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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION** Washington, D.C. 20549

FORM 10-KSB

 ̈ 
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT
  OF 1934

For the fiscal year ended __________________

x 
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
  ACT OF 1934

For the transition period from January 1, 2005 to June 30, 2005

Commission File No. **333-72230**

TERAX ENERGY, INC.(formerly Royal Phoenix) 
  (Name of small business issuer in its charter)

|**Nevada******                                                  | **88-0475757****** 
|--------------------------------------------------------------- | -------------------
|(State or other jurisdiction of                                 | (I.R.S. Employer   
|incorporation or organization)                                  | Identification No.)
|                                                                |                    
|**9600 Great Hills Trail, Suite 150W,
      Austin, Texas****** | **78759******      
|(Address of principal executive offices)                        | (Zip Code)         

Issuer's telephone number:**(512) 231-8444**

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

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

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

No Check if there is no disclosure of delinquent filers in response
  to Item 405 of Regulation S-B is not contained in this 
  form, and no disclosure will 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-KSB or any
  amendment to this Form 10-KSB.x

Revenues for six month period ended June 30, 2005 were $0.

The aggregate market value of the voting stock held by non-affiliates
  computed by reference to the last reported sale
  price of such stock as of August 12, 2005 was: $85,475,250.

The number of shares of the issuer's Common Stock outstanding
  as of August 12, 2005 was 50,725,000.

Transitional Small Business Disclosure Format (check one):  Yes xNo  ̈

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TABLE OF CONTENTS

|           |                                                                                                                              | Page
|---------- | ---------------------------------------------------------------------------------------------------------------------------- | ----
|           |                                                                                                                              |     
|Part I     |                                                                                                                              | 1   
|           |                                                                                                                              |     
|Item 1.    | Description of Business                                                                                                      | 1   
|           |                                                                                                                              |     
|Item 2.    | Description of Property                                                                                                      | 15  
|           |                                                                                                                              |     
|Item 3.    | Legal Proceedings                                                                                                            | 17  
|           |                                                                                                                              |     
|Item 4.    | Submission of Matters to a Vote
      of Securities Holders                                                                  | 17  
|           |                                                                                                                              |     
|Part II    |                                                                                                                              | 17  
|           |                                                                                                                              |     
|Item 5.    | Market for Common Equity and
      Related Stockholder Matters                                                               | 17  
|           |                                                                                                                              |     
|Item 6.    | Plan of Operation                                                                                                            | 20  
|           |                                                                                                                              |     
|Item 7.    | Financial Statements                                                                                                         | 22  
|           |                                                                                                                              |     
|Item 8.    | Changes In and Disagreements
      with Accountants on Accounting and Financial Disclosure                                   | 23  
|           |                                                                                                                              |     
|Item 8A.   | Controls and Procedures                                                                                                      | 23  
|           |                                                                                                                              |     
|Part III   |                                                                                                                              | 24  
|           |                                                                                                                              |     
|Item 9.    | Directors, Executive Officers,
      Promoters and Control Persons; Compliance with Section 16 (a) of the
      Exchange Act | 24  
|           |                                                                                                                              |     
|Item 10.   | Executive Compensation                                                                                                       | 25  
|           |                                                                                                                              |     
|Item 11.   | Security Ownership of Certain
      Beneficial Owners and Management and Related Stockholder Matters                         | 26  
|           |                                                                                                                              |     
|Item 12.   | Certain Relationships and Related
      Transactions                                                                         | 27  
|           |                                                                                                                              |     
|Item 13.   | Exhibits                                                                                                                     | 28  
|           |                                                                                                                              |     
|Item 14.   | Principal Accountant Fees and
      Services                                                                                 | 29  
|           |                                                                                                                              |     
|Signatures | 30                                                                                                                          

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This form 10-KSB contains forward-looking statements within
  the meaning of the federal securities laws. These forward-looking statements
  are necessarily based on certain assumptions and are subject to significant
  risks and uncertainties. These forward-looking statements are based on management's
  expectations as of the date hereof, and we do not undertake any responsibility
  to update any of these statements in the future. Actual future performance and
  results could differ from that contained in or suggested by these forward-looking
  statements as a result of factors set forth in this Form 10-KSB (including those
  sections hereof incorporated by reference from other filings with the Securities
  and Exchange Commission), in particular as set forth in the "Plan of Operation"
  under Item 6. In this filing references to "Company," "we," "our," and/or "us,"
  refers to Terax Energy, Inc.




PART I

ITEM 1. DESCRIPTION OF BUSINESS

Introduction

Terax Energy, Inc. is an independent, managed risk, oil and
  gas exploration and development company headquartered in Austin, Texas. Our
  principal properties consist of two large blocks of oil and gas leases, one
  covering approximately 10,600 acres in the aggregate in close proximity to each
  other in Erath County, Texas and one covering a block of approximately 5,200
  contiguous acres located in Comanche County, Texas, both of which permit us
  to drill and develop the Barnett Shale formation underlying the lease acreage.

Our operations are focused on the identification and evaluation
  of prospective oil and gas properties and the contribution of capital to projects
  that we believe have the potential to produce oil or gas in commercial quantities.

Business Development

We are a development stage company originally incorporated
  in Nevada as Royal Phoenix in October of 2000. Our initial plan of business
  was to sell herbal products via internet sales. However, as a result of the
  lack of revenue generation from that business model and the extremely competitive
  environment for nutritional supplements, we determined to re-assess our business
  plan and alternatively seek out other business opportunities capable of increasing
  stockholder value.

Consistent with this goal, on March 15, 2005, we changed our
  name from Royal Phoenix to Terax Energy, Inc. and on March 22, 2005, our sole
  officer and director, Joseph Scott Wilson, appointed Bill Chester as a director
  and as President, Secretary and Treasurer. More information on Mr. Chester can
  be found in Item 9 of this filing. Mr. Wilson subsequently resigned, leaving
  Mr. Chester as the sole director of the Company. Concurrent with his resignation,
  Mr. Wilson sold 105,150,000 shares of the Company's common stock owned by Mr.
  Wilson to Mr. Chester for $10,000 in cash.

In May, 2005 we appointed J. William Rhea, IV as our Chief
  Executive Officer and a director. More information on Mr. Rhea can be found
  in Item 9 of this filing. Concurrent with his appointment, Mr. Rhea purchased
  5,000,000 shares of our common stock owned by Mr. Chester for $500 in cash.

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Acquisition of Erath Energy Inc.

On May 31, 2005, we entered into a Share Purchase Agreement
  with Holywell Technological Investments Ltd. and First Finance Limited (collectively,
  the “Sellers”) pursuant to which we acquired all of the issued and
  outstanding securities of Erath Energy Inc. (“EEI”) from the Sellers.
  EEI is a Delaware corporation, the sole assets of which consist of approximately
  30 oil and gas leasehold interests located in Erath County, Texas comprising
  approximately 10,600 gross acres and cash of $79,443. Because EEI's assets
  consisted solely of leases and cash, and because EEI had not conducted any operations
  other than lease acquisitions, we accounted for this transaction using the purchase
  method of accounting.

The Share Purchase Agreement closed on June 1, 2005. As consideration
  for the acquisition, we issued to the Sellers an aggregate of 318,000 pre-split
  (1,590,000 post-split) shares of common stock. In addition, we covenanted to
  cause our outstanding common stock to be forward split on the basis of five
  shares for each one outstanding common share. The forward split was completed
  on June 13, 2005. All share figures in the report have been adjusted to reflect
  this forward split.

We were related to EEI by a common director.

The common shares issued as consideration for EEI were offered
  and sold to the Sellers in an offshore transaction made in reliance upon the
  exemption from registration provided by Regulation S as the Sellers were not
  US Persons (as that term is defined in Regulation S).

The Share Purchase Agreement provided that, in the event we
  do not close a financing with minimum gross proceeds of $5,000,000 at not
  less than $1.00 per share on or before July 31, 2005, the Sellers would
  have the right to repurchase EEI. This option was waived by the Sellers following
  the closing of the $5,700,000 financing on August 8, 2005 as discussed below.

Management Group Stock Pool

On June 7, 2005 we entered into a Management Group Stock Pool
  Agreement with our management, J. William Rhea, IV and Bill Chester, for the
  purpose of ensuring that our management has the proper incentives to enhance
  our performance. Pursuant to the terms of the Management Group Stock Pool Agreement,
  Messrs. Rhea and Chester placed the 5,500,000 shares of our common stock held
  by them into escrow, to either be released to them or returned to our treasury
  based upon certain reserve and per day production milestones more particularly
  described under the heading “Securities Authorized for Issuance Under
  Equity Compensation Plans” in Item 5, below.

Return to Treasury

On June 14, 2005 Bill Chester returned to our treasury for
  cancellation without consideration a total of 99,650,000 shares of common stock
  in order to facilitate the financing discussed below.

Financing

On August 8, 2005 we accepted subscriptions from seven purchasers
  for 570,000 Units (the “Units”) at a price of $10.00 per Unit
  for gross proceeds to us of $5,700,000.

Each Unit consisted of eight shares of our common stock (each
  a “Unit Share”) and four non-transferable share purchase warrants
  (each a “Unit Warrant”). Each Unit Warrant is exercisable into one
  share of our common stock (each a “Warrant Share”) at a price of
  $1.75 until February 8, 2007, subject to acceleration as follows: in the
  event that the average closing price of our shares of common stock on the OTC:BB
  or

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other, more senior exchange for the twenty previous trading
  days exceeds $2.25, and provided that an effective registration statement
  registering the resale of the Warrant Shares is then in effect, we may, by written
  notice, accelerate the expiry date of the Unit Warrants to thirty days after
  the date of such notice.

The securities were offered and sold to the Sellers in an
  offshore transaction made in reliance upon the exemption from registration provided
  by Regulation S as the purchasers represented that they were not US Persons
  (as that term is defined in Regulation S).

We have agreed to file a registration statement with the Securities
  and Exchange Commission to register the possible resale of the Unit Shares and
  the Warrant Shares within 180 days of the last sale of Units and thereafter
  to use our best efforts to cause this registration to become effective.

Acquisition of Additional Leasehold Interests

Since June 30, 2005, we have acquired one additional oil and
  gas lease covering approximately 93 gross acres in Erath County, Texas, one
  oil and gas lease covering approximately 100 gross acres in Hamilton County,
  Texas, and seven oil and gas leases covering a total of approximately 5,200
  gross acres in Comanche County, Texas. In addition, we are continuing our efforts
  to secure additional oil and gas leases in Erath and Comanche Counties that
  are contiguous to or in close proximity of our existing leases.

Business Strategy

Our business strategy is to provide long-term growth in shareholder
  value by drilling, developing and exploiting our existing oil and gas properties,
  as well as the properties we may acquire in the future. We plan to implement
  an active exploration program to maximize the value of our properties, and to
  use advanced technologies such as high-resolution aeromagnetics, 3-D seismic
  and other technical applications, as appropriate, to manage our exploration
  and development risks. We may also work with industry partners to lower our
  financial exposure and shorten the time needed to fully develop our properties.
  As our business continues to grow, we plan to retain additional executive management
  personnel with substantial experience in the oil and gas exploration and development
  business.

To date, we have conducted our lease acquisition activities
  exclusively in the Fort Worth Basin of Texas, an area where the Barnett Shale
  formation is known to be of sufficient thickness to make exploration for gas
  reserves feasible.

Drilling, Exploration and Production Activities

We have acquired oil and gas leasehold interests in approximately
  16,000 aggregate gross acres located in Erath , Comanche and Hamilton Counties,
  Texas. See “Description of Properties” for a discussion of our significant
  oil and gas leasehold interests.

Our exploration efforts are focused on discovering new reserves
  by drilling and completing wells under our existing leases, as well as leases
  we may acquire in the future. The investment associated with drilling a well
  and future development of our leasehold acreage depends principally upon whether
  any problems are encountered in drilling the wells, the depth (including the
  length of the horizontal leg) of the wells, whether the wells can be timely
  connected to existing infrastructure or will require additional investment in
  infrastructure, and, if applicable, the amount of water encountered in the wells.

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Title to Properties

We believe that the title to our leasehold properties is good
  and defensible in accordance with standards generally acceptable in the oil
  and gas industry, subject to exceptions that are not so material as to detract
  substantially from the use of the properties. Our leasehold properties are subject
  to royalty, overriding royalty and other outstanding interests customary in
  the industry. The properties may be subject to burdens such as liens incident
  to operating agreements and taxes, development obligations under oil and gas
  leases, and other encumbrances, easements and restrictions. We do not believe
  any of these burdens will materially interfere with our use of these properties.

As is customary in the oil and gas industry, only a preliminary
  title examination is conducted at the time properties believed to be suitable
  for drilling operations are acquired by us. We rely upon oil and gas landmen
  to conduct the title examination. We intend to perform necessary curative work
  with respect to any significant defects in title prior to proceeding with drilling
  operations.

Competition

The oil and natural gas business is highly competitive. We
  compete with private and public companies in all facets of the oil and gas business,
  including suppliers of energy and fuel to industrial, commercial and individual
  customers. Numerous independent oil and gas companies, oil and gas syndicates
  and major oil and gas companies actively seek out and bid for oil and gas prospects
  and properties as well as for the services of third-party providers, such as
  drilling companies, upon which we rely. Many of these companies not only explore
  for, produce and market oil and gas, but also carry out refining operations
  and market the resultant products on a worldwide basis. A substantial number
  of our competitors have longer operating histories and substantially greater
  financial and personnel resources than we do.

