Exterra Energy Inc. - FORM 10-K - September 16, 2010

Attached files

file	filename
EX-32.2 - CERTIFICATION - Exterra Energy Inc.	exterra5312010exh322.htm
EX-23.1 - CONSENT - Exterra Energy Inc.	exterra5312010exh231.htm
EX-14.1 - FINANCIAL CODE OF ETHICS - Exterra Energy Inc.	exterra5312010exh141.htm
EX-32.1 - CERTIFICATION - Exterra Energy Inc.	exterra5312010exh321.htm
EX-31.1 - CERTIFICATION - Exterra Energy Inc.	exterra5312010exh311.htm
EX-31.2 - CERTIFICATION - Exterra Energy Inc.	exterra5312010exh312.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

[X] Annual Report Pursuant to Section 13 or 15(d) of

The Securities Exchange Act of 1934

For the Fiscal Year Ended May 31, 2010

[ ] Transition Report Pursuant to Section 13or 15(d) of

The Securities Exchange Act of 1934

Commission File Number: 000-52319

EXTERRA ENERGY INC.

(Name of small business issuer in its charter)

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

701 South Taylor, Suite 440, Amarillo, Texas 79105

(Address of principal executive offices) (Zip Code)

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

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

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

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

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

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

Large accelerated filer [ ]	Accelerated filer [ ]

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

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

State the issuer's revenues for its most recent fiscal year. $ 305,505

State the aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and ask prices of such stock as of a specified date within 60 days. $5,869,541 (Based on the price per share on August 20, 2010 of $1.80). 3,260,856 shares.

State the number of shares outstanding of each of the issuer's classes of common equity, as of the

latest practicable date.

Class	Outstanding Shares as of September 9, 2010

Common Stock, Par Value $0.001 per share	9,588,144

DOCUMENTS INCORPORATED BY REFERENCE

None.

EXTERRA ENERGY INC.

TABLE OF CONTENTS

PART I


Item 1. Description of Business	2
Item 1A. Risk Factors	6
Item 1B. Unresolved Staff Comments	14
Item 2. Description of Properties	14
Item 3. Legal Proceedings	17
Item 4. Removed and Reserved	18

PART II

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

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

PART IV

Item 15. Exhibits, Financial Statement Schedules	37

Signatures	38

CERTIFICATIONS
Exhibit 31 – Management certification
Exhibit 32 – Sarbanes-Oxley Act

Cautionary Statement

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

·	our growth strategies;

·	anticipated trends in our business;

·	our ability to make or integrate acquisitions;

·	our liquidity and ability to finance our exploration,

·	acquisition and development strategies;

·	market conditions in the oil and gas industry;

·	the timing, cost and procedure for proposed acquisitions;

·	the impact of government regulation;

·	estimates regarding future net revenues from oil and natural gas reserves and the present value thereof;

·	planned capital expenditures (including the amount and nature thereof);

·	increases in oil and gas production; estimates, plans and projections relating to acquired properties;

·	the number of potential drilling locations; and

·	our financial position, business strategy and other plans and objectives for future operations.

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

·	the possibility that our acquisitions may involve unexpected costs;

·	the volatility in commodity prices for oil and gas;

·	the accuracy of internally estimated proved reserves;

·	the presence or recoverability of estimated oil and gas reserves;

·	the ability to replace oil and gas reserves;

·	the availability and costs of drilling rigs and other oilfield services;

·	environmental risks;

·	exploration and development risks;

·	competition;

·	the inability to realize expected value from acquisitions;

·	the ability of our management team to execute its plans to meet its goals;

·	other economic, competitive, governmental, legislative, regulatory, geopolitical and technological factors that may negatively impact our businesses, operations and pricing.

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

PART I

ITEM 1. DESCRIPTION OF BUSINESS

General

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

Exterra is an independent oil and gas exploration and development company focused on building and revitalizing a diversified portfolio of oil and gas assets located in the State of Texas. In addition to exploration, we seek to acquire existing production, as well as underperforming oil and gas assets that we believe we can revitalize in a short period of time. Acquisitions are a core part of our growth strategy. The majority of the acquisition proposals and candidates we review are sourced directly by our management or specialized

third-party consultants with local area knowledge. We focus on opportunistic producing properties which also provide additional undeveloped locations for drilling.

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

Business Strategy

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

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

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

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

History

As described in its original prospectus filed with the Securities and Exchange Commission, the Company acquired the Green Gold Jade mineral claims located in British Columbia, Canada in February 2006 for $10,000.00, which was subsequently recorded as an impairment loss in the fiscal year ending May 31, 2006.

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

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

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

Our main source of revenue comes from the sale of natural gas. We anticipate we will derive some revenue from oil sales from acquired oil production and our natural gas wells. The main costs associated with our business are related to oil and gas property acquisition, initial well revitalization and ongoing lease operating expenses. The revitalization of wells allows short term cash increases, while holding the lease for additional future development.

Our principal office is located at 701 South Taylor, Suite 440, Amarillo, Texas 79101. Our phone number is (806) 373-7111 and fax number is (806) 373-6979. Our website address is www.exterraenergyinc.com. The Company has been granted a Certificate of Authority to transact business in the state of Texas.

Recent Events

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

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

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

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

On March 13, 2009, the Company completed the acquisition of a 25% profit interest in a saltwater disposal well and lease in the Newark East Field of North Texas, in consideration of the payment of $2,660,607 payable in shares of restricted common stock of the Company valued at $.06 a share for a total of 44,343,451 shares. The acquisition consisted of a profit interest in the Saltwater disposal well that was estimated at approximately $3,000,000.00, over a five year period, by a third party consulting firm upon completion of construction and being fully operational. The assets were acquired from ROYALCO Oil & Gas Corporation, a privately held company controlled by Robert Royal, CEO, and Director and Todd R. Royal, President, Secretary and Director of the Company. In addition, ROYALCO is currently in litigation over its profit interest in the saltwater disposal well. According to the purchase agreement, if

the litigation were to result in ROYALCO losing its development and management rights to the saltwater disposal well, the assets transferred to Exterra would be replaced with assets of equivalent value.

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

In July 2010, Exterra purchased 31 wells from TOGS Energy, Inc. for the assumption of $1,240,000 of debt due in 3 years bearing interest at 10%. No principal or interest payments are due until January 1, 2011. At that date, an interest only payment of $62,000 will be due. Monthly principal and interest payments of $40,011 will be due and can be paid in cash or Exterra common stock at Exterra’s option.

In August 2010, Exterra acquired 100% ownership of Cleveland Oil & Gas for 600,000 shares of Exterra common stock with an estimated value of $2.00 per share. Upon Exterra receiving an engineering report with a minimum of $2 million value of proven developed producing reserves, Exterra agreed to repurchase 125,000 shares of the 600,000 at $2.00 share or the former owner of Cleveland Oil & Gas can choose to retain all 600,000 shares. The prior owner of Cleveland Oil & Gas will become an employee of Exterra and will receive compensation in the amount of $10,000 monthly provided all the wells produce a daily average of 32 barrels of oil. The monthly compensation will be adjusted downward for production below this threshold. If production is above this threshold, the employee will receive annual stock option awards of an amount to be determined in the future.

Description of Properties

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

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

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

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

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

On March 13, 2009, the Company completed the acquisition of a profits interest in a saltwater disposal well and lease in the Newark East Field of North Texas. The acquisition consisted of a 25% profit interest in the saltwater disposal. The assets were acquired from ROYALCO Oil & Gas Corporation, a privately held company controlled by Robert Royal, Chairman Secretary, and Director and Todd R. Royal, CEO, President, and Director of the Company.

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

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

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

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

In February 2010, Exterra acquired additional interest in the University Lands property and the Lady Luck 1H well.

Marketing of Crude Oil and Natural Gas

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

by a lender should we be successful in acquiring future financing.

Although management believes that we are not dependent upon any one customer, our current marketing arrangement relies on one purchaser for 90% of our revenue for the year ended May 31, 2010. In the event that our current purchaser is unwilling or unable to purchase the production, management believes alternative purchasers of its production are readily available.

Employees

As of the end of our fiscal year on May 31, 2010, we had one employee. We also utilize certain outsourced third party consultants to provide operational, technical and certain administrative services. As production levels increase, we may find the need to hire additional personnel.

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

Facilities

Corporate offices currently occupy approximately 1,598 square feet of office space under a lease service agreement dated March 23, 2009 for a term of 12 years. The office is located at Suite 440, 701 South Taylor, in Amarillo, Texas. For the period from April 1, 2009 through September 30, 2009, the monthly rental amount is $0. From October 1, 2009 to March 31, 2013 the monthly rental amount is $1,731. From April 1, 2013 to March 31, 2017, the monthly rental amount is $1,798. From April 1, 2017 to March 31, 2021, the monthly rental amount is

$1,864.

In March 2010 the Company entered into a verbal rent agreement with ROYALCO OIL AND GAS, a related party. The payment is $4,300 per month as long as the offices are being used. For the fiscal year ending May 31, 2010 the Company incurred $34,000 related to this office rental.

Industry Segments

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

Competition

We are in direct competition with numerous oil and natural gas companies, drilling and income programs and partnerships exploring various areas of Texas and elsewhere competing for properties. Many competitors are large, well-known oil and gas and/or energy companies, although no single entity dominates the industry. Many of our competitors possess greater financial and personnel resources enabling them to identify and acquire more economically desirable

energy producing properties and drilling prospects than us. Additionally, there is competition from other fuel choices to supply the energy needs of consumers and industry. Management believes that there exists a viable market place for smaller producers of natural gas and oil.

Government Regulation

In the United States, legislation affecting the oil and gas industry has been pervasive and is under constant review for amendment or expansion. Pursuant to such legislation, numerous federal, state and local departments and agencies have issued extensive rules and regulations binding on the oil and gas industry and its individual members, some of which carry substantial penalties for failure to comply. These laws and regulations have a significant impact on oil and gas drilling, gas-processing plants and production activities, increasing

the cost of doing business and, consequently, affect profitability. Inasmuch as new legislation affecting the oil and gas industry is commonplace and existing laws and regulations are frequently amended or reinterpreted, we may be unable to predict the future cost or impact of complying with these laws and regulations. We consider the cost of environmental protection a necessary and manageable part of our business. We have been able to plan for and comply with new environmental initiatives without materially altering our operating

strategies.

Exploration and Production. Our operations are subject to various types of regulation at the federal, state and local levels. These regulations include requiring permits for the drilling wells; maintaining prevention plans; submitting notification and receiving permits related to the presence, use and release of certain materials incidental to oil and gas operations; and

regulating the location of wells, the method of drilling and casing wells, the use, transportation, storage and disposal of fluids and materials used in connection with drilling and production activities, surface plugging and abandoning of wells and the transporting of production. Our operations are also subject to various conservation matters, including the number of wells which may be drilled in a unit, and the unitization or pooling of oil and gas properties. In this regard, some states allow the forced pooling or integration of tracts to

facilitate exploration while other states rely on voluntary pooling of lands and leases, which may make it more difficult to develop oil and gas properties. In addition, state conservation laws establish maximum rates of production oil and gas wells, generally limit the venting or flaring of gas, and impose certain requirements regarding the ratable purchase of production. The effect of these regulations is to limit the amounts of oil and gas we can produce from our wells and to limit the number of wells or the locations at which we can drill.

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

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

CERCLA and comparable state statutes, also known as "Superfund" laws, can impose joint and several and retroactive liability, without regard to fault or the legality of the original conduct, on certain classes of persons for the release of a "hazardous substance" into the environment. In practice, cleanup costs are usually allocated among various responsible parties. Potentially liable parties include site owners or operators, past owners or operators under certain conditions, and entities that arrange for the disposal or treatment of, or

transport hazardous substances found at the site. Although CERCLA, as amended, currently exempts petroleum, including but not limited to, crude oil, gas and natural gas liquids from the definition of hazardous substance, our operations may involve the use or handling of other materials that may be classified as hazardous substances under CERCLA. Furthermore, there can be no assurance that the exemption will be preserved in future amendments of the act, if any.

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

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

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

the future.

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

Taxation

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

Commitments and Contingencies

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

effect on our financial position as a result of this requirement.

