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

FORM 10-QSB

(Mark One)

[ x ] Quarterly report under Section 13 or 15(d) of the Securities
  Exchange Act of 1934 
  for the quarterly period ended March 31, 2006

[]
  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 May 12, 2006, the Company had 60,482,600 shares 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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Quarterly Report on Form 10-QSB for the 
  Quarterly Period Ending March 31, 2006

Table of Contents

|PART I. FINANCIAL INFORMATION |        
|----------------------------- | -------
|                              |        
|                              | Item 1.
|                              |        
|                              |        
|                              |        
|                              |        
|                              |        
|                              |        
|                              |        
|                              |        
|                              |        
|                              | Item 2.
|                              |        
|                              | Item 3.
|                              |        
|PART II. OTHER INFORMATION    | 19     
|                              |        
|                              | Item 1.
|                              |        
|                              | Item 2.
|                              |        
|                              | Item 3.
|                              |        
|                              | Item 4.
|                              |        
|                              | Item 5.
|                              |        
|                              | Item 6.
|                              |        
|Signatures                    | 21     

2

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PART I  FINANCIAL INFORMATION

Item 1. Financial Statements

3

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Terax Energy, Inc. (an Exploration Stage Company)

  Balance Sheets 
  (Unaudited)

|                                                            |   | March 31,   |   |   | June 30,  |  
|----------------------------------------------------------- | - | ----------- | - | - | --------- | -
|                                                            |   | 2006        |   |   | 2005      |  
|Assets                                                      |   |             |   |   |           |  
|Current assets:                                             |   |             |   |   |           |  
|Cash and cash equivalents                                   | $ | 3,019,326   |   | $ | 16,614    |  
|Prepaid expenses                                            |   | 28,269      |   |   | 49,339    |  
|Total
      current assets                                  |   | 3,047,595   |   |   | 65,953    |  
|Oil and gas properties:                                     |   |             |   |   |           |  
|Properties not subject
      to amortization                |   | 5,930,207   |   |   | 1,471,601 |  
|Properties subject
      to amortization                    |   | 14,651,947  |   |   | -         |  
|Total
      oil and gas properties                          |   | 20,582,154  |   |   | 1,471,601 |  
|Other assets:                                               |   |             |   |   |           |  
|Office furniture and
      automobile equipment, net        |   | 134,582     |   |   | -         |  
|Deposits                                                    |   | 12,471      |   |   | -         |  
|Total
      other assets                                    |   | 147,053     |   |   | -         |  
|Total
      assets                                          | $ | 23,776,802  |   | $ | 1,537,554 |  
|                                                            |   |             |   |   |           |  
|Liabilities and Stockholders' Deficit                       |   |             |   |   |           |  
|Current liabilities:                                        |   |             |   |   |           |  
|Accounts payable                                            | $ | 1,575,780   |   | $ | -         |  
|Accrued liabilities                                         |   | 994,256     |   |   | 27,769    |  
|Derivative liability                                        |   | 21,413,629  |   |   | -         |  
|Total
      current liabilities                             |   | 23,983,665  |   |   | 27,769    |  
|Stockholders' deficit:                                      |   |             |   |   |           |  
|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           |   | 60,483      |   |   | 46,165    |  
|shares authorized, 60,482,600 and 46,165,000 shares         |   |             |   |   |           |  
|issued and outstanding at March 31, 2006 and June 30, 2005  |   |             |   |   |           |  
|Additional paid-in
      capital                            |   | 15,865,598  |   |   | 1,552,679 |  
|(Deficit) accumulated
      during exploration stage        |   | (16,132,944 | ) |   | (89,059   | )
|Total
      stockholder' deficit                            |   | (206,863    | ) |   | 1,509,785 |  
|Total liabilities
      and stockholders' deficit           | $ | 23,776,802  |   | $ | 1,537,554 |  

