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MASTER COMPROMISE AND SETTLEMENT AGREEMENT

This Master Compromise and
Settlement Agreement (Agreement) is entered into by and between J. WILLIAM
RHEA, IV (Rhea), on the one hand, and TERAX ENERGY, INC., PHILLIP A. WYLIE,
ANDREW HROMYK, ERIC BOEHNKE, JOHN W. LEGG, and BILLY WAYNE CHESTER (collectively
the Defendants), on the other hand, in order to settle all existing disputes
between them. Rhea and the Defendants, who will be referred to hereinafter
sometimes collectively as the Parties, hereby stipulate and agree as
follows:     WHEREAS, Rhea is a former officer
and director of TERAX ENERGY, INC. who filed the lawsuit styled J. William
Rhea, IV v. Terax Energy, Inc., Phillip A. Wylie, Andrew Hromyk, Eric Boehnke,
John W. Legg, and Billy Wayne Chester, Cause No. GN5-04014, in the District
Court of Travis County, Texas, 345th Judicial District (the
Lawsuit), seeking money damages and injunctive relief against the
Defendants.

WHEREAS, the Defendants deny the
claims and allegations made by Rhea in the Lawsuit and any liability or
wrongdoing in connection with said claims and allegations.

WHEREAS, Terax Energy, Inc. has
filed counterclaims in the Lawsuit seeking money damages and injunctive relief
against Rhea.

WHEREAS, Rhea denies the claims
and allegations made by Terax Energy, Inc. in the Lawsuit and any liability or
wrongdoing in connection with said claims and allegations.

WHEREAS, Rhea has further filed
one additional complaint against Terax Energy, Inc. with the United States
Department of Labor-OSHA pursuant to Section 806 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. §1514A (the DOL Complaint).

WHEREAS, Terax Energy, Inc.
denies the claims and allegations made by Rhea in the DOL Complaint and any
liability or wrongdoing in connection with said claims and allegations.

WHEREAS, Rhea represents and
warrants that he has filed no other claims, lawsuits, petitions, complaints,
reports, charges, or grievances against any of the Defendants with any court,
tribunal, arbitration association, regulatory body, or government agency or
department, in the United States or

MASTER COMPROMISE AND SETTLEMENT
AGREEMENT--PAGE 1

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abroad (except as identified in Exhibit C hereto), and
acknowledges that Defendants are entering into this Agreement in reliance on
this representation and warranty and the representations and warranties set
forth in Paragraphs 9 and 14 below and in Exhibit C hereto.

WHEREAS, the Defendants represent
and warrant that they have filed no other claims, lawsuits, petitions,
complaints, reports, charges, or grievances against Rhea with any court,
tribunal, arbitration association, regulatory body, or government agency or
department, in the United States or abroad, and acknowledge that Rhea is
entering into this Agreement in reliance on this representation and warranty and
the representation and warranty set forth in Paragraphs 9 and 14 below.

WHEREAS, in order to avoid the
uncertainty and expense of litigation, and without admitting any responsibility
or liability for any claims or allegations asserted against them, the Parties
desire to settle and compromise their respective claims.

NOW THEREFORE, for and in
consideration of the mutual covenants, conditions, and agreements set forth
herein, the sufficiency of which is hereby acknowledged by all Parties, the
Parties hereto agree as follows:

1. Cash Payment to Rhea.On account of compensation due to Rhea under the terms of his employment
with Terax Energy, Inc., and other consideration, Terax Energy, Inc. hereby
agrees to pay Rhea cash in the total gross amount of $800,000 (the Cash
Payment). The Cash Payment shall be paid by wire transfer to the account number
identified in Exhibit A hereto, and subject to withholding as identified in
Exhibit A hereto. Terax Energy, Inc. shall seek no recourse against any of the
other Defendants for this payment. Such wire transfer shall be effectuated on or
before 5:00 P.M., February 3, 2006.

