UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-K



(Mark One)





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

For the fiscal year ended December 31, 2008



|o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------

For the transition period from __________ to __________.



|Commission file number:333-90272
|--------------------------------



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



|DELAWARE                                                       |  | 56-1940918                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification No.)
|                                                               |  |                                     
|99 Park Avenue, 16th Floor, New York, NY                       |  | 10016                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



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



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



Securities registered under Section 12(g) of the Exchange Act:  None



Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.oYesxNo



Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.xYesoNo



Indicated by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the 90 past days.xYesoNo



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



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

| | Large accelerated filero                                            | Accelerated filero        
| | ------------------------------------------------------------------- | --------------------------
| | Non-accelerated filero(Do not check if a smaller reporting company) | Smaller reporting companyx



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YesoNox



The aggregate market value of voting and non-voting common equity of the issuer held by non-affiliates on June 30, 2008 was $4,362,428.



As of March 18, 2009, we had 58,358,338 shares of common stock issued and outstanding.



Documents Incorporated by Reference:None.





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TERRA ENERGY & RESOURCE TECHNOLOGIES, INC.



TABLE OF CONTENTS



|           |                                                                                                              | Page
|---------- | ------------------------------------------------------------------------------------------------------------ | ----
|           |                                                                                                              |     
|PART I     |                                                                                                              |     
|           |                                                                                                              |     
|Item 1.    | Business                                                                                                     | 3   
|Item 1A.   | Risk Factors                                                                                                 | 9   
|Item 1B.   | Unresolved Staff Comments                                                                                    | 9   
|Item 2.    | Properties                                                                                                   | 9   
|Item 3.    | Legal Proceedings                                                                                            | 9   
|Item 4.    | Submission of Matters to a Vote of Security Holders                                                          | 10  
|           |                                                                                                              |     
|PART II    |                                                                                                              |     
|           |                                                                                                              |     
|Item 5.    | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 11  
|Item 6.    | Selected Financial Data                                                                                      | 12  
|Item 7.    | Managements Discussion and Analysis of Financial Condition and Results of Operations                        | 13  
|Item 7A.   | Quantitative and Qualitative Disclosures About Market Risk                                                   | 23  
|Item 8.    | Financial Statements and Supplementary Data                                                                  | 24  
|Item 9.    | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure                         | 55  
|Item 9A.   | Controls and Procedures                                                                                      | 55  
|Item 9B.   | Other Information                                                                                            | 56  
|           |                                                                                                              |     
|PART III   |                                                                                                              |     
|           |                                                                                                              |     
|Item 10.   | Directors, Executive Officers and Corporate Governance                                                       | 57  
|Item 11.   | Executive Compensation                                                                                       | 60  
|Item 12.   | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               | 63  
|Item 13.   | Certain Relationships and Related Transactions, and Director Independence                                    | 67  
|Item 14.   | Principal Accountant Fees and Services                                                                       | 72  
|Item 15.   | Exhibits, Financial Statement Schedules                                                                      | 73  
|           |                                                                                                              |     
|Signatures |                                                                                                              | 75  





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PART I



|ITEM 1. | BUSINESS
|------- | --------



General Overview



We are a Delaware corporation named Terra Energy & Resource Technologies, Inc.



We began our current business operations, on May 19, 2005, when we acquired the business of Terra Insight Corporation.  We provide 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.



Our business strategy involves seeking revenues 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 projects that we undertake through joint venture and similar relationships with third parties.



We maintain our executive offices at 99 Park Avenue, 16th Floor, New York, New York 10016, telephone number:  212-286-9197.  We maintain a web site atwww.terrainsight.com.



Current Status of Operations



As of December 31, 2008, we have incurred large operating losses, have a large working capital deficit of approximately $1.8 million, and had cash of $700,001.  These factors raise substantial doubt about our ability to continue as a going concern.  Our ability to continue as a going concern is dependent on our ability to obtain new capital and generate revenues from our service activities.



Since our inception in 2005 until December 31, 2008, we generated approximately $3.6 million in cumulative revenue, incurred cumulative cost of revenues of approximately $2.25 million, and earned a cumulative gross profit of approximately $1.35 million.  Against such cumulative gross profit, we have incurred approximately $16.7 million of cumulative operating costs and wrote-off a cumulative total of approximately $6.9 million of oil and gas properties. The level of fee for service business has not been sufficient to support our operational expenses.



We have supported our operations since inception in 2005 through the sale of $5 million of convertible debentures ($3 million in fiscal 2005 and $2 million in fiscal 2006), sale of approximately $3.76 million of noncontrolling interests in drilling limited partnerships ($3.43 million in fiscal 2006 and $0.33 million in fiscal 2007), sale of $3.5 million of common stock ($3.25 million in fiscal 2005, $0.15 million in fiscal 2006, and $0.1 million in fiscal 2007), and sale of $1.0 million of preferred stock ($0.5 million in fiscal 2007 and $0.5 million in fiscal 2008).



Organization History



We were originally incorporated on September 15, 1995 in the State of North Carolina with the name CompuPrint, Inc. Prior to 2002, CompuPrint was a remanufacturer and distributor of laser and ink jet printer cartridges. In 2003, CompuPrint sold all of its operations and assets in exchange for forgiveness of debt, after which CompuPrint had no material operations and was searching for new business opportunities.



On May 19, 2005, CompuPrint entered into a Split-Off Agreement with David Allison, its sole officer, director and controlling shareholder.  CompuPrint transferred all of its assets and liabilities to CompuPrint Ventures, Inc., a newly formed North Carolina corporation, in exchange for all of the equity of CompuPrint Ventures, Inc. Immediately following the transfer, CompuPrint transferred all of its equity of CompuPrint Ventures to Mr. Allison in exchange for 13,086,360 shares of our common stock that he held, which were then cancelled, and for the release by Mr. Allison of all rights to any amounts advanced or otherwise loaned by him to CompuPrint.





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On May 19, 2005, CompuPrint entered into an Agreement and Plan of Reorganization with Terra Insight Corporation and its shareholders.  In a transaction viewed as a reverse acquisition, CompuPrint issued 35,029,980 shares of common stock, constituting approximately 90% of its outstanding common stock, in exchange for all of the equity of Terra Insight Corporation. Mr. Allison resigned as an officer and director of CompuPrint, and Ivan Raylyan, Roman Rozenberg and Dan Brecher were appointed to as directors and officers of CompuPrint.  No director, executive officer or affiliate of Terra Insight Corporation had any direct or indirect interest in CompuPrint prior to the completion of the reverse acquisition. Terra Insight Corporation, a Delaware corporation, was incorporated on January 7, 2005.  Its business plan was to provide mapping and analysis services to assess the location and nature of natural resources.
Historically, Terra Insight Corporation has been our primary operating subsidiary.



On July 6, 2005, we formed an entity named Tierra Nevada Exploration Partners, LP, a Delaware limited partnership, to engage in oil projects in the State of Nevada.  Terra Resources, Inc. is the general partner of the partnership.  Terra Resources, Inc., a Delaware corporation wholly-owned by Terra Insight Corporation, was incorporated on April 4, 2005.  We utilize Terra Resources for our oil and gas and mining activities, including ownership of related leases and licenses.



On July 12, 2005, we formed an entity named New Found Oil Partners, LP, a Delaware limited partnership. The entity was formed to engage in future oil and gas activities in the Western United States and was cancelled in April 2008. Terra Resources was the general partner of the partnership.



On January 4, 2006, we formed an entity named TexTerra Exploration Partners, LP, a Delaware limited partnership, to engage in oil projects in the State of Texas. Terra Resources is the general partner of the partnership.



On January 17, 2006, Terra Resources acquired a 95% equity interest in NamTerra Mineral Resources (Proprietary) Limited, an entity organized under the laws of the Republic of Namibia.  The entity was formed to engage in the prospecting of precious stones in Namibia.



On March 20, 2006, we formed an entity named Terra Resources Operations Co., Inc., a Texas corporation wholly-owned by Terra Resources.  The entity was formed as a shell entity for future operations in the State of Texas, and has not engaged in any material operations to date.



On August 24, 2006, we formed Terra Insight Technologies Corporation, a wholly-owned Delaware corporation.  The entity was formed as a shell entity to be utilized for future general corporate purposes, and has not engaged in any material operations to date.



Effective November 13, 2006, we reincorporated under the laws of the State of Delaware as Terra Energy & Resource Technologies, Inc.  Pursuant to a Plan and Agreement of Merger, CompuPrint was merged into Terra Energy & Resource Technologies, Inc., a wholly-owned Delaware corporation formed for the purpose of reincorporation.  The reincorporation merger was approved by the shareholders at a special meeting held on November 3, 2006.  At the special meeting, the shareholders also approved an increase in our 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.



On December 5, 2007, we formed Terra Resource Technologies, Inc., a wholly-owned New York corporation now known as Terra Insight Services, Inc.  As of September 2008, we conduct our services operation through Terra Insight Services.



We have not been subject to bankruptcy, receivership or any similar proceedings.





4



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Business of Terra Insight Corporation



We provide 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. The proprietary analytic technology utilizes a broad range of available geological information, together with satellite and aerial photographs, supplementing other geological exploration work, such as thematic processing of recent remote Earth sensing data, making it possible to optimize the exploration process, including acquisition of seismic or other geophysical data. These efforts can be directed to various uses, and are used with regard to exploration projects covering a wide range of natural resources. The mapping services consist of an analysis of a specified geographic area to predict where natural resources, such as oil, mineral ores, water, or diamonds
are likely to exist, so that assessment can be made of the commercial prospects of exploring, drilling or mining in a specified area. The mapping services and the analysis of the geographic area are accomplished using mathematical techniques to process the information gathered. The mapping services do not replace traditional exploration techniques, but rather are intended to supplement and optimize the traditional geological exploration.



Most of the mapping and analytic services are performed with the use of technology and services obtained from The Institute of Geoinformational Analysis of the Earth (the Institute), pursuant to an exclusive licensing agreement and a services agreement.  The Institute is a Lichtenstein corporation with a principal office located in Moscow, Russia, which specializes in the development and application of remote sensing and geographic information technologies. Remote sensing and spatial database technologies are tools used by natural resource scientists to better understand, use and manage the Earths resources. The Institute is owned and operated by Ivan Raylyan, our former President and former Chairman, and an affiliate of a substantial stockholder.  We have an exclusive, worldwide renewable license for a 30-year term from December 2008 for the use of the technology of the Institute.  The
Institute has also entered into an agreement to render services to us, and to refer all inquiries for commercial contract services to us.



Products and Services



We provide information, consulting services and reports that include geological maps of a defined geographic territory and our analyses and assessment of the likelihood of the existence of a targeted-for natural resource in a specifically requested territory, so that our customers can assess the commercial prospects of exploring, drilling or mining in a specified area.



We provide our services for a cash fee, on a per service transaction basis to our customers. Our services are not available to the general public.  Going forward, we intend, if financing permits, to farmin to other parties drilling projects based on a review of the farmin package and the results of our satellite-based sub-terrain prospecting (STeP) technology and other technologies we seek to acquire.  The goal is to improve the value of our technology as a predictive tool and to generate reserves.  We may also seek to invest in, arrange for, or contribute capital to, such exploration projects.



Sales and Marketing



To date, our customers have been those of whom our executives had direct prior knowledge.  We seek customers on an individual basis.  We do not utilize a sales or marketing team.



Competitive Business Conditions



We believe the principal competitive factors in our business are the accuracy of information we provide to customers and price.  Although we do not believe that we have a direct competitor for our particular service offering, we do face significant competition within the natural resource exploration service industry.



We compete against major natural resource exploration and production companies that conduct their geological and exploration analysis in-house, and other independent geological and information companies, consultants and service providers.  This includes companies and consultants that provide software for visualizing, analyzing and modeling sub-surface structures, that provide geology maps and databases, and that perform geological interpretation and assessment services.





5



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Dependence on Major Customers



For the year ended December 31, 2008, we derived all of our revenue from two customers.  For the year ended December 31, 2007, we did not generate any revenues from our service operations.



Agreements with the Institute



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



Under the Technology License Agreement, dated as of December 15, 2008, we have, through our subsidiary, Terra Insight Services, Inc., an exclusive, worldwide renewable license for a 30-year term from December 2008 for the commercial use of all of the technology of the Institute, which has as its focus the exploration, sustainable development and management of the Earths resources and the monitoring of the environment.  Pursuant to the license, the Institute will be entitled to compensation certain project payments generated from the use of the Institutes technology in an amount to be determined on orders for our services, provided that such project payments shall not exceed 10% over the Institutes costs.  Such project payments are not duplicative of any services fees payable by Terra Insight Services, Inc. to the Institute under the Services Agreement. Under the license agreement, Terra
Insight Services, Inc. has an exclusive option to purchase from the Institute its mapping technology, to terminate on the earlier of (i) June 30, 2012 or (ii) the termination of the license agreement.



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



Prior to December 2008, through our subsidiary, Terra Insight Corporation, we held an exclusive, worldwide renewable license with the Institute for a 32-year term from 2005.  Under the former license, we were required to pay the Institute an annual license fee of $600,000, subject to certain deferrals and credits, under the license agreement until we have achieved certain milestones, upon which the payments were to increase.  In July 2006, the license terms were amended to defer payment of the annual license fee for calendar year 2007 until calendar year 2008, provided that certain revenue targets were achieved, and make the fee payable at the rate of no more than $300,000 per year,.  In December 2007, the license terms were further modified to waive the annual license fees payable with respect to calendar years 2007 and 2008.



In connection with the former license, prior to December 2008, our subsidiary, Terra Insight Corporation, had a services agreement with the Institute, for a 32-year term from 2005, to render services to us, and to refer all inquiries for commercial contract services to us. Under the former services agreement, the Institute was to perform certain contract services for us 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, with minimum annual services fees totaling $500,000, subject to certain deferrals and credits.  In July 2006, the service agreement terms were amended to defer payment of the annual service fee for calendar year 2007 until calendar year 2008, provided that certain revenue targets are achieved, and make the fee payable at the rate of no more than $300,000 per year.  In December 2007, the
service fee terms were further modified to waive the annual services fees payable with respect to calendar years 2007 and 2008.





6



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Oil and Gas Leases



Tierra Nevada Exploration Partners held 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 the fourth quarter of fiscal 2007, Tierra Nevada elected to forego payment on the annual rental fees on the Nevada leases.  Under the lease terms, the lack of payment of annual rental results in termination of the leases.  In 2008, Tierra Nevada received notice of the termination of the leases effective as of November 2007.



Tierra Nevada Exploration Partners also held two oil and gas leases, effective as of January 1, 2006, covering approximately 1,240 acres on Federal lands in the State of Nevada from auctions conducted by the Bureau of Land Management.  These two leases terminated in 2007.



Prospecting Licenses



In 2006, our Namibia subsidiary, NamTerra Mineral Resources (Proprietary) Limited (NamTerra), was awarded by the Republic of Namibia six exclusive licenses, covering approximately 1.45 million acres of off-shore territory, for the prospecting of precious stones.  In 2007, NamTerra elected to forego payment on the annual license fees on the licenses, abandoning our rights under the licenses in 2008.  In 2008, NamTerra applied for deregistration of its charter.



Service Agreements



In September 2008, we entered into a service agreement with Semmeous Lion Mining Ltd. Du Niger, pursuant to which we are to provide analysis of potential uranium deposits, in consideration of an aggregate service fees of $299,250, payable in installments through fiscal 2009. We received the first installment payment of $49,875 in 2008.  Due to recent economic conditions, the client has suspended its operations on its licensed territories, and the client may seek to discontinue remaining services under the agreement.



On October 15, 2008, we entered into a service agreement with Nurmunai Petrogaz, LLC, pursuant to which we are to provide geological analysis related to the exploration of hydrocarbons.  The services are to be performed in two phases:  (1) zoning of territories for potential hydrocarbon anomalies; and (2) gas-geochemical survey of the territory.  As of March 31, 2009, the service work for the first phase was completed, and we also delivered to the client the recommendations to perform the second phase.  In November and December 2008, the client pre-paid a retainer for the first phase in the amount of $1,455,900 with the balance of $544,100 due after the completion of the first phase.  The total fee for the two phases is to be $2.4 million under the agreement.



Government Regulation and Compliance with Environmental Laws



We are not aware of any federal, state and local laws, rules and regulations affecting our service business as presently conducted.  In November 2006, we altered our business model to also engage in activities directly involving the exploration and exploitation of oil and other natural resources, for which we may become required to make the expenditures necessary to comply with applicable health and safety, environmental and other regulations.



Oil and gas operations are subject to various United States federal, state and local governmental regulations. Matters subject to regulation include discharge permits for drilling operations, drilling and abandonment bonds, reports concerning operations, the spacing of wells, and pooling of properties and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and gas wells below actual production capacity in order to conserve supplies of oil and gas. The production, handling, storage, transportation and disposal of oil and gas, by-products thereof, and other substances and materials produced or used in connection with oil and gas operations are also subject to regulation under federal, state, provincial and local laws and regulations relating primarily to the protection of human health and the environment.





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To date, expenditures related to complying with these laws, and for remediation of existing environmental contamination, have not been significant in relation to the results of operations of our company. The requirements imposed by such laws and regulations are frequently changed and subject to interpretation, and we are unable to predict the ultimate cost of compliance with these requirements or their effect on our operations.



Intellectual Property



We rely heavily on intellectual property, including the intellectual property we license. We regard licenses and other intellectual property as valuable assets and use intellectual property laws, as well as license and confidentiality agreements with our employees, certain customers, dealers, and others, to protect our rights.  In addition, we have sought to exercise reasonable measures to protect our intellectual property rights and we intend to enforce these rights when we become aware of any potential or actual violation or misuse.  Intellectual property licensed from third parties, including the Institute, have been a vital component of our service offerings.



Employees



As of December 31, 2008, we have four employees, of which two persons, our Chief Executive Officer and our President, are full time employees.



Executive Officers of the Registrant



The following table sets forth our executive officers as of December 31, 2008.



|Name                 |  | Age |  | Position                                                         
|-------------------- |  | --- |  | -----------------------------------------------------------------
|Dmitry Vilbaum       |  | 40  |  | Chief Executive Officer and a Director                           
|Dr. Alexandre Agaian |  | 57  |  | President, Principal Financial Officer and a Director            
|Ivan Raylyan         |  | 42  |  | Chief Executive Officer of Terra Insight Technologies Corporation
|Kenneth Oh           |  | 37  |  | Secretary                                                        
|Elena Palgova        |  | 34  |  | Secretary of company subsidiaries                                



The biographies of Mr. Vilbaum and Dr. Agaian are set forth under Item 10 of this report.



Mr. Raylyan holds or has formerly held the following positions with the Company and its subsidiaries: Chairman of the Board from May 19, 2005 to July 24, 2008; Director of Technology from September 30, 2006 to July 24, 2008; President from May 19, 2005 to September 30, 2006. He has served in the following capacities with respect to the Companys subsidiaries: Chairman of Terra Insight Corporation (TIC) from January 7, 2005 to July 24, 2008; President of TIC from January 7, 2005 to September 30, 2006; Chairman of Terra Resources, Inc. (TRI) from April 4, 2005 to July 24, 2008; President of TRI from April 4, 2005 to September 30, 2006; Chief Executive Officer and President of Terra Insight Technologies Corporation (TITC) since July 24, 2008; Chairman of TITC from August 24, 2006 to July 24, 2008; President of TITC from August 24, 2006 to September 30, 2006; Chairman of
TROC from March 20, 2006 to July 24, 2008; President of Terra Resource Operations Co., Inc. (TROC) from March 20, 2006 to September 30, 2006; and Chairman of Terra Insight Services, Inc. (TISI) from December 6, 2007 to July 24, 2008. In 1997, Mr. Raylyan joined the Institute of Geoinformational Analysis of the Earth, a Liechtenstein company, as the Head of the Representative Office in the Commonwealth of Independent States. From 2003 to the present, Mr. Raylyan has served as Chairman of the Board of the Institute. From 1993 to 1997, Mr. Raylyan served as the Head of Research and Development team of the Russian Defense Ministry, Joint Chiefs of Staff. Mr. Raylyan received a Master of Science degree from the University of Patrisa Lumumby, Moscow in 1991, and an honorary Ph.D. from the Academy of Science, Arts of the CIS Countries, which he received in 2003. Since 2003 to the present, Mr. Raylyan has served as the Vice President of the Academy of Arts and Science
of the Commonwealth of Independent States. In September 2005, Mr. Raylyan was elected as a member of the Russian Academy of Natural Sciences.





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Mr. Oh has served as Secretary of the Company since June 1, 2005. Mr. Oh works on a part-time basis. He has previously served as Secretary with respect to certain subsidiaries of the Company, TIC, TRI, TITC, TROC, and TISI, at various times in 2005, 2006, 2007 and part of 2008. Mr. Oh is a practicing attorney. From 1998 through the present, Mr. Oh has been an attorney with Law Offices of Dan Brecher. Law Offices of Dan Brecher serves as our legal counsel. Mr. Oh graduated from Pomona College with a B.A. degree in 1993 and from Fordham University with a J.D. degree in 1997.



