Lion Copper and Gold (LCGMF) 6-K Condensed Consolidated Interim Financial Statements

(An Exploration Stage Company)

Condensed Consolidated Interim Financial Statements

Three months ended March 31, 2011

(Expressed in Canadian Dollars)

(Unaudited)

Quaterra Resources Inc.

Condensed Consolidated Interim Statement of Financial Position

(Unaudited, expressed in Canadian dollars)

	Note		March 31, 2011			December 31, 2010			January 1, 2010
						(Note 4)			(Note 4)
Assets
Current assets:
Cash and cash equivalents		$	21,854,226		$	18,212,215		$	4,795,220
Restricted cash			44,602			45,752			-
Taxes and other receivables			431,028			307,987			60,323
Prepaids and deposits			267,457			253,036			177,603
Amounts due from exploration partners			768,836			878,770			251,904
			23,366,149			19,697,760			5,311,050
Non-current assets:
Marketable securities	5		59,333			61,667			26,000
Equipment	6		280,025			218,343			163,094
Mineral properties	7		45,457,426			45,085,670			36,091,683
Reclamation bonds			335,794			397,483			306,670
			46,132,578			45,763,163			36,587,447
		$	69,498,727		$	65,460,923		$	41,898,497
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities			1,298,100		$	855,343		$	628,750
Due to related parties			40,941			41,225			250,637
Derivative liability - warrants	4		-			-			8,477,944
			1,339,041			896,568			9,357,331
Shareholders' Equity
Share capital	8		103,526,507			95,800,950			63,168,843
Contributed surplus			15,532,955			15,643,693			13,453,030
Accumulated other comprehensive loss			(19,533	)		(17,199	)		(12,866	)
Deficit			(50,880,243	)		(46,863,089	)		(44,093,841	)
			68,159,686			64,564,355			32,515,166
		$	69,498,727		$	65,460,923		$	41,872,497

Approved on behalf of the

Board of Directors:
	“Thomas Patton”(signed)	“Robert Gayton” (signed)
	Thomas Patton	Robert Gayton

(The accompanying notes are an integral part of these condensed consolidated interim financial statements)

Page 2 of 21

Quaterra Resources Inc.

Condensed Consolidated Interim Statement of Comprehensive Income (Loss)

(Unaudited, expressed in Canadian dollars)

			Three months ended March 31,
			2011			2010
						(Note 4)
General administrative expenses
Administration and general office expense		$	178,000		$	123,049
Consulting			81,569			88,780
Directors' fees			26,090			28,126
Investor relations and communications			87,483			57,696
Personnel costs			278,794			183,942
Professional fees			112,867			117,617
Transfer agent and regulatory fees			120,619			55,953
Travel and promotion			33,564			38,276
Operating expenses			(918,986	)		(693,439	)
Other (expenses) income
Amortization			(37,195	)		(14,310	)
Exploration partner administration income			47,624			25,434
Foreign exchange loss			(218,214	)		(179,541	)
General exploration costs			(102,868	)		(59,413	)
Impairment of mineral properties			(2,748,934	)		-
Interest (expense) income			2,331			(415	)
Share-based payments	Note 9(a)		(40,912	)		(208,362	)
Unrealized revaluation gain on derivative liability			-			3,683,265
			(3,098,168	)		3,246,658
Income (loss) for the period			(4,017,154	)		2,553,219
Unrealized loss on marketable securities			(2,334	)		(9,667	)
Comprehensive income (loss) for the period		$	(4,019,488	)	$	2,543,552
Income (loss) per share - basic and diluted		$	(0.03	)	$	0.02
Weighted average number of common shares outstanding			139,343,149			112,086,488

(The accompanying notes are an integral part of these condensed consolidated interim financial statements)

Page 3 of 21

Quaterra Resources Inc.

Condensed Consolidated Interim Statement of Cash Flows

(Unaudited, expressed in Canadian dollars)

		Three months ended March 31,
		2011			2010
					(Note 4)
Operating activities
Net income (loss) for the period	$	(4,017,154	)	$	2,553,219
Items not involving cash:
Amortization		37,195			14,310
Share-based payment		40,912			208,362
Shares issued for services		22,500			22,500
Impairment of mineral properties		2,748,934			-
Unrealized revaluation gain on derivative liability		-			(3,683,265	)
		(1,167,613	)		(884,874	)
Changes in non-cash working capital
Taxes and other receivables		(123,041	)		(96,642	)
Prepaid and deposits		(14,421	)		(67,059	)
Accounts payable and accrued liabilities		74,430			99,214
Due to related parties		(284	)		(26,013	)
Cash used in operating activities		(1,230,929	)		(975,374	)
Financing activities
Shares issued for cash, net of issue cost		7,551,407			5,002,934
Cash provided by financing activities		7,551,407			5,002,934
Investing activities
Expenditures on mineral properties		(2,752,363	)		(2,632,815	)
Due from exploration partners		109,934			(21,330	)
Purchase of equipment		(98,877	)		(59,498	)
Refund of reclamation bonds		61,689			45,986
Restricted cash		1,150			(46,727	)
Cash used in investing activities		(2,678,467	)		(2,714,384	)
Increase in cash and cash equivalents during the period		3,642,011			1,313,176
Cash and cash equivalents, beginning of period		18,212,215			4,795,220
Cash and cash equivalents, end of period	$	21,854,226		$	6,108,396
Supplemental Cash Flow Information
Mineral property expenditures included in accounts payable	$	991,211		$	504,352
Shares issued for mineral property	$	-		$	150,000

(The accompanying notes are an integral part of these condensed consolidated interim financial statements)

Page 4 of 21

Quaterra Resources Inc.