ITEM 1A. RISK FACTORS

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

Risks Relating to Our Business

We have generated negative cash flow from operations for the two most recent fiscal years, have an accumulated deficit of $23,583,711 at May 31, 2010 and incurred a net loss of $3,368,156 for the fiscal year ended May 31, 2010. We have defaulted on certain note agreements.

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

Exterra’s Board of Directors has authorized a corporate stock dividend policy which the Company is authorized to distribute 25% of the after tax net annual earnings of Exterra to all stockholders of record by distributing quarterly cash dividends to all Exterra stockholders of record. However the Company does not intend to pay out any dividend until such time as will be warranted from positive cash flow and earnings.

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

We have adopted provisions in our Articles of Incorporation and Bylaws which limit the liability of our officers and directors and provide for indemnification by us of our officers and directors to the full extent permitted by Nevada corporate law. Our articles generally provide that our officers and directors shall have no personal liability to us or our shareholders for

monetary damages for breaches of their fiduciary duties as directors, except for breaches of their duties of loyalty, acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law, acts involving unlawful payment of dividends or unlawful stock purchases or redemptions, or any transaction from which a director derives an improper personal benefit. Such provisions substantially limit our shareholders' ability to hold officers and directors liable for breaches of fiduciary duty, and may require us to indemnify our officers and directors. The Company carries Directors and Officers liability insurance to further protect them from liability.

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

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

Our business is subject to extensive regulation.

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

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

Crude oil and natural gas operations are subject to extensive federal, state and local government regulations, which may be changed from time to time. Matters subject to regulation include discharge permits for drilling operations, drilling bonds, reports concerning operations, the spacing of wells, unitization and pooling of properties and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of crude oil and natural gas wells below actual production capacity

in order to conserve supplies of crude oil and natural gas. There are federal, state and local laws and regulations primarily relating to protection of human health and the environment applicable to the development, production, handling, storage, transportation and disposal of crude oil and natural gas, byproducts thereof and other substances and materials produced or used in connection with crude oil and natural gas operations. In addition, we may inherit liability for environmental damages caused by previous owners of property we purchase or

lease. As a result, we may incur substantial liabilities to third parties or governmental entities. We are also subject to changing and extensive tax laws, the effects of which cannot be predicted. The implementation of new, or the modification of existing, laws or regulations could have a material adverse effect on us.

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

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

engineers or by the same engineers but at different times may vary substantially. Accordingly, reserve estimates may be subject to downward or upward adjustment. Actual production, revenue and expenditures with respect to our reserves will likely vary from estimates, and such variances may be material.

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

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

·	unexpected drilling conditions;

·	pressure or irregularities in formations;

·	equipment failures or accidents;

·	inability to obtain leases on economic terms, where applicable;

·	adverse weather conditions;

·	compliance with governmental requirements; and

·	shortages or delays in the availability of drilling rigs or crews and the delivery of equipment.

Drilling or reworking is a highly speculative activity. Even when fully and correctly utilized, modern well completion techniques such as hydraulic fracturing and horizontal drilling do not guarantee that we will find crude oil and/or natural gas in our wells. Hydraulic fracturing involves pumping a fluid with or without particulates into a formation at high pressure, thereby creating fractures in the rock and leaving the particulates in the fractures to ensure that the fractures remain open, thereby potentially increasing the ability of the reservoir to produce oil or gas. Horizontal drilling involves drilling horizontally out from an existing vertical well bore, thereby potentially increasing the area and reach of the well bore that is in contact with the reservoir. Our future drilling activities may not be successful and, ifunsuccessful, such failure would have an adverse effect on our future results of operations and financial condition. We cannot assure you that our overall drilling success rate or our drilling success rate for activities within a particular geographic area will not decline. We may identify and develop prospects through a number of methods, some of which do not include lateral drilling or hydraulic fracturing, and some of which may be unproven. The drilling and results for these prospects may be particularly uncertain. Our drilling schedule may vary from our capital budget. The final determination with respect to the drilling of any scheduled or budgeted prospects will be dependent on a number of factors, including, but not limited to:

·	the results of previous development efforts and the acquisition, review and analysis of data;

·	the availability of sufficient capital resources to us and the other participants, if any, for the drilling of the prospects;

·	the approval of the prospects by other participants, if any, after additional data has been compiled;

·	economic and industry conditions at the time of drilling, including prevailing and anticipated prices for crude oil and natural gas and the availability of drilling rigs and crews;

·	our financial resources and results;

·	the availability of leases and permits on reasonable terms for the prospects; and

·	the success of our drilling technology.

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

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

Our revenues, operating results, profitability, cash flow, future rate of growth and ability to borrow funds or obtain additional capital, as well as the carrying value of our properties, are substantially dependent upon prevailing prices of crude oil and natural gas. Lower crude oil and natural gas prices also may reduce the amount of crude oil and natural gas that we can produce economically. Historically, the markets for crude oil and natural gas have been very volatile, and such markets are likely to continue to be volatile in the future. Prices for crude oil and natural gas are subject to wide fluctuation in response to relatively minor changes in the supply of and demand for crude oil and natural gas, market uncertainty and a variety of additional factors that are beyond our control, including:

·	worldwide and domestic supplies of crude oil and natural gas;

·	the level of consumer product demand;

·	weather conditions;

·	domestic and foreign governmental regulations;

·	the price and availability of alternative fuels;

·	political instability or armed conflict in oil producing regions;

·	the price and level of foreign imports; and

·	overall domestic and global economic conditions.

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

Risks Related To Share Ownership

The market price for our common stock may be volatile.

Many factors could cause the market price of our common stock to rise and fall,

including:

·	actual or anticipated variations in our quarterly results of operations;

·	changes in market valuations of companies in our industry;

·	changes in expectations of future financial performance;

·	fluctuations in stock market prices and volumes;

·	issuances of common stock or other securities in the future;

·	the addition or departure of key personnel;

·	announcements by us or our competitors of acquisitions, investments or strategic alliances; and

·	the increase or decline in the price of oil and natural gas.

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

We cannot predict whether future issuances of our common stock or resales in the open market will decrease the market price of our common stock. The impact of any such issuances or resales of our common stock on our market price may be increased as a result of the fact that our common stock is thinly, or infrequently, traded. The exercise of any options or the vesting of any restricted stock that we may grant to directors, executive officers and other employees in the future, the issuance of common stock in connection with acquisitions and other issuances of our common stock could have an adverse effect on the market price of our common stock. In addition, future issuances of our common stock may be dilutive to existing shareholders. Any sales of substantial amounts of our common stock in the public market, or the perception that such sales might occur, could lower the market price of our common stock.

Our common stock is considered "penny stock" securities under Exchange Act rules.

Our securities are considered low-priced or "designated" securities under rules promulgated under the Exchange Act. Under these rules, broker/dealers participating in transactions in low-priced securities must first deliver a risk disclosure document which describes the risks associated with such stocks, the broker/dealer's duties, the customer's rights and remedies, certain market and other information, and make a suitability determination approving the customer for low-priced stock transactions based on the customer's financial situation,

investment experience and objectives. Broker/dealers must also disclose these restrictions in writing to the customer and obtain specific written consent of the customer, and provide monthly account statements to the customer. The likely effect of these restrictions is a decrease in the willingness of broker/dealers to make a market in the stock, decreased liquidity of the stock and increased transaction costs for sales and purchases of the stock as compared to other securities.

FINRA sales practice requirements may also limit a stockholder's ability to buy and sell our stock.

In addition to the “penny stock” rules described above, the Financial Industry Regulatory Authority (FINRA) has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

The Report Of Our Independent Registered Public Accounting Firm Contains Explanatory Language That Substantial Doubt Exists About Our Ability To Continue As A Going Concern

Footnote 3 of the independent auditor’s report on our financial statements contains explanatory language that substantial doubt exists about our ability to continue as a going concern. The report states that we depend on our Company obtaining adequate capital to fund operating losses until it becomes profitable and to settle or restructure its outstanding past due notes payable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.. If we curtail our operations, we may be placed into bankruptcy or undergo liquidation, the result of which will adversely affect the value of our common shares.

Nevada Law And Our Articles Of Incorporation Protect Our Directors From Certain Types Of Lawsuits, Which Could Make It Difficult For Us To Recover Damages From Them In The Event Of A Lawsuit.

Nevada law provides that our directors will not be liable to our company or to our stockholders for monetary damages for all but certain types of conduct as directors. Our Articles of Incorporation require us to indemnify our directors and officers against all damages incurred in connection with our business to the fullest extent provided or allowed by law. The exculpation provisions may have the effect of preventing stockholders from recovering damages against our directors caused by their negligence, poor judgment or other circumstances. The indemnification provisions may require our company to use our assets to defend our directors and officers against claims, including claims arising out of their negligence, poor judgment, or other circumstances.

Failure to achieve and maintain effective internal controls in accordance with section 404 of the Sarbanes-Oxley act could have a material adverse effect on our business and operating results.

It may be time consuming, difficult and costly for us to develop and implement the additional internal controls, processes and reporting procedures required by the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal auditing and other finance staff in order to develop and implement appropriate additional internal controls, processes and reporting procedures. If we are unable to comply with these requirements of the Sarbanes-Oxley Act, we may not be able to obtain the independent accountant certifications that the Sarbanes-Oxley Act requires of publicly traded companies.

If we fail to comply in a timely manner with the requirements of Section 404 of the Sarbanes-Oxley Act regarding internal control over financial reporting or to remedy any material weaknesses in our internal controls that we may identify, such failure could result in material misstatements in our financial statements, cause investors to lose confidence in our reported financial information and have a negative effect on the trading price of our common stock.

Pursuant to Section 404 of the Sarbanes-Oxley Act and current SEC regulations, we are be required to prepare assessments regarding internal controls over financial reporting and furnish a report by our management on our internal control over financial reporting. The process of documenting and testing our internal control procedures in order to satisfy these requirements will result in increased general and administrative expenses and may shift management time and attention from revenue-generating activities to compliance activities. While our management is expending significant resources in an effort to complete this important project, there can be no assurance that we will be able to achieve our objective on a timely basis. Failure to achieve and maintain an effective internal control environment or complete our Section 404 certifications could have a material adverse effect on our stock price.

In addition, in connection with our on-going assessment of the effectiveness of our internal control over financial reporting, we may discover “material weaknesses” in our internal controls as defined in standards established by the Public Company Accounting Oversight Board, or the PCAOB. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The PCAOB defines “significant deficiency” as a deficiency that results in more than a remote likelihood that a misstatement of the financial statements that is more than inconsequential will not be prevented or detected.

In the event that a material weakness is identified, we will employ qualified personnel and adopt and implement policies and procedures to address any material weaknesses that we identify. However, the process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. We cannot assure you that the measures we will take will remediate any material weaknesses that we may identify or that we will implement and maintain adequate controls over our financial process and reporting in the future.

Any failure to complete our assessment of our internal control over financial reporting, to remediate any material weaknesses that we may identify or to implement new or improved controls, or difficulties encountered in their implementation, could harm our operating results, cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of the periodic management evaluations of our internal controls and, in the case of a failure to remediate any material weaknesses that we may identify, would adversely affect the annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting that are required under Section 404 of the Sarbanes-Oxley Act. Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.

Because We Are Quoted On The OTCBB Instead Of An Exchange Or National Quotation System, Our Investors May Have A Tougher Time Selling Their Stock Or Experience Negative Volatility On The Market Price Of Our Stock.

Our common stock is traded on the OTCBB. The OTCBB is often highly illiquid. There is a greater chance of volatility for securities that trade on the OTCBB as compared to a national exchange or quotation system. This volatility may be caused by a variety of factors, including the lack of readily available price quotations, the absence of consistent administrative supervision of bid and ask quotations, lower trading volume, and market conditions. Investors in our common stock may experience high fluctuations in the market price and volume of the trading market for our securities. These fluctuations, when they occur, have a negative effect on the market price for our securities. Accordingly, our stockholders may not be able to realize a fair price from their shares when they determine to sell them or may have to hold them for a substantial period of time until the market for our common stock improves.

Compliance with changing regulation of corporate governance and public disclosure will result in additional expenses and pose challenges for our management team.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations promulgated thereunder, the Sarbanes-Oxley Act and SEC regulations, have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the U.S. public markets. Our management team will need to devote significant time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities.

