Terra Energy & Resource Technologies, Inc. - Quarterly Report of Financial Condition (10QSB)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

(Mark One)

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

For the quarterly period ended September 30, 2007

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

For the transition period from ________ to ___________.

Commission file number: 333-90272

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC .

(Exact name of registrant as specified in its charter)

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

99 Park Avenue, 16th Floor, New York, NY 10016

(Address of principal executive offices)

(212) 286-9197

(Issuer’s telephone number)

Not applicable.

(Former name, former address and former fiscal year, if changed since last report)

_________________

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

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

As of November 9, 2007, the issuer had 57,533,338 shares of common stock outstanding.

Transitional Small Business Disclosure Format (check one): Yes o No x

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC.

FORM 10-QSB

TABLE OF CONTENTS

	Page

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements	3

Consolidated Balance Sheets
As of September 30, 2007 (Unaudited) and December 31, 2006	3
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2007 and 2006 (Unaudited)	4
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2007 and 2006 (Unaudited)	5
Notes to Consolidated Financial Statements	6

Item 2. Management’s Discussion and Analysis or Plan of Operations	24

Item 3. Controls and Procedures	36

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	37

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	37

Item 5. Other Information	37

Item 6. Exhibits	38

Signatures	39

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	September 30,	December 31,
	2007	2006
ASSETS	(Unaudited)

CASH	$ 8,847	$ 1,055,556
PREPAID EXPENSES AND OTHER CURRENT ASSETS	–	47,313

TOTAL CURRENT ASSETS	8,847	1,102,869

OIL AND GAS PROPERTIES UNPROVED, FULL COST METHOD (NOTE 6)	1,076,866	1,067,427
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION
(NOTE 7)	173,694	206,972
OTHER ASSETS	23,950	–

TOTAL ASSETS	$ 1,283,357	$ 2,377,268


LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)

CURRENT LIABILITIES

ACCOUNTS PAYABLE AND ACCRUED EXPENSES (NOTE 4)	$ 2,460,276	$ 2,566,491
LOANS PAYABLE - RELATED PARTIES (NOTE 9)	335,290	–

TOTAL CURRENT LIABILITIES	2,795,566	2,566,491


SHAREHOLDERS' EQUITY (DEFICIT)

PREFERRED STOCK: $.0001 PAR VALUE,
SHARES AUTHORIZED 25,000,000
NO SHARES OUTSTANDING AT SEPTEMBER 30, 2007 AND
DECEMBER 31, 2006	–	–
COMMON STOCK; $.0001 PAR VALUE
SHARES AUTHORIZED 250,000,000
SHARES ISSUED AND OUTSTANDING: 57,283,338 AT SEPTEMBER 30, 2007
AND 55,958,338 AT DECEMBER 31, 2006	5,728	5,596
ADDITIONAL PAID IN CAPITAL	15,324,985	13,754,551
STOCK OPTIONS OUTSTANDING (NOTE 5)	1,428,950	1,428,950
DEFERRED COMPENSATION (CONSULTANTS) (NOTE 5)	(65,628)	–
DEFERRED COMPENSATION (EMPLOYEES) (NOTE 5)	(393,767)	(24,111)
ACCUMULATED DEFICIT	(17,812,477)	(15,354,209)

TOTAL SHAREHOLDERS' (DEFICIT)	(1,512,209)	(189,223)

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)	$ 1,283,357	$ 2,377,268

See notes to consolidated financial statements.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Month	Three Month	Nine Months	Nine Months
	Ended	Ended	Ended	Ended
	September 30,	September 30,	September 30,	September 30,
	2007	2006	2007	2006

REVENUES	$ –	$ –	$ –	$ 260,000

COST OF REVENUES	–	–	–	49,000

GROSS PROFIT	–	–	–	211,000

OPERATING EXPENSES

DEFERRED COMPENSATION (CONSULTANTS)
(NOTE 5)	65,628	–	319,128	–
DEFERRED COMPENSATION (EMPLOYEES)
(NOTE 5)	393,768	–	417,880	–
EXPENSE RECOGNIZED ON CHANGE OF
INTRINSIC VALUE ON
CONVERSION OF WARRANTS	–	–	50,130	–
WRITEOFFS OF OIL AND GAS PROPERTIES	–	4,897,434	–	5,042,869
OPERATING COSTS AND EXPENSES	506,588	2,528,336	2,000,380	5,541,329
TOTAL OPERATING EXPENSES	965,984	7,425,770	2,787,518	10,584,198

OPERATING LOSS BEFORE OTHER INCOME
(EXPENSE), PROVISION FOR INCOME TAXES
AND NONCONTROLLING INTEREST	(965,984)	(7,425,770)	(2,787,518)	(10,373,198)

OTHER INCOME (EXPENSE):

INTEREST EXPENSE	–	(999,249)	(727)	(1,293,673)
INTEREST INCOME	–	4,556	14	14,234
INTEREST ON CONVERSION OF DEBENTURES	–	253,554	–	253,554
NET INTEREST EXPENSE	–	(741,139)	(713)	(1,025,885)

LOSS BEFORE PROVISION FOR INCOME
TAXES AND NONCONTROLLING INTEREST	(965,984)	(8,166,909)	(2,788,231)	(11,399,083)

NONCONTROLLING INTEREST	–	3,017,936	329,963	3,033,091
PROVISION FOR INCOME TAXES (NOTE 8)	–	–	–	–

NET LOSS	$ (965,984)	$ (5,148,973)	$ (2,458,268)	$ (8,365,992)

NET LOSS PER COMMON SHARE – BASIC
AND DILUTED	$ (0.01)	$ (0.01)	$ (0.04)	$ (0.19)

WEIGHTED AVERAGE PER COMMON SHARES
OUTSTANDING – BASIC AND DILUTED	57,283,338	44,233,881	56,725,005	43,421,342

See notes to consolidated financial statements.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months	Nine Months
	Ended	Ended
	September 30,	September 30,
	2007	2006

NET LOSS	$ (2,458,268)	$ (8,365,992)

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

NON CASH ITEMS:
NONCONTROLLING INTEREST	(329,963)	(3,017,936)
DEPRECIATION	33,278	22,606
AMORTIZATION OF FINANCING COSTS	–	24,950
ACCRETION ON CONVERTIBLE DEBENTURES	–	322,556
INTEREST ON CONVERTIBLE DEBENTURES	–	970,688
COMMON STOCK ISSUED FOR SERVICES	351,000	0
AMORTIZATION OF CONSULTING FEES	65,628	318,564
AMORTIZATION OF DEFERRED COMPENSATION (EMPLOYEES)	417,879	1,047,601
WRITE OFF OF OIL AND GAS PROPERTIES	–	5,042,869
DEBT CONVERSION EXPENSE	–	1,000,000
FORGIVENESS OF DEBT ON CONVERSION	–	(253,554)
STOCK OPTIONS - EMPLOYEES	–	199,776
OFFICER'S SALARY EXPENSE CONTRIBUTED TO EQUITY	57,254	–
EXPENSE RECOGNIZED ON CHANGE OF CONVERSION
RATE - WARRANTS	50,130	–
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS :
RESTRICTED CASH	–	800,000
ACCOUNTS RECEIVABLE	–	(425,000)
DEFERRED COSTS	–	(787,500)
PREPAID EXPENSES AND OTHER CURRENT ASSETS	47,313	61,357
OTHER ASSETS	(23,950)	(25,999)
INCREASE (DECREASE) IN LIABILITIES:
ACCOUNTS PAYABLE AND ACCRUED EXPENSES	(12,804)	1,650,658
DEFERRED REVENUES	–	935,000

NET CASH (USED IN) OPERATING ACTIVITES	(1,802,503)	(479,356)

CASH FLOWS FROM INVESTING ACTIVITIES:

ACQUISITION OF OIL AND GAS PROPERTIES	(9,459)	(5,847,967)
PURCHASES OF PROPERTY AND EQUIPMENT	–	(99,775)
NET CASH (USED IN) INVESTING ACTIVITIES	(9,459)	(5,947,742)

NET CASH FROM FINANCING ACTIVITIES:

ISSUANCE OF CONVERTIBLE DEBENTURES	–	2,000,000
PROCEEDS FROM NONCONTROLLING INTEREST IN
LIMITED PARTNERSHIP	329,963	3,367,527
ISSUANCE OF COMMON STOCK	100,000	–
LOANS FROM RELATED PARTIES	335,290	–
NET CASH PROVIDED BY FINANCING ACTIVITIES	765,253	5,367,527

