but was intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. All previously existing accounting standard documents were superseded and all other accounting literature not included in the ASC is considered non-authoritative. New accounting standards issued subsequent to June 30, 2009 are communicated by the FASB through Accounting Standards Updates (ASUs). The Company adopted the ASC on July 1, 2009. This standard did not have an impact on the Company’s consolidated results of operations or financial condition. However, throughout the notes to the consolidated financial statements references that were previously made to various former authoritative U.S. GAAP pronouncements have been changed to coincide with the appropriate section of the ASC.

In August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair Value, which provides additional guidance on how companies should measure liabilities at fair value under ASC 820. The ASU clarifies that the quoted price for an identical liability should be used. However, if such information is not available, a entity may use, the quoted price of an identical liability when traded as an asset, quoted prices for similar liabilities or similar liabilities traded as assets, or another valuation technique (such as the market or income approach). The ASU also indicates that the fair value of a liability is not adjusted to reflect the impact of contractual restrictions that prevent its transfer and indicates circumstances in which quoted prices for an identical liability or quoted price for an identical liability traded as an asset may be considered level 1 fair value. This ASU is effective October 1, 2009. The Company is currently evaluating the impact of this standard, but would not expect it to have a material impact on the Company’s consolidated results of operations or financial condition.

In September 2009, the FASB issued ASU No. 2009-12, Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), that amends ASC 820 to provide guidance on measuring the fair value of certain alternative investments such as hedge funds, private equity funds and venture capital funds. The ASU indicates that, under certain circumstance, the fair value of such investments may be determined using net asset value (NAV) as a practical expedient, unless it is probable the investment will be sold at something other than NAV. In those situations, the practical expedient cannot be used and disclosure of the remaining actions necessary to complete the sale is required. The ASU also requires additional disclosures of the attributes of all investments within the scope of the new guidance, regardless of whether an entity used the practical expedient to measure the fair value of any of its investments. This ASU is effective October 1, 2009. The Company is currently evaluating the impact of this standard, but would not expect it to have a material impact on the Company’s consolidated results of operations or financial condition.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

(UNAUDITED)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force, that provides amendments to the criteria for separating consideration in multiple-deliverable arrangements. As a result of these amendments, multiple-deliverable revenue arrangements will be separated in more circumstances than under existing U.S. GAAP. The ASU does this by establishing a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. A vendor will be required to determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis. This ASU also eliminates the residual method of allocation and will require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method, which allocates any discount in the overall arrangement proportionally to each deliverable based on its relative selling price. Expanded disclosures of qualitative and quantitative information regarding application of the multiple-deliverable revenue arrangement guidance are also required under the ASU. The ASU does not apply to arrangements for which industry specific allocation and measurement guidance exists, such as long-term construction contracts and software transactions. The ASU is effective beginning January 1, 2011. The Company is currently evaluating the impact of this standard on its consolidated results of operations and financial condition.

In October 2009, the FASB issued ASU No. 2009-14, Certain Revenue Arrangements That Include Software Elements—a consensus of the FASB Emerging Issues Task Force, that reduces the types of transactions that fall within the current scope of software revenue recognition guidance. Existing software revenue recognition guidance requires that its provisions be applied to an entire arrangement when the sale of any products or services containing or utilizing software when the software is considered more than incidental to the product or service. As a result of the amendments included in ASU No. 2009-14, many tangible products and services that rely on software will be accounted for under the multiple-element arrangements revenue recognition guidance rather than under the software revenue recognition guidance. Under the ASU, the following components would be excluded from the scope of software revenue recognition guidance: the tangible element of the product, software products bundled with tangible products where the software components and non-software components function together to deliver the product’s essential functionality, and undelivered components that relate to software that is essential to the tangible product’s functionality. The ASU also provides guidance on how to allocate transaction consideration when an arrangement contains both deliverables within the scope of software revenue guidance (software deliverables) and deliverables not within the scope of that guidance (non-software deliverables). The ASU is effective beginning January 1, 2011. The Company is currently evaluating the impact of this standard on the Company’s consolidated results of operations and financial condition.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

(UNAUDITED)

3.	EQUITY TRANSACTIONS

Sales of Common Stock and Warrants

On March 27, 2009, the Company closed upon two separate Securities Purchase Agreements, each dated as of March 19, 2009, with each of Dmitry Vilbaum, an officer and a director of the Company, and an entity controlled by Dr. Alexandre Agaian, an officer and a director of the Company. Pursuant to the transactions, they purchased an aggregate of 20,000,000 shares of the Company's common stock and 20,000,000 common stock purchase warrants, exercisable until March 27, 2012 at $0.05 per share, for the aggregate price of $200,000.

On March 27, 2009, pursuant to a Securities Purchase Agreement with Sergey Sulgin, an individual accredited investor, the Company sold 10,000,000 shares of the Company's common stock and 10,000,000 common stock purchase warrants, exercisable until March 27, 2012 at $0.05 per share, for the aggregate price of $300,000.

On September 30, 2009, the Company sold to Arista Capital Group, Inc. 2,000,000 shares of common stock and 4,000,000 common stock purchase warrants, exercisable until September 30, 2012 at $0.05 per share, for the aggregate purchase price of $100,000.

Sale of Preferred Stock and Warrants

On December 27, 2007, the Company entered into a Securities Purchase Agreement with Esterna Ltd., a Cypriot limited company, for the sale of securities consisting of (i) 5,000,000 shares of the Company's unregistered Series A preferred stock, par value $0.0001 per share (the "Series A Preferred Stock"), and (ii) warrants exercisable over a two-year period to purchase 20,000,000 shares of Series A Preferred Stock, for the aggregate purchase price of $1,000,000, with closings for $500,000 occurring on each of December 27, 2007 and April 23, 2008. Each share of Series A Preferred Stock was convertible, at the option of the holder without the payment of additional consideration, into one share of the Company's common stock. The warrants had an exercise price of $.25 per share for a period of one year, and thereafter until expiration the exercise price was $.30 per share. On March 27, 2009, pursuant to an Exchange Agreement, the preferred stockholder converted its 5,000,000 preferred shares into 5,000,000 shares of the Company's common stock and exchanged its 20,000,000 preferred stock purchase warrants that were exercisable until December 27, 2009 at $0.30 per share into 20,000,000 common stock purchase warrants that are exercisable until March 27, 2012 at $0.05 per share.

In connection with the above transaction, the Company has considered the impact of the standard “Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity's Own Stock," codified within ASC 815-40, which is effective for years beginning after December 15, 2008. In accordance with the standard “Accounting for Derivative Instruments and Hedging Activities,” codified within ASC 815-10, the Company has determined that the common stock purchase warrants issued are fixed price warrants and indexed to the Company's own stock and therefore meets the exception of ASC 815, section 15-74 that states if a derivative is indexed to an entity's own stock and is classified in stockholder's equity, then derivative accounting is avoided.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

(UNAUDITED)

4.	STOCK BASED COMPENSATION

The Company's 2005 Stock Incentive Plan was adopted by the Company's Board of Directors on December 29, 2005 and approved by the Company's stockholders on November 3, 2006. The plan provides for various types of awards, including stock options, stock awards, and stock appreciation rights performance and growth of the Company, and to align employee interests with those of the Company's stockholders denominated in shares of the Company's common stock to employees, officers, non-employee directors and agents of the Company. The purposes of the plan are to attract and retain such persons by providing competitive compensation opportunities, to provide incentives for those who contribute to the long-term performance and the growth of the Company, and to align employee interests with those of the Company's stockholders. The Plan is administered by the Board of Directors.

In accordance with the standard “Share-based Payment,” codified within ASC 718, the Company has accounted for its employee stock options and other stock options issued to outside consultants under the "modified prospective" method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of the standard for all share-based payments granted after the effective date and (b) based on the requirements of the standard for all awards granted to employees prior to the effective date of the standard that remain unvested on the effective date. Accordingly, the fair market value for these options was estimated at the date of grant using a Black-Scholes option-pricing model based on the following assumptions:

	March 31, 2009 (a)	June 30, 2009	September 30, 2009
Risk-free rate	–	1.75%	1.75%
Dividend yield	–	0.00%	0.00%
Volatility factor	–	5.47	5.47
Average life	–	3 years	3 years

(a) No stock options were granted during the three months period.

