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**UNITED STATES
  SECURITIES AND EXCHANGE COMMISSION**
  Washington, D.C. 20549

FORM 10-QSB /A Amendment
  No. 2

(Mark One)

[ X ] Quarterly report under Section 13 or 15(d) of the Securities
  Exchange Act of 1934
  For the quarterly period ended December 31, 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.)

13355 Noel Road 1370 One Galleria Tower Dallas, TX
75240(Address of Principal Executive Offices)

**(972) 503-0900**(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 February 13, 2006, the Company had 60,398,111shares of its
par value $0.001 common stock issued and outstanding.

Transitional Small Business Disclosure Format (check one): 
  Yes []
  No [ X ]

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**EXPLANATORY NOTE**

This quarterly
  report on Form 10-QSB/A (“Form 10-QSB/A”) is being filed to amend
  our quarterly report on Form 10-QSB for the quarter ended December 31, 2005
  (the “Original Form 10-QSB”), which was originally filed with the
  Securities and Exchange Commission (“SEC”) on February 21, 2006,
  and amended on March 3, 2006. Accordingly, pursuant to rule 12b-15 under the
  Securities Exchange Act of 1934, as amended, the Form 10-QSB/A contains current
  dated certifications from the Principal Executive Officer and the Principal
  Financial Officer.

We have
  revised Note 5 of the Financial Statements, the “Liquidity and Capital
  Reserves” and “Satisfaction of our cash obligations for the next
  twelve months” sections of Item 2. In addition, we have revised to disclose
  that our controls and procedures were effective after implementation of certain
  controls subsequent to its fiscal quarter ended September 30, 2005 and that
  there were changes in internal control over financial reporting occurring in
  the quarter ended December 31, 2005. We have also revised the weighted average
  number of shares outstanding in our Consolidated Statements of Operations, basic
  and diluted, for the three months ended March 31, 2004 and the six months ended
  December 31, 2005 and 2004, to correct errors in prior calculations. We have
  also clarified that we are responsible for making certain production payments.

We have
  not updated the information contained herein for events occurring subsequent
  to February 21, 2006, the filing date of the Original Form 10-QSB.

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Quarterly Report on Form 10-QSB for the Quarterly Period
Ending December 31, 2005

Table of Contents

|PART I. FINANCIAL INFORMATION |        
|----------------------------- | -------
|                              |        
|                              | Item 1.
|                              |        
|                              |        
|                              |        
|                              |        
|                              |        
|                              |        
|                              |        
|                              |        
|                              |        
|                              | Item 2.
|                              |        
|                              | Item 3.
|                              |        
|PART II. OTHER INFORMATION    |        
|                              |        
|                              | Item 1.
|                              |        
|                              | Item 2.
|                              |        
|                              | Item 3.
|                              |        
|                              | Item 4.
|                              |        
|                              | Item 5.
|                              |        
|                              | Item 6.
|                              |        
|Signatures                    | 18     

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Terax Energy, Inc. (an Exploration Stage Company)
Balance Sheet (Unaudited)