Ms. Palgova serves in the following capacities with respect to the Companys subsidiaries since July 24, 2008: Director of TIC; Secretary of TIC; Secretary of TRI; Secretary of TITC; and Secretary of TISI. Ms. Palgova has also served as a legal consultant to the Company since May 2008. Since 2006, Ms. Palgova has been the General Counsel of the Russian Technologies Venture Fund, a venture capital fund in Russia, and employed by Russian Technologies Investment Consultants Limited, a management consulting company for the fund. From 1997 to 2006, Ms. Palgova worked with several international law firms in Moscow, Russia, including with Baker & McKenzie from 2005 to 2006, Capital Legal Services Ltd. from 2002 to 2005, and Mannheimer Swartling from 1998 to 2000. Ms. Palgova graduated from MGIMO (University) with a Degree in Law with concentration in International Commercial Law in 1997 and received an LL.M
degree from Cornell Law School in 2001.



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



Not required.



|ITEM 1B. | UNRESOLVED STAFF COMMENTS
|-------- | -------------------------



Not applicable.



|ITEM 2. | PROPERTIES
|------- | ----------



Office Facilities



We presently lease our executive office facilities in New York, New York, on a month-to-month basis at the rate of $2,500 per month.  In 2006 through March 2007, we subleased executive office facilities on a month-to-month basis pursuant to an oral agreement with a former officer and director of our company.  The rent was $2,250 per month through March 2006, $4,500 per month through August 2006, and $8,000 per month through March 2007.  The increases in rent were due to occupancy of additional space.  As of April 1, 2007, we leased the office facilities from a third party.  In April 2007, we reduced the size of our offices and our rental expense was $2,000 per month through August 2008.  We believe that our present office facilities are suitable for our present needs; however, we may increase or decrease the size of our office facilities, depending on our financial condition.



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



On or about December 11, 2008, Illinois National Insurance Company filed a complaint before the Civil Court of the City of New York, Case No. 74698/08, against Terra Insight Corporation, alleging failure to pay insurance premiums in the amount of $10,598.







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



We held an annual meeting of stockholders on October 28, 2008.  Each holder of shares of common stock was entitled to one vote per share held, and each holder of shares of preferred stock was entitled to three votes per share held.  The common stock and the preferred stock voted as a single class on the matters.  A voting summary of the matters voted upon is set forth below.



|   |                        | For        |  | Votes Withheld
|-- | ---------------------- | ---------- |  | --------------
|1. | Election of directors: |            |  |               
|   | Dmitry Vilbaum         | 49,771,590 |  | 386,033       
|   | Dr. Alexandre Agaian   | 49,771,590 |  | 386,033       
|   | Mikhail Gamzin         | 49,771,590 |  | 386,033       
|   | Evgeny Roytman         | 49,771,590 |  | 386,033       
|   | Dmitri Moiseyev        | 49,771,590 |  | 386,033       



|   |                                                                                                                                                                                    | For        |  | Against |  | Abstentions |  | Non-Votes
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------- |  | ------- |  | ----------- |  | ---------
|2. | Ratification of the selection of Kempisty & Company
Certified Public Accountants PC as independent registered
public accounting firm for the fiscal year ending
December 31, 2008. | 50,083,923 |  | 73,700  |  | 0           |  | 0        







10



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PART II



|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | ------------------------------------------------------------------------------------------------------------



Market Information



Our common stock is quoted on the OTC Bulletin Board under the symbol TEGR.  The following table sets forth, for the fiscal periods indicated, the high and low bid prices per share of common stock as reported on the OTC Bulletin Board. The quotations reflect inter dealer prices, without retail mark-up, mark-down or commissions and may not represent actual transactions.



|Fiscal Year 2007                  |  | High  |  | Low  
|--------------------------------- |  | ----- |  | -----
|Quarter ending March 31, 2007     |  | $0.34 |  | $0.20
|Quarter ending June 30, 2007      |  | $0.33 |  | $0.15
|Quarter ending September 30, 2007 |  | $0.24 |  | $0.09
|Quarter ending December 31, 2007  |  | $0.22 |  | $0.06



|Fiscal Year 2008                  |  | High  |  | Low  
|--------------------------------- |  | ----- |  | -----
|Quarter ending March 31, 2008     |  | $0.30 |  | $0.08
|Quarter ending June 30, 2008      |  | $0.17 |  | $0.08
|Quarter ending September 30, 2008 |  | $0.15 |  | $0.02
|Quarter ending December 31, 2008  |  | $0.12 |  | $0.03



Holders



As of December 31, 2008, we had 30 record holders of our common stock.  The number of record holders does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies.



Dividends



We have never declared any cash dividends on our common stock. Future cash dividends on the common stock, if any, will be at the discretion of our Board of Directors and will depend on our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions, and other factors that the Board of Directors may consider important. The Board of Directors does not intend to declare or pay cash dividends in the foreseeable future. It is the current policy to retain all earnings, if any, to support future growth and expansion.



Transfer Agent



The transfer agent for our common stock is Continental Stock Transfer & Trust Company.



Recent Sales of Unregistered Securities



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. Each purchaser is a sophisticated investor (as described in Rule 506(b)(2)(ii) of Regulation D) or an accredited investor (as defined in Rule 501 of Regulation D), and each received adequate information about the Company or had access to such information, through employment or other relationships, to such information.





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Effective March 27, 2009, the Company closed upon two separate Securities Purchase Agreements, each dated as of March 19, 2009, with each of Dmitry Vilbaum, the Companys Chief Executive Officer, and an entity controlled by Dr. Alexandre Agaian, the Companys President, pursuant to which they purchased an aggregate of 20,000,000 shares of the Companys common stock and 20,000,000 common stock purchase warrants that are exercisable until March 27, 2012 at $0.05 per share, for the aggregate price of $200,000.  The Company applied the proceeds to its working capital.



Effective March 27, 2009, pursuant to an Exchange Agreement, dated as of March 19, 2009, Esterna Ltd., a Cypriot limited company, converted its 5,000,000 shares of the Companys preferred stock into 5,000,000 shares of the Companys common stock and exchanged its 20,000,000 preferred stock purchase warrants that are exercisable until December 27, 2009 at $0.30 per share into 20,000,000 common stock purchase warrants that are exercisable until March 27, 2012 at $0.05 per share.



On March 27, 2009, pursuant to a Securities Purchase Agreement, dated as of March 19, 2009, with Sergey Sulgin, an individual accredited investor, the Company sold 10,000,000 shares of the Companys common stock and 10,000,000 common stock purchase warrants that are exercisable until March 27, 2012 at $0.05 per share, for the aggregate price of $300,000.  As conditions to the investment, the investor required, among other things, that: the Companys Board of Directors shall initially consist of five persons, Alexandre Agaian, Dmitry Vilbaum, one individual nominated by Esterna Ltd., and two nominees of the investor; Esterna shall have exchanged all of its 5,000,000 shares of the Companys preferred stock into 5,000,000 shares of common stock and all of its 20,000,000 preferred stock purchase warrants into  20,000,000 common stock purchase warrants; and each of the Companys two principal
officers, Alexandre Agaian and Dmitry Vilbaum, shall have made an equity investment of $100,000 for 10,000,000 shares of common stock and 10,000,000 common stock purchase warrants.  The Company applied the proceeds to its working capital.



On April 1, 2009, the Company entered into a consulting agreement with Roman Rozenberg, for a term of one year, pursuant to which the Company issued him warrants to purchase 3,000,000 shares of common stock, exercisable for three years at $0.05 per share.



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



Not applicable.





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



Forward-Looking Information



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



The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included in Item 8, Financial Statements and Supplementary Data in this Annual Report on Form 10-K.



INTRODUCTORY NOTE



Operating Entities



Our business operations have been conducted primarily through our wholly-owned operating subsidiary, Terra Insight Corporation, and since September 2008, our service operations have been conducted through our wholly-owned subsidiary, Terra Insight Services, Inc., a New York corporation.  Terra Insight Corporation is the sole owner of Terra Resources, Inc., a Delaware corporation.  Terra Resources, Inc. is the general partner of two Delaware limited partnerships, TexTerra Exploration Partners, LP (TexTerra) and Tierra Nevada Exploration Partners, LP (Tierra Nevada).  Since the third quarter of fiscal 2006, neither TexTerra nor Tierra Nevada or other entities affiliated with the Company have been engaged in active resource projects.  A third limited partnership entity, New Found Oil Partners, LP, was dissolved in April 2008.



Our Operations and Plans



During fiscal 2008, we focused on identifying new technologies for potential acquisition, marketing and promotion of services, and to obtaining additional investment capital to restart our service and exploration efforts, to restructure our operations to reduce our operating costs, and to create case studies demonstrating the value of our proprietary satellite-based sub-terrain prospecting (STeP) technology for locating natural resources.  We intend to demonstrate the value of our 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 farm-in strategy of investing in drilling projects when our STeP technology concurs with the available seismic studies on the projects.  Our goal is to demonstrate a success rate which is better than industry averages and thereby establish the value
of our technology while generating minerals and hydrocarbon reserves and internally generating cash flow to support our cost of operations.



During fiscal 2008, we performed analysis for fees of $62,840.  In the third quarter of fiscal 2008, we entered into a service contract from which we anticipated generating $299,250 in revenues, of which $49,875 was prepaid in the fourth quarter of fiscal 2008.  Due to recent economic conditions, the client has suspended its operations on its licensed territories, and the client may seek to discontinue remaining services under the agreement.





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



During fiscal 2007, we had no paying customers for our services.  During the first three quarters of 2007, we 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 is to enter into services agreements whereby we provide our services, such as providing site location and depth locations, to natural resource exploration companies in exchange for service fees, with regard to a specific natural resource exploration property.



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



Current Status of Operations



We have incurred large operating losses and have a large working capital deficit of approximately $1.8 million at December 31, 2008. As of December 31, 2008, we had cash of $700,001.  These factors raise substantial doubt about our ability to continue as a going concern.



Our operations are based on two sources of revenue:



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



Since inception, revenues from our fee for service business have not been sufficient to support our operational expenses.  In fiscal 2007 and the first three quarters of fiscal 2008, we did not generate revenues from our service business.



To date, we have not had a commercially successful exploration project, and we have no proven hydrocarbon reserves.



Since inception through fiscal 2008, we have supported our operations primarily through the sale of $5 million of convertible debentures ($3 million in fiscal 2005 and $2 million in fiscal 2006), sale of approximately $3.76 million of noncontrolling interests in drilling limited partnerships ($3.43 million in fiscal 2006 and $0.33 million in fiscal 2007), sale of $3.5 million of common stock ($3.25 million in fiscal 2005, $0.15 million in fiscal 2006, and $0.1 million in fiscal 2007), and sale of $1.0 million of preferred stock ($0.5 million in fiscal 2007 and $0.5 million in fiscal 2008).



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





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CRITICAL ACCOUNTING POLICIES



Several of our accounting policies involve significant judgments and uncertainties.  The policies with the greatest potential effect on our results of operations and financial position are our ability to estimate the degree of impairment to unproved oil and gas properties.  We did not have any accounts receivable at December 31, 2008 or 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.  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.





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Accounts Receivable



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



RESULTS OF OPERATIONS



Revenues



Revenues from services for the years ended December 31, 2008 and 2007 were $62,840 and $0, respectively.  Revenues arose solely from performing service work rather than for an ownership or royalty interest in projects or leaseholds.  The lack of significant revenue arose principally from our seeking to perform services for an ownership or royalty interest in projects or leaseholds rather than for a cash service fee.   During fiscal 2008, we have been negotiating with several international mineral and oil companies to render services on a cash basis.  Generally, our services on a cash basis are pursuant to individual contracts for specific services to be performed over a short time frame, and are not a recurring source of revenues.  In addition, we have been concentrating on seeking potential joint venture partners in exploiting our technology and other opportunities presented to us.  In the third quarter of
fiscal 2008, we entered into a service contract from which we anticipate generating $299,250 in revenues, of which $49,875 was prepaid in the fourth quarter of fiscal 2008.  Due to recent economic conditions, the client has suspended its operations on its licensed territories, and the client may seek to discontinue remaining services under the agreement.



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



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



Until we negotiate and enter into definitive agreements for ownership or royalty interests as compensation, we have no basis for predicting when or how much revenue could be generated from such ownership or royalty interests, or from the exploitation of our land leases, if and when drilling is commenced. Negotiations in connection with ownership or royalty positions often take longer than the negotiations for fee for service arrangements.



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





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Cost of Revenues



There were no costs associated with revenue for the years ended December 31, 2008 and 2007.  Historically, our cost of revenues has consisted 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 Ivan Raylyan, an affiliate of the significant shareholder of the Company.  Based on our historical activities, we anticipate that our costs of revenue will ordinarily be approximately 60% of such revenue; however, our fees payable to the Institute under our new arrangement with the Institute are subject to negotiation on a per project basis.



Operating Expenses



Operating expenses (before the write-off of oil and gas properties) for the year ended December 31, 2008 and 2007 were approximately $2.0 million and $4.86 million, respectively.  Operating expenses as a percentage of revenue was approximately 3,315% for the year ended December 31, 2008.  Because revenues were $0 for the year ended December 31, 2007, operating expenses as a percentage of revenues cannot be calculated.



Operating expenses for the year ended December 31, 2008 consisted primarily of professional fees of approximately $606,000, management salaries and benefits of approximately $724,000 (including approximately $532,000 in stock based compensation), independent contractor fees of $73,000, and travel expenses of $57,000.  The majority of the professional fees result from legal and accounting fees, and from the engagement of various consultants to assist us in marketing our business.



Operating expenses for the year ended December 31, 2007 consisted primarily of professional fees of approximately $1,086,926, management and employee salaries and benefits of approximately $519,402, and stock option expense (employees) of approximately $2,067,966.



Our operating expenses decreased during the year ended December 31, 2008 in comparison to the year ended December 31, 2007 because we have focused primarily on identifying new technologies for potential acquisition, marketing and promotion of services, and on the development of projects.  This has decreased travel related expenses and professional fees.  Additionally, in fiscal 2008, we incurred significantly less stock option expense related to deferred compensation for consultants and employees than in fiscal 2007.



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



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



Write-off of Oil and Gas Properties



During the year ended December 31, 2008, we wrote-off an aggregate of $484,623 in soft development costs principally associated with the acquisition of the Bureau of Land Management land leases in Nevada of $1,662,571.  A significant potion of these costs arose from previous payments to the Institute for its services.





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During the year ended 2007, we wrote-off $0 of our investment in oil and gas properties.



Interest Income



For the years ended December 31, 2008 and 2007, the net interest expenses were $9,373 and $9,569, respectively.



Net Loss



The net losses for the years ended December 31, 2008 and 2007 were $2,391,614 and $3,153,098, respectively.  The decrease in net loss principally resulted from a decrease in operating expenses and a decrease in deferred compensation expenses during the year ended December 31, 2008 compared to the same period in 2007.



Our net loss per common share (basic and diluted) attributable to common shareholders for the years ended December 31, 2008 and 2007 were $0.04 and $0.06, respectively.



LIQUIDITY AND CAPITAL RESOURCES



Our primary sources of liquidity have been proceeds generated by the sale of our common stock, convertible debentures, and preferred stock to private investors, and sales of noncontrolling interests in limited partnerships.  During the year ended December 31, 2008, our cash increased by $194,983 to $700,001.  Of the increase in cash, $291,077 was used by operating activities, $12,828 was used in investing activities, and $500,000 was provided by financing activities.



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



Operating Activities



Cash flows from operating activities resulted in deficit cash flows of $291,077 for the year ended December 31, 2008, as compared with deficit cash flows of $1,918,014 for the year ended December 31, 2007.



For the year ended December 31, 2008, cash flows used in operating activities resulted in deficit cash flows of $291,077, primarily due to a net loss of $2,391,614, plus non-cash charges of $1,164,774, adjustments for an increase in deferred costs of $600,000, an increase in liabilities of $178,920, and a decrease in accounts payable and accrued expenses of $98,750. The most significant drivers behind the decrease in our non-cash working capital were charges for common stock issued for services of $101,250, amortization of consulting fees of $125,426, charges for stock options issued to an officer of $532,006, and $484,623 in write-offs of oil and gas properties.



For the year ended December 31, 2007, the $1,918,014 of cash used by operating activities resulted from a net loss of $3,153,098, non-cash charges of $2,441,554, adjustments for a decrease in prepaid expenses of $47,313, an increase in other assets of $10,374, and a decrease in accounts payable and accrued expenses of $1,243,409.  The most significant drivers behind the decrease in our non-cash working capital were charges for common stock issued for services of $360,800, amortization of consulting fees of $155,307, amortization of deferred compensation (employees) of $2,067,966, charges for salaries converted to equity of $93,381, and warrant issuance expense of $50,130.



Investing Activities



Cash used for investing activities for the years ended December 31, 2008 and 2007 was $12,828 and $9,864, respectively, relating to an increase in oil and gas properties.





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



Financing Activities



For the year ended December 31, 2008, cash provided by financing activities was $500,000, from the sale of preferred stock and warrants.  For the year ended December 31, 2007, cash provided by financing activities was $1,377,340, comprised of a sale of preferred stock and warrants to an investor totaling $500,000, 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 $447,377.



Future Needs



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



Our current business plan for fiscal 2009 and 2010 calls for us to perform our exploration technology services to other companies and to farm-in on eight to twelve prospects.  This business plan calls on our company to raise $3 to $5 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 license agreement and a services agreement with the Institute, we were required to pay the Institute minimum annual fees of at least $600,000.  In December 2007, we entered into an agreement with the Institute, pursuant to which the annual license fees due in connection with calendar year were waived.  Commencing in 2009, subject to certain financial criteria, the annual license fee was to be payable a rate of no more than $300,000 per year.



The annual fees to the Institute represented a significant continuing obligation.  We intended 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 would need to use our available working capital to pay such minimum annual fees.  If we lack sufficient working capital, we intended 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 December 2008, the terms of the license agreement were amended.  Pursuant to the license agreement in effect of as December 2008, the Institute will be entitled to compensation certain project payments generated from the use of the Institutes technology in an amount to be determined on orders for our services, provided that such project payments shall not exceed 10% over the Institutes costs.  Such project payments are not duplicative of any services fees payable by our subsidiary, Terra Insight Services, Inc., to the Institute under the Services Agreement.



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





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



As of December 31, 2008, we had four paid employees, of which two persons worked on a full-time basis and two worked on a part-time basis.  We also had two persons serving as unpaid, non-employee officers of our subsidiaries.  We also utilize the services of consultants in connection with certain projects.  Our future employment plans are uncertain given our working capital deficit and lack of revenues.



We are seeking to raise $3 to $5 million to pursue development efforts during the next twelve months.  We plan to use this money to engage in several farm-in projects.  It is our intention to sell securities and incur debt when the terms of such transactions are deemed favorable to us and as necessary to fund our current and projected cash needs.  While we have raised capital to meet our working capital and financing needs in the past, additional financing is required in order to meet our current and projected cash flow deficits from operations and farm-in on oil and gas properties to create a holding of 8 to 12 natural resource interests in U.S. oil and gas prospects.  We are seeking financing, which may take the form of equity, convertible debt or debt, in order to provide the necessary working capital.  At December 31, 2008, we had no commitments for financing.



There can be no assurance that we will be successful in obtaining such funding or, in the event it is successful, the terms of such funding will be on terms advantageous to us.  Any additional equity financing may be dilutive to 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.



INFLATION



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



SEASONALITY



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



OFF-BALANCE SHEET ARRANGEMENT



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



GOING CONCERN MATTERS



The reports of the independent registered public accounting firms on our December 31, 2008 and 2007 financial statements included in our Annual Reports for the years ended December 31, 2008 and 2007 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 and preferred stock. We can make no assurances that our business operations will develop and provide us with significant cash to continue operations.



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





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



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



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



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



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



RECENTLY ADOPTED ACCOUNTING PRINCIPLES



In September 2006, the Financial Accounting Standards Board (the FASB) issued Statement on Financial Accounting Standards (SFAS) No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13" ("FSP 157-1") and FASB Staff Position 157-2, "Effective Date of FASB Statement No. 157" ("FSP 157-2"). FSP 157-1 amends SFAS 157 to remove certain leasing transactions from its scope. FSP 157-2 delays the effective date of SFAS 157 for all non-financial assets and
non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company adopted SFAS 157 effective January 1, 2008 for all financial assets and liabilities as required. The adoption of SFAS 157 was not material to the Company's financial statements or results of operations.



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) which is effective for fiscal years beginning after November 15, 2007. SFAS 159 is an elective standard which permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The Company has not elected the fair value option for any assets or liabilities under SFAS 159.





21



---







RECENT ACCOUNTING PRONOUNCEMENTS



In June 2008, the FASB issued FASB Staff Position (FSP) No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1). FSP EITF 03-6-1 concludes that unvested share-based payment awards that contain rights to receive non-forfeitable dividends or dividend equivalents are participating securities, and thus, should be included in the two-class method of computing earnings per share (EPS). FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. Early application of EITF 03-6-1 is prohibited. It also requires that all prior-period EPS data be adjusted retrospectively. We have not yet determined the effect, if any, of the adoption of this statement on our financial condition or results of operations.



In May 2008, the Financial Accounting Standards Board (the FASB) issued Statement on Financial Accounting Standards (SFAS) No. 163, Accounting for Financial Guarantee Insurance Contracts - an interpretation of SFAS No. 60 (SFAS 163). SFAS 163 clarifies accounting standards applicable to financial guarantee insurance contracts and specifies certain disclosures. SFAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, except certain disclosures are effective for periods beginning after June 30, 2008. The Company does not expect that the adoption of this standard will have any impact on the Companys consolidated financial statements.



