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

FORM 10QSB

(Mark One)

[X] Quarterly report under Section 13 or 15(d) of the Securities
  Exchange Act of 1934
  for the quarterly period ended December, 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 TowerDallas, 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 Terax
(as defined in Rule 12b-2 of the Exchange Act).

Yes [ ]    No
  [X]

As of February 19, 2007, Terax had 3,066,583 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 December 31, 2006

Table of Contents

|PART I. FINANCIAL INFORMATION |                                                                  
|----------------------------- | -----------------------------------------------------------------
|                              |                                                                  
|Item 1.                       | Financial Statements                                             
|                              |                                                                  
|                              | Consolidated
      Balance Sheets:                               
|                              | December 31, 2006 and June 30, 2006 (Unaudited)                  
|                              |                                                                  
|                              | Consolidated
      Statements of Operations:                     
|                              | Three and Six Months Ended December 31, 2006 and 2005 (Unaudited)
|                              |                                                                  
|                              | Consolidated
      Statements of Cash Flows:                     
|                              | Six Months Ended December 31, 2006 and 2005 (Unaudited)          
|                              |                                                                  
|                              | Notes to
      Unaudited Consolidated Financial Information:     
|                              | December 31, 2006                                                
|                              |                                                                  
|Item 2.                       | Plan of Operation                                                
|                              |                                                                  
|Item 3.                       | Controls and Procedures                                          
|                              |                                                                  
|PART II. OTHER INFORMATION    |                                                                  
|                              |                                                                  
|Item 1.                       | Legal Proceedings                                                
|                              |                                                                  
|Item 2.                       | Unregistered Sales of Equity Securities and Use of Proceeds      
|                              |                                                                  
|Item 3.                       | Defaults Upon Senior Securities                                  
|                              |                                                                  
|Item 4.                       | Submission of Matters to a Vote of Security Holders              
|                              |                                                                  
|Item 5.                       | Other Information                                                
|                              |                                                                  
|Item 6.                       | Exhibits                                                         
|                              |                                                                  
|Signatures                    |                                                                  

2

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Terax Energy, Inc. 
  Consolidated Balance Sheet(Unaudited)

|                                                                               |   | December 31, |   |   | June 30,    |  
|------------------------------------------------------------------------------ | - | ------------ | - | - | ----------- | -
|                                                                               |   | 2006         |   |   | 2006        |  
|ASSETS                                                                         |   |              |   |   |             |  
|Current assets:                                                                |   |              |   |   |             |  
|Cash                                                                           | $ | 16,574       |   | $ | 779,872     |  
|Prepaid expenses, and advances to
      operators                              |   | -            |   |   | 559,669     |  
|Total
      current assets                                                     |   | 16,574       |   |   | 1,339,541   |  
|Property, Plant and Equipment:                                                 |   |              |   |   |             |  
|Oil and natural gas
      properties, successful efforts method of accounting: |   |              |   |   |             |  
|Proved properties, net of accumulated
      depletion and impairment           |   | 724,220      |   |   | 718,967     |  
|Unproved properties not
      being amortized, net of impairment               |   | 9,847,317    |   |   | 9,591,386   |  
|Pipeline and gathering system, net of
      accumulated depreciation           |   | 5,537,117    |   |   | 5,767,339   |  
|Furniture and
      equipment, net of accumulated depreciation                 |   | 75,509       |   |   | 128,083     |  
|Total property, plant and
      equipment                                      |   | 16,184,163   |   |   | 16,205,775  |  
|Other assets                                                                   |   | 12,471       |   |   | 12,471      |  
|Total assets                                                                   | $ | 16,213,208   |   | $ | 17,557,787  |  
|                                                                               |   |              |   |   |             |  
|LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                                 |   |              |   |   |             |  
|Current liabilities:                                                           |   |              |   |   |             |  
|Accounts payable and accrued expense                                           | $ | 6,064,667    |   | $ | 5,144,658   |  
|Accrued liabilities                                                            |   | 821,851      |   |   | 436,586     |  
|Short term debt                                                                |   | 2,500,000    |   |   | 2,500,000   |  
|Derivative liability                                                           |   | 84,821       |   |   | 16,458,719  |  
|Total current liabilities                                                      |   | 9,471,339    |   |   | 24,539,963  |  
|Asset retirement obligation                                                    |   | 24,539       |   |   | 24,399      |  
|Stockholders' equity (deficit):                                                |   |              |   |   |             |  
|Preferred stock, $0.001
      par value, 250,000                               |   | -            |   |   | -           |  
|shares authorized,
      zero shares issued and outstanding                    |   |              |   |   |             |  
|Common stock, $0.001
      par value, 15,000,000                               |   | 3,030        |   |   | 3,029       |  
|shares authorized,
      3,029,576 and 3,028,951 shares                        |   |              |   |   |             |  
|issued and outstanding at December 31, 2006 and June 30, 2006                  |   |              |   |   |             |  
|Additional paid-in capital                                                     |   | 16,104,426   |   |   | 16,098,052  |  
|Accumulated deficit                                                            |   | (9,390,126   | ) |   | (23,107,656 | )
|Total stockholders'
      equity (deficit)                                     |   | 6,717,330    |   |   | (7,006,575  | )
|Total liabilities and
      stockholders' equity (deficit)                     | $ | 16,213,208   |   | $ | 17,557,787  |  

See accompanying notes to the consolidated financial statements.

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Terax Energy, Inc. 
  Consolidated Statements of Operations
  (Unaudited)