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

ITEM 1B. UNRESOLVED STAFF COMMENTS

None

ITEM 2. DESCRIPTION OF PROPERTIES

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

Oil and Gas Acreage

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

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

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

President, Secretary and Director of the Company.

In February 2010, Exterra acquired additional interest in the University Lands property and the Lady Luck 1H well.

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

University Lands, Pecos County, Texas. In December 2006, Exterra purchased a 75% Working Interest in 12 wells in the West Cardinal field located in Pecos County. As part of the acquisition, we also acquired a 12-mile long pipeline on the property. Our plan is to make efforts to enhance production in the West Cardinal field.

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

Reserves

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

Oil and Natural Gas Reserves

The net crude oil and gas reserves of the Company as of May 31st, 2010 were 228,450 barrels of oil and condensate and 8.922 BCFG (billion cubic feet) of natural gas. Based on SEC guidelines, the reserves were classified as follows:

Proved Developed Producing	12,040 BO and 0.497 BCFG
Proved Developed Non-Producing	13,520 BO and 0.673 BCFG
Proved Undeveloped	202,890 BO and 7.752 BCFG
Total Proved Reserves	228,450 BO and 8.922 BCFG

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

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

	Year ended May 31,
Gas and Oil Properties, net:	2010	2009

Proved developed gas reserves-Mcf (1)	1,170,650	382,430

Proved undeveloped gas reserves-Mcf (2)	7,751,800	6,459,120

Total proved gas reserves-Mcf	8,922,450	6,841,550

Proved developed crude oil and Condensate reserves-Bbls (1)	25,560	31,650

Proved undeveloped crude oil and Condensate reserves-Bbls (2)	202,890	184,100

Total proved crude oil and condensate Reserves-Bbls	228,450	215,750

*deminimus amounts

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

(2) "Proved Undeveloped Reserves" are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion.

Wells

The Company did not drill any new wells during the fiscal year. The following table summarizes the Company's Working Interests in productive and non-productive oil and gas wells at May 31st, 2010. Productive wells are producing wells and wells capable of production. Gross wells are the total number of wells in which the company has an interest. Net wells are the sum of the Company's fractional working interests owned in gross wells:

	Year Ended May 31,
	2010					2009

	Gross		Net			Gross		Net

Total Wells:
Productive		42.000		3.10			16.000		6.24
Non-Productive		2.000		0.06			13.000		6.21
Total		44.000		3.16	*		29.000		12.45	*

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

	Year Ended May 31,

	2010		2009

Average Sales Price per Unit
Produced:
Natural Gas ($Mcf)	$	5.25	$	6.19
Crude Oil & Condensate ($/Bbl)	$	71.64	$	72.51

Average Production Cost per
Equivalent Barrel (1) (2)	$	17.68	$	17.43

(1) Includes severance taxes and ad valorem taxes.

(2) Gas production is converted to equivalent barrels at the rate of six Mcf per barrel, representing relative energy content of natural gas to oil.

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

ITEM 3. LEGAL PROCEEDINGS

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

At May 31, 2010, the following litigation is pending:

1. Warrior Energy Services Corporation d/b/a Bobcat Pressure Control v. Exterra Energy, Inc.; United States District Court, Northern District of Texas, Fort Worth Division (May 2009).

a. Plaintiff is suing the Company for $287,850.86 plus attorneys’ fees and interest relating to services performed. The Company did not contract with the Plaintiff and did not operate the wells of which the services were performed.

b. An answer has been filed on behalf of the Company.

c. Management intends to attempt to resolve this matter.

As of May 31, 2010, Exterra has not accrued for this case because management has determined that an unfavorable outcome is only reasonably possible.

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

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

In November 2009, a debt settlement between Exterra and a former officer was made for prior year compensation. This settlement resulted in Exterra paying $30,000 cash and issuing 29,867 shares of restricted stock to Boatright. The $30,000 paid to Boatright was recorded as debt settlement expense in the fiscal year ended May 31, 2010. The services related to the issuance of the stock were accrued in a prior year.

In August 2010, a debt settlement between Exterra and a former officer was made for prior year compensation. 75,000 restricted shares of Exterra stock was issued as settlement with the underlying guarantee that the former employee will receive a total of $154,500 either by stock sales or cash from Todd and Robert Royal personally. As of May 31, 2010, an accrual of $154,500 has been made in relation to this settlement.

A settlement between Exterra and a third party vendor was made during the fiscal year ended May 31, 2010. This settlement resulted in a $20,000 accrual of debt settlement expense.

In September of 2009, Exterra issued 5,000,000 free trading shares of common stock to various third parties in an attempt to settle outstanding amounts owed on the Coventry Capital note payable described in Note 7. Shortly after the initial issuance, Exterra attempted to unwind the transaction with the third parties. 700,000 of the 5,000,000 shares of common stock were returned within a month of the initial issuance. Exterra later became aware that the parties did not intend to return the remainder of the shares and has filed fraudulent inducement claims against the third parties and received a temporary injunction against sale of the outstanding shares. As of the date of this filing, Exterra believes it is probable that 3,687,947 of the remaining shares subject to the temporary injunction will be returned. Exterra is also seeking monetary damages for shares already sold, however the likelihood of the award and ultimate collection is uncertain. Due to the uncertainty of the return or monetary awards for shares already sold, Exterra has recorded the remaining shares (612,053) as issued as of May 31, 2010 and recognized a charge for debt settlement expense in the amount of $918,080 for the estimated fair value of the shares sold.

ITEM 4. REMOVED AND RESERVED

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS

Market Information

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

The following information is provided to show quarterly high and low prices of our common stock for the fiscal year ended May 31, 2010.


	Price Per Share
	High		Low

Fiscal 2010
First Quarter		4.25		1.01
Second Quarter		2.25		0.70
Third Quarter		1.44		0.25
Fourth Quarter		2.45		0.60

During the First Quarter of 2011, subsequent to year end, the following high and low prices were recorded for the Company's common stock.

	Price Per Share
	High	Low

Fiscal 2011
First Quarter	2.40	1.23

A total of 32,242 common stock warrants were outstanding as of May 31, 2008 with an aggregate intrinsic value of $459,000 and a weighted average remaining life of 1.54 years.

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

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

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

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

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

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

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

As of May 31, 2010, there were 1,213,167 common stock warrants outstanding with an aggregate intrinsic Value of $2,235,000. Of these warrants outstanding, 1,200,000 have an exercise price of $0.05 and 13,167 have an exercise price of $.75. The 1,200,000 warrants expire in March 2015 and the 13,167 warrants expire in August of 2010.

Holders

As of May 31, 2010, there were approximately 570 holders of record of our common stock, which figure does not take into account those shareholders whose certificates are held in the name of broker-dealers or other nominee accounts.

Dividend Policy

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

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

ITEM 6. SELECTED FINANCIAL DATA

N/A

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

The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements, as well as information relating to the plans of our current management. This report includes forward-looking statements. Generally, the words “believes,” “anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,” “continue,” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10-K

Results of Operations

The following table sets forth the percentage relationship to total revenues of principal items contained in the statements of operations of the financial statements included herewith for the two most recent fiscal years ended May 31, 2010 and 2009. It should be noted that percentages discussed throughout this analysis are stated on an approximate basis.


	Fiscal Years Ended May 31,
	2010						2009
	Amount			Percentage			Amount			Percentage

Total Revenues	$	305,505			100	%	$	437,968			100	%
Total Expenses		2,570,726			841	%		5,468,784			1,249	%
Total Other Income (Expenses)		(1,102,935	)		-361	%		(140,166	)		-32	%
Income before income taxes	$	(3,368,156	)		-1,102	%	$	(5,170,982	)		-1,181	%
Net loss	$	(3,368,156	)		-1,102	%	$	(5,170,982	)		-1,181	%

Year Ended May 31, 2010 and 2009

Oil and Gas Revenues

Revenues for the year ended May 31, 2010 and 2009 were $305,505 and $437,968, respectively. The decrease is due to reduced production due to reduced oil and gas commodity pricing. We expect our oil and gas revenues to increase in the following year as our oil and natural gas properties are brought to greater levels of production.

Lease Operating Expenses

Lease operating expenses for the year ended May 31, 2010 and 2009 were $152,339 and $298,508, respectively. The decrease in expenses was due to a tighter overseeing of operations, reducing excessive spending and work and decreased production. We expect our operating expenses will grow in the future as we acquire more wells and improve the wells we have purchased.

General and Administrative Expenses

General and administrative expenses for the year ended May 31, 2010 and 2009 were $2,187,635 and $1,425,722, respectively. The increase is principally due to non-cash expenses as they relate to stock issued for services and warrant options in the amount of $622,983 in 2009 compared to $918,372 for 2010. Our legal and accounting fees totaled $358,683 for the year ended May 31, 2010 compared to $241,782 in 2009. We also incurred $947,432 in public company consulting fees in 2010 compared to $25,547 in 2009. We expect our general and administrative expenses to decline in the current year as the majority of non-cash consulting expenses are non-recurring.

Interest Expense

Interest expense for the year ended May 31, 2010 and 2009 were $171,518 and $140,166, respectively. The increase is due to the increase in outstanding debt during 2010.

Net Loss

Our net loss for the year ended May 31, 2010 and 2009 was $3,368,156 and $5,170,982, respectively. The decrease is primarily attributable to a decrease of oil and gas property impairment of $3,375,251.

Liquidity and Capital Resources

As of May 31, 2010, we had cash of $5,341 and negative working capital of $3,257,100. This compares to $7,505 and negative working capital of $2,051,932 for the year ending May 31, 2009.

Receivables outstanding at May 31, 2010 are as follows:

(1) Note receivable from Wilkerson	$	335,000
(2) Note receivable from Marlowe		15,000
	$	350,000

(1) In October 2009, we loaned Wilkerson, an individual, $335,000 in connection with an agreement with Wilkerson that our company and Wilkerson will be equal partners in the ownership and operations of all ranches, developments and oil fields owned by Wilkerson and Wilkerson’s affiliates to the agreement. If our management decided to proceed with the joint venture, the loan would be applied against the total purchase price. Our management subsequently decided not to go forward with the joint venture. As a result, the note became due 90 days after execution of the agreement. As of May 31, 2010 no payments on the principal have been received. The note is collaterized by land valued at $4.5 million. The note bears a 10% annual interest rate. As of May 31, 2010, interest income of $22,300 has been recorded of which $4,800 has not been paid and therefore recorded as interest receivable.

(2) In October 2009, we loaned Marlowe, an individual, $15,000 bearing interest at 10 percent. This loan is collateralized by 8,000 shares of Exterra Energy, Inc., Common restricted Stock. One payment of $16,500 is due September 2010 with $15,000 being principal and $1,500 being interest. As of May 31, 2010, interest income of $1,000 has been recorded with a corresponding $1,000 amount in interest receivable.

Debt outstanding at May 31, 2010 are as follows:

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

(2) Convertible loans		367,500

(3) Note payable to Coventry Capital		462,125

(4) Note payable to RoyalCo Financial		20,000

(5) Line of credit with Happy State Bank		1,324,750

	$	2,374,375

(1) Principal and interest (10% per annum) on the note are payable on the tenth 10th) day of each calendar month, beginning on January 10, 2007, in monthly installments equal to the difference between the prior month's (i) income and (ii) the royalties, severance, ad valorem, lifting and transportation expenses directly related to the operation of the Pecos County leases. Each monthly installment will be applied first to any outstanding and accrued interest and, thereafter, to principal on the note. The note payable is secured by the Pecos

County leases and 6,000 shares of our restricted common stock. The Company has accrued $60,000 and $80,000 in interest on the note payable as of May 31, 2009 and 2010. The entire principal amount outstanding under the note and all accrued interest thereon was due and payable on July 15, 2008. As the Company is unable at present to pay the balances due, we are seeking an extension from the Lender. There are no guarantees these discussions will be successful.

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

interest at May 31, 2009 and 2010 of $48,645 and $63,145.

Through May 31, 2010 a net revenue sharing bonus has not been paid as the University Lands have yet to yield net revenue.