The Accompanying Notes are an Integral Part of These Financial
  Statements

4

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

Three-Months Ended
      
      
      Nine-Months Ended
      
      
      October 17, 2000March 31,
      
      
      March 31,
      
      
      (Inception) to2006
      
      
      2005
      
      
      2006
      
      
      2005
      
      
      March 31, 2006Revenue
      $
      -
      
      $
      -
      
      $
      -
      
      $
      -
      
      $
      -Expenses:Depreciation expense
      
      7,475
      
      
      -
      
      
      10,864
      
      
      -
      
      
      10,864Investor relations expenses
      
      25,821
      
      
      -
      
      
      136,895
      
      
      -
      
      
      136,895Professional fees
      
      409,139
      
      
      -
      
      
      748,061
      
      
      -
      
      
      748,061Payroll expense
      
      128,168
      
      
      -
      
      
      1,158,807
      
      
      -
      
      
      1,158,807General and administrative expenses
      
      269,100
      
      
      3,531
      
      
      428,985
      
      
      5,942
      
      
      518,044Total expenses
      
      839,703
      
      
      3,531
      
      
      2,483,612
      
      
      5,942
      
      
      2,572,671Net operating (loss)
      
      (839,703
      )
      
      (3,531
      )
      
      (2,483,612
      )
      
      (5,942
      )
      
      (2,572,671
      )Other income (expense):Dividend income
      
      43,902
      
      
      -
      
      
      74,841
      
      
      -
      
      
      74,841Interest (expense)
      
      (460,702
      )
      
      -
      
      
      (493,251
      )
      
      -
      
      
      (493,251
      )Loss on derivative liability
      
      (13,115,985
      )
      
      -
      
      
      (13,115,985
      )
      
      -
      
      
      (13,115,985
      )Other
      
      (243
      )
      
      -
      
      
      (25,878
      )
      
      -
      
      
      (25,878
      )Total other income (expenses)
      
      (13,533,028
      )
      
      -
      
      
      (13,560,273
      )
      
      -
      
      
      (13,560,273
      )Net (loss)
      $
      (14,372,731
      )
      $
      (3,531
      )
      $
      (16,043,885
      )
      $
      (5,942
      )
      $
      (16,132,944
      )Net (loss) per share
      $
      (0.25
      )
      $
      (0.00
      )
      $
      (0.30
      )
      $
      (0.00
      )Weighted average number ofcommon shares outstandingbasic and fully diluted
      
      56,740,946
      
      
      28,845,000
      
      
      53,006,501
      
      
      28,845,000 The Accompanying Notes are an Integral Part of These Financial
    Statements 5


