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UNITED STATESSECURITIES
AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10QSB

(Mark One)x Quarterly report under Section
  13 or 15(d) of the Securities Exchange Act of 1934
  for the quarterly period ended September 30, 2005

 ̈ Transition
  report under Section 13 or 15(d) of the Securities Exchange Act of 1934
  For the transition period from ____________ to ______________

Commission file number 333-72230

TERAX ENERGY, INC.(Name of
Small Business Issuer in Its Charter)

|Nevada                   | 88-0475757                       
|------------------------ | ---------------------------------
|(State of Incorporation) | (IRS Employer Identification No.)

9600 Great Hills TrailSuite
150WAustin, Texas 78759(Address of Principal Executive
Offices)

(512) 231-8444(Issuer's Telephone Number)

(Former name, former address and former fiscal year, if changed
since last report)

Check whether the issuer (1) 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.

Yes x No  ̈

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

Yes  ̈ No x

As of November 11, 2005, the Company had 51,577,000 shares of
  its par value $0.001 common stock issued and outstanding, of which 5,000,000
  are to be returned to treasury upon resolution of an injunction application.

Transitional Small Business Disclosure Format (check one):

Yes  ̈ No x

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Terax Energy, Inc.

Quarterly Report on Form 10-QSB for the
  Quarterly Period Ending September 30, 2005

Table of Contents

|PART I.    | FINANCIAL INFORMATION |                                                                                                                                          
|---------- | --------------------- | -----------------------------------------------------------------------------------------------------------------------------------------
|           |                       |                                                                                                                                          
|           | Item 1.               | Financial Statements                                                                                                                     
|           |                       |                                                                                                                                          
|           |                       | Balance Sheet (Unaudited):                                                                                                               
|           |                       | September 30, 2005                                                                                                                       
|           |                       |                                                                                                                                          
|           |                       | Statements of Operations (Unaudited):                                                                                                    
|           |                       | Three Months
        Ended September 30, 2005 and 2004 and
        Period from October 17, 2000 (Date of Inception) to September 30, 2005
|
|           |                       |                                                                                                                                          
|           |                       | Statements of Cash Flows (Unaudited):                                                                                                    
|           |                       | Three Months Ended September 30, 2005 and
      2004 and
      Period from October 17, 2000 (Date of Inception) to September 30, 2005    
|           |                       |                                                                                                                                          
|           |                       | Notes to Unaudited Condensed Consolidated
      Financial Information:                                                                   
|           |                       | September 30, 2005                                                                                                                       
|           |                       |                                                                                                                                          
|           | Item 2.               | Plan of Operation                                                                                                                        
|           |                       |                                                                                                                                          
|           | Item 3.               | Controls and Procedures                                                                                                                  
|           |                       |                                                                                                                                          
|PART II.   | OTHER INFORMATION     |                                                                                                                                          
|           |                       |                                                                                                                                          
|           | Item 1.               | Legal Proceedings                                                                                                                        
|           |                       |                                                                                                                                          
|           | Item 2.               | Unregistered Sales of Equity Securities
      and Use of Proceeds                                                                        
|           |                       |                                                                                                                                          
|           | Item 3.               | Defaults Upon Senior Securities                                                                                                          
|           |                       |                                                                                                                                          
|           | Item 4.               | Submission of Matters to a Vote of Security
      Holders                                                                                
|           |                       |                                                                                                                                          
|           | Item 5.               | Other Information                                                                                                                        
|           |                       |                                                                                                                                          
|           | Item 6.               | Exhibits                                                                                                                                 
|           |                       |                                                                                                                                          
|Signatures |                       |                                                                                                                                          

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Terax Energy, Inc.(a Development Stage Company)Balance
Sheet(Unaudited)