Competitive conditions may be substantially affected by various
  forms of energy legislation and regulation considered from time to time by the
  government of the United States and the states in which we have operations,
  as well as factors that we cannot control, including international political
  conditions, overall levels of supply and demand for oil and gas, and the markets
  for synthetic fuels and alternative energy sources. Intense competition occurs
  with respect to marketing, particularly of natural gas.

Regulation

General. The availability of a ready market for oil
  and gas production depends upon numerous factors beyond our control. These factors
  include local, state, federal and international regulation of oil and gas production
  and transportation, as well as regulations governing environmental quality and
  pollution control, state limits on allowable rates of production by a well or
  proration unit, the amount of oil and gas available for sale, the availability
  of adequate pipeline and other transportation and processing facilities, and
  the marketing of competitive fuels. For example, a productive gas well may be
  "shut-in" because of an over-supply of gas or lack of an available pipeline
  in the areas in which we may conduct operations. State and federal regulations
  are generally intended to prevent waste of oil and gas, protect rights to produce
  oil and gas between owners in a common reservoir, and control contamination
  of the environment. Pipelines and gas plants are also subject to the jurisdiction
  of various federal, state and local agencies that may affect the rates at which
  they are able to process or transport gas from our properties.

Applicable legislation is under constant review for amendment
  or expansion. These efforts frequently result in an increase in the regulatory
  burden on companies in our industry and a consequent increase in the cost of
  doing business and decrease in profitability. Numerous federal and state departments
  and agencies issue rules and regulations imposing additional burdens on the
  oil and gas industry that are often costly to comply with and carry substantial
  penalties for non-compliance. Our production operations may

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be affected by changing tax and other laws relating to the
  petroleum industry, constantly changing administrative regulations and possible
  interruptions or termination by government authorities.

Sales of Oil and Natural Gas. Sales of any oil that
  we produce will be affected by the availability, terms and costs of transportation.
  The rates, terms and conditions applicable to the interstate transportation
  of oil by pipelines are regulated by the Federal Energy Regulatory Commission
  ("FERC") under the Interstate Commerce Act. FERC has implemented a simplified
  and generally applicable ratemaking methodology for interstate oil pipelines
  to fulfill the requirements of Title VIII of the Energy Policy Act of 1992 comprised
  of an indexing system to establish ceilings on interstate oil pipeline rates.
  FERC has announced several important transportation-related policy statements
  and rule changes, including a statement of policy and final rule issued February
  25, 2000, concerning alternatives to its traditional cost-of-serve rate-making
  methodology to establish the rates interstate pipelines may charge for their
  services. The final rule revises FERC's pricing policy and current regulatory
  framework to improve the efficiency of the market and further enhance competition
  in natural gas markets.

Sales of any natural gas that we produce will be affected
  by the availability, terms and costs of transportation. The rates, terms and
  conditions applicable to the interstate transportation of gas by pipelines are
  regulated by FERC under the Natural Gas Acts, as well as under Section 311 of
  the Natural Gas Policy Act. Since 1985, the FERC has implemented regulations
  intended to increase competition within the gas industry by making gas transportation
  more accessible to gas buyers and sellers on an open-access, non-discriminatory
  basis.

Pipelines. Pipelines that we use to gather and transport
  our oil and gas will be subject to regulation by the Department of Transportation
  ("DOT") under the Hazardous Liquids Pipeline Safety Act of 1979, as amended
  ("HLPSA"), relating to the design, installation, testing, construction, operation,
  replacement and management of pipeline facilities. The HLPSA requires pipeline
  operators to comply with regulations issued pursuant to HLPSA designed to permit
  access to and allowing copying of records and to make certain reports and provide
  information as required by the Secretary of Transportation.

State Restrictions. State regulatory authorities have
  established rules and regulations requiring permits for drilling operations,
  drilling bonds and reports concerning operations. Many states have statutes
  and regulations governing various environmental and conservation matters, including
  the unitization or pooling of oil and gas properties and establishment of maximum
  rates of production from oil and gas wells, and restricting production to the
  market demand for oil and gas. Such statutes and regulations may limit the rate
  at which oil and gas could otherwise be produced from our properties.

Most states impose a production or severance tax with respect
  to the production and sale of crude oil, natural gas and natural gas liquids
  within their respective jurisdictions. State production taxes are generally
  applied as a percentage of production or sales. In addition, in the event we
  conduct operations on federal or state oil and gas leases, such operations must
  comply with numerous regulatory restrictions, including various nondiscrimination
  statutes, royalty and related valuation requirements, and certain of such operations
  must be conducted pursuant to certain on-site security regulations and other
  appropriate permits issued by the Bureau of Land Management or the Minerals
  Management Service or other appropriate federal or state agencies.

Other. Oil and gas rights may be held by individuals
  and corporations, and, in certain circumstances, by governments having jurisdiction
  over the area in which such rights are located. As a general rule, parties holding
  such rights grant licenses or leases to third parties, such as us, to facilitate
  the exploration and development of these rights. The terms of the licenses and
  leases are generally established to require timely development. Notwithstanding
  the ownership of oil and gas rights, the government of the

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jurisdiction in which the rights are located generally retains
  authority over the manner of development of those rights.

Environmental

General. Our activities are subject to local, state
  and federal laws and regulations governing environmental quality and pollution
  control in the United States. The exploration, drilling and production from
  wells, natural gas facilities, including the operation and construction of pipelines,
  plants and other facilities for transporting, processing, treating or storing
  natural gas and other products, are subject to stringent environmental regulation
  by state and federal authorities, including the Environmental Protection Agency
  ("EPA"). Such regulation can increase our cost of planning, designing, installing
  and operating such facilities.

Significant fines and penalties may be imposed for the failure
  to comply with environmental laws and regulations. Some environmental laws provide
  for joint and several strict liability for remediation of releases of hazardous
  substances, rendering a person liable for environmental damage without regard
  to negligence or fault on the part of such person. In addition, we may be subject
  to claims alleging personal injury or property damage as a result of alleged
  exposure to hazardous substances, such as oil and gas related products.

Waste Disposal. We may generate wastes, including hazardous
  wastes, that are subject to the federal Resource Conservation and Recovery Act
  ("RCRA") and comparable state statutes. The EPA has limited the disposal options
  for certain wastes that are designated as hazardous under RCRA ("Hazardous Wastes").
  Furthermore, it is possible that certain wastes generated by our oil and gas
  operations that are currently exempt from treatment as Hazardous Wastes may
  in the future be designated as Hazardous Wastes, and therefore be subject to
  more rigorous and costly operating and disposal requirements.

CERCLA. The federal Comprehensive Environmental Response,
  Compensation and Liability Act ("CERCLA"), also known as the "Superfund" law,
  generally imposes joint and several liability for costs of investigation and
  remediation and for natural resource damages, without regard to fault or the
  legality of the original conduct, on certain classes of persons with respect
  to the release into the environment of substances designated under CERCLA as
  hazardous substances ("Hazardous Substances"). These classes of persons or so-called
  potentially responsible parties include the current and certain past owners
  and operators of a facility where there is or has been a release or threat of
  release of a Hazardous Substance and persons who disposed of or arranged for
  the disposal of the Hazardous Substances found at such a facility. CERCLA also
  authorizes the EPA and, in some cases, third parties to take action in response
  to threats to the public health or the environment and to seek to recover from
  the potentially responsible parties the costs of such action. Although CERCLA
  generally exempts petroleum from the definition of Hazardous Substances, we
  may have generated and may generate wastes that fall within CERCLA's definition
  of Hazardous Substances.

Air Emissions. Our operations may be subject to local,
  state and federal regulations for the control of emissions of air pollution.
  Major sources of air pollutants are subject to more stringent, federally imposed
  permitting requirements, including additional permits. Producing wells may generate
  volatile organic compounds and nitrogen oxides. If ozone problems are not resolved
  by the deadlines imposed by the federal Clean Air Act, or on schedule to meet
  the standards, even more restrictive requirements may be imposed, including
  financial penalties based upon the quantity of ozone producing emissions. If
  we fail to comply strictly with applicable air pollution regulations or permits,
  we may be subject to monetary fines and be required to correct any identified
  deficiencies. Alternatively, regulatory agencies could require us to forego
  construction, modification or operation of certain air emission sources.

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We believe that we are in substantial compliance with current
  applicable environmental laws and regulations and that, absent the occurrence
  of an extraordinary event, compliance with existing local, state, federal and
  international laws, rules and regulations governing the release of materials
  in the environment or otherwise relating to the protection of the environment
  will not have a material effect upon our business, financial condition or results
  of operations.

Employees and Consultants

We currently have two employees, being our two executive officers.
  We also utilize the services of several consultants who provide, among other
  things, technical support and accounting services to the Company. We anticipate
  retaining additional personnel during the next 12 months, including additional
  executive management personnel with substantial experience in the oil and gas
  exploration and development business.

Subsidiaries

We have one wholly-owned subsidiary, Erath Energy Inc., a
  Delaware corporation, through which we hold our oil and gas leasehold interests.

Desert Health Products

We have not totally abandoned our prior business plan. We
  are party to a "License, Manufacture and Distribution Agreement," with Desert
  Health Products dated October 18, 2000, as subsequently amended. Under this
  Agreement, Desert Health Products has agreed to manufacture, package, ship,
  and handle credit card processing of Royal Phoenix products. This relationship
  is intended to allow us to concentrate on the marketing of herbal products.
  In addition, we may pursue and market other vitamin products which will be private
  labeled specifically for us by companies other than Desert Health Products.

Our management is presently reviewing the viability of this
  business plan in order to determine what, if any, steps should be taken to further
  same. Options open to our management include seeking a joint venture partner
  willing to assume operational control of the herbal products business while
  leaving us with a residual interest, selling our interest in the herbal products
  business, or abandoning the business.

RISK FACTORS

The following risk factors, among others, may affect our financial
  condition and results of operations.

Risks Associated With Our Business

We have had operating losses and no revenues to date, require
  additional capital to execute our business plan and do not expect to be profitable
  in the foreseeable future.

We have experienced net losses in each fiscal quarter since
  our inception, and we expect to continue to incur substantial losses for the
  foreseeable future. Net loss applicable to common stockholders from inception
  to June 30, 2005 was approximately $89,059, and as of June 30, 2005 we had
  an accumulated deficit of approximately $89,059. We have had no revenue
  to date.

We may not be able to generate significant revenues in the
  future and expect our operating expenses to increase substantially over the
  next 12 months as we continue to pursue our oil and gas exploration activities.
  As a result, we expect to continue to experience negative cash flow for the
  foreseeable future

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and cannot predict when, if ever, we might become profitable.
  We will need to raise additional funds, and such funds may not be available
  on commercially acceptable terms, if at all. If we cannot raise funds on acceptable
  terms, we may not be able to execute on our business plan, take advantage of
  future opportunities, or respond to competitive pressures or unanticipated requirements.
  This may seriously harm our business, financial condition and results of operations.

We are a development stage company with a limited operating
  history.

We are a development stage company with only a limited operating
  history upon which to base an evaluation of our current business and future
  prospects. We have only been actively engaged in the oil and gas exploration
  and development business since May 2005 and do not have an established history
  of locating and developing properties that have oil and gas reserves. As a result,
  the revenue and income potential of our business is unproven. In addition, because
  of our limited operating history, we have limited insight into trends that may
  emerge and affect our business. We may make errors in predicting and reacting
  to relevant business trends and will be subject to the risks, uncertainties
  and difficulties frequently encountered by early-stage companies in evolving
  markets such as ours. We may not be able to successfully address any or all
  of these risks and uncertainties. Failure to adequately do so could cause our
  business, results of operations and financial condition to suffer.

Our proposed operations will require significant capital
  expenditures for which we may not have sufficient funding.

We intend to make capital expenditures far in excess of our
  existing capital resources to explore our existing oil and gas properties and
  acquire additional oil and gas properties. Specifically, we plan to incur exploration
  costs in excess of $25 million over the next 12 months. We intend to rely
  on external sources of financing to meet our capital requirements to continue
  acquiring, exploring and developing oil and gas properties and to otherwise
  implement our business plan. We plan to obtain such funding through the debt
  and equity markets, but we cannot assure you that we will be able to obtain
  additional funding when it is required or that it will be available to us on
  commercially acceptable terms, if at all.

We also intend to continue acquiring oil and gas leases in
  our development area in the ordinary course of our business. If we are successful
  in these acquisitions, our capital needs may increase substantially. If we fail
  to obtain the funding that we need when it is required, we may have to forego
  or delay potentially valuable opportunities to acquire new oil and gas properties
  or default on existing funding commitments to third parties and forfeit or dilute
  our rights in existing oil and gas properties.

The successful implementation of our business plan is subject
  to risks inherent in the oil and gas business.

Our oil and gas operations are subject to the economic risks
  typically associated with exploration and development activities, including
  the necessity of making significant expenditures to locate and acquire properties
  and to drill exploratory wells. In addition, the availability of drilling rigs
  and the cost and timing of drilling, completing and, if warranted, operating
  wells is often uncertain. In conducting exploration and development activities,
  the presence of unanticipated pressure or irregularities in formations, miscalculations
  or accidents may cause our exploration, development and, if warranted, production
  activities to be unsuccessful. This could result in a total loss of our investment
  in a particular well. If exploration efforts are unsuccessful in establishing
  proved reserves and exploration activities cease, the amounts accumulated as
  unproved costs will be charged against earnings as impairments.