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility.

The Company grants stock options to employees and outside consultants. The following tables summarize information about the stock option transactions for the indicated periods:

	Number of Options	Weighted Average Exercise Price
Balance outstanding at December 31, 2008	26,965,000	$ 0.25
Granted	–	–
Exercised	–	–
Cancelled/forfeited	(5,000,000)	(0.46)
Balance outstanding at March 31, 2009	21,965,000	$ 0.21
Granted	4,000,000	0.05
Exercised	–	–
Cancelled/forfeited	–	–
Balance outstanding at June 30, 2009	25,965,000	$ 0.18
Granted	9,900,000	0.10
Exercised	–	–
Cancelled/forfeited	–	–
Balance outstanding at September 30, 2009	35,865,000	$ 0.16

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

(UNAUDITED)

4.	STOCK BASED COMPENSATION (CONTINUED)

The stock options outstanding and exercisable at September 30, 2009 were in the following exercise price ranges:

	Outstanding			Exercisable
Range of Exercise Prices	Number of Options	Weighted Average Remaining Years of Contractual Life	Weighted Average Exercise Price	Number of Options	Weighted Average Exercise Price
$0.05	4,900,000	2.6	$0.05	4,000,000	$0.05
$0.10 – 0.11	10,000,000	2.8	$0.10	1,000,000	$0.11
$0.16 – 0.165	10,000,000	2.8	$0.16	9,000,000	$0.16
$0.21 – 0.22	10,450,000	2.9	$0.22	10,450,000	$0.22
$0.50	15,000	1.4	$0.50	15,000	$0.50
$0.80	500,000	0.8	$0.80	500,000	$0.80
	35,865,000	2.8	$0.16	24,965,000	$0.18

Options to Officers and Employees

During the three months ended September 30, 2009, the Company granted stock options to two employees to purchase up to 9,000,000 shares of common stock, exercisable at $0.10 per share. The stock options are subject to vesting on October 29, 2009.

During the three months ended September 30, 2008, the Company granted stock options to an employee to purchase up to 5,000,000 shares of common stock, of which stock options to purchase: 2,000,000 shares, exercisable until July 21, 2012 at $0.20 per share, were to vest upon receipt by the Company of third party financing (in debt or equity) prior to July 21, 2009 in the amount of at least $10,000,000; 1,000,000 shares, exercisable until July 21, 2012 at $0.40 per share, were to vest on July 21, 2009; 1,000,000 shares, exercisable until July 21, 2013 at $0.60 per share, were to vest on July 21, 2010; and 1,000,000 shares, exercisable until July 21, 2014 at $0.90 per share, were to vest on July 21, 2011. The total grant date fair value of the options was $2,208,172. Effective March 27, 2009, the employee elected to forfeit such stock options.

During the three months ended June 30, 2008, the Company granted stock options to an employee to purchase up to 3,000,000 shares of common stock, exercisable at $0.22 per share. Stock options to purchase 1,000,000 shares vested on April 23, 2008 and expire on April 22, 2011. Stock options to purchase an additional 1,000,000 shares vested on April 23, 2009 and are to expire on April 22, 2012. Stock options to purchase a further 1,000,000 shares are to vest on April 23, 2010 and to expire on April 22, 2013. The total grant date fair value of the options was $438,835.

For the nine months ended September 30, 2009 and 2008, deferred compensation (employees) amounted to $2,355,597 and $0, respectively. Deferred compensation (employees) on the balance sheet is $153,262 and $2,508,859 at September 30, 2009 and December 31, 2008, respectively.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

(UNAUDITED)

4.	STOCK BASED COMPENSATION (CONTINUED)

Consultants

On August 20, 2009, the Company issued to a consultant 900,000 shares of common stock, exercisable at $0.05 per shares for a period of three years, subject to vesting in 50% increments on each of October 15, 2009 and November 1, 2009.

On August 12, 2009, the Company entered into a consulting agreement for business development and advisory services pursuant to which it issued the consultant 1,100,000 shares of common stock.

In April 2009, the Company issued to a consultant 1,000,000 shares of the Company's common stock and warrants to purchase 1,000,000 shares of the Company's common stock, exercisable until April 27, 2012 at $0.05 per share, in consideration of the termination of a license and services agreement.

In April 2009, the Company granted stock options to a consultant, who also is a director of the Company, to purchase 3,000,000 shares of common stock, exercisable for three years at $0.05 per share. The total grant date fair value of the options was $30,000.

In May 2008, the Company granted stock options to an outside consultant to purchase 1,000,000 shares of common stock, exercisable for two years at $0.11 per share. On each of the following dates, stock options to purchase 250,000 shares vested: August 1, 2008; November 1, 2008; February 1, 2009; and May 1, 2009. The total grant date fair value of the options was $82,393.

On March 27, 2008, the Company entered into a consulting agreement, dated as of March 10, 2008, with an outside consultant pursuant to which the Company issued 675,000 shares of common stock in connection with services for March 2008. The fair market value of services amounted to $101,250, which was charged to operations during the three months ended March 31, 2008. The consulting agreement was for a term of up to twelve months, and the Company was to issue 75,000 shares of common stock per month for the remaining months of the consulting term. In June 2008, the parties agreed to postpone services and payment under the consulting agreement. In April 2009, the parties agreed to a one month continuation of the consulting arrangement, when ended on April 30, 2009, and on April 30, 2009, the Company issued 75,000 shares of common stock for services rendered in April 2009.

For the nine months ended September 30, 2009 and 2008, deferred compensation (consultants) amounted to $63,598 and $0, respectively. Deferred compensation (consultants) on the balance sheet is $90,598 and $61,795 at September 30, 2009 and December 31, 2008, respectively.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

(UNAUDITED)

5.	OIL AND GAS PROPERTIES

TexTerra

On January 26, 2006, TexTerra Exploration Partners, LP entered into a Farmout Agreement with Davidson Energy, L.L.C. and Johnson Children's Trust No. 1, dated January 10, 2006. The Farmout Agreement related to the development of the Richard Bellows 1280-acre oil and gas lease, covering two 640 acre tracts in La Salle County, Texas (the "Bellows Lease"). TexTerra's leasehold interest was subject to an approximate 25% royalty interest held by the assignors of the Bellows Lease to Davidson and the Johnson Children's Trust, leaving an approximately 75% net revenue interest to be split between Davidson Energy and the Johnson Children's Trust, on the one hand, and TexTerra, on the other hand. Davidson Energy and Johnson Children's Trust assigned to TexTerra a 70% working interest (70% of the 75% net revenue interest) in and to the first well and a defined area around such well as specified under Texas law (the Railroad Commission spacing unit) and TexTerra was to receive a 50% working interest in all other acreage covered by the Bellows Lease. The purchase price for TexTerra's working interest was TexTerra's agreement to pay up to the budgeted amount of $1,417,150 for drilling, testing, stimulating, completing and equipping the initial well on the Bellows Lease (the "Davidson Project"). Any additional costs were to be paid 70% by TexTerra and 30% by Davidson Energy. After the initial well, Davidson Energy and Johnson Children's Trust shall have the right, but not the obligation, to participate in a 50% interest in future wells on the Bellows Lease. The rights of the parties pursuant to the Farmout Agreement were subject to the terms of a joint operating agreement. In the event Davidson Energy and Johnson Children's Trust elect not to participate in future wells on the Bellows Lease, they were to receive a 10% working interest after certain costs are recouped by TexTerra.

On March 22, 2006, the Farmout Agreement was modified. In the modification, TexTerra waived its interest in the second well to the lesser of the maximum depth drilled or 8,000 feet and as consideration, Davidson and Johnson Children's Trust reduced their working interests in the third and fourth wells from 50% to 25% should they choose to participate.