|                                                          |   | September 30, 2005 |  
|--------------------------------------------------------- | - | ------------------ | -
|Assets                                                    |   |                    |  
|                                                          |   |                    |  
|Current assets:                                           |   |                    |  
|Cash and cash
      equivalents                           | $ | 4,570,371          |  
|Total current
      assets                                |   | 4,570,371          |  
|                                                          |   |                    |  
|Other assets:                                             |   |                    |  
|Oil and gas properties
       successful efforts method: |   |                    |  
|Properties not
      subject to amortization              |   | 3,685,085          |  
|                                                          |   |                    |  
|Total Assets                                              | $ | 8,255,456          |  
|                                                          |   |                    |  
|                                                          |   |                    |  
|Liabilities and Stockholders' Equity                      |   |                    |  
|                                                          |   |                    |  
|Current liabilities                                       | $ | 133,847            |  
|                                                          |   |                    |  
|                                                          |   |                    |  
|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         |   |                    |  
|shares authorized, 52,077,000 shares issued and           |   |                    |  
|outstanding                                               |   | 52,077             |  
|Additional paid-in
      capital                          |   | 8,651,768          |  
|(Deficit) accumulated during
      development stage      |   | (582,236           | )
|Total Stockholders Equity                                |   | 8,121,609          |  
|                                                          |   |                    |  
|Total Liabilities and Stockholders Equity                | $ | 8,255,456          |  

The Accompanying Notes are an Integral Part of These Financial
Statements.

3

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Terax Energy, Inc.(a Development Stage Company)Statements of
Operations(Unaudited)

|                                          |   |                            |   |   |                |   |   | October 17, 2000 |  
|----------------------------------------- | - | -------------------------- | - | - | -------------- | - | - | ---------------- | -
|                                          |   | For the Three-Months Ended |   |   | (Inception) to |  
|                                          |   | September 30,              |   |   | September 30,  |  
|                                          |   | 2005                       |   |   | 2004           |   |   | 2005             |  
|Revenue                                   | $ | -                          |   | $ | -              |   | $ | -                |  
|                                          |   |                            |   |   |                |   |   |                  |  
|Expenses:                                 |   |                            |   |   |                |   |   |                  |  
|Promotional and marketing                 |   | 26,467                     |   |   | -              |   |   | 26,467           |  
|Professional fees                         |   | 237,498                    |   |   | -              |   |   | 237,498          |  
|Payroll expense                           |   | 108,804                    |   |   | -              |   |   | 108,804          |  
|General and
      administrative expenses |   | 107,785                    |   |   | 750            |   |   | 196,844          |  
|Total expenses                            |   | 480,554                    |   |   | 750            |   |   | 569,613          |  
|                                          |   |                            |   |   |                |   |   |                  |  
|Net operating (loss)                      |   | (480,554                   | ) |   | (750           | ) |   | (569,613         | )
|                                          |   |                            |   |   |                |   |   |                  |  
|Other income (expense)                    |   |                            |   |   |                |   |   |                  |  
|Dividend income                           |   | 14,122                     |   |   | -              |   |   | 14,122           |  
|Interest (expense)                        |   | (1,110                     | ) |   | -              |   |   | (1,110           | )
|Unauthorized
      disbursements          |   | (25,635                    | ) |   | -              |   |   | (25,635          | )
|                                          |   |                            |   |   |                |   |   |                  |  
|Net (loss)                                | $ | (493,177                   | ) | $ | (750           | ) | $ | (582,236         | )
|                                          |   |                            |   |   |                |   |   |                  |  
|Weighted average number of                |   |                            |   |   |                |   |   |                  |  
|common shares outstanding                 |   |                            |   |   |                |   |   |                  |  
|- basic and
      fully diluted           |   | 49,408,913                 |   |   | 144,225,000    |   |   |                  |  
|                                          |   |                            |   |   |                |   |   |                  |  
|Net (loss) per share - basic and          |   |                            |   |   |                |   |   |                  |  
|fully diluted                             | $ | (0.01                      | ) | $ | (0.00          | ) |   |                  |  

The Accompanying Notes are an Integral Part of These Financial
Statements.

4

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Terax Energy, Inc.(a Development Stage Company)Statements of Cash
Flows(Unaudited)