In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162").  SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States.  It is effective 60 days following the SECs approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The adoption of this Statement is not expected to have a material effect on the Companys consolidated financial statements.



In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets (FSP FAS 142-3) which amends the factors an entity should consider in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FAS No. 142, Goodwill and Other Intangible Assets (FAS No. 142). FSP FAS 142-3 applies to intangible assets that are acquired individually or with a group of assets and intangible assets acquired in both business combinations and asset acquisitions. It removes a provision under FAS No. 142, requiring an entity to consider whether a contractual renewal or extension clause can be accomplished without substantial cost or material modifications of the existing terms and conditions associated with the asset. Instead, FSP FAS 142-3 requires that an entity consider its own experience in renewing similar
arrangements. An entity would consider market participant assumptions regarding renewal if no such relevant experience exists. FSP FAS 142-3 is effective for year ends beginning after December 15, 2008 with early adoption prohibited. We have not yet determined the effect, if any, of the adoption of this statement on our financial condition or results of operations.



In March 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 161, Disclosures about Derivative Instruments and Hedging Activities  an amendment of FASB Statement No. 133 (SFAS 161").  SFAS 161 gives financial statement users better information about an entity's hedges by providing for qualitative disclosures about the objectives and strategies for using derivatives, quantitative data about the fair value of and gains and losses on derivative contracts, and details of credit-risk-related contingent features in their hedged positions. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008 with earlier application encouraged.  The Company does not expect the adoption of SFAS 161 to have a material effect on the Companys consolidated financial statements.





22



---







In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements  an amendment of ARB No. 51 (SFAS 160). SFAS 160 establishes accounting and reporting standards for noncontrolling interests in subsidiaries and for the deconsolidation of a subsidiary and also amends certain consolidation procedures for consistency with SFAS 141R. Under SFAS 160, noncontrolling interests in consolidated subsidiaries (formerly known as minority interests) are reported in the consolidated statement of financial position as a separate component within shareholders equity. Net earnings and comprehensive income attributable to the controlling and noncontrolling interests are to be shown separately in the consolidated statements of earnings and comprehensive income. Any changes in ownership interests of a noncontrolling interest where the
parent retains a controlling financial interest in the subsidiary are to be reported as equity transactions. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008 with earlier adoption prohibited. When adopted, SFAS 160 is to be applied prospectively at the beginning of the year, except that the presentation and disclosure requirements are to be applied retrospectively for all periods presented.  The Company has not yet determined the impact, if any, that SFAS No. 160 will have on its consolidated financial statements.



In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS 141(R)). SFAS 141(R) retains the fundamental requirements of the original pronouncement requiring that the purchase method be used for all business combinations. SFAS 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination, establishes the acquisition date as the date that the acquirer achieves control and requires the acquirer to recognize the assets acquired, liabilities assumed and any noncontrolling interest at their fair values as of the acquisition date. In addition, SFAS 141(R) requires expensing of acquisition-related and restructure-related costs, remeasurement of earn out provisions at fair value, measurement of equity securities issued for purchase at the date of close of the transaction and non-expensing of in-process
research and development related intangibles. SFAS 141(R) is effective for the Companys business combinations for which the acquisition date is on or after July 1, 2009. The Company is currently evaluating the impact of adopting SFAS 141(R).



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



Not applicable.







23



---







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



|Consolidated Financial Statements                                                                         |   
|--------------------------------------------------------------------------------------------------------- | --
|                                                                                                          |   
|Report of Independent Registered Public Accounting Firm                                                   | 25
|Consolidated Balance Sheets at December 31, 2008 and 2007                                                 | 26
|Consolidated Statements of Operations for the Years Ended December 31, 2008 and 2007                      | 27
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2008 and 2007                      | 28
|Consolidated Statements of Changes in Shareholders Equity for the Years Ended December 31, 2008
and 2007 | 30
|Notes to Consolidated Financial Statements                                                                | 31
|                                                                                                          |   



24



---







KEMPISTY & COMPANY

CERTIFIED PUBLIC ACCOUNTANTS, P.C.

15 MAIDEN LANE - SUITE 1003 - NEW YORK, NY 10038 - TEL (212) 406-7272 - FAX (212) 513-1930



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



Board of Directors

Terra Energy & Resource Technologies, Inc.:



We have audited the accompanying consolidated balance sheets of Terra Energy & Resource Technologies, Inc. as of December 31, 2008 and 2007 and the related consolidated statements of operations, changes in shareholders equity (deficit) and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required at this time, to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Terra Energy & Resource Technologies, Inc. at December 31, 2008 and 2007 and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the in the United States of America.



The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and had a net capital deficiency, which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also discussed in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.



/s/ Kempisty & Company CPAs PC

Kempisty & Company

Certified Public Accountants PC

New York, New York

April 14, 2009







25



---







TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                         | December 31,   |  | December 31,  
|---------------------------------------------------------------------------------------------------------------------------------------- | -------------- |  | --------------
|                                                                                                                                         | 2008           |  | 2007          
|                                                                                                                                         |                |  |               
|ASSETS                                                                                                                                   |                |  |               
|                                                                                                                                         |                |  |               
|CASH                                                                                                                                     | $      700,001 |  | $      505,018
|DEFERRED COSTS                                                                                                                           | 600,000        |  |              
|                                                                                                                                         |                |  |               
|TOTAL CURRENT ASSETS                                                                                                                     | 1,300,001      |  | 505,018       
|                                                                                                                                         |                |  |               
|OIL AND GAS PROPERTIES UNPROVED, FULL COST METHOD (NOTE 5)                                                                               | 603,456        |  | 1,077,291     
|PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION
(NOTE 6)                                                                         | 120,606        |  | 163,038       
|OTHER ASSETS                                                                                                                             | 10,670         |  | 10,374        
|                                                                                                                                         |                |  |               
|TOTAL ASSETS                                                                                                                             | $   2,034,733  |  | $   1,755,721 
|                                                                                                                                         |                |  |               
|                                                                                                                                         |                |  |               
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                                                                            |                |  |               
|                                                                                                                                         |                |  |               
|CURRENT LIABILITIES                                                                                                                      |                |  |               
|                                                                                                                                         |                |  |               
|ACCOUNTS PAYABLE AND ACCRUED EXPENSES (NOTE 3)                                                                                           | $   1,043,982  |  | $   1,265,818 
|PROMISSORY NOTE PAYABLE                                                                                                                  | 178,920        |  |              
|LOANS PAYABLE - RELATED PARTIES (NOTE 7)                                                                                                 | 446,265        |  | 447,377       
|DEFERRED REVENUE                                                                                                                         | 1,455,900      |  |              
|                                                                                                                                         |                |  |               
|TOTAL CURRENT LIABILITIES                                                                                                                | 3,125,067      |  | 1,713,195     
|                                                                                                                                         |                |  |               
|                                                                                                                                         |                |  |               
|SHAREHOLDERS EQUITY (DEFICIT)                                                                                                           |                |  |               
|                                                                                                                                         |                |  |               
|PREFERRED STOCK: $.0001 PAR VALUE,                                                                                                       |                |  |               
|SHARES AUTHORIZED 25,000,000
SHARES ISSUED AND OUTSTANDING:  5,000,000 AT
DECEMBER 31, 2008 AND 2,500,000 AT DECEMBER 31, 2007 (NOTE 10) | 500            |  | 250           
|COMMON STOCK; $.0001 PAR VALUE                                                                                                           |                |  |               
|SHARES AUTHORIZED 250,000,000
SHARES ISSUED AND OUTSTANDING: 58,358,338 AT
DECEMBER 31, 2008 AND 57,533,338 AT DECEMBER 31, 2007         | 5,836          |  | 5,753         
|ADDITIONAL PAID IN CAPITAL                                                                                                               | 20,943,955     |  | 17,613,475    
|STOCK OPTIONS OUTSTANDING (NOTE 4)                                                                                                       | 1,428,950      |  | 1,428,950     
|DEFERRED COMPENSATION (CONSULTANTS) (NOTE 4)                                                                                             | (61,795)       |  | (104,828)     
|DEFERRED COMPENSATION (EMPLOYEES) (NOTE 4)                                                                                               | (2,508,859)    |  | (393,767)     
|ACCUMULATED DEFICIT                                                                                                                      | (20,898,921)   |  | (18,507,307)  
|                                                                                                                                         |                |  |               
|TOTAL SHAREHOLDERS EQUITY (DEFICIT)                                                                                                     | (1,090,334)    |  | 42,526        
|                                                                                                                                         |                |  |               
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)                                                                                     | $   2,034,733  |  | $   1,755,721 



See notes to consolidated financial statements.







26



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TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                                                                                                      | Year Ended December 31,
|----------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------
|                                                                                                                                                      | 2008                   
|                                                                                                                                                      |                        
|REVENUES                                                                                                                                              | $       62,840         
|                                                                                                                                                      |                        
|COST OF REVENUES                                                                                                                                      |                       
|                                                                                                                                                      |                        
|GROSS PROFIT                                                                                                                                          | 62,840                 
|                                                                                                                                                      |                        
|OPERATING EXPENSES                                                                                                                                    |                        
|                                                                                                                                                      |                        
|DEFERRED COMPENSATION (CONSULTANTS) (NOTE 4)                                                                                                          | 125,426                
|DEFERRED COMPENSATION (EMPLOYEES) (NOTE 4)                                                                                                            | 532,006                
|EXPENSE RECOGNIZED ON CHANGE OF INTRINSIC VALUE ON
CONVERSION OF WARRANTS                                                                             |                       
|OPERATING COSTS AND EXPENSES                                                                                                                          | 1,426,026              
|TOTAL OPERATING EXPENSES                                                                                                                              | 2,083,458              
|                                                                                                                                                      |                        
|OPERATING LOSS BEFORE OTHER INCOME (EXPENSE),
ABANDONMENT OF LAND LEASES, FORGIVENESS OF DEBT,
NONCONTROLLING INTEREST AND PROVISION FOR INCOME TAXES | (2,020,618)            
|                                                                                                                                                      |                        
|OTHER INCOME (EXPENSE):                                                                                                                               |                        
|                                                                                                                                                      |                        
|INTEREST EXPENSE                                                                                                                                      | (10,529)               
|INTEREST INCOME                                                                                                                                       | 1,156                  
|NET INTEREST INCOME (EXPENSE)                                                                                                                         | (9,373)                
|                                                                                                                                                      |                        
|LOSS BEFORE ABANDONMENT OF LAND LEASES, FORGIVENESS OF
DEBT, NONCONTROLLING INTEREST AND PROVISION FOR INCOME
TAXES                                   | (2,029,991)            
|                                                                                                                                                      |                        
|ABANDONMENT OF LAND LEASES                                                                                                                            | (484,623)              
|FORGIVENESS OF DEBT                                                                                                                                   | 123,000                
|                                                                                                                                                      |                        
|LOSS BEFORE NONCONTROLLING INTEREST AND
PROVISION FOR INCOME TAXES                                                                                    | (2,391,614)            
|                                                                                                                                                      |                        
|NONCONTROLLING INTEREST                                                                                                                               |                       
|                                                                                                                                                      |                        
|NET LOSS                                                                                                                                              | $ (2,391,614)          
|                                                                                                                                                      |                        
|NET LOSS PER COMMON SHARE  BASIC AND DILUTED                                                                                                         | $        (0.04)        
|                                                                                                                                                      |                        
|WEIGHTED AVERAGE PER COMMON SHARES OUTSTANDING  BASIC
AND DILUTED                                                                                    | 58,156,289             
|                                                                                                                                                      |                        



See notes to consolidated financial statements.







27



---







TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                          | Year Ended December 31,
|----------------------------------------------------------------------------------------- | -----------------------
|                                                                                          | 2008                   
|                                                                                          |                        
|NET LOSS                                                                                  | $   (2,391,614)        
|                                                                                          |                        
|ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES: |                        
|                                                                                          |                        
|NON CASH ITEMS:                                                                           |                        
|NONCONTROLLING INTEREST                                                                   |                       
|DEPRECIATION                                                                              | 44,469                 
|COMMON STOCK ISSUED FOR SERVICES                                                          | 101,250                
|AMORTIZATION OF CONSULTING FEES                                                           | 125,426                
|AMORTIZATION OF DEFERRED COMPENSATION (EMPLOYEES)                                         | 532,006                
|ABANDONMENT OF OIL AND GAS PROPERTIES                                                     | 484,623                
|FORGIVENESS OF DEBT                                                                       | (123,000)              
|OFFICERS SALARY EXPENSE CONTRIBUTED TO EQUITY                                            |                       
|EXPENSE RECOGNIZED ON CHANGE OF CONVERSION
RATE  WARRANTS                                |                       
|CHANGES IN ASSETS AND LIABILITIES:                                                        |                        
|(INCREASE) DECREASE IN ASSETS :                                                           |                        
|DEFERRED COSTS                                                                            | (600,000)              
|OTHER ASSETS                                                                              | (307)                  
|INCREASE (DECREASE) IN LIABILITIES:                                                       |                        
|ACCOUNTS PAYABLE AND ACCRUED EXPENSES                                                     | (98,750)               
|PROMISSORY NOTE PAYABLE                                                                   | 178,920                
|DEFERRED REVENUES                                                                         | 1,455,900              
|                                                                                          |                        
|NET CASH (USED IN) OPERATING ACTIVITES                                                    | (291,077)              
|                                                                                          |                        
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |                        
|                                                                                          |                        
|ACQUISITION OF OIL AND GAS PROPERTIES                                                     | (12,828)               
|NET CASH (USED IN) INVESTING ACTIVITIES                                                   | (12,828)               
|                                                                                          |                        
|NET CASH  FROM FINANCING ACTIVITIES:                                                      |                        
|                                                                                          |                        
|PROCEEDS FROM NONCONTROLLING INTEREST IN
LIMITED PARTNERSHIP                              |                       
|ISSUANCE OF PREFERRED STOCK                                                               | 500,000                
|ISSUANCE OF COMMON STOCK                                                                  |                       
|LOANS (REPAYMENTS) FROM RELATED PARTIES                                                   | (1,112)                
|NET CASH PROVIDED BY FINANCING ACTIVITIES                                                 | 498,888                
|                                                                                          |                        
|NET CHANGE IN CASH                                                                        | 194,983                
|                                                                                          |                        
|CASH - BEGINNING OF YEAR                                                                  | 505,018                
|                                                                                          |                        
|CASH  END OF YEAR                                                                        | $         700,001      



(Continued on next page)







28



---







TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)



|                                                                                              | Year Ended December 31,
|--------------------------------------------------------------------------------------------- | -----------------------
|                                                                                              | 2008                   
|                                                                                              |                        
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                            |                        
|                                                                                              |                        
|Cash paid during the period for:                                                              |                        
|Interest                                                                                      | $     10,529           
|Income taxes                                                                                  | $     25,749           
|                                                                                              |                        
|SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES:                                     |                        
|                                                                                              |                        
|Accrued officers salaries converted to equity                                                | $                     
|                                                                                              |                        
|Value of stock options and warrants granted to employees for
services provided to the Company | $   532,006            
|                                                                                              |                        
|Value of stock options granted to consultant for
services provided to the Company             | $   125,426            
|                                                                                              |                        
|Value of common stock issued to consultant for
services provided to the Company               | $   101,250            



See notes to consolidated financial statements.







29



---







TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

STATEMENT OF SHAREHOLDERS EQUITY



|                                                         |                 |  |              |  |            |  |         |  |             |  | Deferred      |  |               |  |               
|-------------------------------------------------------- | --------------- |  | ------------ |  | ---------- |  | ------- |  | ----------- |  | ------------- |  | ------------- |  | --------------
|                                                         |                 |  |              |  |            |  |         |  |             |  | Compensation  |  |               |  |               
|                                                         |                 |  |              |  |            |  |         |  |             |  | (Consultants) |  |               |  |               
|                                                         |                 |  |              |  |            |  |         |  |             |  | and           |  |               |  | Total         
|                                                         |                 |  |              |  |            |  |         |  | Additional  |  | Stock         |  |               |  | Shareholders 
|                                                         | Preferred Stock |  | Common Stock |  | Paid-in    |  | Options |  | Accumulated |  | Equity       
|                                                         | Shares          |  | Amount       |  | Shares     |  | Amount  |  | Capital     |  | Outstanding   |  | Deficit       |  | (Deficit)     
|BALANCE -
DECEMBER 31, 2006                              |                |  | $           |  | 55,958,338 |  | $5,596  |  | $13,754,551 |  | $ 1,404,839   |  | $(15,354,209) |  | $    (189,223)
|                                                         |                 |  |              |  |            |  |         |  |             |  |               |  |               |  |               
|Value of stock options
issued to officers                |                |  |             |  |           |  |        |  |            |  | 24,111        |  |              |  | 24,111        
|Value of stock issued to
consultant for services         |                |  |             |  | 75,000     |  | 7       |  | 20,993      |  |              |  |              |  | 21,000        
|Issuance of shares of
common stock for cash              |                |  |             |  | 500,000    |  | 50      |  | 99,950      |  |              |  |              |  | 100,000       
|Issuance of stock warrants                               |                |  |             |  |           |  |        |  | 50,130      |  |              |  |              |  | 50,130        
|Value of stock issued to
consultant for services         |                |  |             |  |           |  |        |  | 97,463      |  |              |  |              |  | 97,463        
|Conversion of accrued
expenses to equity                 |                |  |             |  |           |  |        |  | 150,707     |  |              |  |              |  | 150,707       
|Value of stock issued to
consultant for services         |                |  |             |  | 750,000    |  | 75      |  | 232,425     |  |              |  |              |  | 232,500       
|Value of stock options
issued to officers                |                |  |             |  |           |  |        |  | 787,535     |  | (393,767)     |  |              |  | 393,768       
|Value of stock options issued
to consultant for services |                |  |             |  |           |  |        |  | 131,256     |  | (65,628)      |  |              |  | 65,628        
|Value of stock options
issued to employees               |                |  |             |  |           |  |        |  | 1,650,086   |  |              |  |              |  | 1,650,086     
|Value of stock options issued
to consultant for services |                |  |             |  |           |  |        |  | 89,679      |  |              |  |              |  | 89,679        
|Value of stock issued to
consultant for services         |                |  |             |  | 250,000    |  | 25      |  | 48,950      |  | (39,200)      |  |              |  | 9,775         
|Issuance of shares of
preferred stock for cash           | 2,500,000       |  | 250          |  |           |  |        |  | 499,750     |  |              |  |              |  | 500,000       
|Net loss                                                 |                |  |             |  |           |  |        |  |            |  |              |  | (3,153,098)   |  | (3,153,098)   
|BALANCE -
DECEMBER 31, 2007                              | 2,500,000       |  | 250          |  | 57,533,338 |  | 5,753   |  | 17,613,475  |  | 930,355       |  | (18,507,307)  |  | 42,526        
|                                                         |                 |  |              |  |            |  |         |  |             |  |               |  |               |  |               
|                                                         |                 |  |              |  |            |  |         |  |             |  |               |  |               |  |               
|Value of stock issued to
consultant for services         |                |  |             |  | 825,000    |  | 83      |  | 101,240     |  |              |  |              |  | 101,323       
|Value of stock options issued
to consultant for services |                |  |             |  |           |  |        |  | 82,393      |  | 43,033        |  |              |  | 125,426       
|Value of stock options
issued to employees               |                |  |             |  |           |  |        |  | 2,647,097   |  | (2,115,092)   |  |              |  | 532,005       
|Issuance of shares of
preferred stock for cash           | 2,500,000       |  | 250          |  |           |  |        |  | 499,750     |  |              |  |              |  | 500,000       
|Net loss                                                 |                |  |             |  |           |  |        |  |            |  |              |  | (2,391,614)   |  | (2,391,614)   
|BALANCE -
DECEMBER 31, 2008                              | 5,000,000       |  | $500         |  | 58,358,338 |  | $5,836  |  | $20,943,955 |  | $(1,141,704)  |  | $(20,898,921) |  | $ (1,090,334) 
|                                                         |                 |  |              |  |            |  |         |  |             |  |               |  |               |  |               



See notes to consolidated financial statements.





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TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





|1. | NATURE OF BUSINESS AND BASIS OF PRESENTATION
|-- | --------------------------------------------



The consolidated balance sheets of Terra Energy & Resource Technologies, Inc. (Terra), a Delaware corporation, formerly CompuPrint, Inc. (see below) and Subsidiaries (collectively, the Company) as of December 31, 2008 and 2007, and the related statements of operations and cash flows for the years ended December 31, 2008 and 2007 have been prepared by the Company, 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.



Principal Business Activities



The Company, through its wholly owned subsidiary, Terra Insight Services, Inc., a New York corporation (TISI), provides mapping, surveying, and analytical services to exploration, drilling, and mining companies.  Prior to September 2008, the Company offered similar services through Terra Insight Corporation, a Delaware corporation (TIC) formed January 7, 2005.  The Company 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 an affiliate of the significant 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 December 5, 2007, the Company formed Terra Resource Technologies, Inc. a wholly-owned New York corporation, now known as Terra Insight Services, Inc. (TISI).  TISI was inactive through August 30, 2008.



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



On August 24, 2006, the Company formed Terra Insight Technologies Corporation (TITC), a wholly-owned Delaware corporation.  TITC was inactive through September 30, 2008.