In addition, in the event that we commence production, market
  conditions or the unavailability of satisfactory oil and gas transportation
  arrangements may hinder our access to oil and gas markets and delay our production.
  The availability of a ready market for our prospective oil and gas production

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depends on a number of factors, including the demand for and
  supply of oil and gas and the proximity of reserves to pipelines and other facilities.
  Our ability to market such production depends in substantial part on the availability
  and capacity of gathering systems, pipelines and processing facilities, in most
  cases owned and operated by third parties. Our failure to obtain such services
  on acceptable terms could materially harm our business. We may be required to
  shut in wells for lack of a market or because of inadequacy or unavailability
  of pipelines or gathering system capacity. If that occurs, we would be unable
  to realize revenue from those wells until arrangements are made to deliver such
  production to market.

Our future performance is dependent upon our ability to
  identify, acquire and develop oil and gas properties.

Our future performance depends upon our ability to identify,
  acquire and develop oil and gas reserves that are economically recoverable.
  Our success will depend upon our ability to acquire working and revenue interests
  in properties upon which oil and gas reserves are ultimately discovered in commercial
  quantities, and our ability to develop prospects that contain proven oil and
  gas reserves to the point of production. Without successful acquisition and
  exploration activities, we will not be able to develop oil and gas reserves
  or generate revenues. We cannot provide you with any assurance that we will
  be able to identify and acquire oil and gas reserves on acceptable terms, or
  that oil and gas deposits will be discovered in sufficient quantities to enable
  us to recover our exploration and development costs or sustain our business.

The successful acquisition and development of oil and gas
  properties requires an assessment of recoverable reserves, future oil and gas
  prices and operating costs, potential environmental and other liabilities, and
  other factors. Such assessments are necessarily inexact and their accuracy inherently
  uncertain. In addition, no assurance can be given that our exploitation and
  development activities will result in the discovery of any reserves. Our operations
  may be curtailed, delayed or canceled as a result of lack of adequate capital
  and other factors, such as lack of availability of rigs and other equipment,
  title problems, weather, compliance with governmental regulations or price controls,
  mechanical difficulties, or unusual or unexpected formations, pressures and
  or work interruptions. In addition, the costs of exploitation and development
  may materially exceed our initial estimates.

We have a very small management team and the loss of any
  member of this team may prevent us from implementing our business plan in a
  timely manner.

We have two executive officers and a limited number of additional
  consultants. Our success depends largely upon the continued services of these
  two individuals, particularly our Chief Executive Officer. We do not maintain
  key person life insurance policies on these individuals. The loss of one or
  more of these individuals could seriously harm our business, financial condition
  and results of operations. In such an event, we may not be able to recruit personnel
  to replace these individuals in a timely manner, or at all, on acceptable terms.

Future growth could strain our personnel and infrastructure
  resources, and if we are unable to implement appropriate controls and procedures
  to manage our growth, we may not be able to successfully implement our business
  plan.

We expect to experience rapid growth in our operations, which
  will place a significant strain on our management, administrative, operational
  and financial infrastructure. Our future success will depend in part upon the
  ability of our executive officers to manage growth effectively. This may require
  us to hire and train additional personnel to manage our expanding operations.
  In addition, we must continue to improve our operational, financial and management
  controls and our reporting systems and procedures. If we fail to successfully
  manage our growth, we may be unable to execute upon our business plan.

9

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The geographic concentration of all of our properties in
  the Fort Worth Basin in Texas, subjects us to an increased risk of loss of revenue
  or curtailment of production from factors affecting that area.

The geographic concentration of all of our leasehold interests
  in Erath, Comanche and Hamilton Counties, Texas means that our properties could
  be affected by the same event should the region experience:

| | • | severe weather;                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------
| |   |                                                                                                           
| | • | delays or decreases in production, the
        availability of equipment, facilities or services;         
| |   |                                                                                                           
| | • | delays or decreases in the availability
        of capacity to transport, gather or process production; or
| |   |                                                                                                           
| | • | changes in the regulatory environment.                                                                    

The oil and gas exploration and production industry historically
  is a cyclical industry and market fluctuations in the prices of oil and gas
  could adversely affect our business.

Prices for oil and gas tend to fluctuate significantly in
  response to factors beyond our control. These factors include, but are not limited
  to:

| | • | weather conditions in the United States
        and elsewhere;                                                              
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                             
| | • | economic conditions, including demand
        for petroleum-based products, in the United States and elsewhere;             
| |   |                                                                                                                             
| | • | actions by OPEC, the Organization of
        Petroleum Exporting Countries;                                                 
| |   |                                                                                                                             
| | • | political instability in the Middle East
        and other major oil and gas producing regions;                             
| |   |                                                                                                                             
| | • | governmental regulations, both domestic
        and foreign;                                                                
| |   |                                                                                                                             
| | • | domestic and foreign tax policy;                                                                                            
| |   |                                                                                                                             
| | • | the pace adopted by foreign governments
        for the exploration, development, and production of their national reserves;
| |   |                                                                                                                             
| | • | the price of foreign imports of oil and
        gas;                                                                        
| |   |                                                                                                                             
| | • | the cost of exploring for, producing
        and delivering oil and gas; the discovery rate of new oil and gas reserves;    
| |   |                                                                                                                             
| | • | the rate of decline of existing and new
        oil and gas reserves;                                                       
| |   |                                                                                                                             
| | • | available pipeline and other oil and
        gas transportation capacity;                                                   
| |   |                                                                                                                             
| | • | the ability of oil and gas companies
        to raise capital;                                                              
| |   |                                                                                                                             
| | • | the overall supply and demand for oil
        and gas; and                                                                  

10

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| | • | the availability of alternate fuel sources.
| | - | -------------------------------------------

Changes in commodity prices may significantly affect our capital
  resources, liquidity and expected operating results. Price changes will directly
  affect revenues and can indirectly impact expected production by changing the
  amount of funds available to reinvest in exploration and development activities.
  Reductions in oil and gas prices not only reduce revenues and profits, but could
  also reduce the quantities of reserves that are commercially recoverable. Significant
  declines in prices could result in non-cash charges to earnings due to impairment.
  We do not currently engage in any hedging program to mitigate our exposure to
  fluctuations in oil and gas prices.

Changes in commodity prices may also significantly affect
  our ability to estimate the value of producing properties for acquisition and
  divestiture and often cause disruption in the market for oil and gas producing
  properties, as buyers and sellers have difficulty agreeing on the value of the
  properties. Price volatility also makes it difficult to budget for and project
  the return on acquisitions and the development and exploitation of projects.
  We expect that commodity prices will continue to fluctuate significantly in
  the future.

Our ability to produce oil and gas from our properties
  may be adversely affected by a number of factors outside of our control.

The business of exploring for and producing oil and gas involves
  a substantial risk of investment loss. Drilling oil and gas wells involves the
  risk that the wells may be unproductive or that, although productive, the wells
  may not produce oil or gas in economic quantities. Other hazards, such as unusual
  or unexpected geological formations, pressures, fires, blowouts, loss of circulation
  of drilling fluids or other conditions may substantially delay or prevent completion
  of any well. Adverse weather conditions can also hinder drilling operations.
  A productive well may become uneconomic if water or other deleterious substances
  are encountered that impair or prevent the production of oil or gas from the
  well. In addition, production from any well may be unmarketable if it is impregnated
  with water or other deleterious substances. There can be no assurance that oil
  and gas will be produced from the properties in which we have interests. In
  addition, the marketability of oil and gas that may be acquired or discovered
  may be influenced by numerous factors beyond our control. These factors include
  the proximity and capacity of oil and gas, gathering systems, pipelines and
  processing equipment, market fluctuations in oil and gas prices, taxes, royalties,
  land tenure, allowable production and environmental protection. We cannot predict
  how these factors may affect our business.

We are dependent upon the efforts of various third parties
  that we do not control and, as a result, we may not be able to control the timing
  of development efforts, the associated costs, or the rate of production of reserves
  (if any).

The success of our business is dependent upon the efforts
  of various third parties that we do not control. At least at the present, we
  do not plan to serve as the operator for our projects. As a result, we may have
  limited ability to exercise influence over the operations of the properties
  or their associated costs. Our dependence on the operator and, where applicable,
  other working interest owners for these projects and our limited ability to
  influence operations and associated costs could prevent the realization of our
  targeted returns on capital in drilling or acquisition activities. The success
  and timing of development and exploitation activities on properties operated
  by others depend upon a number of factors that will be largely outside of our
  control, including:

| | • | the timing and amount of capital expenditures;   
| | - | -------------------------------------------------
| |   |                                                  
| | • | the operator's expertise and financial resources;

11

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| | • | approval of other participants in drilling wells;                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                           
| | • | selection of technology;                                                                                                                                                  
| |   |                                                                                                                                                                           
| | • | the rate of production of the reserves; and                                                                                                                               
| |   |                                                                                                                                                                           
| | • | the availability of suitable offshore
        drilling rigs, drilling equipment, production and transportation 
        infrastructure, and qualified operating personnel.

We will rely upon various companies to provide us with technical
  assistance and services. We will also rely upon the services of geologists,
  geophysicists, chemists, engineers and other scientists to explore and analyze
  oil and gas prospects to determine a method in which the oil and gas prospects
  may be developed in a cost-effective manner. Although we have developed relationships
  with a number of third-party service providers, we cannot assure you that we
  will be able to continue to rely on such persons. If any of these relationships
  with third-party service providers are terminated or are unavailable on commercially
  acceptable terms, we may not be able to execute our business plan.

The unavailability or high cost of drilling rigs, equipment,
  supplies, personnel and oil field services could adversely affect our ability
  to execute our exploration and development plans on a timely basis and within
  our budget.

Shortages or the high cost of drilling rigs, equipment, supplies
  or personnel could delay or adversely affect our exploitation and exploration
  operations, which could have a material adverse effect on our business, financial
  condition and results of operations. Since our operations and properties are
  concentrated in the Fort Worth Basin in Texas, we could be materially and adversely
  affected if drilling rigs are unavailable or cost of rigs, equipment supplies
  or personnel increase significantly over current costs.

We may be required to write-down the carrying values and/or
  estimates of total reserves of our oil and gas properties.

Accounting rules applicable to us require that we review periodically
  the carrying value of our oil and gas properties for possible impairment. Based
  on specific market factors and circumstances at the time of prospective impairment
  reviews and the continuing evaluation of development plans, production data,
  economics and other factors, we may be required to write down the carrying value
  of our oil and gas properties.

We may be unable to retain our leases and working interests
  in leases.

Our properties are held under oil and gas leases. If we fail
  to meet the specific requirements of each lease, such lease may terminate or
  expire. We cannot assure you that any of the obligations required to maintain
  each lease will be met. The termination or expiration of our leases may harm
  our business. Our property interests will terminate unless we fulfill certain
  obligations under the terms of our leases and other agreements related to such
  properties. If we are unable to satisfy these conditions on a timely basis,
  we may lose our rights in these properties. The termination of our interests
  in these properties may harm our business.

In addition, we will need significant funds to meet capital
  requirements for the exploration activities that we intend to conduct on our
  properties.

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Title deficiencies could render our leases worthless.

The existence of a material title deficiency can render a
  lease worthless and can result in a large expense to our business. It is our
  practice in acquiring oil and gas leases or undivided interests in oil and gas
  leases to forgo the expense of retaining lawyers to examine the title to the
  oil or gas interest to be placed under lease or already placed under lease.
  Instead, we rely upon the judgment of oil and gas landmen who perform the field
  work in examining records in the appropriate governmental office before attempting
  to place under lease a specific oil or gas interest. This is customary practice
  in the oil and gas industry. However, we do not anticipate that we, or the person
  or company acting as operator of the wells located on the properties that we
  currently lease or may lease in the future, will obtain counsel to examine title
  to the lease until the well is about to be drilled. As a result, we may be unaware
  of deficiencies in the marketability of the title to the lease. Such deficiencies
  may render the lease worthless.

If we or our operators fail to maintain adequate insurance,
  our business could be materially and adversely affected.

Our operations are subject to risks inherent in the oil and
  gas industry, such as blowouts, cratering, explosions, uncontrollable flows
  of oil, gas or well fluids, fires, pollution, earthquakes and other environmental
  risks. These risks could result in substantial losses due to injury and loss
  of life, severe damage to and destruction of property and equipment, pollution
  and other environmental damage, and suspension of operations. We could be liable
  for environmental damages caused by previous property owners. As a result, substantial
  liabilities to third parties or governmental entities may be incurred, the payment
  of which could have a material adverse effect on our financial condition and
  results of operations.

Any prospective drilling contractor or operator which we hire
  will be required to maintain insurance of various types to cover our operations
  with policy limits and retention liability customary in the industry. Therefore,
  we do not plan to acquire our own insurance coverage for such prospects. The
  occurrence of a significant adverse event on such prospects that is not fully
  covered by insurance could result in the loss of all or part of our investment
  in a particular prospect which could have a material adverse effect on our financial
  condition and results of operations.

Complying with environmental and other government regulations
  could be costly and could negatively impact our production.