|                                                    |   |                            |   |   |                |   |   | October 17, 2000 |  
|--------------------------------------------------- | - | -------------------------- | - | - | -------------- | - | - | ---------------- | -
|                                                    |   | For the Three Months Ended |   |   | (Inception) to |  
|                                                    |   | September 30,              |   |   | September 30,  |  
|                                                    |   | 2005                       |   |   | 2004           |   |   | 2005             |  
|Cash flows from operating activities                |   |                            |   |   |                |   |   |                  |  
|Net (loss)                                          | $ | (493,177                   | ) | $ | (750           | ) | $ | (582,236         | )
|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 and
      other current assets              |   | 49,339                     |   |   | -              |   |   | -                |  
|Accrued liabilities                                 |   | 106,079                    |   |   | 750            |   |   | 133,847          |  
|Net cash (used) by operating activities             |   | (337,759                   | ) |   | -              |   |   | (440,889         | )
|                                                    |   |                            |   |   |                |   |   |                  |  
|Cash flows from investing activities                |   |                            |   |   |                |   |   |                  |  
|Purchase of oil and gas leases                      |   | (2,213,484                 | ) |   | -              |   |   | ( 2,213,484      | )
|Net cash (used) by investing activities             |   | (2,213,484                 | ) |   | -              |   |   | ( 2,213,484      | )
|Cash flows from financing activities                |   |                            |   |   |                |   |   |                  |  
|Proceeds
      from notes payable                   |   | 325,000                    |   |   | -              |   |   | 325,000          |  
|Payments on notes payable                           |   | (325,000                   | ) |   |                |   |   | (325,000         | )
|Debt
      conversion                               |   | -                          |   |   | -              |   |   | 1,800            |  
|Issuance of common stock, net of issuance           |   |                            |   |   |                |   |   |                  |  
|costs                                               |   | 7,105,000                  |   |   | -              |   |   | 7,222,944        |  
|Net cash provided by financing activities           |   | 7,105,000                  |   |   | -              |   |   | 7,224,744        |  
|                                                    |   |                            |   |   |                |   |   |                  |  
|Net (decrease) increase in cash                     |   | 4,553,757                  |   |   | -              |   |   | 4,570,371        |  
|Cash - beginning                                    |   | 16,614                     |   |   | -              |   |   | -                |  
|Cash - ending                                       | $ | 4,570,371                  |   | $ | -              |   | $ | 4,570,371        |  
|                                                    |   | -                          |   |   |                |   |   |                  |  
|Supplemental disclosures:                           |   |                            |   |   |                |   |   |                  |  
|Interest
      paid                                 | $ | 1,110                      |   | $ | -              |   | $ | 1,110            |  
|Income taxes paid                                   |   | -                          |   |   | -              |   |   | -                |  
|                                                    |   |                            |   |   |                |   |   |                  |  
|Non-cash transactions:                              |   |                            |   |   |                |   |   |                  |  
|Shares issued for asset acquisition                 |   | -                          |   |   | -              |   | $ | 1,471,601        |  

The Accompanying Notes are an Integral Part of These Financial
Statements.

5

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Terax Energy, Inc.
  (a
Development Stage Company)Notes to Unaudited Interim Financial
Statements

Note 1 - Basis of Presentation

The consolidated interim financial statements included herein
are presented in accordance with United States generally accepted accounting
principles, and have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Notes to the financial statements which
would substantially duplicate the disclosure contained in the audited financial
statements for the year ended June 30, 2005 as reported in Form 10-KSB have been
omitted.

These statements reflect all adjustments, consisting of normal
recurring adjustments, which, in the opinion of management, are necessary for
fair presentation of the information contained therein. It is suggested that
these consolidated interim financial statements be read in conjunction with the
financial statements of Terax for the year ended June 30, 2005 and notes thereto
included in Teraxs Form 10-KSB annual report.

Note 2  Stockholders equity

From August 8, 2005 through September 14, 2005, Terax accepted
subscriptions for 739,000 Units at a price of $10.00 per Unit for gross proceeds
to Terax of $7,390,000. Each Unit consists of eight shares of Teraxs common
stock and four non-transferable share purchase warrants. Each warrant is
exercisable into one share of Teraxs common stock at a price of $1.75, subject
to acceleration upon certain conditions. The value of the warrants, using the
Black Scholes method of calculation, was estimated to be $1,192,608. In
addition, Terax incurred fees totaling $285,000 in connection with the Unit
offering.

Note 3  Leasehold Acquisitions

In the quarter ended September 30, 2005, Terax acquired
approximately 5,200 additional gross acres of oil and gas leasehold interests in
Erath and Comanche Counties, Texas for cash in the amount of $2,213,484.

Note 4  Related Party Transactions

Through September 30, 2005, fees totaling $159,591 were
incurred with a law firm in which a Director was, and still is, a partner of the
law firm.

On or about September 22, 2005, the Board of Directors of Terax
became aware that its Chief Executive Officer may have withdrawn the sum of
$25,635 from Teraxs bank account for his personal benefit.