|                                                           |   | December 31, |   |   | June 30,  |  
|---------------------------------------------------------- | - | ------------ | - | - | --------- | -
|                                                           |   | 2005         |   |   | 2005      |  
|Assets                                                     |   |              |   |   |           |  
|                                                           |   |              |   |   |           |  
|Current assets:                                            |   |              |   |   |           |  
|Cash and cash
      equivalents                            | $ | 1,206,623    |   | $ | 16,614    |  
|Prepaid expenses                                           |   | 56,537       |   |   | 49,339    |  
|Total current assets                                       |   | 1,263,160    |   |   | 65,953    |  
|                                                           |   |              |   |   |           |  
|Oil and gas properties:                                    |   |              |   |   |           |  
|Properties not subject to amortization                     |   | 5,190,897    |   |   | 1,471,601 |  
|Properties subject
      to amortization                   |   | 5,084,659    |   |   | -         |  
|Oil
      and gas equipment                                |   | 665,777      |   |   | -         |  
|Total oil and gas properties                               |   | 10,941,333   |   |   | 1,471,601 |  
|                                                           |   |              |   |   |           |  
|Other assets:                                              |   |              |   |   |           |  
|Office furniture and automobile equipment, net             |   | 64,397       |   |   | -         |  
|Deposits                                                   |   | 1,020        |   |   | -         |  
|Total other assets                                         |   | 65,417       |   |   | -         |  
|                                                           |   |              |   |   |           |  
|Total assets                                               | $ | 12,269,910   |   | $ | 1,537,554 |  
|                                                           |   |              |   |   |           |  
|Liabilities and Stockholders' Equity                       |   |              |   |   |           |  
|                                                           |   |              |   |   |           |  
|Current liabilities:                                       |   |              |   |   |           |  
|Accounts payable                                           | $ | 294,288      |   | $ | -         |  
|Accrued liabilities                                        |   | 931,991      |   |   | 27,769    |  
|Short term debt                                            |   | 4,100,000    |   |   | -         |  
|Total current liabilities                                  |   | 5,326,279    |   |   | 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          |   | 52,077       |   |   | 46,165    |  
|shares authorized, 52,077,000 and 46,165,000 shares issued |   |              |   |   |           |  
|and outstanding at December 31, 2005 and June 30, 2005,    |   |              |   |   |           |  
|respectively                                               |   |              |   |   |           |  
|Additional paid-in
      capital                           |   | 8,651,768    |   |   | 1,552,679 |  
|(Deficit) accumulated during exploration stage             |   | (1,760,214   | ) |   | (89,059   | )
|Total stockholder's equity                                 |   | 6,943,631    |   |   | 1,509,785 |  
|                                                           |   |              |   |   |           |  
|Total liabilities
      and stockholders' equity           | $ | 12,269,910   |   | $ | 1,537,554 |  

1

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Terax Energy, Inc.(an Exploration Stage Company) 
  Statements of Operations (Unaudited)

Three-Months Ended
    
    
    Six-Months Ended
    
    
      October 17, 2000December 31,
    
    
    December 31,
    
    
      (Inception) to2005
    
    
      2004
    
    
      2005
    
    
      2004
    
    
      December 31, 2005Revenue
    $
      -
    
    $
      -
    
    $
      -
    
    $
      -
    
    $
      -Expenses:Depreciation expense
    
      3,389
    
    
      -
    
    
      3,389
    
    
      -
    
    
      3,389Promotional and
      marketing
    
      84,607
    
    
      -
    
    
      111,074
    
    
      -
    
    
      111,074Professional fees
    
      101,424
    
    
      -
    
    
      338,922
    
    
      -
    
    
      338,922Payroll expense
    
      921,836
    
    
      -
    
    
      1,030,639
    
    
      -
    
    
      1,030,640General and administrative
      expenses
    
      52,100
    
    
      1,661
    
    
      159,885
    
    
      2,411
    
    
      248,944Total expenses
    
      1,163,356
    
    
      1,661
    
    
      1,643,909
    
    
      2,411
    
    
      1,732,969Net operating (loss)
      
      (1,163,356
      )
      
      (1,661
    )
      
      (1,643,909
      )
      
      (2,411
    )
      
      (1,732,969
      )Other income (expense):Dividend income
    
      16,817
    
    
      -
    
    
      30,939
    
    
      -
    
    
      30,939Interest
      (expense)
    
      (31,439
    )
    
      -
    
    
      (32,549
    )
    
      -
    
    
      (32,549
    )Other
      
      -
      
      
      -
    
      
      (25,635
      )
      
      -
    
      
      (25,635
      )Total other income (expenses)
    
      (14,622
    )
    
      -
    
    
      (27,245
    )
    
      -
    
    
      (27,245
    )Net (loss)
    $
      (1,177,978
    )
    $
      (1,661
    )
    $
      (1,671,154
    )
    $
      (2,411
    )
    $
      (1,760,214
    )Net (loss) per share
    $
      (0.02
    )
    $
      (0.00
    )
    $
      (0.03
    )
    $
      (0.00
    )Weighted average number ofcommon shares outstandingbasic and fully
      diluted
    