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

(3) Principal and interest (18% per annum) due monthly in blended payments of $20,000 commenced December 7, 2007. The loan is secured by certain oil and gas properties and was due May 7, 2008. The Company has accrued $103,183 and $176,245 in interest as of May 31, 2009 and 2010. In September 2009, we negotiated a preliminary settlement agreement for this note that would result in the issuance of 5,000,000 shares of common stock for full settlement of the amounts owed.

(4) Principal and interest (10% per annum) is un-secured and due April 15, 2010. The Company has accrued $500 and $2,750 in interest as of May 31, 2009 and 2010.

(5) In September 2009, we entered into a $10,000,000 bank line of credit. The line of credit is subject to an initial borrowing base limitation of $1,475,000 and is secured by Exterra’s interests in various oil and gas leases originally acquired in October of 2007. The loan proceeds are to be used for oil and gas investments, development of oil and gas properties and working capital associated with operating oil and gas properties. The line of credit’s balance is $1,324,750 as of May 31, 2010.

During the fiscal year ended May 31, 2010, we consummated the following transactions:

06/22/2009 Issued 15,000 common shares at $2.25 per share for attorney services.

09/14/2009 Issued 612,053 common shares for settlement of debt (See Note 11 to the Consolidated Financial Statements)

12/21/2009 Issued 29,867 common shares at $2.25 per share for a legal settlement (see Note 11 to the Consolidated Financial Statements)

03/24/2010 Issued 300,000 common shares at $1.05 per share for investor relations services

05/10/2010 Issued 50,000 common shares at $1 per share to an employee for cash

During the fiscal year ended May 31, 2010, we issued 315,000 shares for legal and investor relations consulting services. In relation to these services, an expense of $348,750 was recorded for the fiscal year ended May 31, 2010.

In March 2010, we granted 1,200,000 warrants for investor relations consulting. As of the fiscal year ended May 31, 2010, $569,622 has been recorded as consulting expense in relation to these warrants.

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

to cease operations.

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

The ability of our company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations.

Cash flow from operating activities

For the year ended May 31, 2010, net cash used by operating activities was $979,301 compared to net cash used by operating activities of $ 182,076 for the year ended May 31, 2009. The $797,225 increase in net cash used by operating activities is primarily due to our increase of paying for expenses with cash from our line of credit as opposed to issuing stock for expenses.

Cash flow from investing activities

For the year ended May 31, 2010, net cash used in investing activities was $387,613 compared to $0 for the year ended May 31, 2009. The $387,613 increase is primarily attributed to our increase in note receivables of $350,000 for 2010.

Our investing activities in fiscal 2010 were funded from the use of proceeds from our bank line of credit.

Cash flow from financing activities

For the year ended May 31, 2010, net cash flows from financing activities was $1,364,750 compared to $180,391 for the year ended May 31, 2009. The $1,184,359 increase is primarily attributable to our advances from our bank line of credit opened during the current year.

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

N/A

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

EXTERRA ENERGY, INC.

INDEX TO THE FINANCIAL STATEMENTS



Report of Independent Registered Public Accounting Firm	F-2

Consolidated Balance Sheets	F-4

Consolidated Statements of Operations	F-5

Consolidated Statements of Stockholders' Equity	F-6

Consolidated Statements of Cash Flows	F-7

Notes to Consolidated Financial Statements	F-8

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Stockholders of Exterra Energy, Inc.

Amarillo, Texas

We have audited the accompanying balance sheets of Exterra Energy, Inc. (“the Company”) as of May 31, 2010 and 2009 and the related statements of operations, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are

appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Exterra Energy, Inc. as of May 31, 2010 and 2009 and the results of operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

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

MaloneBailey LLP

www.malone-bailey.com

Houston, Texas

September 15, 2010

F-2

EXTERRA ENERGY, INC.

BALANCE SHEETS

	May 31, 2010			May 31, 2009

CURRENT ASSETS:
Cash and equivalents	$	5,341		$	7,505
Oil and gas receivable, net of allowance of
$0 and $31,000 as of May 31, 2010 and 2009		59,262			42,326
Prepaid expenses		245			611
Interest receivable		5,833			--
Notes receivable		350,000			--


TOTAL CURRENT ASSETS		420,681			50,442


OIL AND GAS PROPERTIES, net - successful efforts method		2,180,727			2,379,194
VEHICLES, FURNITURE AND EQUIPMENT, net		19,956			25,075
OTHER ASSETS		--			9,913


TOTAL ASSETS	$	2,621,364		$	2,464,624


CURRENT LIABILITIES:
Accounts payable and accrued expenses	$	1,303,406		$	1,042,749
Oil and gas properties purchase note payable		200,000			200,000
Convertible notes payable		367,500			367,500
Related party note payable		20,000			30,000
Bank line of credit		1,324,750			--
Other current notes		462,125			462,125


TOTAL CURRENT LIABILITIES		3,677,781			2,102,374

NON-CURRENT LIABILITIES:
Asset retirement obligation		116,107			120,271


TOTAL LIABILITIES		3,793,888			2,222,645


STOCKHOLDERS' EQUITY (DEFICIT):
Common stock: $0.001 par value
75,000,000 shares authorized: 8,043,199
and 7,036,279 shares issued and outstanding, respectively		8,044			7,036
Additional paid-in capital		22,403,143			20,450,498
Accumulated deficit		(23,583,711	)		(20,215,555	)


TOTAL STOCKHOLDERS' EQUITY (DEFICIT)		(1,172,524	)		241,979


TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)	$	2,621,364		$	2,464,624

The accompanying notes are an integral part of these financial statements

F-4

EXTERRA ENERGY, INC.

STATEMENTS OF OPERATIONS


	Years Ended
	May 31, 2010			May 31, 2009

REVENUE:
Oil and gas sales	$	305,505		$	437,968

OPERATING EXPENSES:

Lease operating expenses		152,339			298,508
Depreciation, depletion and accretion		85,380			223,931
Impairment		145,372			3,520,623
General and administrative		2,187,635			1,425,722


Total Expenses		2,570,726			5,468,784



LOSS FROM OPERATIONS		(2,265,221	)		(5,030,816	)


OTHER EXPENSES:

Interest income		23,333			--
Interest expense		(171,518	)		(140,166	)
Debt settlement expense		(954,750	)		--


Total Other Income (Expenses)		(1,102,935	)		(140,166	)


NET LOSS	$	(3,368,156	)	$	(5,170,982	)


LOSS PER SHARE - BASIC AND DILUTED	$	(0.45	)	$	(5.80	)

WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC AND DILUTED		7,556,684			897,973

The accompanying notes are an integral part of these financial statements

F-5

EXTERRA ENERGY, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY


	Common Stock				Paid-In			Accmulated
	Shares		Amount		Capital			Deficit			Total

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

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

Net loss									(5,170,982	)		(5,170,982	)

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

Issuance of common stock for:
Cash		50,000		50		49,950						50,000
Debt settlement		612,053		612		917,468						918,080
Services		315,000		316		348,434						348,750
Services – prior year accrual		29,867		30		67,171						67,201

Warrant expense		--		--		569,622						569,622

Net loss									(3,368,156	)		(3,368,156	)

Balances at May 31, 2010		8,043,199	$	8,044	$	22,403,143		$	(23,583,711	)	$	(1,172,524	)

The accompanying notes are an integral part of these financial statements

F-6

EXTERRA ENERGY, INC.

STATEMENTS OF CASH FLOWS


	For the Year Ended For the Year Ended
	May 31, 2010			May 31, 2009

CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss	$	(3,368,156	)	(5,170,982		)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation, depletion and accretion		85,380			223,931
Impairment		145,372			3,520,623
Stock issued services		348,750			622,983
Stock issued for debt settlement		918,080			--
Warrant expense		569,622			--
Write off of security deposit		9,913			--
Changes in operating assets and liabilities
Oil and gas receivables		(16,936	)		105,788
Interest receivable		(5,833	)		--
Prepaid expenses and other current assets		366			10,716
Accounts payable and accrued expenses		328,308			504,865

Net Cash Used in Operating Activities		(985,134	)		(182,076	)

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of oil and gas property		(29,117	)		--
Purchase of fixed assets		(2,663	)		--
Notes receivable		(350,000	)		--

Net Cash Used in Investing Activities		(381,780	)		--

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of stock		50,000			158,000
Borrowings on debt		1,324,750			--
Borrowings on related party debt		30,000			30,000
Payments on debt		(40,000	)		(7,609	)

Net Cash Provided by Financing Activities		1,364,750			180,391

NET DECREASE IN CASH		(2,164	)		(1,685	)

CASH AT BEGINNING OF PERIOD		7,505			9,190

CASH AT END OF PERIOD	$	5,341		$	7,505

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest	$	71,130		$	--
Income taxes		--			--

NON-CASH INVESTING AND FINANCING ACTIVITIES
Stock Issued for oil and gas properties	$	--		$	22,833,490
Deemed distribution to directors		--			(21,977,454	)
Stock issued for accounts payable and accrued expenses		67,201			200,000
Change in estimate on asset retirement obligations		16,730			39,713

The accompanying notes are an integral part of these financial statements

F-7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND HISTORY

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

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

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

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

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

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

Cash and Cash Equivalents

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

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist of cash. The Company had no cash in excess of federally insured limits for the periods ending May 31, 2010 and 2009, respectively. The Company maintains cash accounts only at large high quality financial institutions and Exterra believes the credit risk associated with cash is remote.

The Company's receivables primarily consist of accounts receivable from oil and gas sales. Accounts receivable are recorded at invoice amount and do not bear interest. Any allowance for doubtful accounts is based on management's estimate of the amount of probable losses due to the inability to collect from customers. As of May 31, 2010 and 2009, $0 and $31,000 allowance for doubtful accounts has been recorded and none of the accounts receivable have been collateralized.

During the years ended May 31, 2010 and 2009, one purchaser accounted for approximately 70% and 90% of our oil and gas sales revenue.

F-8

Although the Company is directly affected by the well-being of the oil and gas production industry, management does not believe a significant credit risk exists at May 31, 2010 and 2009.

Fair Value of Financial Instruments

As at May 31, 2010 and 2009, the fair value of cash, accounts receivable, notes payable and accounts payable, approximate carrying values because of the short-term maturity of these instruments.

Oil and Gas Properties, Successful Efforts Method

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

unproved properties (i.e. delay rentals) are expensed as incurred. Costs to operate and maintain wells and field equipment are expensed as incurred.

Capitalized proved property acquisition costs are amortized by lease using the unit-of-production method based on total proved reserves. Capitalized exploration well costs and development costs (plus estimated future dismantlement, surface restoration, and property abandonment costs, net of equipment salvage values) are amortized in a similar fashion based on their proved developed reserves. Support equipment and other property and equipment are depreciated over their estimated useful lives. As of May 31, 2010 and 2009,

respectively. Depletion, depreciation and accretion expense for the years ended May 31, 2010 and 2009 was $85,830 and $223,931 respectively.

Pursuant to FASB ASC 360-10, "Impairment or Disposal of Long-Lived Assets", the Company reviews proved oil and natural gas properties and other long-lived assets for impairment. These reviews are performed at least annually and more frequently if events and circumstances, (such as downward revision of the reserve estimates or commodity prices) indicate a decline in the recoverability of the carrying value of such properties. The Company estimates the undiscounted future cash flows expected in connection with the properties and compares such future cash flows to the carrying amount of the properties to determine if the carrying amount is recoverable. When the carrying amounts of the properties exceed their estimated undiscounted future cash flows, the carrying amounts of the properties are reduced to their estimated fair value. The factors used to determine fair value include, but are not limited to, estimates of proved reserves, future commodity prices, the timing of future production, future capital expenditures and a risk-adjusted discount rate. See Note 9 for details

on impairment recorded during the years ended May 31, 2010 and 2009.

Unproved oil and gas properties that are individually significant are also periodically assessed for impairment of value. An impairment loss for unproved oil and gas properties is recognized at the time of impairment by providing an impairment allowance. As of May 31, 2010 and 2009, the Company did not own any unproved oil and gas properties.