Note 5  Note Payable

During the quarter ended September 30, 2005, Terax borrowed
$325,000 bearing interest at 6% per annum. The note, including $1,110 in
interest, was repaid during the quarter.

6

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Terax Energy, Inc.
  (a
Development Stage Company)Notes to Unaudited Interim Financial
Statements

Note 6  Subsequent Events

Pursuant to the terms of the Management Group Stock Pool Agreement
  between Terax and certain of its officers and directors dated June 7, 2005,
  the officers and directors agreed that in the event of resignation or, in the
  event of termination for cause, the shares of Terax’s common stock registered
  in their names and held in escrow pursuant to that Agreement would be returned
  to the treasury of Terax for cancellation. Due to certain events involving certain
  officers and directors whom were parties to the Agreement as described below,
  500,000 shares of Terax’s common stock have been returned to the treasury
  of Terax for cancellation and 5,000,000 are to be returned to treasury for cancellation
  upon resolution of an injunction application.

Terax retained the services of a VP of Operations on an at
  will basis. Terax has agreed to issue options to acquire 500,000 shares
  of common stock at a price of $2.80 per share.

Terax retained the services of a CFO and interim CEO on an at
will basis. Terax has agreed to issue 500,000 shares of common stock as a stock
bonus to be earned in the event that Terax meets certain performance
criteria.

On October 28, 2005 Teraxs CEO was removed as a director and
on October 31, 2005 he was terminated as CEO, for cause. On November 7, 2005,
the former CEO filed a petition and application for preliminary injunctive
relief against Terax and individually against current and former board members.
The former CEO also seeks declaratory relief that his employment was not
terminated for cause and that he is entitled to all benefits conferred upon
him upon involuntary termination of his employment for other than cause. Terax
has agreed to indemnify the other defendants in the matter. Terax and the other
defendants vigorously object to former CEOs claims and Terax has set aside
$250,000 to pay for anticipated legal costs and expenses which may be incurred
in connection with this matter.

7

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|**ITEM 2.** | PLAN OF OPERATION
|----------- | -----------------

Forward-Looking Statements

This document contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. All statements
other than statements of historical fact are forward-looking statements for
purposes of federal and state securities laws, including, but not limited to,
any projections of earnings, revenue or other financial items; any statements of
the plans, strategies and objections of management for future operations; any
statements concerning proposed new services or developments; any statements
regarding future economic conditions or performance; any statements or belief;
and any statements of assumptions underlying any of the foregoing.

Forward-looking statements may include the words may,
could, estimate, intend, continue, believe, expect or anticipate
or other similar words. These forward-looking statements present our estimates
and assumptions only as of the date of this report. Except for our ongoing
securities laws, we do not intend, and undertake no obligation, to update any
forward-looking statement.

Although we believe that the expectations reflected in any of
our forward-looking statements are reasonable, actual results could differ
materially from those projected or assumed in any of our forward-looking
statements. Our future financial condition and results of operations, as well as
any forward-looking statements, are subject to change and inherent risks and
uncertainties. The factors impacting these risks and uncertainties include, but
are not limited to:

- increased competitive pressures from existing competitors and new
  entrants;
- increases in interest rates or our cost of borrowing or a default under
  any material debt agreements;
- deterioration in general or regional economic conditions;
- adverse state or federal legislation or regulation that increases the
  costs of compliance, or adverse findings by a regulator with respect to
  existing operations;
- loss of customers or sales weakness;
- inability to achieve future sales levels or other operating results;
- fluctuations of oil and gas prices;
- the unavailability of funds for capital expenditures; and
- operational inefficiencies in distribution or other systems.

For a detailed description of these and other factors that
could cause actual results to differ materially from those expressed in any
forward-looking statement, please see Factors That May Affect Our Results of
Operation in this document and in our Annual Report on Form 10-KSB for the year
ended June 30, 2005.

Overview And Outlook

We are an oil and gas exploration, development and production
company. Our properties are located in the Fort Worth Basin. Our corporate
strategy is to continue building value in the Company through the development
and acquisition of gas and oil assets that exhibit consistent, predictable, and
long-lived production. Our current focus is exploring the gas reserves located
in the Barrnett Shale formations of the Fort Worth Basin.