      52,077,000
    
    
      144,225,000
    
    
      51,232,760
    
    
      144,225,000


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

2

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Terax Energy, Inc.(an Exploration Stage Company)
Statements of Cash Flows (Unaudited)

|                                                |   |                          |   |   |                |   |   | October 17, 2000 |  
|----------------------------------------------- | - | ------------------------ | - | - | -------------- | - | - | ---------------- | -
|                                                |   | For the Six-Months Ended |   |   | (Inception) to |  
|                                                |   | December 31,             |   |   | December 31,   |  
|                                                |   | 2005                     |   |   | 2004           |   |   | 2005             |  
|Cash flows from operating activities:           |   |                          |   |   |                |   |   |                  |  
|Net (loss)                                      | $ | (1,671,154               | ) | $ | (2,411         | ) | $ | (1,760,214       | )
|Adjustments to reconcile net loss :             |   |                          |   |   |                |   |   |                  |  
|Shares issued
      for services                |   |                          |   |   |                |   |   | 7,500            |  
|Depreciation
      expense                      |   | 3,389                    |   |   | -              |   |   | 3,389            |  
|Changes in current assets and liabilities:      |   |                          |   |   |                |   |   |                  |  
|Increase
      in prepaid expenses              |   | (7,198                   | ) |   | -              |   |   | (56,537          | )
|Increase
      in accounts payable              |   | 294,288                  |   |   | -              |   |   | 294,288          |  
|Increase
      in accrued liabilities           |   | 904,222                  |   |   | -              |   |   | 931,992          |  
|Increase
      in deposits                      |   | ( 1,020                  | ) |   | -              |   |   | (1,020           | )
|Net cash used in operating activities           |   | (477,473                 | ) |   | (2,411         | ) |   | (580,602         | )
|                                                |   |                          |   |   |                |   |   |                  |  
|Cash flows from investing activities            |   |                          |   |   |                |   |   |                  |  
|Purchase
      of oil and gas leases            |   | (3,719,296               | ) |   | -              |   |   | (3,719,296       | )
|Increase in Oil and Gas equipment               |   | (665,777                 | ) |   |                |   |   | (665,777         | )
|Increase in drilling and equipment              |   | (5,084,659               | ) |   | -              |   |   | (5,084,659       | )
|Increase in office furniture and automobiles    |   | (67,786                  | ) |   | -              |   |   | (67,786          | )
|Net cash used in investing activities           |   | (9,537,518               | ) |   | -              |   |   | (9,537,518       | )
|Cash flows from financing activities            |   |                          |   |   |                |   |   |                  |  
|Proceeds
      from notes payable               |   | 4,425,000                |   |   | -              |   |   | 4,425,000        |  
|Payments
      on notes payable                 |   | (325,000                 | ) |   | -              |   |   | (325,000         | )
|Debt
      conversion                           |   | -                        |   |   | -              |   |   | 1,800            |  
|Issuance
      of common stock, net of offering |   |                          |   |   |                |   |   |                  |  
|cost                                            |   | 7,105,000                |   |   | -              |   |   | 7,222,943        |  
|Net cash provided by financing activities       |   | 11,205,000               |   |   | -              |   |   | 11,324,743       |  
|                                                |   |                          |   |   |                |   |   |                  |  
|Net (decrease) increase in cash                 |   | 1,190,009                |   |   | (2,411         | ) |   | 1,206,623        |  
|Cash  beginning of period                      |   | 16,614                   |   |   | 18,101         |   |   | -                |  
|Cash  ending of period                         | $ | 1,206,623                |   | $ | 15,690         |   | $ | 1,206,623        |  
|                                                |   | -                        |   |   |                |   |   |                  |  
|Supplemental disclosures:                       |   |                          |   |   |                |   |   |                  |  
|Interest
      paid                             | $ | 1,144                    |   | $ | -              |   | $ | 1,144            |  
|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.

3

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Terax Energy, Inc. (An
Exploration 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 period 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 (the Company) for the period ended
  June 30, 2005 and notes thereto included in Companys Form 10-KSB.

Note 2  Stockholders Equity

Pursuant to the terms of the Management Stock Pool Agreement
between the Company 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 the Companys stock registered
in their names and held in escrow pursuant to that Agreement would be returned
to the treasury of the Company for cancellation. Due to certain events involving
certain officers and directors whom were parties to the Agreement as described
below, 500,000 shares of the Companys stock have been returned to treasury for
cancellation and the remaining 5,000,000 shares are to be returned to treasury
for cancellation upon resolution of an injunction application. See Note 7 below
for such resolution.

From August 8, 2005 through September 14, 2005, Company
accepted subscriptions for 739,000 Units at a price of $10.00 per Unit for gross
proceeds to Company of $7,390,000. Each Unit consists of eight shares of the
Companys common stock and four non-transferable share purchase warrants. Each
warrant is exercisable into one share of the Company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 $1,192,608. In
addition, the Company incurred fees totaling $285,000 in connection with the
Unit offering.