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

|                                                          |   |                           |   |   |                |   |   | October 17, 2000 |  
|--------------------------------------------------------- | - | ------------------------- | - | - | -------------- | - | - | ---------------- | -
|                                                          |   | For the Nine-Months Ended |   |   | (Inception) to |  
|                                                          |   | March
      31,           |   |   | March 31,      |  
|                                                          |   | 2006                      |   |   | 2005           |   |   | 2006             |  
|Cash flows from operating activities:                     |   |                           |   |   |                |   |   |                  |  
|Net (loss)                                                | $ | (16,043,885               | ) | $ | (5,942         | ) | $ | (16,132,944      | )
|Adjustments to reconcile net loss :                       |   |                           |   |   |                |   |   |                  |  
|Shares
      issued for services                          |   |                           |   |   |                |   |   | 7,500            |  
|Shares issued for
      interest expense                  |   | 375,000                   |   |   |                |   |   | 375,000          |  
|Depreciation
      expense                                |   | 10,864                    |   |   | -              |   |   | 10,864           |  
|Unrealized
      Loss on derivative liability             |   | 13,115,985                |   |   | -              |   |   | 13,115,985       |  
|Changes in current assets and liabilities:                |   |                           |   |   |                |   |   |                  |  
|Increase (Decrease)
      in prepaid expenses             |   | 21,070                    |   |   | -              |   |   | (28,269          | )
|Increase
      in accounts payable                        |   | 1,575,780                 |   |   | -              |   |   | 1,575,780        |  
|Increase in accrued
      liabilities                     |   | 966,486                   |   |   | -              |   |   | 994,255          |  
|Increase
      in deposits                                |   | (12,471                   | ) |   | -              |   |   | (12,471          | )
|Net cash used in operating activities                     |   | 8,829                     |   |   | (5,942         | ) |   | (94,300          | )
|                                                          |   |                           |   |   |                |   |   |                  |  
|Cash flows from investing activities                      |   |                           |   |   |                |   |   |                  |  
|Purchase
      of oil and gas leases                      |   | (4,458,606                | ) |   | -              |   |   | (4,458,606       | )
|Increase in drilling
      and equipment                  |   | (14,651,945               | ) |   | -              |   |   | (14,651,945      | )
|Increase
      in furniture and automobiles               |   | (145,446                  | ) |   | -              |   |   | (145,446         | )
|Net cash used in investing activities                     |   | (19,255,997               | ) |   | -              |   |   | (19,255,997      | )
|                                                          |   |                           |   |   |                |   |   |                  |  
|Cash flows from financing activities                      |   |                           |   |   |                |   |   |                  |  
|Proceeds from notes
      payable                         |   | 7,825,000                 |   |   | -              |   |   | 7,825,000        |  
|Payments on notes
      payable                           |   | (7,825,000                | ) |   | -              |   |   | (7,825,000       | )
|Debt conversion                                           |   | -                         |   |   | -              |   |   | 1,800            |  
|Issuance of common
      stock, net of offering cost      |   | 22,249,880                |   |   | -              |   |   | 22,367,823       |  
|Net cash provided by financing activities                 |   | 22,249,880                |   |   | -              |   |   | 22,369,623       |  
|                                                          |   |                           |   |   |                |   |   |                  |  
|Net (decrease) increase in cash                           |   | 3,002,712                 |   |   | (5,942         | ) |   | 3,019,326        |  
|Cash  beginning of period                                |   | 16,614                    |   |   | 20,660         |   |   | -                |  
|Cash  ending of period                                   | $ | 3,019,326                 |   | $ | 14,718         |   | $ | 3,019,326        |  
|                                                          |   | -                         |   |   |                |   |   |                  |  
|Supplemental disclosures:                                 |   |                           |   |   |                |   |   |                  |  
|Interest paid                                             | $ | 118,251                   |   |   | -              |   | $ | 118,251          |  
|Income taxes paid                                         | $ | -                         |   | $ | -              |   | $ | -                |  
|Non-cash investing and financing activities:              |   |                           |   |   |                |   |   |                  |  
|Common Stock for
      Asset Acquistion                   | $ | -                         |   | $ | -              |   | $ | 1,471,601        |  
|Common Stock for
      Interest Expense                   | $ | 375,000                   |   | $ | -              |   | $ | 375,000          |  
|Warrant
      issued in connection with issuance of stock | $ | 8,297,644                 |   | $ | -              |   | $ | 8,297,644        |  

The Accompanying Notes are an Integral Part of These Financial
  Statements

6

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

Note 2  Stockholders' Equity

Sale of Securities

From August 8, 2005 through September 14, 2005, the Company
accepted subscriptions for 739,000 Units at a price of $10.00 per Unit for gross
proceeds to the 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 at a price of $1.75 per share, 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 offering.

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 at an exercise price of $1.50 per share and expire
  on February 6, 2011. 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 paid in connection with the February
7, 2006 private placement were approximately $862,120. In addition, warrants to
purchase 574,120 shares of common stock, identical to those sold to the
investors, except with an exercise price of $1.25 per share were issued to the
placement agent. 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.

With respect to February 7, 2006 private placement, 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.