Condensed Consolidated Interim Statement of Changes in Equity

(Unaudited, expressed in Canadian dollars)

	Common Shares				Contributed						Accumulated Other
	Shares		Amount		Surplus			Deficit			Comprehensive Loss			Total
Balance at December 31, 2009	111,459,371	$	63,168,843	$	13,453,030		$	(44,093,841	)	$	(12,866	)	$	32,515,166
Common shares issued during the period:
Shares issued for cash, net of issue costs	3,001,418		4,192,467											4,192,467
Exercise of options	25,000		25,000											25,000
Exercise of warrants	1,041,833		785,467											785,467
Common shares issued for services	19,565		22,500											22,500
Common shares issued for mineral property	100,000		150,000											150,000
Fair value of options and warrants exercised			41,466		(41,466	)								-
Fair value of derivative liability - warrants exercised			146,971											146,971
Share-based payments					208,362									208,362
Unrealized loss on available-for-sale marketable securities											(9,667	)		(9,667	)
Net income for the period								2,553,219						2,553,219
Balance at March 31, 2010	115,647,187	$	68,532,714	$	13,619,925		$	(41,540,622	)	$	(22,533	)	$	40,589,485
Balance at December 31, 2010	136,464,161	$	95,800,950	$	15,643,693		$	(46,863,089	)	$	(17,199	)	$	64,564,355
Common shares issued during the period:
Shares issued for cash, net of issue costs	3,293,407		5,918,882											5,918,882
Exercise of options	200,000		244,900											244,900
Exercise of warrants	1,850,167		1,387,625											1,387,625
Common shares issued for services	15,306		22,500											22,500
Fair value of options and warrants exercised			151,650		(151,650	)								-
Share-based payments					40,912									40,912
Unrealized loss on available-for-sale marketable securities											(2,334	)		(2,334	)
Net loss for the period								(4,017,154	)					(4,017,154	)
Balance at March 31, 2011	141,823,041	$	103,526,507	$	15,532,955		$	(50,880,243	)	$	(19,533	)	$	68,159,686

(The accompanying notes are an integral part of these condensed consolidated interim financial statements)

Page 5 of 21

Quaterra Resources Inc.

Notes to Condensed Consolidated Interim Financial Statements

For the three months ended March 31, 2011

(Unaudited, expressed in Canadian dollars)

1.	Nature of operations
	Quaterra Resources Inc., (“Quaterra” or “the Company”), is engaged in the acquisition and exploration of precious and base metal mineral properties in the United States and Mexico. Quaterra is incorporated and domiciled in Canada under the Business Corporations Act (British Columbia). The address of its registered office is 950 - 1100 West Hastings Street, Vancouver, British Columbia.
	The Company is in the process of exploring its mineral properties and has not yet determined whether its mineral properties contain economically recoverable mineral reserves. The underlying value and the recoverability of the amounts recorded as mineral properties is entirely dependent upon the existence of economically recoverable mineral reserves, the ability of the Company to obtain the necessary financing to complete its acquisition, exploration and development of its mineral properties or receive proceeds from disposition of mineral properties. The carrying value of the Company’s mineral properties does not reflect current or future values.
	The condensed consolidated interim financial statements have been prepared on a going concern basis which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business. The Company has prepared a cash flow forecast for 2011 and believes that it has sufficient funds to continue operations for at least the next twelve months.
2.	Basis of presentation
	The Company prepares its financial statements in accordance with Canadian generally accepted accounting principles as set out in the Handbook of the Canadian Institute of Chartered Accountants (“CICA Handbook”). In 2010, the CICA Handbook was revised to incorporate International Financial Reporting Standards (“IFRS”), and require publicly accountable enterprises to apply such standards effective for years beginning on or after January 1, 2011. Accordingly, the Company has commenced reporting on this basis in these consolidated interim financial statements. In the financial statements, the term “Canadian GAAP” refers to Canadian GAAP before the adoption of IFRS.
	These consolidated interim financial statements have been prepared in accordance with International Accounting Standard 34,Interim Financial Reporting(“IAS 34”) and IFRS 1,First-time Adoption of International Financial Reporting Standards(“IFRS1”). They do not include all of the information required for full annual financial statements.
	Subject to certain transition elections disclosed in note 4, the Company has consistently applied the same accounting policies in its opening IFRS Statement of Financial Position at January 1, 2010 and throughout all periods presented, as if these policies had always been in effect. Note 4 discloses the impact of the transition to IFRS on the Company’s reported financial position, financial performance and cash flows, including the nature and effect of significant changes in accounting policies from those used in the Company’s consolidated financial statements for the year ended December 31, 2010.
	These condensed consolidated interim financial statements should be read in conjunction with the Company’s Canadian GAAP annual financial statements for the year ended December 31, 2010.