|                                              |   | Three-Months
        Ended |   |   | Six-Months Ended |  
|--------------------------------------------- | - | -------------------------- | - | - | ---------------- | -
|                                              |   | December 31,               |   |   | December 31,     |  
|                                              |   | 2006                       |   |   | 2005             |  
|                                              |   |                            |   |   |                  |  
|Revenue                                       | $ | -                          |   | $ | -                |  
|                                              |   |                            |   |   |                  |  
|Expenses:                                     |   |                            |   |   |                  |  
|Depreciation and depletion
      expense      |   | 162,705                    |   |   | 3,389            |  
|Impairment
      of oil and gas properties    |   | -                          |   |   |                  |  
|General and administrative
      expenses     |   | 277,378                    |   |   | 1,159,967        |  
|Total
      expenses                          |   | 440,083                    |   |   | 1,163,356        |  
|                                              |   |                            |   |   |                  |  
|Net operating (loss)                          |   | (440,083                   | ) |   | (1,163,356       | )
|                                              |   |                            |   |   |                  |  
|Other income (expense):                       |   |                            |   |   |                  |  
|Dividend income                               |   | 977                        |   |   | 16,817           |  
|Interest
      (expense)                      |   | (80,762                    | ) |   | (31,439          | )
|Gain on derivative liability                  |   | 2,053,031                  |   |   | -                |  
|Other                                         |   | -                          |   |   | -                |  
|Other income
      (expense)                  |   | 1,973,246                  |   |   | (14,622          | )
|                                              |   |                            |   |   |                  |  
|Net income (loss)                             | $ | 1,533,163                  |   | $ | (1,177,978       | )
|                                              |   |                            |   |   |                  |  
|Basic and diluted net income (loss) per share | $ | 0.51                       |   | $ | (0.45            | )
|                                              |   |                            |   |   |                  |  
|Weighted average number of                    |   |                            |   |   |                  |  
|common shares
      outstanding               |   |                            |   |   |                  |  
|basic and diluted                             |   | 3,029,576                  |   |   | 2,603,850        |  

See accompanying notes to the consolidated financial statements.

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Terax Energy, Inc. 
  Consolidated Statements of Cash Flows(Unaudited)

|                                                                      |   | For the Six-Months Ended |  
|--------------------------------------------------------------------- | - | ------------------------ | -
|                                                                      |   | December 31,             |  
|                                                                      |   | 2006                     |  
|Cash flows from operating activities:                                 |   |                          |  
|Net income (loss)                                                     | $ | 13,717,525               |  
|Adjustments to reconcile net loss :                                   |   |                          |  
|Shares issued
      for compensation                                  |   | 6,375                    |  
|Asset retirement obligations                                          |   | 2,319                    |  
|Depreciation,
      depletion and amortization                        |   | 360,513                  |  
|Impairment oil and gas
      properties                               |   | 998,911                  |  
|Write off of
      fixed assets                                       |   | 8,412                    |  
|Unrealized gain on derivative
      liability                         |   | (16,373,897              | )
|Changes in current assets and liabilities:                            |   |                          |  
|Increase and decrease in
      prepaid expenses and operator advances |   | 559,669                  |  
|Increase
      in accounts payable                                    |   | 44,749                   |  
|Increase in accrued
      liabilities                                 |   | 383,515                  |  
|Decrease
      in deposits                                            |   | -                        |  
|Net cash used in operating activities                                 |   | (291,909                 | )
|                                                                      |   |                          |  
|Cash flows from investing activities                                  |   |                          |  
|Reduction
      (purchases) of oil and gas leases                     |   | (255,929                 | )
|Investments in drilling
      and equipment                           |   | (162,377                 | )
|Investments in pipeline and gathering system                          |   | (70,533                  | )
|Investments in furniture
      and fixtures                           |   | -                        |  
|Disposition of automobile                                             |   | 17,450                   |  
|Net cash used in investing activities                                 |   | (471,389                 | )
|                                                                      |   |                          |  
|Cash flows from financing activities                                  |   |                          |  
|Proceeds
      from notes payable                                     |   | -                        |  
|Payments on notes payable                                             |   | -                        |  
|Issuance
      of common stock, net of offering cost                  |   | -                        |  
|Net cash provided by financing activities                             |   | -                        |  
|                                                                      |   |                          |  
|Net (decrease) increase in cash                                       |   | (763,298                 | )
|Cash  beginning of period                                            |   | 779,872                  |  
|Cash  ending of period                                               | $ | 16,574                   |  
|                                                                      |   |                          |  
|Supplemental disclosures:                                             |   |                          |  
|Interest
      paid                                                   | $ | -                        |  
|Income taxes paid                                                     | $ | -                        |  

See accompanying notes to the consolidated financial statements.

5

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Terax Energy, Inc.

Notes to Unaudited Interim Consolidated 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, 2006 as reported in Form 10-KSB have been
omitted.

These statements reflect all adjustments, consisting of normal recurring adjustments which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that
these consolidated interim financial statements be read in conjunction with the financial statements of Terax for the period ended June 30, 2006 and notes thereto included in Teraxs Form 10-KSB.

Note 2  Going Concern

Terax's financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities and commitments in the normal course of business for the foreseeable
future. Since inception, Terax has accumulated losses aggregating to $9,376,195 and has insufficient working capital to meet operating needs for the next twelve months as of December 31, 2006, all of which raise substantial doubt about Terax's
ability to continue as a going concern.

Management's plans for Terax's continued existence include selling additional stock, the sale of assets, or borrowing additional funds to pay current accounts payable, short-term debt, and overhead expenses. In
addition, Terax will need to raise additional capital for development of its properties or enter into joint ventures with other operators in order to execute its business plan.

Teraxs future success is dependent upon its ability to achieve profitable operations, generate cash from operating activities, and obtain additional financing. There is no assurance that Terax will be able to
generate sufficient cash from operations, sell additional shares of common stock, or borrow additional funds.

Terax's inability to obtain additional cash could have a material adverse effect on its financial position, results of operations, and its ability to continue in existence. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

Note 3  Stockholders Equity

Reverse stock split

On January 29, 2007, a 1
  to 20 (one to twenty) reverse split of Teraxs common shares was implemented
  which resulted in 3,066,583 outstanding common shares at February 20, 2007.
  The total authorized common and preferred shares were also adjusted which
  resulted in authorized shares of 15,000,000 and 250,000, respectively.All outstanding warrants were also adjusted on a 1 to 20 (one to twenty)
  ratio and the strike price was increased 20 (twenty) times the original strike
  price. All share and per share information has been retroactively restated in
  the consolidated financial statements to reflect the reverse stock split.

Terax was issued a new CUSIP number and a new quoted symbol
  of TEXG.

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Sale of Securities

On February 7, 2006, Terax entered into a series of securities purchase agreements to sell units consisting of common stock and warrants to four institutional investors an aggregate of 12,805,600 shares of Terax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 per unit. The warrants are
exercisable at an exercise price of $1.50 per share and expire on February 6, 2011. Terax 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 Teraxs common stock for each of the previous thirty trading days is in excess of $2.50 per share.

With respect to the February 7, 2006 private placement, Terax 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, Terax 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, Terax is obligated to pay the investors liquidated damages in the amount of 1.5% of the purchase
price for each month in which Terax is in default.