Our business is governed by numerous laws and regulations
  at various levels of government. These laws and regulations govern the operation
  and maintenance of our facilities, the discharge of materials into the environment
  and other environmental protection issues. Such laws and regulations may, among
  other potential consequences, require that we acquire permits before commencing
  drilling and restrict the substances that can be released into the environment
  with drilling and production activities.

Under these laws and regulations, we could be liable for personal
  injury, clean-up costs and other environmental and property damages, as well
  as administrative, civil and criminal penalties. Prior to commencement of drilling
  operations, we may secure limited insurance coverage for sudden and accidental
  environmental damages as well as environmental damage that occurs over time.
  However, we do not believe that insurance coverage for the full potential liability
  of environmental damages is available at a reasonable cost. Accordingly, we
  could be liable, or could be required to cease production on properties, if
  environmental damage occurs.

13

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The costs of complying with environmental laws and regulations
  in the future may harm our business. Furthermore, future changes in environmental
  laws and regulations could occur that result in stricter standards and enforcement,
  larger fines and liability, and increased capital expenditures and operating
  costs, any of which could have a material adverse effect on our financial condition
  or results of operations.

The oil and gas industry is highly competitive.

The oil and gas industry is highly competitive. We compete
  with oil and natural gas companies and other individual producers and operators,
  many of which have longer operating histories and substantially greater financial
  and other resources than we do, as well as companies in other industries supplying
  energy, fuel and other needs to consumers. Our larger competitors, by reason
  of their size and relative financial strength, can more easily access capital
  markets than we can and may enjoy a competitive advantage in the recruitment
  of qualified personnel. They may be able to absorb the burden of any changes
  in laws and regulation in the jurisdictions in which we do business and handle
  longer periods of reduced prices for oil and gas more easily than we can. Our
  competitors may be able to pay more for oil and gas leases and properties and
  may be able to define, evaluate, bid for and purchase a greater number of leases
  and properties than we can. Further, these companies may enjoy technological
  advantages and may be able to implement new technologies more rapidly than we
  can. Our ability to acquire additional properties in the future will depend
  upon our ability to conduct efficient operations, evaluate and select suitable
  properties, implement advanced technologies and consummate transactions in a
  highly competitive environment.

Risks Related to Our Stock

There is no significant market for our common stock.

There is no active trading market for our common stock. Our
  common stock is not eligible for trading on any national or regional securities
  exchange or the Nasdaq Stock Market. Our common stock is eligible for trading
  on the OTC Bulletin Board. This market tends to be substantially less liquid
  than national and regional securities exchanges or the Nasdaq Stock Market.
  We cannot provide you with any assurance that an active trading market for our
  common stock will develop, or if such a market develops, that it will be sustained.

Applicable SEC Rules governing the trading of "penny stocks"
  limits the trading and liquidity of our common stock which may affect the trading
  price of our common stock.

Our common stock currently trades on the OTC Bulletin Board.
  Since our common stock continues to trade below $5.00 per share, our common
  stock is considered a "penny stock" and is subject to SEC rules and regulations
  that impose limitations upon the manner in which our shares can be publicly
  traded. These regulations require the delivery, prior to any transaction involving
  a penny stock, of a disclosure document explaining the penny stock market and
  the associated risks. Under these regulations, brokers who recommend penny stocks
  to persons other than established customers or certain accredited investors
  must make a special written suitability determination for the purchaser and
  receive the purchaser's written agreement to a transaction prior to sale. These
  regulations may have the effect of limiting the trading activity of our common
  stock and reducing the liquidity of an investment in our common stock.

We intend to raise additional capital in the future, and
  such additional capital may be dilutive to stockholders or impose operational
  restrictions.

14

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We intend to raise additional capital in the future to help
  fund our operations through sales of shares of our common stock or securities
  convertible into shares of our common stock, as well as issuances of debt. For
  example, we are currently seeking to raise as much as $10 million in an
  offering of units comprised of shares of our common stock and warrants, of which
  we have closed on $5,700,000 to date. There is no guarantee that the remainder
  of the financing will be subscribed for. Additional equity financing may be
  dilutive to our stockholders and debt financing, if available, may involve restrictive
  covenants that may limit our operating flexibility. If additional capital is
  raised through the issuance of shares of our common stock or securities convertible
  into shares of our common stock, the percentage ownership of our stockholders
  will be reduced. These stockholders may experience additional dilution in net
  book value per share and any additional equity securities may have rights, preferences
  and privileges senior to those of the holders of our common stock.

Our existing stockholders may experience substantial dilution
  of their ownership interests due to the issuance of additional shares of our
  common stock.

We currently have 50,725,000 shares of common stock issued
  and outstanding and outstanding warrants exercisable into 2,280,000 shares of
  our common stock. We are currently seeking to raise additional funds through
  the issuance of equity securities as discussed above. The issuance of additional
  shares of common stock upon the exercise or conversion of these warrants may
  result in substantial dilution to the equity interests of our existing stockholders.

We may also issue additional shares of our common stock in
  connection with the hiring of additional personnel, future acquisitions of oil
  and gas prospects, future offerings of our securities, and other business purposes.
  Such issuances may further dilute the interests of our existing stockholders.

The trading price of our common stock is likely to be highly
  volatile.

The trading price of our shares has from time to time fluctuated
  widely and in the future may be subject to similar fluctuations. The trading
  price may be affected by a number of factors including events described in the
  risk factors set forth in this report as well as our operating results, financial
  condition, announcements regarding our oil and gas activities, general conditions
  in the oil and gas exploration and development industry, and other events or
  factors. In addition, the stock market has experienced significant price and
  volume fluctuations that have particularly affected the price of many small
  capitalization companies and that often have been unrelated or disproportionate
  to the operating performance of these companies. Market fluctuations such as
  these may seriously harm the market price of our common stock. Further, securities
  class action suits have been filed against companies following periods of market
  volatility in the price of their securities. If such an action is instituted
  against us, we may incur substantial costs and a diversion of management attention
  and resources, which would seriously harm our business, financial condition
  and results of operations.

We do not intend to pay dividends in the foreseeable future.

We have never declared or paid a dividend on our common stock.
  We intend to retain earnings, if any, for use in the operation and expansion
  of our business and, therefore, do not anticipate paying any dividends in the
  foreseeable future.

ITEM 2. DESCRIPTION OF PROPERTY

The properties in which we have an interest consist of our
  principal executive offices and our Erath County Properties on which we plan
  to conduct our exploration, development and production activities.

15

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Principal Executive Offices

Our principal executive offices are located at 9600 Great
  Hills Trail, Suite 150W, Austin, Texas 78759. We rent this office space for
  approximately $3,000 per month. We believe our current offices will be adequate
  to support our operations for the foreseeable future.

Current Oil and Gas Projects

To date, our acquisition, exploitation and development activities
  have been limited to Texas.

Erath County Property

We own 100% of the working interest under oil and gas leases
  covering two blocks of approximately 10,600 acres in the aggregate in close
  proximity to each other in Erath County, Texas, which permit us to drill and
  develop the Barnett Shale formation underlying that lease acreage. Our interest
  has been acquired pursuant to leases from the owners of the minerals covered
  by the leases.

The lease are generally for a primary term of three years
  and most of the leases contain an option to extend the leases for an additional
  two years by making a bonus payment to the mineral owners. In some cases, the
  leases limit our ability to drill deeper than the Barnett Shale formation. Almost
  all of the leases provide for surface damages to be paid in connection with
  drilling activities, and they contain other provisions that are customary for
  leases in the Fort Worth Basin.

Comanche County Property

We own 100% of the working interest under approximately 5,200
  contiguous acres in Comanche County, Texas, which permit us to drill and develop
  the Barnett Shale formation underlying the lease acreage. Our interest has been
  acquired pursuant to leases from owners of the minerals covered by the leases.
  The lease are generally for a primary term, of two years and most of the leases
  contain an option to extend the leases for an additional three years by making
  a bonus payment to the mineral owners. The leases also provide for surface damages
  to be paid in connection with drilling activities, and they contain other provisions
  that are customary for leases in the Fort Worth Basin.

Erath and Comanche Properties - Geology

Depositionally, Mississippian-age organic-rich shales are
  the reservoir for the Barnett Shale unconventional gas accumulation in the Fort
  Worth basin. The Barnett hydrocarbon system is one of the ten richest in the
  world, due to the massive organic matter deposited in this setting. This large,
  geologically continuous gas accumulation occupies a structurally low position
  straddling the basin axis. The accumulation is characterized by the presence
  of gas downdip from water saturated rocks, no obvious lithologic or structural
  barrier that separate the updip water and downdip gas, very low (microdarcy
  and nanodarcy level) matrix permeability, the importance of natural fractures
  for production, and the absence of truly dry holes.

The Barnett Shale in a number of counties lies unconformably
  on sedimentary rocks of Ordovician age (Ellenburger Group, Simpson Group, Viola
  limestone) and is comformably overlain by the Pennsylvanian Marble Falls formation.
  Regionally, the thickness of the Barnett Shale approaches 1,000 feet near the
  southwest fault boundary of the Southern Oklahoma aulacogen and thins to the
  southwest as it crops out along the flanks of the Llano uplift. Most vertical
  wells are completed in the lower part of the Barnett Shale with perforations
  in vertical wells typically spanning 200-300 feet. Most horizontal wells are

16

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completed with a horizontal leg of up to 3,000 feet or more
  using slotted liner technology and multi-stage fracture stimulation techniques.

The Barnett Shale, of North Texas, is similar to that of Black
  Shales in the U.S. of Devonian-Mississippian age that produce natural gas, such
  as the Antrim shale of the Michigan basin, New Albany shale of the Illinois
  basin, Woodford shale of the Anadarko basin, and "Devonian" shales of the Appalachian
  basin. These organic-rich shales are a storage site for absorbed gas. The organic
  matter in the shale contains approximately 60 standard cubic feet of natural
  gas/ton of reservoir rock, about 25% of the natural gas stored in the pore space.
  This gas is released (desorbed) as formation pressure is lowered and contributes
  to the long life of Barnett Shale gas wells.

ITEM 3. LEGAL PROCEEDINGS

We are not currently a party to any legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders, through
  the solicitation of proxies or otherwise, during the six month period ended
  June 30, 2005.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
  MATTERS

Market Information

Our common stock is quoted on the Over-the-Counter Bulletin
  Board under the symbol “TERX”.

As of August 12, 2005 we had 50,725,000 shares of our common
  stock outstanding, which shares were held by approximately 26 shareholders of
  record.

The following table sets forth the range of high and low closing
  bid quotations for our common stock since our common stock was listed on the
  Over-the-Counter Bulletin Board. The quotations represent inter-dealer prices
  without retail markup, markdown or commission, and may not necessarily represent
  actual transactions.

|Period                                              | High     | Low     
|--------------------------------------------------- | -------- | --------
|June 30, 2004                                       | $0.00(1) | $0.00(1)
|September 30, 2004                                  | $0.00(1) | $0.00(1)
|December 31, 2004                                   | $0.00(1) | $0.00(1)
|March 31, 2005                                      | $0.00(1) | $0.00(1)
|June 30, 2005                                       | $1.40    | $0.55   
|(1)There were no trades during these
      periods. |         

The Securities and Exchange Commission has adopted rules that
  regulate broker-dealer practices in connection with transactions in penny stocks.
  Penny stocks are generally equity securities with a price of less than $5.00,
  other than securities registered on certain national securities exchanges or
  quoted on the Nasdaq system, provided that current price and volume information
  with respect to transactions in such securities is provided by the exchange
  or system. The penny stock rules require a broker-dealer, prior to a transaction
  in a penny stock not otherwise exempt from those rules, deliver a standardized
  risk disclosure

17

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document prepared by the Commission, which: (a) contains a
  description of the nature and level of risk in the market for penny stocks in
  both public offerings and secondary trading; (b) contains a description of the
  broker's or dealer's duties to the customer and of the rights and remedies available
  to the customer with respect to a violation to such duties or other requirements
  of Securities' laws; (c) contains a brief, clear, narrative description of a
  dealer market, including bid and ask prices for penny stocks and significance
  of the spread between the bid and ask price; (d) contains a toll-free telephone
  number for inquiries on disciplinary actions; (e) defines significant terms
  in the disclosure document or in the conduct of trading in penny stocks; and
  (f) contains such other information and is in such form as the Commission shall
  require by rule or regulation. The broker-dealer also must provide, prior to
  effecting any transaction in a penny stock, the customer: (a) with bid and offer
  quotations for the penny stock; (b) the compensation of the broker-dealer and
  its salesperson in the transaction; (c) the number of shares to which such bid
  and ask prices apply, or other comparable information relating to the depth
  and liquidity of the market for such stock; and (d) monthly account statements
  showing the market value of each penny stock held in the customer's account.
  In addition, the penny stock rules require that prior to a transaction in a
  penny stock not otherwise exempt from those rules; the broker-dealer must make
  a special written determination that the penny stock is a suitable investment
  for the purchaser and receive the purchaser's written acknowledgment of the
  receipt of a risk disclosure statement, a written agreement to transactions
  involving penny stocks, and a signed and dated copy of a written suitably statement.

These disclosure requirements may have the effect of reducing
  the trading activity in the secondary market for our stock if it becomes subject
  to these penny stock rules. Therefore, if our common stock becomes subject to
  the penny stock rules, stockholders may have difficulty selling those securities.