We have consolidated mineral lease positions in both Erath and
  Comanche counties. Our focus now turns to developing and producing those leases
  so as to realize the value held in them. With approximately 16,350 gross leased
  acres the task of developing the properties with wells will commence in the
  second quarter of our fiscal year.

8

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We intend to continue seeking acquisition opportunities, which
compliment our current focus. We intend to fund our development activity
primarily through proceeds from various private placements sufficient enough to
develop a greater portion of our mineral leases.

Our revenue, profitability and future growth rate depend
substantially on factors beyond our control, such as economic, political and
regulatory developments and competition from other sources of energy. Oil and
natural gas prices historically have been volatile and may fluctuate widely in
the future. Sustained periods of low prices for oil or natural gas could
materially and adversely affect our financial position, our results of
operations, the quantities of oil and natural gas reserves that we can
economically produce and our access to capital.

Results of Operations

The following overview provides a summary of key information
concerning our financial results for the first quarter of 2006 and 2005.

| |                            |   | First Quarter |   |   |        |  
| | -------------------------- | - | ------------- | - | - | ------ | -
| |                            |   | 2006          |   |   | 2005   |  
| |                            |   | Amount        |   |   | Amount |  
| | Revenue                    | $ | -             |   | $ | -      |  
| |                            |   |               |   |   |        |  
| | Expenses:                  |   |               |   |   |        |  
| | General and administrative |   | 243,056       |   |   | 750    |  
| | Professional and           |   |               |   |   |        |  
| | consulting fees            |   | 237,498       |   |   | -      |  
| | Total expenses             |   | 480,554       |   |   | 750    |  
| |                            |   |               |   |   |        |  
| | Loss from operations       |   | (480,554      | ) |   | (750   | )
| | Other income (expense):    |   |               |   |   |        |  
| | Other expenses             |   | (25,635       | ) |   | -      |  
| | Interest and other income  |   | 14,122        |   |   | -      |  
| | Interest expense           |   | (1,110        | ) |   | -      |  
| | Net loss                   | $ | (493,177      | ) | $ | (750   | )

First Quarter of 2006 Compared to First Quarter in
2005

Revenue:

Total revenue for the first quarter of 2006 and 2005 was $-0-
and $-0-.Currently, we are in a development stage, acquiring various mineral
leases and implementing all necessary capital improvements in order to become
efficient in our production efforts.

Expenses:

General and administrative expensesfor the first
quarter of 2006 and 2005 were $243,056 and $750, respectively, for an increase
of $242,306. The increase is attributable to the commencement of acquisition
efforts and preparation for exploratory drilling and the additional overhead
incurred in connection with the commencement of field operations.

Professional and consulting fees were $237,498 and $-0-
  for the first quarter of 2006 and 2005, for an increase of $237,498. The increase
  is a result of our endeavors to obtain the necessary capital and properties
  required to ultimately increase revenue.

9

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Other Income (Expense):

Interest and other income for the first quarter of 2006
and 2005 was $14,122 and $-0-, respectively, for an increase of $14,122 which
was the result of the placement of proceeds from the sale of securities being
place in an interest bearing money market account.

Interest Expense for the first quarter of 2006 and 2005
was $1,110 and $-0-, respectively, for an increase of $1,110. During the first
quarter of 2006, we entered into a short-term demand note in order to meet our
operating cost requirements.

Net Loss:Our net loss for the first
quarter of 2006 and 2005 was $493,177 and $750, respectively, for an increase
loss in the amount of $492,427. The majority of the increase was attributable to
an increase in overhead due to increased field operations.

Operation Plan

During the next twelve months we plan to continue to focus our
efforts on the sustained development and production of gas reserves located on
our existing properties, pursuing strategic acquisitions of producing properties
and creating value by furthering our business plan.

We intend to fund our field operations and development program
through our equity financing efforts and from proceeds of anticipated exercise
of warrants and options. This strategy may allow us to realize the value in our
own financial assets toward the growth of our leased acreage holdings, pursue
the acquisition of strategic oil and gas producing properties or companies and
generally expand our existing operations.

Our future financial results will depend primarily on: (i) the
ability to continue to produce gas and oil from existing wells; (ii) the ability
to discover commercial quantities of natural gas and oil; (iii) the market price
for oil and gas; and (iv) the ability to fully implement our exploration and
development program, which is dependent on the availability of capital
resources. In order to be successful in all or any of these respects, the prices
of oil and gas prevailing at the time of production must be at a level allowing
for profitable production, and we must be able to obtain additional funding to
increase our capital resources.