Terax 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 Teraxs Own Stock. The accounting treatment of these derivative financial instruments requires that Terax 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 December 31, 2006 the fair value of the warrants was determined utilizing the Black Scholes valuation model. The fair value of the warrants at December 31, 2006 was $84,821. The significant assumptions used in
the valuation were: the exercise price as noted above; Teraxs common stock price on December 31, 2006, which was $.065 per share; expected volatility of 84.42%; risk free interest rate of approximately 4.7%, and a term of four years and
one month. The resulting unrealized change in fair value of $16,373,897 from June 30, 2006 to December 31, 2006 was recorded in the statement of operations as a gain on derivative liability resulting in a net gain on derivative liability for the
period of $16,373,897.

Securities Issued for Compensation

On September 21, 2006, Terax issued 12,500 shares of common stock to a former Director as compensation. The share price of the stock on September 21, 2006, was $0.51 per share and therefore $6,375 was recorded
in equity and general and administrative expenses.

Note 4  Oil and Gas Properties

Asset Retirement Obligations

Terax follows the provisions
  of Financial Accounting Standards Board Statement No. 143, Accounting for Asset
  Retirement Obligations (SFAS No. 143). This accounting standard requires entities
  to record the fair value of a liability for an asset retirement obligation in
  the period in which it is incurred. When the liability is initially recorded,
  the entity capitalizes a cost by increasing the carrying amount of the related
  long-lived asset. Over time, the liability is accreted to its present value
  each period, and the capitalized cost is depreciated over the useful life of
  the related asset. Upon settlement of the liability, an entity either settles
  the obligation for its recorded amount or incurs a gain or loss upon settlement.

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Following is a reconciliation of
the asset retirement obligation liability as of December 31, 2006:

|Asset retirement obligation at June 30,
      2006 | $ 24,399      
|-------------------------------------------------- | --------------
|Liabilities incurred                               | -             
|Liabilities settled                                | -             
|                                                   |               
|Accretion expense                                  | 140           
|Asset retirement obligation at December 31, 2006   | $
      24,539

Note 5  Note Payable

On May 12, 2006, Terax 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 is due and payable in 71,429 shares of Teraxs common stock
at closing. The note is secured by a security interest in all of Terax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 Terax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. During the six months ended December
31, 2006, Terax has accrued $157,534 in interest. The total interest accrued to
date is $199,486. On January 19, 2007, Terax received a notice of default and a
demand letter from the lender. See managements plans to address this and other
liquidity issues discussed in Note 2 above.

Note 6  Other Obligations

Registration Obligation

Subject to the terms of the
registration rights agreement, Terax was 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, Terax is obligated to pay the investors liquidated
damages in the amount of 1.5% of the purchase price for each month in which
Terax is in default.

The date the registration needed
to become effective with the Securities and Exchange Commission to avoid any
registration penalty was June 7, 2006. However, Terax did not get the
registration effective with the Securities and Exchange Commission until August
14, 2006. As a result Terax has incurred a total registration penalty of
$536,783 which has been accrued as of December 31, 2006.

Litigation

On July 20, 2006, an action was
  commenced in the District Court of Erath County, Texas, against Terax by Centex
  Pipeline Construction, Inc. for failure to pay for services performed, breach
  of contract and to foreclose on Centexs mechanic lien. The Complaint alleges
  that Terax and Centex entered into an agreement to install certain components
  of a gas pipeline gathering system on Teraxs Mitchell Ranch property in
  Erath County, Texas. The Complaint further alleges that Centex completed work
  on June 5, 2006 and that Terax has failed to pay certain outstanding invoices.
  Centex has filed a mechanics lien to create a security interest against
  the gathering line and compressor station. Centex is seeking damages

8

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in the amount of $510,319 plus interest, attorney fees and entry of an Order of Sale directing the Sheriff to sell the property covered by Centexs mechanic lien.

On December 13, 2006, Centex obtained a judgment against Terax which provided that any payments to Centex were to be made to Centex and the bank which has an interest in Centexs receivable from Terax. Provided
Terax can get the funds its our plan is to seek a settlement with Centex and its bank.

On August 28, 2006, an action was commenced in the District Court of Travis County, Texas, against Terax, Andrew Hromyk and Starr County Energy, Inc. by Sam Warren and Tennessee Eastern Oil & Gas, Inc. for damages
for breach of a personal services contract with the Plaintiffs or in the alternative, based upon the doctrine of quantum merit, for value of services which Plaintiffs allegedly rendered to Defendants. The complaint alleges that in early 2006,
Tennessee Eastern and Starr County entered into an agreement to purchase certain oil and gas properties located in Tennessee, which agreement was terminated. The complaint alleges that Hromyk continued discussions with Plaintiff Warren and indicated
that a lawsuit filed against Terax by William Rhea was impeding the potential sale of the Tennessee property, at which point, Warren offered to assist with settling the William Rhea lawsuit. The complaint further alleged that Plaintiffs negotiated
and mediated a settlement of the William Rhea lawsuit and that after the lawsuit was settled, the Defendants breached their agreement to purchase the Tennessee property for $5.7 million. The Plaintiffs are seeking a judgment against the
Defendants in the amount of $5.7 million and attorneys fees and expenses and costs of court.

On November 10, 2006, the Plaintiff and the Defendants met for negotiations and reached a settlement agreement subject to documentation. Terax will agree to pay $50,000 for settlement of all claims against Terax. To
date the settlement has not been finalized and no payments have been made to the Plaintiff.

On September 22, 2006, an action was commenced in the District Court of Erath County, Texas, by Geosite, Inc. against Terax and Bill Chester for breach of contract and foreclosure of lien. The Plaintiff alleges that
Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $10,930 allegedly owed to the Plaintiff, interest, and attorneys fees and an order of foreclosure of Plaintiffs lien. Terax
has responded to the Geosite lawsuit in a timely manner but plans to reach a settlement with Geosite in the near future provided funds are available.

On October 3, 2006, an action was commenced in the District Court of Erath County, Texas, by Digital Mud Logging, LLC against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges that Terax has
failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $11,200 allegedly owed to the Plaintiff, interest, and attorneys fees and an order of foreclosure of Plaintiffs lien. Terax has
responded to the Digital Mud Logging, LLC lawsuit in a timely manner but plans to reach a settlement with Digital Mud in the near future provided funds are available

On October 5, 2006, an action was commenced in the District Court of Erath County, Texas, by BJ Services Company, USA against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges that Terax has
failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $475,844 allegedly owed to the Plaintiff, interest, and attorneys fees and an order of foreclosure of Plaintiffs lien. Terax has
responded to the BJ Services lawsuit in a timely manner.