Dividends

There are no restrictions in our articles of incorporation
  or bylaws that prevent us from declaring dividends. The Nevada Revised Statutes,
  however, do prohibit us from declaring dividends where, after giving effect
  to the distribution of the dividend:

1. We would not be able to pay our debts as they become due
  in the usual course of business; or

2. Our total assets would be less than the sum of our total
  liabilities plus the amount that would be needed to satisfy the rights of shareholders
  who have preferential rights superior to those receiving the distribution.

We have never declared or paid any cash dividends on our common
  stock. We currently intend to retain future earnings, if any, to finance the
  expansion of our business. As a result, we do not anticipate paying any cash
  dividends in the foreseeable future.

Securities Authorized for Issuance Under Equity Compensation
  Plans

The following table shows information with respect to each
  equity compensation plan under which our common stock is authorized for issuance
  as of the six month period ended June 30, 2005.

18

---

|Plan category                | Number of securities to be issued | Weighted average exercise | Number of securities
|---------------------------- | --------------------------------- | ------------------------- | --------------------
|                             | upon exercise of outstanding      | price of                  | remaining available 
|                             | options, warrants and rights      | outstanding options,      | for future issuance 
|                             |                                   | warrants and rights       |                     
|                             |                                   |                           |                     
|                             | (a)                               | (b)                       | (c)                 
|Equity compensation plans    | Nil                               | N/A                       | Nil                 
|approved by security holders |                                   |                           |                     
|                             |                                   |                           |                     
|Equity compensation plans    | Nil                               | N/A                       | Nil                 
|not approved by              |                                   |                           |                     
|security holders             |                                   |                           |                     
|                             |                                   |                           |                     
|Total                        | Nil                               |                           | Nil                 

As discussed in Item 1 under the caption “Management
  Group Stock Pool” members of our management have placed their 5,500,000
  shares of our common stock into escrow pursuant to the terms of a Management
  Stock Pool Agreement dated for reference June 7, 2005. The following table summarizes
  these shares.

|Shareholder         | Number of Shares
|------------------- | ----------------
|J. William Rhea, IV | 5,000,000       
|Bill Chester        | 500,000         
|Total:              | 5,500,000       

The Management Group Stock Pool has the following terms:

| | • | in the event that either Mr. Rhea or
        Mr. Chester resigns or is terminated for cause on or before December 31,
        2007, all of the shares held by the person resigning will be returned
        to the treasury without consideration;                                                                                                                                                                                           
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | • | 1/3 of their shares will be released
        from escrow if we achieve total proved reserves of not less than 3,515
        MMCF equivalent recoverable as at December 31, 2005 and an average MCF
        equivalent per day production rate for the thirty days immediately prior
        to December 31, 2005 of not less than 1,090 MCF equivalent per day;                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | • | 1/3 of their shares will be released
        from escrow if we achieve total proved reserves of not less than 36,700
        MMCF equivalent recoverable as at December 31, 2006 and an average MCF
        equivalent per day production rate for the thirty days immediately prior
        to December 31, 2006 of not less than 14,857 MCF equivalent per day;                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | • | 1/3 of their shares will be released
        from escrow if we achieve total proved reserves of not less than 65,875
        MMCF equivalent recoverable as at December 31, 2007 and an average MCF
        equivalent per day production rate for the thirty days immediately prior
        to December 31, 2007 of not less than 29,930 MCF equivalent per day;                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | • | any shares not previously released from
        escrow will be released from escrow if we achieve total proved reserves
        of not less than 109,791 MMCF equivalent recoverable as at December 31,
        2007 or March 31, 2008 and an average MCF equivalent per day production
        rate for the thirty days immediately prior to December 31, 2007 or March
        31, 2008 of not less than 49,882 MCF equivalent per day; and

19

---

| | • | any shares not released from escrow or
        returned to our treasury will be returned to our treasury without consideration
        thirty days after the filing of our interim statements for the three month
        period ended March 31, 2008 are filed with the Securities and Exchange
        Commission.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, all of the shares in escrow will be released
  from escrow in the event of a “Change of Control” of the Registrant.

ITEM 6. PLAN OF OPERATION

Forward-Looking Statements

The information in this registration statement contains forward-looking
  statements within the meaning of the Private Securities Litigation Reform Act
  of 1995. This Act provides a “safe harbor” for forward-looking statements
  to encourage companies to provide prospective information about themselves so
  long as they identify these statements as forward looking and provide meaningful
  cautionary statements identifying important factors that could cause actual
  results to differ from the projected results. All statements other than statements
  of historical fact made in this registration statement are forward looking.
  In particular, the statements herein regarding industry prospects and future
  results of operations or financial position are forward-looking statements.
  Forward-looking statements reflect management’s current expectations and
  are inherently uncertain. Our actual results may differ significantly from management’s
  expectations.

The following discussion and analysis should be read in conjunction
  with the financial statements included herewith. This discussion should not
  be construed to imply that the results discussed herein will necessarily continue
  into the future, or that any conclusion reached herein will necessarily be indicative
  of actual operating results in the future. Such discussion represents only the
  best present assessment of our management.

Plan of Operation

We are a growing independent oil and gas company that is focused
  primarily on drilling, developing and exploiting oil and gas properties in the
  Fort Worth Basin of Texas where the thickness of the Barnett Shale formation
  makes exploration for gas reserves feasible.

Assuming availability of drilling rigs and equipment, we intend
  to drill 24 wells on our properties in Erath and Comanche Counties, Texas during
  the next 12 months. In order to achieve this objective, we will need significant
  additional equity financing. If we are not able to obtain this financing, we
  will be required to significantly scale back our drilling program and this,
  in turn, could cause serious harm to our business, financial condition and results
  of operations.

Our competitive advantage is our in-house expertise and low
  internal overhead. We employ independent engineers and geologists to aid in
  evaluating the economic merits of drilling plans and potential acquisitions
  on an “as needed” basis. We believe that the incremental cost of
  hiring independent engineering firms justifies the expense because they provide
  a check and balance on our acquisition and development plans. Further, employing
  third party experts on a case-by-case basis enables us to maintain low operating
  expenses and adhere to our commitment to keep fixed costs low.

Liquidity and Capital Resources

There is limited historical financial information about our
  company upon which to base an evaluation of our performance. We are a development
  stage company and have not generated any revenues from

20

---

operations.

Our continued existence and plans for future growth depend
  on our ability to obtain the capital necessary to operate, through the generation
  of revenue and the issuance of additional debt or equity. We will need to raise
  additional capital to fund normal operating costs and exploration efforts. If
  we are not able to generate sufficient revenues and cash flows or obtain additional
  or alternative funding, we will be unable to continue as a going concern.

At June 30, 2005 we had cash of $16,614 and working capital
  of $38,184. Subsequent to June 30, 2005, on August 8, 2005 we accepted private
  placement subscriptions for 570,000 units at $10.00 per unit for gross proceeds
  to us of $5,700,000. Each Unit consisted of eight shares of our common stock
  (each a “Unit Share”) and four non-transferable share purchase warrants
  (each a “Unit Warrant”). Each Unit Warrant is exercisable into one
  share of our common stock (each a “Warrant Share”) at a price of
  $1.75 until February 8, 2007, subject to acceleration as follows: in the
  event that the average closing price of our shares common stock on the OTC:BB
  or other, more senior exchange for the twenty previous trading days exceeds
  $2.25, and provided that an effective registration statement registering
  the resale of the Warrant Shares is then in effect, we may, by written notice,
  accelerate the expiry date of the Unit Warrants to thirty days after the date
  of such notice

We believe that we currently have sufficient working capital
  to pay for the additional leases in Erath and Comanche Counties, Texas, for
  which we have committed and to pay our administrative and general operating
  expenses through October 31, 2005. We will need to obtain additional funds (presumably
  through equity offerings and/or debt borrowing) in order, if warranted, to fund
  our general and administrative expenses beyond October 31, 2005, and to implement
  the planned exploration and development program on our properties. Failure to
  obtain such additional financing will result in our inability to accelerate
  the planned exploration programs on our properties or to acquire additional
  properties.

We have no agreements or understandings with any person for
  additional financing.

Our oil and gas properties do not have any commercial production.
  We have no history of earnings or cash flow from our operations. While we may
  attempt to generate additional working capital through the operation, development,
  sale or possible joint venture development of our oil and gas properties, there
  is no assurance that any such activity will generate funds that will be available
  for operations.

We have not declared or paid dividends on our shares since
  incorporation and do not anticipate doing so in the foreseeable future.

Critical Accounting Policies

Oil and Gas Properties

We use the successful efforts method of accounting for oil
  and gas producing activities. Costs to acquire mineral interests in oil and
  gas properties, to drill and equip exploratory wells that find proved reserves,
  to drill and equip development wells and related asset retirement costs are
  capitalized. Costs to drill exploratory wells that do not find proved reserves,
  geological and geophysical costs, and costs of carrying and retaining unproved
  properties are expensed.

Unproved oil and gas properties that are individually significant
  are periodically assessed for impairment of value, and a loss is recognized
  at the time of impairment by providing an impairment allowance. Other unproved
  properties are amortized based on our experience of successful drilling and
  average holding

21

---

period. Capitalized costs of producing oil and gas properties,
  after considering estimated residual salvage values, are depreciated and depleted
  by the unit-of-production method. Support equipment and other property and equipment
  are depreciated over their estimated useful lives.

On the sale or retirement of a complete unit of a proved property,
  the cost and related accumulated depreciation, depletion, and amortization are
  eliminated from the property accounts, and the resultant gain or loss is recognized.
  On the retirement or sale of a partial unit of proved property, the cost is
  charged to accumulated depreciation, depletion, and amortization with a resulting
  gain or loss recognized in income.

On the sale of an entire interest in an unproved property
  for cash or cash equivalent, gain or loss on the sale is recognized, taking
  into consideration the amount of any recorded impairment if the property had
  been assessed individually. If a partial interest in an unproved property is
  sold, the amount received is treated as a reduction of the cost of the interest
  retained.

Through August 12, 2005, we have no producing properties.

ITEM 7. FINANCIAL STATEMENTS

|Auditors' Report for the six month period
      ended June 30, 2005                                                                                                                                                     | F-1
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---
|                                                                                                                                                                                                                        |    
|Auditors' Report for the years ended December
      31, 2004 and 2003                                                                                                                                                   | F-2
|                                                                                                                                                                                                                        |    
|Consolidated Balance Sheet as at June
      30, 2005                                                                                                                                                                    | F-3
|                                                                                                                                                                                                                        |    
|Consolidated Statements of Operations
      for the six month period ended June 30, 2005, the years ended December 31,
      2004 and 2003 and for the period from inception on October 17, 2000 to June
      30, 2005 | F-4
|                                                                                                                                                                                                                        |    
|Consolidated Statements of Stockholders'
      Equity for the period from inception on October 17, 2000 to June 30, 2005                                                                                                | F-5
|                                                                                                                                                                                                                        |    
|Consolidated Statements of Cash Flows
      for the six month period ended June 30, 2005, the years ended December 31,
      2004 and 2003 and for the period from inception on October 17, 2000 to June
      30, 2005 | F-6
|                                                                                                                                                                                                                        |    
|Notes to Consolidated Financial Statements                                                                                                                                                                              | F-7

22

---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders 
  Terax Energy, Inc. 
  (formerly Royal Phoenix) 
  (A Development Stage Company)
  Austin, Texas

We have audited the accompanying consolidated balance sheet
  of Terax Energy, Inc. as of June 30, 2005, and the related consolidated statements
  of operations, stockholders’ equity, and cash flows for the six-month
  period then ended. These financial statements are the responsibility of Terax’s
  management. Our responsibility is to express an opinion on these financial statements
  based on our audit.

We conducted our audit in accordance with 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. 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 financial statements referred to above
  present fairly, in all material respects, the financial position of Terax Energy,
  Inc. as of June 30, 2005, and the results of its operations and its cash flows
  for the periods described in conformity with accounting principles generally
  accepted in the United States of America.

August 5, 2005

*/s/ Malone & Bailey, PC*
  Malone & Bailey, PC 
  www.malone-bailey.com 
  Houston, Texas

F-1

---

|Beckstead and Watts, LLP     |                    
|---------------------------- | -------------------
|Certified Public Accountants |                    
|                             | 2425 Horizon Ridge 
|                             | Henderson, NV 89052
|                             | 702.257.1984       
|                             | 702.362.0540 (fax) 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
  FIRM

We have audited the accompanying statements of operations,
  stockholders' equity, and cash flows of Terax Energy, Inc., (formerly Royal
  Phoenix) (the "Company") (A Development Stage Company), for the periods ended
  December 31, 2004 and 2003 and from October 17, 2000 (Date of Inception) to
  December 31, 2004. These financial statements are the responsibility of the
  Company's management. Our responsibility is to express an opinion on these financial
  statements based on our audit.

We conducted our audits in accordance with the standards of
  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. 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 financial statements referred to above
  present fairly, in all material respects, the results of operations and cash
  flows of Terax Energy, Inc., (formerly Royal Phoenix) (A Development Stage Company)
  for the periods ended December 31, 2004 and 2003 and for the period October
  17, 2000 (Date of Inception) to December 31, 2004, in conformity with U.S. generally
  accepted accounting principles.