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 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 September 30, 2005 we had cash of $4,570,371 and working capital
  of $4,436,524. We believe that we currently have sufficient working capital
  to commence our drilling efforts and to pay our administrative and general operating
  expenses through December 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 December 31, 2005, and
  to continue the implementation of planned exploration and development programs
  on our properties. Furthermore, should we continue the pace of our acquisitions
  and/or or drilling activities, we will require additional capital sooner. 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.

Cash Flows.Since inception, we have financed cash flow
  requirements through debt financing and the issuance of common stock for cash.
  As we expand operational activities, we may continue to experience net

10

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negative cash flows from operations, pending receipt of sales
or development fees, and will be required to obtain additional financing to fund
operations through common stock offerings and debt borrowings to the extent
necessary to provide working capital.

Satisfaction of our cash obligations for the next 12
months.

Our oil and gas properties do not have any commercial production.
  We have no history of earnings or cash flow from our operations. A critical
  component of our operating plan impacting our continued existence is to efficiently
  manage the costs associated with exploratory drilling efforts, our ability to
  obtain additional capital through additional equity and/or debt financing, and
  JV or WI partnerships could also be important to our expansion plans. In the
  event we experience any significant problems assimilating acquired assets into
  our operations or cannot obtain the necessary capital to pursue our strategic
  plan, we may have to significantly curtail our operations. This would materially
  impact our ability to continue operations.

We believe that with the funds obtained through our private
placement, we are able to proceed with the next phase of our operations, which
is field development. However, we anticipate the need for a significant amount
of funds in order to fully develop our leased acreage.

Over the next twelve months we believe that existing capital
combined with cash flow from operations will be sufficient to sustain operations
and planned expansion.

We may incur operating losses over the next twelve months. Our
  lack of operating history makes predictions of future operating results difficult
  to ascertain. Our prospects must be considered in light of the risks, expenses
  and difficulties frequently encountered by companies in their early stage of
  development and production, particularly companies in the oil and gas industry.
  Such risks include, but are not limited to, an evolving and unpredictable business
  model and the management of growth. To address these risks we must, among other
  things, implement and successfully execute our business and marketing strategy,
  respond to competitive developments, and attract, retain and motivate qualified
  personnel. There can be no assurance that we will be successful in addressing
  such risks, and the failure to do so can have a material adverse effect on our
  business prospects, financial condition and results of operations.

Under our current operating plan, we are required to make
certain lease payments to maintain our rights to develop and drill for oil and
gas. These lease payments are material obligations to us.

As of September 30, 2005, we had assets of $8,255,456, and
$133,847 in current liabilities; resulting in a stockholders equity of
$8,121,609.

Summary of product and research and development that we will
perform for the term of our plan.

Field Development

Our original plan of operation for field development started
  with identifying the most promising and cost-effective drill sites on our current
  leased acres, drilling and testing wells to prove reserves, completing the more
  promising test wells, extracting the gas, oil and other hydrocarbons that we
  find, and delivering them to market. We believe that we have leased enough land
  to move forward with our field development and are proceeding with the next
  phase of our operations.

In the field development stages of our plan, each new well will
  be drilled and tested individually. The well, upon a favorable evaluation of
  its producing capabilities, will be fully completed and connected to gas gathering
  and water disposal pipelines.

When we have identified a proposed drilling site, we as a licensed
  operator in the State of Texas, will be engaged in all aspects of well site
  operations. As the operator we will be responsible for permitting the well,
  which will include obtaining permission from the Texas Railroad Commission relative
  to spacing requirements and any other state and federal environmental clearances
  required at the time that the permitting process commences. In addition to the
  permitting process, we as the operator will be responsible for hiring the driller,
  geologist and land men to make final

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decisions relative to the zones to be targeted, confirming
  that we have good title to each leased parcel covered by the spacing permit
  and to actually drill the well to the target zones. We will be responsible for
  completing each successful well and connecting it to the most appropriate portion
  of our gas gathering system.