Page 6 of 21

Quaterra Resources Inc.

Notes to Condensed Consolidated Interim Financial Statements

For the three months ended March 31, 2011

(Unaudited, expressed in Canadian dollars)

3.	Significant accounting policies
	The policies applied in these condensed consolidated interim financial statements are based on IFRS issued and outstanding as of June 7, 2011, the date the Board of Directors approved the statements. Any subsequent changes to IFRS that are given effect in the Company’s annual consolidated financial statements for the year ending December 31, 2011 could result in a restatement of these consolidated interim financial statements, including the transition adjustments recognized on conversion to IFRS.
	The significant accounting policies used in the preparation of these condensed consolidated interim financial statements are described below.
	a)	Basis of measurement
		The interim consolidated financial statements have been prepared under the historical cost convention, except for the revaluation of certain financial assets and liabilities to fair value, including certain derivative instruments and available-for-sale investments.
	b)	Consolidation
		The financial statements of the Company consolidate the accounts of Quaterra and its subsidiaries which Quaterra controls by having the power to govern the financial and operating polices. All intercompany transactions, balances and unrealized gains and losses from intercompany transactions are eliminated on consolidation.
	c)	Foreign currency translation
		Items included in the financial statements of each consolidated entity in the Quaterra group are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated interim financial statements are presented in Canadian dollars, which is Quaterra’s functional currency.
		Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of transactions. Monetary assets and liabilities are translated at exchange rates prevailing at each reporting date. Generally, foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in currencies other than the Company’s functional currency are recognized in net income (loss).
	d)	Cash and cash equivalents
		Cash equivalents include deposits in banks and highly-liquid investments that are readily convertible to known amounts of cash and have maturities of three months or less from the date acquired. Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes.

Page 7 of 21

Quaterra Resources Inc.

Notes to Condensed Consolidated Interim Financial Statements

For the three months ended March 31, 2011

(Unaudited, expressed in Canadian dollars)

3. Significant accounting policies, continued

e)	Financial instruments
	Financial assets and liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership.
	Financial assets and liabilities are offset and the net amount is reported in the statement of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.
	At initial recognition, the Company classifies its financial instruments in the following categories depending on the purpose for which the instruments were acquired:

i)	Financial assets and liabilities at fair value through profit or loss: A financial asset or liability is classified in this category if acquired principally for the purpose of selling or repurchasing in the short-term.
	Financial instruments in this category are recognized initially and subsequently at fair value. Gains and losses arising from changes in fair value are recorded in net income (loss) in the period in which they arise. Financial assets and liabilities at fair value through profit or loss are classified as current except if they are expected to be realized beyond twelve months of the statement of financial position date, where they are classified as non-current.
ii)	Available-for-sale investments: Available-for-sale investments are non-derivatives that are either designated in this category or not classified in any of the other categories. The Company’s available-for-sale assets are marketable securities.
	Available-for-sale investments are recognized at fair value and are subsequently carried at fair value. Gains or losses arising from changes in fair value are recognized in other comprehensive loss. Available-for-sale investments are classified as non-current, unless management expects to dispose of them within twelve months.
iii)	Loans and receivables: loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest rate method, less any impairment losses.
iv)	Financial liabilities at amortized cost: financial liabilities at amortized cost include accounts payable and accrued liabilities and due to related parties. They are initially recognized on the trade date at fair value when the Company becomes a party to the contractual provisions of the instrument and derecognized when its contractual obligations are discharged or cancelled or, they expire.

Page 8 of 21

Quaterra Resources Inc.

Notes to Condensed Consolidated Interim Financial Statements

For the three months ended March 31, 2011

(Unaudited, expressed in Canadian dollars)

3.	Significant accounting policies, continued
	e)	Financial instruments, continued
		v)	Derivative financial instruments: the Company has outstanding warrants that have an exercise price denominated in the U.S. dollars. Such instruments have been treated as derivative liabilities at fair value determined by the Black-Scholes option pricing model. Changes in fair values have been recorded as gains or losses in net income (loss).
	f)	Equipment
		Equipment is measured at cost less accumulated amortization and impairment losses. Cost comprises expenditures that are directly attributable to the acquisition of the asset. Gains and losses on disposal of an item of equipment are determined by comparing the proceeds from disposal with the carrying amount of the equipment, and are recognized net within other items in net income (loss).
		Amortization is calculated over the estimated useful life of the assets using the declining-balance method at an annual rate of 30% for vehicles, equipment and furniture, 45% for computers and 75% for software.
	g)	Mineral properties
		The cost of acquiring mineral properties and related exploration and development costs are deferred on an individual area of interest basis until the properties are placed into production, sold or abandoned. Once a licence to explore an area has been secured, directly attributable expenditures on exploration and evaluation activities are capitalized to mineral properties. Costs incurred to acquire an interest in a mineral property are capitalized as a mineral property acquisition cost. Costs incurred prior to obtaining the right to explore are expensed as incurred.
		Management reviews the carrying value of capitalized exploration costs at least annually to consider whether there are any conditions that may indicate impairment. The impairment review is based on the exploration and evaluation results to-date and the Company’s intentions for development or sale of the mineral property.
	h)	Revenue recognition
		Revenue comprises interest income, administration fees from exploration partners, gains on the disposal of available-for-sale financial assets and increases in the fair value of financial assets. Interest income and the administration fees from exploration partners are recognized when earned and reasonable collection is assured.
	i)	Reclamation bonds
		Certain cash is held in long-term reclamation bonds to support future reclamation work in the United States. No interest is earned on these bonds.