In 2006, the initial well was drilled. During the third quarter of fiscal 2006, the Company determined that the well was not commercially viable and wrote-off capitalized costs associated with such well, totaling $2,204,181 as of December 31, 2006.

In January 2006, to finance its obligations under the Farmout Agreement, TexTerra entered into The Limited Partnership Agreement of TexTerra, dated as of January 22, 2006, between TexTerra, Terra Resources, Inc., the general partner, and Enficon Establishment, a limited partner. Pursuant to the agreement, Enficon was responsible for $1,133,720, which was 80% of the budgeted costs ($1,417,150) in connection with the Davidson Project, and 80% of the expenditures for professional fees, including TexTerra's oil and gas consultant, legal costs, title review fees, the costs of the Company's technical studies, and additional cash calls made by Terra Resources to cover the direct costs from third parties directly related to the Davidson Project.

Until the budgeted costs are paid back in full to Enficon and Terra Resources, TexTerra was to pay net revenue it receives from the initial well 80% to Enficon and 20% to Terra Resources after payment of its own costs and the 5% overriding royalty to Terra Insight Corporation. This payout arrangement was modified by a subsequent agreement between Kiev Investment Group and the Company.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

(UNAUDITED)

5.	OIL AND GAS PROPERTIES (CONTINUED)

On August 8, 2006, the Company entered into a Further Modification to Protocol Agreement with Kiev Investment Group and Enficon Establishment. The Further Modification related to and modified the terms of the Protocol Agreement dated April 5, 2006 and Modification to Protocol Agreement entered June 16, 2006. The purpose of the Further Modification was to resolve certain breaches by Kiev Investment Group and Enficon Establishment of their obligations, without prejudice to the Company's rights under the Protocol Agreement, as previously modified. Under the Protocol Agreement, as previously modified, Kiev Investment Group undertook the several obligations related to the purchase of the Company's securities, and to fund exploration projects.

Pursuant to the Further Modification, among other things, Kiev Investment Group agreed to deposit $900,000 in escrow with the Company to fund completion costs of the Sage Well being drilled in Nevada, and to provide the funding for increases in expenditures as to the Sage Well. The deposit was not paid into escrow. A cash call was made, and, on July 19, 2006, Kiev Investment Group and Enficon Establishment paid $350,000 pursuant to the cash call in connection with the Sage Well.

The Company agreed to the Further Modification provided Kiev Investment Group and Enficon Establishment agreed to fund a $680,000 cash call made on July 31, 2006, and other cash calls, and to provide the funding pursuant to the Protocol Agreement, particularly the non-debt securities purchases from the Company. In the third quarter of fiscal 2006, the $680,000 cash call was paid.

In October 2006, the Company made a $355,000 capital call to Enficon representing their portion of drilling costs associated with the Sage Well. Enficon negotiated this balance and paid $329,963 of this capital call on January 17, 2007.

In October 2007, TexTerra conveyed its working interest to the Bellows Lease to Botasch Operating, LLC in exchange for Botasch's assumption of all TexTerra's obligations related to the Bellows Lease, resulting in debt forgiveness income of $161,919 because the Company is no longer legally liable to pay the obligation.

Tierra Nevada

In September 2005, the Company through its wholly-owned subsidiary, Tierra Nevada Exploration Partners, LP, a wholly-owned subsidiary of the Company, was the successful bidder in auctions for nine separate oil and gas leases on Federal lands in the State of Nevada, conducted by the Bureau of Land Management (BLM), an agency within the U.S. Department of the Interior. The parcels total 15,439 acres, at an aggregate purchase price of $435,516. Leases from BLM are for a primary term of 10 years, and continue beyond the primary term as long as the lease is producing, as defined. Rental is $1.50 per acre for the first 5 years ($2 per acre after that) until production begins. Once a lease is producing, the BLM charges a royalty of 12.5% on the production. The bids were made without detailed knowledge of the condition of the properties, their suitability for oil and gas operations, the history of prior operations on such properties, if any, or the potential economic significance of the property. The leases became effective on November 1, 2005. In 2007, Tierra Nevada elected to forego making payment on the annual rental on the leases. Under the lease terms, the lack of payment of annual rental would result in termination of the leases.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

(UNAUDITED)

5.	OIL AND GAS PROPERTIES (CONTINUED)

On December 13, 2005, Tierra Nevada submitted bids at a competitive oral sale of Federal lands in the State of Nevada for oil and gas leasing, conducted by the Bureau of Land Management, an agency within the U.S. Department of the Interior. Tierra Nevada's bids for two separate parcels of land, totaling approximately 1,240.44 acres, were accepted at the auction, at an aggregate price of approximately $30,935. These two leases commenced on January 1, 2006 and terminated in 2007. In 2007, Tierra Nevada elected to forego making payment on the annual rental on the leases. Under the lease terms, the lack of payment of annual rental would result in termination of the leases.

In July 2006, the Company commenced drilling on its first well. This well is referred to as the Sage Well. During the course of drilling, the Company invested $3,146,794 in drilling costs. In fiscal year 2006, the Company determined that the Sage Well was not commercially viable and wrote-off the entire investment.

In 2008, Tierra Nevada received notice of the terminations of the leases that became effective as of November 1, 2005 for failure to pay the annual rental on the leases. The notice stated that the terminations were effective as of November 1, 2007.

In the year ended December 31, 2008, the Company wrote-off costs associated with such leases totaling $484,623.

Total Oil and Gas Investment

The Company's oil and gas investments, net of write-offs, were $603,456 as of September 30, 2009 and December 31, 2008.

6.	PROPERTY AND EQUIPMENT

Property and equipment are stated at cost and at September 30, 2009 and December 31, 2008 consisted of the following:

	Estimated Useful Lives – Years	September 30, 2009 Amount	December 31, 2008 Amount
Computer Equipment	5	$ 98,226	$ 97,140
Computer Software	3	613	613
Oil & Gas Equipment	3	12,485	12,485
Office Equipment	5	17,011	17,011
Transportation Equipment	5	85,750	85,750
Furniture & Fixtures	7	37,896	37,896
		251,981	250,895
Less accumulated depreciation		(165,640)	(130,289)
		$ 86,341	$ 120,606

Depreciation expense for the nine months ended September 30, 2009 was $35,351.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

(UNAUDITED)

7.	RELATED PARTY TRANSACTIONS

Transactions with the Institute

Terra Insight Corporation licensed, under a 32-year license agreement entered into January 7, 2005, as amended on May 19, 2005, July 23, 2007 and December 19, 2007 (the "Technology License Agreement"), certain mapping technology from The Institute of Geoinformational Analysis of the Earth, a foreign-based related company controlled by an affiliate of the Company. In connection with the license, the parties also entered into a services agreement on January 7, 2005, as amended on May 19, 2005, July 23, 2007 and December 19, 2007 (the "Services Agreement"), for consulting and advisory services including analysis, surveying, and mapping as well as recommendations related to the utilization of the Institute's mapping technologies.

In December 2008, the parties entered agreements, dated as of December 15, 2008, with the Institute which revised the terms of the existing technology license agreement and the related services agreement with the Institute. Pursuant to agreements, the technology license agreement and the related services agreement between the Institute and Terra Insight Corporation were terminated, and replaced with a technology license agreement and a services agreement between the Institute and Terra Insight Services, Inc.

Under the Technology License Agreement, dated as of December 15, 2008, Terra Insight Services, Inc., had an exclusive, worldwide renewable license for a 30-year term from December 2005 for the commercial use of all of the technology of the Institute. Pursuant to the license, the Institute was entitled to compensation certain project payments generated from the use of the Institute's technology in an amount to be determined on orders for our services, provided that such project payments was not to exceed 10% over the Institute's costs. Such project payments were not to be duplicative of any services fees payable by Terra Insight Services, Inc. to the Institute under the Services Agreement. Under the license agreement, Terra Insight Services, Inc. had an exclusive option to purchase from the Institute its mapping technology, to terminate on the earlier of (i) June 30, 2012 or (ii) the termination of the license agreement.