7

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The Company is accounting for the warrants associated with the
  sale of its common stock in the February 7, 2006 private placement, in accordance
  with SFAS 133 Accounting for Derivative instruments and Hedging Activities
  and EITF 00-19 Accounting for Derivative Financial Instruments Indexed
  to and Potentially Settled in a Companys Own Stock. The accounting
  treatment of these derivative financial instruments requires that the Company
  record the derivatives at their fair values as of the date of the sale of the
  common stock and at fair value as of each subsequent balance sheet date as a
  liability. At February 7, 2006 the proceeds were allocated between the common
  stock and the warrants. The allocation was based on the value of the common
  stock issued utilizing the closing price of the common stock on February 7,
  2006 and the fair market value of the warrants as determined using the Black
  Scholes pricing model. The proceeds were allocated $7,099,291, to the fair value
  of the warrants and recorded as a liability, and the remaining $8,907,709 was
  allocated to the common stock. The allocated value of the common stock was recorded
  as $8,894,903 in additional paid in capital, and $12,806 in common stock. Any
  future change in the fair value is recorded as non-operating, non-cash income
  or expense at each balance sheet date as Gain (loss) on derivative liabilities.
  The Company estimates fair value using the Black Scholes option pricing model.
  This model requires the use of estimates such as the expected holding period,
  the expected future volatility of the Companys common stock and the risk-free
  rate of return over the holding period. These estimates directly affect the
  reported amounts of the derivative instrument liabilities. The fair value of
  the warrants at February 7, 2006, was $27,045,484. The significant assumptions
  used in the valuation were: the exercise price as noted above; Teraxs
  common stock price on February 7, 2006, which was $2.65; expected volatility
  of 79.92%; risk free interest rate of approximately 4.5%, and a term of 5 years.
  At March 31, 2006 the fair value of the warrants was again determined utilizing
  the Black Scholes valuation model. The fair value of the warrants at March 31,
  2006 was $21,413,629. The significant assumptions used in the valuation were:
  the exercise price as noted above; Teraxs common stock price on March
  31, 2006, which was $2.20; expected volatility of 79.35%; risk free interest
  rate of approximately 4.8%, and a term of four years and eight months. The resulting
  unrealized change in fair value of $5,631,855 from February 7, 2006 was recorded
  in the statement of expenses derivative liability.

Stock Return to Treasury

On June 13, 2005 Bill Chester returned to our treasury for cancellation
  without consideration a total of 99,650,000 shares of common stock. These shares
  were part of 105,150,000 shares issued from October 2000 through August 2003
  which were acquired by Mr. Chester in March 2005 from one of our former officers.
  Of the 105,150,000 shares acquired by Mr. Chester in March 2005, Mr. Chester
  subsequently sold 5,000,000 to another officer of the Company. In June 2005,
  to facilitate our private placement offering, discussed below, Mr. Chester agreed
  to cancel 99,650,000 shares held by him and retained 500,000 shares, 500,000
  of which he subsequently deposited into escrow pursuant to the Management Stock
  Pool Agreement dated June 7, 2005. There were no additional terms with respect
  to such Mr. Chesters agreement to cancel the 99,650,000 shares.

On February 2, 2006, pursuant to the Master Compromise and
Settlement Agreement with J. William Rhea, IV, 4,200,000 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. See Management
Group Stock Plan discussed below.

Management Compensation

Management Group Stock Plan

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.

On October 26, 2005, Mr. Chester resigned his positions of
Director and Vice President of the Company. As provided for in the Management
Group Stock Agreement, Mr. Chesters resignation resulted in forfeiture of the
500,000 shares of the Company stock registered to Mr. Chester which were being
held in escrow. The shares were returned to the treasury of the Company and
cancelled on February 2, 2006.

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

8

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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.

There are currently no shares held in escrow which are subject
to the Management Group Stock Plan.

Management
  Stock and Options Grants

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 stock at a price of $2.80 per share for a period
  of 5 years. The options will vest in equal amounts, over three years from the
  date of issue. The grants are subject to the Companys 2006 Incentive Stock
  Plan which was approved by shareholders owning a majority of the Companys
  stock in May 2006.

On November 15, 2005, the Company hired a Chief Financial Officer
  and interim Chief Executive Officer 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 were to be determined at a
  later date. The grants are subject to the Companys 2006 Incentive Stock
  Plan which was approved by shareholders owning a majority of the Companys
  stock in May 2006.

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 are subject
  to the Companys 2006 Incentive Stock Plan which was approved by shareholders
  owning a majority of the Companys stock in May 2006.