On November 3, 2006, Terax was notified that BJ Services filed a Motion for Summary Judgment with the court. On December 7, 2006, the court issued an abstract of judgment in favor of BJ Services Company; Terax is plans
to reach a settlement with BJ Services in the near future provided the funds are available.

On October 10, 2006, an action
  was commenced in the District Court of Erath County, Texas, by J.D. Fields &
  Company, Inc. against Terax for breach of contract and foreclosure of lien.
  The Plaintiff alleges that Terax has failed to pay for certain goods, merchandise,
  or services sold to Terax. The complaint is seeking $305,216 allegedly owed
  to the Plaintiff, interest, and attorneys fees and an order of

9

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foreclosure of Plaintiffs lien. Terax has responded to the J. D. Fields lawsuit in a timely manner but plans to reach a settlement with J.D. Fields in the near future provided funds are available.

On January 8, 2007, J.D. Fields filed a motion for a summary judgment with the court and hearing has been set for February 27, 2007.

On October 18, 2006, an action was commenced in the District Court of Erath County, Texas, by Schlumberger Technology Corporation against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges that
Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $49,288 allegedly owed to the Plaintiff, interest, and attorneys fees and an order of foreclosure of Plaintiffs lien. Terax
has responded to the Schlumberger lawsuit in a timely manner but plans to reach a settlement with Schlumberger in the near future provided funds are available

On October 19, 2006, an action was commenced in the Precinct 3, Place 3, Justice of the Peace Court, Dallas County, Texas, by Riviera Finance of Texas, Inc. on behalf of NTX Roadrunner Transportation, LLC against Terax
for breach of contract and foreclosure of lien. The Plaintiff alleges that Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $3,938 allegedly owed to the Plaintiff, interest, and
attorneys fees and an order of foreclosure of Plaintiffs lien. The court set a hearing on January 18, 2007, and on January 30, 2007, the court issued a default judgment. Terax plans to reach a settlement with Riviera in the near future
provided funds are available.

On October 19, 2006, an action was commenced in the District Court of Erath County, Texas, by Baker Hughes Oilfield Operations, Inc. against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges
that Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $55,523 allegedly owed to the Plaintiff, interest, and attorneys fees and an order of foreclosure of Plaintiffs lien.
Terax has responded to the Baker Hughes lawsuit in a timely manner but plans to reach a settlement with Baker Hughes in the near future provided funds are available.

On October 26, 2006, an action was commenced in the District Court of Erath County, Texas, by Jay Mills Contracting, Inc. against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges that Terax
has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $72,979 allegedly owed to the Plaintiff, interest, and attorneys fees and an order of foreclosure of Plaintiffs lien. Terax has
responded to the Jay Mills lawsuit in a timely manner but plans to reach a settlement with Jay Mills in the near future provided funds are available.

On November 2, 2006, an action was commenced in the County Court at Law No.2, Dallas County, Texas, by Leam Drilling Systems, Inc. against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges that
Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $113,489 allegedly owed to the Plaintiff, interest, and attorneys fees and an order of foreclosure of Plaintiffs lien. Terax
plans to respond to the Leam Drilling lawsuit in a timely manner but plans to reach a settlement with Leam Drilling in the near future provided funds are available. On December 21, 2006, the court set a non jury trial for June 19, 2007.

On November 8, 2006, an action
  was commenced in the District Court of Erath County, Texas, by Ideal Energy
  Directional Drilling Services, Inc. against Terax for breach of contract and
  foreclosure of lien. The Plaintiff alleges that Terax has failed to pay for
  certain goods, merchandise, or services sold to Terax. The complaint is seeking
  $52,500 allegedly owed to the Plaintiff, interest, and attorneys fees
  and an order of foreclosure of Plaintiffs lien. Terax has responded to
  the Ideal lawsuit in a timely manner but

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plans to reach a settlement with Ideal Energy Directional Drilling in the near future provided funds are available.

On November 9, 2006, an action was commenced in the District Court of Erath County, Texas, by Red River Well Service, Ltd, Mercer Well Service, Basin Tool, Shale Tank Truck, LP, and Bell Supply I, LP (the
Plaintiffs) against Terax for breach of contract and foreclosure of lien. The Plaintiffs alleges that Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $279,078 allegedly owed to
the Plaintiff, interest, and attorneys fees and an order of foreclosure of Plaintiffs lien. Terax plans to respond to the Plaintiffs lawsuit in a timely manner but plans to reach a settlement with Plaintiffs in the near future provided funds
are available.

On December 5, 2006, an action was commenced in the County Court at Law No.2 in Midland County, Texas, by Alliance Drilling Fluids, LLC against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges
that Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $18,890 allegedly owed to the Plaintiff, interest and attorneys fees and an order of foreclosure of Plaintiffs lien.
Terax has responded to the Alliance lawsuit in a timely manner, but plans to reach a settlement with Alliance Drilling Fluids in the near future provided funds are available.

On December 10, 2006, an action was commenced in the District Court of Erath County, Texas, by Brett Construction Company, Inc. against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges that
Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $16,852 allegedly owed to the Plaintiff, interest attorneys fees and an order of foreclosure of Plaintiffs lien. Terax has
responded to the Brett lawsuit in a timely manner but plans to reach a settlement with Brett Construction in the near future provided funds are available.

On January 29, 2007, Brett Construction final a motion for summary judgment with the court but Terax plans to reach a settlement with Brett Construction in the near future provided funds are available.

On December 26, 2006, an action was commenced in the District Court of Erath County, Texas, by Alamo Field Services, Inc. against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges that Terax
has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $142,195 allegedly owed to the Plaintiff, interest, and attorneys fees and an order of foreclosure of Plaintiffs lien. Terax has
responded to the Alamo lawsuit in a timely manner but plans to reach a settlement with Alamo Field Services in the near future provided funds are available.

On January 3, 2007, an action was commenced in the District Court of Erath County, Texas, by Integrated Production Services, LLC. against Terax for breach of contract and foreclosure of its lien. The Plaintiff alleges
that Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $200,800 allegedly owed to the Plaintiff, interest, and attorneys fees and an order of foreclosure of Plaintiffs lien.
Terax has responded to the Integrated lawsuit in a timely manner but plans to reach a settlement with Integrated Production Services in the near future provided funds are available.