In connection with the Technology License Agreement, Terra Insight Services, Inc., also entered into a Services Agreement, dated as of December 15, 2008, with the Institute for a 30-year term from December 15, 2008, to render services to us, and to refer all inquiries for commercial contract services to us. In connection with services provided by the Institute, the Institute was entitled to a service fee in an amount to be determined on orders for our services, provided that the Institute shall not charge a fee at the rate of more than 10% over its cost.

On April 27, 2009, Terra Insight Services, Inc., the Company, Terra Insight Technologies Corporation, and the Institute entered into an agreement, pursuant to which the Technology License Agreement and the Services Agreement, each dated as of December 15, 2008, between the Institute and Terra Insight Services, Inc. were terminated. In connection therewith the Company issued to the Institute 1,000,000 shares of the Company's common stock and warrants to purchase 1,000,000 shares of the Company's common stock, exercisable until April 27, 2012 at $0.05 per share.

Securities Transactions

On September 29, 2009, the Company granted to each of two officers, Dmitry Vilbaum and Dr. Alexandre Agaian, stock options to purchase 4,500,000 shares of common stock, exercisable at $0.10 per share. The stock options are subject to vesting on October 29, 2009.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

(UNAUDITED)

7.	RELATED PARTY TRANSACTIONS (CONTINUED)

On March 27, 2009, each of Dmitry Vilbaum, an officer and a director of the Company, and an entity controlled by Dr. Alexandre Agaian, an officer and a director of the Company, purchased 10,000,000 shares of the Company's common stock and 10,000,000 common stock purchase warrants, exercisable until March 27, 2012 at $0.05 per share, for the purchase price of $100,000 each. (See Note 3).

Effective March 27, 2009, Dr. Alexandre Agaian, an officer and a director of the Company, elected to forfeit 5,000,000 stock options granted pursuant to an employment agreement, dated as of July 21, 2008. (See Note 8).

Consulting Agreement

On April 1, 2009, the Company entered into a consulting agreement with Roman Rozenberg, for a term of one year, pursuant to which the Company issued him warrants to purchase 3,000,000 shares of common stock, exercisable for three years at $0.05 per share. On March 27, 2009, Mr. Rozenberg had been appointed to the Board of Directors. The consulting agreement is unrelated to services as a Board member.

Legal Services

The Company incurred legal fees for the nine months ended September 30, 2009 and 2008 of $86,495 and $232,106, respectively, to a law firm which is owned by a former director, former officer, and a current minority stockholder of the Company.

Loans

As of March 31, 2008, an individual, who was at the time of the loan an officer and director, loaned the Company $110,975, another individual, who was at the time of the loan an officer and director, loaned the Company $295,322, and a related party loaned $39,968 to the Company. The loans were unsecured, non-interest bearing and have no specific repayment terms, other than commencing June 1, 2008, the Company was to commence paying down loans in the principal amount of $400,322, together with mutually agreeable interest, in loans as monies became available from the Company's revenues or financing activities at the rate of 8% of such monies received or raised until fully repaid.

8.	COMMITMENTS AND CONTINGENCIES

Employment Agreements

On April 23, 2008, the Company entered into a three year employment agreement with an officer. The executive is entitled to: an annual salary at the rate of $150,000; an annual performance based bonus in an amount equal to 5% of the Company's consolidated net profit, except if terminated for cause; and is also entitled to other bonuses, performance-based or otherwise, and an annual increase in salary, as the Company's Board of Directors may determine in its discretion. If the Company terminates the executive's employment for any reason other than for cause, the Company is to pay the executive four months of salary as severance. The Company granted to the executive stock options to purchase three million shares of the Company's common stock, exercisable at $0.165 per share. Stock options to purchase one million shares vested on April 23, 2008 and expire on April 22, 2011. Stock options to purchase an additional 1,000,000 shares vested on April 23, 2009 and expire on April 22, 2012. Stock options to purchase a further 1,000,000 shares are to vest on April 23, 2010 and to expire on April 22, 2013.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

(UNAUDITED)

8.	COMMITMENTS AND CONTINGENCIES (CONTINUED)

On August 29, 2008, the Company entered into a three year employment agreement, dated as of July 21, 2008, with an officer. The employment agreement provides for: a base salary at the rate of $200,000 per year for the first year, and at a rate of $240,000 per year for the next two years; a sign-on bonus of $20,000; family health insurance with premiums not exceeding $14,000 per year; an automobile allowance not to exceed $12,000 per year; twelve sick days per year; three weeks vacation per year; ten holidays; participation in the Company's 401(k) plan or such other plan as the Company may adopt; a business cell phone; certain reimbursement for business travel; and eligibility for a performance-based bonus upon achievement of performance targets and thresholds to be established by the Board of Directors, such as achievement of certain market price, business performance, or other criteria, determined by the Board of Directors in its reasonable discretion, for which the executive would be entitled to a bonus of 100% of his base salary upon achievement of 100%-120% of the performance target, and a bonus of up to, in the discretion of the Board of the Directors, 200% of the executive's base salary, for achievement of more than 120% of the performance target. The employment agreement may be earlier terminated, among other reasons, upon three months' prior written notice, at the option of either the executive or the Company, without cause, in which event the Company shall have the right to require the executive not to perform any services for the Company until the termination becomes effective, subject to payment to the salary for three months. If the Company terminates the executive's employment for any reason other than for cause, all fringe benefits provided for in the employment agreement shall continue for three months from the effective date of termination. The Company granted to the executive stock options to purchase up to five million shares of the Company's common stock, subject to vesting and exercisability conditions as follows: two million stock options, exercisable for four years at $0.20 per share, to vest upon receipt by the Company of third party financing (in debt or equity) in the amount of at least $10 million during the first year of the employment term; one million stock options, exercisable for four years at $0.40 per share, to vest upon completion of one year of service; one million stock options, exercisable for five years at $0.60 per share, to vest upon completion of the second year of service; and one million stock options, exercisable for six years at $0.90 per share, to vest upon completion of the third year of service. Effective March 27, 2009, the executive elected to forfeit those stock options.

Consulting Agreement

On August 20, 2009, the Company entered into a consulting agreement with Arista Capital Group, Inc. for business consulting services. The initial service period is through September 30, 2009 and thereafter the service term is renewable on a month to month basis. As compensation for an initial term, the Company issued to the consultant stock options to purchase 900,000 shares of common stock, exercisable at $0.05 per shares for a period of three years, subject to vesting in 50% increments on each of October 15, 2009 and November 1, 2009. As compensation for each subsequent month periods, the Company agreed to issue stock options to purchase 50,000 shares of common stock, exercisable for three years with an exercise price not less than the fair market value of the Company's common stock at the time of issuance.

Operating Lease

The Company leases office space in New York City from a third party. Rent is $2,500 per month since September 2008, and previously in 2008 was $2,000 per month. The Company does not have a written lease on its main New York City office space.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

(UNAUDITED)

8.	COMMITMENTS AND CONTINGENCIES (CONTINUED)

Vendor

Tierra Nevada recorded approximately $85,400 in account payable to a vendor based on contract terms. The vendor claims that the amount due should have been approximately $235,000 since September 2006, which Tierra Nevada disputes, and claims substantial interest on the $235,000 amount, claiming that the amount due is approximately $476,000 as of December 2008. Tierra Nevada disputes the principal amount and the interest the vendor claims is owed.

9.	LITIGATION

In March 2008, the Company settled a lawsuit captioned Baker Hughes Oilfield Operations Inc. v. Tierra Nevada Exploration Partners, LP and Terra Resources, Inc., before the Supreme Court of the State of New York, Case No. 603274/07. Pursuant to the terms of settlement, the Company delivered one million shares of its common stock, which were returned to the Company for cancellation in exchange for a promissory note due July 31, 2009 in the amount of $178,920 together with 12% interest from October 4, 2007. The note remains unpaid as of September 30, 2009.

On or about December 11, 2008, Illinois National Insurance Company filed a complaint before the Civil Court of the City of New York, Case No. 74698/08, against Terra Insight Corporation, alleging failure to pay insurance premiums in the amount of $10,598. Terra Insight Corporation did not file an answer to the complaint. On May 4, 2009, a judgment was entered in favor of the plaintiff in the amount of $12,678.71, including costs, together with interest thereon.