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

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

F-9

Vehicles, Furniture and Equipment

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

Asset Retirement Obligations

The Company follows the provisions of Financial Accounting Standards Board ASC 410-20, "Accounting for Asset Retirement Obligations". The fair value of an asset retirement obligation is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The present value of the estimated asset retirement costs is capitalized as part of the carrying amount of the long-lived asset. For the Company, asset retirement obligations relate to the abandonment of oil and gas producing facilities. The amounts recognized are based upon numerous estimates and assumptions, including future retirement costs, future recoverable quantities of oil and gas, future

inflation rates and the credit-adjusted risk-free interest rate.

Income Taxes

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

Revenue and Cost Recognition

The Company recognizes oil and natural gas revenue under the sales method of accounting for its interests in producing wells as oil and natural gas is produced and sold from those wells. The volumes sold may differ from the volumes to which the Company is entitled based on its interests in the properties. These differences create imbalances which are recognized as a liability only when the imbalance exceeds the estimate of remaining reserves. The Company had no significant imbalances as of May 31, 2010 and 2009.

Stock-based compensation

The Company follows FASB ASC 718 "Share Based Payment" to account for any options or common stock granted to employees. ASC 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values.

The Company accounts for stock-based compensation issued to non-employees in accordance with the provisions of ASC 505,"Accounting for Equity Investments That Are Issued to Non-Employees for Acquiring, or in Conjunction with Selling Goods or Services". For expensing purposes, the value of common stock issued to non-employees and consultants is determined based on the fair value of the equity instruments issued and charged to expense for the nature of the service for which the stock compensation is paid.

F-10

Basic and Diluted Income per Share of Common Stock

Basic and diluted net income per share calculations are presented in accordance with Financial Accounting Standards Board ASC 260 and are calculated on the basis of the weighted average number of common shares outstanding during the year. Common stock equivalents such as stock options and warrants, are excluded from the calculation when a loss is incurred as their effect would be anti-dilutive. At May 31, 2010 and May 31, 2009, the potential dilutive effect of converting notes payable and related interest to shares was determined to be anti-dilutive, and therefore their effect is excluded from the calculation of diluted weighted average shares.

Stock Splits

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

Recent Accounting Pronouncements

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

Reclassifications

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

NOTE 3 - GOING CONCERN

The Company's financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet established an ongoing source of revenues sufficient to cover its operating costs and has defaulted on certain outstanding notes payable, which raises substantial doubt about its ability to continue as a going concern. The ability of the Company to continue

as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable and to settle or restructure its outstanding past due notes payable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.

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

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

F-11

NOTE 4 - ACQUISITIONS AND DISPOSITIONS OF OIL AND GAS PROPERTIES

In February 2010, Exterra acquired additional interest in the University Lands property and the Lady Luck 1H well. An addition of $22,127 was added to oil and gas properties for the University Lands acquisition and $6,541 was added for the Lady Luck 1H well.

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

ROYALCO is currently in litigation over its profit interest in the saltwater disposal well. According to the purchase agreement, if the litigation were to result in Royalco losing its development and management rights to the saltwater disposal well, the assets transferred to Exterra would be replaced with assets of equivalent value.

On March 13, 2009, Exterra issued 739,059 shares of common stock valued at $2,660,612 for a 25% profit interest in a saltwater disposal well and lease in the Newark East Field of North Texas. The profit interest was acquired from ROYALCO Oil & Gas Corporation, a privately held company controlled by Robert Royal, CEO, and Director of Exterra and Todd R. Royal, President, Secretary and Director of the Company. Because the transaction occurred between two entities under common control, the profit interest was transferred to Exterra at

ROYALCO's basis of $191,445. The difference between the fair value of the common stock issued and ROYALCO's basis in the profit interest is recorded as a deemed distribution in the statement of changes in stockholders' equity. In addition,

NOTE 5 - ASSET RETIREMENT OBLIGATIONS

In accordance with FASB ASC 410-20, "Accounting for Asset Retirement Obligations" the Company records the fair value of a liability for asset retirement obligations ("ARO") in the period in which it is incurred and records a corresponding increase in the carrying amount of the related long-lived asset. The present value of the estimated asset retirement cost is capitalized as part of the carrying amount of the long-lived asset and is depreciated over the useful life of the asset. The Company accrues an abandonment liability associated with its

oil and gas wells when those assets are placed in service. The ARO is recorded at its estimated fair value and accretion is recognized over time as the discounted liability is accreted to its expected settlement value. Fair value isdetermined by using the expected future cash outflows discounted at the Company's credit-adjusted risk-free interest rate. No market risk premium has been included in Exterra's calculation of the ARO balance. The Company recorded $116,107 and $120,271 of asset retirement obligations for the years ending May 31, 2010 and 2009, respectively.

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


	2010			2009


Asset retirement obligations at beginning of year	$	120,271		$	62,872
Additions for exploratory and development drilling		--			--
Additions (subtractions) due to changes in estimates		(16,191	)		39,713
Accretion expense		12,027			17,686

Asset retirement obligations at end of year	$	116,107		$	120,271

F-12

NOTE 6 – NOTES RECEIVABLE

Receivables outstanding at May 31,2010 and 2009 are as follows:


	2010		2009

(1) Note receivable from Wilkerson	$	335,000	$	--
(2) Note receivable from Marlowe		15,000		--

	$	350,000	$	--

(1) In October 2009, Exterra loaned Wilkerson, an individual, $335,000 in connection with an agreement with Wilkerson that Exterra and Wilkerson will be equal partners in the ownership and operations of all ranches, developments and oil fields owned by Wilkerson and Wilkerson’s affiliates to the agreement. If Exterra decided to proceed with the joint venture, the loan would be applied against the total purchase price. Exterra later decided not to go forward with the joint venture. As a result, the note became due 90 days after execution of the agreement. As of May 31, 2010 no payments on the principal have been received. The note is collaterized by land valued at approximately $4.5 million. The note bears a 10% annual interest rate. As of May 31, 2010, interest income of $22,300 has been recorded of which $4,800 has not been paid and therefore recorded as interest receivable.

(2) In October 2009, Exterra loaned Marlowe, an individual, $15,000 bearing interest at 10 percent. This loan is collateralized by 8,000 shares of Exterra Energy, Inc., Common restricted Stock. One payment of $16,500 is due September 2010 with $15,000 being principal and $1,500 being interest. As of May 31, 2010, interest income of $1,000 has been recorded with a corresponding $1,000 amount in interest receivable.

NOTE 7 - NOTES PAYABLE

Debts outstanding at May 31, 2010 and 2009 are as follows:


	2010		2009

(1) Note payable to purchase oil and gas properties	$	200,000	$	200,000
(2) Convertible loans		367,500		367,500
(3) Note payable to Coventry Capital		462,125		462,125
(4) Note payable to RoyalCo Finance		20,000		30,000
(5) Line of credit with Happy State Bank		1,324,750		--

	$	2,374,375	$	1,059,625

(1) Principal and interest (10% per annum) on the note are payable on the tenth (10th) day of each calendar month, beginning on January 10, 2007, in monthly installments equal to the difference between the prior month's (i) income and (ii) the royalties, severance, ad valorem, lifting and transportation expenses directly related to the operation of the Pecos County leases. Each monthly installment will be applied first to any outstanding and accrued interest and, thereafter, to principal on the note. The note payable is secured by the Pecos

County leases and 6,000 shares of the Company's restricted common stock. The Company has accrued $60,000 and $80,000 in interest on the note payable as of May 31, 2009 and 2010. The entire principal amount outstanding under the note and all accrued interest thereon was due and payable on July 15, 2008. As the Company is unable at present to pay the balances due, we are seeking an extension from the Lender. There are no guarantees these discussions will be successful.

F-13

(2) During the year ended May 31, 2007, the Company received $367,500 from the sale of its Convertible Loans. The Convertible Loans were due June 30, 2008 and bear interest at 10% per annum payable quarterly. In addition, 10% of the face value of the Convertible Loans are due to the holders as a revenue sharing bonus. This bonus is due from initial production revenue realized for the first six months of net revenue from the University Lands, Pecos County, Texas. Furthermore, 3,342 common shares in aggregate were issued as a bonus. These bonus shares are restricted from sale for 2 years . The Convertible Loans are convertible into common shares of the Company at $45 per share for a total of 8,167 common shares. The common shares from the conversion are subject to a "pooling arrangement", whereby the shares will be released in equal installments over a 6 month period. The Company is currently negotiating an extension with the Convertible Loan Holders. There are no guarantees these negotiations will be successful. The Company has accrued interest at May 31, 2009 and 2010 of $48,645 and $85,395.

Through May 31, 2010 a net revenue sharing bonus has not been paid as the University Lands have yet to yield net revenue.

The Company may force conversion of the Convertible Loans into common shares. This will only occur if the Company's common shares trade at $120 per share or more for a period of 90 consecutive days, or if the Company completes a stock offering for $3 million at a price of $90 per share or higher. As of the date of this filing, neither of these triggers have occurred.

(3) Principal and interest (18% per annum) due monthly in blended payments of $20,000 commenced December 7, 2007. The loan is secured by certain oil and gas properties and was due May 7, 2008. The Company has accrued $103,183 and $176,245 in interest as of May 31, 2009 and 2010. In September 2009, the Company negotiated a preliminary settlement agreement for this note that would result in the issuance of 5,000,000 shares of common stock for full settlement of the amounts owed. As described in Note 11, this agreement resulted in the recognition of an approximately $918,000 debt settlement charge and did not extinguish the note payable.

(4) Principal and interest (10% per annum) is un-secured and due April 15, 2010. The Company has accrued $500 and $2,750 in interest as of May 31, 2009 and 2010.

(5) In September 2009, Exterra entered into a $10,000,000 bank line of credit. The line of credit is subject to an initial borrowing base limitation of $1,475,000 and is secured by Exterra’s interests in various oil and gas leases originally acquired in October of 2007. The borrowing base limitation is equal to the value that the bank assigns to the collateral pledged by Exterra and is redetermined semi-annually. The loan proceeds are to be used for oil and gas investments, development of oil and gas properties and working capital associated with operating oil and gas properties. The line of credit’s balance is $1,324,750 as of May 31, 2010.

NOTE 8 - COMMON STOCK

Common Stock

During fiscal year May 31, 2010, the Company consummated the following

transactions:

06/22/2009 Issued 15,000 common shares at $2.25 per share for attorney services

09/14/2009 Issued 612,053 common shares for settlement of debt (See Note 11)

12/21/2009 Issued 29,867 common shares at $2.25 per share for a legal settlement (see Note 11)

03/24/2010 Issued 300,000 common shares at $1.05 per share for investor relations services

05/10/2010 Issued 50,000 common shares at $1 per share to an employee for cash

As of May 31, 2010, 7,500 shares of common stock were held by an attorney in escrow for possible future payment of fees. The shares used as payment of fees if Exterra fails to pay in cash. If Exterra pays all fees in cash, the shares will be returned. Also, 6,000 shares of common stock were in escrow in conjunction with the oil and gas purchase note payable described in Note 7. None of these shares held in escrow were included as outstanding as of May 31, 2010.

F-14

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

transactions:

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

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

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

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

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

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

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

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

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

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

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

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

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

03/13/2009 In a related party transaction as discussed in Note 4, issued 739,059 shares valued at $3.60 per share to acquire a working interest in a salt water disposal well from RoyalCo Oil and Gas Corporation

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

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

05/18/2009 In a related party transaction as discussed in Note 4, Issued 5,603,577 shares valued at $3.60 per share to acquire oil and gas working interests from RoyalCo Oil and Gas Corporation

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

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

As of May 31, 2009, 6,000 shares of common stock were in escrow in conjunction with the oil and gas purchase note payable described in Note 7. None of these shares held in escrow were included as outstanding as of May 31, 2009.

F-15

NOTE 9 - WARRANTS OUTSTANDING AND EXERCISED

A total of 32,242 common stock warrants were outstanding as of May 31, 2008 with an aggregate intrinsic value of $459,000 and a weighted average remaining life of 1.54 years.