NET CHANGE IN CASH	(1,046,709)	(1,059,571)

CASH - BEGINNING OF PERIOD	1,055,556	2,300,925

CASH - END OF PERIOD	$ 8,847	$ 1,241,354

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND
INVESTING ACTIVITIES:
ACCRUED OFFICERS’ SALARIES CONVERTED TO EQUITY	$ 93,381	$ –

See notes to consolidated financial statements.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.	ORGANIZATION AND BASIS OF PRESENTATION

The consolidated balance sheet of Terra Energy & Resource Technologies, Inc. (“Terra”), a Delaware corporation, formerly CompuPrint, Inc. (see below) and Subsidiaries (collectively, the “Company”), and the related statements of operations and cash flows have been prepared by the Company, without audit, with the exception of the consolidated balance sheet dated as of December 31, 2006, pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”). In the opinion of management, the accompanying consolidated financial statements include all adjustments (consisting of normal, recurring adjustments) necessary to summarize fairly the Company's financial position and results of operations. The results of operations for the three and nine months ended September 30, 2007 are not necessarily indicative of the results of operations for the full year or any other interim period. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2006, filed on April 18, 2007 with the Commission.

Effective November 13, 2006, CompuPrint, Inc., parent of Terra Insight Corporation, was reincorporated under the laws of the State of Delaware, pursuant to a Plan and Agreement of Merger, dated as of November 3, 2006 (the "Plan"), by merging CompuPrint, Inc. into its wholly-owned subsidiary, Terra Energy & Resource Technologies, Inc. Terra Energy & Resource Technology, Inc. is a corporation, which was formed for the purpose of reincorporation. Pursuant to the Plan, each share of CompuPrint, Inc. was exchanged for one share of Terra Energy & Resource Technologies, Inc., and all shares previously outstanding of Terra Energy & Resource Technologies, Inc. that were previously outstanding were cancelled.

Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred substantial losses, sustained substantial cash outflows, and has a significant working capital deficiency and accumulated deficit at September 30, 2007. Furthermore, the Company has not paid certain executives and employees for several months. The above factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s continued existence depends on its ability to obtain additional equity and/or debt financing to fund its operations and ultimately be profitable. The Company does not have the cash necessary to maintain its operations and its efforts are presently devoted to raising capital. There can be no assurance that the Company will be successful in either effort.

Basis of Consolidation

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

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.	ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)

Principal Business Activities

The Company, through its wholly owned subsidiary, Terra Insight Corporation, a Delaware corporation formed January 7, 2005, provides mapping, surveying, and analytical services to exploration, drilling, and mining companies. The Company manages and interprets geologic and satellite data to improve the assessment of natural resources. The Company provides these services to (1) its customers utilizing services provided to the Company through an outsourcing relationship with The Institute of Geoinformational Analysis of the Earth (the “Institute”), a related foreign entity controlled by the majority shareholder of the Company and (2) joint venture interests in exchange for oil or mineral rights, licenses for oil and mineral rights, or royalties and working interests in exploration projects.

On August 31, 2006, the Company formed Terra Energy & Resource Technologies, Inc. (See Note 6).

On August 24, 2006, the Company formed Terra Insight Technologies Corporation (“TITC”), a wholly-owned Delaware corporation. TITC was inactive through September 30, 2007.

On March 20, 2006, the Company formed Terra Resources Operations Co., Inc. (“TRO”), a Texas corporation. Our wholly-owned subsidiary, TRI, is the sole shareholder of the entity. TRO was inactive through September 30, 2007.

On January 17, 2006, the Company acquired through TRI a 95% interest in NamTerra Mineral Resources (Proprietary) Limited (“NamTerra”), a Namibia company. As of September 30, 2006, NamTerra was awarded six licenses by Namibia to explore for diamonds. NamTerra did not commence any exploration activities and wrote-off $72,000 of soft development costs in connection with the project during calendar year 2006.

On January 4, 2006, the Company formed TexTerra Exploration Partners, LP (“TexTerra”) a Delaware limited partnership, in contemplation of an exploration project. TRI is the general partner of this new entity with an initial 100% interest. TexTerra commenced drilling its first well and is in the process of completing such well. Enficon has provided equity funding covering 80% of the costs and is entitled to 80% of the cash distributed, until it receives back its capital contribution. Further, Enficon is entitled to 65% of the profits, as defined, on the initial well. (See Note 6). Enficon’s funding of TexTerra is shown as “noncontrolling interest” in the accompanying consolidated balance sheet. Enficon’s share of the income (loss) of TexTerra is shown as “noncontrolling interest” in the accompanying consolidated statements of operations.

On July 12, 2005, the Company formed New Found Oil Partners, LP, a Delaware limited partnership, in contemplation of an exploration project. The Company’s wholly-owned subsidiary, TRI, is the general partner of this entity with an initial 100% interest.

On July 6, 2005, the Company formed Tierra Nevada Exploration Partners, LP (“Tierra"), a Delaware limited partnership, in furtherance of an exploration agreement with Enficon Establishment ("Enficon"), a Liechtenstein company. The Company's wholly-owned subsidiary, Terra Resources, Inc. (“TRI”), is the general partner of Tierra with an initial 100% interest. As of September 30, 2006, the Company advanced approximately $2.5 million into the limited partnership in furtherance of the exploration project. On April 6, 2006, Kiev Investment Group (“KIG”), an affiliate of Enficon, also agreed to fund certain Tierra projects. Such funding and other funding provided by KIG would dilute Terra’s interest in Tierra by creating a noncontrolling interest. On April 14, 2006, KIG invested $1 million into Tierra.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Revenue Recognition

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

Oil and Gas Properties, Unproved, Full Cost Method

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

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

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

Deferred Costs

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

Accounts Receivable

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

Credit Risk

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

Significant Customers

The Company had no revenue during the three month period ended September 30, 2007 and 2006. For the year ended December 31, 2006, approximately ninety percent (90%) of the Company’s revenue was attributable to one customer.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Property, Equipment and Depreciation

Other property and equipment, consisting of office and transportation equipment, are stated at cost. Depreciation is computed utilizing the straight-line method over the estimated useful lives of the assets. (See Note 7).

Income Taxes

The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Under the provisions of this Statement, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred income tax provisions are based on the changes to the respective assets and liabilities from period to period. A valuation allowance is recorded to reduce deferred tax assets when uncertainty regarding realization of the deferred tax assets exists. (See Note 8).

Stock Options

Prior to 2006, as permitted under SFAS No. 123, “Accounting for Stock-Based Compensation”, the Company elected to continue to follow the intrinsic value method in accounting for its stock-based compensation arrangements as defined by Accounting Principle Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees”. Under APB No. 25, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the stock at the date of grant over the option price. However, companies that did not adopt SFAS 123 must provide additional pro forma disclosure as if they had adopted SFAS 123 for valuing stock based compensation to employees. (See Note 5). Effective for the first quarter of 2006, the Company adopted SFAS No. 123(R).

Segments

The Company follows FASB Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS No. 131 requires that a business enterprise report a measure of segment profit or loss and certain specific revenue and expense items. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company reports three operating segments.

Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the year. Dilutive earnings per share reflect, in periods in which they have a dilutive effect, the effect of the common shares issuable upon exercise of stock options.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Estimates

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

3.	REINCORPORATION

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

4.	EQUITY TRANSACTIONS

Sale of Common Stock and Warrants

On February 26, 2007, the Company entered into a Securities Purchase Agreement, dated as of February 15, 2007, with an accredited individual investor, pursuant to which the Company sold 500,000 shares of common stock at $0.20 per share, and issued warrants to purchase 200,000 shares of common stock for no cost, exercisable until February 25, 2009, for the aggregate purchase price of $100,000. The warrants are exercisable commencing August 26, 2007 at an exercise price the greater of (i) $0.20 per share, or (ii) the 30-day volume weighted average of the closing prices of our common stock prior to exercise. In connection with the Securities Purchase Agreement, the terms of the warrants to purchase 150,000 shares of common stock issued on October 30, 2006 to the investor pursuant to the Securities Purchase Agreement dated as of October 13, 2006, was adjusted: (A) to change the exercise price from $2.00 per share to the greater of (i) $0.20 per share, or (ii) the 30-day volume weighted average of the closing prices of our common stock prior to exercise; and (B) to change the initial exercise date from October 30, 2006 to August 26, 2007. As a result of the repricing of the warrants, the Company charged $50,130 against income for the nine month period ended September 30, 2007.