On March 20, 2006, the Company formed Terra Resources Operations Co., Inc. (TRO), a Texas corporation.  The Companys wholly-owned subsidiary, Terra Resources, Inc. (TRI), a Delaware corporation, is the sole shareholder of the entity.  TRO was inactive through September 30, 2008.



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



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





31



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TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





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



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



On July 6, 2005, the Company formed Tierra Nevada Exploration Partners, LP (Tierra Nevada), a Delaware limited partnership, in furtherance of an exploration agreement with Enficon.  TRI is the general partner of Tierra Nevada with an initial 100% interest.  As of September 30, 2006, the Company advanced approximately $2.5 million into the limited partnership in furtherance of the exploration project.  In 2006, Kiev Investment Group (KIG), an affiliate of Enficon, also agreed to fund certain Tierra Nevada projects.  Such funding and other funding provided by KIG and Enficon would dilute Terras interest in Tierra Nevada by creating a noncontrolling interest.



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



Reincorporation



Effective November 13, 2006, CompuPrint, Inc. was reincorporated under the laws of the State of Delaware, pursuant to a Plan and Agreement of Merger, dated as of November 3, 2006 (the Plan), by merging into CompuPrint, Inc. into its wholly-owned subsidiary, Terra Energy & Resource Technologies, Inc., a corporation formed for the purpose of reincorporation.  Pursuant to the Plan, each share of CompuPrint, Inc. was exchanged for one share of Terra Energy & Resource Technologies, Inc., and all shares previously outstanding of Terra Energy & Resource Technologies, Inc. that were previously outstanding were cancelled.  Pursuant to the Plan, the Company changed its corporate name to Terra Energy & Resource Technologies, Inc.  The Plan was approved by the holders of a majority of the Companys shares at a special meeting of 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.



Going Concern



The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  The Company has incurred substantial losses from operations, sustained substantial cash outflows from operating activities, and has both a significant working capital deficiency and accumulated deficit at December 31, 2008 and 2007.  The above factors raise substantial doubt about the Companys ability to continue as a going concern.  The Companys continued existence depends on its ability to obtain additional equity and/or debt financing to fund its operations and ultimately to achieve profitable operations.  The Company is attempting to raise additional financing and has initiated a cost reduction strategy.  Given the Companys tight cash position, its ability to continue as a going concern is dependent on the Company (1) raising additional
equity or debt financing or (2) the Company obtaining sufficient fee revenue from service business to support the operations of the Company.  There can be no assurance that the Company will be successful in either effort.





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TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- | ------------------------------------------



Basis of Consolidation



The consolidated financial statements include the accounts of Terra and its wholly owned subsidiaries, Terra Insight Corporation, Terra Resources, Inc., Terra Resources Operations Co., Inc., Terra Insight Technologies Corporation, Terra Insight Services, Inc., and New Found Oil Partners, LP through April 2008.  Also included are the accounts of  Tierra Nevada Exploration Partners, LP and TexTerra Exploration Partners, LP, drilling partnerships in which a significant 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.



In the opinion of the management, the consolidated financial statements reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position of the Company.



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.





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TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)
|-- | -----------------------------------------------------



Credit Risk



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



Significant Customers



The Company derived all of its revenue for the year ended December 31, 2008 from two customers. The Company had no revenue during the year ended December 31, 2007.



Noncontrolling Interest



The financing received by TexTerra and Tierra Nevada from Enficon and KIG is reflected as noncontrolling interest in the accompanying consolidated statements.



Property, Equipment and Depreciation



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



Income Taxes



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 10).



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 4).  Effective for the first quarter of fiscal 2006, the Company adopted SFAS No. 123(R).





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TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)
|-- | -----------------------------------------------------



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.  For the years ended December 31, 2008 and 2007, the effect of stock options has been excluded from the dilutive calculation, as the impact of the stock options would be anti-dilutive. There are conversion features included in the 2,500,000 shares of Series A Preferred Stock issued on December 27, 2007 and the 2,500,000 shares of Series A Preferred Stock issued on April 23, 2008.  Accordingly, weighted average shares outstanding-diluted in 2008 and 2007 include 68,884 and 34,427 shares, respectively.



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.



Recently Adopted Accounting Principles



In September 2006, the Financial Accounting Standards Board (the FASB) issued Statement on Financial Accounting Standards (SFAS) No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13" ("FSP 157-1") and FASB Staff Position 157-2, "Effective Date of FASB Statement No. 157" ("FSP 157-2"). FSP 157-1 amends SFAS 157 to remove certain leasing transactions from its scope. FSP 157-2 delays the effective date of SFAS 157 for all
non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company adopted SFAS 157 effective January 1, 2008 for all financial assets and liabilities as required. The adoption of SFAS 157 was not material to the Company's financial statements or results of operations.





35



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TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)
|-- | -----------------------------------------------------



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) which is effective for fiscal years beginning after November 15, 2007. SFAS 159 is an elective standard which permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The Company has not elected the fair value option for any assets or liabilities under SFAS 159.



Recent Accounting Pronouncements



In June 2008, the FASB issued FASB Staff Position (FSP) No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1). FSP EITF 03-6-1 concludes that unvested share-based payment awards that contain rights to receive non-forfeitable dividends or dividend equivalents are participating securities, and thus, should be included in the two-class method of computing earnings per share (EPS). FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. Early application of EITF 03-6-1 is prohibited. It also requires that all prior-period EPS data be adjusted retrospectively. We have not yet determined the effect, if any, of the adoption of this statement on our financial condition or results of operations.



In May 2008, the FASB issued SFAS No. 163, Accounting for Financial Guarantee Insurance Contracts - an interpretation of SFAS No. 60 (SFAS 163). SFAS 163 clarifies accounting standards applicable to financial guarantee insurance contracts and specifies certain disclosures. SFAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, except certain disclosures are effective for periods beginning after June 30, 2008. The Company does not expect that the adoption of this standard will have any impact on the Companys consolidated financial statements.



In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162").  SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States.  It is effective 60 days following the SECs approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The adoption of this Statement is not expected to have a material effect on the Companys consolidated financial statements.



In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets (FSP FAS 142-3) which amends the factors an entity should consider in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FAS No. 142, Goodwill and Other Intangible Assets (FAS No. 142). FSP FAS 142-3 applies to intangible assets that are acquired individually or with a group of assets and intangible assets acquired in both business combinations and asset acquisitions. It removes a provision under FAS No. 142, requiring an entity to consider whether a contractual renewal or extension clause can be accomplished without substantial cost or material modifications of the existing terms and conditions associated with the asset. Instead, FSP FAS 142-3 requires that an entity consider its own experience in
renewing similar arrangements. An entity would consider market participant assumptions regarding renewal if no such relevant experience exists. FSP FAS 142-3 is effective for year ends beginning after December 15, 2008 with early adoption prohibited. We have not yet determined the effect, if any, of the adoption of this statement on our financial condition or results of operations.





36



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TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)
|-- | -----------------------------------------------------



In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities  an amendment of FASB Statement No. 133 (SFAS 161").  SFAS 161 gives financial statement users better information about an entity's hedges by providing for qualitative disclosures about the objectives and strategies for using derivatives, quantitative data about the fair value of and gains and losses on derivative contracts, and details of credit-risk-related contingent features in their hedged positions. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008 with earlier application encouraged.  The Company does not expect the adoption of SFAS 161 to have a material effect on the Companys consolidated financial statements.



In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements  an amendment of ARB No. 51 (SFAS 160). SFAS 160 establishes accounting and reporting standards for noncontrolling interests in subsidiaries and for the deconsolidation of a subsidiary and also amends certain consolidation procedures for consistency with SFAS 141R. Under SFAS 160, noncontrolling interests in consolidated subsidiaries (formerly known as minority interests) are reported in the consolidated statement of financial position as a separate component within shareholders equity. Net earnings and comprehensive income attributable to the controlling and noncontrolling interests are to be shown separately in the consolidated statements of earnings and comprehensive income. Any changes in ownership interests of a noncontrolling
interest where the parent retains a controlling financial interest in the subsidiary are to be reported as equity transactions. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008 with earlier adoption prohibited. When adopted, SFAS 160 is to be applied prospectively at the beginning of the year, except that the presentation and disclosure requirements are to be applied retrospectively for all periods presented.  The Company has not yet determined the impact, if any, that SFAS No. 160 will have on its consolidated financial statements.



In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS 141(R)). SFAS 141(R) retains the fundamental requirements of the original pronouncement requiring that the purchase method be used for all business combinations. SFAS 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination, establishes the acquisition date as the date that the acquirer achieves control and requires the acquirer to recognize the assets acquired, liabilities assumed and any noncontrolling interest at their fair values as of the acquisition date. In addition, SFAS 141(R) requires expensing of acquisition-related and restructure-related costs, remeasurement of earn out provisions at fair value, measurement of equity securities issued for purchase at the date of close of the transaction and non-expensing of
in-process research and development related intangibles. SFAS 141(R) is effective for the Companys business combinations for which the acquisition date is on or after July 1, 2009. The Company is currently evaluating the impact of adopting SFAS 141(R).





37



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TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





|3. | EQUITY TRANSACTIONS
|-- | -------------------



Sale of Preferred Stock and Warrants



On December 27, 2007, the Company entered into a Securities Purchase Agreement with Esterna Ltd., a Cypriot limited company, for the sale of securities consisting of (i) 5,000,000 shares of the Companys unregistered Series A preferred stock, par value $0.0001 per share (the Series A Preferred Stock), and (ii) warrants exercisable over a two-year period to purchase 20,000,000 shares of Series A Preferred Stock, for the aggregate purchase price of $1,000,000.  Each share of Series A Preferred Stock is convertible, at the option of the holder without the payment of additional consideration, into one share of the Company's common stock.  The warrants have an exercise price of $.25 per share for a period of one year, and thereafter until expiration the exercise price shall be $.30 per share.  A closing for the purchase of 2,500,000 preferred shares and 10,000,000 warrants for
$500,000 occurred on December 27, 2007.  A second closing for the purchase of the remainder of the securities, 2,500,000 preferred shares and 10,000,000 warrants, for an additional payment of $500,000, occurred on April 23, 2008.



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 (i) 500,000 shares of common stock at $0.20 per share, and (ii) 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.



On October 30, 2006, the Company entered into a Securities Purchase Agreement, dated October 13, 2006, with an accredited individual investor, pursuant to which the Company sold (i) 750,000 shares of common stock, and (ii) warrants to purchase 150,000 shares of common stock, exercisable until October 29, 2008 at $2.00 per share, for the aggregate purchase price of $150,000.



Additional Paid in Capital



As of December 31, 2007, certain officers elected to forego salaries and expenses totaling $150,635.  For 2007, such expenses, in the amount of $57,325, 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.





38



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TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





|4. | 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:



| |                   |  | March 31,
2008 (a) |  | June 30,
2008 |  | September 30,
2008 |  | December 31,
2008 (a)
| | ----------------- |  | ------------------ |  | ------------- |  | ------------------ |  | ---------------------
| | Risk-free rate    |  |                   |  | 2.42  2.98%  |  | 1.59               |  |                     
| | Dividend yield    |  |                   |  | 0.00%         |  | 0.00%              |  |                     
| | Volatility factor |  |                   |  | 1.56          |  | 3.41               |  |                     
| | Average life      |  |                   |  | 2 to 5 years  |  | 4 to 6 years       |  |                     



| |                   |  | March 31,
2007 (a) |  | June 30,
2007 (a) |  | September 30,
2007 |  | December 31,
2007
| | ----------------- |  | ------------------ |  | ----------------- |  | ------------------ |  | -----------------
| | Risk-free rate    |  |                   |  |                  |  | 4.57%              |  | 4.24%            
| | Dividend yield    |  |                   |  |                  |  | 0.00%              |  | 0.00%            
| | Volatility factor |  |                   |  |                  |  | 1.10               |  | 1.10             
| | Average life      |  |                   |  |                  |  | 5 years            |  | 5 years          



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



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





39



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TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





|4. | STOCK BASED COMPENSATION(CONTINUED)
|-- | -----------------------------------



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



| |                                   | Number of
Options |  | Weighted
Average
Exercise Price
| | --------------------------------- | ----------------- |  | -------------------------------
| |                                   |                   |  |                                
| | 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                        
| | Granted                           | 9,700,000         |  | 0.22                           
| | Exercised                         |                  |  |                               
| | Cancelled/forfeited               | (6,363,333)       |  | (0.49)                         
| | Outstanding, December 31, 2007    | 18,690,000        |  | $  0.23                        
| | Granted                           |                  |  |                               
| | Exercised                         |                  |  |                               
| | Cancelled/forfeited               |                  |  |                               
| | Outstanding at March 31, 2008     | 18,690,000        |  | $  0.23                        
| | Granted                           | 4,000,000         |  | 0.15                           
| | Exercised                         |                  |  |                               
| | Cancelled/forfeited               |                  |  |                               
| | Outstanding at June 30, 2008      | 22,690,000        |  | $  0.22                        
| | Granted                           | 5,000,000         |  | 0.46                           
| | Exercised                         |                  |  |                               
| | Cancelled/forfeited               | (375,000)         |  | (0.90)                         
| | Outstanding at September 30, 2008 | 27,315,000        |  | $  0.25                        
| | Granted                           |                  |  |                               
| | Exercised                         |                  |  |                               
| | Cancelled/forfeited               | (350,000)         |  | (0.50)                         
| | Outstanding at December 31, 2008  | 26,965,000        |  | $  0.25                        







40



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TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





|4. | STOCK BASED COMPENSATION(CONTINUED)
|-- | -----------------------------------



The stock options outstanding and exercisable at December 31, 2008 and 2007 were in the following exercise price ranges:



| |                          |  | At December 31, 2008
| | ------------------------ |  | --------------------
| |                          |  | Outstanding         
| | Range of
Exercise
Prices |  | Number of
Options   
| | $0.11                    |  | 1,000,000           
| | $0.16                    |  | 7,000,000           
| | $0.165                   |  | 3,000,000           
| | $0.20                    |  | 2,000,000           
| | $0.21                    |  | 500,000             
| | $0.22                    |  | 9,950,000           
| | $0.40                    |  | 1,000,000           
| | $0.50                    |  | 15,000              
| | $0.60                    |  | 1,000,000           
| | $0.80                    |  | 500,000             
| | $0.90                    |  | 1,000,000           
| |                          |  | 26,965,000          



| |                          |  | At December 31, 2007
| | ------------------------ |  | --------------------
| |                          |  | Outstanding         
| | Range of
Exercise
Prices |  | Number of
Options   
| | $0.16                    |  | 7,000,000           
| | $0.21                    |  | 500,000             
| | $0.22                    |  | 9,950,000           
| | $0.50                    |  | 365,000             
| | $0.80                    |  | 500,000             
| | $0.90                    |  | 375,000             
| |                          |  | 18,690,000          



Options to Officers and Employees



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





41



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TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





|4. | STOCK BASED COMPENSATION(CONTINUED)
|-- | -----------------------------------



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



During the three months ended December 31, 2007, the Company granted stock options to employees to purchase up to an aggregate of 9,200,000 shares of common stock, exercisable for five years at $0.22 per share.  The total grant date fair value of the options was $1,650,086.



During the three months ended September 30, 2007, the Company granted stock options to employees to purchase up to an aggregate of 6,000,000 shares of common stock, exercisable for five years at $0.16 per share.  One-half of the options vested immediately and one-half became exercisable on August 13, 2008.  The total grant date fair value of the options was $787,535.



For the years ended December 31, 2008 and 2007, compensation expense related to the amortization of deferred compensation (employees) amounted to $532,006 and $2,067,966, respectively.  Deferred compensation (employees) on the balance sheet is $2,508,859 and $393,767 at December 31, 2008 and 2007, respectively.



Consultants



In May 2008, the Company granted stock options to an outside consultant to purchase 1,000,000 shares of common stock, exercisable for two years at $0.11 per share.  Stock options to purchase 250,000 shares vested on August 1, 2008 and additional stock options to purchase 250,000 shares vested on November 1, 2008.  The other 500,000 stock options are to vest in equal installments on each of the following dates:  February 1, 2009 and May 1, 2009.  The total grant date fair value of the options was $82,393.



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



On October 1, 2007, the Company issued to an outside consultant 250,000 shares of common stock, as payment for consulting services. The total grant date fair value of the shares was $48,975, of which $9,775 and $9,800 were charged to operations during the three months ended December 31, 2007 and March 31, 2008, respectively.



On October 1, 2007, the Company granted stock options to an outside consultant to purchase 500,000 shares of common stock, exercisable for five years at $0.22 per share.  The total grant date fair value of the options was $89,679.





42



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TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





|4. | STOCK BASED COMPENSATION(CONTINUED)
|-- | -----------------------------------



On August 13, 2007, the Company granted stock options to three consultants, each an individual, to purchase up to an aggregate of 1,000,000 shares of common stock, exercisable for five years at $0.16 per share.  One-half of the options vested immediately and one-half became exercisable on August 13, 2008.  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 and $65,628 was charged to operations during the three months ended September 30, 2008.



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.



For the years ended December 31, 2008 and 2007, compensation expense related to the amortization of deferred compensation (consultants) amounted to $0 and $408,807, respectively.  Deferred compensation (consultants) on the balance sheet is $61,795 and $104,828 at December 31, 2008 and December 31, 2007, respectively.







43



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TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





|5. | OIL AND GAS PROPERTIES
|-- | ----------------------



TexTerra



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



Davidson Energy and Johnson Childrens Trust assigned to TexTerra a 70% working interest (70% of the 75% net revenue interest) in and to the first well and a defined area around such well as specified under Texas law (the Railroad Commission spacing unit) and TexTerra was to receive a 50% working interest in all other acreage covered by the Bellows Lease. The purchase price for TexTerras working interest was TexTerras agreement to pay up to the budgeted amount of $1,417,150 for drilling, testing, stimulating, completing and equipping the initial well on the Bellows Lease (the Davidson Project). Any additional costs were to be paid 70% by TexTerra and 30% by Davidson Energy. After the initial well, Davidson Energy and Johnson Childrens Trust shall have the right, but not the obligation, to participate in a 50% interest in future wells on the Bellows Lease.
The rights of the parties pursuant to the Farmout Agreement were subject to the terms of a joint operating agreement. In the event Davidson Energy and Johnson Childrens Trust elect not to participate in future wells on the Bellows Lease, they were to receive a 10% working interest after certain costs are recouped by TexTerra.



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



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



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



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





44



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TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





|5. | OIL AND GAS PROPERTIES(CONTINUED)
|-- | ---------------------------------



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



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



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



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



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



Tierra Nevada



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



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





45



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TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





|5. | OIL AND GAS PROPERTIES(CONTINUED)
|-- | ---------------------------------



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



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



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



Total Oil and Gas Investment



The Companys oil and gas investments, net of write-offs, were $603,456 and $1,077,291 as of December 31, 2008 and 2007, respectively.



|6. | PROPERTY AND EQUIPMENT
|-- | ----------------------



Property and equipment are stated at cost at December 31, 2008 and 2007 consisted of the following:



| |                               | Estimated
Useful
Lives  Years |  | December 31,
2008
Amount |  | December 31,
2007
Amount
| | ----------------------------- | ------------------------------ |  | ------------------------ |  | ------------------------
| | Computer Equipment            | 5                              |  | $    97,140              |  | $    95,715             
| | Computer Software             | 3                              |  | 613                      |  |                        
| | Oil & Gas Equipment           | 3                              |  | 12,485                   |  | 12,485                  
| | Office Equipment              | 5                              |  | 17,011                   |  | 17,011                  
| | Transportation Equipment      | 5                              |  | 85,750                   |  | 85,750                  
| | Furniture & Fixtures          | 7                              |  | 37,896                   |  | 37,896                  
| |                               |                                |  | 250,895                  |  | 248,857                 
| | Less accumulated depreciation |                                |  | (130,289)                |  | (85,819)                
| |                               |                                |  | $  120,606               |  | $  163,038              



Depreciation expense for the years ended December 31, 2008 and December 31, 2007 were $44,469 and $43,934, respectively.



|7. | INCOME TAXES
|-- | ------------



At December 31, 2008, the Company has an aggregate deferred tax asset of approximately $10,027,000, representing the net operating loss carry forwards which expire in 2021 through 2028.



The following summarizes the provision for income taxes for the year ending December 31, 2008:





46



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TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





|7. | INCOME TAXES(CONTINUED)
|-- | -----------------------



| |                              | At December 31, 2008
| | ---------------------------- | --------------------
| |                              |                     
| |                              |                     
| |                              | Consolidated        
| |                              |                     
| | Loss before Income Taxes     | $ (2,391,614)       
| | Tax Benefit (Expense)        | 813,149             
| | Total                        | 1,578,465           
| | Valuation Allowance          | (1,578,465)         
| | Net Provision for Income Tax |                    
| | Net Loss                     | $ (2,391,614)       



| |                                |  |  | At December 31,
2008 |  | 
| | ------------------------------ |  |  | -------------------- |  | 
| |                                |  |  |                      |  | 
| | Currently payable              |  |  | $                   |  | 
| | Deferred tax (benefit)         |  |  | (1,578,465)          |  | 
| | Total                          |  |  | (1,578,465)          |  | 
| | Valuation allowance            |  |  | 1,578,465            |  | 
| | Net provision for income taxes |  |  | $                   |  | 



At December 31, 2007, the Company has an aggregate deferred tax asset of approximately $8,449,000, representing the net operating loss carry forwards which expire in 2021 through 2027.