Page 9 of 21

Quaterra Resources Inc.

Notes to Condensed Consolidated Interim Financial Statements

For the three months ended March 31, 2011

(Unaudited, expressed in Canadian dollars)

3.	Significant accounting policies, continued
	j)	Use of judgments and estimates
		The Company makes estimates and assumptions concerning the future that will, by definition, seldom equal actual results. Significant areas requiring the use of management estimates relate to amortization of equipment, the determination of the recoverability of mineral property costs, the valuation allowance of future tax assets, the bifurcation of the convertible notes into debt and equity components, the determination of environmental restoration, and the assumptions about the variables used in the calculation of share-based payments and derivative instruments. Management believes the estimates are reasonable; however, actual results could differ from those estimates and could impact future results of operations and cash flows.
	k)	Share-based payments
		The Company has a stock option plan that is described in note 9. Share-based payments to employees are measured at the fair value of the instruments issued and are amortized over the vesting periods. Share-based payments to non-employees are measured at the fair value of the goods or services received or at the fair value of the equity instruments issued (if it is determined the fair value of the goods or services cannot be reliably measured), and are recorded at the date the goods or services are received. The offset to the recorded cost is to contributed surplus. If and when the stock options or warrants are ultimately exercised, the applicable amounts of contributed surplus are transferred to share capital.
	l)	Income tax
		Income tax comprises current and deferred tax. Income tax is recognized in net income (loss) except to the extent that it relates to a business combination, or items recognized directly in equity or in the other comprehensive loss.
		Deferred tax is recognized in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax is determined on a non-discounted basis using tax rates and laws that have been enacted or substantively enacted by the reporting date and are expected to apply when the deferred tax asset or liability is settled. Deferred tax assets are recognized to the extent that it is probable that the assets can be recovered.

Page 10 of 21

Quaterra Resources Inc.

Notes to Condensed Consolidated Interim Financial Statements

For the three months ended March 31, 2011

(Unaudited, expressed in Canadian dollars)

3.	Significant accounting policies, continued
	m)	Unit offering
		The Company uses the residual value method with respect to the measurement of common shares and share purchase warrants issued as units. The proceeds from the issue of units is allocated between common shares and share purchase warrants on a residual value basis, wherein the fair value of the common shares is based on the market value on the date of the announcement of the placement and the balance, if any, is allocated to the attached warrants. Share issue costs are netted against share proceeds.
	n)	Income (loss) per share
		Basic income (loss) per share is calculated using the weighted average number of common shares outstanding during the period. The Company uses the treasury stock method to compute the dilutive effect of options, warrants and similar instruments. Under this method the dilutive effect on loss per share is calculated presuming the exercise of outstanding options, warrants and similar instruments. It assumes that the proceeds of such exercise would be used to repurchase common shares at the average market price during the year. However, the calculation of diluted loss per share excludes the effects of various conversions and exercise of options and warrants that would be anti-dilutive.
4.	Transition to IFRS
	The condensed consolidated interim financial statements for the three months ended March 31, 2011 are the Company’s first financial statements prepared under IFRS, as stated in note 2 to those statements. The accounting policies described in note 3 have been applied in preparing the condensed consolidated interim financial statements for the three months ended March 31, 2011, the comparative information presented in the condensed consolidated interim financial statements for the three months ended March 31, 2010, the opening IFRS statement of financial position at January 1, 2010 and the statement of financial position as at December 31, 2010. An explanation of IFRS 1, exemptions applicable to first-time adoption of IFRS, and the required reconciliations between IFRS and Canadian GAAP are described below.
	IFRS 1 First-time Adoption of IFRS
	In preparing these condensed consolidated interim financial statements, the Company has applied IFRS 1, which provides guidance for an entity’s initial adoption of IFRS. IFRS 1 gives entities adopting IFRS for the first time a number of optional exemptions and mandatory exceptions, in certain areas, to the general requirement for full retrospective application of IFRS.
	The Company elected to not apply IFRS 2, Share-based Payments, to equity instruments granted on or before November 7, 2002 and those granted but fully vested before the date of transition of January 1, 2010.

Page 11 of 21

Quaterra Resources Inc.