On January 8, 2007, an action was commenced in the District Court of Erath County, Texas, by Mangums Oilfield Services, Inc. against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges that
Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $25,955 plus interest and allegedly owed to the Plaintiffs attorney fees and an order of foreclosure of Plaintiffs lien.
Terax has responded to the Mangums lawsuit in a timely manner but plans to reach a settlement with Mangums Oilfield Services in the near future provided funds are available.

On January 10, 2007, an action
  was commenced in the District Court of Erath County, Texas, by Lenward Caraway
  Enterprises, LLC. against Terax for breach of contract and foreclosure of lien.
  The Plaintiff alleges that Terax has failed to pay for certain goods, merchandise,
  or services sold to Terax. The complaint is seeking $116,617 allegedly owed
  to the Plaintiff, interest, and attorneys fees. Terax has

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responded to the Lenward Caraway lawsuit in a timely manner but plans to reach a settlement with Lenward Caraway in the near future provided funds are available.

On January 29, 2007, an action was commenced in the District Court of Dallas County, Texas, by CDM Resources Management, Ltd. against Terax for breach of contract. The Plaintiff alleges that Terax has failed to pay for
certain goods, merchandise, or services sold to Terax. The complaint is seeking $73,601 allegedly owed to the Plaintiff, interest, and attorneys fees. Terax plans to respond to CDMs lawsuit in a timely manner but plans to reach a
settlement with CDM Resources in the near future provided funds are available.

Note 7  Subsequent Events

On January 23, 2007, the Company issued a demand note in the principal amount of $500,000 (the Note) to Century Capital Management, Ltd., which is controlled by Andrew Hromyk a director of Terax Energy,
Inc. The initial advance under the agreement was $100,000. The Note bears interest at prime rate plus three percent (3%) per annum, payable on repayment of the Note. The Note is due on demand by the lender. 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 Comanche County, Texas. In the Event of Default, the holder of the Note has the right, but not the obligation, to seek remedies for repayment of the
Note including but not limited to foreclosure and sale of the secured assets.

On January 29, 2007, a 1 to 20 (one to twenty) reverse split of Teraxs common shares was implemented which resulted in 3,066,583 outstanding common shares at February 20, 2007. The total authorized common and preferred shares
were also adjusted which resulted in authorized shares of 15,000,000 and 250,000, respectively.All outstanding warrants were also adjusted on a 1 to 20 (one to twenty) ratio and the strike price was increased 20 (twenty) times the
original strike price.

Terax was issued a new CUSIP number and a new quoted symbol of TEXG.

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:

- increased competitive pressures from existing competitors and new entrants;

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

For a detailed description of these and other factors that
could cause actual results to differ materially from those expressed in any
forward-looking statement, please see Factors That May Affect Our Results of
Operation in this document and in our Report on Form 10-KSB for the period
ended June 30, 2006.

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 Terax 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. We have begun the evaluation process of our Comanche
County properties but any further evaluation will require Terax to resolve its
financial situation.

We may seek 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 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 2007 Compared to Second Quarter of
2006

The following overview provides a summary of key information
  concerning our financial results for the second quarter of our fiscal year ending
  June 30, 2007.

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|                             |   | Three Months |   |   | Three Months |   |   | Increase   |  
|---------------------------- | - | ------------ | - | - | ------------ | - | - | ---------- | -
|                             |   | December 31, |   |   | December 31, |   |   | (Decrease) |  
|                             |   | 2006         |   |   | 2005         |   |   |            |  
|Revenue                      | $ | -            |   | $ | -            |   | $ | -          |  
|Expenses:                    |   |              |   |   |              |   |   |            |  
|Depletion and depreciation   |   | 162,705      |   |   | 3,389        |   |   | 159,316    |  
|Impairment of properties     |   | -            |   |   | -            |   |   | -          |  
|General and administrative   |   | 277,378      |   |   | 1,159,967    |   |   | (882,589   | )
|Total
      expenses         |   | 440,083      |   |   | 1,163,356    |   |   | (723,273   | )
|                             |   |              |   |   |              |   |   |            |  
|(Loss) from operations       |   | (440,083     | ) |   | (1,163,356   | ) |   | 723,273    |  
|                             |   |              |   |   |              |   |   |            |  
|Other income (expense):      |   |              |   |   |              |   |   |            |  
|Dividend income              |   | 977          |   |   | 16,817       |   |   | (15,840    | )
|Interest expenses            |   | (80,762      | ) |   | (31,439      | ) |   | (49,323    | )
|Gain on derivative liability |   | 2,053,031    |   |   | -            |   |   | 2,053,031  |  
|Net Income( loss)            | $ | 1,533,163    |   | $ | (1,177,978   | ) | $ | 2,711,141  |  

Revenue

Terax had no revenue for the second quarter of fiscal 2007 and
  2006. Production on Teraxs properties did not begin until the fourth quarter
  of 2006. In August and September 2006 Terax shut in all of its production due
  to its financial situation.

Expenses

Operations on Teraxs oil and gas properties did not begin
  until the fourth quarter of 2006 and all production was shut in during August
  and September 2006. Terax did not incur any lease operating, depletion and deprecation,
  and impairment expenses for the second quarter of 2006 and no lease operating
  expenses were incurred in second quarter of 2007.

General and administrative expenses for the second quarter of
  2007 as compared to the second quarter of 2006 were $277,378 and $1,159,967,
  respectively, for a decrease of $882,589. The decrease in general and administrative
  expenses was primarily due to the severance expense of a former officer in the
  second quarter of 2006 of $817,740.

Other Income (Expense)

Dividend income for the second quarter of 2007 and 2006 was $977
  and $16,817, respectively, for a decrease of $15,840 which was the result of
  a decrease in funds available in an interest bearing account.

Interest expense for the second quarter of 2007 and 2006 was
  $80,762 and $31,439, respectively, for an increase of $49,323. During the second
  quarter of 2007and 2006 the outstanding debt was $2,500,000 but the debt was
  outstanding for only part of the quarter in 2006. The rate of interest for the
  debt in the second quarter of 2007 and 2006 was the same.

The gain on derivative liability in the second quarter was $2,053,031.
  Terax had no derivative liability in the second quarter of 2006.

Net Income (Loss)

Our net income for the second quarter of 2007 was $1,533,163
  compared to a net loss of $1,177,978 for the second quarter of 2006, for an
  increase in income of $2,711,141. Of this increase in income, $2,053,031 was
  attributable to non-cash gain associated with derivative liability offset by
  $166,604 non-cash cost associated with depletion and depreciation expenses.