The following summarizes the provision for income taxes for the year ending December 31, 2007:



| |                              | At December 31, 2007
| | ---------------------------- | --------------------
| |                              |                     
| |                              |                     
| |                              | Consolidated        
| |                              |                     
| | Loss before Income Taxes     | $ (3,483,061)       
| | Tax Benefit (Expense)        | 1,053,905           
| | Total                        | (2,429,156)         
| | Valuation Allowance          | (1,053,905)         
| | Net Provision for Income Tax | (  )               
| | Net Loss                     | $ (3,483,061)       



| |                                |  |  | At December 31,
2007 |  | 
| | ------------------------------ |  |  | -------------------- |  | 
| |                                |  |  |                      |  | 
| | Currently payable              |  |  | $                   |  | 
| | Deferred tax (benefit)         |  |  | (1,053,905)          |  | 
| | Total                          |  |  | (1,053,905)          |  | 
| | Valuation allowance            |  |  | 1,053,905            |  | 
| | Net provision for income taxes |  |  | $                   |  | 







47



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TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





|8. | RELATED PARTY TRANSACTIONS
|-- | --------------------------



Technology License Agreement and Services Agreement



The Company, through its subsidiary, Terra Insight Corporation, licensed, 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 an affiliate of the significant shareholder of the Company.  Under the Technology License Agreement, the Company was 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 was to increase annually by the lesser of four percent or the percentage increase of the Consumer
Price Index using 2007 as the base year.



The Technology License Agreement, pursuant to the July 23, 2007 amendment, provided for the deferral of the annual license fee due for calendar year 2007.  Commencing in 2008, provided that the Company has total positive net revenues from its operations of at least $2 million annually, the Institute was entitled to payment on the deferred license fee at a rate of no more than $300,000 per year.  The Institute was also 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 farm-in or farm-out agreements with third parties), the Institute was entitled to payments equal to 20% of the net revenues received by TIC from such farm-in and/or farm-out agreements.  For non-internal projects, the Institute was 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 was to be payable only after the Company generates over $1,000,000 in net revenues from service projects.



The Company, through its subsidiary, Terra Insight Corporation, 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 was to 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.  Commencing in 2008, the minimum annual service fee was to increase by the lesser of 4% or the percentage increase in the Consumer Price Index using 2007 as the base year.



The Services Agreement, pursuant to the July 23, 2007 amendment, provided for the deferral of any services fee attributable to the Companys internal projects.  Commencing in 2008, provided that the Company has total positive net revenues from its operations of at least $2 million annually, the Institute was entitled to payment on the deferred services fee at a rate of no more than $300,000 per 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 was to 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 was to be offset against the annual license fee payable to the Institute.





48



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TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





|8. | RELATED PARTY TRANSACTIONS(CONTINUED)
|-- | -------------------------------------



In December 2007, the Company and the Institute entered into an agreement, effective December 27, 2007, that modified the terms of the Technology License Agreement, pursuant to which, the deferred annual license fee pursuant to the Technology License Agreement and the deferred minimum annual services fee pursuant to the Services Agreement attributable to the period January 1, 2007 through December 31, 2008 was waived.



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



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



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



Operating Lease



The Company subleased office space from one of its directors on a month-to-month basis pursuant to an oral agreement from January 1, 2007 to March 31, 2007.  Rent expense was $8,000 per month.  Since April 1, 2007, substantially reduced office space has been leased from a third party and the rent expense is $2,000 per month through August 2008, and $2,500 per month thereafter.  Total rent expense related to the office facility amounted to $26,500 and $42,000 for the years ended December 31, 2008 and 2007, respectively.



In January 2007, the Company leased an apartment in Moscow, Russia, at a monthly rent of $5,000, for use by executives of the Company when visiting Moscow.  For the year ended December 31, 2007, rent expense amounted to $5,000.  The lease was terminated as of January 30, 2007.





49



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TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





|8. | RELATED PARTY TRANSACTIONS(CONTINUED)
|-- | -------------------------------------



Legal Services



The Company paid or accrued legal fees for years ended December 31, 2008 and 2007 of $309,644 and $367,881, respectively, to a law firm which is owned by a former director, former officer, and a current minority shareholder of the Company.  In December 2007, the law firm agreed to waive legal fees in the amount of $477,953.



Loans



As of December 31, 2008, an officer, a former officer, and a former director loaned the Company an aggregate of $406,297, and a related party has loaned $39,968.  The loans are unsecured and non-interest bearing and have no specific repayment terms.



Waiver of Salaries



In October 2007, two executives agreed to waive accrued salaries totaling approximately $295,529.



|9. | COMMITMENTS AND CONTINGENCIES
|-- | -----------------------------



Employment Agreement



On April 23, 2008, the Company entered into an employment agreement with an executive.  The executive is entitled to: an annual salary at the rate of $150,000; an annual performance based bonus in an amount equal to 5% of the Companys consolidated net profit, except if terminated for cause; and is also entitled to other bonuses, performance-based or otherwise, and an annual increase in salary, as the Companys Board of Directors may determine in its discretion.  The Company granted to the executive stock options to purchase 3 million shares of the Companys common stock, exercisable at $0.165 per share.  Stock options to purchase 1,000,000 shares vested on April 23, 2008 and expire on April 22, 2011.  Stock options to purchase an additional 1,000,000 shares are to vest on April 23, 2009 and to expire on April 22, 2012.  Stock options to purchase a further 1,000,000 shares are
to vest on April 23, 2010 and to expire on April 22, 2013.  The employment term is for a period of up to three years.  If the Company terminates the executives employment for any reason other than for cause, the Company is to pay the executive four months of salary as severance.





50



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TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





|9. | COMMITMENTS AND CONTINGENCIES(CONTINUED)
|-- | ----------------------------------------



On August 29, 2008, the Company entered into employment agreement, dated as of July 21, 2008, with an executive.  The thee year employment agreement provides for: a base salary at the rate of $200,000 per year for the first year, and at a rate of $240,000 per year for the next two years; a sign-on bonus of $20,000; family health insurance with premiums not exceeding $14,000 per year; an automobile allowance not to exceed $12,000 per year; twelve sick days per year; three weeks vacation per year; ten holidays; participation in the Companys 401(k) plan or such other plan as the Company may adopt; a business cell phone; certain reimbursement for business travel; eligibility for a performance-based bonus upon achievement of performance targets and thresholds to be established by the Board of Directors, such as achievement of certain market price, business performance, or other criteria,
determined by the Board of Directors in its reasonable discretion, for which the executive would be entitled to a bonus of 100% of his base salary upon achievement of 100%-120% of the performance target, and a bonus of up to, in the discretion of the Board of the Directors, 200% of the executives base salary, for achievement of more than 120% of the performance target; and, a grant of stock options to purchase up to 5 million shares of the Companys common stock, subject to vesting and exercisability conditions as follows: two million stock options, exercisable for four years at $0.20 per share, to vest upon receipt by the Company of third party financing (in debt or equity) in the amount of at least $10 million during the first year of the employment term; one million stock options, exercisable for four years at $0.40 per share, to vest upon completion of one year of service; one million stock options, exercisable for five years at $0.60 per share, to vest upon completion
of the second year of service; and one million stock options, exercisable for six years at $0.90 per share, to vest upon completion of the third year of service. The employment agreement may be earlier terminated, among other reasons, upon three months prior written notice, at the option of either the executive or the Company, without cause, in which event the Company shall have the right to require the executive not to perform any services for the Company until the termination becomes effective, subject to payment to the salary for three months. If the Company terminates the executives employment for any reason other than for cause, all fringe benefits provided for in the employment agreement shall continue for three months from the effective date of termination and stock options are to vest on the next anniversary date following the date of termination shall become vested.



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 a former office on 57th Street in New York City were $55,200. The lease expired on December 31, 2007.



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



Vendor



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





51



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TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





|10. | LITIGATION
|--- | ----------



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



On or about December 11, 2008, Illinois National Insurance Company filed a complaint before the Civil Court of the City of New York, Case No. 74698/08, against Terra Insight Corporation, alleging failure to pay insurance premiums in the amount of $10,598.





|11. | PREFERRED STOCK
|--- | ---------------



The Companys Certificate of Incorporation authorizes the issuance of up to 25,000,000 shares of Preferred Stock.  The Board of Directors is expressly authorized to provide for the issue of all or any shares of the preferred stock, in one or more series, and to fix for each such series such voting powers, full or limited, and other such designations and preferences. The number of authorized shares of preferred stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the voting power of all of the then outstanding shares of the capital stock of the corporation entitled to vote generally in the election of directors. In December 2007, the Board authorized the issuance of up to 25,000,000 shares of Series A Preferred Stock.



On December 27, 2007, the Company entered into an agreement for the sale of 5,000,000 shares of Series A Preferred Stock and warrants exercisable over a two-year period to purchase 20,000,000 shares of Series A Preferred Stock.  (See Note 3).



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





52



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TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





|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.



|                                                                                                                                                      | Year Ended December 31, 2008
|----------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------
|                                                                                                                                                      | Mapping
Services            
|REVENUES                                                                                                                                              | $   62,840                  
|COST OF SALES                                                                                                                                         |                            
|GROSS PROFIT                                                                                                                                          | 62,840                      
|                                                                                                                                                      |                             
|OPERATING COSTS AND EXPENSES                                                                                                                          |                            
|                                                                                                                                                      |                             
|OPERATING LOSS BEFORE OTHER INCOME
(EXPENSE), ABANDONMENT OF LAND LEASES,
FORGIVENESS OF DEBT, NONCONTROLLING
INTEREST AND PROVISION FOR INCOME TAXES |                            
|                                                                                                                                                      |                             
|NET INTEREST INCOME (EXPENSE)                                                                                                                         |                            
|                                                                                                                                                      |                             
|LOSS BEFORE ABANDONMENT OF LAND LEASES,
FORGIVENESS OF DEBT, NONCONTROLLING
INTEREST AND PROVISION FOR INCOME
TAXES                                   |                            
|                                                                                                                                                      |                             
|ABANDONMENT OF LAND LEASES                                                                                                                            |                            
|FORGIVENESS OF DEBT                                                                                                                                   |                            
|                                                                                                                                                      |                             
|LOSS BEFORE NONCONTROLLING INTEREST AND
PROVISION FOR INCOME TAXES                                                                                    |                            
|                                                                                                                                                      |                             
|NET PROFIT (LOSS)                                                                                                                                     | $   62,840                  



|                                        | Year Ended December 31, 2007
|--------------------------------------- | ----------------------------
|                                        | Mapping
Services            
|REVENUES                                | $                          
|COST OF SALES                           |                            
|GROSS PROFIT                            |                            
|                                        |                             
|OPERATING COSTS AND EXPENSES            |                            
|WRITE OFF OF OIL AND GAS PROPERTIES     |                            
|OTHER INCOME (EXPENSE):                 |                             
|NET INTEREST EXPENSE                    |                            
|TOTAL COSTS AND EXPENSES                |                            
|                                        |                             
|FORGIVENESS OF DEBT AND ACCRUED
PAYROLL |                             
|PROFIT (LOSS) BEFORE PROVISION FOR      |                             
|NONCONTROLLING INTERESTS AND            |                             
|INCOME TAXES                            |                            
|NONCONTROLLING INTEREST                 |                            
|PROVISION FOR INCOME TAXES (NOTE 8)     |                            
|                                        |                             
|NET PROFIT (LOSS)                       | $                          







53



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TERRA ENERGY & RESOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





|13. | SUBSEQUENT EVENTS
|--- | -----------------



Effective March 27, 2009, pursuant to an Exchange Agreement, dated as of March 19, 2009, Esterna Ltd., a Cypriot limited company, converted its 5,000,000 shares of the Companys preferred stock into 5,000,000 shares of the Companys common stock and exchanged its 20,000,000 preferred stock purchase warrants that are exercisable until December 27, 2009 at $0.30 per share into 20,000,000 common stock purchase warrants that are exercisable until March 27, 2012 at $0.05 per share.



Effective March 27, 2009, the Company closed upon two separate Securities Purchase Agreements, each dated as of March 19, 2009, with each of Dmitry Vilbaum, the Companys Chief Executive Officer, and an entity controlled by Dr. Alexandre Agaian, the Companys President, pursuant to which they purchased an aggregate of 20,000,000 shares of the Companys common stock and 20,000,000 common stock purchase warrants that are exercisable until March 27, 2012 at $0.05 per share, for the aggregate price of $200,000.  The Company applied the proceeds to its working capital.



On March 27, 2009, pursuant to a Securities Purchase Agreement, dated as of March 19, 2009, with Sergey Sulgin, an individual accredited investor, the Company sold 10,000,000 shares of the Companys common stock and 10,000,000 common stock purchase warrants that are exercisable until March 27, 2012 at $0.05 per share, for the aggregate price of $300,000.  As conditions to the investment, the investor required, among other things, that: the Companys Board of Directors shall initially consist of five persons, Alexandre Agaian, Dmitry Vilbaum, one individual nominated by Esterna Ltd., and two nominees of the investor; Esterna shall have exchanged all of its 5,000,000 shares of the Companys preferred stock into 5,000,000 shares of common stock and all of its 20,000,000 preferred stock purchase warrants into  20,000,000 common stock purchase warrants; and each of the
Companys two principal officers, Alexandre Agaian and Dmitry Vilbaum, shall have made an equity investment of $100,000 for 10,000,000 shares of common stock and 10,000,000 common stock purchase warrants.  The Company applied the proceeds to its working capital.



On April 1, 2009, the Company entered into a consulting agreement with Roman Rozenberg, for a term of one year, pursuant to which the Company issued him warrants to purchase 3,000,000 shares of common stock, exercisable for three years at $0.05 per share.







54



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



On July 31, 2007, the Company dismissed Rosen Seymour Shapss Martin & Company LLP (RSSM) as the Companys independent registered public accounting firm.  There were no disagreements with RSSM on the type described in paragraph (a)(1)(iv) or any reportable event as described in paragraph (a)(1)(v) of Item 304 of Regulation S-K.



|ITEM 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------



Evaluation of Disclosure 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 December 31, 2008. 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.



Managements Report on Internal Control over Financial Reporting



Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act.  Our management has conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on this evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2008.  This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. We were not required to have, nor have we engaged our independent registered public accounting firm to perform, an audit on our internal control over financial reporting pursuant to
the rules of the Securities and Exchange Commission that permit us to provide only managements report in this annual report.



Changes in Internal Control Over Financial Reporting



There were no changes in our internal control over financial reporting during the quarter ended December 31, 2008 to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



Limitations on Controls



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





55



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|ITEM 9B. | OTHER INFORMATION
|-------- | -----------------



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



Under the Technology License Agreement, dated as of December 15, 2008, we have, through our subsidiary, Terra Insight Services, Inc., an exclusive, worldwide renewable license for a 30-year term from December 2008 for the commercial use of all of the technology of the Institute, which has as its focus the exploration, sustainable development and management of the Earths resources and the monitoring of the environment.  Pursuant to the license, the Institute will be entitled to compensation certain project payments generated from the use of the Institutes technology in an amount to be determined on orders for our services, provided that such project payments shall not exceed 10% over the Institutes costs.  Such project payments are not duplicative of any services fees payable by Terra Insight Services, Inc. to the Institute under the Services Agreement. Under the license agreement, Terra
Insight Services, Inc. has an exclusive option to purchase from the Institute its mapping technology, to terminate on the earlier of (i) June 30, 2012 or (ii) the termination of the license agreement.



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



Effective March 27, 2009, two directors, Evgeny Roytman and Dmitri Moiseyev, who served on the Companys Board of Directors as nominees of Esterna resigned.



Effective March 27, 2009, Sergey Sulgin and Roman Rozenberg were appointed to serve on the Companys Board of Directors.







56



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PART III



|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
|-------- | -------------------------------------------------------------------------------------------------------------------------------------



Our Directors and Executive Officers



The following table sets forth our directors and executive officers as of December 31, 2008.



|Name                 |  | Age |  | Position                                                         
|-------------------- |  | --- |  | -----------------------------------------------------------------
|Dmitry Vilbaum       |  | 40  |  | Chief Executive Officer and a Director                           
|Dr. Alexandre Agaian |  | 57  |  | President, Principal Financial Officer and a Director            
|Mikhail Gamzin       |  | 43  |  | Director                                                         
|Evgeny Roytman       |  | 42  |  | Director                                                         
|Dmitri Moiseyev      |  | 37  |  | Director                                                         
|Ivan Raylyan         |  | 42  |  | Chief Executive Officer of Terra Insight Technologies Corporation
|Kenneth Oh           |  | 37  |  | Secretary                                                        
|Elena Palgova        |  | 34  |  | Secretary of company subsidiaries                                



The biographies of persons who are not directors are set forth under the heading Executive Officers of the Registrant under Item 1 of Part I of this report.



Dmitry Vilbaum, Chief Executive Officer and a Director

Dmitry Vilbaum has served as Chief Executive Officer and as a member of the board of directors of the Company since July 10, 2007.  Previously, Mr. Vilbaum served as its President from July 10, 2007 to July 21, 2008, and as its Chief Operating Officer from June 13, 2005 to July 10, 2007.  He has served in the following capacities with respect to the Companys subsidiaries:  as Chief Executive Officer, President, and as a Director of Terra Insight Corporation (TIC), from July 10, 2007 to July 24, 2008; as Chief Operating Officer of TIC from December 29, 2005 to July 10, 2007; as Chief Executive Officer and President of Terra Resources, Inc. (TRI) since July 10, 2007; Treasurer of TRI since July 24, 2008; as a Director of TRI from July 10, 2007 to July 24, 2008; as Chief Operating Officer of TRI from December 29, 2005 to July 10, 2007; as Chief Executive Officer and President of
Terra Insight Technologies Corporation (TITC) from July 10, 2007 to July 24, 2008; as a Director of TITC from July 10, 2007 to July 24, 2008; as Chief Operating Officer of TITC from August 24, 2006 to July 10, 2007; as Chief Executive Officer, President and as a Director of Terra Resource Operations Co., Inc. (TROC) since July 10, 2007; as Chief Operating Officer of TROC from March 20, 2006 to July 10, 2007; as Chief Executive Officer and President of Terra Insight Services, Inc. (TISI) since December 6, 2007; as a Director of TISI from December 6, 2007 to July 24, 2008; as Director of NamTerra Mineral Resources (Proprietary) Limited (NamTerra) since January 17, 2006.  From June 2005 to March 2006, Mr. Vilbaum was employed by Law Offices of Dan Brecher on a part-time basis.  From March 2001 to June 2005, Mr. Vilbaum was employed by Deutsche Bank where he held various positions in the banks information technology department. From
January 1996 through March of 2001, Mr. Vilbaum served as the president of Anyent, Inc., a consulting company providing information technology services to major Wall Street corporations, such as Citibank, Deutsche Bank, Newbridge Securities, Deloitte & Touche LLP., as well as technology companies, such as Compaq and MatchBlade Technologies. Mr. Vilbaum received a Bachelor of Engineering degree in 1995 from the City University of New York.



Dr. Alexandre Agaian, President and Principal Financial Officer, and a Director

Dr. Agaian has served as President of the Company since July 21, 2008, and as Principal Financial Officer and as a member of the board of directors of the Company since July 24, 2008. He serves in the following capacities with respect to the Companys subsidiaries since July 24, 2008:  Chief Executive Officer, President and Treasurer of TIC; Director of TRI; Director and Treasurer of TITC since July 24, 2008; Director of TISI.  He co-founded, in May 2007, Helios Petroleum Holding, AG, a Swiss company developing and operating mini-refineries in Russia, and serves as its President and as a member of its Board of Directors. From 2005 to 2007, Dr. Agaian, through his private consulting company, Balance Capital, LLC, participated in structuring several oil and gold projects in Kazakhstan and Ukraine. From May 2003 to July 2005, Dr. Agaian served as President and Chief Executive Officer





57



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of BMB Munai, Inc, an oil and gas exploration and production company. Dr. Agaian was one of the founders and member of the Board of Directors of BMB Munai. In 1994, Dr. Agaian founded ANBI Corporation, a New Jersey corporation with business interests and relationships in Russia, Ukraine and Kazakhstan. In 1989, Dr. Agaian co-founded the All-Russian Association of Commercial Banks, a non-commercial organization in the former Soviet Union, and served as Vice President until 1992. In 1988, Dr. Agaian founded the first commercial bank in the USSR, The Innovation Bank of Saint-Petersburg, and served as its Chief Executive Officer until 1994. In 1993, Dr. Agaian was elected as a Corresponding Member of the Engineering Academy of St. Petersburg (Russia). From 1985 to 1988, Dr. Agaian served as Chief Information Officer at the Bank for Industry and Construction. From 1973 until 1985, Dr. Agaian performed scientific
work at different research centers and institutes in Tbilissi, Moscow and Leningrad. Dr. Agaian graduated from the State University of Tbilissi (Georgia, former USSR) in 1973, summa cum laude, with a degree in applied cybernetics. He received a Ph.D. in 1980 from The Academy of Science in Moscow in the field of computer networking.