Notes to Condensed Consolidated Interim Financial Statements

For the three months ended March 31, 2011

(Unaudited, expressed in Canadian dollars)

4.	Transition to IFRS, continued
	Adjustments on transition to IFRS
	Under Canadian GAAP, warrants that have an exercise price denominated in a currency other than the Company’s functional currency are accounted for as equity instruments. Under IFRS, such instruments meet the definition of a derivative liability and are recorded as a financial liability and are required to be measured at fair value at each reporting period with gains or losses recognized in net income (loss). The warrants issued on November 27, December 19, 2008 and January 15, 2009 with respect to the convertible debt financing have an exercise price denominated in United States dollars. As a result, these warrants are required to be measured and recognized at fair value with changes subsequent to the initial recognition charged to the net income (loss) until they are fully exercised. The Company has determined the fair value using the Black-Scholes option pricing model.
	As at January 1, 2010, the Company recorded an adjustment to recognize the fair value of the warrant liability amounting to $8,477,944 and increased deficit by $8,477,944.
	For the three month period ended March 31, 2010, the Company recorded a warrant revaluation gain of $3,683,265 resulting from the fair value impact of this derivative liability.
	Reconciliation of liabilities and equity

		December 31,			March 31,			January 1,
		2010			2010			2010
Total liabilities under Canadian GAAP	$	896,568		$	1,026,724		$	879,387
Derivative liability - warrants		-			4,647,708			8,477,944
Total liabilities under IFRS	$	896,568		$	5,674,432		$	9,357,331
Deficit under Canadian GAAP		(42,422,329	)		(36,745,943	)		(35,615,897	)
Derivative liability - warrants		(4,440,760	)		(4,794,679	)		(8,477,944	)
Deficit under IFRS		(46,863,089	)		(41,540,622	)		(44,093,841	)
Share capital under Canadian GAAP		91,360,190			68,385,743			63,168,843
Derivative liability - warrants		4,440,760			146,971			-
Share capital under IFRS	$	95,800,950		$	68,532,714		$	63,168,843
Total shareholders' equity		64,564,355			45,237,193			40,993,110
Adjustment on adoption of IFRS		-			(4,647,708	)		(8,477,944	)
Total shareholders' euity under IFRS	$	64,564,355		$	40,589,485		$	32,515,166

Page 12 of 21

Quaterra Resources Inc.

Notes to Condensed Consolidated Interim Financial Statements

For the three months ended March 31, 2011

(Unaudited, expressed in Canadian dollars)

4.	Transition to IFRS, continued
	Reconciliation of comprehensive income (loss)

		Three months ended			Year ended
		March 31, 2010			December 31, 2010
Comprehensive loss under Canadian GAAP	$	(1,139,713	)	$	(6,810,765	)
Adjustment on adoption of IFRS		3,683,265			4,037,184
Comprehensive income (loss) under IFRS	$	2,543,552		$	(2,773,581	)

There are no adjustments or impact on the statement of cash flows for the three months ended March 31, 2010.

5. Marketable securities

The fair values of the Company’s shares of Copper Ridge Exploration Inc. (“Copper Ridge”) and Auramex Resource Corp. (“Auramex”) are as follows:

			March 31, 2011							December 31, 2010
					Accumulated							Accumulated
	Number of				unrealized							unrealized gains
	common shares		Cost		gains (losses)			Fair value		Cost		(losses)			Fair value
Copper Ridge	66,667	$	38,866	$	(14,533	)	$	24,333	$	38,866	$	(22,199	)	$	16,667
Auramex	1,000,000		40,000		(5,000	)		35,000		40,000		5,000			45,000
		$	78,866	$	(19,533	)	$	59,333	$	78,866	$	(17,199	)	$	61,667

The fair value of these marketable securities has been determined by reference to their quoted closing price at the reporting date.

6. Equipment

		March 31, 2011						December 31, 2010
				Accumulated		Carrying				Accumulated		Carrying
		Cost		amortization		value		Cost		amortization		value
Computer	$	37,482	$	37,482	$	-	$	37,482	$	33,842	$	3,640
Office equipment		128,835		83,378		45,457		93,651		63,679		29,972
Vehicles		417,920		183,352		234,568		354,228		169,497		184,731
	$	584,237	$	304,212	$	280,025	$	485,360	$	267,017	$	218,343

Page 13 of 21

Quaterra Resources Inc.

Notes to Condensed Consolidated Interim Financial Statements

For the three months ended March 31, 2011

(Unaudited, expressed in Canadian dollars)

7. Mineral properties

The total deferred exploration and acquisition costs of mineral properties for March 31, 2011 and December 31, 2010 were as follows:

		Mexico					United States
		Nieves		Other			MacArthur		Yerington		Alaska			Uranium		Other			Total
Mineral Properties				Properties			Copper		Copper					Properties		Properties
Acquisition
Balance, December 31, 2010	$	1,472,896	$	1,267,888		$	1,731,500	$	2,100,233	$	276,933		$	4,458,996	$	2,165,930		$	13,474,376
Additions during the period		47,890		151,967			517,502		122,770		-			21,528		451,056			1,312,713
Impairments		-		-			-				(163,220	)		-		(222,611	)		(385,831	)
Balance, March 31, 2011		1,520,786		1,419,855			2,249,002		2,223,003		113,713			4,480,524		2,394,375			14,401,258
Exploration
Balance, December 31, 2010		2,780,131		6,138,519			10,820,796		839,354		2,415,742			7,611,207		1,005,545			31,611,294
Geological		30,263		158,117			176,968		43,035		801			17,414		16,120			442,718
Geophysical		-		128,228			121,718		74,795		-			-		-			324,741
Geochemical		23,077		74,974			34,685		-		-			-		168			132,904
Drilling		114,949		497,905			643,624		-		-			-		-			1,256,478
Technical Studies		12,130		3,638			13,125		19,899		-			-		-			48,792
Other		1,787		37,742			53,261		17,590		-			302		-			110,682
Additions during the period		182,206		900,604			1,043,381		155,319		801			17,716		16,288			2,316,315
Impairments		-		-			-		-		(2,278,372	)		-		(84,731	)		(2,363,103	)
Recovery - Goldcorp		-		(508,338	)		-		-		-			-					(508,338	)
Balance, March 31, 2011	$	2,962,337	$	6,530,785		$	11,864,177	$	994,673	$	138,171		$	7,628,923	$	937,102		$	31,056,168
Total acquisition and exploration atMarch 31, 2011	$	4,483,123	$	7,950,640			14,113,179	$	3,217,676	$	251,884		$	12,109,447	$	3,331,477		$	45,457,426