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First Six Months of 2007 Compared to First Six Months of 2006

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, 2007.

|                             |   | Six Months   |   |   | Six Months   |   |   | Increase   |  
|---------------------------- | - | ------------ | - | - | ------------ | - | - | ---------- | -
|                             |   | December 31, |   |   | December 31, |   |   | (Decrease) |  
|                             |   | 2006         |   |   | 2005         |   |   |            |  
|Revenue                      | $ | 189,139      |   | $ | -            |   | $ | 189,139    |  
|                             |   |              |   |   |              |   |   |            |  
|Expenses:                    |   |              |   |   |              |   |   |            |  
|Depletion and depreciation   |   | 362,832      |   |   | 3,389        |   |   | 359,443    |  
|Impairment of properties     |   | 998,911      |   |   | -            |   |   | 998,911    |  
|General and administrative   |   | 1,329,496    |   |   | 1,640,520    |   |   | (311,024   | )
|Total
      expenses         |   | 2,691,239    |   |   | 1,643,909    |   |   | 1,047,330  |  
|                             |   |              |   |   |              |   |   |            |  
|(Loss) from operations       |   | (2,502,100   | ) |   | (1,643,909   | ) |   | (858,191   | )
|                             |   |              |   |   |              |   |   |            |  
|Other income (expense):      |   |              |   |   |              |   |   |            |  
|Dividend income              |   | 3,262        |   |   | 30,939       |   |   | (27,677    | )
|Interest expenses            |   | (157,534     | ) |   | (32,549      | ) |   | (124,985   | )
|Other                        |   | -            |   |   | (25,635      | ) |   | 25,635     |  
|Gain on derivative liability |   | 16,373,897   |   |   | -            |   |   | 16,373,897 |  
|                             |   |              |   |   |              |   |   |            |  
|Net Income ( loss)           | $ | 13,717,525   |   | $ | (1,671,154   | ) | $ | 15,388,679 |  

Revenue

Total revenue for the first six months of 2007 and 2006 was $189,139
  and $0, respectively. Production on the Companys properties did not begin
  until the fourth quarter of 2006. In August and September 2006 Terax shut in
  all of its production due to its financial situation.

Expenses

Operations on the Companys oil and gas properties did not
  begin until the fourth quarter of 2006. Therefore the Company did not incur
  any lease operating, depletion and deprecation, and impairment expenses for
  the first six months of 2006

General and administrative expenses for the first six months
  of 2007 as compared to the first six months of 2006 were $1,329,496 and $1,640,520,
  respectively, for a decrease of $311,024. The decrease in general and administrative
  expenses is due primarily to severance payment to a former officer in the first
  six months of 2006, which was offset by the accrual of registration rights penalty
  in the first six months of 2007 in the amount of $355,224.

Other Income (Expense)

Dividend income for the first six months of 2007 and 2006 was
  $3,262 and $30,939, respectively, for a decrease of $27,677 which was the result
  of a decrease in funds available in an interest bearing account.

Interest expense for the first six months of 2007 and 2006 was
  $157,534 and $32,549, respectively, for an increase of $124,985. During the
  first six months of 2007 and 2006 the outstanding debt was $2,500,000 but the
  debt was outstanding for only part of the quarter in 2006. The rate of interest
  for the

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debt in the first six months of 2007 was the same as the interest
  rate on the debt in the first six months of 2006.

The gain on derivative liability in the first quarter was
  $16,373,897. The Company had no derivative liability in the first six months
  of 2006.

Net Income (Loss)

Our net income for the first six months of 2007 was $13,717,525
  compared to a net loss of $1,671,154 for the first six months of 2006, for
  an increase in the income of $15,388,679. Of this increase, $16,373,897
  was attributable to non-cash income associated with derivative liability offset
  by $363,342 non-cash cost associated with depletion and depreciation expenses.

Liquidity and Capital Resources

As
  of December 31, 2006 we had a net working capital deficit of $9,454,765
  compared to a net working capital deficit of $23,200,422 at year end June
  30, 2006. If the non-cash derivative liability is not considered, the working
  capital deficit would be $9,369,944 at December 31, 2006 and $6,741,703
  at June 30, 2006. The $2,628,241 increase in our working capital position
  was primarily attributable to the decrease in derivative liability of $16,373,897,
  offset by a decrease in prepaid expense and advances to operators of $559,669,
  an increase in accounts payable of $44,749 and an increase in accrued liabilities
  of $383,515.

Net
  cash flow used in operations was $291,909 for the six months ended December
  31, 2006. The primary use of cash in operating activities was to fund our net
  loss. Net cash used in investing activities for the six months was $471,389
  and primarily consisted of an increase in purchases of oil and gas leases of
  $255,929, an increase in investment in drilling and equipment, and an investment
  in pipeline and gathering system of $232,910, compared to $9,537,518
  in purchases of oil and gas leases, drilling and equipment; and pipeline and
  gathering for the six months ended December 31, 2005.

There
  was no net cash provided by financing activities during the six months ended
  December 31, 2006, compared to $11,205,000 provided from the sale of stock
  for the six months ended December 31, 2005. The cash provided in the six months
  ended December 31, 2005 was from both equity and debt financings. From August
  8, 2005 through September 14, 2005, Terax issued 739,000 Units at a price of
  $10.00 per Unit for gross proceeds to Terax of $7,390,000. Each Unit
  consisted of eight shares of our common stock (each a Unit Share)
  and four non-transferable share purchase warrants (each a Unit Warrant).
  Each Unit Warrant is exercisable into one share of our common stock (each a
  Warrant Share) at an exercise price of $1.75 per share. During
  the six months ended December 31, 2005, Terax borrowed $325,000 bearing
  interest at 6% per annum and $4,100,000 bearing interest at 12.5% per annum.
  The notes had interest of $32,549 during the first six months of 2006. In
  May 2006, Terax borrowed $2,500,000 which was still outstanding at December
  31, 2006. The interest rate on the $2,500,000 is 12.5% per annum and the
  note had accrued interest of $157,534 at December 31, 2006. On January 19,
  2007, Terax received notice of default from the lender and a demand for payment.

Our
  liquidity has continued to be adversely affected during the six months ended
  December 31, 2006, due to not being able to secure additional financing to fund
  the operations of Terax. Since the December 31, 2006 Terax has continued to
  seek financing for its operations but has been unsuccessful.