Mikhail Gamzin, Director

Mr. Gamzin joined our Board of Directors on April 23, 2008.  Since 2003, Mr. Gamzin has been the Chief Executive Officer and Managing Partner of the Russian Technologies Venture Fund, a venture capital fund in Russia, backed by the Alfa Group Consortium, and is a principal of Russian Technologies Investment Consultants Limited, a management consulting company for the fund and other entities.  Since 2001, Mr. Gamzin has been a member of the Alfa Group Consortium, a privately owned Russian financial industrial conglomerate.  Since 2003, Mr. Gamzin has been a member of the Administrative Council of the Russian Private Equity and Venture Capital Association.  From 2001 to 2003, Mr. Gamzin was Chief Executive Officer and a director of United Food Company Ltd., Moscow, Russia.  From 1996 to 2001, Mr. Gamzin was Chairman of the Board of Intec Group, a sugar and grain business which in 2001 merged with Alfa Group's
sugar business to create United Food Company.  Mr. Gamzin graduated from Moscow Commercial Institute in 1989 with a Master of Economics.



Evgeny Roytman, Director

Mr. Roytman joined our Board of Directors on April 23, 2008.  Since 2003, Mr. Roytman has been Chief Executive Officer of Kolangon-optim LLC (Moscow, Russia), a company working in the sphere of digital and mobile television formats.  Since 2006, Mr. Roytman has been a director of Dominanta LLC (Moscow, Russia).  Since 2005, Mr. Roytman has been a director of Dicom LLC (Moscow, Russia).  From 2003 to 2007, Mr. Roytman served as a Chief Executive Officer of MediaTrust LLC (Moscow, Russia).  From 2000 to 2002, Mr. Roytman served as Chief Executive Officer of NTV - Internet ZAO (Moscow, Russia).  Mr. Roytman graduated from Moscow State Technologic University Stankin in 1992 with a Master of Science.



Dmitri Moiseyev, Director

Mr. Moiseyev joined our Board of directors on July 24, 2008.  Since May 2008, Mr. Moiseyev has been Investment Director at Technoprom Investment Corp., and employed by its management consulting company, RTIC Russian Technologies Investment Consultants Limited.  He was a Director with Infort Capital from October 2007 to March 2008.  From May 2002 to September 2007, he served as Senior Portfolio Manager for Berkeley Capital Partners, West Siberia Venture Fund of European Bank for Reconstruction and Development (EBRD). He also served as a director for the following portfolio companies:  ZAO NPK Katren from May 2002 to June 2005; MS United Group from June 2002 to October 2003; and SK Press from May 2005 to September 2007.  From 1999 to 2002, he served as Vice President on Business Development at National Timber Company, a Sputnik Funds portfolio company.  From 1997 to 1999, he served as an Associate for Russia
Partners Management, a private equity investment fund.  From 1995 to 1996, he worked at Arthur Andersen in Moscow, Russia. He received a graduate diploma in Economics from Moscow State University in 1996.



Recent Changes on the Board of Directors



Effective March 27, 2009, two directors, Evgeny Roytman and Dmitri Moiseyev, who served on the Companys Board of Directors as nominees of Esterna resigned.



Effective March 27, 2009, Sergey Sulgin and Roman Rozenberg were appointed to serve on the Companys Board of Directors.





58



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Sergey Sulgin, age 35, became a director on March 27, 2009. Since 2003, he has been principal executive of GMCS, a technology company in Russia.  He is also the Chairman of Compulink, a technology company in Russia.  From 1999 to 2003, he served as Business Development Director at GMCS.  Since 2005, Mr. Sulgin was an employee of Terra Insight Corp., a Florida corporation.  From 1997 to 1999, he served as Development and Localization Director at the Russia representative office of Baan Company.  From 1996 to 1997, he was a Program Manager with Epicor (Platinum Software Russia).  From 1995 to 1996, he served as Project Manager for Epicor.  From 1993 to 1995, he served as a consultant to TengizShevrOil (Chevron-Kazakhstan Government Joint Venture) in Kazakhstan.  Mr. Sulgin received a Bachelor of Arts degree in 1995 from Lomonosov Moscow State University.



Roman Rozenberg, age 46, became a director on March 27, 2009. Since June 2007, Mr. Rozenberg is President of Simbiotel, a Cypress telecommunication company that provides innovative software and communication services for mobile phones in GSM networks.  Mr. Rozenberg previously served as the Company's Chief Executive Officer from May 19, 2005 to July 10, 2007, as President from September 30, 2006 to July 10, 2007, and as a director from May 19, 2005 to July 10, 2007.   From January 7, 2005 to July 10, 2007, Mr. Rozenberg served as Chief Executive Officer and a director of the Company's subsidiary, Terra Insight Corporation. From March 2004 through January 2005, Mr. Rozenberg served as Vice President of TelcoEnergy, Inc. From February 2002 through March 2004, Mr. Rozenberg served as Chief Executive Officer of Syntaz, Inc. He served as President and Chief Technology Officer of Machblade Technologies
from 2002 to 2004.  From September 1999 through February 2002, Mr. Rozenberg served as President and Chief Technology Officer of Biolink Technologies International, Inc. From 1997 to 1998, he served as Managing Director, CIS operations for Baan Company, N.V., the leading Dutch software developer. Prior to that he was with Price Waterhouse Coopers from 1995 to 1997 in the position of Senior Manager where he advised number of large Russian companies including Gazprom on vast array of business issues.   Mr. Rozenberg received a Bachelor of Science degree in electrical engineering in 1986 and a Masters of Sciences degree in Information Systems Engineering in 1989 from Polytechnic University (formerly known as Polytechnic Institute of New York).



Additional Information about Officers and Directors



Our executive officers or directors are not associated with another by family relationships.  None of our directors or officers serves as a director of another reporting company. Based solely in reliance on representations made by our officers and directors, during the past five years, none of the following occurred with respect to such persons: (1) no petition under the Federal bankruptcy laws or any state insolvency law was filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such persons, or any partnership in which he or she was a general partner or any corporation or business association of which he or she was an executive officer at or within two years before the time of such filing; (2) no such persons were convicted in a criminal proceeding or are a named subject of a pending criminal proceeding (excluding traffic violations and
other minor offenses); (3) no such persons were the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of any competent jurisdiction, permanently or temporarily enjoining, or of any federal or state authority barring, suspending or otherwise limiting, their involvement in any type of business practice, or in securities or banking or other financial institution activities; and (4) no such persons were found by a court of competent jurisdiction in a civil action or by the SEC or by the Commodity Futures Trading Commission to have violated any federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.



Section 16(a) Beneficial Ownership Reporting Compliance



Section 16(a) of the Securities Exchange Act of 1934, as amended, requires executive officers, directors, and persons who beneficially own more than ten percent of any class of equity securities of a company registered pursuant to Section 12 of the Exchange Act to file with the Securities and Exchange Commission initial reports of beneficial ownership and reports of changes in beneficial ownership.  Such persons are also required by Securities and Exchange Commission regulations to furnish the company with copies of all such Section 16(a) forms filed by such person.  As of the year ended December 31, 2008, we did not have any class of equity securities registered pursuant to Section 12 of the Exchange Act.





59



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Code of Ethics



We have not yet implemented a code of ethics applicable to our directors, officers and employees. Our present business operations were only recently commenced, and we have had a small number of employees since inception, many of whom were officers and officers simultaneously.  We expect to adopt a code of ethics during calendar year 2009.



Board of Directors, Committees and Meetings



Our directors are to be elected annually and to serve until the next annual meeting of stockholders and until their successors are elected and qualified. Our Board of Directors does not currently maintain a separately-designated standing audit, nominating, or compensation committee, or other similar committee, of the Board of Directors, and we do not have audit, nominating, or compensation committee, or other similar charter. Members of our Board of Directors are responsible for matters typically performed by such audit, nominating, compensation or other similar committees. No person serving on our Board of Directors qualifies as a financial expert. As all of our Board members are officers or nominees of a substantial stockholder who may not be deemed independent, we have not established separate Board committees.



|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------



Summary Compensation Table



The following table summarizes the compensation we paid to our Chief Executive Officer and our two other most highly compensated executive officers who served at the end of our last fiscal year (collectively, the Named Executive Officers).



|Name and Principal Position               |  | Year
(a) |  | Salary
($)(b) |  | Bonus
($)(c) |  | Option
Awards
($)(d)(e)
(f)(g)(h)(i) |  | All Other
Compensation
($)(i) |  | Total
($)
|----------------------------------------- |  | -------- |  | ------------- |  | ------------ |  | ------------------------------------ |  | ----------------------------- |  | ---------
|Dmitry Vilbaum                            |  | 2008     |  | 132,885       |  |             |  | 328,139                              |  |                              |  | 461,024  
|Chief Executive Officer                   |  | 2007     |  | 5,769         |  |             |  | 523,122                              |  |                              |  | 528,891  
|Dr. Alexandre Agaian                      |  | 2008     |  | 92,308        |  | 20,000       |  |                                     |  |                              |  | 112,308  
|President and Principal Financial Officer |  |          |  |               |  |              |  |                                      |  |                               |  |          
|Ivan Raylyan                              |  | 2008     |  |              |  |             |  | 65,628                               |  |                              |  | 65,628   
|Chief Executive Officer of subsidiary     |  | 2007     |  |              |  |             |  | 514,021                              |  |                              |  | 514,021  



|(a) | Mr. Agaian joined the Company on July 21, 2008.
|--- | -----------------------------------------------

|(b) | For fiscal 2007, refers to salaries actually paid, and does not include accrued salaries, in the amounts of $134,135 for Mr. Vilbaum and $63,942 for Mr. Raylyan, which were waived in 2007.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | For Mr. Agaian, the amount refers to a cash sign-on bonus.
|--- | ----------------------------------------------------------

|(d) | Represents the stock-based compensation recognized in accordance with SFAS No. 123(R). Option awards are valued at the fair value on the grant date using a Black-Scholes model. Assumptions made in the valuation of option awards are discussed in Note 4 to the consolidated financial statements.                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(e) | On August 13, 2007, we granted 5 million stock options to Mr. Vilbaum and 1 million stock options to Mr. Raylyan, in each case, exercisable for five years at $0.16 per share, of which 50% vested on the grant date and the other half vested on August 13, 2008.  The total grant date fair values of the awards to Mr. Vilbaum and Mr. Raylyan were $656,279 and $131,256, respectively.                                                                                                                                                                                                                                                         
|(f) | On October 1, 2007, we granted 1 million stock options to Mr. Vilbaum, and 2.5 million stock options to Mr. Raylyan, in each case, exercisable for five years at $0.22 per share.  The total grant date fair values of the awards to Mr. Vilbaum and Mr. Raylyan were $179,357 and $448,393, respectively.                                                                                                                                                                                                                                                                                                                                          
|(g) | On April 17, 2006, we granted 50,000 stock options to Mr. Vilbaum, exercisable for five years at $1.38 per share, which vested at the rate of 25% per quarter following the grant date, with 75% vesting in fiscal 2006 and 25% vesting in fiscal 2007.  The total grant date fair value of the award was $62,500.  The stock options were subsequently terminated in fiscal 2007.                                                                                                                                                                                                                                                                  
|(h) | On April 23, 2008, we granted 3 million stock options to Mr. Vilbaum, exercisable at $0.165 per share. Stock options to purchase 1 million shares vested on April 23, 2008 and expire on April 22, 2011. The total grant date fair value of those options was $138,238.  Stock options to purchase an additional 1 million shares are to vest on April 23, 2009 and to expire on April 22, 2012. The total grant date fair value of those options was $147,425.  Stock options to purchase a further 1 million shares are to vest on April 23, 2010 and to expire on April 22, 2013.  The total grant date fair value of those options was $153,172.





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|(i) | In 2008, we granted Mr. Agaian 5 million stock options, which remain subject to vesting and exercisability conditions as follows:  two million stock options, exercisable for four years at $0.20 per share, to vest upon receipt by the Company of third party financing (in debt or equity) in the amount of at least $10 million during the first year of the employment term; one million stock options, exercisable for four years at $0.40 per share, to vest on July 21, 2009; one million stock options, exercisable for five years at $0.60 per share, to vest on July 21, 2010; and one million stock options, exercisable for six years at $0.90 per share, to vest on July 21, 2011.  The total grant date fair values of such options were $365,323, $376,414, $581,313, and $885,122, respectively.  Effective March 27, 2009, Dr. Alexandre Agaian elected to forfeit the five million stock
options granted to him under his Employment Agreement, dated as of July 21, 2008.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(j) | This column reports the total amount of perquisites and other benefits provided, if such total amount exceed $10,000.
|--- | ---------------------------------------------------------------------------------------------------------------------



In general, compensation payable to a Named Executive Officer consists of a base salary.  We had written employment agreements with our Chief Executive Officer and President during our 2008 fiscal year.  Prior to entering those agreements, at various times, we have granted stock options to a Named Executive Officer at such times as determined by the Board of Directors.  Our compensation system has generally not been tied to performance based conditions other than the passage of time.  Mr. Agaians employment agreement provides for eligibility for a performance-based bonus upon achievement of performance targets and thresholds to be established by the Board of Directors, however, the Board has not yet adopted the criteria for such bonus.



Employment Agreement with CEO



On April 23, 2008, the Company entered into an employment agreement with Dmitry Vilbaum, the Companys Chief Executive Officer, effective April 23, 2008. Mr. Vilbaum is entitled to: an annual salary at the rate of $150,000; an annual performance based bonus in an amount equal to 5% of the Companys consolidated net profit, except if terminated for cause; and is also entitled to other bonuses, performance-based or otherwise, and an annual increase in salary, as the Companys Board of Directors may determine in its discretion. Also, under the employment agreement, Mr. Vilbaum is entitled to medical and dental insurance, twelve sick days per year, three weeks vacation, and participation in employee benefit plans that the Company may adopt. In connection with the employment agreement, the Company granted to Mr. Vilbaum stock options to purchase 3 million shares of the Companys common stock,
exercisable at $0.165 per share. Stock options to purchase 1 million shares vested on April 23, 2008 and expire on April 22, 2011. Stock options to purchase an additional 1 million shares are to vest on April 23, 2009 and to expire on April 22, 2012. Stock options to purchase a further 1 million shares are to vest on April 23, 2010 and to expire on April 22, 2013. The employment term is for a period of up to three years. The Company may earlier terminate the employment of Mr. Vilbaum under the employment agreement for the following reasons: (a) death; (b) because of physical injury or illness if Mr. Vilbaum is unable to materially perform his duties; (c) upon two months prior written notice, if determined by majority vote of the Companys Board of Directors at a duly constituted meeting; or (d) for reasons of cause, as such term is defined in the employment agreement. If the Company terminates Mr. Vilbaums employment for any reason other than for cause, the Company is
to pay him four months of salary as severance.



Prior to entering the employment agreement described above, Mr. Vilbaum worked as an at-will employee with a base annual salary at the rate of $100,000 for calendar year 2008.  In December 27, 2007, our three-year employment agreement with Mr. Vilbaum, effective as of June 13, 2005, as may have been amended and supplemented, was terminated.  The employment agreement had provided for an initial annual base salary, for services on a part-time basis, of $100,000 for fiscal year 2005.  In fiscal year 2006, Mr. Vilbaum was paid at the rate of $125,000 through March 2006, when his salary was increased to the rate of $150,000 per year.  Beginning in late 2006, Mr. Vilbaum was paid at the rate of fifty percent of his stated salary until February 2007, when we ceased making all employee salary payments.  In 2007, Mr. Vilbaum waived all accrued salary due to him through December 27, 2007. In 2005, under the employment
agreement, we granted him five-year stock options to purchase 413,333 shares of our common stock, exercisable for five years at $0.80 per share, and he also held 500,000 stock options granted on June 29, 2005, 250,000 stock options granted on December 29, 2005, and 50,000 stock options granted on April 17, 2006.  In October 2007, those stock options were cancelled.  At December 31, 2007, Mr. Vilbaum held 250,000 stock options granted on September 25, 2006, 5,000,000 stock options granted on August 13, 2007, and 1,000,000 stock options granted on October 1, 2007.  Under the employment agreement, he was also entitled to receive reimbursement for reasonable travel and other business related expenses, four weeks vacation, and medical and dental insurance. We were also providing to Mr. Vilbaum certain life insurance and long-term care insurance coverage.





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Employment Agreement with President



On August 29, 2008, the Company entered into employment agreement, dated as of July 21, 2008, with Dr. Alexandre Agaian, who joined the Company as the Companys President on July 21, 2008.  The thee year employment agreement provides for:  a base salary at the rate of $200,000 per year for the first year, and at a rate of $240,000 per year for the next two years; a sign-on bonus of $20,000; family health insurance with premiums not exceeding $14,000 per year; an automobile allowance not to exceed $12,000 per year; twelve sick days per year; three weeks vacation per year; ten holidays; participation in the Companys 401(k) plan or such other plan as the Company may adopt; a business cell phone; certain reimbursement for business travel; eligibility for a performance-based bonus upon achievement of performance targets and thresholds to be established by the Board of Directors, such as achievement of
certain market price, business performance, or other criteria, determined by the Board of Directors in its reasonable discretion, for which he would be entitled to a bonus of 100% of his base salary upon achievement of 100%-120% of the performance target, and a bonus of up to, in the discretion of the Board of the Directors, 200% of his base salary, for achievement of more than 120% of the performance target; and, a grant of stock options to purchase up to 5 million shares of the Companys common stock, subject to vesting and exercisability conditions as follows:  two million stock options, exercisable for four years at $0.20 per share, to vest upon receipt by the Company of third party financing (in debt or equity) in the amount of at least $10 million during the first year of the employment term; one million stock options, exercisable for four years at $0.40 per share, to vest upon completion of one year of service; one million stock options, exercisable for five years at $0.60
per share, to vest upon completion of the second year of service; and one million stock options, exercisable for six years at $0.90 per share, to vest upon completion of the third year of service.  The employment agreement may be earlier terminated for the following reasons: (a) death; (b) because of physical injury or illness, upon 30 days prior written notice, if Dr. Agaian is unable to materially perform his duties for a continuous period of 120 days with no expectation of return within a reasonable time; (c) upon three months prior written notice, at the option of either Dr. Agaian or the Company, without cause, in which event the Company shall have the right to require Dr. Agaian not to perform any services for the Company until the termination becomes effective, subject to payment to the salary for three months; or (d) for reasons of cause, as such term is defined in the employment agreement. If the Company terminates Dr. Agaians employment for any reason other
than for cause, all fringe benefits provided for in the employment agreement shall continue for three months from the effective date of termination and stock options are to vest on the next anniversary date following the date of termination shall become vested.  Effective March 27, 2009, Dr. Agaian elected to forfeit the five million stock options granted to him under his Employment Agreement, dated as of July 21, 2008.



Outstanding Equity Awards at Fiscal Year End



The following table sets forth information concerning outstanding option awards held by the Named Executive Officers as at December 31, 2008.  We have not granted stock awards to a Named Executive Officer.



|                     |  | Option Awards                                                      
|-------------------- |  | -------------------------------------------------------------------
|Name                 |  | Number of securities
underlying unexercised
options (#)
exercisable
|Dmitry Vilbaum       |  | 250,000                                                            
|Dmitry Vilbaum       |  | 5,000,000                                                          
|Dmitry Vilbaum       |  | 1,000,000                                                          
|Dmitry Vilbaum       |  | 1,000,000                                                          
|Dmitry Vilbaum       |  |                                                                   
|Dmitry Vilbaum       |  |                                                                   
|Dr. Alexandre Agaian |  |                                                                   
|Dr. Alexandre Agaian |  |                                                                   
|Dr. Alexandre Agaian |  |                                                                   
|Dr. Alexandre Agaian |  |                                                                   
|Ivan Raylyan         |  | 250,000                                                            
|Ivan Raylyan         |  | 1,000,000                                                          
|Ivan Raylyan         |  | 2,500,000                                                          



|(a) | Effective March 27, 2009, Dr. Agaian elected to forfeit the five million stock options granted to him under his Employment Agreement, dated as of July 21, 2008.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------





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Stock Incentive Plan



Our 2005 Stock Incentive Plan provides for various types of awards, including stock options, stock awards, and stock appreciation rights, denominated in shares of our common stock to our employees, officers, non-employee directors and agents, and those of our participating subsidiaries. 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 growth of our company, and to align employee interests with those of our shareholders.  The plan is administered by the Board of Directors.  The plan prohibits the repricing of awards.  The maximum aggregate number of shares of common stock that may be granted under the plan is five million shares, subject to an evergreen provision, provided that not more than one million shares may be issued as awards of incentive stock options.  The
evergreen provision provides that for a period of nine years from the adoption date of the plan, the aggregate number of shares of common stock that is available for issuance under the plan shall automatically be increased by that number of shares equal to five percent of our outstanding shares, on a diluted basis, or such lesser number of shares as determined by the Board of Directors.  Unless terminated earlier by the Board of Directors, the plan will terminate on December 28, 2015. As of December 31, 2008, no shares have been issued under the plan and there were no outstanding stock options under the plan.



Director Compensation



In fiscal year 2008, we did not compensate directors for their services on the Board of Directors.



|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------



Security Ownership



The tables below set forth information, as of December 31, 2008, concerning the shares of our common and preferred stock beneficially owned by each director, by each Named Executive Officer, and by all of our officers and directors as a group, and (ii) by each person whom we know beneficially own more than five percent of our of voting securities. This information was determined in accordance with Rule 13(d)-3 under the Securities Exchange Act of 1934, and is based upon the information provided by the persons listed below.