Additional Paid in Capital

As of September 30, 2007, certain officers elected to forego salaries and expenses totaling $150,635. For the first nine months of 2007, such expenses, in the amount of $57,254, have been charged to operations and credited additional paid in capital. Accrued expenses in the amount of $93,381 pertaining to 2006 have been forgone by the debtors and contributed to additional paid in capital.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

5.	STOCK BASED COMPENSATION

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

In accordance with SFAS 123(R), the Company has accounted for its employee stock options and other stock options issued to outside consultants under the “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date. Accordingly, the fair market value for these options was estimated at the date of grant using a Black-Scholes option-pricing model based on the following assumptions:

			September 30, 2007
	Risk-free rate		4.57%
	Dividend yield		0.00%
	Volatility factor		1.10
	Average life		5 years

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

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

5.	STOCK BASED COMPENSATION (CONTINUED)

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

	At September 30, 2007
	Number of Options	Weighted Average Exercise Price

Outstanding, December 31, 2005	7,013,333	$ 0.51
Granted	415,000	$ 0.89
Exercised	–	–
Cancelled/forfeited	–	–

Outstanding, March 31, 2006	7,428,333	$ 0.56
Granted	1,685,000	0.33
Exercised	(500,000)	(0.21)
Cancelled/forfeited	(7,500)	(1.07)

Outstanding, December 31, 2006	8,605,833	$ 0.51
Granted	–	–
Exercised	–	–
Cancelled/forfeited	–	–

Outstanding, March 31, 2007	8,605,833	$ 0.51
Granted	–	–
Exercised	–	–
Cancelled/forfeited	–	–

Outstanding, June 30, 2007	8,605,833	$ 0.51
Granted	7,000,000	0.16
Exercised	–	–
Cancelled/forfeited	(252,500)	0.51

Outstanding, September 30, 2007	15,353,333	$ 0.35

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

5.	STOCK BASED COMPENSATION (CONTINUED)

	At September 30, 2007
	Outstanding			Exercisable

Range of Exercise Prices	Number of Options	Weighted Average Remaining Years of Contractual Life	Weighted Average Exercise Price	Number of Options	Weighted Average Exercise Price

$0.16	7,000,000	4.9	$0.16	7,000,000	$0.16
$0.21	500,000	4.0	$0.21	500,000	$0.21
$0.22	250,000	4.1	$0.22	250,000	$0.22
$0.32	3,100,000	2.3	$0.32	–	–
$0.50	2,365,000	3.2	$0.50	2,365,000	$0.50
$0.80	1,163,333	2.8	$0.80	1,163,333	$0.80
$0.90	400,000	3.5	$0.90	400,000	$0.90
$1.00	500,000	2.8	$1.00	500,000	$1.00
$1.07	25,000	3.6	$1.07	25,000	$1.07
$1.38	50,000	3.6	$1.38	50,000	$1.38

	15,353,333	3.8	$0.35	12,252,333	$0.53

Options to Officers and Employees

During the third quarter of 2007, the Company granted stock options to employees to purchase up to an aggregate of 6,000,000 shares of common stock, exercisable at $0.16 per share. One-half of the options vested immediately and one-half become exercisable in one year.

During the three months ended September 30, 2007 and March 31, 2007, the Company did not issue any stock options to employees.

During the fourth quarter of 2006, the Company granted stock warrants to purchase 250,000 shares of common stock, exercisable for a period of up to five years from the date of grant at $0.22 per share, to the Company’s Chief Financial Officer.

During the third quarter of 2006, the Company granted stock options to employees to purchase up to an aggregate of 1,000,000 shares of common stock, exercisable at $0.21 per share. The options vested immediately and are exercisable over a period of 5 years.

During the second quarter of 2006, the Company granted stock options to employees to purchase up to an aggregate of 85,000 shares of common stock, of which 35,000 stock options are exercisable at $1.07 per share and 50,000 stock options are exercisable at $1.38 per share. The options are exercisable over a period of 5 years and vest over one year in increments of 25% per fiscal quarter.

During the first quarter of 2006, the Company granted stock options to employees to purchase up to an aggregate of 400,000 shares of common stock which are exercisable over a period of 5 years at an exercise price of $0.90 per share. The stock options are to vest over one year in increments of 25% per fiscal quarter.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

5.	STOCK BASED COMPENSATION (CONTINUED)

Compensation expense related to the amortization of deferred compensation (employees) amounted to $393,768 for the three months and nine months ended September 30, 2007.

Consultants

On August 13, 2007, the Company granted stock options to three consultants, each an individual, stock options to purchase up to an aggregate of 1,000,000 shares of common stock, exercisable at $0.16 per share. One-half of the options vested immediately and one-half become exercisable in one year. The fair market value of services amounted to $131,256, of which $65,628 was charged to operations during the three months ended September 30, 2007.

On May 23, 2007, the Company issued 750,000 shares of common stock to Stonegate Securities, Inc., pursuant to a consulting agreement. The fair market value of services amounted to $232,500, which was charged to operations during the three months ended June 30, 2007.

On January 26, 2007, the Company issued 75,000 shares of common stock to an individual, pursuant to a consulting agreement. The fair market value of services amounted to $21,000, which was charged to operations.

On November 27, 2006, the Company entered into an agreement with Leapfrog Capital Group, LLC for business consulting services for a term of one year, pursuant to which the Company issued 375,000 shares of common stock in November 2006, and, subject to future release from escrow, issued an additional 375,000 shares of common stock. The escrowed shares were released in March 2007. The fair market value of services amounted to $97,500, which was charged to operations.

On March 7, 2006, the Company issued to an attorney, pursuant to an oral consulting agreement for legal services, stock options to purchase 15,000 shares of the Company’s common stock. The stock options are exercisable until March 6, 2011 at $0.50 per share. The Company recognized $6,750 in legal expenses in connection with such issuance.

Compensation expense related to the amortization of deferred compensation (consultants) amounted to $65,628 for the three months and nine months ended September 30, 2007.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

6.	OIL AND GAS PROPERTIES

TEXTERRA EXPLORATION PARTNERS, LP

Write-Off of the Davidson Well Prospect

During the third quarter of 2006, the Company determined that the Davidson well (as described below) was not commercially viable and wrote-off capitalized costs associated with such well totaling.

On January 26, 2006, TexTerra Exploration Partners, LP entered into a “Farmout Agreement” with Davidson Energy, L.L.C. and Johnson Children’s Trust No. 1, dated January 10, 2006. The Farmout Agreement relates to the development of the Richard Bellows 1280-acre oil and gas lease, covering two 640-acre tracts in La Salle County, Texas (“Davidson Project”). TexTerra’s leasehold interest is subject to an approximate 25% royalty interest to the assignors to Davidson and the Johnson Children’s Trust, leaving an approximately 75% net revenue interest to be split between Davidson Energy and the Johnson Children’s Trust, on the one hand, and TexTerra, on the other hand.

Davidson Energy and Johnson Children’s Trust assigned to TexTerra a 70% working interest (70% of the 75% net revenue interest) in and to the first well and a defined area around such well as specified under Texas law (the Railroad Commission spacing unit). The purchase price for TexTerra’s 70% working interest was TexTerra’s agreement to pay up to the budgeted amount of $1,417,150 for drilling, testing, stimulating, completing and equipping the initial well. Any additional costs are to be paid 70% by TexTerra and 30% by Davidson Energy.

After the initial well Davidson Energy and Johnson Children’s Trust shall have the right, but not the obligation, to participate in a 50% interest in future wells on the lease. The rights of the parties pursuant to the Farmout Agreement will be subject to the terms of a joint operating agreement. In the event Davidson Energy and Johnson Children’s Trust elect not to participate in future wells on the lease, they shall receive a 10% working interest after certain costs are recouped by TexTerra. Such interest shall occur if and when TexTerra reaches payout on the lease.