Satisfaction of our cash obligations for the next 12 months

Our
  current capital resources, together with our expected cash flow from operations,
  are not sufficient to continue and maintain our operations (including resolution
  of amounts relating to pending litigation discussed elsewhere in this document)
  over the course of the next twelve months. If Terax does not secure additional
  financing in the near term it will be forced to seek other alternatives including
  the sale of assets to repay its current creditors. This includes resources for
  the payment of our anticipated

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overhead expenses and current liabilities. If Terax is successful
  in securing sufficient capital to repay its creditors, it will need additional
  capital to continue its operations and evaluate its properties. We would, therefore,
  continue to seek to raise capital over the next 12 months as we attempt to finance
  the development of our existing projects and in order to fund our future growth
  and exploration activities. This may take the form of either debt-based financing,
  or sale of equity securities. If we are unable to obtain additional funds when
  we need them or if we cannot obtain funds on terms favorable to us, we may need
  to delay, scale back, or eliminate plans for further development efforts.

Our
  oil and gas properties have been shut-in until Terax can resolve its current
  working capital deficit. We have no significant 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 joint venture or working interest 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 not be sufficient to sustain operations and our planned expansion.

We
  believe we will continue to 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 Terax 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 which range
  from 16.66% to 21.5% . 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 in Erath and an additional 3 years in Comanche
  by making an additional 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, 2006, we had assets of $16,213,208,
  and $9,471,339 in liabilities, resulting in a stockholders equity
  of $6,717,330.

Significant changes in the number of employees

During the six month period ended December 31, 2006, there
  were reductions in the number of employees and full-time consultants. The number
  of employee has been reduced from 4 to 2 and the numbers of full-time consultants
  were reduced from 6 to none.

Our desired personnel structure could be divided into three
  broad categories: management and professional, administrative, and project field
  personnel. As in most small companies, the divisions

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between these three categories are somewhat indistinct, as employees are engaged in various functions as projects and work loads demand.

Off-Balance Sheet Arrangements

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

Critical Accounting Policies and Estimates

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

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

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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.

Change in Internal controls:There were no changes in internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially effect, our internal
control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

On July 20, 2006, an action was commenced in the District Court of Erath County, Texas, against Terax by Centex Pipeline Construction, Inc. for failure to pay for services performed, breach of contract and to foreclose
on Plaintiffs mechanic lien. The Complaint alleges that Terax and Centex entered into an agreement for to install certain components of a gas pipeline gathering system on Teraxs Mitchell Ranch property in Erath County, Texas. The
Complaint further alleges that the Plaintiff completed work on June 5, 2006 and that Terax has failed to pay certain outstanding invoices. The Plaintiffs has filed a mechanics lien to create a security interest against the gathering line
and compressor station. The Plaintiffs is seeking damages in the amount of $510,319 plus interest, attorney fees and entry of an Order of Sale directing the Sheriff to sell the property covered by the Plaintiffs mechanic lien.

On December 13, 2006, Centex obtained a judgment against Terax which provided that any payments to Centex were to be made to Centex and the bank which has an interest in Centexs receivable from Terax. Provided
Terax can get the funds its our plan is to seek a settlement with Centex and its bank.

On August 28, 2006, an action was commenced in the District Court of Travis County, Texas, against Terax, Andrew Hromyk and Starr County Energy, Inc. by Sam Warren and Tennessee Eastern Oil & Gas, Inc. for damages
for breach of a personal services contract with the Plaintiffs or in the alternative, based upon the doctrine of quantum merit, for value of services which Plaintiffs allegedly rendered to Defendants. The complaint alleges that in early 2006,
Tennessee Eastern and Starr County entered into an agreement to purchase certain oil and gas properties located in Tennessee, which agreement was terminated. The complaint alleges that Hromyk continued discussions with Plaintiff Warren and indicated
that a lawsuit filed against Terax by William Rhea was impeding the potential sale of the Tennessee property, at which point, Warren offered to assist with settling the William Rhea lawsuit. The complaint further alleged that Plaintiffs negotiated
and mediated a settlement of the William Rhea lawsuit and that after the lawsuit was settled, the Defendants breached their agreement to purchase the Tennessee property for $5.7 million. The Plaintiffs are seeking a judgment against the
Defendants in the amount of $5.7 million and attorneys fees and expenses and costs of court.

On November 10, 2006, the Plaintiff and the Defendants met for negotiations and reached a settlement agreement subject to documentation. Terax will agree to pay $50,000 for settlement of all claims against Terax. To
date the settlement has not been finalized and no payments have been made to the Plaintiff.

On September 22, 2006, an action
  was commenced in the District Court of Erath County, Texas, by Geosite, Inc.
  against Terax and Bill Chester for breach of contract and foreclosure of lien.
  The Plaintiff alleges that Terax has failed to pay for certain goods, merchandise,
  or services sold to Terax. The complaint is seeking $10,930 allegedly owed
  to the Plaintiff, interest, and attorneys fees and an order of

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foreclosure of Plaintiffs lien. Terax has responded to the Geosite lawsuit in a timely manner but plans to reach a settlement with Geosite in the near future provided funds are available.

On October 3, 2006, an action was commenced in the District Court of Erath County, Texas, by Digital Mud Logging, LLC against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges that Terax has
failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $11,200 allegedly owed to the Plaintiff, interest, and attorneys fees and an order of foreclosure of Plaintiffs lien. Terax has
responded to the Digital Mud Logging, LLC lawsuit in a timely manner but plans to reach a settlement with Digital Mud in the near future provided funds are available

On October 5, 2006, an action was commenced in the District Court of Erath County, Texas, by BJ Services Company, USA against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges that Terax has
failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $475,844 allegedly owed to the Plaintiff, interest, and attorneys fees and an order of foreclosure of Plaintiffs lien. Terax has
responded to the BJ Services lawsuit in a timely manner.

On November 3, 2006, Terax was notified that BJ Services filed a Motion for Summary Judgment with the court. On December 7, 2006, the court issued an abstract of judgment in favor of BJ Services Company; Terax is plans
to reach a settlement with BJ Services in the near future provided the funds are available.

On October 10, 2006, an action was commenced in the District Court of Erath County, Texas, by J.D. Fields & Company, Inc. against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges that
Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $305,216 allegedly owed to the Plaintiff, interest, and attorneys fees and an order of foreclosure of Plaintiffs lien. Terax
has responded to the J. D. Fields lawsuit in a timely manner but plans to reach a settlement with J.D. Fields in the near future provided funds are available.