The accompanying financial statements have been prepared assuming
  the Company will continue as a going concern. The Company has had limited operations
  and have not commenced planned principal operations. This raises substantial
  doubt about its ability to continue as a going concern. Management's plan in
  regard to these matters are also described in Note 2. The financial statements
  do not include any adjustments that might result from the outcome of this uncertainty.

*/s/ Beckstead and Watts, LLP*
  Beckstead and Watts, LLP
  Las Vegas, NV

March 24, 2005

F-2

---

Terax Energy, Inc. 
  (formerly Royal Phoenix) 
  (a Development Stage Company) 
  Consolidated Balance Sheet

|                                                     |   | June 30,  |  
|---------------------------------------------------- | - | --------- | -
|                                                     |   | 2005      |  
|                                                     |   |           |  
|Assets                                               |   |           |  
|                                                     |   |           |  
|Current assets:                                      |   |           |  
|Cash                                                 | $ | 16,614    |  
|Prepaid Expenses                                     |   | 49,339    |  
|Total
      current assets                           |   | 65,953    |  
|                                                     |   |           |  
|Other assets:                                        |   |           |  
|Oil and gas properties –
      undeveloped           |   | 1,471,601 |  
|                                                     |   |           |  
|                                                     | $ | 1,537,554 |  
|                                                     |   |           |  
|Liabilities and Stockholders’ Equity                 |   |           |  
|                                                     |   |           |  
|Accrued expenses                                     | $ | 27,769    |  
|                                                     |   |           |  
|                                                     |   |           |  
|Stockholders’ Equity:                                |   |           |  
|Preferred stock, $0.001 par
      value, 5,000,000   |   | -         |  
|shares
      authorized, zero shares issued and      |   |           |  
|outstanding                                          |   |           |  
|Common stock, $0.001 par value,
      300,000,000    |   | 46,165    |  
|shares
      authorized, 46,165,000 shares issued    |   |           |  
|and
      outstanding                                |   |           |  
|Additional paid-in capital                           |   | 1,552,679 |  
|(Deficit) accumulated during development
      stage |   | (89,059   | )
|                                                     |   | 1,509,785 |  
|                                                     |   |           |  
|                                                     | $ | 1,537,554 |  

See accompanying summary of accounting policies and notes to
  consolidated financial statements.

F-3

---

Terax Energy, Inc. 
  (formerly Royal Phoenix) 
  (a Development Stage Company) 
  Consolidated Statements of Operations

|                                               |   |            |   |   |                    |   |   |             |   |   | October 17, |  
|---------------------------------------------- | - | ---------- | - | - | ------------------ | - | - | ----------- | - | - | ----------- | -
|                                               |   |            |   |   |                    |   |   |             |   |   | 2000        |  
|                                               |   | Six months |   |   | For the Year Ended |   |   | (Inception) |  
|                                               |   | ended      |   |   |                    |   |   |             |   |   | to          |  
|                                               |   | June 30,   |   |   | December 31,       |   |   | June 30,    |  
|                                               |   | 2005       |   |   | 2004               |   |   | 2003        |   |   | 2005        |  
|                                               |   |            |   |   |                    |   |   |             |   |   |             |  
|Revenue                                        | $ | -          |   | $ | -                  |   | $ | -           |   | $ | -           |  
|                                               |   |            |   |   |                    |   |   |             |   |   |             |  
|Expenses:                                      |   |            |   |   |                    |   |   |             |   |   |             |  
|General and administrative                     |   | 56,949     |   |   | 7,661              |   |   | 4,500       |   |   | 89,059      |  
|expenses                                       |   |            |   |   |                    |   |   |             |   |   |             |  
|                                               |   |            |   |   |                    |   |   |             |   |   |             |  
|Net (loss)                                     | $ | (56,949    | ) | $ | (7,661             | ) | $ | (4,500      | ) | $ | (89,059     | )
|                                               |   |            |   |   |                    |   |   |             |   |   |             |  
|Weighted average number of  common shares      |   |            |   |   |                    |   |   |             |   |   |             |  
|outstanding – basic and fully diluted          |   | 44,825,027 |   |   | 44,575,000         |   |   | 9,615,000   |   |   |             |  
|                                               |   |            |   |   |                    |   |   |             |   |   |             |  
|Net (loss) per share – basic and fully diluted | $ | 0.00       |   | $ | 0.00               |   | $ | 0.00        |   |   |             |  

See accompanying summary of accounting policies and notes to
  consolidated financial statements.

F-4

---

Terax Energy, Inc. 
  (formerly Royal Phoenix) 
  (a Development Stage Company)Consolidated Statements of Changes in Stockholders’ Equity

|                               |              |   |   |         |   |   |             |   |   | (Deficit)     |   |   |           |  
|------------------------------ | ------------ | - | - | ------- | - | - | ----------- | - | - | ------------- | - | - | --------- | -
|                               |              |   |   |         |   |   |             |   |   | Accumulated   |   |   |           |  
|                               |              |   |   |         |   |   | Additional  |   |   | During        |   |   | Total     |  
|                               | Common Stock |   |   | Paid-In |   |   | Development |   |   | Stockholders’ |  
|                               | Shares       |   |   | Amount  |   |   | Capital     |   |   | Stage         |   |   | Equity    |  
|                               |              |   |   |         |   |   |             |   |   |               |   |   |           |  
|October 17, 2000               |              |   |   |         |   |   |             |   |   |               |   |   |           |  
|Founders shares                | 1,500,000    |   | $ | 1,500   |   | $ | (1,200      | ) | $ | -             |   | $ | 300       |  
|                               |              |   |   |         |   |   |             |   |   |               |   |   |           |  
|October 18, 2000               |              |   |   |         |   |   |             |   |   |               |   |   |           |  
|Shares issued for services     | 37,500,000   |   |   | 37,500  |   |   | (30,000     | ) |   |               |   |   | 7,500     |  
|Shares issued for cash         | 37,500,000   |   |   | 37,500  |   |   | (30,000     | ) |   |               |   |   | 7,500     |  
|Shares issued for cash         | 30,000,000   |   |   | 30,000  |   |   | (24,000     | ) |   |               |   |   | 6,000     |  
|                               |              |   |   |         |   |   |             |   |   |               |   |   |           |  
|Net (losses)                   |              |   |   |         |   |   |             |   |   |               |   |   |           |  
|Year ended December 31, 2000   |              |   |   |         |   |   |             |   |   | (12,303       | ) |   | (12,303   | )
|                               |              |   |   |         |   |   |             |   |   |               |   |   |           |  
|Year ended December 31, 2001   |              |   |   |         |   |   |             |   |   | (6,090        | ) |   | (6,090    | )
|                               |              |   |   |         |   |   |             |   |   |               |   |   |           |  
|Year ended December 31, 2002   |              |   |   |         |   |   |             |   |   | (1,556        | ) |   | (1,556    | )
|                               |              |   |   |         |   |   |             |   |   |               |   |   |           |  
|Balances, December 31, 2002    | 106,500,000  |   |   | 106,500 |   |   | (85,200     | ) |   | (19,949       | ) |   | (1,351    | )
|                               |              |   |   |         |   |   |             |   |   |               |   |   |           |  
|July 18, 2003                  |              |   |   |         |   |   |             |   |   |               |   |   |           |  
|Shares issued for cash         | 37,500,000   |   |   | 37,500  |   |   | (12,500     | ) |   |               |   |   | 25,000    |  
|                               |              |   |   |         |   |   |             |   |   |               |   |   |           |  
|August 31, 2003                |              |   |   |         |   |   |             |   |   |               |   |   |           |  
|Shares issued for debt         | 225,000      |   |   | 225     |   |   | 1,275       |   |   |               |   |   | 1,500     |  
|conversion                     |              |   |   |         |   |   |             |   |   |               |   |   |           |  
|                               |              |   |   |         |   |   |             |   |   |               |   |   |           |  
|Net (loss)                     |              |   |   |         |   |   |             |   |   | (4,500        | ) |   | (4,500    | )
|                               |              |   |   |         |   |   |             |   |   |               |   |   |           |  
|Balances, December 31, 2003    | 144,225,000  |   |   | 144,225 |   |   | (96,425     | ) |   | (24,449       | ) |   | 23,351    |  
|                               |              |   |   |         |   |   |             |   |   |               |   |   |           |  
|Net (loss)                     |              |   |   |         |   |   |             |   |   | (7,661        | ) |   | (7,661    | )
|                               |              |   |   |         |   |   |             |   |   |               |   |   |           |  
|Balances, December 31, 2004    | 144,225,000  |   |   | 144,225 |   |   | (96,425     | ) |   | (32,110       | ) |   | 15,690    |  
|                               |              |   |   |         |   |   |             |   |   |               |   |   |           |  
|May 31, 2005                   |              |   |   |         |   |   |             |   |   |               |   |   |           |  
|Shares issued for asset        | 1,508,498    |   |   | 1,508   |   |   | 1,470,093   |   |   |               |   |   | 1,471,601 |  
|acquisition                    |              |   |   |         |   |   |             |   |   |               |   |   |           |  
|Shares issued for cash         | 81,502       |   |   | 82      |   |   | 79,361      |   |   |               |   |   | 79,443    |  
|                               |              |   |   |         |   |   |             |   |   |               |   |   |           |  
|June 13, 2005                  |              |   |   |         |   |   |             |   |   |               |   |   |           |  
|Shares rescinded per agreement | (99,650,000  | ) |   | (99,650 | ) |   | 99,650      |   |   |               |   |   | 0         |  
|                               |              |   |   |         |   |   |             |   |   |               |   |   |           |  
|Net (loss)                     |              |   |   |         |   |   |             |   |   | (56,949       | ) |   | (56,949   | )
|                               |              |   |   |         |   |   |             |   |   |               |   |   |           |  
|Balance, June 30, 2005         | 46,165,000   |   | $ | 46,165  |   | $ | 1,552,679   |   | $ | (89,059       | ) | $ | 1,509,785 |  

See accompanying summary of accounting policies and notes to
  consolidated financial statements.

F-5

---

Terax Energy, Inc. 
  (formerly Royal Phoenix) 
  (a Development Stage Company) 
  Consolidated Statements of Cash Flows

|                                          |   |           |   |   |              |   |   |        |   |   | October 17, 2000 |  
|----------------------------------------- | - | --------- | - | - | ------------ | - | - | ------ | - | - | ---------------- | -
|                                          |   |           |   |   |              |   |   |        |   |   | (Inception) to   |  
|                                          |   |           |   |   |              |   |   |        |   |   | June 30,         |  
|                                          |   | June 30,  |   |   | December 31, |   |   |        |  
|                                          |   | 2005      |   |   | 2004         |   |   | 2003   |   |   | 2005             |  
|                                          |   |           |   |   |              |   |   |        |   |   |                  |  
|Cash flows from operating activities      |   |           |   |   |              |   |   |        |   |   |                  |  
|Net (loss)                                | $ | (56,949   | ) | $ | (7,661       | ) | $ | (4,500 | ) | $ | (89,059          | )
|Shares issued for services                |   |           |   |   |              |   |   |        |   |   | 7,500            |  
|Adjustments to reconcile net income       |   |           |   |   |              |   |   |        |   |   |                  |  
|(loss) to net cash used by operating      |   |           |   |   |              |   |   |        |   |   |                  |  
|activities:                               |   |           |   |   |              |   |   |        |   |   |                  |  
|Changes in assets and liabilities:        |   |           |   |   |              |   |   |        |   |   |                  |  
|Prepaid expenses                          |   | (49,339   | ) |   |              |   |   |        |   |   | (49,339          | )
|Accrued expenses                          |   | 27,769    |   |   |              |   |   |        |   |   | 27,769           |  
|Net cash (used) by operating activities   |   | (78,519   | ) |   | (7,661       | ) |   | (4,500 | ) |   | (103,129         | )
|                                          |   |           |   |   |              |   |   |        |   |   |                  |  
|Cash flows from investing activities      |   |           |   |   |              |   |   |        |   |   |                  |  
|                                          |   |           |   |   |              |   |   |        |   |   |                  |  
|Cash flows from financing activities      |   |           |   |   |              |   |   |        |   |   |                  |  
|Debt conversion                           |   | -         |   |   | -            |   |   | 1,500  |   |   | 1,800            |  
|Issuance of common stock                  |   | 79,443    |   |   | -            |   |   | 25,000 |   |   | 38,500           |  
|Net cash provided by financing activities |   | 79,443    |   |   | -            |   |   | 26,500 |   |   | 40,300           |  
|                                          |   |           |   |   |              |   |   |        |   |   |                  |  
|Net (decrease) increase in cash           |   | 924       |   |   | (7,661       | ) |   | 22,000 |   |   | (62,829          | )
|Cash – beginning                          |   | 15,690    |   |   | 23,351       |   |   | 1,351  |   |   | -                |  
|Cash – ending                             | $ | 16,614    |   | $ | 15,690       |   | $ | 23,351 |   | $ | (62,829          | )
|                                          |   |           |   |   |              |   |   |        |   |   |                  |  
|Supplemental disclosures:                 |   |           |   |   |              |   |   |        |   |   |                  |  
|Interest paid                             | $ | -         |   | $ | -            |   | $ | -      |   | $ | -                |  
|Income taxes paid                         | $ | -         |   | $ | -            |   | $ | -      |   | $ | -                |  
|                                          |   |           |   |   |              |   |   |        |   |   |                  |  
|Non-cash investing transactions:          |   |           |   |   |              |   |   |        |   |   |                  |  
|Shares issued for oil and gas properties  | $ | 1,471,601 |   |   |              |   |   |        |   | $ | 1,471,601        |  

See accompanying summary of accounting policies and notes to
  consolidated financial statements.