The grants are subject to the Company's 2006 Incentive Stock
  Plan. The holders of the stock and option grants discussed above have agreed
  to waive their rights to the stock and option grants provided that the 2006
  Incentive Stock Plan is approved by the Company's shareholders. The 2006 Incentive
  Stock Plan is discussed below.

2006 Incentive Stock Plan

The 2006 Incentive Stock Plan has initially reserved 3,200,000
shares of common Stock for issuance. Under the 2006 Incentive Stock Plan,
options may be granted which are intended to qualify as Incentive Stock Options
under Section 422 of the Internal Revenue Code of 1986 or which are not intended
to qualify as Incentive Stock Options thereunder. Under the 2006 Stock Incentive
Plan, options, stock grants, or restricted stock may be granted to key
employees, officers, directors or consultants of the Company, as provided in the
2006 Stock Incentive Plan.

On February 27, 2006, the Board of Directors approved certain
stock grants to four employees, subject to the approval of shareholders of the
Company. With respect to each of the following grants, 40% of such shares would
be earned on January 1, 2007 and 60% would be earned on January 1, 2008.

Grantee
    Position
    SharesLawrence J. Finn
      CEO and CFO
      1,500,000Richard C. Binz
    Controller and CAO
    300,000Sam M. Governale
      VP Field Operations
      250,000Joyce Moore
    Secretary
    100,000


The Companys 2006 Stock Incentive Stock Plan was approved
  by shareholders owning a majority of the Companys stock in May 2006.

Note 3  Oil and Gas PropertiesIn the nine months ended March 31, 2006, the Company acquired additional
  gross acres of oil and gas leasehold interests in Erath and Comanche Counties,
  Texas. These acquisition costs for the three and nine months ended March 31,
  2006 were $739,310 and $4,458,606, respectively.

9

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Note 3  continued

In October, 2005, the Company began development of its oil and
  gas leases in Erath County Texas. Through the quarter ended March 31, 2006,
  the Company had drilled four wells to total depth and began installation of
  its gathering system. At March 31, 2006, the Company was completing one well
  and the remaining three wells were waiting on completion of the gathering or
  a fracture stimulation crew before they can be completed and begin production.
  The total cost incurred for drilling and gathering system for the three and
  nine months ended March 31, 2006, was $9,567,288 and $14,651,947, respectively.

Note 4  Related Party Transactions

For the Nine months ended March 31, 2006, $298,844, of legal
fees and reimbursable expenses, were incurred with a law firm in which a
Director is a partner of the law firm.

For the Nine months ended March 31, 2006, fees totaling
$138,962 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 first 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, and are due on demand
  after May 31, 2006. The Notes 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.

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 Notes as follows:
  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 a total of 215,517 shares of the Companys common
  stock as further consideration for the Notes and the Additional Note. The Company
  has agreed to issue an additional 84,483 share of common stock as further compensation
  for the Notes and the Additional Note. In the Event of Default, the holder of
  the Notes and the Additional Note 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.

On February 17, 2006, the Company repaid $7,500,000 principal
plus accrued interest of $117,106. In addition, $375,000 was charged to interest
expense for common stock issued in connection with the notes. As result of the
repayment, the holder of the notes released all his security interest in the
properties.

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
1,188 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.

On January 24, 2006 the Company signed a three (3) year office
lease for approximately 2,893 square feet. The month rental rate is $5,726 per
month.

Note 7- Subsequent Events

On May 12, 2006, the Company issued a promissory note in the
  principal amount of $2,500,000 to an investor. The Note bears interest at the
  rate of 12.5% per annum, payable on repayment of the Note. The Note is due on
  demand after December 31, 2006. In addition, interest in the amount of $125,000.00
  is due and payable in 71,429 shares of the Companys common stock at closing.
  The Note is 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 note 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.