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

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

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

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

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

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

In March 2010, Exterra granted 1,200,000 common stock warrants exercisable for five years at $0.05 per share for consulting services related to investor relations. The warrants vest after one year and an expense of $569,622 has been recorded for the fiscal year ended May 31, 2010 in relation to these warrants. As of May 31, 2010, unrecognized consulting expense related to these warrants is approximately $1,708,865. The formal measurement date for these instruments has not yet occurred as the services to be provided are not complete and there is no performance commitment. As such, for purposes of recognition of costs during those periods the warrants will be measured at their then fair value at each of the interim financial reporting dates. None of these warrants were exercised as of May 31, 2010. In June 2010, this agreement was amended to increase the total warrants granted 1,500,000. Subsequent to May 31, 2010, 625,000 shares of common stock were issued upon exercise of these warrants, however the shares issued are subject to the same vesting conditions as the original warrants and therefore cannot be sold until the March 2011. Exterra used the Black-Scholes option pricing model to value these warrants. Assumptions used at the reporting date to value these warrants included (1) 2.28% risk-free interest rate, (2) warrant life is the remaining contractual life of the warrants, (3) expected volatility of 250%, (4) zero expected dividends (5) exercise prices as set forth in the agreements, (6) common stock price of the underlying share on the valuation date, and (7) number of warrants as set forth in the agreement.

NOTE 10 - IMPAIRMENT OF OIL AND GAS PROPERTIES

Due to the fall in oil and natural gas prices, Exterra evaluated its oil and gas properties under ASC 360-10 as of November 30, 2008 to determine if they were impaired. Based on the analysis, Exterra recognized an impairment loss of $1,207,558 as of November 30, 2008.

As of May 31, 2009, Exterra again analyzed its oil and gas properties for impairment under ASC 360-10 and determined an additional impairment loss of $2,313,065 should be recognized for the year ended May 31, 2009.

As of May 31, 2010, Exterra again analyzed its oil and gas properties for Impairment under ASC 360-10 and determined an additional impairment loss of $145,372 should be recognized for the year ended May 31, 2010.

F-16

NOTE 11 - COMMITMENTS AND CONTINGENCIES

In March 2010, the Company entered into a verbal rent agreement with ROYALCO Oil and Gas, a related party. The payment is $4,300 per month as long as the offices are being used. For the fiscal year ending May 31, 2010, the Company incurred $34,000 related to this office rental.

Litigation

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

material loss:

At May 31, 2010, the following litigation is pending:

1. Warrior Energy Services Corporation d/b/a Bobcat Pressure Control v.

Exterra Energy, Inc.; United States District Court, Northern District of

Texas, Fort Worth Division (May 2009).

a. Plaintiff is suing the Company for $287,850.86 plus attorneys’ fees

and interest relating to services performed. The Company did not

contract with the Plaintiff and did not operate the wells of which

the services were performed.

b. An answer has been filed on behalf of the Company.

c. Management's intends to attempt to resolve this matter.

As of May 31, 2010, Exterra has made no accrual related to this case because management has determined an unfavorable outcome is not probable.

In addition to the above litigation, Exterra has been named in several cases

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

question.

Management efforts to resolve all these matters will include litigation and

settlement negotiation.

A settlement between Exterra and a third party vendor was made during the fiscal year ended May 31, 2010. This settlement resulted in a $20,000 accrual of debt settlement expense.

F-17

NOTE 12 - INCOME TAXES

Reconciliation between actual tax expense (benefit) and income taxes computed by applying the U.S. federal income tax rate and state income tax rate to income from continuing operations before income taxes are as follows:


	May 31, 2010			May 31, 2009

Computed at U.S. and State statutory rates (34%)	$	(1,145,000	)	$	(1,759,000	)
Permanent differences		90,000			1,409,000
Changes in valuation allowance		1,055,000			350,000

Total	$	--		$	--

Tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred liabilities are presented below:


	May 31, 2010			May 31, 2009

Deferred tax assets:
Net operating loss carryforwards	$	2,304,000		$	1,249,000
Less valuation allowance		(2,304,000	)		(1,249,000	)

Total	$	--		$	--

At May 31, 2010, Exterra Energy, Inc. had a net operating loss carryforwards for federal and state income tax purposes of approximately $6,776,000 which will begin to expire, if unused, beginning in 2027. As a result of the change in control that occurred during 2009, the tax benefit of unused net operating losses prior to March 2009 may be limited by section 382 of the Internal Revenue Code.

The above estimates are based upon management's decisions concerning certain elections which could change the relationship between net income and taxable income. Management decisions are made annually and could cause the estimates to vary significantly.

NOTE 13 - RELATED PARTY TRANSACTIONS

In March of 2009, the Board of Directors negotiated two asset purchases from ROYALCO Oil & Gas Corporation (see Note 4). ROYALCO Oil and Gas is a private oil and gas company in Texas that is owned and controlled by Robert and Todd Royal, who became officers and directors of Exterra in February of 2009. At the time of the negotiations, Robert and Todd Royal controlled a majority of the Board of Directors and accordingly these asset purchases were accounted for as transactions between entities under common control.

In addition, during the year ended May 31, 2009, ROYALCO Oil and Gas loaned $30,000 to Exterra. See Note 6 for details.

During the fiscal year ended May 31, 2010, ROYALCO Oil and Gas loaned $30,000 to Exterra. Exterra paid ROYALCO Oil and Gas back $40,000 during the fiscal year 2010 which left the balance as $20,000 owed to ROYALCO Oil and Gas at year ended May 31, 2010.

During the fiscal year ended May 31, 2010, the Company paid ROYALCO Oil and Gas a total of $34,000 in rent expense.

F-18

NOTE 14 - SUBSEQUENT EVENTS

Subsequent to May 31, 2010, Exterra issued 185,000 shares of common stock for services to third parties.

In July 2010, Exterra issued 625,000 shares of common stock for exercise of a warrant at $0.05 per share.

In August 2010, Exterra issued 59,945 shares of common stock for conversion of $50,000 of note payable to Coventry Capital described in Note 7.

As disclosed in note 9, Exterra amended an agreement with a third party investor relations firms to increase the total number of warrants granted to purchase Exterra common stock from 1,200,000 to 1,500,000. In addition, 625,000 of these common stock warrants were exercised in August of 2010.

In August 2010, a debt settlement between Exterra and a former officer was made for prior year compensation. 75,000 restricted shares of Exterra stock were issued as settlement with the underlying guarantee that the former employee will receive a total of $154,500 either by stock sales or cash from Todd and Robert Royal personally. As of May 31, 2010, an accrual of $154,500 has been made in relation to this settlement.

F-19

SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES

(UNAUDITED)

The following supplemental unaudited information regarding The Company's oil and gas activities is presented pursuant to the disclosure requirements of FASB ASC 932-235. The standardized measure of discounted future net cash flows is computed by applying constant prices of oil and gas to the estimated future production of proved oil and gas reserves, less estimated future expenditures (based on period-end costs) to be incurred in developing and producing the proved reserves, less estimated future income tax expenses (based on period-end statutory tax rates) to be incurred on pre-tax net cash flows less tax basis of the properties and available credits, and assuming continuation of existing economic conditions. The estimated future net cash flows are then discounted using a rate of 10 percent to reflect the estimated timing of the future cash flows.

(1) Capitalized Costs Relating to Oil and Gas Producing Activities:

	At			At
	May 31, 2010			May 31, 2009
Proved oil and gas producing properties and
related lease and well equipment	$	10,629,455		$	10,600,338

Accumulated depreciation,depletion and impairment		(8,448,728	)		(8,221,144	)


Net Capitalized Costs	$	2,180,727		$	2,379,194

(2) Costs Incurred in Oil and Gas Property Acquisition, Exploration, and Development Activities:


	For the Year Ended		For the Year Ended
	May 31, 2010		May 31, 2009
Acquisition of Properties
Proved	$	29,243	$	856,035
Unproved		--		--
Exploration Costs		--		--
Development Costs		--		--

Total	$	29,243	$	856,035

All operations of The Company are located in the United States.

F-20

(3) Results of Operations for Producing Activities:

	For the Year			For the Year
	Ended			Ended
	May 31, 2010			May 31, 2009

Sales	$	305,505		$	437,968
Production costs		(152,339	)		(298,507	)
Depreciation, depletion and impairment		(218,725	)		(3,719,192	)

Income tax expense		--			--

Results of operations for producing activities
(excluding corporate overhead and interest costs	$	(65,559)		$	(3,579,731	)

(4) Reserve Quantity Information

	Oil		Gas
	(BBL)		(MCF)


May 31, 2009	215,750		6,841,550
Revisions of previous estimates for improved recovery	(3,705	)	1,357,915
Purchases of minerals in place	16,610		774,400
Extensions and discoveries	--		--
Production	(205	)	(51,415	)
Sales of minerals in place	--		--

May 31, 2010*	228,450		8,922,450

* Proved Developed Producing Reserves are 12,040 Barrels of Oil and 0.497 BCF of gas.

During the year ended May 31, 2010, The Company had reserve studies and estimates prepared on its various properties. The difficulties and uncertainties involved in estimating proved oil and gas reserves makes comparisons between companies difficult. Estimation of reserve quantities is subject to wide fluctuations because it is dependent on judgmental interpretation of geological and geophysical data.

(5) Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves

	May 31, 2010			May 31, 2009

Future cash inflows	$	58,257,870		$	37,794,640
Future production		(13,956,890	)		(9,278,880	)
Future development costs		(13,934,640	)		(13,430,060	)
Future income tax expense		(7,278,373	)		(3,067,699	)

Future net cash flows		23,087,967			12,018,001
Discounted for estimated timing of
cash flows		(14,554,624	)		(7,219,833	)
Standardized measure of discounted
future net cash flows	$	8,533,343		$	4,798,168

F-21

Future income taxes were determined by applying the statutory income tax rate to future pre-tax net cash flow relating to proved reserves.

The following schedule summarizes changes in the standardized measure of discounted future net cash flow relating to proved oil and gas reserves:

	Years ended May 31,

	2010			2009


Standardized measure, beginning of year	$	4,798,168		$	7,588,547
Extensions, discoveries and improved recovery		--			--
Revisions of previous estimates		728,146			(1,234,061	)
Purchases of minerals in place		1,456,930			5,260,836
Sales of minerals in place		--			--
Net change in prices and production costs		2,519,653			(3,108,416	)
Accretion of discount		602,296			--
Oil and gas sales, net of production costs		(153,166	)		(139,461	)
Changes in estimated future development costs		46,635			(682,272	)
Previously estimated development cost incurred		--			--
Net change in income taxes		(1,465,318	)		(2,887,005	)
Change in timing of estimated future production		--			--

Standardized measure, end of year	$	8,533,343		$	4,798,168

The above schedules relating to proved oil and gas reserves, standardized measure of discounted future net cash flows and changes in the standardized measure of discounted future net cash flows have their foundation in engineering estimates of future net revenues that are derived from proved reserves and prepared using the prevailing economic conditions. These reserve estimates are made from evaluations conducted by independent geologists, of such properties and will be periodically reviewed based upon updated geological and production data. Estimates of proved reserves are inherently imprecise. The above standardized measure does not include any restoration costs due to the fact the Company does not own the land.

Subsequent development and production of the Company's reserves will necessitate revising the present estimates. In addition, information provided in the above schedules does not provide definitive information as the results of any particular year but, rather, helps explain and demonstrate the impact of major factors affecting the Company's oil and gas producing activities. Therefore, the Company suggests that all of the aforementioned factors concerning assumptions and concepts should be taken into consideration when reviewing and analyzing this information.

F-22

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the "Act") is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. As of the end of the period covered by this Annual Report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our CEO and CFO have concluded that our disclosure controls and procedures are not effective because of the identification of a material weakness in our internal control over financial reporting which is identified below, which we view as an integral part of our disclosure controls and procedures. This annual report does not include an

attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Our internal controls were not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management report in this annual report.

Management’s Annual Report on Internal Control over Financial Reporting

We have not yet made any changes in our internal controls over financial reporting that occurred during the period covered by this report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes, in accordance with generally accepted accounting principles. Because of inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to change in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria as required by Section 404 of the Sarbanes-Oxley Act, management, including testing using the criteria in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on its evaluation, our management concluded that there is a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.

The material weakness relates to the lack of segregation of duties in financial reporting, as our financial reporting and all accounting functions were performed by our Chief Financial Officer, who left Exterra on March 4, 2009 and since that point, by an external project accountant. Our CEO does not possess accounting expertise and our Company does not have an audit committee. This weakness was due to our lack of working capital to hire additional staff during the period covered by this report. We intend to hire additional accounting

personnel to assist with financial reporting as soon as our finances will allow.