As the operator we will be the caretaker of the well once production
  has commenced. As the operator, we will be responsible for paying bills related
  to the well, billing working interest owners for their proportionate expenses
  in drilling and completing the well, and selling the production from the well.
  Prior to the first payment for production on each well, we anticipate that the
  purchaser thereof will carry out its own research with respect to ownership
  of that production and will send out a division order to confirm the nature
  and amount of each interest owned by each interest owner. Once a division order
  has been established and confirmed by the interest owners, the production purchaser
  will issue the checks to each interest owner in accordance with its appropriate
  interest. From that point forward, we as operator will be responsible for maintaining
  the well and the wellhead site during the entire term of the production or until
  such time as we have been replaced or the site appropriately abandoned.

Significant changes in the number of employees.

During the three month period ended September 30, 2005 there were no significant changes in the number of employees.

Our proposed personnel structure could be divided into three broad categories: management and professional, administrative, and project field personnel. As in most small companies, the divisions between these three categories are somewhat
indistinct, as employees are engaged in various functions as projects and work loads demand.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results or operations, liquidity, capital
expenditures or capital resources that is material to investors.

Critical Accounting Policies and Estimates

Our discussion of financial condition and results of operations is based upon the information reported in our financial statements. The preparation of these statements requires us to make assumptions and estimates that affect the reported amounts of
assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities at the date of our financial statements. We base our assumptions and estimates on historical experience and other sources that we believe to be
reasonable at the time. Actual results may vary from our estimates due to changes in circumstances, weather, politics, global economics, mechanical problems, general business conditions and other factors. Our significant accounting policies are
detailed in Note 1 to our financial statements included in this Annual Report. We have outlined below certain of these policies as being of particular importance to the portrayal of our financial position and results of operations and which require
the application of significant judgment by our management.

Revenue Recognition.It is our policy to recognize revenue when production is sold to a purchaser at a fixed or determinable price.

Successful Efforts Method of Accounting.We account for our oil and natural gas operations using the successful efforts method of accounting. Under this method, all costs associated with property acquisition, exploration and development of
oil and gas reserves are capitalized. Costs capitalized include acquisition costs, geological and geophysical expenditures, lease rentals on undeveloped properties and cost of drilling and equipping productive wells. In the event we do not find
proved reserves, geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed. All of our properties are located within the continental United States.

Oil and Natural Gas Reserve Quantities.Reserve quantities and the related estimates of future net cash flows affect our periodic calculations of depletion and impairment of our oil and natural gas properties. Proved oil and

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natural gas reserves are the estimated quantities of crude oil,
natural gas and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future periods from
known reservoirs under existing economic and operating conditions. Reserve
quantities and future cash flows included in the Form 10-KSB are prepared in
accordance with guidelines established by the SEC and FASB.

|**ITEM 3.** | CONTROLS AND PROCEDURES
|----------- | -----------------------

|a) | Evaluation of Disclosure Controls and Procedures:As of the end of the period covered by this report, our management
      carried out an evaluation, under the supervision of our Interim Chief
      Executive Officer and Chief Financial Officer of the effectiveness of the
      design and operation of our system of disclosure controls and procedures
      pursuant to the Securities and Exchange Act, Rule 13a-15(e) and 15d-15(e)
      under the Exchange Act). Based on that evaluation, our interim chief
      executive officer and chief financial officer concluded that our
      disclosure controls and procedures were not effective to provide
      reasonable assurance that information we are required to disclose in
      reports that we file or submit under the Exchange Act is recorded,
      processed, summarized and reported within the time periods specified in
      Securities and Exchange Commission rules and forms, and that such
      information is accumulated and communicated to our management, including
      our chief executive officer and chief financial officer, as appropriate,
      to allow timely decisions regarding required disclosure.                                                      
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|b) | Changes in internal controls:There were no
      changes in internal controls over financial reporting that occurred during
      the period covered by this report that have materially affected, or are
      reasonably likely to materially effect, our internal control over
      financial reporting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | As disclosed in the Companys Form 8-K with an initial
      event date of October 28, 2005, and further described under Legal
      Proceedings below, certain funds were improperly withdrawn from Company
      bank accounts or charged as expenses during the period covered by this
      report. Subsequent to the end of the period covered by this report the
      Company engaged a new Chief Financial Officer and implemented new
      procedures with respect to the withdrawal and payment of Company funds.
      Based upon these changes, the interim chief executive officer and chief
      financial officer now concludes that our disclosure controls and
      procedures are effective to provide reasonable assurance that information
      we are required to disclose in reports that we file or submit under the
      Exchange Act is recorded, processed, summarized and reported within the
      time periods specified in Securities and Exchange Commission rules and
      forms, and that such information is accumulated and communicated to our
      management, including our chief executive officer and chief financial
      officer, as appropriate, to allow timely decisions regarding required
      disclosure.