On October 17, 2005, the Company hired a VP of Operations on
  an at will basis. In addition the Company agreed to issue options
  to acquire 500,000 in common at a price of $2.80 per share for a period of 5
  years. The options will vest equal amounts, over three years from the date of
  issue. The grants will be subject to a Stock Incentive Plan to be approved by
  the Shareholders.

On November
  15, 2005, the Company hired a CFO and interim CEO on an “at will”
  basis. The Company has agreed to issue 500,000 shares of common stock as a stock
  bonus to be earned in event the Company meets certain criteria, which criteria
  has not yet been determined by the Company’s Board of Directors. The grants
  are subject to a Stock Incentive Plan to be approved by the Shareholders.

Note 3  Oil and Gas Properties

In the six months ended December 31, 2005, the Company acquired
  additional gross acres of oil and gas leasehold interests in Erath and Comanche
  Counties, Texas for $3,719,296.

4

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Note 3  continued

In the quarter ended December 31, 2005, the Company began
  development of it oil and gas leases in Erath County Texas. Through the end
  of the quarter, the Company had drilled two wells to total depth and began installation
  of its gathering system. These wells were waiting on completion of the gathering
  before they can be completed and begin production. The total cost incurred for
  drilling and gathering system cost for the quarter was $5,084,659. The cost
  for Oil and Gas equipment held for future use was $665,777.

Note 4  Related Party Transactions

For the six months ended December 31, 2005, $230,306, of legal fees and reimbursable expenses, were incurred with a law firm in which a Director was, and still is, a partner of the law firm.

For the six months ended December 31, 2005, fees totaling $88,478 were paid by the Company to a Director for services rendered in managing certain litigation matters.

Note 5  Note Payable

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

On December
  2, 2005 for $2,500,000, December 19, 2005 for $1,600,000, and January 26, 2006
  for $900,000, the Company issued promissory notes (the “Notes”)
  to an investor with aggregate principal amounts of $5,000,000. The Notes bear
  interest at the rate of 12.5% per annum, they are due on demand after May 31,
  2006, and they may be repaid at any time by the Company. The Notes are secured
  by a security interest in all of the Company’s oil and gas leases and
  pipeline right of ways and easements in Erath County, Texas, as well as well
  and pipeline equipment and personal property, contracts and agreements, and
  production from the Company’s wells located on the leases. In the Event
  of Default, the holder of the notes has the right, but not the obligation, to
  seek remedies for repayment of the notes including but not limited to foreclosure
  and sale of the secured assets.

Note 6  Other Obligations

On December 8, the Company entered into a one (1) year lease for a field office in Stephenville, Texas, The office space has approximately 1188 square feet, and rental is rate is approximately $1,300 per month. The Company has the right to renew
the lease for up to two (2) years.

Note 7  Subsequent Events

Office Lease

On January 24, 2006 the Company signed a three (3) year office lease for approximately 2893 square feet. The month rental rate is $5,726 per month.

Litigation Settlement

On February 2, 2006 the Company and certain current and former
  directors, officers and agents of the Company entered into a Master Compromise
  and Settlement Agreement with J. William Rhea, IV pursuant to which the parties
  resolved all outstanding claims between them. As part of the resolution, 800,000
  of the 5,000,000 shares of the Companys common stock registered in Mr.
  Rheas name and held in escrow were released to Mr. Rhea and 4,200,000
  of the 5,000,000 shares of the Companys common stock registered in Mr.
  Rheas name and held in escrow were returned to treasury of the Company
  for cancellation, without consideration. In addition, the Company paid Mr. Rhea
  $800,000 on account of compensation due to him under his employment agreement
  with the Company.

5

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Sale of Securities

On
  February 7, 2006, the Company entered into securities purchase agreements
  to sell to four institutional investors an aggregate of 12,805,600 shares of
  the Companys common stock and warrants to purchase an additional 12,805,600
  shares of common stock, for an aggregate purchase price of $16,007,000. The
  unit purchase price of the common stock and corresponding warrant was $1.25.
  The warrants are exercisable until February 6, 2011 at an exercise price of
  $1.50 per share. The Company has the right to require exercise of all of the
  warrants in the event that (i) a registration statement registering the resale
  of the warrants is then in effect and (ii) the volume weighted average trading
  price per share of the Companys common stock for each of the previous
  thirty trading days is in excess of $2.50.