The Company's management based its evaluation on criteria set forth in the framework in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, management has concluded that the Company's internal control over financial reporting was not effective as of May 31, 2010.

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

Changes in Internal Controls over Financial Reporting

There have been no changes in our internal controls over financial reporting or in other factors that could materially affect, or are reasonably likely to affect, our internal controls over financial reporting during the year ended May 31, 2010. There have not been any significant changes in the Company's critical accounting policies identified since the Company filed its Form 10-K as of May 31, 2009.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVES OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

The following table sets forth the names, ages, and offices held by our directors and executive officers as of the end of our fiscal year:

Name	Position	Director Since	Age

Robert Royal	Chairman of the Board,	February 25, 2009	74
	Secretary and Director

Todd R. Royal	Chief Executive Officer, President,	February 25, 2009	39
	and Director

Frank Simmen	Director	October 24, 2007	53


Mark McBryde	Consultant Engineer	N/A

Nick Steinsberger	Consultant as Company Engineer	N/A

Ray Ledesma, *	Former Chief Operating Officer,	December 5, 2006	57
	President and Director

John Punzo, *	Former Chief Executive Officer,	July 1, 2008	54
	Chairman of the Board, and Director

Randall K. Boatright***	Former Chief Financial Officer,	December 1, 2007	61
	Executive Vice President and Director

James D. Romano***	Former Secretary, Treasurer and	November 14, 2006	53
	Director

Gordon C. McDougall***	Former Director	December 22, 2006	55

Robert Royal, age 74, is and has been since its founding in 1995 the CEO and Chairman of Royalco Oil and Gas Corporation ("Royalco"), a private oil and gas company headquartered in Weatherford, Texas. Mr. Royal has over 30 years experience in the oil & gas industry, real estate and the financial markets. Mr. Royal was the CEO and President of IGE, an oil and gas company which did a reverse merger into Life Partners Holdings (LPHI), a publically reporting company. Mr. Royal is not currently serving on the board of directors of any publicly traded companies. Mr. Royal is Todd Royal's father.

Todd R. Royal, age 39, is and has been since its founding in 1995 the President and Director of Royalco. Mr. Royal is a Texas Tech University graduate with significant experience in marketing and public relations. Mr. Royal is not currently serving on the board of directors of any publicly traded companies,

Mr. Royal is Robert Royal's son.

Mark McBryde earned a BS in Petroleum Engineering from Texas Tech University graduating Magna Cum Laude in 1996. Prior to consulting with Exterra, Mr. McBryde served as President of SkyBridge Energy LLC, operating in north-central Texas since 2007. He has over 20 years experience in field operations and petroleum engineering having spent time in the field prior to advancing his education. Prior to SkyBridge Energy he worked for Anadarko Petroleum and Southwestern Energy. He has domestic and overseas engineering experience having worked many different onshore assets as well as, the world class fields of Algeria. He last held the position of Texas Gulf Coast Production Engineering Manager responsible

for oversight of Anadarko's Austin chalk and gulf coast properties.

Nick Steinsberger ranks as one of the most knowledgeable Professionals in the Barnett Shale Play. Nick helped Pioneer the Barnett Shale and developed the slick water frac that is used today. Also, while with Mitchell Energy/Devon, Nick developed and drilled the first horizontal wells in the Newark East field. Nick oversees all field operations and well completion from start to finish.

Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers.

* On April 4, 2008, Mr. McDougall resigned as an officer of the Company, but remained on the Board of Directors. On June 23, 2008, Mr. McDougall resigned as a Director of the Company.

** On July 1, 2008, Mr. John Punzo was appointed Chairman of the Board and Chief Executive Officer. Mr. Ledesma resigned as Chief Executive Officer and was appointed Chief Operating Officer; he remained President until February 25, 2009.

*** February 25, 2009 that Mr. Robert Royal was named Chairman of the Board of Directors, Chief Executive Officer and Director and that Mr. Todd R. Royal was named as President, Corporate Secretary and Director. Mr. John Punzo resigned as Chairman of the Board, Chief Executive Officer and Director, Mr. James D. Romano resigned as Corporate Secretary and Director and Mr. Randall K. Boatright resigned as Director, Chief Financial Officer, yet remained as Interim Chief Financial Officer, and Executive Vice President and been appointed interim Chief Financial Officer. Messrs. Punzo, Romano and Boatright have no disagreement with the Company on any matters relating to the Company's operations, policies or

practices. The Company announces that effective March 4, 2009 that Mr. Randall K. Boatright resigned as interim Chief Financial Officer. Mr. Boatright has no disagreement with the Company on any matters relating to the Company's operations, policies or practices.

All directors hold office until the next annual meeting of stockholders and until their successors have been duly elected and qualified. There are no agreements with respect to the election of directors. We have compensated our independent director for service by the issuance of 325,000 restricted common shares of the Company. The Board of Directors and the directors are reimbursed for expenses incurred for attendance at meetings of the Board and any committee thereof. Executive officers are appointed annually by the Board and each

executive officer serves at the discretion of the Board.

The business experience of each of the persons listed above during the past five years is as follows:

John Punzo, former Chairman, CEO & Director*

Since 1981, Mr. Punzo has served as a Director and as President or Chief Executive Officer of several businesses. During this time, Mr. Punzo played a key role in launching, directing and obtaining the funding for a few of these entities into the public markets. Mr. Punzo has assembled a successful team of energy experts, along with experienced accountants, financial and legal advisors to assist his efforts. His experience and corporate leadership, combined with his dedication to ensuring strict compliance and adherence to the rules and

regulations of the Securities and Exchange Commission, are a matter of record. In 2002, Mr. Punzo led the restructuring of Sonoran Energy, Inc. into a successful energy company. He departed in 2004 to further develop his energy consultancy and private management group. Most recently, Mr. Punzo was CEO of Wentworth Energy Inc., an East Texas oil and gas exploration company. His experience and corporate leadership, combined with his prior knowledge of the oil and gas industry, make Mr. Punzo not only qualified, but also fully

committed to establish Exterra Energy as an industry leader in the oil and gas sector.

Ray Ledesma, former President, COO, & Director*

Mr. Ledesma, who has served as a director of Exterra since December 2006, is President of Star Of Texas Energy Services, Inc. He also serves as President of The Legacy Corporation, Hydro-FX, Inc., Star Of Texas Mineral Resources, LLC and is a Managing Member of Barnett Holding, LLC. These entities are in stages of divesting their assets an are not a distraction or burden on his services to Exterra. He is a graduate of Rice University with a BS in Chemical Engineering in 1977. He began his career with Amoco Production Company where he was

re-trained as a petroleum reservoir engineer. Mr. Ledesma is the founder of Star Of Texas Energy Services, Inc. He has structured and funded drilling programs that have resulted in over 200 wells and the discovery of five (5) new gas fields. He has drilled and completed over 90 Barnett Shale Wells since 2001. Other experiences of note include providing drilling and engineering consulting services in deep gas plays of western Oklahoma, the Vicksburg gas trend of Starr and Hidalgo Counties, Texas, as well as the Miocene, Frio and Yegua gas trends of the Texas Gulf Coast.

Randall K. Boatright, former CFO, EVP & Director

Most recently Mr. Boatright served as Interim President and Chief Executive Officer, Chief Financial Officer and Director of Dexterity Surgical, Inc. He has extensive experience in the energy business as he was formerly Executive Vice President, Chief Financial Office and Director of Abraxas Petroleum Corporation (AMEX:ABP) and Controller of a large private independent oil & gas company. Prior to that, Mr. Boatright practiced accounting with the firm of Coopers & Lybrand LLP. He is a Certified Public Accountant and a graduate of the College of William & Mary in Virginia.

James D. Romano, former Corporate Secretary & Director

Mr. Romano has served as an officer and director of Exterra Energy, Inc. since November 2006. Prior to joining the Company, Mr. Romano founded Horizon Industries Ltd. ("Horizon") in 2003, where he aggressively launched the Company into the oil and gas business in the United States. Mr. Romano acted as President and Director of Horizon, where he led the company through its formative stage to production and cash flow. Mr. Romano resigned as an officer of Horizon in November, 2005 and as a director in February, 2006. For the past

15 years, Mr. Romano has been involved in the management, strategic planning, corporate communications and financing of companies in the oil and gas, as well as mining sectors. He has been instrumental in the due diligence and financing of project acquisitions. Mr. Romano brings a diverse 30 years of business and entrepreneurial skills to the Company.

Frank Simmen, Director

Since graduating from the University of Texas in 1980 with a Bachelor of Business degree, Mr. Simmen has been involved solely in the oil and gas industry. He began his 27 years of experience as a landman with Ballard Exploration in Houston, Texas. There he concentrated in South Texas, Gulf Coast and in Louisiana overseeing leasing, drilling, completion and operation of wells as well as executing acquisitions, divestitures and negotiating farm-ins and farm-outs with major oil companies. Prior to founding his own company, Jackson

and Simmen Drilling, Inc., he served 12 years from 1998-2003 as Vice President with McCarthy Oil and Gas. Having a broad knowledge of leasing, drilling and production of oil and natural gas, Mr. Simmen purchased a drilling rig in the Fort Worth Basin in 2003 and formed Jackson and Simmen Drilling. His present company, Wolf Island Oil and Gas, L.P., concentrates in the Fort Worth Basin seeking production and exploration opportunities.

July 1, 2008, Mr. John Punzo was appointed Chairman of the Board and Chief Executive Officer. Mr. Ledesma resigned as Chief Executive Officer and was appointed Chief Operating Officer; he remained President.

Audit Committee Financial Expert

The Company does not have an audit committee or a compensation committee of its board of directors. In addition, the Company’s board of directors has determined that the Company does not have an audit committee financial expert serving on the board. When the Company develops its operations, it will create an audit and a compensation committee and will seek an audit committee financial expert for its board and audit committee.

Conflicts of Interest

Members of our management are associated with other firms involved in a range of business activities. Consequently, there are potential inherent conflicts of interest in their acting as officers and directors of our company. Although the officers and directors are engaged in other business activities, we anticipate they will devote an important amount of time to our affairs.

Our officers and directors are now and may in the future become shareholders, officers or directors of other companies, which may be formed for the purpose of engaging in business activities similar to ours. Accordingly, additional direct conflicts of interest may arise in the future with respect to such individuals acting on behalf of us or other entities. Moreover, additional conflicts of interest may arise with respect to opportunities which come to the attention of such individuals in the performance of their duties or otherwise. Currently, we do not have a right of first refusal pertaining to opportunities that come to their attention and may relate to our business operations.

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

Compliance with Section 16(A) Of The Exchange Act 9.A. Directors And Executive Officers, Promoters, And Control Persons:

As of May 31, 2010, the Company is aware that all filings of Form 4 and 5 required of Section 16(a) of the Exchange Act of Directors, Officers or holders of 10% of the Company's shares have not been timely.

Code of Ethics

We have adopted a code of ethics that applies to all of our executive officers, directors and employees. Code of ethics codifies the business and ethical principles that govern all aspects of our business. This document will be made available in print, free of charge, to any shareholder requesting a copy in writing from the Company. A form of the code of conduct and ethics was filed as Exhibit 14.1 to this Annual Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

Compensation Discussion & Analysis

We compensate our executive officers through a combination of base salary and equity based awards. The compensation is designed to be competitive and to alignthe interests of our executive officers with the interests of our stockholders.

This section discusses our executive compensation decisions. It provides qualitative information regarding the manner and context in which compensation is awarded and earned by our Executive Officers.

Compensation Committee

The Company does not currently have a Compensation Committee. Our Board of Directors approves, implements and monitors all compensation and awards to Executive Officers including the Chief Executive Officer, Chief Financial Officer and the other Executive Officers named in the Summary Compensation Table below, all of whom we refer to as the Executive Officers or named executive officers. In the near future, the Company plans to establish a Compensation Committee and membership will be determined by the Board of Directors. This

Committee will be composed of independent, non-management directors. It is envisaged that this Committee, in its sole discretion, will have the authority to delegate any of its responsibilities to subcommittees as it deems appropriate.

Compensation Philosophy and Objectives

Our underlying philosophy in the development and administration of Exterra's annual and long-term compensation plans is to align the interests of our Executive Officers with those of Exterra's stockholders.