10

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ITEM 2. PLAN OF OPERATIONS

Forward-Looking Statements

This report 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

11

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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

Third Quarter of 2006 Compared to Third Quarter of
2005

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

Three Months
      
      
      Three Months
      
      
      IncreaseMarch
        31, 2006
      
      
      March
        31,2005
      
      
      (Decrease)Revenue
      $
      -
      
      $
      -
      
      $
      -Expenses:General and administrative
      
      269,100
      
      
      3,531
      
      
      265,569Payroll expenses
      
      128,168
      
      
      -
      
      
      128,168Professional fees
      
      409,139
      
      
      -
      
      
      409,139Investor relations expenses
      
      25,821
      
      
      -
      
      
      25,821Depreciation expenses
      
      7,475
      
      
      -
      
      
      7,475Total expenses
      
      839,703
      
      
      3,531
      
      
      836,172(Loss) from operations
      
      (839,703
      )
      
      (3,531
      )
      
      (836,172
      )Other income (expense):Other expenses
      
      (243
      )
      
      -
      
      
      (243
      )Interest and other income
      
      43,902
      
      
      -
      
      
      43,902Interest expense
      
      (460,702
      )
      
      -
      
      
      (460,702
      )Loss on derivative liability
      
      (13,115,985
      )
      
      0
      
      
      (13,115,985
      )Net ( loss)
      $
      (14,372,731
      )
      $
      (3,531
      )
      $
      (14,369,200
      )


Revenue

Total revenue for the third 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.

12

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Expenses

The General and Administrative Expenses, Payroll Expenses,
Professional Fees, and Investor Relations Expenses for the third quarter of 2006
as compared to the third quarter of 2005 were $832,228 and 3,531, respectively,
for an increase of $828,697. 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.

Depreciation expenses for the third quarter of 2006 was $7,475
  as compared to the third quarter 2005 which was $.0, for an increase of $7,475.
  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 third quarter of 2006 and
2005 was $43,902 and $.0, respectively, for an increase of $43,902 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 third quarter of 2006 and 2005 was $460,702
  and $.0, respectively, for an increase of $460,702. During the second and third
  quarter of 2006, we entered into a short-term promissory note(s) in order to
  meet our operating cost requirements.

Loss on derivative liability for the third quarter of 2006 and
  2005 was $13,115,985 and $.0, respectively, for an increase of $13,115,985.
  This increase is fully described and reference in Note 2, Stockholders
  Equity.

Net Loss

Our net loss for the third quarter of 2006 and 2005 was $14,372,731
  and $3,531, respectively, for an increase loss in the amount of $14,369,200.
  Of these losses, approximately $385,864 was attributable to non-cash costs associated
  depreciation expenses and non-cash interest expenses. Additionally, a loss on
  derivative liability of $13,115,985 was recognized in the third quarter of 2006,
  as is fully described and referenced in Note 2, Stockholders Equity.

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

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

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|                                 |   | Nine Months    |   |   | Nine Months   |   |   | Increase    |  
|-------------------------------- | - | -------------- | - | - | ------------- | - | - | ----------- | -
|                                 |   | March 31, 2006 |   |   | March 31,2005 |   |   | (Decrease)  |  
|Revenue                          | $ | -              |   | $ | -             |   | $ | -           |  
|                                 |   |                |   |   |               |   |   |             |  
|Expenses:                        |   |                |   |   |               |   |   |             |  
|General and
      administrative |   | 428,985        |   |   | 5,942         |   |   | 423,043     |  
|Payroll expenses                 |   | 1,158,807      |   |   | -             |   |   | 1,158,807   |  
|Professional fees                |   | 748,061        |   |   | -             |   |   | 748,061     |  
|Investor relations expenses      |   | 136,895        |   |   | -             |   |   | 136,895     |  
|Depreciation expenses            |   | 10,864         |   |   | -             |   |   | 10,864      |  
|Total
      expenses             |   | 2,483,612      |   |   | 5,942         |   |   | 2,477,670   |  
|                                 |   |                |   |   |               |   |   |             |  
|(Loss) from operations           |   | (2,483,612     | ) |   | (5,942        | ) |   | (2,477,670  | )
|                                 |   |                |   |   |               |   |   |             |  
|Other income (expense):          |   |                |   |   |               |   |   |             |  
|Other expenses                   |   | (25,878        | ) |   | -             |   |   | (25,878     | )
|Interest
      and other income  |   | 74,841         |   |   | -             |   |   | 74,841      |  
|Interest expense                 |   | (493,251       | ) |   | -             |   |   | (493,251    | )
|Loss on derivative liability     |   | (13,115,985    | ) |   | 0             |   |   | (13,115,985 | )
|Net Income ( loss)               | $ | (16,043,885    | ) | $ | (5,942        | ) | $ | (16,037,943 | )