The
aggregate commissions payable in connection with the private placement were
approximately $862,120. In addition, warrants to purchase 574,120 shares of
common stock identical to those sold to the investors. The pricing of the
securities was agreed to with the lead institutional buyer in early January 2006
when the Companys stock was trading in the $1.75 range and represents an
approximate 30% discount to the market price at that time.

The
Company also entered into registration rights agreements with the investors to
register the resale of the shares of common stock sold in the offering and
issuable upon exercise of the warrants. Subject to the terms of the registration
rights agreement, the Company is required to file the registration statement
with the Securities and Exchange Commission within 30 days of the closing, to
use its best efforts to cause the Registration Statement to be declared
effective under the Securities Act of 1933 (the Act) within 60 days following
the closing date of the offering, or 120 days following the closing of the
offering if the registration statement is reviewed by the Securities and
Exchange Commission. In the event the registration statement is not filed or
declared effective when due, the Company is obligated to pay the investors
liquidated damages in the amount of 1.5% of the purchase price for each month in
which the Company is in default. See Form 8-K filed on February 7, for a more
detailed explanation of the transaction.

Controller and Chief Accounting Officer

On February 8, 2006, the Company retained the services of a
Controller and Chief Accounting Officer on an at will basis. The Company has
agreed to issue 200,000 shares of common stock as a stock bonus to be earned
100,000 at December 31, 2006 and 100,000 at December 31, 2007. In addition the
Company has agreed to issue options to acquire 200,000 shares of common stock at
a price of $2.43 per share for a period of 5 years. The options will vest in
equal amounts, over two years from the date of issue. The grants will be subject
to a Stock Incentive Plan to be approved by the Shareholders.

Notes Payable

On February 1, 2006, the Company issued an additional promissory
  note (the Additional Note) with a principal amount of $2,500,000
  to an investor. The Additional Note has the same terms as the Initial Notes:
  it bears interest at the rate of 12.5% per annum, it is due on demand after
  May 31, 2006, and it may be repaid at any time by the Company. On February 2,
  2006, the Company issued to a total of 215,517 shares of the Companys
  common stock as further consideration for the Notes and the Additonal Note.
  The Company has agreed to issue an additional 84,483 shares of common stock
  as further consideration for the Notes and the Additional Note. See Note 5.

6

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ITEM 2. PLAN OF OPERATIONS

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:

| | o | increased competitive pressures from existing competitors
      and new entrants;                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                               
| | o | increases in interest rates or our cost of borrowing or a
      default under any material debt agreements;                                                                   
|
| |   |                                                                                                                                                                               
| | o | deterioration in general or regional economic conditions;                                                                                                                     
| |   |                                                                                                                                                                               
| | o | adverse state or federal legislation or regulation that
      increases the costs of compliance, or adverse findings by a regulator with
      respect to existing operations;
|
| |   |                                                                                                                                                                               
| | o | loss of customers or sales weakness;                                                                                                                                          
| |   |                                                                                                                                                                               
| | o | inability to achieve future sales levels or other
      operating results;                                                                                                    
| |   |                                                                                                                                                                               
| | o | fluctuations of oil and gas prices;                                                                                                                                           
| |   |                                                                                                                                                                               
| | o | the unavailability of funds for capital expenditures; and                                                                                                                     
| |   |                                                                                                                                                                               
| | o | 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 Report on Form 10-KSB for the period 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 Barnett Shale formations of the Fort Worth Basin.

We have consolidated mineral lease positions in both Erath and
  Comanche counties. Our current focus is on the development and production of
  our Erath County properties. However, we have begun the

7

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evaluation process of our Comanche County properties and expect
to develop strategy for those leases and the value in them, in the second half
of 2006.

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
evaluate 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

Second Quarter of 2006 Compared to Second Quarter of 2005

The following overview provides a summary of key information
concerning our financial results for the second quarter of our fiscal year
ending June 30, 2006.