The compensation currently paid to Exterra's Executive Officers consists of two main elements: base salary and equity based awards. We believe these elements support our underlying philosophy of aligning the interests of our Executive Officers with those of Exterra's stockholders by providing the Executive Officers a competitive salary, as well as equity-based incentives to ensure motivation over the long-term.

Exterra does not have any other deferred compensation programs or supplemental executive retirement plans and no perquisites are provided to Exterra's Executive Officers that are not otherwise available to all employees of Exterra.

Elements of Executive Compensation

Executive compensation consists of the following elements:

Base Salary. In determining base salaries for the Executive Officers of Exterra, we aim to set base salaries at a level we believe enables us to hire and retain individuals in a competitive environment and to reward individual performance and contribution to our overall business goals.

The base salaries paid to our named Executive Officers in Fiscal 2010 are set forth below in the Summary Compensation Table. For Fiscal 2009, base salaries, paid as cash compensation, were $382,200. We believe that the base salaries paid achieved our objectives.

The Board approved the following base salaries for Fiscal 2010 as detailed in the table below:

Base

Bonus Award Achieved

Maximum Award (Percentage

Annual Bonus

Name

Salary (1)

(Percentage of Salary)

of Salary)

Awarded

Robert Royal

300,000

N/A

$Nil

Todd Royal

300,000

N/A

$Nil

John Punzo (3)

Nil

N/A

$Nil

Ray Ledesma (4)

Nil

N/A

$Nil

Randall K. Boatright (5)

Nil

N/A

$Nil

James D. Romano (6)

Nil

N/A

$Nil

Gordon McDougall (7)

Nil

N/A

$Nil

The Company announces that effective February 25, 2009 that Mr. Robert Royal was named Chairman of the Board of Directors, Chief Executive Officer and Director

and that Mr. Todd R. Royal was named as President, Corporate Secretary and Director.

(1) All of the Executive Officers of the Company have agreed to defer a portion of their Base Salary. All current Executive Officers of the Company are also members of the Board of Directors.

(2) The Company announces that effective February 25, 2009 that Mr. Robert Royal was named Chairman of the Board of Directors, Chief Executive Officer and Director and that Mr. Todd R. Royal was named as President, Corporate Secretary and Director. Mssrs. Royal each are to receive Base Salary of $300,000 per year.

(3) Mr. Punzo joined the Company on July 1, 2008 as Chairman & CEO, therefore no compensation was paid in Fiscal 2008. Per his Management Consulting Agreement, Mr. Punzo was to receive a Base Salary of $150,000.00 per year. Mr. Punzo resigned February 24, 2009.

(4) Mr. Ledesma became an Executive of the Company on October 17, 2007 as CEO (he then resigned as CEO to accommodate the appointment of Mr. Punzo; he then held the positions of President & COO). Per his Employment Agreement, Mr. Ledesma was to receive a Base Salary of $150,000.00 per year. Mr. Ledesma had agreed to defer his entire compensation to allow the Company to conserve cash. Mr. Ledesma resigned February 24, 2009.

(5) Mr. Boatright joined the Company on December 1, 2007 as EVP and CFO. Per his Management Consulting Agreement, Mr. Boatright was to receive a Base Salary of $129,600.00 per year. Mr. Boatright resigned February 24, 2009.

(6) Mr. Romano joined the Company on November 14, 2006 as President and CEO (subsequently he has resigned from these positions and then was Corporate Secretary and Treasurer). Per his Management Consulting Agreement, Mr. Romano was to receive a Base Salary of $129,600.00 per year. Mr. Romano resigned February 24, 2009.

(7) Mr. McDougall resigned as an Executive Officer of the Company on April 4, 2008 and as a Director subsequent to the fiscal year-end on June 23, 2008. Mr. McDougall was receiving $129,600.00 per year.

Currently all Executive Officers of the Company Salaries are being accrued. Subsequent to the fiscal year end, Mr. Romano elected to convert $60,000 of his outstanding accrual into restricted shares in the Company.

Equity Incentives. The Executive Officers received restricted stock awards as a one-time equity incentive. During Fiscal 2008, Mr. Ledesma received 1,200,000 restricted shares; Mr. Boatright received 1,000,000 restricted shares; Mr. Romano received 1,020,000 restricted shares; and Mr. McDougall received 1,020,000 restricted shares. Mr. Punzo received 1,000,000 restricted shares All of these restricted stock issuances are one time stock incentive bonuses.

Employee Plan

Exterra does not currently have an Employee Plan.

Employment Contracts, Change-In-Control Arrangements and Certain Other Matters. We provide the opportunity for our executive officers to be protected under the severance and change in control provisions contained in their employment agreements. We believe that these provisions help us to attract and retain an appropriate caliber of talent for the position. Our severance and change in control provisions for the executive officers are summarized in their respective Employment Agreements.

Other Employee Benefits. Exterra does not currently have an employee benefit plans, such as medical, dental, group life and long-term disability insurance.

Fiscal 2010 Compensation Decisions

Base Salaries. No increases in Base salaries are planned for Fiscal 2010.

Equity Incentives. No further equity incentives are planned for Fiscal 2010.

Impact of Regulatory Requirements

Deductibility of Executive Compensation. In 1993, the federal tax laws were amended to limit the deduction a publicly-held company is allowed for compensation paid to the chief executive officer and to the four most highly compensated executive officers other than the chief executive officer. Generally, amounts paid in excess of $1 million to a covered executive, other than performance-based compensation, cannot be deducted. In order to constitute performance-based compensation for purposes of the tax law, stockholders must approve the performance measures. Since Exterra does not anticipate that the compensation for any executive officer will exceed the $1 million threshold in the near term, stockholder approval necessary to maintain the tax deductibility of compensation at or above that level is not being requested. We will reconsider this matter if compensation levels approach this threshold, in light of the tax laws then in effect. We will consider ways to maximize the deductibility of executive compensation, while retaining the discretion necessary to compensate executive officers in a manner commensurate with performance and the competitive environment for executive talent.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The table below sets forth the information indicated regarding ownership of the Company's common stock, $0.001 par value, the only outstanding voting securities, as of May 31, 2010 with respect to: (i) any person who is known to the Company to be the owner of more than five percent (5%) of the Company's common stock; (ii) the common stock of the Company beneficially owned by each of the directors of the Company and (iii) by all officers and directors as a group. Each person has sole investment and voting power with respect to the shares indicated, except as otherwise set forth in the footnotes to the table.

Security Ownership of Certain Beneficial Owners

	Amount and Nature of	Percent
Name and Address of Beneficial Owner	Beneficial Ownership	of Class

Robert Royal	3,171,368(1)	45.07%
4802 Mineral Wells Hwy
Weatherford, Texas 76088

Todd R. Royal	3,171,367(2)	45.07%
7611 Southwood Drive
Amarillo, Texas 79119

Ray Ledesma	168,737(3)	2.39%
1717 St. James Street, Suite 205
Houston, Texas 77056

James D. Romano	20,202(4)	0.28%
1717 St. James Street, Suite 205
Houston, Texas 77056

John Punzo	16,768	0.24%
16149 Morgan Creek Crescent
Surrey, BC, V3S 0J2

Randall K. Boatright	16,767	4%
1717 St. James Street, Suite 205
Houston, Texas 77056

Frank Simmen	5,518	0.07%
1717 St. James Street, Suite 205
Houston, Texas 77056

All Officers and Directors as a Group	6,570,727	38%

(1) Robert Royal directly owns -0- restricted common shares (0.0%), RoyalCo, Inc. directly owns 6,342,735 restricted common shares (90.14%). Mr. Robert Royal holds 50% shares of RoyalCo, Inc.

(2) Todd R. Royal directly owns -0- restricted common shares (0.0%), RoyalCo, Inc. directly owns 6,342,735 restricted common shares (90.14%). Mr. Todd R. Royal holds 50% shares of RoyalCo, Inc.

(3) Ray Ledesma directly owns 36,769 restricted common shares (0.052%), Star of Texas Energy Services, Inc. directly owns 767 restricted common shares (0.01%), Star of Texas Minerals Resources LLC directly owns 10,434 restricted common shares (0.148%) and Hydro-FX Inc. directly owns 2,350 restricted common shares (0.033%). Mr. Ledesma owns 100% of Star of Texas

Mineral Resources, LLC and Hydro-FX Inc. Mr. Ledesma is also the trustee of SMLL Trust, which holds 100% of the shares of Star of Texas Energy Services, Inc., which directly holds 117,517 restricted common shares (1.67%).

(4) James D. Romano directly owns 12,100 restricted common shares (0.172%), Calderan Ventures Ltd. directly owns 100 restricted common shares (0.000%)

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

During the past two fiscal years, there have been no transactions between us and any officer, director, nominee for election as director, or any shareholder owning greater than five percent (5%) of our outstanding shares, nor any member of the above referenced individuals' immediate family, except as set forth under Items 1, 2, and 3 above, Recent History describing the acquisition of a profit interest in a salt water well and acquisition of lease properties from RoyalCo which is held by Mssrs. Royal, and the Star of Texas acquisition from Mr. Ledesma and affiliates.

It is our policy that any future material transactions between us and members of management or their affiliates shall be on terms no less favorable than those available from unaffiliated third parties.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

We do not have an audit committee and as a result our entire board of directors performs the duties of an audit committee. Our board of directors will approve in advance the scope and cost of the engagement of an auditor before the auditor renders audit and non-audit services. As a result, we do not rely on pre-approval policies and procedures.

Audit Fees

The aggregate fees billed by our independent auditors, for professional services rendered for the audit of our annual financial statements included in our Annual Reports on Form 10-K for the years ended May 31, 2010 and 2009, and for the review of quarterly financial statements included in our Quarterly Reports on Form 10-Q for the quarters ending August 31, November 30, and February 28, 2009 and 2010, were:

	2010		2009

MaloneBailey LLP	$	44,500	$	40,000

Audit Related Fees

For the years ended May 31, 2010 and 2009, there were no fees billed for assurance and related services by our Auditor relating to the performance of the audit of our financial statements which are not reported under the caption "Audit Fees" above.

Tax Fees

We do not use our Auditors for tax compliance, tax advice and tax planning.

We do not use the Auditors for financial information system design and implementation. These services, which include designing or implementing a system that aggregates source data underlying the financial statements or generates information that is significant to our financial statements, are provided internally or by other service providers. We do not engage the auditors to provide compliance outsourcing services.

The Board of Directors has considered the nature and amount of fees billed by our Auditors and believes that the provision of services for activities unrelated to the audit is compatible with maintaining MaloneBailey LLP's independence.

ITEM 15. EXHIBITS

Exhibit No. Exhibit Name

3.1 Articles of Incorporation (previously filed with Form SB-1 on July 20, 2006)

3.2 Bylaws (previously filed with Form SB-1 on July 20, 2006)

3.3 Certificate of Amendment of Articles of Incorporation (previously filed with Form 10-KSB on August 29, 2007)

10.1 Agreement with Green Gold Jade Property, Dated February 24, 2006, (previously filed with SB-1 on July 20, 2007)

10.2 Agreement of Purchase and Sale of Star of Texas Energy Services, Inc.and Star of Texas Minerals Resources LLC (previously filed with Form 8-K on September 20, 2007)

10.3 Amended Agreement of Purchase and Sale of Star of Texas Energy Services, Inc. and Star of Texas Minerals Resources LLC (previously filed with Form 8-K on October 23, 2007)

14.1 Financial Code of Ethics*

23.1 Consent of Harper & Associates, independent petroleum engineers *

31.1 Certification of Principal Executive Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

31.2 Certification of Principal Financial Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

*filed herewith

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	EXTERRA ENERGY INC.

	By:	/s/ Todd R. Royal
		Todd R. Royal
		CEO, President and Director

		Date: September 15, 2010

	By:	/s/ Robert Royal
		Robert Royal
		CFO, Secretary, and Director

		Date: September 15, 2010

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature	Title	Date

/S/ Robert Royal	Chairman, CFO, Secretary and Director	September 15, 2010

/S/ Todd R. Royal	Chief Executive Officer, President and Director	September 15, 2010

Attached files

Exterra Energy Inc. Reports

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