TIERRA NEVADA EXPLORATION PARTNERS, LP

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

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

6.	OIL AND GAS PROPERTIES (CONTINUED)

On December 13, 2005, Tierra Nevada Exploration Partners, LP submitted bids at a competitive oral sale of Federal lands in the State of Nevada for oil and gas leasing, conducted by the Bureau of Land Management, an agency within the U.S. Department of the Interior. Tierra Nevada’s bids for two separate parcels of land, totaling approximately 1,240.44 acres, were accepted at the auction, at an aggregate price of approximately $30,935. Leases from the Bureau of Land Management are issued for a primary term of 10 years, and continue beyond the primary term as long as the lease is producing. Rental is $1.50 per acre for the first 5 years, and $2 per acre after that period, until production begins. Once a lease is producing, the Bureau of Land Management charges a royalty of 12.5% on the production. The leases commenced on January 1, 2006.

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

NAMTERRA

In May 2006, the Company was awarded five leases for properties, and in July 2006, the Company was awarded one additional lease for properties, on which it intended to seek diamond deposits. The Company did not commence such development efforts. The Company wrote-off $72,000 of soft development costs in connection with this project during calendar year 2006.

TOTAL OIL AND GAS INVESTMENT

As of September 30, 2007, the Company’s oil and gas investments were $1,076,866. As of December 31, 2006, the Company’s oil and gas investments were $1,067,427 net of write-offs.

7.	PROPERTY AND EQUIPMENT

Property and equipment are stated at cost at September 30, 2007 consisted of the following:

	Estimated	September 30,
	Useful	2007
	Lives – Years	Amount

Computer Equipment	5	$ 108,200
Office Equipment	5	17,012
Transportation Equipment	5	85,750
Furniture & Fixtures	7	37,895
		248,857
Less accumulated depreciation		(75,163)
		$ 173,694

Depreciation expense for the three months ended September 30, 2007 was $11,092.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

8.	INCOME TAXES

At September 30, 2007, the Company has an aggregate deferred tax asset of approximately $6,602,251, representing the net operating loss carry forwards which expire in 2021 through 2027.

The following summarizes the provision for income taxes for the nine month period ending September 30, 2007:

	As of September 30, 2007

		Noncontrolling	Controlling
	Consolidated	Interest	Interest

Loss before Income Taxes	$ (2,458,268)	$ 329,963	$ (2,788,231)
Tax Benefit (Expense)	983,307	(131,985)	1,115,292
Total	(1,474,961)	197,978	(1,672,939)
Valuation Allowance	(983,307)	131,985	(1,115,292)
Net Provision for Income Tax	( – )	( – )	( – )
Net Loss	$ (2,458,268)	$ 329,963	$ (2,788,231)

				At September 30, 2007

	Currently payable			$ –
	Deferred tax (benefit)			(6,602,251)
	Total			(6,602,251)
	Valuation allowance			(6,602,251)
	Net provision for income taxes			$ –

9.	RELATED PARTY TRANSACTIONS

Technology License Agreement

The Company licenses, under a 32-year license agreement entered into January 7, 2005, as amended on May 19, 2005 and July 23, 2007 (the “Technology License Agreement”), certain mapping technology from The Institute of Geoinformational Analysis of the Earth (the “Institute”), a foreign-based related company controlled by the majority shareholder of the Company. Under the Technology License Agreement, the Company is required to pay the Institute an annual license fee of $600,000 (subject to certain deferrals and credits as specified in the Technology License Agreement and the Services Agreement described below), payable on or before December 31 of each year. Commencing in 2008, the annual license fee is to increase annually by the lesser of four percent or the percentage increase of the Consumer Price Index using 2007 as the base year. For the nine months ended September 30, 2007, the Company accrued $450,000 which represented 75% of the minimum annual license fee. Pursuant to July 23, 2007 amendment to the Technology License Agreement, the annual license fee due for calendar year 2007 has been deferred.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

9.	RELATED PARTY TRANSACTIONS (CONTINUED)

Commencing in 2008, provided that the Company has total positive net revenues from its operations of at least $2 million annually, the Institute shall be entitled to payment on the deferred license fee at a rate of no more than $300,000 per year. The Institute shall also be entitled to payments on certain service projects engaged in by the Company. For all internal projects of the Company (i.e., natural resource projects that the Company engages in pursuant to farmin or farmout agreements with third parties), the Institute shall be entitled to payments equal to 20% of the net revenues received by TIC from such farmin and/or farmout agreements. For non-internal projects, the Institute shall be entitled to payments equal to: (i) 20% of the net cash success fee compensation earned by the Company from such projects; and (ii) 20% of the net cash received by the Company from royalty-free interests in such service projects. Such project related payments shall be payable only after the Company generates over $1 million in net revenues from service projects.

Services Agreement

The Company entered into a services agreement with the Institute on January 7, 2005, as amended on May 19, 2005 and July 23, 2007 (the “Services Agreement”), for consulting and advisory services including analysis, surveying, and mapping as well as recommendations related to the utilization of the Institute’s mapping technologies. Under the terms of the Services Agreement, the Institute will perform certain contract services for the Company for a service fee at the rate of (i) no more than 40% to 60% of its published rates depending on the nature of the requested services or (ii) no more than 10% over cost, subject to an annual minimum charge of $500,000. The Amended Services Agreement further provides that any services fee attributable to the Company’s internal projects, are deferred. Commencing in 2008, provided that the Company has total positive net revenues from its operations of at least $2 million annually, the Institute shall be entitled to payment on the deferred services fee at a rate of no more than $300,000 per year.

The minimum annual service fees for 2006 and 2005 were $500,000. Subsequent to 2007, the minimum annual service fee will increase by the lesser of 4% or the percentage increase in the Consumer Price Index (CPI) using 2007 as the base year. Until such time as the Company has annual revenues of at least $10 million or until such time as the market capitalization of the Company exceeds $100 million, 83.334% of the license fees paid by the Company pursuant to the Technology License Agreement will be credited against service fees pursuant to the Services Agreement, and further provided, that in any calendar year in which the Company’s revenues are less than $6 million, the minimum annual services fee is to be offset against the annual license fee payable to the Institute. The Company may terminate the Services Agreement by giving the Institute four weeks’ prior notice. If the Company does not provide such notice, the Company is obligated to pay a termination fee equal to 8.33% of the prior calendar year’s service fee payments to the Institute. Termination of the Services Agreement does not relieve the Company of its obligations under the Technology License Agreement.

For the year ended December 31, 2006, the Company met the minimum payment requirements for both the Technology License Agreement and Services Agreements. The minimum payment is an annual test and is not applicable to the nine month periods ended September 30, 2007 and September 30, 2006.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

9.	RELATED PARTY TRANSACTIONS (CONTINUED)

Operating Lease

The Company leased office space from one of its directors on a month-to-month basis pursuant to an oral agreement. Rent expense was $2,250 through March 2006 and $4,500 per month for April through August 2006, and $8,000 per month through March 31, 2007. As of April 1, 2007, substantially reduced office space was leased from a third party and the rent expense is $2,000 per month. Total rent expense related to the office facility amounted to $36,000 and $36,192 for the nine months ended September 30, 2007 and 2006, respectively.

Effective February 1, 2006, the Company leased an apartment in Moscow, Russia, at a monthly rent of $5,000, to be used by executives of the Company when visiting Moscow. Rent expense on this apartment amounted to $5,000 and $40,000 for the nine months ended September 30, 2007 and 2006, respectively. The lease was terminated as of January 30, 2007.

Legal Services

The Company paid or accrued legal fees for the nine months ended September 30, 2007 and 2006 of $284,000 and $576,000, respectively, to a law firm which is owned by a director, officer, and shareholder of the Company.

Loans

As of September 30, 2007, an officer has loaned the Company $295,322, and a related party has loaned $39,968. The loans are unsecured and noninterest bearing and have no specific repayment terms.

10.	COMMITMENTS

Employment Agreements

On January 7, 2005, the Company entered into three, 3-year employment agreements with certain of its executives. These agreements include automatic compensation increases if the Company achieves certain financing and revenue targets. In connection with these employment agreements, the executives would receive performance-based stock options to purchase up to 3.1 million shares of the Company’s common stock at a price of $0.32 per share. The stock options are exercisable over a 5-year period. The stock options vest as follows:

½ of the total

When EBITDA exceeds $2 million or

revenue exceeds $6 million

½ of the total

When EBITDA exceeds $4 million or

revenue exceeds $10 million

The employment agreements also contain a “change of control” provision, as defined, whereby the executives would be entitled to 290% of their base compensation in effect at that time. All stock options would automatically vest in the event of a “change of control”. To date no options were vested under these agreements.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

10.	COMMITMENTS (CONTINUED)

Operating Leases

The Company does not have a written lease on its main New York City office space.