|                           |   | Three Months |   |   | Three Months |   |   |            |  
|-------------------------- | - | ------------ | - | - | ------------ | - | - | ---------- | -
|                           |   | December 31, |   |   | December 31, |   |   | Increase   |  
|                           |   | 2005         |   |   | 2004         |   |   | (Decrease) |  
|Revenue                    | $ | -            |   | $ | -            |   | $ | -          |  
|                           |   |              |   |   |              |   |   |            |  
|Expenses:                  |   |              |   |   |              |   |   |            |  
|General and administrative |   | 52,100       |   |   | 1,661        |   |   | 50,439     |  
|Payroll Expenses           |   | 921,836      |   |   | -            |   |   | 921,836    |  
|Professional fees          |   | 101,424      |   |   | -            |   |   | 101,424    |  
|Marketing Expenses         |   | 84,607       |   |   | -            |   |   | 84,607     |  
|Depreciation expenses      |   | 3,389        |   |   | -            |   |   | 3,389      |  
|Total expenses             |   | 1,163,356    |   |   | 1,661        |   |   | 1,161,695  |  
|                           |   |              |   |   |              |   |   |            |  
|(Loss) from operations     |   | (1,163,356   | ) |   | (1,661       | ) |   | (1,161,695 | )
|Other income (expense):    |   |              |   |   |              |   |   |            |  
|Other expenses             |   | -            |   |   | -            |   |   | -          |  
|Interest and other income  |   | 16,817       |   |   | -            |   |   | 16,817     |  
|Interest expense           |   | (31,439      | ) |   | -            |   |   | (31,439    | )
|Net Income ( loss)         | $ | (1,177,978   | ) | $ | (1,661       | ) | $ | (1,176,317 | )

Revenue

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

Expenses

The increase in General and Administrative Expenses, Payroll
  Expenses, Professional Fees, and Marketing Expensesfor the second quarter
  of 2006 as compared to the second quarter of 2005 were $1,159,967 and $1,661,
  respectively, for an increase of $1,158,306. Of this increase, $817,740 was
  due the settlement with a former officer of the Company. The remainder of increase
  in overhead was incurred in connection with the continued acquisition of leases,
  reporting to stockholders and the beginning of field operations necessary for
  the evaluation of our oil and gas leases. The increase is a result of our

8

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endeavors to obtain the necessary capital required to
ultimately to begin production and generate revenue from our oil and gas
properties.

The increase in Deprecation expenses for the second quarter of
  2006 was $3,389 as compared to the second quarter 2005 which was $.0, for an
  increase of $3,389. The increase was due to the Companys acquisition of
  certain office assets and vehicles to support the Companys operations.

Other Income (Expense)

Interest and other income for the second quarter of 2006 and
  2005 was $16,817 and $.0, respectively, for an increase of $16,817 which was
  the result of the placement of proceeds from the sale of securities in an interest
  bearing money market account.

Interest Expense for the second quarter of 2006 and 2005 was
  $31,439 and $.0, respectively, for an increase of $31,439. During the second
  quarter of 2006, we entered into a short-term promissory note(s) in order to
  meet our operating cost requirements.

Net Loss

Our net loss for the second quarter of 2006 and 2005 was $1,177,978
  and $1,661, respectively, for an increase loss in the amount of $1,176,317.
  Of these losses, approximately $3,389 was attributable to non-cash costs associated
  with assets purchased by the Company.

First Six Months of 2006 Compared to the First Six Months
  of 2005

The following overview provides a summary of key information
concerning our financial results for the first six months of our fiscal year
ending June 30, 2006.

|                                 |   | Six Months   |   |   | Six Months   |   |   |            |  
|-------------------------------- | - | ------------ | - | - | ------------ | - | - | ---------- | -
|                                 |   | December 31, |   |   | December 31, |   |   | Increase   |  
|                                 |   | 2005         |   |   | 2004         |   |   | (Decrease) |  
|Revenue                          | $ | -            |   | $ | -            |   | $ | -          |  
|                                 |   |              |   |   |              |   |   |            |  
|Expenses:                        |   |              |   |   |              |   |   |            |  
|General and
      administrative |   | 159,885      |   |   | 2,411        |   |   | 157,474    |  
|Payroll
      Expenses           |   | 1,030,639    |   |   | -            |   |   | 1,030,639  |  
|Professional fees                |   | 338,922      |   |   | -            |   |   | 338,922    |  
|Marketing
      Expenses         |   | 111,074      |   |   | -            |   |   | 111,074    |  
|Depreciation expenses            |   | 3,389        |   |   | -            |   |   | 3,389      |  
|Total expenses                   |   | 1,643,909    |   |   | 2,411        |   |   | 1,641,498  |  
|                                 |   |              |   |   |              |   |   |            |  
|(Loss) from operations           |   | (1,643,909   | ) |   | (2,411       | ) |   | (1,641,498 | )
|Other income (expense):          |   |              |   |   |              |   |   |            |  
|Other
      expenses             |   | (25,635      | ) |   | -            |   |   | (25,635    | )
|Interest and other income        |   | 30,939       |   |   | -            |   |   | 30,939     |  
|Interest
      expense           |   | (32,549      | ) |   | -            |   |   | (32,549    | )
|Net Income ( loss)               | $ | (1,671,154   | ) | $ | (2,411       | ) | $ | (1,668,743 | )