Page 14 of 21

Quaterra Resources Inc.

Notes to Condensed Consolidated Interim Financial Statements

For the three months ended March 31, 2011

(Unaudited, expressed in Canadian dollars)

7. Mineral properties, continued

		Mexico					United States
		Nieves		Other			MacArthur		Yerington		Alaska		Uranium		Other			Total
Mineral Properties				Properties			Copper		Copper				Properties		Properties
Acquisition
Balance, December 31, 2009	$	1,413,183	$	795,977		$	1,069,819	$	1,659,336	$	275,707	$	3,951,141	$	2,171,767		$	11,336,930
Additions during the year		59,713		545,000			661,681		440,897		1,226		507,855		547,672			2,764,044
Impairment		-		-			-		-		-		-		(553,509	)		(553,509	)
Recoveries		-		(73,089	)		-		-		-		-		-			(73,089	)
Balance, December 31, 2010		1,472,896		1,267,888			1,731,500		2,100,233		276,933		4,458,996		2,165,930			13,474,376
Exploration
Balance, December 31, 2009		2,017,463		3,521,777			8,299,960		739,824		2,410,713		7,391,365		373,651			24,754,753
Geological		130,028		929,677			818,559		40,762		4,489		146,931		320,283			2,390,729
Geophysical		128,440		1,177,042			11,741		-		540		3,740		8,938			1,330,441
Geochemical		84,744		236,425			406,841		488		-		2,474		51,942			782,914
Drilling		362,299		1,473,420			1,053,838		-		-		-		299,093			3,188,650
Technical Studies		36,545		51,064			25,560		22,750		-		50,328		-			186,247
Other		20,612		140,101			204,297		35,530		-		16,369		20,250			437,159
Additions during the year		762,668		4,007,729			2,520,836		99,530		5,029		219,842		700,506			8,316,140
Impairment		-		-			-		-		-		-		(68,612	)		(68,612	)
Recovery - Goldcorp		-		(1,390,987	)		-		-		-		-					(1,390,987	)
Balance, December 31, 2010	$	2,780,131	$	6,138,519		$	10,820,796	$	839,354	$	2,415,742	$	7,611,207	$	1,005,545		$	31,611,294
Total acquisition and exploration atDecember 31, 2010	$	4,253,027	$	7,406,407			12,552,296	$	2,939,587	$	2,692,675	$	12,070,203	$	3,171,475		$	45,085,670

Page 15 of 21

Quaterra Resources Inc.

Notes to Condensed Consolidated Interim Financial Statements

For the three months ended March 31, 2011

(Unaudited, expressed in Canadian dollars)

7.	Mineral properties, continued
	The significant transactions that occurred during the three months ended March 31, 2011 are as follows:
	Properties in the United States:
		��
	a)	Macarthur Copper Project
		Pursuant to an agreement dated September 13, 2005 with North Exploration LLC (“North Exploration”), the Company made a US$524,000 option payment on January 11, 2011. The remaining option payments require the Company to pay either US$1,048,000 due on January 15, 2012 plus additional interest at the rate of 6%, or US$524,000 plus additional interest by January 15, 2012 and 2013, respectively.
	b)	Yerington Porphyry Copper Project
		US$25,000 was paid in March 2011 to extend the technical due diligence process. Please refer to Note 14(a) for further details.
	c)	Willow Creek Molybdenum Project
		On March 24, 2011, the Company renegotiated the option agreement with Willow Creek Discovery Group, LLC for the Willow Creek property in Montana. All second anniversary option payments (year 2010) were waived and cancelled providing that all BLM rental payments are made and additional drilling to a minimum of 500 feet is undertaken.
	d)	Butte Valley Copper Prospect
		On January 1, 2011, the Company entered into an option agreement with North Exploration to acquire 41 mining claims in White Pine County, Nevada, known as Butte Valley property. The Company can earn a 100% interest in the claims by making following staged payments totaling US$1 million:

i)	US$20,000 upon execution (paid);
ii)	US$20,000 each on or before January 1, 2012 and 2013;
iii)	US$40,000 on or before January 1, 2014;
iv)	US$50,000 each on or before January 1, 2015 and 2016;
v)	US$100,000 each on or before January 1, 2017, 2018 and 2019;
vi)	US$250,000 each on or before January 1, 2020 and 2021.