10.	PREFERRED STOCK

The Company's Certificate of Incorporation authorizes the issuance of up to 25,000,000 shares of Preferred Stock. The Board of Directors is expressly authorized to provide for the issue of all or any shares of the preferred stock, in one or more series, and to fix for each such series such voting powers, full or limited, and other such designations and preferences. The number of authorized shares of preferred stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the voting power of all of the then outstanding shares of the capital stock of the corporation entitled to vote generally in the election of directors.

In December 2007, the Board authorized the issuance of up to 25,000,000 shares of Series A Preferred Stock. Each share of Series A Preferred Stock is convertible into one share of common stock. Upon conversion, exchange or other transaction with the Company of more than 50% of the originally issued Series A Preferred Stock, such that less than 50% of the originally issued Series A Preferred Stock becomes outstanding at any time, the remaining outstanding Series A Preferred Stock shall automatically convert into shares of common stock. Each share of Series A Preferred Stock is entitled to three votes for each share of common stock issuable upon conversion of the Series A Preferred Stock. For so long as at least 50% of the Series A Preferred Stock originally issued pursuant to the Securities Purchase Agreement remain outstanding, the holders of the outstanding Series A Preferred Stock shall have the exclusive right to elect a majority of the Company's board of directors.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

(UNAUDITED)

10.	PREFERRED STOCK (CONTINUED)

On December 27, 2007, the Company entered into an agreement for the sale of 5,000,000 shares of Series A Preferred Stock and warrants exercisable over a two-year period to purchase 20,000,000 shares of Series A Preferred Stock. On March 27, 2009, pursuant to an Exchange Agreement, the preferred stockholder converted its 5,000,000 preferred shares into 5,000,000 shares of the Company's common stock and exchanged its 20,000,000 preferred stock purchase warrants into 20,000,000 common stock purchase warrants. (See Note 3).

11.	SEGMENTS AND RELATED INFORMATION

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on operating earnings of the respective units, segregated into Mapping Services, Oil and Gas Operations, and Other, i.e., Diamond Mines.

	For the Nine Months Ended September 30, 2009
	Mapping Services	Oil and Gas Operations	Other (ie, Diamond Operations, Etc.)	Total
REVENUES	$ 2,054,704	$ –	$ –	$ 2,054,704
COST OF SALES	1,355,000	–	–	1,355,000
GROSS PROFIT	699,704	–	–	699,704

OPERATING COSTS AND EXPENSES	3,417,993	–	–	3,417,993

OPERATING LOSS BEFORE OTHER INCOME (EXPENSE) AND PROVISION FOR INCOME TAXES	(2,718,289)	–	–	(2,718,289)

OTHER INCOME (EXPENSE)	(7,770)	–	–	(7,770)

LOSS BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST	(2,726,059)	–	–	(2,726,059)

NET PROFIT (LOSS)	$ (2,700,354)	$ –	$ –	$ (2,700,354)

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

(UNAUDITED)

11.	SEGMENTS AND RELATED INFORMATION (CONTINUED)

	For the Nine Months Ended September 30, 2008
	Mapping Services	Oil and Gas Operations	Other (ie, Diamond Operations, Etc.)	Total

REVENUES	$ 13,000	$ –	$ –	$ 13,000
COST OF SALES	–	–	–	–
GROSS PROFIT	13,000	–	–	13,000

OPERATING COSTS AND EXPENSES	–	(1,707,715)	–	(1,707,715)
WRITE OFF OF OIL AND GAS PROPERTIES	–	(484,623)	–	(484,623)
TOTAL COSTS AND EXPENSES	–	(2,192,338)	–	(2,192,338)

OPERATING LOSS BEFORE OTHER INCOME (EXPENSE) AND PROVISION FOR INCOME TAXES	–	(2,179,338)	–	(2,179,338)

OTHER INCOME (EXPENSE)	–	6,627	–	6,627

LOSS BEFORE PROVISION FOR INCOME TAXES	–	(2,172,711)	–	(2,172,711)

NET PROFIT (LOSS)	$ 13,000	$ (2,185,711)	$ –	$ (2,172,711)

12.	SUBSEQUENT EVENTS

Pursuant to the consulting agreement with Arista Capital Group, Inc., the Company issued stock options to purchase 50,000 shares of common stock, exercisable for three years at $.10 for services related to the month of October 2009, and stock options to purchase 50,000 shares of common stock, exercisable for three years at $.08 for services related to the month of November 2009.

On October 22, 2009, the Company entered into an agreement with McLan Accounting Services LLC, a financial and accounting consultant, pursuant to which the Company agreed to pay half of the fees due to the consultant through the issuance of shares of common stock, based on the average market bid price during the 30 day period preceding the applicable invoice date. In November 2009, the Company issued to the consultant 60,000 shares of common stock in exchange for $3,000 in financial and accounting services.

In November 2009, the Company entered into an agreement with Baker Hughes Oilfield Operations Inc. setting forth a payment plan with respect to a promissory note due July 31, 2009 in the amount of $178,920 together with 12% interest from October 4, 2007. The payment plan calls for certain minimum monthly payments from service fee proceeds and an account receivable.

On November 10, 2009, the Company sold to an accredited investor 400,000 shares of common stock for $20,000. The Company applied the proceeds to its working capital.

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

"Forward-Looking" Information

These management discussion and analysis contain forward-looking statements and information that are based on our management's beliefs, as well as assumptions made by, and information currently available to our management. These forward-looking statements are based on many assumptions and factors, and are subject to many conditions, including our continuing ability to obtain additional financing, ability to attract new customers, competitive pricing for our services, any change in our business model from providing services to natural resources exploration companies to engaging in exploration activities, and demand for our products, which depends upon the condition of the oil industry. Except for the historical information contained in this report, all forward-looking information are estimates by our management and are subject to various risks, uncertainties and other factors that may be beyond our control and may cause results to differ from our management's current expectations, which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.

The following discussion of our financial condition and results of operations should be read in conjunction with the information set forth in our audited consolidated financial statements for the year ended December 31, 2008, and the related notes, included in our Annual Report on Form 10-K.

INTRODUCTORY NOTE

Our Operations and Plans

During the current fiscal year, we focused on identifying new technologies for potential acquisition, marketing and promotion of services, and on obtaining additional investment capital to restart our service and exploration efforts, to restructure our operations to reduce our operating costs, and to create case studies demonstrating the value of our proprietary satellite-based sub-terrain prospecting ("STeP") technology for locating natural resources. We intend to demonstrate the value of our STeP technology by pursuing a fee for service business model with exploration companies, which may include seeking royalties on the exploration project, as well as a farm-in strategy of investing in drilling projects when our STeP technology concurs with the available seismic studies on the projects. Our goal is to demonstrate a success rate which is better than industry averages and thereby establish the value of our technology while generating minerals and hydrocarbon reserves and internally generating cash flow to support our cost of operations.

In the third quarter of fiscal 2009, we provided analysis services pursuant to which we generated $54,704 in revenues.

In the fourth quarter of fiscal 2008, we entered into a service contract with Nurmunai Petrogaz, LLC, pursuant to which we are to provide geological analysis related to the exploration of hydrocarbons. The services are to be performed in two phases: (1) zoning of territories for potential hydrocarbon anomalies; and (2) gas-geochemical survey of the territory. The total fee for the two phases is to be $2.4 million under the agreement. As of March 31, 2009, the service work for the first phase was completed, and we also delivered to the client the recommendations to perform the second phase. In November and December 2008, the client pre-paid a retainer for the first phase in the amount of $1,455,900 with a balance of $544,100 due.

In the third quarter of fiscal 2008, we entered into a service contract from which we anticipated generating $299,250 in revenues, of which $49,875 was prepaid in the fourth quarter of fiscal 2008. Due to recent economic conditions, the client has suspended its operations on its licensed territories, and the client may seek to discontinue remaining services under the agreement.