2. Share Delivery to Rhea and
Return of Shares to Terax Energy, Inc.Terax Energy, Inc. agrees to release
800,000 shares of common stock of Terax Energy, Inc. to Rhea, which shares shall
be subject to and governed by the restrictions set forth in Paragraph 3 below.
The 800,000 shares that will be released to Rhea are currently in Rheas name
and are being held by Phillip A. Wylie, Escrow Agent, pursuant to the Management
Stock Pool Agreement executed by Rhea on June 7, 2005. Rhea agrees to

MASTER COMPROMISE AND SETTLEMENT
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release and relinquish all claims of ownership (whether actual,
beneficial, or otherwise) to the remaining 4,200,000 shares of common stock of
Terax Energy, Inc. currently in the management stock pool, and agrees to return
such shares to the company treasury. Terax Energy, Inc. and Rhea, moreover,
hereby agree to terminate the Management Stock Pool Agreement. Additionally,
Rhea shall execute and deliver to Terax Energy, Inc. all documents necessary to
issue the certificate representing the 800,000 shares to be released to Rhea and
to return to the treasury of Terax Energy, Inc. the remaining 4,200,000 shares
of Terax Energy, Inc. common stock that are currently in Rheas name and that
are being held pursuant to the Management Stock Pool Agreement. These documents
include, but are not limited to, letters of direction and stock powers of
attorney (if required). The Parties obligations under this paragraph shall be
performed on or before 5:00 P.M., February 3, 2006.

3. Restrictions on Resale.The
  800,000 shares of Terax Energy, Inc. common stock to be released to Rhea pursuant
  to Paragraph 2 shall, in addition to all restrictions imposed by law or regulation,
  be subject to further restriction as follows:

|Date on and after **Which** **Resale**
      Allowed | Number of Shares Allowed for Resale
|---------------------------------------------------- | -----------------------------------
|June
      30, 2006                                  | 50,000                             
|                                                     |                                    
|September
      30, 2006                             | 100,000                            
|                                                     |                                    
|December 31, 2006                                    | 200,000                            
|                                                     |                                    
|March 31, 2007                                       | 200,000                            
|                                                     |                                    
|June 30, 2007                                        | 200,000                            
|                                                     |                                    
|September 31, 2007                                   | 50,000                             
|                                                     |                                    

Rhea shall not sell, pledge, hypothecate, transfer, or assign
any of the 800,000 shares before the dates specified above, and shall not sell,
pledge, hypothecate, transfer, or assign any shares beyond the amount

MASTER COMPROMISE AND SETTLEMENT
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allowed, as indicated above.1 Moreover, Rhea shall not maintain
or facilitate a short position in any common stock of Terax Energy, Inc.
Additionally, Rhea agrees not to sell, pledge, hypothecate, transfer, or assign
in any calendar quarter more than 200,000 shares of the 800,000 shares to be
released to Rhea. Rhea further agrees that the certificates representing the
800,000 shares shall bear the following legends:



> THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
>   ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR UNDER THE PROVISIONS OF ANY APPLICABLE
>   STATE SECURITIES LAWS, BUT HAVE BEEN ACQUIRED BY THE REGISTERED HOLDER HEREOF
>   FOR PURPOSES OF INVESTMENT AND IN RELIANCE ON STATUTORY EXEMPTIONS UNDER THE
>   1933 ACT, AND UNDER ANY APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES MAY
>   NOT BE SOLD, PLEDGED, HYPOTHECATED, TRANSFERRED OR ASSIGNED EXCEPT IN A TRANSACTION
>   WHICH IS EXEMPT UNDER PROVISIONS OF THE 1933 ACT AND ANY APPLICABLE STATE SECURITIES
>   LAWS OR PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT; AND IN THE CASE OF
>   AN EXEMPTION, ONLY IF THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY
>   TO THE COMPANY THAT SUCH TRANSACTION DOES NOT REQUIRE REGISTRATION OF THESE
>   SECURITIES.
>   AND
> THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE
> SOLD, PLEDGED, HYPOTHECATED, TRANSFERRED OR ASSIGNED BY THE HOLDER UNTIL [INSERT
> DATES FROM TABLE ABOVE], AFTER WHICH THIS RESTRICTION SHALL BE OF NO FURTHER
> FORCE OR EFFECT.