Minimum annual rental costs under the lease for the office on 57th Street in New York City is $55,200. The lease expires on December 31, 2007.

The Company terminated its Moscow, Russia apartment effective January 30, 2007.

11.	PREFERRED STOCK

The Board of Directors is expressly authorized to provide for the issue of all or any shares of the preferred stock, in one or more series, and to fix for each such series such voting powers, full or limited, and other such designations and preferences. The number of authorized shares of preferred stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the voting power of all of the then outstanding shares of the capital stock of the corporation entitled to vote generally in the election of directors. To date no preferred shares have been issued by the Company.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

12.	SEGMENTS AND RELATED INFORMATION

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

	FOR NINE MONTHS ENDED SEPTEMBER 30, 2007

	MAPPING SERVICES	OIL AND GAS OPERATIONS	OTHER (i.e. DIAMOND OPERATIONS, ETC.)	TOTAL

REVENUES	$ –	$ –	$ –	$ –

COST OF SALES	–	–	–	–

GROSS PROFIT	–	–	–	–

OPERATING COSTS AND EXPENSES	–	(2,787,518)	–	(2,787,518)

WRITE OFF OF OIL AND GAS PROPERTIES	–	–	–	–

OTHER INCOME (EXPENSE):
NET INTEREST EXPENSE	–	(713)	–	(713)
TOTAL COSTS AND EXPENSES	–	(2,788,231)	–	(2,788,231)

PROFIT (LOSS) BEFORE PROVISION FOR
NONCONTROLLING INTERESTS AND
INCOME TAXES	–	(2,788,231)	–	(2,788,231)

NONCONTROLLING INTEREST	–	329,963	–	329,963

PROVISION FOR INCOME TAXES (NOTE 8)	–	–	–	–

NET PROFIT (LOSS)	$ –	$ (2,458,268)	$ –	$ (2,458,268)

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

12.	SEGMENTS AND RELATED INFORMATION (CONTINUED)

	FOR NINE MONTHS ENDED SEPTEMBER 30, 2006

	MAPPING SERVICES	OIL AND GAS OPERATIONS	DIAMOND OPERATIONS	TOTAL

REVENUES	$ 260,000	$ –	$ –	$ 260,000

COST OF SALES	49,000	–	–	49,000

GROSS PROFIT	211,000	–	–	211,000

OPERATING COSTS AND EXPENSES	–	(5,541,329)	–	(5,541,329)

WRITE OFF OF OIL AND GAS PROPERTIES	–	(5,042,869)	–	(5,042,869)

OTHER INCOME (EXPENSE):
NET INTEREST EXPENSE	–	(1,025,885)	–	(1,025,885)
TOTAL COSTS AND EXPENSES	–	(11,610,083)	–	(11,610,083)

PROFIT (LOSS) BEFORE PROVISION FOR
NONCONTROLLING INTERESTS AND
INCOME TAXES	211,000	(11,610,083)	–	(11,399,083)

NONCONTROLLING INTEREST	–	3,033,091	–	3,033,091

PROVISION FOR INCOME TAXES (NOTE 8)	–	–	–	–

NET PROFIT (LOSS)	$ 211,000	$ (8,576,992)	$ –	$ (8,365,992)

13.	RECENT ACCOUNTING PRONOUNCEMENTS

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115" ("SFAS 159"). This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. Most of the provisions in SFAS 159 are elective; however, the amendment to SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities", applies to all entities with available-for-sale and trading securities. The fair value option established by SFAS 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. The fair value option (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method, (b) is irrevocable (unless a new election date occurs) and (c) is applied only to entire instruments and not to portions of instruments. SFAS 159 is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007. The adoption of SFAS 159 is not expected to have any impact on the Company’s consolidated financial statements.

TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

14.	SUBSEQUENT EVENTS

On October 25, 2007, the Company issued to Stuart Sundlun, an individual, 250,000 shares of common stock, as payment for consulting services.

On October 1, 2007, the Company entered into agreements with certain of its present and former officers and employees that terminated an aggregate of 6,363,333 stock options that were previously granted in 2005 and 2006 pursuant to employment agreements or stock option agreements. The terminated stock options were exercisable for five years from the date of grant and were exercisable at prices ranging from $0.32 to $1.38 per share.

On October 1, 2007, the Company granted an aggregate of 9,700,000 stock options, exercisable for five years at $0.22 per share, to six employees and one consultant.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

“Forward-Looking” Information

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

The following discussion of our financial condition and results of operations should be read in conjunction with the information set forth in our audited consolidated financial statements for the year ended December 31, 2006, and the related notes, included in our Annual Report on Form 10-KSB.

INTRODUCTORY NOTE

Operating Entities

The discussion below refers to our current operations, those primarily of Terra Insight Corporation, which we acquired on May 19, 2005 in a transaction viewed as a reverse acquisition, and does not refer to the operations of our former business, which was an inactive shell company.

Our operations are primarily conducted through our wholly-owned operating subsidiary, Terra Insight Corporation. Terra Insight Corporation is the sole owner of Terra Resources, Inc., a Delaware corporation. Terra Resources, Inc. is the general partner of three Delaware limited partnerships, TexTerra Exploration Partners, LP (“TexTerra”), Tierra Nevada Exploration Partners, LP (“Tierra Nevada”) and New Found Oil Partners, LP. Since the third quarter of 2006, neither TexTerra nor Tierra Nevada or other entities affiliated with the Company have been engaged in active resource projects.

Our Operations and Plans

During fiscal 2005 and the first part of fiscal 2006, we focused primarily on obtaining royalty or ownership rights in projects on which we provide professional services with a secondary effort on obtaining cash fee for service business. In mid 2006, we refocused our efforts to obtain more cash fee for service business. This resulted in our company obtaining a $2.5 million dollar service contract from Petrobras International Braspetro BV, a major Brazilian oil and gas exploration company, during the second half of fiscal 2006.

During the later part of fiscal 2006 and in 2007, we focused on obtaining additional investment capital to restart our service and exploration efforts, to restructure our operations to reduce our operating costs, and to create case studies demonstrating the value of our proprietary satellite-based sub-terrain prospecting technology for locating natural resources (the “STeP technology”). We intend to demonstrate the value of our licensed STeP technology by pursuing a fee for service business model with exploration companies, which may include seeking royalties on the exploration project, as well as a “farmin” strategy of investing in drilling projects when our STeP technology concurs with the available seismic studies on the projects. Our goal is to demonstrate a success rate which is better than industry averages and thereby establish the value of our technology while generating minerals and hydrocarbon reserves and internally generating cash flow to support our cost of operations.

Because of our negative working capital position, in September 2006, we started to pay partial salaries to our employees, and as of March 2007, ceased paying all salaries to our employees. These unpaid salaries have been accrued. At September 30, 2007, accrued and unpaid salaries totaled $428,752. Our operations would be adversely impacted if our employees ceased to render services to us as a result of our inability to make payments of salaries.

During the first quarter of fiscal 2006, we had one paying customer whose project had been started during 2005 and which was concluded in 2006. We had no paying customers during the first three quarters of fiscal 2007. During the first three quarters of fiscal 2007, the Company had non-operating income of $329,963 resulting from the holder of noncontrolling interest meeting a cash call for drilling expenses which was issued in a prior calendar quarter.

Our goal continues to be to enter into agreements whereby we provide our services, such as providing site location and depth locations, to natural resource exploration companies in exchange for royalties or ownership rights, and fees, with regard to a specific natural resource exploration property. We may also seek to finance or otherwise participate in the efforts to recover natural resources from such properties. Our intent, in the event our cash flow permits, is to finish the land acquisition in connection with the West Deweyville prospect and farmout the project to obtain financing for the drilling program on this prospect.

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

Current Insolvency; Operations

We have incurred large operating losses and currently have a large working capital deficit (approximately $2.8 million) as of September 30, 2007. Furthermore, as of September 30, 2007, we had no substantial cash. These factors raise substantial doubt about our ability to continue as a going concern.

We have two revenue sources:

	(1)	Revenue from providing mapping and analytic services to exploration, drilling and mining companies, using an integrated approach with proprietary attributes to gather, manage and interpret geologic and satellite data to improve the assessment of natural resources; and

	(2)	Revenue from projects that we undertake through joint venture and similar relationships with third parties.