The Company has an option at any time to purchase the property for the difference between US$1 million and the sum of amounts previously paid or if the full amounts have been paid under the above the sum of US$1. The property is subject to 2.5% NSR upon commencement of commercial production of which 1% can be bought down for US$1 million.

Page 16 of 21

Quaterra Resources Inc.

Notes to Condensed Consolidated Interim Financial Statements

For the three months ended March 31, 2011

(Unaudited, expressed in Canadian dollars)

7.	Mineral properties, continued
	Properties in the United States, continued:
	e)	During the three months ended March 31, 2011, Duke Island and Peg Leg properties were returned by the exploration partners and Klondike property option agreement was terminated. At the moment, the Company has no further exploration plan for these properties and determined they were impaired due to lack of exploration merits.
	Properties in Mexico
	a)	Nieves Silver Concessions
		During the three months ended March 31, 2011, the Company received US$354,434 from the exploration partner, Blackberry Ventures 1, LLC (“Blackberry”) and US$256,777 was due from Blackberry for its share of ongoing exploration costs that were incurred in the three months ended March 31, 2011.
	b)	Goldcorp Inc. (“Goldcorp”) – Investment Framework Agreement (“IFA”)
		On January 29, 2010 the Company entered into an investment framework agreement with Goldcorp to fund the Company’s mining properties, currently 12 properties, in central Mexico totaling US$10 million. US$4 million and US$6 million from Goldcorp were received in February 2010 and 2011 respectively. As of March 31, 2011, US$4.2 million was spent on those properties.
		In February 2010, Goldcorp selected Sierra Sabino for advanced exploration. As March 31, 2011, the Company has incurred US$1.9 million in exploration expenditures of which US$536,164 was due from Goldcorp including administration fees.
	Other properties in Mexico are in good standing.
8.	Share capital
	The Company has an authorized unlimited number of common shares without par value.
	Pursuant to the Goldcorp IFA agreement, the Company issued 3,293,407 common shares during the three months ended March 31, 2011 for US$6 million and 1,646,703 share purchase warrants. The warrants are exercisable at a price of $2.27 expiring February 7, 2013.
	The Company issued 3,001,418 common shares for the Goldcorp US$4 million received in February 2010, and 1,500,709 share purchase warrants at an exercise price of $1.76 expiring February 4, 2012.

Page 17 of 21

Quaterra Resources Inc.

Notes to Condensed Consolidated Interim Financial Statements

For the three months ended March 31, 2011

(Unaudited, expressed in Canadian dollars)

9.	Share-based payments
	a)	Stock options
		The Company has a stock option plan (the “Plan”) which is approved by the shareholders annually. The Plan is designed to attract and retain individuals and to reward them for current and expected future performance. Options generally are granted for a maximum term of five years and expire 90 days following the termination of the optionee’s agreement. The exercise price for the options is set at the closing market price of the common shares on the grant date. The vesting periods of options vary with terms determined by the board of directors. Under the Plan, the Company is authorized to grant stock options of up to 10% of the number of common shares issued and outstanding of the Company at any given time.
		The number and weighted average exercise prices of stock options are as follows:

	March 31, 2011				March 31, 2010
				Weighted				Weighted
	Number of			Average	Number of			Average Exercise
	Options			Exercise Price	Options			Price
Outstanding, beginning of the period	10,624,000		$	1.60	9,237,000		$	1.56
Granted	355,000		$	1.60	170,000		$	2.00
Forfeited	-		$	-	(106,000	)	$	2.48
Exercised	(200,000	)	$	1.22	(25,000	)	$	1.00
Outstanding, end of period	10,779,000		$	1.60	9,276,000		$	1.56
Exercisable, end of period	10,290,667		$	1.60	9,276,000		$	1.56

The weighted average grant date fair value of option outstanding at March 31, 2011 was $0.95 (2010 -$1.22) . The weighted average remaining contractual life of option outstanding at March 31, 2011 was 2.96 years (2010 – 3.38 years).

The table below summarizes the outstanding options by year of expiry:

Year	Number of options	Exercise price ($)
2011	1,664,000	1.0 - 1.55
2012	805,000	3.33
2013	1,095,000	3.33 - 3.45
2014	4,240,000	0.98 - 1.02
2015	2,620,000	1.51 - 2.0
2016	355,000	1.60
March 31, 2011	10,779,000	$ 1.60

The Company used the following weighted average assumptions to fair value the options granted using Black-Scholes option pricing model:

Page 18 of 21

Quaterra Resources Inc.