In the event of a Change of Control (as hereinafter defined)
  and upon written request by Rhea and the delivery by Rhea to Terax Energy, Inc.
  of the certificates representing the 800,000 shares (or such of the 800,000
  shares as are still owned by Rhea) together with appropriate stock powers of
  attorney, medallion guaranteed, Terax Energy, Inc. agrees to remove the restrictions
  provided in this Paragraph 3 (other than restrictions imposed by law or regulation).
  For the purposes of this Paragraph 3, "Change of Control" means: 
       (i) The acquisition by any individual, entity
  or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
  Exchange Act of 1934, as amended (the "Exchange Act")) of beneficial ownership
  (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50%
  or more of the then outstanding shares of common stock of Terax Energy, Inc.
  (the "Outstanding Company Common Stock"); provided, however, that the following
  acquisitions shall not constitute a Change of Control: (i) any acquisition directly
  from Terax Energy, Inc., (ii) any acquisition by Terax Energy, Inc., (iii) any
  acquisition by any employee benefit plan (or related trust) sponsored or maintained
  by Terax

1 By way of example only, the maximum total sales of shares by
Rhea during the period between June 30, 2006 and December 30, 2006 are 150,000,
meaning 50,000 after June 30, 2006, plus 100,000 after September 30, 2006.

MASTER COMPROMISE AND SETTLEMENT
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Energy, Inc. or any corporation controlled by Terax Energy,
Inc., or (iv) any acquisition by any corporation pursuant to a transaction which
complies with the following clause (ii); or

(ii) The approval by the
shareholders of Terax Energy, Inc. of a reorganization, merger, share exchange
or consolidation (a "Business Combination"), in each case, unless, following
such Business Combination, all or substantially all of the individuals and
entities who were the beneficial owners of the Outstanding Company Common Stock
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 50% of the then outstanding shares of common stock of the
corporation resulting from such Business Combination (including, without
limitation, a corporation which as a result of such transaction owns Terax
Energy, Inc. through one or more subsidiaries);
or      (iii) The approval by the
shareholders of Terax Energy, Inc. of (i) a complete liquidation or dissolution
of Terax Energy, Inc., or (ii) the sale or other disposition of all or
substantially all of the assets of Terax Energy, Inc. (other than dispositions
of undeveloped acreage) unless, following such sale or other disposition more
than 50% of the then outstanding shares of common stock of such corporation is
then beneficially owned, directly or indirectly, by all or substantially all of
the individuals and entities who were the beneficial owners of the Outstanding
Company Common Stock immediately prior to such sale or other disposition.

4. Release by Defendants.
The Defendants, their predecessors, successors and assigns, heirs, executors,
administrators, legal representatives, employees, shareholders, directors,
officers, employees, parent or subsidiary organizations, affiliates, owners,
agents, trustees, and attorneys, hereby release and forever discharge (except
for the obligations created in this Agreement) Rhea, his predecessors,
successors and assigns, heirs, insurers, executors, administrators, legal
representatives, employees, shareholders, directors, officers, employees, parent
or subsidiary organizations, affiliates, owners, agents, trustees, and attorneys
from and against any and all claims, counterclaims, suits, demands, or causes of
action under contract, in tort, by statute, constitution or otherwise, whether
known or unknown, that were or could have been raised against Rhea for any
reason whatsoever. This includes, but is not limited to, all claims relating to
or arising from Rheas employment with Terax Energy, Inc. or

MASTER COMPROMISE AND SETTLEMENT
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his relationship with the Defendants.