Historically and during the three and nine months ended September 30, 2007, the level of revenues from our fee for service business has not been sufficient to support our operational expenses.

To date, we have not had a commercially successful exploration project. We have no proven hydrocarbon reserves. Our principal assets are our investments in the West Deweyville prospect, and oil and gas leases in the State of Nevada.

Since inception, we have supported our operations primarily through the sale of $5 million of convertible debentures, sale of approximately $3.37 million of noncontrolling interest in drilling limited partnerships, and sale of approximately $3.5 million in equity securities.

Our ability to continue as a going concern is dependent on our ability to obtain new capital.

Discussions Regarding New Capital

In about September 2006, we commenced discussions with several investment bankers and venture capital funds to obtain bridge and long term debt or equity funding. To date, we have not been successful in raising significant additional equity or debt capital. There can be no assurance that we will be successful in obtaining such funding or, in the event it is successful, the terms of such funding will be on terms advantageous to us.

Development Projects

To date, we have drilled one well on the Davidson lease in Texas and one well on a lease obtained from the Bureau of Land Management in the Railroad and White River Valley in Nevada. While the well on the Davidson lease originally looked promising, the reservoir quality was not sufficient and we decided the well was not commercially viable. In connection with the Nevada well, we experienced problems with the rig we leased and for safety reasons decided to plug the well before reaching the target depth. From inception through March 31, 2007, capitalized costs incurred with the Davidson lease and the Sage well in Nevada of approximately $1.9 million and $3.2 million were written off.

During the third quarter of fiscal 2006, we obtained land leases in West Deweyville, Texas for a drilling project. We also bought a 2.5% interest in a project neighboring the West Deweyville project to obtain data from the drilled well. This information helped us confirm the results of our technology relating to the West Deweyville leases. The project neighboring West Deweyville was not successful and we wrote off its investment of approximately $180,000 in this project in 2006.

We also wrote off soft development costs principally associated with the acquisition of the Bureau of Land Management land leases in Nevada of approximately $1.7 million. A significant potion of these costs arose from previous payments to the Institute for studies.

While we have investments in oil and gas projects totaling approximately $1.1 million on the Company’s consolidated balance sheet at September 30, 2007, current development efforts have been suspended until we raise sufficient capital.

As of September 30, 2007, New Found Oil Partners and NamTerra Mineral Resources (Pty) Ltd (“NamTerra”), our Namibia subsidiary, had yet to conduct substantive operations, other than activities related to preliminary analysis of certain parcels of land.

CRITICAL ACCOUNTING POLICIES

Several of our accounting policies involve significant judgments and uncertainties. The policies with the greatest potential effect on our results of operations and financial position is our ability to estimate the degree of impairment to unproved oil and gas properties. We did not have any accounts receivable at September 30, 2007.

Revenue Recognition

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

Oil and Gas Properties

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

Reserve Estimates

We currently do not own any oil and gas reserves.

Our estimates of oil and natural gas reserves, by necessity, are projections based on geologic and engineering data, and there are uncertainties inherent in the interpretation of such data as well as the projection of future rates of production and the timing of development expenditures. Reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that are difficult to measure. The accuracy of any reserve estimate is a function of the quality of available data, engineering and geological interpretation and judgment. Estimates of economically recoverable oil and natural gas reserves and future net cash flows necessarily depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, the assumed effects of regulations by governmental agencies and assumptions governing future oil and natural gas prices, future operating costs, severance and excise taxes, development costs and workover and remedial costs, all of which may in fact vary considerably from actual results. For these reasons, estimates of the economically recoverable quantities of oil and natural gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery, and estimates of the future net cash flows expected there from may vary substantially. Any significant variance in the assumptions could materially affect the estimated quantity and value of the reserves, which could affect the carrying value of our oil and gas properties and/or the rate of depletion of the oil and gas properties. Actual production, revenues and expenditures with respect to our reserves will likely vary from estimates, and such variances may be material.

Depletion

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

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

Accounts Receivable

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

RESULTS OF OPERATIONS

Our results of operations for the three and nine months ended September 30, 2007 and 2006 are discussed below.

Three Month Period Ended September 30, 2007

Compared to Three Month Period Ended September 30, 2006

Revenues

There were no revenues from services for the three months ended September 30, 2007 and September 30, 2006. The lack of revenue arose principally from our seeking to perform services for an ownership or royalty interest in projects or leaseholds rather than for a cash service fee.

During the three months ended September 30, 2007, we have been negotiating with several international mineral and oil companies to render services on a cash basis.

In 2007, we anticipate, if we achieve our capital raising goals of focusing on fee for service work, joint ventures and internal resource projects. The purpose of focusing on internal resource projects is to generate reserves and to establish that the technology can increase the success rate in oil, gas and other mineral exploration projects. There can be no assurance that if we obtain the needed financing it will be successful in establishing the efficacy of our technology. We will also seek to find potential joint venture partners with whom the technology can be used to gain a participation interest in a project as well as fee for service revenue. There can be no assurance that we will be successful in finding such joint venture partners.

Until we negotiate and enter into definitive agreements for ownership or royalty interests as compensation, we have no basis for predicting when or how much revenue could be generated from such ownership or royalty interests, or from the exploitation of our land leases, if and when drilling is commenced. Negotiations in connection with ownership or royalty positions often take longer than the negotiations for fee for service arrangements. We did not earn any revenue from joint ventures or its own development projects during the three months ended September 30, 2007 and September 30, 2006.

Cost of Revenues

There were no costs associated with revenue for the three months ended September 30, 2007 and September 30, 2006.

Our cost of revenues consists primarily of payments to the Institute of Geoinformational Analysis of the Earth (“Institute”), a related foreign professional services firm that specializes in the development and application of remote sensing and geographic information technologies. The foreign professional services firm is a Lichtenstein corporation located in Moscow, Russia, owned and operated by our Chairman, Ivan Railyan. We anticipate that our costs of revenue will ordinarily be approximately 60% of such revenue. In connection with our own exploration and/or joint venture projects, our costs are based on a discount to the Institute’s published rates for services and are subject to negotiation.

Operating Expenses

Operating expenses (before the writeoff of oil and gas properties) for the three months ended September 30, 2007 and September 30, 2006 were $965,984 and $2,528,336, respectively. Because revenues were $0 for the three months ended September 30, 2007 and 2006, operating expenses as a percentage of revenues cannot be calculated.

Operating expenses for the three months ended September 30, 2007 consisted primarily of professional fees of approximately $226,000, licensing fees of $150,000, management and employee salaries and benefits of approximately $72,000, and stock option expense (employees) of approximately $393,768. Operating expenses for the three months ended September 30, 2006 consisted primarily of professional fees of approximately $200,000, management and employee salaries and benefits of approximately $270,000, stock option expense (to employees) of approximately $557,005, and travel related expenses of approximately $48,000.

The majority of the professional fees result from legal and accounting fees, and from the engagement of various consultants to assist us in marketing our business.

Our operating expenses decreased during the three months ended September 30, 2007 in comparison to the three months ended September 30, 2006 because we have focused primarily on raising additional capital in fiscal 2007 and on the development of projects. This has decreased travel related expenses and professional fees. Additionally, we have reduced the number of salaried employees, and ceased paying salaries to employees.

The shift to providing services for royalties or ownership rights instead of solely for cash fees may act to increase our operating expenses significantly as a percentage of revenues, as revenues from royalties or ownership rights may take years to be realized.

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

Interest Expense

For the three months ended September 30, 2007 and 2006, the net interest expense was $0 and $741,139, respectively. For the three months ended September 30, 2006, we accrued approximately $999,249 in interest on the outstanding amount of the debentures, and we also recognized $253,554 of income relating to accrued interest which were not paid due to the conversion. The interest expense related to issuance of 6% convertible debentures, convertible into shares of common stock, due December 31, 2007 in the aggregate principal amount of $4 million that were issued in 2005 and 2006 and the issuance of 7% convertible debentures, convertible into shares of common stock, due December 31, 2008 in the principal amount of $1 million that were issued in 2006. Because the conversion price of the debentures was less than the closing trading prices of our common stock on the commitment date, the convertible debentures contained a beneficial conversion feature. We estimated the beneficial conversion feature of the debentures issued in 2005 to be $750,000 and $500,000 for the debentures issued in 2006. These debentures were converted in the third quarter of fiscal 2006.