Notes to Condensed Consolidated Interim Financial Statements

For the three months ended March 31, 2011

(Unaudited, expressed in Canadian dollars)

9.	Share-based payments, continued
	a)	Stock options, continued

	March 31, 2011	March 31, 2010
Risk-free interest rate	2.05%	4.04%
Expected share price volatility	90.33%	90.46%
Expected option life in years	3.0	3.0
Forfeiture rate	0%	0%
Expected dividend yield	0%	0%

The share-based payments are listed below:

		Three months ended March 31,
		2011		2010
Consultants	$	27,139	$	208,362
Directors and officers		-		-
Employees		13,773		-
	$	40,912	$	208,362

b) Share purchase warrants

	March 31, 2011				March 31, 2010
	Number of			Weighted Average	Number of			Weighted Average
	Warrants			Exercise Price	Warrants			Exercise Price
Outstanding, beginning of period	20,186,023		$	0.91	21,584,701		$	0.80
Issued	1,646,703		$	2.27	1,500,709		$	1.87
Exercised	(1,850,167	)	$	0.75	(1,041,833	)	$	0.75
Outstanding, end of period	19,982,559		$	1.29	22,043,577		$	0.91

The number of share purchase warrants outstanding as of March 31 is listed below:

Expiry date		Exercise price		March 31, 2011	March 31, 2010
November 27, 2010	$	0.75	US	-	1,799,125
December 19, 2010	$	0.75	US	-	2,441,333
January 15, 2011	$	0.75	US	-	1,880,500
September 29, 2011	$	0.75		6,892,540	8,805,206
October 28, 2011	$	0.75		4,080,507	5,616,704
February 4, 2012	$	1.76		1,500,709	1,500,709
October 27, 2012	$	1.90		5,862,100	-
February 7, 2013	$	2.27		1,646,703	-
				19,982,559	22,043,577

Page 19 of 21

Quaterra Resources Inc.

Notes to Condensed Consolidated Interim Financial Statements

For the three months ended March 31, 2011

(Unaudited, expressed in Canadian dollars)

9.	Share-based payments, continued
	c)	Agent compensation options
		The Company issued 703,452 agent compensation options at an exercise price of $1.45 expiring October 27, 2012 in relation to the brokered private placement on October 27, 2010.
10.	Compensation of key management
	Key management comprises directors and executive officers (see note11 (b)). Certain executive officers are entitled to termination benefits due to a change of control equal to up to two years’ gross salary. The Company has no post-employment benefits and other long-term employee benefits. Compensation awarded to key management is listed below:

		For the three months ended March 31,
		2011		2010
Salaries and employee benefits	$	201,090	$	159,376
Share-based payments		-		-
	$	201,090	$	159,376

11.	Related party transactions
	The Company’s related parities consist of companies owned by executive officers and directors including:

a)	Manex Resource Group (“Manex”), a private company owned by a director that provides general office and administration services at market rates.
b)	Atherton Enterprises Ltd., a private company owned by an officer that provides CFO function to the Company.
c)	Lawrence Page, Q.C. Law Corp., a company owned by a director that provides legal services.
d)	On March 17, 2009, the Company borrowed US$200,000 from the CEO. The loan was unsecured and bore interest rate at 4.5% per annum maturing within one year. The loan was extended in March 2010 and repaid in full in May 2010.

The following fees and expenses were incurred in the normal course of operations in connection with the above related parties:

		Three months ended March 31,
		2011		2010
Manex Resources Group(a)	$	137,904	$	133,855
Atherton Enterprises Ltd.(b)		43,750		43,750
Lawrence Page Q.C. Law Corp(c)		2,710		1,044
Short-term loan(d)		-		212,678
	$	184,364	$	391,327

Page 20 of 21

Quaterra Resources Inc.

Notes to Condensed Consolidated Interim Financial Statements

For the three months ended March 31, 2011

(Unaudited, expressed in Canadian dollars)

12. Commitments

The Company has the following annual commitments in respect to the Manex service agreement:

Period ending March 31, 2012	$	186,000
Period ending March 31, 2013		46,500
	$	232,500

13.	Segmented information
	The Company has one business segment, the exploration of mineral properties. The Company’s major non- current assets are distributed by geographic locations as follows:

		March 31, 2011						December 31, 2010
				Mineral		Total				Mineral		Total
		Equipment		Property		Assets		Equipment		Property		Assets
Canada	$	-	$	-	$	21,621,417	$	-	$	-	$	18,250,564
Mexico		109,552		12,433,763		13,850,547		118,435		11,659,434		13,000,424
U.S.A		170,473		33,023,663		34,026,763		99,908		33,426,236		34,209,935
Total	$	280,025	$	45,457,426	$	69,498,727	$	218,343	$	45,085,670	$	65,460,923

14.	Subsequent events
	a)	On April 27, 2011, the Company completed the acquisition of Yerington copper property. On May 1, 2007, the Company received the bankruptcy court approval for the acquisition by a subsidiary of Quaterra of all Arimetco assets in the Yerington Mining District. The purchase price comprises US$500,000 cash, 250,000 of the Company’s common shares and a 2% NSR to a maximum of US$7.5 million on commencement of commercial production. The previously issued 250,000 common shares, held under escrow, were released and the remaining acquisition balance of US$141,650 was paid.
	b)	568,100 warrants were exercised at a weighted price of $0.75 for gross proceeds of $426,075.
	c)	354,500 stock options were exercised at a weighted price of $1.03 for gross proceeds of $366,135.
	d)	A mining lease with option to purchase was made in May 2011 that enables the Company to earn a 100% interest in certain mining claims in Lyon County, Nevada. The term of the lease requires the Company to make staged option payments totalling US$1.61 million over ten years and to incur exploration expenditures of at least US$300,000 by May 2014. The initial option payment of US$140,000 was made.

Page 21 of 21