Our goal is to enter into services agreements whereby we provide our services, such as providing site location and depth locations, to natural resource exploration companies in exchange for service fees, with regard to a specific natural resource exploration property.

While we have oil exploration experience, we need substantial additional capital to conduct oil exploration activities alone. We continue to seek joint ventures to assist in our operations, including examining, drilling, operating and financing such activities. We will determine our plan for our existing leases and for future leases we acquire based on our ability to fund such projects.

Current Status of Operations

We have incurred large operating losses and have a large working capital deficit of approximately $1.37 million at September 30, 2009. As of September 30, 2009, we had cash of approximately $117,000. These factors raise substantial doubt about our ability to continue as a going concern.

Our operations are based on two sources of revenue:

	(1)	Revenue from providing mapping and analytic services to exploration, drilling and mining companies, using an integrated approach with proprietary attributes to gather, manage and interpret geologic and satellite data to improve the assessment of natural resources; and
	(2)	Revenue from projects that we undertake through joint venture and similar relationships with third parties.

We generated approximately $4.6 million in revenues since inception in 2005 through September 30, 2009; however, our fee for service business has not been sufficient to support our operational expenses. Since inception through the first half of fiscal 2009, we have supported our operations primarily through the sale of $5 million of convertible debentures ($3 million in fiscal 2005 and $2 million in fiscal 2006), sale of approximately $3.76 million of noncontrolling interests in drilling limited partnerships ($3.43 million in fiscal 2006 and $0.33 million in fiscal 2007), sale of $4.0 million of common stock ($3.25 million in fiscal 2005, $0.15 million in fiscal 2006, $0.1 million in fiscal 2007, and $0.6 million in fiscal 2009), and sale of $1.0 million of preferred stock ($0.5 million in fiscal 2007 and $0.5 million in fiscal 2008).

Our ability to continue as a going concern is dependent on our ability to obtain new capital and generate revenue from service operations. There can be no assurance that we will be successful in obtaining additional funding or, in the event it is successful, the terms of such funding will be on terms advantageous to us.

CRITICAL ACCOUNTING POLICIES

Several of our accounting policies involve significant judgments and uncertainties. The policies with the greatest potential effect on our results of operations and financial position are our ability to estimate the degree of impairment to unproved oil and gas properties. For accounts receivable, we estimate the net collectibility, considering both historical and anticipated trends as well as the financial condition of the customer.

Revenue Recognition

Revenue is recognized when the survey is delivered to the customer and collectibility of the fee is reasonably assured. Amounts received in advance of performance and/or completion of such services are recorded as deferred revenue.

Oil and Gas Properties

For oil and gas properties, costs associated with lease acquisitions and land costs have been capitalized. Such unproven properties are valued at the lower of cost or fair value.

Reserve Estimates

We currently do not own any oil and gas reserves. Estimates of oil and natural gas reserves, by necessity, are projections based on geologic and engineering data, and there are uncertainties inherent in the interpretation of such data as well as the projection of future rates of production and the timing of development expenditures. Reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that are difficult to measure. The accuracy of any reserve estimate is a function of the quality of available data, engineering and geological interpretation and judgment. Estimates of economically recoverable oil and natural gas reserves and future net cash flows necessarily depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, the assumed effects of regulations by governmental agencies and assumptions governing future oil and natural gas prices, future operating costs, severance and excise taxes, development costs and workover and remedial costs, all of which may in fact vary considerably from actual results. For these reasons, estimates of the economically recoverable quantities of 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 there from may vary substantially. Any significant variance in the assumptions could materially affect the estimated quantity and value of the reserves, which could affect the carrying value of our oil and gas properties and/or the rate of depletion of the oil and gas properties. Actual production, revenues and expenditures with respect to our reserves will likely vary from estimates, and such variances may be material.

Depletion

We follow the "full-cost" method of accounting for oil and gas properties. Under this method, all productive and nonproductive costs incurred in connection with the exploration for and development of oil and gas reserves are capitalized. Such capitalized costs include lease acquisition, geological and geophysical work, delay rentals, drilling, completing and equipping oil and gas wells, and other related costs directly attributable to these activities. Costs associated with production and general corporate activities are expensed in the period incurred. If the net investment in oil and gas properties exceeds an amount equal to the sum of (1) the standardized measure of discounted future net cash flows from proved reserves, and (2) the lower of cost or fair market value properties in process of development and unexplored acreage, the excess is charged to expense as additional depletion. Normal dispositions of oil and gas properties are accounted for as adjustments of capitalized costs, with no gain or loss recognized.

Capitalized costs of proved reserves will be amortized by the unit-of-production method so that each unit is assigned a pro-rata portion of unamortized costs. We have no proved reserves and no costs have been amortized.

Accounts Receivable

For accounts receivable, if any, we estimate the net collectibility, considering both historical and anticipated trends as well as the financial condition of the customer.

RESULTS OF OPERATIONS

Revenues

Revenues from services for the three months ended September 30, 2009 and 2008 were $54,704 and $13,000, respectively. In 2009, we entered into two minor service contracts pursuant to which we received cash fees. Revenue arose solely from performing service work rather than for an ownership or royalty interest in projects or leaseholds. The lack of significant revenue arose principally from our seeking to perform services for an ownership or royalty interest in projects or leaseholds rather than for a cash service fee. During the three months ended September 30, 2009, we have been negotiating with several international mineral and oil companies to render services on a cash basis. Generally, our services on a cash basis are pursuant to individual contracts for specific services to be performed over a short time frame, and are not a recurring source of revenues. In addition, we have been concentrating on seeking potential joint venture partners in exploiting our technology and other opportunities presented to us.

Revenues from services for the nine months ended September 30, 2009 and 2008 were $2,054,704 and $13,000, respectively. Revenues arose solely from performing service work.

In the third quarter of fiscal 2008, we entered into a service contract from which we anticipate generating $299,250 in revenues, of which $49,875 was prepaid in the fourth quarter of fiscal 2008. Due to recent economic conditions, the client has suspended its operations on its licensed territories, and the client may seek to discontinue remaining services under the agreement.

We anticipate that, subject to global economic conditions and willingness of potential clients to expand capital on exploration activities, during the next twelve months, if we achieve our capital raising goals of focusing on fee for service work, we will be engaged in joint ventures and internal resource projects. The purpose of focusing on internal resource projects is to generate reserves and to establish that the technology can increase the success rate in oil, gas and other mineral exploration projects. There can be no assurance that if we obtain the needed financing it will be successful in establishing the efficacy of our technology. We will also seek to find potential joint venture partners with whom the technology can be used to gain a participation interest in a project as well as fee for service revenue. There can be no assurance that we will be successful in finding such joint venture partners. Until we negotiate and enter into definitive agreements for ownership or royalty interests as compensation, we have no basis for predicting when or how much revenue could be generated from such ownership or royalty interests, or from the exploitation of our land leases, if and when drilling is commenced. Negotiations in connection with ownership or royalty positions often take longer than the negotiations for fee for service arrangements.

Current economic conditions may cause a decline in business and in exploration related spending which could adversely affect our business and financial performance. Our business and operating results are impacted by the health of exploration companies, domestic and international, engaged in oil and gas and other exploration activities. Our business and financial performance may be adversely affected by current and future economic conditions, such as a reduction in research and development and other spending by exploration companies.

Cost of Revenues

Costs associated with revenue for the three months ended September 30, 2009 and 2008 were $0. Costs associated with revenue for the nine months ended September 30, 2009 and 2008 were $1,355,000 and $0, respectively. Our fees payable to the Institute under our prior arrangement with The Institute of Geoinformational Analysis of the Earth were subject to negotiation on a per project basis and accordingly our costs may vary on a project basis. On April 27, 2009, we terminated our license and services arrangement with the Institute. Historically, our cost of revenues has consisted primarily of payments to the Institute. Based on our historical activities, we anticipate that our costs of revenue will ordinarily be approximately 60% of revenue.

Operating Expenses

Operating expenses for the three months ended September 30, 2009 and 2008 were $406,850 and $994,269, respectively. Operating expenses for the three months ended September 30, 2009 and 2008 as a percentage of revenue were 15.1% and 1.3%, respectively.