All persons named in the tables below, except as indicated by the footnotes to the tables, have the sole voting and dispositive power with respect to common and preferred stock that they beneficially own. In computing the number of shares of common or preferred stock beneficially owned by a person and the percentage ownership of that person, we deemed outstanding shares that are acquirable within 60 days of December 31, 2008 upon exercise of options and warrants; however, ownership of shares of preferred stock which carry conversion privileges are listed separately and are not included in the calculation of beneficial ownership of common stock.  Applicable percentage ownership is based on 58,358,338 shares of common stock and 5,000,000 shares of preferred stock outstanding at December 31, 2008.



|                                                  |  | Shares Beneficially Owned
|------------------------------------------------- |  | -------------------------
|                                                  |  | Common                   
|Name of Beneficial Owner (a)                      |  | Stock                    
|Officers and Directors                            |  |                          
|Dmitry Vilbaum (b)                                |  | 7,250,000                
|Dr. Alexandre Agaian (c)                          |  |                         
|Mikhail Gamzin (d)                                |  | 29,275,483               
|Evgeny Roytman (d)                                |  | 29,275,483               
|Ivan Raylyan (d)(e)                               |  | 33,025,483               
|Dmitri Moiseyev (f)                               |  |                         
|All officers and directors as a group (8 persons) |  | 42,025,483               
|5 Security Holders                                |  |                          
|River Universal Trading Limited                   |  |                          
|and related entity as a group (g)                 |  | 29,275,483               
|Enficon Establishment (h)                         |  | 6,000,000                
|Parten Corporation Inc. (i)                       |  | 4,000,000                









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|(a) | Unless otherwise indicated, the address of each person is c/o Terra Energy & Resource Technologies, Inc., 99 Park Avenue, 16th Floor, New York, New York 10016.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | Refers to stock options to purchase 250,000 shares of common stock at $0.21 per share until September 24, 2011, 5,000,000 shares of common stock at $0.16 per share until August 12, 2012, 1,000,000 shares of common stock at $0.22 per share until September 30, 2012, and 1,000,000 shares of common stock at $0.165 per share until April 23, 2011.  Excludes stock options, to vest in 2009, to purchase 1,000,000 shares of common stock, at $0.165 until April 23, 2012, and stock options, to vest in 2010, to purchase 1,000,000 shares of common stock, at $0.165 until April 23, 2013.                                                                                                                                                                                                
|(c) | Excludes stock options to purchase 5 million shares of common stock, which remain subject to vesting and exercisability conditions as follows:  two million stock options, exercisable for four years at $0.20 per share, to vest upon receipt by the Company of third party financing (in debt or equity) in the amount of at least $10 million during the first year of the employment term; one million stock options, exercisable for four years at $0.40 per share, to vest on July 21, 2009; one million stock options, exercisable for five years at $0.60 per share, to vest on July 21, 2010; and one million stock options, exercisable for six years at $0.90 per share, to vest on July 21, 2011.                                                                                    
|(d) | See footnote (g) below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(e) | Includes stock options to purchase 250,000 shares of common stock at $0.21 per share until September 24, 2011, 1,000,000 shares of common stock at $0.16 per share until August 12, 2012, and 2,500,000 shares of common stock at $0.22 per share until September 30, 2012.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(f) | Employed by Technoprom Investment Corporation , which is owned by Mikhail Gamzin and Evgeny Roytman. See footnote (i) below.  Mr. Moiseyev disclaims beneficial ownership of shares held, or controlled, directly or indirectly, by each of Technoprom Investment Corporation, Mikhail Gamzin, Evgeny Roytman, RUT and Esterna Ltd.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(g) | The group consists of River Universal Trading Limited, a British Virgin Islands company (RUT), and Esterna Ltd., a Cypriot limited company. RUTs address is 50 Agias Zonis Street, Arianthi Court, CY-3090 Limassol, Cyprus.  Its beneficial owners with shared voting and dispositive powers are Mikhail Gamzin, Evgeny Roytman and Ivan Raylyan.  RUT is 50% owned by Technoprom Investment Corporation, a British Virgin Islands company owned by Mikhail Gamzin and Evgeny Roytman, and 50% owned by Ivan Raylyan.  Esterna is a wholly-owned entity of RUT.  Includes the following securities held by Esterna:  500,000 shares of common stock, 5,000,000 shares of preferred stock, and warrants to purchase 20,000,000 shares of preferred stock, exercisable until December 27, 2009.
|(h) | Its address is Liechtenstein, Poststrasse 403, FL-9491 Ruggell. The beneficial owner is Alexander Fediaev.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(i) | Its address is c/o Lexinter SA, AV.de Champel 8C, 1206 Geneva, Switzerland.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      



Changes in Control



On December 27, 2007, we entered into a Securities Purchase Agreement with Esterna Ltd., a Cypriot limited company, for the sale of securities consisting of 5,000,000 shares of Series A preferred stock, and warrants exercisable over a two-year period to purchase 20,000,000 shares of Series A Preferred Stock for the aggregate purchase price of $1 million.  A closing for one-half of the securities occurred on December 27, 2007, and a final closing for the remainder of the securities occurred April 23, 2008.  In connection with the transaction, the Company designated 25 million shares as Series A Preferred Stock.



Each share of Series A preferred stock is convertible into one share of common stock.  Each share of Series A preferred stock is entitled to three votes for each vote afforded to a share of common stock.  Upon conversion, exchange or other transaction with the Company of more than 50% of the originally issued Series A Preferred Stock, such that less than 50% of the originally issued Series A Preferred Stock becomes outstanding at any time, the remaining outstanding Series A Preferred Stock shall automatically convert into shares of common stock.  Except as required by law, the holders of the Series A preferred stock are entitled to vote on an as-converted basis on all matters in which the holders of common stock are entitled to vote, including the election of directors. For so long as at least 50% of the Series A preferred stock remain outstanding, the holders of the Series A preferred stock have the exclusive
right to elect a majority of the Companys board of directors. Such directors may only be removed and may be removed from time to time by the holders of the Series A preferred stock.



Additionally, for so long as at least 50% of the aggregate number of originally-issued shares of Series A preferred stock remain outstanding, consent of the holders of at least 66 2/3% of then outstanding shares of Series A preferred stock voting together as a class are required for certain corporate actions, such as:  (i) any action that creates any new class or series of equity securities or any other security convertible into equity securities ranking on par with the Series A Preferred Stock with respect to redemption, voting, dividends, or upon liquidation, (ii) the amendment, alteration or repeal of any provision of the Articles of Incorporation or the Bylaws of the Company so as adversely to affect the relative rights, preferences, qualifications, limitations or restrictions of the Series A Preferred Stock, (iii) the declaration or payment of any dividend or distribution on any securities of the Company
other than the Series A Preferred Stock pursuant to and in accordance with the provisions of this Certificate of Designation for the Series A Preferred Stock, or the authorization of the repurchase of any securities of the Company, (iv) the approval of any event constituting a liquidation preference, (v) the carrying on by the Company of any business other than the business of the Company similar to the business conducted by the Company or any affiliate to date, (vi) the creation (through reclassification, issuance or otherwise) any shares of preferred stock (regardless of rights, privileges,





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powers or preferences; (vii) the issuance of any additional shares of preferred stock other than the shares of Series A Preferred Stock sold pursuant to the Securities Purchase Agreement; (viii) the merger or consolidation into or with any other entity (other than a merger or consolidation where the Company is the survivor or continuing corporation of such merger or consolidation and the Companys stockholders as constituted immediately prior to such merger or consolidation will, immediately after such merger or consolidation hold a majority of the voting power of the Company), sell all or substantially all of the Companys assets or effect a liquidation of the assets of the Company; (ix) the entering into, directly or indirectly, or permitting of any Subsidiary to enter into, directly or indirectly, any debt or lease transaction where the aggregate value of any such transaction exceeds $1 million;
(x) changing the size of, or election procedure of, the Companys Board of Directors; (xi) increasing the number of shares reserved under any plan adopted by the Company for issuance of equity to employees, non-employee directors and consultants; (xii) entering into or permitting any sale, transfer, assignment, conveyance, lease or other disposition or any series of related dispositions of any assets, business or operations of the Company or any of its Subsidiaries, where the value of the assets, business or operations so disposed during the immediately preceding 12 months exceeds the lesser of (A) $1 million or (B) 10% of the Company's total consolidated assets; provided, however, that such restriction shall not apply to inventory sales and other sales in the ordinary course of business; (xiii) entering into or permitting any subsidiary to enter into, any transaction, including, without limitation, any purchase, sale, lease or exchange of property, the rendering of any service
or the payment of any management, advisory or similar fees, with any affiliates, directors, officers, employees or stockholders of the Company or any subsidiary where the aggregate value of any such transaction exceeds $25,000; (xiv) entering into or permitting any sale, transfer, encumbrance, other disposition or any series of related dispositions of any key technology or intangible, license or otherwise transfer the rights to technology or intangibles necessary or material to its operations; (xv) hiring, terminating or replacing the Companys Chief Executive Officer, Chief Technology Officer, Chief Financial Officer or President or any person performing functions equivalent to those of such offices; or (xvi) engaging in any transaction that is material or could reasonably be expected to be a material matter to the assets or operations of the Company.



In connection with the transaction, Esterna nominated Mikhail Gamzin and Evgeny Roytman to the Companys board of directors, and they joined the board of directors on April 23, 2008.  On July 24, 2008, a nominee of Esterna, Dmitry Moiseev, was appointed to the Companys Board of Directors.



In April 2008, River Universal Trading Limited consummated a transaction with Ivan Raylyan, an affiliate of the Company, whereby Mr. Raylyan acquired a 50% interest in River Universal Trading Limited in consideration of his transfer of 28,775,483 shares of the Companys common stock to River Universal Trading Limited. In connection with the transaction, Mr. Raylyan joined Messrs. Gamzin and Roytman on the Boards of Directors of River Universal Trading Limited and Esterna Ltd.  As of March 18, 2009, Esterna was the record holder of 500,000 shares of the Companys common stock, 5,000,000 shares of Series A preferred stock, and 20,000,000 Series A preferred stock purchase warrants, and River Universal Trading Limited was the record holder of 28,775,483 shares of the Companys common stock.



On March 27, 2009, Sergey Sulgin purchased 10,000,000 shares of the Companys common stock and 10,000,000 common stock purchase warrants.  As conditions to the investment, the investor required, among other things, that: the Companys Board of Directors shall initially consist of five persons, Alexandre Agaian, Dmitry Vilbaum, one individual nominated by Esterna Ltd., and two nominees of the investor; Esterna shall have converted all of its 5,000,000 shares of the Companys preferred stock into 5,000,000 shares of common stock and exchanged its 20,000,000 preferred stock purchase warrants into  20,000,000 common stock purchase warrants; and each of the Companys two principal officers, Alexandre Agaian and Dmitry Vilbaum, shall have made an equity investment for 10,000,000 shares of common stock and 10,000,000 common stock purchase warrants.



In connection with recent sales of securities in March 2009, effective March 27, 2009, Esterna converted its 5,000,000 shares of the Companys preferred stock into 5,000,000 shares of the Companys common stock and exchanged its 20,000,000 preferred stock purchase warrants into 20,000,000 common stock purchase warrants.  In connection therewith, two directors, Evgeny Roytman and Dmitri Moiseyev, who served on the Companys Board of Directors as nominees of Esterna resigned, and two nominees of the investor, Sergey Sulgin and Roman Rozenberg, were appointed to serve on the Companys Board of Directors.





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Securities Authorized for Issuance under Equity Compensation Plans



The following table set forth outstanding securities authorized for issuance under equity compensation plans as of December 31, 2008.



|Plan Category                                              |  | Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights (a) |  | Weighted average
exercise price of
outstanding options,
warrants and rights |  | Number of securities
remaining available
for future issuance
|---------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- |  | ------------------------------------------------------------
|Equity compensation plans
approved by securities holders   |  |                                                                                                |  |                                                                            |  | 5,000,000                                                   
|Equity compensation plans not
approved by security holders |  | 26,965,000                                                                                      |  | $0.25                                                                       |  | 5,000,000                                                   
|Total                                                      |  | 26,965,000                                                                                      |  | $0.25                                                                       |  | 5,000,000                                                   



Plans in the Shareholder Approved Category



Our 2005 Stock Incentive Plan for employees, directors and consultants provides for the issuance of up to 5,000,000 shares of our common stock, subject to an evergreen provision, pursuant to awards granted under the plan.  To date, only nonincentive stock options to employees have been granted under the plan, all of which were terminated by its terms.  A nonincentive stock option entitles the holder to purchase a share of our common stock for a period of five years from grant at a purchase price no less than the fair market value of the common stock on the day of grant.  As of December 31, 2008, no shares have been issued under the plan and no awards under the plan were outstanding.



Plans Not in the Shareholder Approved Category



On June 30, 2005, we entered into a consulting agreement with Stuart Sundlun, an individual, pursuant to which we issued stock options to purchase 500,000 shares of our common stock. The stock options are exercisable until June 30, 2010 at $0.80 per share.



On March 7, 2006, we issued to Norman Sheresky, a legal consultant, stock options to purchase 15,000 shares of our common stock. The stock options are exercisable until March 6, 2011 at $0.50 per share.



On September 25, 2006, we granted stock options to purchase 250,000 shares of common stock, exercisable until September 24, 2011 at $0.21 per share, to each of the persons who were at the time employees:  Ivan Raylyan, Roman Rozenberg, Dan Brecher and Dmitry Vilbaum. Messrs. Rozenberg and Brecher exercised such options in December 2006.



On October 27, 2006, we granted to Eric M. Weiss, who was then our Chief Financial Officer, stock warrants to purchase 250,000 shares of common stock, exercisable until October 26, 2011 at $0.22 per share.



On August 13, 2007, we granted to Dmitry Vilbaum, our Chief Executive Officer, stock options to 5,000,000 purchase shares of our common stock, exercisable until August 12, 2012 at $0.16 per share. One-half of the stock options are deemed vested as of the date of grant, and the other half are to vest on August 13, 2008.



On August 13, 2007, we granted to Ivan Raylyan, Director of Technology, stock options to 1,000,000 purchase shares of our common stock, exercisable until August 12, 2012 at $0.16 per share. One-half of the stock options are deemed vested as of the date of grant, and the other half are to vest on August 13, 2008.



On August 13, 2007, we granted to three consultants, Victor Andreev, Denis Negoda, and Igor Chirkin, stock options to purchase an aggregate of 1,000,000 shares of our common stock, exercisable for a period of up to five years from the date of grant at $0.16 per share. One-half of the stock options are deemed vested as of the date of grant, and the other half are to vest on August 13, 2008.





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On October 1, 2007, we granted to employees stock options to purchase an aggregate of 9,200,000 shares of our common stock, exercisable for a period of up to five years from the date of grant at $0.22 per share, as follows:  2,500,000 options to Ivan Raylyan, Director of Technology; 1,000,000 options to Dmitry Vilbaum, Chief Executive Officer; 4,500,000 options to Dan Brecher, our then Managing Director; 1,000,000 options to Ken Oh, Secretary; 100,000 options to Kim Reilly; and 100,000 options to Susan Fox.



On October 1, 2007, we granted to Victor Andreev, a consultant, stock options to purchase 500,000 shares of our common stock, exercisable for a period of up to five years from the date of grant at $0.22 per share.



On April 23, 2008, we granted to Dmitry Vilbaum, our Chief Executive Officer, three million stock options, exercisable at $0.165 per share. Stock options to purchase 1 million shares vested on April 23, 2008 and expire on April 22, 2011.  Stock options to purchase an additional 1 million shares are to vest on April 23, 2009 and to expire on April 22, 2012.  Stock options to purchase a further 1 million shares are to vest on April 23, 2010 and to expire on April 22, 2013.



In 2008, we granted to Dr. Alexandre Agaian, our President, five million stock options, which are subject to vesting and exercisability conditions as follows:  two million stock options, exercisable for four years at $0.20 per share, to vest upon receipt by the Company of third party financing (in debt or equity) in the amount of at least $10 million during the first year of the employment term; one million stock options, exercisable for four years at $0.40 per share, to vest on July 21, 2009; one million stock options, exercisable for five years at $0.60 per share, to vest on July 21, 2010; and one million stock options, exercisable for six years at $0.90 per share, to vest on July 21, 2011.



On May 19, 2008, we granted Ms. Palgova, a consultant, one million stock options, exercisable for two years at $0.11 per share, subject to vesting in equal installments on August 1, 2008, November 1, 2008, February 1, 2009, and May 1, 2009.



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|-------- | -------------------------------------------------------------------------



Agreements with the Institute



In 2005, Terra Insight Corporation, our subsidiary, entered into a license agreement and a services agreement with The Institute of Geoinformational Analysis of the Earth. Mr. Raylyan, our former President and Chairman, is the owner and operator of the Institute. The Institute is an international professional services firm which specializes in the development and application of remote sensing and geographic information technologies. The purpose of the agreements was to provide us with a license right to the technology, and a right to utilize the Institutes services. We believed that the terms of the agreements with the Institute were fair, and were on terms at least as equivalent to transactions with an unaffiliated party. The terms of the agreements were negotiated between Mr. Raylyan and the other members of our Board of Directors, and factors in determining the terms included, the availability and
costs of obtaining other technology and services from third parties, our good faith judgment as to the value of the Institutes technology and services, the long term nature of the agreements, a discount on services from the Institutes normal rates, and that we were receiving offsets on our service payments to the Institute against our annual minimum license fees for a period of time until we generate substantial revenues. Periodically, from time to time, the Board of Directors, excluding Mr. Raylyan, intended to reevaluate the terms of the agreements and reevaluate our contractual arrangements with the Institute, considering the availability and costs of obtaining other technology and services available from third parties.



Under the license agreement in effect in 2005, we had an exclusive, worldwide 30-year renewable right to use of all of the technology of the Institute.  We were required to pay the Institute $600,000 each year under the license agreement, subject to certain deferrals and credits as specified in the license agreement and the services agreement, until we have achieved certain milestones, upon which the payments increase. Commencing in 2007, the minimum payment for annual license fees was to increase annually by the lesser of four percent or the percentage increase of the New York Consumer Price Index using 2005 as the base year.





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In July 2007, the parties entered into an agreement, pursuant to which the license period became a 32-year term from 2005, and the annual license fee for calendar year 2007 was deferred, and payable at the rate of no more than $300,000 per year commencing with calendar year 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 our subsidiary, Terra Insight Corporation, 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. Commencing in 2008, the annual license fee was to increase annually by the lesser of four percent or the percentage increase of the Consumer Price Index using 2007 as the base year.  Under the license agreement, we obtained an exclusive option to purchase from the Institute its mapping technology.  This option terminates on the first to occur of (i) June 30, 2012 or (ii) the termination of the license agreement.  The purchase price for the mapping technology is to be the lesser of (i) $20 million, or the (ii) then-current market value of the
mapping technology as determined by independent appraisers. Notwithstanding the foregoing, the parties may negotiate in good faith a different purchase price. One-half of all internal project payments and one-half of all service success fee payments received by the Institute is to be credited against the purchase price.



In December 2007, the parties entered into an agreement of waiver, pursuant to which the annual license fees payable with respect to calendar years 2007 and 2008 have been waived.



Under the services agreement in effect in 2005, the Institute was to render services to us, and to refer all inquiries for commercial contract services to us. The Institute was to perform certain contract services for us at no more than 40% of the published rates of $500 per square kilometer, with minimum annual fees of $500,000, and with offsets against the license fee until certain minimum revenues are obtained.  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 will be credited against service fees, and 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.  Commencing in 2007, the minimum payment for annual services fees is to increase annually by the lesser of
four percent or the percentage increase of the New York Consumer Price Index using 2005 as the base year.



In July 2007, the parties entered into an agreement, pursuant to which the annual services fee payable to the Institute for our internal projects for calendar year 2007 was deferred, and payable at the rate of no more than $300,000 per year commencing with calendar year 2008, provided that the Company has total positive net revenues from its operations of at least $2 million annually, and provided that in the event that the Institute also has payable deferred annual license fees owed to the Institute, the Institute shall be entitled to payment on the deferred license fees and the deferred services fees at the collective rate of no more than $300,000 per year, on a pro rata basis. The Institute is to perform certain contract services for us 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, with minimum annual
services fees totaling $500,000, subject to certain deferrals and credits.  Commencing in 2008, the minimum annual service fee is to increase by the lesser of 4% or the percentage increase in the Consumer Price Index (CPI) using 2007 as the base year.



In December 2007, the parties entered into an agreement of waiver, pursuant to which the annual services fees payable with respect to calendar years 2007 and 2008 have been waived.



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





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Under the Technology License Agreement, dated as of December 15, 2008, we have, through our subsidiary, Terra Insight Services, Inc., an exclusive, worldwide renewable license for a 30-year term from December 2008 for the commercial use of all of the technology of the Institute, which has as its focus the exploration, sustainable development and management of the Earths resources and the monitoring of the environment.  Pursuant to the license, the Institute will be entitled to compensation certain project payments generated from the use of the Institutes technology in an amount to be determined on orders for our services, provided that such project payments shall not exceed 10% over the Institutes costs.  Such project payments are not duplicative of any services fees payable by Terra Insight Services, Inc. to the Institute under the Services Agreement. Under the license agreement, Terra
Insight Services, Inc. has an exclusive option to purchase from the Institute its mapping technology, to terminate on the earlier of (i) June 30, 2012 or (ii) the termination of the license agreement.