PART II - OTHER INFORMATION

|**Item 1.** | Legal Proceedings.
|----------- | ------------------

From time to time, we may become involved in various lawsuits
and legal proceedings which arise in the ordinary course of business. Except as
disclosed below, we are currently not aware of any such legal proceedings or
claims that we believe will have, individually or in the aggregate, a material
adverse affect on our business, financial condition or operating results.

On November 7, 2005, J. William Rhea IV, a former member of the
Board of Directors and Chief Executive Officer of the Company filed a petition
and application for temporary restraining order and preliminary injunctive
relief against the Company and individually against current and former members
of the Companys Board of Directors. The action was filed in the District Court
of Travis County, Texas. Mr. Rhea was removed as a member of the Board of
Directors on October 28, 2005 and he was terminated as Chief Executive Officer
on October 31, 2005, for cause.

On or about September 22, 2005 the Board of Directors of the
Company became aware that Mr. Rhea may have withdrawn the sum of $26,000 from
the Companys bank account for his personal benefit. On September 29, 2005, the
Board of Directors formed a Special Committee to investigate the matter and
report back to the Board. Upon

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completion of the report of the Special Committee, it was
determined that Mr. Rhea in fact did withdraw approximately $26,000 from the
Companys bank account, as well as take other actions in violation of his
employment agreement and his fiduciary duties to the Company. In addition, upon
his termination as Chief Executive Officer and pursuant to the terms of the
Management Group Stock Pool Agreement between the Company and Mr. Rhea dated
June 7, 2005, Mr. Rhea forfeited 5,000,000 shares of the Companys common stock
registered in his name. In the legal action, Mr. Rhea seeks declaratory relief
that his employment was not terminated for cause and that he is entitled to
all benefits conferred upon him upon involuntary termination of his employment
for other than cause. In addition, Mr. Rhea seeks unspecified damages,
including the value of his rights under the Management Stock Pool which he
alleges equals approximately $15,000,000.

The Company has agreed to indemnify the other defendants in the
matter.

The Company and the other defendants vigorously object to Mr.
Rheas claims and will submit a response to the action on or prior to November
28, 2005. The Company has set aside $250,000 to pay for the legal costs and
expenses in connection with this matter. Such amount is merely a preliminary
estimate of possible costs, which may be more or less than the amount set
aside.

|**Item 2.** | Unregistered Sales of Equity Securities and
      Use of Proceeds.
|----------- | ------------------------------------------------------------------

During the period covered by this Report the Registrant has not
sold any securities not registered under the Securities Act which were not
previously reported in Form 8-K filings made by the Registrant.

|**Item 3.** | Defaults Upon Senior Securities.
|----------- | --------------------------------

None.

|**Item 4.** | Submission of Matters to a Vote of Security
      Holders.
|----------- | ----------------------------------------------------------

On October 28, 2005, our Board of Directors received consent
resolutions executed as of October 28, 2005, by the holders of more than
two-thirds of our outstanding common shares removing J. William Rhea, IV from
office as a member of the Board of Directors. The consent resolutions also
instructed our Board of Directors to determine whether Mr. Rhea had breached the
terms of his employment by the Registrant and, if so, to remove Mr. Rhea as an
officer of the Registrant and to terminate Mr. Rheas employment by the
Registrant.

|**Item 5.** | Other Information.
|----------- | ------------------

On October 18, 2005, Rex H. White was appointed as a member of
our Board of Directors. Mr. White resigned from the Board on October 31, 2005.

|**Item 6.** | Exhibits
|----------- | --------

|31.1 | Certification of Chief Executive
        Officer and Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d-
        14(a), promulgated under the Securities and Exchange Act of 1934, as amended
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                        
|32.1 | Certification pursuant to
        18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
        Act of 2002 (Chief Executive Officer and Chief Financial Officer)           

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SIGNATURES

In accordance with requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

|                         | TERAX ENERGY, INC.
|------------------------ | ------------------
|                         |                   
|Date:  November 18, 2005 | By:               
|                         |                   
|                         | Title:            
|                         |                   
|                         |                   
|                         |                   

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