Revenue

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

Expenses

The increase in General and Administrative Expenses, Payroll
  Expenses, Professional Fees, and Marketing Expensesfor the first six months
  of 2006 as compared to the first six months of 2005 were

9

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$1,640,520 and $2,411, respectively, for an increase of
$1,638,109. Of this increase, $817,740 was due the settlement with a former
officer of the Company. The remainder of increase in overhead was incurred in
connection with the continued acquisition of leases, reporting to stockholders
and the beginning of field operations necessary for the evaluation of our oil
and gas leases. The increase is a result of our endeavors to obtain the
necessary capital required to ultimately to begin production and generate
revenue from our oil and gas properties.

The increase in Deprecation expenses for the six months 2006
  was $3,389 as compared to the first six months of 2005 which was $.0, for an
  increase of $3,389. The increase was due to the Companys acquisition of
  certain office assets and vehicles to support the Companys operations

Other Income (Expense)

Interest and other income for the first six months of 2006 and
  2005 was $30,939 and $.0, respectively, for an increase of $30,939 which was
  the result of the placement of proceeds from the sale of securities in an interest
  bearing money market account.

Interest Expense for the first six months of 2006 and 2005 was
  $32,549 and $.0, respectively, for an increase of $32,549. During the first
  six months of 2006, we entered into a short-term promissory note(s) in order
  to meet our operating cost requirements.

Net Loss

Our net loss for the first six months of 2006 and 2005 was $1,671,154
  and $2,411, respectively, for an increase loss in the amount of $1,668,743.
  Of these losses, approximately $3,389 was attributable to non-cash deprecation
  costs associated with the purchase of certain office furniture and vehicles
  to support our operations.

Operation Plan

During the next twelve months we plan to continue to focus our
efforts on the current business plan which is the sustained development of our
existing properties. The Company may consider pursuing strategic acquisitions of
producing properties and additional oil and gas leases provided we have access
to capital resources which will not interfere with continued evaluation and
development of our existing assets.

We intend to fund our field operations and development program
through a combination of equity financing, proceeds of anticipated exercise of
warrants and options and the use of commercial or mezzinne debt as necessary to
complete or business plan. Our strategy is to seek financing alternatives which
will yield the lowest cost of capital while maintaining the flexibility
necessary to fully realize the value in our own oil and gas leased acreage
holdings. Before the Company can seek strategic acquisitions of additional
leases, producing properties, or acquisition of other companies, the Company
must first develop its existing properties to stage which they can sustain their
own development or develop financing alternatives which will not hinder the
development of is current assets.

Our future financial results will depend primarily on: (i) the
ability to produce gas and oil from existing and future 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.

10

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Our continued existence and plans for future growth depend on our ability to continue obtain the capital necessary to develop our existing assets, and the generation of revenue from our current assets. We will need to raise additional capital to
fund our development 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 December
  31, 2005 we had current assets of $1,263,160 and current liabilities of $5,326,279
  for a negative working capital of $4,063,119. On February 7, 2006 we closed
  an equity financing with gross proceeds $16,007,000. The proceeds will be used
  to repay existing debt, to fund continued drilling and development activities,
  and general working capital. We believe that we currently have sufficient working
  capital to complete our first three wells, to drill and complete our next three
  wells and complete the gathering system in order to begin production on all
  six wells. We expect to begin production in March 2006, and have all six wells
  on production in May 2006. We will need to obtain additional funds to supplement
  our expected revenues from the first six wells in order to continue the implementation
  of planned exploration and development programs on our existing properties over
  the next twelve months. Furthermore, should the pace of our acquisitions and/or
  or drilling activities differ from our current plans, we may 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. Should the pace of our acquisitions and/or
  or drilling activities differ from our current plans, we may 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 and services. As we continue our development activities, we may continue to experience net 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 will 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 from the recent private placement, we are able to proceed with the current phase of our operations, the continued field development of our Erath County properties. However, we anticipate the need for additional funds
in order to fully develop our leased acreage.