Operating expenses for the three months ended September 30, 2009 consisted primarily of professional fees of approximately $30,000, management salaries and benefits of approximately $120,545, travel expenses of approximately $13,037, and stock based compensation of approximately $110,000. Operating expenses for the three months ended September 30, 2008 consisted primarily of professional fees of approximately $172,000, management salaries and benefits of $511,000, independent contractor fees of $18,000, and travel expenses of $29,000. The majority of the professional fees result from legal and accounting fees, and from the engagement of various consultants to assist us in marketing our business.

Operating expenses during the three months ended September 30, 2009 decreased in comparison to the three months ended September 30, 2008, because during the period we have focused primarily on identifying new technologies for potential acquisition, marketing and promotion of services, and on the development of projects, which resulted in decreases in professional fees, management salaries and benefits, independent contractor fees, and travel expenses.

Operating expenses for the nine months ended September 30, 2009 and 2008 were $3,417,993 and $2,192,338, respectively. Operating expenses for the nine months ended September 30, 2009 and 2008 as a percentage of revenue were 60% and 0.6%, respectively. Operating expenses for the nine months ended September 30, 2009 and 2008 were $998,798 (excluding certain stock based compensation of $2,419,195) and $1,707,715 (excluding write-off of oil and gas properties of $484,623), respectively. Operating expenses, excluding certain stock based compensation of $2,419,195, as a percentage of revenue was approximately 207% for the nine months ended September 30, 2009. The $2,419,195 in stock based compensation includes $2,208,172 in expenses incurred during the three months ended March 31, 2009 related to stock options which were granted during the latter half of fiscal 2008 and which the executive elected to forfeit during the three months ended March 31, 2009.

Operating expenses for the nine months ended September 30, 2009 consisted primarily of professional fees of approximately $211,811, management salaries and benefits of approximately $395,486, and travel expenses of approximately $34,665, and stock based compensation of approximately $2,529,195. Operating expenses for the nine months ended September 30, 2008 consisted primarily of professional fees of approximately $606,000, management salaries and benefits of $724,000, independent contractor fees of $73,000, and travel expenses of $57,000.

Operating expenses for the nine months ended September 30, 2009 was significantly higher than the comparable period in 2008 primarily due to stock based compensation incurred in the nine months ended September 30, 2009. Operating expenses (excluding stock based compensation of $2,419,195) during the nine months ended September 30, 2009 decreased in comparison to the nine months ended September 30, 2008 because we have focused primarily on raising additional capital in the first half of fiscal 2009 and on the development of projects, which resulted in decreases in professional fees, management salaries and benefits, independent contractor fees, and travel expenses.

If we are successful in raising new capital or generating substantial service projects, we would expect our operating expenses to increase as we would have the capital to engage in various oil and gas and mining exploration projects. The increase in operating expenses could result from the hiring of geologists and other oil and gas professionals to assist us in carrying out the farm-in aspect of our business strategy. Travel related expenses could increase in the future, as many of our customers, and prospective customers and projects, and the territories for which our services are requested or utilized, are located in western United States and in foreign countries. Further, if sufficient funding were available, we would contemplate opening a Houston service center which would decrease travel related expenses but would increase office expenses significantly.

Our employee compensation expenses may increase if we are successful in raising new capital. The increase could result from the hiring of geologists, consultants and other oil and gas professionals to assist the Company in carrying out the farm-in aspect of our business strategy. Travel related expenses could increase in the future, as many of our customers, and prospective customers and projects, and the territories for which our services are requested or utilized, are located in western United States and in foreign countries. Alternatively, if sufficient funding were available, we would contemplate opening a Houston office which would decrease travel and entertainment expenses but would increase office expenses significantly.

Write-off of Oil and Gas Properties

During the nine months ended September 30, 2008, we wrote-off an aggregate of $484,623 in soft development costs principally associated with the acquisition of the Bureau of Land Management land leases in Nevada of $1,662,571. A significant potion of these costs arose from previous payments to the Institute for its services.

Interest Expense

For the three months ended September 30, 2009 and 2008, the net interest expenses (income) were $4,860 and ($17,156), respectively. For the nine months ended September 30, 2009 and 2008, the net interest expenses were $7,770 and $6,627, respectively.

Net Loss

The net losses for the three months ended September 30, 2009 and 2008 were $331,301 and $964,113, respectively. The decrease in net loss principally resulted from a decrease in operating expenses during the three months ended September 30, 2009 compared to the same period in 2008. For the three month ended September 30, 2009, our net loss per common share (basic and diluted) attributable to common shareholders was $0.00.

The net losses for the nine months ended September 30, 2009 and 2008 were $2,700,354 (of which $2,419,195 relate to stock based compensation) and $2,172,711, respectively. The increase in net loss during the nine months ended September 30, 2009 compared to the same period in 2008 principally resulted from an increase in operating expenses due to stock compensation expenses. Excluding stock based compensation expenses of $2,419,195, we would have had net loss of $281,159 during the nine months ended September 30, 2009. For the nine month ended September 30, 2009, our net loss per common share (basic and diluted) attributable to common shareholders was $0.03.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity have been proceeds generated by the sale of our common stock, convertible debentures, and preferred stock to private investors, and sales of noncontrolling interests in limited partnerships. During the nine months ended September 30, 2009, our cash decreased by $583,001 to $117,000. Of the decrease in cash, $1,183,001 was used by operating activities and $600,000 was provided by financing activities.

Current economic conditions may cause a decline in business and consumer spending which could adversely affect our business and financial performance. Our operating results are impacted by the health of the North American economy as well as economies worldwide. Our business and financial performance may be adversely affected by current and future economic conditions, such as a reduction in the availability of credit, financial market volatility, recession, and the reluctance of potential clients to engage in exploration activities in light of recent economic conditions. Additionally, we may experience difficulties in scaling our operations to react to such economic pressures.

Operating Activities

Cash flows from operating activities resulted in deficit cash flows of $1,183,001 for the nine months ended September 30, 2009, as compared with deficit cash flows of $892,662 for the nine months ended September 30, 2008.

For the nine months ended September 30, 2009, cash flows from operating activities resulted in deficit cash flows of $1,183,001, primarily due to a net loss of $2,700,354, plus non-cash charges of $2,577,862, adjustments for a decrease in deferred costs of $600,000, an increase in accounts receivable of $572,364, an increase in prepaid expenses and other current assets of $1,636, an increase in property and equipment of $1,052, and a decrease in other assets of $42,551. The most significant drivers behind the decrease in our non-cash working capital were charges for common stock and options issued to consultants of $153,000, amortization of consulting fees of $41,196 and charges for stock options issued to employees of $2,355,597.

For the nine months ended September 30, 2008, cash flows from operating activities resulted in deficit cash flows of $892,662 primarily due to a net loss of $2,172,711, plus non-cash charges of $1,243,141, an increase in liabilities of $178,920, and a decrease in accounts payable of $137,941. The most significant drivers behind the decrease in our non-cash working capital were charges for common stock issued for services of $101,250, charges for stock options issued to an officer of $532,006, and $484,623 in write-offs of oil and gas properties.

Investing Activities

Cash used for investing activities for the nine months ended September 30, 2009 and 2008 was $0 and $12,996, respectively.

Depending on our available funds and other business needs, it is our intention to engage in fee for service activities, and engage in a farm-in strategy during the next twelve months in which we make small investments in the exploration projects of others. There is no assurance we will have the financing to pursue this strategy or if pursued that it will be successful in developing reserves of hydrocarbons.

Financing Activities

For the nine months ended September 30, 2009, cash provided by financing activities was $600,000, from the sales of common stock and warrants to four investors. For the nine months ended September 30, 2008, cash provided by financing activities was $498,888, comprised of a sale of preferred stock and warrants to an investor totaling $500,000, and repayment of a loan in the amount of $1,112.

Future Needs

Our management has concerns as to the ability of our company to continue as a going concern in the absence of raising additional equity capital, debt financing or obtaining significant new fee for service business. We believe that our available cash is inadequate to support our month-to-month obligations for the next twelve months. Establishing ownership or other interests in natural resource exploration projects will require significant capital resources.