5. Release by Rhea. Rhea,
his predecessors, successors and assigns, heirs, executors, administrators,
legal representatives, employees, shareholders, directors, officers, employees,
parent or subsidiary organizations, affiliates, owners, agents, trustees, and
attorneys, hereby release and forever discharge (except for the obligations
created in this Agreement) the Defendants, their predecessors, successors and
assigns, heirs, insurers, executors, administrators, legal representatives,
employees, shareholders, directors, officers, employees, parent or subsidiary
organizations, affiliates, owners, agents, trustees, and attorneys from and
against any and all claims, counterclaims, suits, demands, or causes of action
under contract, in tort, by statute, constitution or otherwise, whether known or
unknown, that were or could have been raised against any of the Defendants for
any reason whatsoever. This includes, but is not limited to, any claim under the
Age Discrimination in Employment Act (ADEA) and all claims relating to or
arising from Rheas employment with Terax Energy, Inc. or his relationship with
the Defendants.

6. Dismissal of Lawsuit with
Prejudice.Rhea agrees to dismiss all claims that he has made in the Lawsuit
with prejudice to refiling same. This includes, but is not limited to, any claim
under the ADEA that was made in the Lawsuit. Furthermore, Terax Energy, Inc.
agrees to dismiss all claims that it has made in the Lawsuit with prejudice to
refiling same. Within ten (10) days of the delivery of the amount set forth in
Paragraph 1 herein, both Rhea and Terax Energy, Inc. shall file notices of
non-suit with prejudice, dismissing their respective claims in the Lawsuit, and
shall request an order from the court dismissing their respective claims with
prejudice.

7. Withdrawal of DOL
Complaint.Rhea agrees to notify the United States Department of Labor-OSHA
in writing of his desire to withdraw and dismiss his DOL Complaint. Rhea shall
deliver to the United States Department of Labor-OSHA an executed copy of the
Agreement to Withdraw and Dismiss DOL Complaint attached hereto as Exhibit B,
which Rhea shall execute and deliver to Daniel R. Smith, 111 Congress, Suite
1400, Austin, Texas on or before the date the amount set forth in Paragraph 1 is
delivered. The Agreement to Withdraw and Dismiss DOL Complaint is subject to
this Agreement

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and does not limit the terms of this Agreement. The Agreement
to Withdraw and Dismiss DOL Complaint shall be specifically delivered to Mr.
Anthony Incristi, Whistleblower Investigator, United States Department of
Labor-OSHA, Austin Area OSHA Office, 1033 La Posada Drive, Suite 375, Austin,
Texas 78752, by verifiable means, within three (3) business days from the date
of delivery of the amount set forth in Paragraph 1 herein, and shall be
simultaneously delivered to Daniel R. Smith, Brown McCarroll, L.L.P., 111
Congress, Suite 1400, Austin, Texas 78701, as counsel for Terax Energy, Inc.
Rhea shall also perform any other acts required or suggested by the United
States Department of Labor-OSHA to have his DOL Complaint withdrawn or
dismissed. Rhea further agrees not to further file, assert, or initiate (or
cause to be filed, asserted, or initiated) any other claims, complaints,
reports, charges, or allegations with the United States Department of Labor-OSHA
or any other regulatory body or government authority, agency or department,
whether in the United States or abroad, relating to or involving the Defendants,
their predecessors, successors and assigns, heirs, insurers, executors,
administrators, legal representatives, shareholders, directors, officers,
employees, parent or subsidiary organizations, affiliates, owners, agents,
trustees, and attorneys.

