CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISION OF THE PRIVATE LITIGATION REFORM ACT OF 1995. Statements contained in this filing that are not based on historical fact, including without limitation statements containing the words "believe," "may," "will," "estimate," "continue," "anticipate." "intend," "expect" and similar words, constitute "forward-looking statements". These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, events or developments to be materially different from any future results, events or developments expressed or implied by such forward-looking statements. These factors include, among other, the following: general economic and business conditions, both nationally and in the regions in which Exterra Energy, Inc. ("we", "Exterra" or "Company") operates; technology changes, the competition we face; changes in our business strategy or development plans; the high leverage of Exterra; our ability to attract and retain qualified personnel; existing governmental regulations and changes in, or our failure to comply with, governmental regulations; liability and other claims asserted against us; our ability or the ability of our third-party suppliers to take corrective action in a timely manner with respect to changing government regulations; and other factors referenced in our filings with the Securities and Exchange Commission.

Results of Operations

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

                                      Three Months Ended August 31,
                                      2009                      2008
                             -----------------------   -----------------------
                               Amount     Percentage     Amount     Percentage
                             ----------   ----------   ----------   ----------
Total revenues               $  72,392       100%      $ 193,246        100%

Total Expenses                 296,024       409%        638,281        330%

Total Other Expenses           (28,100)      -39%        (34,983)       -18%

Income before income taxes    (251,732)     -348%       (480,018)      -248%
Net loss                     $(251,732)     -348%      $(480,018)      -248%

Three months ended August 31, 2009 and 2008

Oil and Gas Revenues

Revenues for the three months ended August 31, 2009 and 2008 were $72,392 and $193,246, respectively. The decrease is due to decreased production and decreases in commodity pricing. We expect our oil and gas revenues to increase in the following months as our oil and natural gas properties are brought to greater levels of production.

Lease Operating Expenses

Lease operating expenses for the three months ended August 31, 2009 and 2008 were $22,754 and $88,758, respectively. The decrease is due to decreased production and decreases in commodity pricing. We expect our operating expenses to continue to grow as we repair and improve the wells we have purchased.

Depreciation and Depletion

Depreciation and depletion expenses for the three months ended August 31, 2009 and 2008 were $24,720 and $65,276, respectively. The decrease in the depletion and depreciation is due to the decrease in the depletable property base as a result of impairment recognized during the year ended May 31, 2009.

General and Administrative Expenses

General and administrative expenses for the three months ended August 31, 2009 and 2008 were $248,550 and $484,247, respectively. The decrease is principally due to the change in management. We expect our general and administrative expenses to decline in the current year as the majority of non-cash consulting expenses are non-recurring.

Interest Expense

Interest expense for the three months ended August 31, 2009 and 2008 were $28,100 and $34,983, respectively. The decrease is due to a reduction in non-cash interest expense for the three months ended August 31, 2009 as compared to the same period in 2008.

Net Loss

Our net loss for the three months ended August 31, 2009 and 2008 was $251,732 and $480,018, respectively. The decrease is primarily attributable to the decrease in general and administrative expenses noted above.

Liquidity and Capital Resources

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

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

As of August 31, 2009, Exterra had cash of $2,098 and negative working capital of $2,233,943. This compares to cash of $7,505 and negative working capital of $2,051,932 for the year ending May 31, 2009.

Debts outstanding at August 31, 2009 are as follows:

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

(2) Convertible loans $367,500

(3) Note payable to Coventry Capital, net of discount $462,125

(4) Note payable to ROYALCO Oil and Gas Corporation $50,000

Total debt outstanding - $1,079,625

(1) Principal with interest (10% per annum) on the note are payable on the tenth
(10th) day of each calendar month, beginning on January 10, 2007, in monthly installments equal to the difference between the prior month's (i) income and
(ii) the royalties, severance, ad valorem, lifting and transportation expenses directly related to the operation of the Pecos County leases. Each monthly installment will be applied first to any outstanding and accrued interest and, thereafter, to principal on the note. The entire principal amount outstanding under the note and all accrued interest thereon was due and payable on July 15, 2008. The note payable is secured by the oil and gas properties and 20,000 shares of the Company's restricted common stock. The Company has accrued $65,041 in interest on the note payable as of August 31, 2009. As the Company is unable at present to pay the balances due, we are seeking an extension from the Lender. There are no guarantees these discussions will be successful.

(2) During the year ended May 31, 2007, the Company received $367,500 from the sale of its Convertible Loans. The Convertible Loans were due June 30, 2008 and bear interest at 10% per annum payable quarterly. In addition, 10% of the face value of the Convertible Loans is due to the holders as a revenue sharing bonus. This bonus is due from initial production revenue realized from the first six months of net revenue from the University Lands, Pecos County, Texas. Furthermore, 205,900 common shares in aggregate were issued as a bonus. These bonus shares are restricted from sale for 2 years. The Convertible Loans are convertible into common shares of the Company at $45 per share for a total of 8,167 common shares. The Company is currently negotiating an extension with the Convertible Loan Holders. There are no guarantees these negotiations will be successful.

Through August 31, 2009 a net revenue sharing bonus has not been paid as the University Lands have yet to yield net revenue. The Company has accrued interest of $57,908 at August 31, 2009 on the Convertible Loans.

(3) Principal with interest (18% per annum) due monthly in blended payments of $20,000 commenced December 7, 2007. The loan is secured by certain oil and gas properties and was due May 7, 2008. The Company had accrued $117,183 in interest as of August 31, 2009. The Company successfully re-negotiated the terms of the Loan. The debt was settled with 5,000,000 shares of stock issued subsequent to August 31, 2009.

(5) Principal and interest (10% per annum) is un-secured and due April 15, 2010. The Company has accrued $2,010 in interest as of May 31, 2009.

We believe these funds are inadequate to satisfy current operation needs and comply with debt obligation for the next 12 months. Additional financing whether debt or equity is necessary although we cannot provide any assurance we will be able to successfully raise additional funds as needed to compete in the energy market.

Cash Flow from Operating Activities

For the three-month period ended August 31, 2009, net cash used by operating activities was $25,407, versus net cash used by operating activities of $41,656 for the three-month period ended August 31, 2008. This decrease in net cash used by operations activities is primarily due to decreased general and administrative expenses.

Cash Flow from Financing Activities

For the three-month period ended August 31, 2009, net cash provided by financing activities was $20,000, versus net cash provided by financing activities of $126,435 for the three month period ended August 31, 2008. The decrease was due to private placement stock sales that occurred during the three month period ended August 31, 2008 that did not occur for the same period in 2009.

Subsequent Events

Subsequent to August 31, 2009, Exterra issued 5,000,000 shares of common stock for settlement of $579,308 of principal and accrued interest on one of its notes payable.

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

Hedging

We did not hedge any of our oil or natural gas production during 2009 and have not entered into any such hedges from August 31, 2009 through the date of this filing.

Contractual Commitments

Information about contractual obligations at August 31, 2009 did not change materially from the disclosures in our Annual Report on Form 10-K for the year ended May 31, 2009.

Off-Balance Sheet Arrangements

As of August 31, 2009, we had no off-balance sheet arrangements.

Related Party Transactions

During the quarter ended August 31, 2009, Exterra was loaned $20,000 from ROYALCO Oil & Gas Corporation. ROYALCO Oil and Gas is a private oil and gas company in Texas that is owned and controlled by Robert Royal, CEO and Director and Todd Royal, President and Director.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.