Our current business plan for fiscal 2009 and 2010 calls for us to perform our exploration technology services to other companies and to farm-in on eight to twelve prospects. This business plan calls on our company to raise $3 to $6.3 million dollars. If we are unable to raise such funding, we will not be able to act on this business plan. To the extent we raise a lesser amount, we will only be able to act on a portion of our business plan.

Under our business model, we do not anticipate incurring significant research and development expenditures during the next twelve months; however, subject to available capital, we may seek to acquire certain innovative exploration technologies and build geochemical facilities.

We do not anticipate the sale of any significant property, plant or equipment during the next twelve months. Depending on our future business prospects and the growth of our business, and the need for additional employees, we may seek to lease new executive office facilities or to open offices in Texas.

As of September 30, 2009, we had 19 employees, including 13 employees of corporate subsidiaries, of which two persons worked on a full-time basis. As of September 30, 2009, five employees were paid and others served without pay. In July 2009, in order to conserve capital, we ceased paying or paid reduced salaries to our employees based in New York. In July 2009, we retained the services of 13 persons in connection with the establishment of an office in Moscow. Our future employment plans are uncertain given our working capital deficit and lack of revenues.

We are seeking to raise $3 to $6.3 million to pursue development efforts during the next twelve months. We plan to use this money to engage in several farm-in projects. It is our intention to sell securities and incur debt when the terms of such transactions are deemed favorable to us and as necessary to fund our current and projected cash needs. While we have raised capital to meet our working capital and financing needs in the past, additional financing is required in order to meet our current and projected cash flow deficits from operations and farm-in on oil and gas properties to create a holding of 8 to 12 natural resource interests in U.S. oil and gas prospects. We are seeking financing, which may take the form of equity, convertible debt or debt, in order to provide the necessary working capital. At September 30, 2009, we had no commitments for financing.

There can be no assurance that we will be successful in obtaining such funding or, in the event it is successful, the terms of such funding will be on terms advantageous to us. Any additional equity financing may be dilutive to stockholders and such additional equity securities may have rights, preferences or privileges that are senior to those of our existing authorized shares of common or preferred stock. Furthermore, debt financing, if available, will require payment of interest and may involve restrictive covenants that could impose limitations on our operating flexibility. However, if we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, this will have a material adverse effect on our business, results of operations, liquidity and financial condition, and we will have to delay our planned or proposed operations and development and continue to conduct activities on a limited scale.

INFLATION

We do not expect inflation to have a significant impact on our business in the future.

SEASONALITY

We do not expect seasonal aspects to have a significant impact on our business in the future.

OFF-BALANCE SHEET ARRANGEMENT

To date, we do not maintain off-balance sheet arrangements nor do we participate in non-exchange traded contracts requiring fair value accounting treatment.

GOING CONCERN MATTERS

The reports of the independent registered public accounting firms on our December 31, 2008 and 2007 financial statements included in our Annual Reports for the years ended December 31, 2008 and 2007 stated that our recurring losses from operations and net capital deficiency, raise substantial doubt about our ability to continue as a going concern. If we are unable to raise new investment capital, we will have to discontinue operations or cease to exist, which would be detrimental to the value of our common and preferred stock. We can make no assurances that our business operations will develop and provide us with significant cash to continue operations.

We have a working capital deficiency as a result of our large operational losses. We have been and are seeking financing, which may take the form of equity, convertible debt or debt, in order to provide the necessary working capital. There is no guarantee that we will be successful in consummating a financing transaction. Further, in the event we obtain an offer of private or public funding, there is no assurance that such funding would be on terms favorable to us. The failure to obtain such funding will threaten our ability to continue as a going concern.

Our ability to continue as a going concern is subject to our ability to develop profitable operations, and, in the absence of revenues from operations, to our ability to raise additional equity or debt capital and to develop profitable operations. We continue to experience net operating losses. During 2008 and the first half of fiscal 2009, we focused on restructuring our operations to reduce operating costs and in seeking capital.

The primary issues management will focus on in the immediate future to address the going concern issues include: seeking institutional investors for debt or equity investments in our Company, and initiating negotiations to secure short term financing through promissory notes or other debt instruments on an as needed basis.

To improve our liquidity, our management has been actively pursing additional financing through discussions with investment bankers, venture capital firms and private investors. There can be no assurance that we will be successful in our effort to secure additional financing.

In fiscal 2008 and the first half of fiscal 2009, we focused on obtaining additional investment capital to restart our service and exploration efforts, and to create case studies demonstrating the value of the STeP technology. We plan to continue such efforts during the next twelve months, subject to the receipt of adequate financing. We intend to demonstrate the value of our licensed technology by pursuing (i) a fee for service business model with exploration companies, which may include seeking royalties on the exploration project and (ii) a farm-in strategy of investing in drilling projects when our STeP technology concurs with the available seismic studies on the projects. Our goal is to demonstrate a success rate which is better than industry averages and thereby establish the value of our technology while generating hydrocarbon reserves and internally generating cash flow to support our cost of operations.

Our goal continues to be to enter into agreements whereby we provide our services, such as providing site locations and depth locations, to natural resource exploration companies in exchange for royalties or ownership rights, and fees, with regard to a specific natural resource exploration property. We may also seek to finance or otherwise participate in the efforts to recover natural resources from such properties. While we have oil exploration experience, we need substantial additional capital to conduct oil exploration activities alone. We continue to seek joint ventures to develop our operations, including examining, drilling, operating and financing such activities. We will determine our plan for our existing leases and for future leases we acquire based on our ability to fund such projects.

RECENT ACCOUNTING PRONOUNCEMENTS

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Our management, with the participation of our Chief Executive Officer and Principal Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Principal Financial Officer have concluded that, as of such date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms, and is accumulated and communicated to the Company's management, including its Chief Executive Officer and Principal Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

There has been no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) under the Exchange Act, that occurred during the quarter ended September 30, 2009, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Not applicable.

ITEM 1A. RISK FACTORS

Not applicable.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Each of the issuance and sale of securities described below was deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering. No advertising or general solicitation was employed in offering the securities. All recipients either received adequate information about us or had access, through employment or other relationships, to such information.

On August 12, 2009, the Company entered into a consulting agreement for business development and advisory services pursuant to which it issued the consultant 1,100,000 shares of common stock.

On September 29, 2009, the Company granted to each of Alexandre Agaian and Dmitry Vilbaum, stock options to purchase 4,500,000 shares of common stock, subject to vesting on October 29, 2009 and exercisable for three years at $0.10 per share.

On September 30, 2009, pursuant to a subscription agreement, dated as of September 21, 2009, with Arista Capital Group, Inc. the Company sold 2,000,000 shares of common stock and 4,000,000 common stock purchase warrants that are exercisable until September 30, 2012 at $0.05 per share, for the aggregate purchase price of $100,000. The Company applied the proceeds to its working capital.

On November 10, 2009, the Company sold to an accredited investor 400,000 shares of common stock for $20,000. The Company applied the proceeds to its working capital.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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

Not applicable.

ITEM 5. OTHER INFORMATION

ITEM 6. EXHIBITS

Exhibit No.		Description of Exhibit
10.1*		Form of Subscription Agreement, September 2009
11		Statement re: computation of per share earnings is hereby incorporated by reference to "Financial Statements" of Part I - Financial Information, Item 1 – Financial Statements, contained in this Form 10-Q.
31.1*		Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
31.2*		Certification of Principal Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
32.1*		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
32.2*		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350

* Filed herewith

SIGNATURES

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

	TERRA ENERGY & RESOURCE TECHNOLOGIES, INC.

Dated: November 20, 2009	By: /s/ Dmitry Vilbaum
	Dmitry Vilbaum
	Chief Executive Officer

Dated: November 20, 2009	By: /s/ Alexandre Agaian
	Alexandre Agaian
	Principal Financial Officer

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. - FORM 10-Q - November 20, 2009

Attached files

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. Reports