8. Return of Property.
Rhea agrees to return all property currently in his possession, custody, and
control that belongs to the Defendants. Such property includes without
limitation any computer hardware and software, telephones, personal data
assistants, accessories, documents, files, paperwork and other records. Rhea
shall maintain no copies, whether in paper or electronic form, of any documents,
files, paperwork, or other records of Terax Energy, Inc. Rhea shall return this
property by hand delivering it to Daniel R. Smith at Brown McCarroll, L.L.P.,
111 Congress Ave., Suite 1400, Austin, Texas within three (3) business days from
the date of delivery of the amount set forth in Paragraph 1 herein. Similarly,
the Defendants agree to return all personal telephone and bank records relating
to Rhea currently in their possession, custody, and control that belong to Rhea.
The Defendants shall maintain no copies, whether in paper or electronic form, of
these records. However, the Defendants are not required to permanently remove
such records from their respective computer systems, but rather must return only
paper copies of the records. The Defendants shall return these records by hand

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delivering them to Kirk W. Evans at Cotham, Harwell &
Evans, P.C., 1616 S. Voss, Suite 200, Houston, Texas within three (3) business
days from the date of delivery of the amount set forth in Paragraph 1 herein.

9. Ownership of Claims.
Each Party represents and warrants that they have not assigned their rights or
claims herein released to any other person, company, or entity. Provided,
however, that this paragraph shall not be deemed to include any contingent
interest that Rhea may have assigned to Kirk Evans or his law firm as part of an
attorney fee arrangement. Rhea warrants and represents that he has no
contractual or other obligation with any attorneys aside from Kirk Evans and his
law firm regarding the representation of Rhea in any disputes made the subject
of this Agreement.

10. Confidentiality. The
Parties agree to execute the Confidentiality Agreement attached hereto as
Exhibit C. Rhea shall execute and deliver the Confidentiality Agreement to
Daniel R. Smith at Brown McCarroll, L.L.P., 111 Congress, Suite 1400, Austin,
Texas on or before the date the amount set forth in Paragraph 1 is delivered.
The Defendants shall execute and deliver the Confidentiality Agreement to Kirk
W. Evans at Cotham, Harwell & Evans, P.C., 1616 S. Voss, Suite 200, Houston,
Texas on or before the amount set forth in Paragraph 1 is delivered.

11. Injunction.The
Parties agree that money damages would not be a sufficient remedy for any breach
of Paragraphs 3 and 8 of this Agreement, and that in addition to other remedies,
each offended Party may be entitled to specific performance and injunctive or
other equitable relief to enforce such Paragraphs.

12. Non-Admission. All
Parties acknowledge that this Agreement does not constitute an admission by any
Party of any liability whatsoever, but results from the Parties desire to
expeditiously resolve disputed issues of fact and law, and further acknowledge
that the Parties deny all allegations of violation of any law, statute,
ordinance, insurance, regulation, common law, tort or contract. By this
Agreement, the Parties are compromising claims that they dispute in good
faith.

13. No Reliance.Rhea has
not relied upon any representation, express or implied, made by Defendants or
any of their attorneys, agents or representatives, as to the tax consequences of
the

MASTER COMPROMISE AND SETTLEMENT
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consideration paid pursuant to this Agreement. Rhea releases Defendants from any and all liability in connection with any such tax consequences. Rhea shall be responsible for any and all taxes that, as a result of this Agreement, Rhea may owe to
federal, state, and local authorities, including interest or penalties, if any, that are applicable to Rhea. Rhea expressly agrees to indemnify and hold Defendants harmless from any claims or actions, including attorneys fees and court costs,
if any tax proceeding shall take place against Defendants specifically arising from Rheas failure to pay Rheas taxes that relate to the consideration paid under this Agreement.

14. Stipulation Relating to Settlement Consideration.  The Parties hereby stipulate and represent that the consideration provided to Rhea hereunder (a) is new consideration to which he was not otherwise entitled
and/or which was subject to good faith dispute, (b) constitutes good and valuable consideration from all persons and entities released by Rhea hereunder, and (c) would not have been paid by any person or entity released hereunder unless the release
was such to ensure that all disputes and claims of violations that are, or could have been, brought or asserted by Rhea were fully and finally settled and resolved.