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



Transactions with Directors and Officers



In 2006 through March 2007, we subleased executive office facilities on a month-to-month basis pursuant to an oral agreement with Dan Brecher, a former officer, former director, and a present minority stockholder, of our company. The rent was $2,250 per month through March 2006, $4,500 per month through August, 2006, and was $8,000 per month through March 31, 2007. The rent represented the actual cost being charged to Mr. Brecher by the lessor for the facilities utilized by our company. The increases in rent were due to occupancy of additional space.  As of April 1, 2007, we leased from the third party substantially reduced office space.



In 2007, Dan Brecher, Dmitry Vilbaum, Ivan Raylyan, each who were an officer or director at the time, loaned the Company an aggregate of $407,409, and a related party has loaned $39,968 to the Company. The loans are unsecured and non-interest bearing and have no specific repayment terms. In December 2007, Mr. Brecher agreed to defer the repayment of monies advanced by him to the Company, totaling approximately $295,322 through September 30, 2007, and Mr. Raylyan agreed to defer the repayment of monies advanced by him to the Company, totaling approximately $105,000 through December 12, 2007, until the earlier of June 1, 2008 or such time that monies become available, out of future monies either raised by the Company and its affiliated entities or monies received as revenue at the rate of 8% of such monies raised or received until fully repaid.



At various times since 2005 to the present, certain of our present or former officers or directors, Dan Brecher and Kenneth Oh, and other employees of our company, have worked for our attorneys, Law Offices of Dan Brecher, and may continue to do so. Mr. Brecher and Mr. Oh are practicing attorneys who have devoted a majority of their time to Law Offices of Dan Brecher. The law firm, the proprietor of which is an attorney is a former director and officer, and a present minority stockholder, of our company, provides certain legal services to us. We paid the law firm or accrued legal fees for years ended December 31, 2008 and 2007 of $309,644 and $367,881, respectively. In December 2007, the law firm agreed to waive legal fees in the amount of $477,953.



On May 19, 2008, we entered into a consulting agreement with Elena Palgova to serve as a legal consultant, for a term through April 2009.  Pursuant to the agreement, she received $10,000 for the initial month of services, is entitled to a monthly fee of $5,000 thereafter, and stock options to purchase 1,000,000 shares of the Companys common stock, exercisable, subject to vesting at various times between August 1, 2008 and May 1, 2009, for two years at $0.11 per share.



On March 27, 2009, we sold to each of Dmitry Vilbaum, the Companys Chief Executive Officer, and an entity controlled by Dr. Alexandre Agaian, the Companys President, the following securities:  10,000,000 shares of the Companys common stock and 10,000,000 common stock purchase warrants that are exercisable until March 27, 2012 at $0.05 per share, for the price of $100,000.





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On April 1, 2009, we entered into a consulting agreement with Roman Rozenberg, a new director, pursuant to which we issued him warrants to purchase 3,000,000 shares of common stock, exercisable for three years at $0.05 per share.



Transactions involving Esterna Ltd. and Other Parties



On December 27, 2007, we entered into a Securities Purchase Agreement with Esterna Ltd., a Cypriot limited company, for the sale of securities consisting of 5,000,000 shares of Series A preferred stock, and warrants exercisable over a two-year period to purchase 20,000,000 shares of Series A Preferred Stock for the aggregate purchase price of $1 million.  A closing for one-half of the securities occurred on December 27, 2007, and a final closing for the remainder of the securities occurred April 23, 2008.  In connection with the transaction, the Company designated 25 million shares as Series A Preferred Stock.



Each share of Series A preferred stock is convertible into one share of common stock.  Each share of Series A preferred stock is entitled to three votes for each vote afforded to a share of common stock.  Upon conversion, exchange or other transaction with the Company of more than 50% of the originally issued Series A Preferred Stock, such that less than 50% of the originally issued Series A Preferred Stock becomes outstanding at any time, the remaining outstanding Series A Preferred Stock shall automatically convert into shares of common stock.  Except as required by law, the holders of the Series A preferred stock are entitled to vote on an as-converted basis on all matters in which the holders of common stock are entitled to vote, including the election of directors. For so long as at least 50% of the Series A preferred stock remain outstanding, the holders of the Series A preferred stock have the exclusive
right to elect a majority of the Companys board of directors. Such directors may only be removed and may be removed from time to time by the holders of the Series A preferred stock.



Additionally, for so long as at least 50% of the aggregate number of originally-issued shares of Series A preferred stock remain outstanding, consent of the holders of at least 66 2/3% of then outstanding shares of Series A preferred stock voting together as a class are required for certain corporate actions, such as:  (i) any action that creates any new class or series of equity securities or any other security convertible into equity securities ranking on par with the Series A Preferred Stock with respect to redemption, voting, dividends, or upon liquidation, (ii) the amendment, alteration or repeal of any provision of the Articles of Incorporation or the Bylaws of the Company so as adversely to affect the relative rights, preferences, qualifications, limitations or restrictions of the Series A Preferred Stock, (iii) the declaration or payment of any dividend or distribution on any securities of the Company
other than the Series A Preferred Stock pursuant to and in accordance with the provisions of this Certificate of Designation for the Series A Preferred Stock, or the authorization of the repurchase of any securities of the Company, (iv) the approval of any event constituting a liquidation preference, (v) the carrying on by the Company of any business other than the business of the Company similar to the business conducted by the Company or any affiliate to date, (vi) the creation (through reclassification, issuance or otherwise) any shares of preferred stock (regardless of rights, privileges, powers or preferences; (vii) the issuance of any additional shares of preferred stock other than the shares of Series A Preferred Stock sold pursuant to the Securities Purchase Agreement; (viii) the merger or consolidation into or with any other entity (other than a merger or consolidation where the Company is the survivor or continuing corporation of such merger or consolidation and the
Companys stockholders as constituted immediately prior to such merger or consolidation will, immediately after such merger or consolidation hold a majority of the voting power of the Company), sell all or substantially all of the Companys assets or effect a liquidation of the assets of the Company; (ix) the entering into, directly or indirectly, or permitting of any Subsidiary to enter into, directly or indirectly, any debt or lease transaction where the aggregate value of any such transaction exceeds $1 million; (x) changing the size of, or election procedure of, the Companys Board of Directors; (xi) increasing the number of shares reserved under any plan adopted by the Company for issuance of equity to employees, non-employee directors and consultants; (xii) entering into or permitting any sale, transfer, assignment, conveyance, lease or other disposition or any series of related dispositions of any assets, business or operations of the Company or any of its
Subsidiaries, where the value of the assets, business or operations so disposed during the immediately preceding 12 months exceeds the lesser of (A) $1 million or (B) 10% of the Company's total consolidated assets; provided, however, that such restriction shall not apply to inventory sales and other sales in the ordinary course of business; (xiii) entering into or permitting any subsidiary to enter into, any transaction, including, without limitation, any purchase, sale, lease or exchange of property, the rendering of any service or the payment of any management, advisory or similar fees, with any affiliates, directors, officers, employees or stockholders of the Company or any subsidiary where the aggregate value





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of any such transaction exceeds $25,000; (xiv) entering into or permitting any sale, transfer, encumbrance, other disposition or any series of related dispositions of any key technology or intangible, license or otherwise transfer the rights to technology or intangibles necessary or material to its operations; (xv) hiring, terminating or replacing the Companys Chief Executive Officer, Chief Technology Officer, Chief Financial Officer or President or any person performing functions equivalent to those of such offices; or (xvi) engaging in any transaction that is material or could reasonably be expected to be a material matter to the assets or operations of the Company.



The holders of Series A Preferred Stock are entitled to notices of the following corporate actions: (i) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right; (ii) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company, any consolidation or merger involving the Company and any other person or any transfer of all or substantially all the assets of the Company to any other person; (iii) any voluntary or involuntary dissolution, liquidation or winding-up of the Company; and (iv) any plan or proposal by the Company to register shares of the Common Stock
with the Securities and Exchange Commission.



In connection with the transaction, Esterna nominated Mikhail Gamzin and Evgeny Roytman to the Companys board of directors, and they joined the board of directors on April 23, 2008.  On July 24, 2008, a nominee of Esterna, Dmitry Moiseev, was appointed to the Companys Board of Directors.



In April 2008, River Universal Trading Limited consummated a transaction with Ivan Raylyan, an affiliate of the Company, whereby Mr. Raylyan acquired a 50% interest in River Universal Trading Limited in consideration of his transfer of 28,775,483 shares of the Companys common stock to River Universal Trading Limited. In connection with the transaction, Mr. Raylyan joined Messrs. Gamzin and Roytman on the Boards of Directors of River Universal Trading Limited and Esterna Ltd.  As of March 18, 2009, Esterna was the record holder of 500,000 shares of the Companys common stock, 5,000,000 shares of Series A preferred stock, and 20,000,000 Series A preferred stock purchase warrants, and River Universal Trading Limited was the record holder of 28,775,483 shares of the Companys common stock.



On March 27, 2009, Sergey Sulgin purchased 10,000,000 shares of the Companys common stock and 10,000,000 common stock purchase warrants that are exercisable until March 27, 2012 at $0.05 per share, for the aggregate price of $300,000.  As conditions to the investment, the investor required, among other things, that: the Companys Board of Directors shall initially consist of five persons, Alexandre Agaian, Dmitry Vilbaum, one individual nominated by Esterna Ltd., and two nominees of the investor; Esterna shall have exchanged all of its 5,000,000 shares of the Companys preferred stock into 5,000,000 shares of common stock and all of its 20,000,000 preferred stock purchase warrants into  20,000,000 common stock purchase warrants; and each of the Companys two principal officers, Alexandre Agaian and Dmitry Vilbaum, shall have made an equity investment of $100,000 for 10,000,000 shares of
common stock and 10,000,000 common stock purchase warrants.



In connection with recent sales of securities in March 2009, effective March 27, 2009, Esterna converted its 5,000,000 shares of the Companys preferred stock into 5,000,000 shares of the Companys common stock and exchanged its 20,000,000 preferred stock purchase warrants that are exercisable until December 27, 2009 at $0.30 per share into 20,000,000 common stock purchase warrants that are exercisable until March 27, 2012 at $0.05 per share.



In connection therewith, two directors, Evgeny Roytman and Dmitri Moiseyev, who served on the Companys Board of Directors as nominees of Esterna resigned, and two nominees of the investor, Sergey Sulgin and Roman Rozenberg, were appointed to serve on the Companys Board of Directors.



Based upon information previously provided by Esterna, the Company was informed that River Universal Trading Limited intended to transfer its ownership of the Companys shares to Esterna.





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Esterna, River Universal Trading Limited, Sergey Sulgin, Balance Capital LLC, an entity owned by Alexandre Agaian, and Dmitry Vilbaum are parties to an agreement, effective as of March 27, 2008 for a period of up to three years, pursuant to which the parties agreed, among other things, subject to the terms and conditions of the agreement, to vote for: a director nominee of Esterna as long as Esterna is the owner, directly or indirectly, of at least 25% of the Companys common stock entitled to vote on the election of directors; two director nominees of Sulgin as long as Sulgin is the owner, directly or indirectly, of at least 8,500,000 shares, subject to adjustment, of the Companys common stock entitled to vote on the election of directors; Agaian as a director as long as he is an executive officer of the Company; and Vilbaum as a director as long as Vilbaum is an executive officer of the Company.



Director Independence



Our Board currently consists of five members, each of whom, other than our Chief Executive Officer, Mr. Vilbaum, and our President, Dr. Agaian, are non-employee members of our Board.  As all of our Board members are officers or nominees of a substantial stockholder who may not be deemed independent, the Board has deemed that none of our non-employees members of the Board are independent.  In determining independence, we are applying the independence standards of the American Stock Exchange. Reference is made to Item 10 of Part III of this Report on Form 10-K for additional information about our Board.



|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|-------- | --------------------------------------



Audit Fees



Fees for audit services provided by Kempisty & Company, Certified Public Accountants, P.C. (Kempisty & Company), our current principal independent registered public accounting firm, during the years ended December 31, 2008 and 2007 were $76,000 and $72,500, respectively.  Audit fees consist of the aggregate fees billed for the audits of our annual financial statements, the reviews of our quarterly financial statements included in the Companys Form 10-QSBs, and services that are normally provided in connection with statutory and regulatory filings or engagements for those fiscal years.



Audit-Related Fees



Fees for audit-related services provided by Kempisty & Company, our current principal independent registered public accounting firm, during the years ended December 31, 2008 and 2007 were $0.  Audit-related fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements outside of those fees disclosed above under the caption Audit Fees.



Tax Fees



Fees for tax services provided by Kempisty & Company, our current principal independent registered public accounting firm, during the years ended December 31, 2008 and 2007 were $0.  Tax fees consist of fees billed for tax compliance, tax advice, and tax planning.



All Other Fees



There were no other fees billed for services by Kempisty & Company or Rosen Seymour Shapss Martin & Company LLP for the years ended December 31, 2008 and 2007.



Pre-Approval Policies and Procedures



Our Board of Directors has a policy that requires pre-approval of all audit, audit-related, tax services, and other services, including non-audit services, performed by our independent registered public accounting firm.  All services performed by our current and former principal independent registered public accounting firms in our fiscal years ended December 31, 2008 and 2007 were pre-approved. We do not have a separate audit committee of the Board of Directors.





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|ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES
|-------- | ---------------------------------------



|(a) | List of documents filed as a part of this report:
|--- | -------------------------------------------------



|(1) | Index to Consolidated Financial Statements
|--- | ------------------------------------------



Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets at December 31, 2008 and 2007

Consolidated Statements of Operations for the Years Ended December 31, 2008 and 2007

Consolidated Statements of Cash Flows for the Years Ended December 31, 2008 and 2007

Consolidated Statements of Changes in Shareholders Equity for the Years Ended

|December 31, 2008 and 2007
|--------------------------

Notes to Consolidated Financial Statements



|(2) | Index to Financial Statement Schedules
|--- | --------------------------------------



Not required.



|(3) | Index to Exhibits
|--- | -----------------



|Exhibit  |  | Description                                                                                                                                                                                  
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3(i)(1)  |  | Certificate of Incorporation of Terra Energy & Resource Technologies, Inc. (Incorporated by reference to Exhibit 3(i)(1) of Form 8-K, filed on November 15, 2006)                            
|3(i)(2)  |  | Certificate of Amendment of Certificate of Incorporation of Terra Energy & Resource Technologies, Inc. (Incorporated by reference to Exhibit 3(i)(2) of Form 8-K, filed on November 15, 2006)
|3(i)(3)  |  | Certificate of Designation (Incorporated by reference to Exhibit 3(i) of Form 8-K filed on January 4, 2008)                                                                                  
|3(ii)(1) |  | Bylaws of Terra Energy & Resource Technologies, Inc., as amended December 27, 2007 (Incorporated by reference to Exhibit 3(ii) of Form 8-K filed on January 4, 2008)                         
|10.1     |  | Second Amended and Restated Technology License Agreement (Incorporated by reference to Exhibit 10.1 of Form 8-K, filed on July 24, 2007)                                                     
|10.2     |  | Second Amended and Restated Services Agreement (Incorporated by reference to Exhibit 10.2 of Form 8-K, filed on July 24, 2007)                                                               
|10.3     |  | Agreement of waiver of fees with the Institute (Incorporated by reference to Exhibit 10.2) of Form 8-K filed on January 4, 2008)                                                             
|10.4*    |  | Termination Agreement                                                                                                                                                                        
|10.5*    |  | Technology License Agreement                                                                                                                                                                 
|10.6*    |  | Services Agreement                                                                                                                                                                           
|10.7+    |  | Employment Agreement with Dmitry Vilbaum (Incorporated by reference to Exhibit 10.2 of Form 8-K filed on July 6, 2005)                                                                       
|10.8+    |  | Addendum to Employment Agreement with Dmitry Vilbaum (Incorporated by reference to Exhibit 10.16 to Registration Statement on Form SB-2, No. 333-127815 filed on August 24, 2005)            
|10.9+    |  | Addendum to Employment Agreement, Dmitry Vilbaum, December 2005 (Incorporated by reference to Exhibit 10.2 of Form 8-K filed on January 4, 2006)                                             
|10.10+   |  | Agreement of waiver of compensation with Vilbaum (Incorporated by reference to Exhibit 10.4 of Form 8-K filed on January 4, 2008)                                                            
|10.11+   |  | Agreement of termination of employment agreement with Vilbaum (Incorporated by reference to Exhibit 10.5 of Form 8-K filed on January 4, 2008)                                               
|10.12+   |  | Employment Agreement with Dmitry Vilbaum (incorporated by reference to Exhibit 10.1 of Form 8-K, filed on April 28, 2008)                                                                    
|10.13+   |  | Employment Agreement with Alexandre Agaian (incorporated by reference to Exhibit 10.1 of Form 8-K, filed on September 2, 2008)                                                               
|10.14+   |  | Letter modification to Agaian employment agreement (Incorporated by reference to Exhibit 10.5 of Form 8-K filed on April 2, 2009)                                                            
|10.15+   |  | Agreement of waiver of compensation with Raylyan (Incorporated by reference to Exhibit 10.3 of Form 8-K filed on January 4, 2008)                                                            





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|10.16   |  | Agreement of deferral of loans with Raylyan (Incorporated by reference to Exhibit 10.7 of Form 8-K filed on January 4, 2008)                                               
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.17+  |  | Agreement of termination of employment agreement with Brecher (Incorporated by reference to Exhibit 10.6 of Form 8-K filed on January 4, 2008)                             
|10.18   |  | Agreement of deferral of loans with Brecher (Incorporated by reference to Exhibit 10.8 of Form 8-K filed on January 4, 2008)                                               
|10.19   |  | Agreement of waiver of fees (Incorporated by reference to Exhibit 10.9 of Form 8-K filed on January 4, 2008)                                                               
|10.20+  |  | 2005 Stock Incentive Plan, as Restated (Incorporated by reference to Exhibit 10.1 of Form 8-K, filed on November 15, 2006)                                                 
|10.21+  |  | Form of Stock Warrant issued to employees on September 25, 2006 and October 27, 2006 (Incorporated by reference to Exhibit 10.10 of Form 10-QSB filed on December 18, 2006)
|10.22   |  | Securities Purchase Agreement with Jan Arnett, dated as of February 15, 2007 (Incorporated by reference to Exhibit 10.21 of Form 10-KSB, filed on April 18, 2007)          
|10.23+  |  | Form of Stock Options dated August 13, 2007 (Incorporated by reference to Exhibit 10.1 of Form 8-K, filed on August 20, 2007)                                              
|10.24+  |  | Form of Stock Options dated October 1, 2007 (Incorporated by reference to Exhibit 10.1 of Form 8-K, filed on October 5, 2007)                                              
|10.25   |  | Form of Securities Purchase Agreement, dated as of December 27, 2007 (Incorporated by reference to Exhibit 10.1 of Form 8-K filed on January 4, 2008)                      
|10.26*+ |  | Form of Consulting Agreement with Elena Palgova                                                                                                                            
|10.27   |  | Form of Securities Purchase Agreement with officers (Incorporated by reference to Exhibit 10.3 of Form 8-K filed on April 2, 2009)                                         
|10.28   |  | Exchange Agreement (Incorporated by reference to Exhibit 10.2 of Form 8-K filed on April 2, 2009)                                                                          
|10.29   |  | Securities Purchase Agreement with investor (Incorporated by reference to Exhibit 10.1 of Form 8-K filed on April 2, 2009)                                                 
|10.30   |  | Form of warrant issued March 2009 (Incorporated by reference to Exhibit 10.4 of Form 8-K filed on April 2, 2009)                                                           
|10.31   |  | Form of Consulting Agreement with Roman Rozenberg (Incorporated by reference to Exhibit 10.6 of Form 8-K filed on April 2, 2009)                                           
|10.32*  |  | Agreement regarding voting matters                                                                                                                                         
|11      |  | Statement re: computation of per share earnings is hereby incorporated by reference to Part II, Item 8 of this report                                                      
|21*     |  | Subsidiaries of the Registrant                                                                                                                                             
|31.1*   |  | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)                                                                      
|31.2*   |  | Certification of Principal Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)                                                                  
|32.1*   |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350                                                                                                
|32.2*   |  | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350                                                                                            



*  Filed herewith

+  Represents executive compensation plan or agreement







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---







SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



| | TERRA ENERGY & RESOURCE TECHNOLOGIES, INC.
| | ------------------------------------------
| |                                           
| | By:/s/ Dmitry Vilbaum                     
| | Dmitry Vilbaum                            
| | Chief Executive Officer                   
| |                                           
| | Dated:  April 15, 2009                    



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



|Signature                |  | Title                                               |  | Date          
|------------------------ |  | --------------------------------------------------- |  | --------------
|                         |  |                                                     |  |               
|/s/ Dmitry Vilbaum       |  | Chief Executive Officer and Director                |  | April 15, 2009
|Dmitry Vilbaum           |  |                                                     |  |               
|                         |  |                                                     |  |               
|/s/ Dr. Alexandre Agaian |  | President, Principal Financial Officer and Director |  | April 15, 2009
|Dr. Alexandre Agaian     |  |                                                     |  |               
|                         |  |                                                     |  |               
|/s/ Roman Rozenberg      |  | Director                                            |  | April 15, 2009
|Roman Rozenberg          |  |                                                     |  |               
|                         |  |                                                     |  |               
|/s/ Sergey Sulgin        |  | Director                                            |  | April 15, 2009
|Sergey Sulgin            |  |                                                     |  |               
|                         |  |                                                     |  |               









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