Over the next twelve months, our existing capital combined with cash flow from operations will be not be sufficient to sustain operations and our 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

11

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marketing
  strategy, continue to develop and upgrade technology and products, 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.

All of the
  leases purchased by the Company are paid up oil and gas leases which do not
  require future payments. If we begin production of oil or natural gas on a lease
  before the end of the primary term, we may retain that lease without additional
  cost. If production is established, we are required to pay the leaseholder a
  portion of the oil or gas production as “royalty payments”. If production
  is not established during the primary term of the lease, in most cases, we have
  the right, but not the obligation, to extend the lease for an additional 2 years
  by making an addition lump sum payment to the leaseholder, as provided for in
  each lease. If oil and gas production is not established within the additional
  two years period, the lease is returned to the leaseholder and we have no additional
  rights to the lease.

As of December 31, 2005, we had assets of $12,269,910, and $5,326,279 in current liabilities; resulting in a stockholders equity of $6,943,631.

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, which is
field development.

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 local 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 Oil and Gas commission relative to spacing requirements and any other state and federal environmental clearances required at the time that the permitting process commences. Additionally, we will formulate and deliver to all
interest owners an operating agreement establishing each participants rights and obligations in that particular well based on the location of the well and the ownership. In addition to the permitting process, we as the operator will be
responsible for hiring the driller, geologist, and land men to make final 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. Once the production has
  been sold, the Company will have legal counsel determine 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 Company 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 December 31, 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.

12

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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 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 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) an 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 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
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

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| |    | 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.
        Subsequent to the end of the period covered by this report, the Company
        implemented additional procedures with respect to require two signatures
        on all checks over $5,000.                                                                                                                                                                                                                        
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | b) | Change
        in Internal controls: There were 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. Additional cash management
        procedures that have been implemented include (i) timely review of all
        expenditures by one or more board members; (2) approval of all expenditures
        by an officer of the Company; and (3) all payments to officers are reviewed
        and approved by another officer or Board member, in the case of the CEO.
|
|

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 which
were not previously reported in Form 8-K filings by the Company.

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 February 2, 2006 the Company and certain current and former
  directors, officers and agents of the Company entered into a Master Compromise
  and Settlement Agreement with Mr. Rhea pursuant to which the parties resolved
  all outstanding claims between them. As part of the resolution, 800,000 of the
  5,000,000 shares of the Companys common stock registered in Mr. Rheas
  name and held in escrow were released to Mr. Rhea and 4,200,000 of the 5,000,000
  shares of the Companys common stock registered in Mr. Rheas name
  and held in escrow were returned to treasury of the Company for cancellation,
  without consideration. In addition, the Company paid Mr. Rhea $800,000 on account
  of compensation due to him under his employment agreement with the Company.
  The parties agreed to the following joint statement: In January 2006, J. William
  Rhea and Terax Energy, Inc., Phillip A. Wylie, Andrew Hromyk, Eric Boehnke,
  John W. Legg, and Billy Wayne Chester resolved all outstanding claims between
  them. None of the Parties accepted any liability or admitted any wrongdoing.
  The Parties no longer desire to pursue any claims against each other. As part
  of the resolution, Mr. Rhea will be paid $800,000. Furthermore, Terax Energy,
  Inc. will release from the management stock pool 800,000 shares of Terax Energy,
  Inc. common stock to Mr. Rhea. The 800,000 shares of the Companys common
  stock released to Mr. Rhea are subject to restrictions on resale as detailed
  in the Form 8-K filed on February 3, 2006

14

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Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds.

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

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

During the period covered by this report the removal of the Company’s
  former Chief Executive Officer as a director of the Company and certain other
  related matters were submitted to a vote of security holders, as more particularly
  described in the Company’s Current Report on Form 8-K dated November 3,
  2005. As permitted by Nevada law, written consents were solicited by certain
  shareholders of the Company. No meeting was held. 37,399,604 votes (being in
  excess of two-thirds of the then outstanding shares) were cast in favor of the
  resolutions.

Item 5. Other Information.

None.

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)          
|     |                                                                                                                                                                                                               
|10.1 | Master
      Compromise and Settlement Agreement dated February 2, 2006 between Terax
      Energy, Inc. et al. and J. William Rhea, IV. (1)                                                                  

(1) Incorporated by reference
  to same exhibit filed with the Company’s Form 10-QSB/A filed with the
  SEC on March 3, 2006

15

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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: May
      25, 2006 | By:               
|                         |                   
|                         |                   
|
|

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