15. Entire Agreement. This Agreement and all exhibits hereto, when executed, set forth the entire agreement between the Parties. No other promises or agreements shall be binding on any party unless it is in
writing and signed by both Parties.

16. Full Knowledge, Consent and Voluntary Signing of Agreement. All Parties acknowledge and agree that: (a) they have carefully read the Agreement and fully understand its meaning, intent and terms; (b) they have
full knowledge of its legal consequences; (c) they agree to all the terms of the Agreement and are voluntarily signing below; (d) other than as stated herein, they attest that no promise or inducement has been offered for this Agreement; and (e)
they are legally competent to execute this Agreement and accept full responsibility therefor. Rhea further acknowledges and agrees that he was advised to consult with an attorney prior to executing this Agreement, that he did so consult with
attorneys and other advisors of his choosing prior to executing this Agreement, that he has had sufficient and reasonable time to consider this Agreement, and that the Agreement is drafted in a manner that is

MASTER COMPROMISE AND SETTLEMENT AGREEMENT--PAGE 9

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understandable to him.

17. Heirs and Assigns.
This Agreement shall be binding upon and inure to the benefit of the respective
heirs, successors, assigns, and legal representatives of the Parties.

18. Amendment. Neither
this Agreement nor any provision hereof may be changed, waived, discharged, or
terminated orally, but only by an instrument in writing signed by the Party
against whom enforcement of the change, waiver, discharge or termination is
sought.

19. Governing Law. This
Agreement has been executed and delivered in the State of Texas. This Agreement
shall be deemed to be a contract made under and shall be construed in accordance
with and governed by the law of the State of Texas and of the United States of
America, as applicable. Venue for any lawsuit arising out of this Agreement
shall be in Travis County, Texas.

20. Severability. In the
event any one or more of the provisions contained in this Agreement shall, for
any reason, be held to be invalid, illegal, or unenforceable in any respect,
such invalidity, illegality, or unenforceability shall not affect any other
provision of this Agreement.

21. Multiple counterparts.
This Agreement may be executed in multiple counterparts, including counterparts
transmitted by telephonic document transfer, with the same effect as if all
Parties had signed the same, and all such counterparts shall be construed
together to constitute one original instrument. Each counterpart shall have the
same effect as the original.

22. Construction. The
Agreement shall not be construed against the Party drafting all or any

part thereof.

23. Headings.The headings
in this Agreement are used for reference only. They are not part

of and do not limit the terms of the Agreement.

24. Costs. All costs and
fees will be borne by the Parties as they were incurred.

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25. Effective Date:The effective date of this Agreement
is the last date on which the Parties execute and exchange the settlement
documents.

| | AGREED AS TO FORM AND SUBSTANCE:      
| | --------------------------------------
| |                                       
| | J. WILLIAM RHEA, IV                   
| |                                       
| | J.
      William Rhea. IV           
| | Date:
      February 2, 2006          
| |                                       
| | TERAX ENERGY, INC.                    
| |                                       
| | By:Lawrence Finn                    
| | Lawrence Finn, Chief Executive Officer
| | Date:                                 
| |                                       
| | PHILLIP A. WYLIE                      
| |                                       
| | Phillip A. Wylie                    
| | Date:
      February 2, 2006          
| |                                       
| | ANDREW HROMYK                         
| |                                       
| | Andrew Hromyk                       
| | Date:
      February 2, 2006          
| |                                       
| | ERIC BOEHNKE                          
| |                                       
| | Eric Boehnke                        
| | Date:
      February 2, 2006          
| |                                       
| | JOHN W. LEGG                          
| |                                       
| | John W. Legg                        
| | Date:
      February 2, 2006          

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| | BILLY WAYNE CHESTER         
| | ----------------------------
| |                             
| | Billy
      Wayne Chester 
| | Date:
      February 2, 2006

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