F-6

---

Terax Energy, Inc. 
  (formerly Royal Phoenix) 
  (a Development Stage Company) 
  Notes to Consolidated Financial Statements

Note 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Terax was organized on October 17, 2000 in Nevada as Royal
  Phoenix. Royal Phoenix began activities to license, manufacture and distribute
  vitamin formulations. These activities ceased in 2001. On March 15, 2005, the
  Company changed its name to Terax Energy, Inc. Terax acquired 29 mineral leases
  in Erath County, Texas on May 31, 2005, and intends to explore and produce oil
  and gas. Terax had no business operations previously and is considered a development
  stage company.

Change in fiscal year

On August 4, 2005, Terax changed its fiscal year from December
  31 to June 30. Accordingly, Terax’s short period ended on June 30, 2005.

Use of estimates

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

Cash and cash equivalents

For the purpose of the statements of cash flows, all highly
  liquid investments with the maturity of three months or less are considered
  to be cash equivalents.

Oil and gas properties

Terax uses the successful efforts method of accounting for
  oil and gas producing activities. Costs to acquire mineral interests in oil
  and gas properties, to drill and equip exploratory wells that find proved reserves,
  to drill and equip development wells and related asset retirement costs are
  capitalized. Costs to drill exploratory wells that do not find proved reserves,
  geological and geophysical costs, and costs of carrying and retaining unproved
  properties are expensed.

Unproved oil and gas properties that are individually significant
  are periodically assessed for impairment of value, and a loss is recognized
  at the time of impairment by providing an impairment allowance. Other unproved
  properties are amortized based on Terax's experience of successful drilling
  and average holding period. Capitalized costs of producing oil and gas properties,
  after considering estimated residual salvage values, are depreciated and depleted
  by the unit-of-production method.* Support equipment and other property
  and equipment are depreciated over their estimated useful lives.

F-7

---

On the sale or retirement of a complete unit of a proved property,
  the cost and related accumulated depreciation, depletion, and amortization are
  eliminated from the property accounts, and the resultant gain or loss is recognized.
  On the retirement or sale of a partial unit of proved property, the cost is
  charged to accumulated depreciation, depletion, and amortization with a resulting
  gain or loss recognized in income.

On the sale of an entire interest in an unproved property
  for cash or cash equivalent, gain or loss on the sale is recognized, taking
  into consideration the amount of any recorded impairment if the property had
  been assessed individually. If a partial interest in an unproved property is
  sold, the amount received is treated as a reduction of the cost of the interest
  retained.

Through June 30, 2005, Terax had no producing properties.

Impairment of long-lived assets

Long-lived assets held and used by Terax are reviewed for
  possible impairment whenever events or circumstances indicate the carrying amount
  of an asset may not be recoverable or is impaired. No such impairments have
  been identified by management at June 30, 2005.

Income taxes.

Terax recognizes deferred tax assets and liabilities based
  on differences between the financial reporting and tax bases of assets and liabilities
  using the enacted tax rates and laws that are expected to be in effect when
  the differences are expected to be recovered. Terax provides a valuation allowance
  for deferred tax assets for which it does not consider realization of such assets
  to be more likely than not.

Loss per share

Basic and diluted net loss per share calculations are presented
  in accordance with Financial Accounting Standards Statement 128, and are calculated
  on the basis of the weighted average number of common shares outstanding during
  the year. They include the dilutive effect of common stock equivalents in years
  with net income. Basic and diluted loss per share is the same due to the absence
  of common stock equivalents.

New Accounting Standards

In December 2004, the FASB issued SFAS No. 123R, “Accounting
  for Stock-Based

Compensation” SFAS No. 123R establishes standards for
  the accounting for transactions in which an entity exchanges its equity instruments
  for goods or services. This Statement focuses primarily on accounting for transactions
  in which an entity obtains employee services in share-based payment transactions.
  SFAS No. 123R requires that the fair value of such equity instruments be recognized
  as expense in the historical financial statements as services are performed.
  Prior to SFAS No. 123R, only certain pro forma disclosures of fair value were
  required. SFAS No. 123R shall be effective for small business issuers as of
  the beginning of the first interim or annual reporting period that begins after
  December 15, 2005. The adoption of this new accounting pronouncement is not
  currently expected to have a material impact on the financial statements of
  Terax during fiscal 2006.

F-8

---

Note 2 - INCOME TAXES

The tax effects of temporary differences that give rise to
  significant portions of the deferred tax assets and deferred tax liabilities
  at December 31, 2004 are as follows:

|Deferred tax assets       |   |         |  
|------------------------- | - | ------- | -
|Net operating losses      | $ | 19,000  |  
|Less: valuation allowance |   | (19,000 | )
|                          |   |         |  
|Net deferred tax asset    | $ | 0       |  

Terax has no prior net operating loss carryforwards because
  of Internal Revenue Code Section 382 limitations following ownership changes
  as defined. Terax experienced such an ownership change on March 15, 2005. Available
  loss carryforwards since that date of $56,949 expire in the year ended June
  2025.

Note 3 – STOCKHOLDERS’ EQUITY

On September 29, 2004 and again June 13, 2005, Terax approved
  forward stock splits of 3 for 1 and 5 for 1, respectively. All references to
  the number of shares issued and outstanding have been retroactively restated
  to reflect the forward split.

On October 17, 2000, Terax issued 1,500,000 shares to an officer
  as founders’ shares.

On October 18, 2000, Terax issued 37,500,000 shares for services
  valued at $7,500, and sold 67,500,000 shares for $13,500.

During July 2003, Terax sold 37,500,000 shares for $25,000.

During August 2003, Terax issued to its sole officer and director
  225,000 shares for conversion of a $1,500 note payable.

On May 31, 2005, Terax purchased all of the outstanding shares
  of Erath Energy, Inc., which included 29 undeveloped oil and gas leases in Erath
  County Texas valued at $1,471,601 for 1,508,498 shares and issued another
  81,502 shares for $79,443. Erath had no prior operations except the acquisition
  of these leases during the period September 2004 through May 2005.

On June 13, 2005, Terax canceled 99,650,000 shares from an
  officer.

NOTE 4 – MANAGEMENT STOCK BONUS PLAN

On June 7, 2005, Terax created a senior management stock bonus
  plan entitled the

Management Group Stock Pool Agreement, with share issuances
  up to 5,500,000 shares based on performance.

F-9

---

NOTE 5 – SUBSEQUENT EVENTS

Subsequent to June 30, 2005, Terax accepted subscriptions
  for the sale of 570,000 units at a price of $10.00 per unit for gross proceeds
  of $5,700,000. Each unit consists of 8 shares of common stock and 4 warrants.

Subsequent to June 30, 2005, Terax acquired approximately
  5,200 additional gross acres of oil and gas leasehold interests in Erath and
  Comanche Counties, Texas.

F-10

---

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
  ACCOUNTING AND FINANCIAL DISCLOSURE

We have had no disagreements with our independent auditors
  on accounting or financial disclosures.

On August 4, 2005 we dismissed Beckstead and Watts, LLP as
  our independent public accountants, our board of directors having determined
  that it would be in our best interests to retain the services of an independent
  public auditor located in the State of Texas with experience with oil and gas
  companies.

Beckstead and Watts, LLP’sopinion in their reports
  on our financial statements for the years ended December 31, 2004 and 2003 expressed
  substantial doubt with respect to our ability, during those periods, to continue
  as a going concern.

During the years ended December 31, 2004 and 2003 Beckstead
  and Watts, LLPdid not issue any other report on our financial statements
  which contained any adverse opinion or disclaimer of opinion, or was qualified
  or modified as to uncertainty, audit scope or accounting principles. Furthermore,
  during the period from October 17, 2000 (date of incorporation) through December
  31, 2004, and the subsequent interim periods preceding August 4, 2005, there
  were no disagreements with Beckstead and Watts, LLPwithin the meaning
  of Instruction 4 to Item 304 of Regulation S-B under the Securities Exchange
  Act of 1934 on any matter of accounting principles or practices, financial statement
  disclosure, or auditing scope or procedure, which disagreements, if not resolved
  to the satisfaction of Beckstead and Watts, LLP, would have caused them to make
  reference in connection with their opinion to the subject matter of the disagreement
  in connection with any report they might have issued.

On August 4, 2005, our board of directors resolved to engage
  Malone & Bailey, PC, of Houston, Texas as our independent public accountants
  effective as at that date. We did not previously consult with Malone & Bailey,
  PC regarding any matter, including but not limited to:

| | • | the application of accounting principles to
      a specified transaction, either completed or proposed; or the type of audit
      opinion that might be rendered on our financial statements; or                                            
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                               
| | • | any matter that was either the subject matter
      of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-B and
      the related instructions) or a reportable event (as defined in Item 304(a)(1)(v)
      of Regulation S-B).

ITEM 8A. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management,
  including the Chief Executive Officer and Chief Financial Officer, we have evaluated
  the effectiveness of the design and operation of our disclosure controls and
  procedures pursuant to Exchange Act Rules 13a-14(c) and 15d-14(c) as of the
  end of the period covered by this report. Based on that evaluation, the Chief
  Executive Officer and Chief Financial Officer have concluded that these disclosure
  controls and procedures are effective. There were no changes in our internal
  control over financial reporting during the six month period ended June 30,
  2005 that have materially affected, or are reasonably likely to materially affect,
  our internal controls over financial reporting.

23

---

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
  PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Each of our directors is elected by stockholders to a term
  of one year and serves until his or her successor is elected and qualified.
  Each of our officers is elected by the board of directors to a term of one year
  and serves until his or her successor is duly elected and qualified, or until
  he is removed from office. The board of directors has no nominating, compensation
  or audit committees. We do not have an "audit committee financial expert" as
  defined in Item 401(e) of Regulation S-B. Our Board of Directors believes that
  attracting and retaining board members that could be classified as an "audit
  committee financial expert" is unlikely due to the high cost of such Director
  candidates.

The names, addresses, ages and positions of our present officers
  and directors are set forth below:

|Full Name and Address      | Age | Positions                    | Date Appointed Director
|-------------------------- | --- | ---------------------------- | -----------------------
|                           |     |                              |                        
|J. William Rhea, IV        | 52  | Chief Executive Officer and  | May 27, 2005           
|c/o 9600 Great Hills Trail |     | Director                     |                        
|Suite 150W, Austin         |     |                              |                        
|Texas 78759                |     |                              |                        
|                           |     |                              |                        
|Bill Chester               | 56  | Vice-President, Business     | March 22, 2005         
|c/o 9600 Great Hills Trail |     | Development, Chief           |                        
|Suite 150W, Austin         |     | Financial Officer, Secretary |                        
|Texas 78759                |     | and Director                 |                        

The persons named above have held their offices/positions
  since the date of appointment and are expected to hold their offices/positions
  until the next annual general meeting of our stockholders.

Background of Officers and Directors

J. William Rhea, IV, our Chief Executive Officer, has over
  30 years of business and petroleum engineering experience in all phases of the
  upstream exploration and production sector of the oil and gas industry, both
  domestically and internationally on four continents. Mr. Rhea has been a petroleum
  engineering consultant to the industry for many years and has served in senior
  management and chief executive roles in several independent oil and gas companies.
  Most recently, Mr. Rhea was the President and Chief Operating Officer of Truestar
  Petroleum Corp. (formerly Trinity Plumas Capital Corp.), a TSX Venture Exchange
  listed gas exploration and production company with assets in North and Central
  America. He was formerly President and Chief Executive Officer of APP Production,
  Inc., which acquired various oil and gas producing properties totaling US$85
  Million over a several-year period. Mr. Rhea is also deeply versed in exploration
  and has recently served as President and Chief Operating Officer of BF Production,
  Inc., which acquired exploration licenses for high-risk, high-potential exploration
  prospects in South Australia. Mr. Rhea additionally served as President and
  Chief Executive Officer of LAE Energy, Inc., a London, England based exploration
  venture that invested US$100 Million in Lower 48 States exploration opportunities.
  He also served as Managing Partner of TexStar Partners and TexStar North America,
  Inc., an independent oil and gas company engaged in exploration ventures, producing
  property acquisitions, and secondary recovery operations. Mr. Rhea earned a
  B.S. in Mechanical Engineering with Honors from the University of Texas at Austin
  and worked toward an MBA from the University of Texas, Permian Basin.

24

---

Bill Chester, our Vice-President, Business Development, Chief
  Financial Officer and Secretary, has over 25 years experience in the oil and
  gas, banking and real estate industries. Since 2000, Mr. Chester has been an
  independent consultant providing services to the oil and gas and real estate
  industries. From 1998 to 2000 Mr. Chester was Vice-President of Strategy One
  Solutions, a 3D seismic services company and from 1985 to 1997 Mr. Chester was
  President of Crestar Investments, an oil and gas exploration company. Mr. Chester
  received a Bachelor of Science Degree in 1971 from Lamar University and a Masters
  Degree form Stephen F. Austin State University in 1977.

Conflicts of Interest

We believe that all of our directors and officers may be subject
  to conflicts of interest. The conflicts of interest arise from their relationships
  in other mining companies and agreements with us.