Revenue

Total revenue for the first nine 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 General and Administrative Expenses, Payroll Expenses,
Professional Fees, and Investor Relations Expenses for the first Nine months of
2006 as compared to the first nine months of 2005 were $2,472,748 and $5,942,
respectively, for an increase of $2,466,806. 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 depreciation expenses for the nine months 2006
  was $10,864 as compared to the first nine months of 2005 which was $.0, for
  an increase of $10,864. 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 nine months of 2006 and
  2005 was $74,841 and $.0, respectively, for an increase of $74,841, 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 nine months of 2006 and 2005 was
  $493,251 and $.0, respectively, for an increase of $493,251. During the first
  nine months of 2006, we entered into a short-term promissory note(s) in order
  to meet our operating cost requirements.

14

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Loss on derivative liability for the first nine months of
  2006 and 2005 was $13,115,985 and $.0, respectively, for an increase
  of $13,115,985. This increase is fully described and reference in Note 2,
  Stockholders Equity.

Net Loss

Our net loss for the first nine months of 2006 and 2005 was
  $16,043,885 and $5,942, respectively, for an increase loss in the amount
  of $16,037,943. Of these losses, approximately $385,864 was attributable
  to non-cash depreciation costs associated with the purchase of certain office
  furniture and vehicles to support our operations. Additionally, a loss on derivative
  liability of $13,115,985 was recognized in the third quarter of 2006, as
  is fully described and referenced in Note 2, Stockholders Equity.

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 mezzanine debt as necessary
  to complete our 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 the stage which they can sustain their own development
  or develop financing alternatives which will not hinder the development of its
  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.

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 March 31, 2006 we had current assets of $3,047,595 and
  current liabilities of $23,983,665 for a negative net working capital of $20,936,070.
  The net working capital would be positive $447,559 net of the derivative liability
  $21,413,629. We will need additional working capital to complete our first six
  wells and complete the gathering system in order to begin production on all
  six wells. We completed our first well in March 2006 and have been selling some
  gas in April while the well continued to unload its fracture stimulation water.
  If we secure sufficient capital we may have all six wells on production in June
  2006. We will need to obtain additional funds to supplement our expected revenues
  from the first six wells

15

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in order to continue the implementation of our planned exploration and development programs on our existing properties over the next twelve months. Furthermore, should the pace of our acquisitions and/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 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 will need additional capital to proceed with the current phase of our operations and the continued field development of our Erath County properties

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 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 lease 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.

16

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As of March 31, 2006, we had assets of $23,776,802, and
  $23,983,665 in current liabilities; resulting in a stockholders deficit
  of $(206,863).

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 council 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 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 March 31, 2006 there were no significant changes in the number of employees. We currently have 4 employees and 6 full-time consultants.

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.

17

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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 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 the Securities and Exchange Commissions 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. Subsequent to the end of the period covered by this report,
      the Company implemented additional procedures to require two signatures on
      all checks over $5,000.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|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.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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, IV 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

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, approval by written
  consent was obtained from shareholders owning a majority of the Companys
  stock for the Companys 2006 Stock Incentive Stock Plan. The 2006 Incentive
  Stock Plan has initially reserved 3,200,000 shares of common Stock for issuance.
  Under the 2006 Incentive Stock Plan, options may be granted which are intended
  to qualify as Incentive Stock Options under Section 422 of the Internal Revenue
  Code of 1986 or which are not intended to qualify as

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Incentive Stock Options thereunder. Under the 2006 Stock
Incentive Plan, options, stock grants, or restricted stock may be granted to key
employees, officers, directors or consultants of the Company, as provided in the
2006 Stock Incentive Plan.

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)          

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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 15, 2006 | By:               
|                   |                   
|                   |                   
|                   |                   
|                   |                   

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