Net Loss

The net loss for the three months ended September 30, 2007 and September 30, 2006 were $965,984 and $5,148,973, respectively. The decrease in net loss principally resulted from a decrease in operating expenses during the three months ended September 30, 2007 compared to the same period in 2006. In addition, in the quarter ended September 30, 2006, we had writeoffs of oil and gas properties of approximately $4.9 million.

Our net loss per common share (basic and diluted) attributable to common shareholders for the three months ended September 30, 2007 and September 30, 2006 were $0.01 and $0.01, respectively.

Nine Month Period Ended September 30, 2007

Compared to Nine Month Period Ended September 30, 2006

Revenues

Revenues from services for the nine months ended September 30, 2007 and September 30, 2006 were $0 and $260,000, respectively. The lack of revenue for the nine months ended September 30, 2007 arose principally from our seeking to perform services for an ownership or royalty interest in projects or leaseholds rather than for a cash service fee. The revenue for the nine months ended September 30, 2006 were derived from sales to one customer and related to our mapping and surveying services. This sale made during the nine months ended September 30, 2006 was made to a customer that was identified during calendar year 2005 and the bulk of the services to such client were delivered in 2005.

Cost of Revenues

Our costs of revenues for the nine months ended September 30, 2007 and September 30, 2006 and $0 and $49,000, respectively. As a percentage of net revenues, cost of revenues for the nine months ended September 30, 2006 were approximately 19%. The cost of revenues consists of payments to a related foreign professional services firm that specializes in the development and application of remote sensing and geographic information technologies. We anticipate that our costs of revenue will ordinarily be approximately 60% of such revenue. We do not believe the costs incurred during the nine months ended September 30, 2006 are, on a percentage basis, indicative of the costs of future revenue as we received cost concessions in connection with rendering such services. In connection with our own exploration and/or joint venture projects, our costs are based on a discount to the Institute’s published rates for services and are subject to negotiation.

Operating Expenses

Operating expenses (before the writeoff of oil and gas properties) for the nine months ended September 30, 2007 and September 30, 2006 were $2,787,518 and $5,541,329, respectively. Because revenues were $0 for the nine months ended September 30, 2007, operating expenses as a percentage of revenues cannot be calculated. Operating expenses as a percentage of net revenues for the nine months ended September 30, 2006 were approximately 2,131%.

Operating expenses for the nine months ended September 30, 2007 consisted primarily of professional fees of approximately $763,000, licensing fees of $450,000, management and employee salaries and benefits of approximately $247,000, independent contractor fees of approximately $24,000, and stock option expense (employees) of approximately $393,768. Operating expenses for the nine months ended September 30, 2006 consisted primarily of professional fees of approximately $1,048,000, management and employee salaries of $870,000, stock option expense (to employees) of approximately $1,247,000, and travel related expenses of $325,000

The majority of the professional fees result from legal and accounting fees.

Our operating expenses decreased during the nine months ended September 30, 2007 in comparison to the nine months ended September 30, 2006 because we have focused primarily on raising additional capital in fiscal 2007 and on the development of projects. This has decreased travel related expenses and professional fees. Additionally, during the nine months ended September 30, 2007, we have reduced the number of salaried employees, reduced the compensation rate of many employees, and as of March 2007, ceased payment of salaries to employees.

Interest Expense

For the nine months ended September 30, 2007 and 2006, the net interest expense was $713 and $1,025,885, respectively. For the nine months ended September 30, 2006, we accrued approximately $1,293,673 in interest on the outstanding amount of the debentures, and we also recognized $253,554 of income relating to accrued interest which were not paid due to the conversion. For the nine months ended September 30, 2006, the interest expense related to issuance of 6% convertible debentures, convertible into shares of common stock, due December 31, 2007 in the aggregate principal amount of $4 million that were issued in 2005 and 2006 and the issuance of 7% convertible debentures, convertible into shares of common stock, due December 31, 2008 in the principal amount of $1 million that were issued in 2006. Because the conversion price of the debentures was less than the closing trading prices of our common stock on the commitment date, the convertible debentures contained a beneficial conversion feature. We estimated the beneficial conversion feature of the debentures issued in 2005 to be $750,000 and $500,000 for the debentures issued in 2006. These debentures were converted in the third quarter of fiscal 2006.

Net Loss

The net loss for the nine months ended September 30, 2007 and September 30, 2006 were $2,458,268 and $8,365,992, respectively. The decrease in net loss principally resulted from the lack of revenue in the nine months ended September 30, 2007 in comparison to the same period in 2006, and a decrease in operating expenses during the nine months ended September 30, 2007 compared to the same period in 2006. In addition, in the nine months ended September 30, 2006, we had writeoffs of oil and gas properties of approximately $5.0 million.

Our net loss per common share (basic and diluted) attributable to common shareholders for the nine months ended September 30, 2007 and September 30, 2006 were $0.04 and $0.19, respectively.

Non-operating Revenue

During the nine months ended September 30, 2007, we received $329,963 relating to a cash call on the holder of the noncontrolling interest resulting from cost overruns on the Sage well.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity have been proceeds generated by the sale of our common stock, convertible debentures to private investors, and sales of noncontrolling interests in limited partnerships. As of September 30, 2007, we had cash on hand of $8,847.

Operating Activities

For the nine months ended September 30, 2007, cash flows from operating activities resulted in deficit cash flows of $1,802,503, primarily due to a net loss of $2,458,268, plus non-cash charges of $645,206 and adjustments for a decrease in prepaid expenses of $47,313 and an increase in other assets of $23,950, a decrease in accounts payable of $12,804.

Investing Activities

Cash used in investing activities was $9,459 for the nine months ended September 30, 2007 relating to an increase in oil and gas properties.

Depending on our available funds and other business needs, it is our intention to (i) engage in fee for service activities, (ii) engage in a farmin strategy during calendar year 2007 in which we make small investments in the exploration projects of others, and (ii) to complete land acquisition relating to the West Deweyville prospect and to farmout such prospect. There is no assurance we will have the financing to pursue this strategy or if pursued that it will be successful in developing reserves of hydrocarbons.

Financing Activities

For the nine months ended September 30, 2007, cash provided by financing activities was $765,253, comprised of a sale of common stock and warrants to an investor totaling $100,000, proceeds from noncontrolling interest in limited partnership of $329,963, and loans from related parties of $335,290.

Future Needs

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

Our current business plan for 2007 calls for us to farmin to eight to twelve prospects and farmout the West Deweyville prospect it has been developing. This business plan calls on our company to raise $4 to $6 million dollars. If we are unable to raise such funding, we will not be able to act on this business plan. To the extent we raise a lesser amount, we will only be able to act on a portion of our business plan.

Pursuant to our licensing agreement and a services agreement with the Institute, an entity owned and operated by Ivan Railyan, our President and Chairman, we are required to pay the Institute minimum annual fees of at least $600,000, which we have satisfied with respect to our fiscal year ending December 31, 2006. In 2006, the fees were paid exclusively from the revenue from fee for service work.

The annual fees to the Institute represent a significant continuing obligation. In 2007 and future years, we intend to fund such payment obligations from revenues generated by operations or making alternative arrangements for payment. If our operating activities do not generate enough revenues to finance the minimum annual fees, we will need to use our available working capital to pay such minimum annual fees. If we lack sufficient working capital, we intend to fund such payment obligations in the future through proceeds from the sales of securities or debt or bank financing. Alternatively, we would seek to obtain a waiver or deferral of payment obligations from the Institute. In the event that we become unable to pay the minimum annual fees or to obtain a waiver or deferral of payment obligations from the Institute, we would be in default of our agreements with the Institute and our business will be irreparably impaired, as most of our mapping and analytic services are performed with the use of technology and services obtained from the Institute. In July 2007, we entered into an amendment of our licensing agreement with the Institute, pursuant to which the annual license fee for 2007 payable to the Institute has been deferred to 2008, and commencing in 2008, subject to certain financial criteria, the annual license fee is payable a rate of no more than $300,000 per year. We have entered into preliminary discussions with the Institute pertaining to further modifications of the license agreement, including a waiver of fees in connection with fiscal 2007.