ITEM 10. EXECUTIVE COMPENSATION

Compensation of Directors

Our directors have not been compensated for their services
  and there are no plans to compensate them in the near future until such time
  as we generate sufficient revenue to do so.

Executive Compensation - Summary Compensation Table

The following table sets forth information with respect to
  the total compensation paid or accrued by us for the six month period ended
  June 30, 2005 and the three years ended December 31, 2004 on behalf of each
  of our named executive officers.

SUMMARY COMPENSATION TABLE

|                        |         | ANNUAL  COMPENSATION | LONG TERM COMPENSATION |             
|----------------------- | ------- | -------------------- | ---------------------- | ------------
|                        |         |                      |                        |             
|Name and Principal      |         |                      |                        | Other       
|Position                | Year    | Salary               | Bonus                  | annual      
|                        |         | ($)                  | ($)                    | compensation
|                        |         |                      |                        | ($)         
|                        |         |                      |                        |             
|J. William Rhea IV (1)  | 2005(2) | $93,454              | $ -                    | $ -         
|Chief Executive Officer |         |                      |                        |             
|                        |         |                      |                        |             
|Bill Chester(3)         | 2005(2) | $7,500               | $ -                    | $ -         
|President               |         |                      |                        |             
|                        |         |                      |                        |             
|Joseph Wilson(4)        | 2005(2) | Nil                  |                        |             
|President               | 2004    | Nil                  | Nil                    | Nil         
|                        | 2003    | Nil                  |                        |             

| | (1) | Appointed Chief Executive Officer May 27, 2005.                        
| | --- | -----------------------------------------------------------------------
| | (2) | Six Month Period Ended June 30, 2005.                                  
| | (3) | Appointed President March 22, 2005. Resigned as President May 27, 2005.
| | (4) | Resigned as President March 22, 2005.                                  

During the six month period ended June 30, 2005, we paid Mr.
  Rhea $93,454. During the six month

25

---

period ended June 30, 2005, we paid Mr. Chester $7,500.

During the years ended December 31, 2004 and 2003, we did
  not pay any compensation to our named executive officers.

Employment Agreements with Executive Officers

We have entered into employment agreements with our officers
  or directors as follows:

| | • | On May 27, 2005 we entered into an Executive
        Employment Agreement with J. William Rhea, IV pursuant to which we agreed
        to employ Mr. Rhea as our Chief Executive Officer for a term of two years
        ending May 31, 2007. The Executive Employment Agreement was effective
        June 1, 2005. We also agreed to appoint Mr. Rhea to our board of directors.
        We have agreed to pay to Mr. Rhea a base salary of $275,000 per year
        during the term of his agreement. In addition, we have agreed to consider
        Mr. Rhea for an annual bonus (to be determined by our board of directors)
        of up to an additional $82,500 (to be paid in cash or common stock
        at Mr. Rhea’s election).
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | • | On June 7, 2005 we entered into an Employment
        Agreement with Bill Chester pursuant to which we agreed to employ Mr.
        Chester as our Vice President (Business Development) for a term of one
        year ending May 31, 2006. The Employment Agreement was effective June
        1, 2005. We have agreed to pay to Mr. Chester a base salary of $90,000
        per year during the term of his agreement. In addition, we have agreed
        to consider Mr. Chester for an annual bonus (to be determined by our board
        of directors).                                                                                                                                                                               

Compensation Committee

We do not have a formal Compensation Committee. Our Board
  of Directors will perform the functions of a Compensation Committee. Due to
  the lack of revenues and our development stage status, we deemed a Compensation
  Committee to not be necessary at this time.

Benefit Plans

We do not have a long-term incentive plan nor do we have a
  defined benefit, pension plan, profit sharing or other retirement plan.

Code of Ethics

We have adopted a Code of Ethics and Business Conduct for
  Officers, Directors and Employees, that applies to all of our officers, directors
  and employees. The Code of Ethics is filed as an exhibit to this Report on Form
  10-KSB.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
  AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth, as at August 12, 2005, the
  total number of shares owned beneficially by the present owners of 5% or more
  of our total outstanding shares. Unless otherwise stated, the stockholders listed
  below have direct ownership of their shares and possess sole voting and dispositive
  power with respect to their shares:

26

---

The persons named below may be deemed to be a parent and promoter
  of our company within the meaning of such terms under the Securities Act, as
  amended, by virtue of his/its direct and indirect stock holdings. Mr. Rhea is
  the only promoter of our company.

|Title of Class | Name and Address of        | Amount and Nature of    | Percent of Class
|-------------- | -------------------------- | ----------------------- | ----------------
|               | Beneficial Owner           | Beneficial Ownership    |                 
|Common Stock   | J. William Rhea, IV        | 5,000,000 Common Shares | 9.86%           
|               | c/o 9600 Great Hills Trail | Direct                  |                 
|               | Suite 150W, Austin         |                         |                 
|               | Texas 78759                |                         |                 

The following table sets forth, as at August 12, 2005, the
  total number of shares owned beneficially by each of our directors, officers
  and key employees, individually and as a group. Unless otherwise stated, the
  stockholders listed below have direct ownership of their shares and possess
  sole voting and dispositive power with respect to their shares:

|Title of Class | Name and Address of        | Amount and Nature of    | Percent of Class
|-------------- | -------------------------- | ----------------------- | ----------------
|               | Beneficial Owner           | Beneficial Ownership    |                 
|Common Stock   | J. William Rhea, IV        | 5,000,000 Common Shares | 9.86%           
|               | c/o 9600 Great Hills Trail | Direct                  |                 
|               | Suite 150W, Austin         |                         |                 
|               | Texas 78759                |                         |                 
|Common Stock   | Bill Chester               | 500,000 Common Shares   | 0.99%           
|               | c/o 9600 Great Hills Trail | Direct                  |                 
|               | Suite 150W, Austin         |                         |                 
|               | Texas 78759                |                         |                 
|Common Stock   | All Officers and           | 5,500,000 Common Shares | 10.84%          
|               | Directors, as a group      |                         |                 

Except as otherwise noted, it is believed that all persons
  have full voting and investment power with respect to the shares indicated.
  Under the rules of the Securities and Exchange Commission, a person (or group
  of persons) is deemed to be a beneficial owner of a security if he or she, directly
  or indirectly, has or shares the power to vote or to direct the voting of such
  security, or the power to dispose of or to direct the disposition of such security.
  Accordingly, more than one person may be deemed to be a beneficial owner of
  the same security. A person is also deemed to be a beneficial owner of any security,
  which that person has the right to acquire within 60 days, such as options or
  warrants to purchase our Common Stock.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Except as disclosed below, none of the following parties has
  in the last two fiscal years had any material interest, direct or indirect,
  in any transaction with us or in any presently proposed transaction that has
  or will materially affect us:

| | • | Any of our directors or officers;                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | • | Any person proposed as a nominee for
        election as a director;                                                                                                            
| | • | Any person who beneficially owns, directly
        or indirectly, shares carrying more than 10% of the voting rights
        attached to our outstanding shares of common stock;
| | • | Any of our promoters; or                                                                                                                                                        
| | • | Any relative or spouse of any of the
        foregoing persons who has the same house as such person.                                                                           

27

---

On June 1, 2005, we acquired all of the issued and outstanding
  securities of Erath Energy Inc. from Holywell Technological Investments Ltd.
  and First Finance Limited. Bill Chester, one of our directors, was also a director
  of Erath Energy Inc. The particulars of this transaction are described under
  the heading “Description of Business”, above.

ITEM 13. EXHIBITS

|Exhibit No. | Document Description                                                                                                                                                  
|----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |                                                                                                                                                                       
|3.1(1)      | Articles
        of Incorporation                                                                                                                                     
|            |                                                                                                                                                                       
|3.1.1(2)    | Certificate
        of Change                                                                                                                                         
|            |                                                                                                                                                                       
|3.1.2(3)    | Certificate
        of Name Change                                                                                                                                    
|            |                                                                                                                                                                       
|3.1.3(4)    | Certificate
        of Change                                                                                                                                         
|            |                                                                                                                                                                       
|3.1.4       | Certificate of Correction                                                                                                                                             
|            |                                                                                                                                                                       
|3.2(1)      | Bylaws                                                                                                                                                                
|            |                                                                                                                                                                       
|4.1         | Specimen Stock Certificate                                                                                                                                            
|            |                                                                                                                                                                       
|4.2         | Specimen Warrant Certificated dated August 8, 2005.                                                                                                                   
|            |                                                                                                                                                                       
|10.1(1)     | Separation
        and Distribution Agreement dated October 18, 2001, between Desert Health
        Products, Inc. and Royal Phoenix                                  
|            |                                                                                                                                                                       
|10.2(1)     | License,
        Manufacture and Distribution Agreement                                                                                                               
|            |                                                                                                                                                                       
|10.3(1)     | Addendum
        to Separation and Distribution Agreement                                                                                                             
|            |                                                                                                                                                                       
|10.4(5)     | Stock
        Purchase Agreement dated May 31, 2005 between Terax Energy, Inc., Holywell
        Technological Investments Ltd. and First Finance Limited.            
|            |                                                                                                                                                                       
|10.5        | Executive Employment Agreement between Terax Energy, Inc. and J. William
        Rhea, IV dated May 27, 2005.                                                         
|            |                                                                                                                                                                       
|10.6        | Executive Employment Agreement between Terax Energy, Inc. and Bill Chester
        dated June 7, 2005.                                                                
|            |                                                                                                                                                                       
|10.7(4)     | Management
        Group Stock Pool Agreement between Terax Energy, Inc., J. William Rhea,
        IV and Bill Chester dated for reference June 7, 2005.              
|            |                                                                                                                                                                       
|10.8        | Form of Subscription Agreement dated for reference June 13, 2005.                                                                                                     
|            |                                                                                                                                                                       
|21.1        | Subsidiaries
      of Terax Energy, Inc.                                                                                                                              
|            |                                                                                                                                                                       
|31.1        | Certification of Principal Executive Officer Pursuant to Section 302 of
        the Sarbanes-Oxley Act of 2002.                                                       
|            |                                                                                                                                                                       
|31.2        | Certification of Principal Financial Officer Pursuant to Section 302 of
        the Sarbanes-Oxley Act of 2002.                                                       
|            |                                                                                                                                                                       
|32.1        | Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section
        1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
        of 2002.
|            |                                                                                                                                                                       
|32.2        | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section
        1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
        of 2002.
|            |                                                                                                                                                                       
|99.1        | Code of Ethics and Business Conduct of Officers, Directors and Employees.                                                                                             

|(1) | Incorporated by reference to same exhibit filed
        with the Company’s Form SB-2 filed with the SEC on October 26, 2001,
        SEC File No, 333-72230.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Incorporated by reference to same exhibit filed
        with the Company’s Form 8-K filed with the SEC on October 22, 2004,
        SEC File No, 333-72230. 
|(3) | Incorporated by reference to same exhibit filed
        with the Company’s Form 8-K filed with the SEC on March 28, 2005,
        SEC File No, 333-72230.   
|(4) | Incorporated by reference to same exhibit filed
        with the Company’s Form 8-K filed with the SEC on June 9, 2005,
        SEC File No, 333-72230.     
|(5) | Incorporated by reference to same exhibit filed
        with the Company’s Form 8-K filed with the SEC on June 2, 2005,
        SEC File No, 333-72230.     

28

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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The Company's board of directors reviews and approves audit
  and permissible non-audit services performed by Malone & Bailey, PC, as
  well as the fees charged by Malone & Bailey, PC for such services. In its
  review of non-audit service fees and its appointment of Malone & Bailey,
  PC as the Company's independent accountants, the board of directors considered
  whether the provision of such services is compatible with maintaining Malone
  & Bailey, PC 's independence. All of the services provided and fees charged
  by Malone & Bailey, PC in 2005 were pre-approved by the board of directors.

Audit Fees

The aggregate fees billed for professional services rendered
  by Malone & Bailey, PC for the audit of our financial statements for the
  six month period ended June 30, 2005 are $5,000, and the aggregate feels
  billed by our predecessor auditors Beckstead and Watts for the year ended June
  30, 2004 were $4,250.

Audit-Related, Tax and Other Fees

There were no other fees billed by Malone & Bailey, PC
  or Beckstead and Watts for 2005 or 2004.

29

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SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act,
  the registrant caused this report to be signed on its behalf by the undersigned,
  thereunto duly authorized.

TERAX ENERGY, INC.

|By: | /s/ J. William Rhea, IV                                                       
|--- | ------------------------------------------------------------------------------
|    | J. William Rhea, IV                                                           
|    | Chief Executive Officer (Principal Executive Officer)                         
|    | Date: August 17, 2005                                                         
|    |                                                                               
|By: | /s/ Bill Chester                                                              
|    | Bill Chester                                                                  
|    | Treasurer (Principal Financial Officer and Principal Accounting
      Officer)
|    | Date: August 17, 2005                                                         

In accordance with the Exchange Act, this report has been
  signed below by the following persons on behalf of the registrant and in the
  capacities and on the dates indicated.

|By | /s/ J. William Rhea, IV
|-- | -----------------------
|   | J. William Rhea, IV    
|   | Director               
|   | Date: August 17, 2005  
|   |                        
|By | /s/ Bill Chester       
|   | Bill Chester           
|   | Director               
|   | Date: August 17, 2005  

30

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