It is our intention to sell securities and incur debt when the terms of such transactions are deemed favorable to us and as necessary to fund our current and projected cash needs. While we have raised capital to meet our working capital and financing needs in the past, additional financing is required in order to meet our current and projected cash flow deficits from operations and development of oil and gas properties. We are seeking financing, which may take the form of equity, convertible debt or debt, in order to provide the necessary working capital. While we have been in negotiations with a private investor for the sale of our common stock and common stock purchase warrants, we currently have no commitments for financing. There is no guarantee that we will be successful in consummating the transaction.

We are in the process of discussions with several investment banks and venture capital funds to obtain bridge and long term debt or equity funding. To date, we have not been successful in raising significant additional equity or debt capital. We have not received certain funding we expected to receive from Enficon Establishment or Kiev Investment Group as a result of the breaches of certain agreements by Kiev Investment Group and Enficon Establishment.

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

AUDITOR'S OPINION EXPRESSES DOUBT ABOUT THE COMPANY'S ABILITY TO CONTINUE AS A "GOING CONCERN"

The report of the former independent registered public accounting firm on our December 31, 2006 financial statements included in our Annual Report for the year ended December 31, 2006 states that our recurring losses from operations and net capital deficiency, raise substantial doubt about our ability to continue as a going concern. If we are unable to raise new investment capital, we will have to discontinue operations or cease to exist, which would be detrimental to the value of our common stock. We can make no assurances that our business operations will develop and provide us with significant cash to continue operations.

We have a working capital deficiency and substantially no cash. We have been and are seeking financing, which may take the form of equity, convertible debt or debt, in order to provide the necessary working capital. While we have been seeking equity or debt capital since September 2006, to date, we have not been successful in closing on any significant equity or debt capital raise. Further, in the event we obtain an offer of private or public funding, there is no assurance that such funding would be on terms favorable to us. The failure to obtain such funding will threaten our ability to continue as a going concern.

PLAN OF OPERATIONS

Addressing the Going Concern Issues

Our ability to continue as a going concern is subject to our ability to raise additional equity or debt capital and to develop profitable operations. We are devoting substantially all of our efforts to developing our business and raising capital. We continue to experience net operating losses. During the next twelve months, we plan to continue to restructure our operations to reduce operating costs

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

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

During 2005 and the first part of 2006, we focused primarily on obtaining royalty or ownership rights in projects on which we provide professional services with a secondary effort on obtaining cash fee for service business. In mid 2006, we refocused our efforts to obtain more cash fee for service business. This resulted in our company obtaining a $2.5 million dollar service contract from Petrobras International Braspetro BV, a major oil and gas exploration company, during the second half of 2006.

During the next twelve months, we anticipate focusing on obtaining additional investment capital to restart our service and exploration efforts, and to create case studies demonstrating the value of the STeP technology. We intend to demonstrate the value of our licensed technology by pursuing (i) a fee for service business model with exploration companies, which may include seeking royalties on the exploration project and (ii) a farmin strategy of investing in drilling projects when our STeP technology concurs with the available seismic studies on the projects. Our goal is to demonstrate a success rate which is better than industry averages and thereby establish the value of our technology while generating hydrocarbon reserves and internally generating cash flow to support our cost of operations.

Our goal continues to be to enter into agreements whereby we provide our services, such as providing site locations and depth locations, to natural resource exploration companies in exchange for royalties or ownership rights, and fees, with regard to a specific natural resource exploration property. We may also seek to finance or otherwise participate in the efforts to recover natural resources from such properties. Our intent, in the event our cash flow permits, is to finish the land acquisition in connection with the West Deweyville prospect and farmout the project to obtain financing for the drilling program on this prospect.

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

Product Research and Development

Under our past business model, we do not anticipate incurring significant research and development expenditures during the next twelve months. We are changing our business model to focus on utilizing our licensed technology in connection with the acquisition of royalties, ownership rights or land rights for purposes of oil or mineral exploration, and such exploration may involve significant development expenditures.

Acquisition or Disposition of Plant and Equipment

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

Acquisition of Oil and Gas Properties

We are seeking to raise $4 to $6 million to pursue development efforts during the next twelve months. We plan to use this money to complete development efforts of the West Deweyville prospect and to engage in several farmin projects.

Employees

As of September 30, 2007, we have six employees. We also utilize the services of consultants in connection with certain projects. Our employment plans are uncertain given our working capital deficit and our inability to plan future development efforts until funding is achieved. Because of our insolvency, as of March 2007, we have ceased paying salaries to employees. Notwithstanding the salary deferrals, certain employees have continued to work for the company.

INFLATION

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

SEASONALITY

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

OFF-BALANCE SHEET ARRANGEMENT

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

TRENDS, RISKS AND UNCERTAINTIES

We anticipate that high oil prices this year may cause natural resources exploration companies to conduct more drilling activities and investigate the potential of previously undiscovered oil reserves, and if oil prices remain high, we anticipate that our services will be in higher demand. However, that may create a short supply of drilling rigs and other equipment needed for exploration activities, which may drive up the costs of exploration activities.

RECENT ACCOUNTING PRONOUNCEMENTS

ITEM 3. CONTROLS AND PROCEDURES

Our management, with the participation of our Chief Executive Officer and Principal Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period ended September 30, 2007. Based on such evaluation, our Chief Executive Officer and Principal Financial Officer have concluded that, as of such date, our disclosure controls and procedures are effective in providing reasonable assurance that the information required to be disclosed in this report has been recorded, processed, summarized and reported, on a timely basis, as of the end of the period covered by this report, and that our disclosure controls and procedures are also effective to ensure that information required to be disclosed in the reports we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2007 to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On October 4, 2007, Baker Hughes Oilfield Operations Inc. filed a complaint before the Supreme Court of the State of New York, Case No. 603274/07, against a limited partnership, Tierra Nevada Exploration Partners, LP, of which or subsidiary corporation, Terra Resources, Inc. is the general partner, and as the general partner, that subsidiary was also named as a defendant The complaint alleges five causes of action, breach of contract, quantum meruit, account stated, accord and satisfaction, and unjust enrichment, and seeks damages of $178,920 together with pre-judgment interest, and costs and expenses in connection with the lawsuit. The subsidiary and the limited partnership intend to file an answer to the complaint, but there can be no assurance, however, that the defendants will be entirely successful in defense of this action, because the defendants do not contest that the plaintiff in that action rendered services to the limited partnership for which it has not been fully paid. The plaintiff acknowledges receipt of payment of $450,000 for its services, but seeks, an additional $178,920 it claims is owed. While the loss of this lawsuit, in and of itself, would not be expected to have a direct material adverse affect on our results of operations and financial position, there is no representation or assurance that such loss would not have a material negative affect on the Company in the future.

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

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

On October 1, 2007, we issued to Stuart Sundlun, an individual, 250,000 shares of common stock, as payment for consulting services.

ITEM 5. OTHER INFORMATION

In 2005, Tierra Nevada Exploration Partners acquired eight oil and gas leases, effective as of November 1, 2005, covering approximately 14,361 acres, on Federal lands in the State of Nevada from auctions conducted by the Bureau of Land Management, an agency within the U.S. Department of the Interior. In October 2007, Tierra Nevada Exploration Partners elected to forego payment on the annual rental on the eight leases. Tierra Nevada Exploration Partners also holds two additional oil and gas leases, effective as of January 1, 2006, covering approximately 1,240 acres, on Federal lands in the State of Nevada, and may elect to forego payment on those two leases when due. By the terms of the leases, the lack of payment of annual rental terminates the leases.

ITEM 6. EXHIBITS

The following exhibits are filed with this report:

Exhibit Number	Description of Exhibit

10.1	Form of Stock Options dated August 13, 2007 (Incorporated by reference to Exhibit 10.1 of Form 8-K, filed on August 20, 2007)
10.2	Form of Stock Options dated October 1, 2007 (Incorporated by reference to Exhibit 10.1 of Form 8-K, filed on October 5, 2007)
11*	Statement re: computation of per share earnings is hereby incorporated by reference to “Financial Statements” of Part I - Financial Information, Item 1 – Financial Statements, contained in this Form 10-QSB.
31.1*	Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
31.2*	Certification of Principal Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
32.1*	Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350
32.2*	Certification of Principal Financial Officer pursuant to Securities Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350
_____
* Filed herewith.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	TERRA ENERGY & RESOURCE TECHNOLOGIES, INC.

Dated: November 19, 2007	By: /s/ Dmitry Vilbaum
	Dmitry Vilbaum
	Chief Executive Officer

Dated: November 19, 2007	By: /s/ Dan Brecher
	Dan Brecher
	Principal Financial Officer

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