On January 8, 2007, J.D. Fields filed a motion for a summary judgment with the court and hearing has been set for February 27, 2007.

On October 18, 2006, an action was commenced in the District Court of Erath County, Texas, by Schlumberger Technology Corporation against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges that
Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $49,288 allegedly owed to the Plaintiff, interest, and attorneys fees and an order of foreclosure of Plaintiffs lien. Terax
has responded to the Schlumberger lawsuit in a timely manner but plans to reach a settlement with Schlumberger in the near future provided funds are available

On October 19, 2006, an action was commenced in the Precinct 3, Place 3, Justice of the Peace Court, Dallas County, Texas, by Riviera Finance of Texas, Inc. on behalf of NTX Roadrunner Transportation, LLC against Terax
for breach of contract and foreclosure of lien. The Plaintiff alleges that Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $3,938 allegedly owed to the Plaintiff, interest, and
attorneys fees and an order of foreclosure of Plaintiffs lien. Terax has responded to the Riviera lawsuit in a timely manner but plans to reach a settlement with Riviera in the near future provided funds are available. The court set a
hearing on January 18, 2007, and on January 30, 2007, the court issued a default judgment.

On October 19, 2006, an action
  was commenced in the District Court of Erath County, Texas, by Baker Hughes
  Oilfield Operations, Inc. against Terax for breach of contract and foreclosure
  of lien. The Plaintiff alleges that Terax has failed to pay for certain goods,
  merchandise, or services sold to Terax. The complaint is seeking $55,523
  allegedly owed to the Plaintiff, interest, and attorneys fees and an order
  of foreclosure of Plaintiffs lien. Terax has responded to the Baker Hughes
  lawsuit in a timely

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manner but plans to reach a settlement with Baker Hughes in the near future provided funds are available.

On October 26, 2006, an action was commenced in the District Court of Erath County, Texas, by Jay Mills Contracting, Inc. against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges that Terax
has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $72,979 allegedly owed to the Plaintiff, interest, and attorneys fees and an order of foreclosure of Plaintiffs lien. Terax has
responded to the Jay Mills lawsuit in a timely manner but plans to reach a settlement with Jay Mills in the near future provided funds are available.

On November 2, 2006, an action was commenced in the County Court at Law No.2, Dallas County, Texas, by Leam Drilling Systems, Inc. against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges that
Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $113,489 allegedly owed to the Plaintiff, interest, and attorneys fees and an order of foreclosure of Plaintiffs lien. Terax
plans to respond to the Leam Drilling lawsuit in a timely manner but plans to reach a settlement with Leam Drilling in the near future provided funds are available. On December 21, 2006, the court set a non jury trial for June 19, 2007.

On November 8, 2006, an action was commenced in the District Court of Erath County, Texas, by Ideal Energy Directional Drilling Services, Inc. against Terax for breach of contract and foreclosure of lien. The Plaintiff
alleges that Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $52,500 allegedly owed to the Plaintiff, interest, and attorneys fees and an order of foreclosure of Plaintiffs
lien. Terax has responded to the Ideal lawsuit in a timely manner but plans to reach a settlement with Ideal Energy Directional Drilling in the near future provided funds are available.

On November 9, 2006, an action was commenced in the District Court of Erath County, Texas, by Red River Well Service, Ltd, Mercer Well Service, Basin Tool, Shale Tank Truck, LP, and Bell Supply I, LP (the
Plaintiffs) against Terax for breach of contract and foreclosure of lien. The Plaintiffs alleges that Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $279,078 allegedly owed to
the Plaintiff, interest, and attorneys fees and an order of foreclosure of Plaintiffs lien. Terax plans to respond to the Plaintiffs lawsuit in a timely manner but plans to reach a settlement with Plaintiffs in the near future provided funds
are available.

On December 5, 2006, an action was commenced in the County Court at Law No.2 in Midland County, Texas, by Alliance Drilling Fluids, LLC against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges
that Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $18,890 allegedly owed to the Plaintiff, interest and attorneys fees and an order of foreclosure of Plaintiffs lien.
Terax has responded to the Alliance lawsuit in a timely manner, but plans to reach a settlement with Alliance Drilling Fluids in the near future provided funds are available.

On December 10, 2006, an action was commenced in the District Court of Erath County, Texas, by Brett Construction Company, Inc. against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges that
Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $16,852 allegedly owed to the Plaintiff, interest attorneys fees and an order of foreclosure of Plaintiffs lien. Terax has
responded to the Brett lawsuit in a timely manner but plans to reach a settlement with Brett Construction in the near future provided funds are available.

On January 29, 2007, Brett Construction final a motion for summary judgment with the court but Terax plans to reach a settlement with Brett Construction in the near future provided funds are available.

On December 26, 2006, an action
  was commenced in the District Court of Erath County, Texas, by Alamo Field Services,
  Inc. against Terax for breach of contract and foreclosure of lien. The Plaintiff
  alleges that Terax has failed to pay for certain goods, merchandise, or services
  sold to Terax. The

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complaint is seeking $142,195 allegedly owed to the Plaintiff, interest, and attorneys fees and an order of foreclosure of Plaintiffs lien. Terax has responded to the Alamo lawsuit in a timely manner but plans to reach a settlement
with Alamo Field Services in the near future provided funds are available.

On January 3, 2007, an action was commenced in the District Court of Erath County, Texas, by Integrated Production Services, LLC. against Terax for breach of contract and foreclosure of its lien. The Plaintiff alleges
that Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $200,800 allegedly owed to the Plaintiff, interest, and attorneys fees and an order of foreclosure of Plaintiffs lien.
Terax has responded to the Integrated lawsuit in a timely manner but plans to reach a settlement with Integrated Production Services in the near future provided funds are available.

On January 8, 2007, an action was commenced in the District Court of Erath County, Texas, by Mangums Oilfield Services, Inc. against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges that
Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $25,955 plus interest and allegedly owed to the Plaintiffs attorney fees and an order of foreclosure of Plaintiffs lien.
Terax has responded to the Mangums lawsuit in a timely manner but plans to reach a settlement with Mangums Oilfield Services in the near future provided funds are available.

On January 10, 2007, an action was commenced in the District Court of Erath County, Texas, by Lenward Caraway Enterprises, LLC. against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges that
Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $116,617 allegedly owed to the Plaintiff, interest, and attorneys fees. Terax has responded to the Lenward Caraway lawsuit in a
timely manner but plans to reach a settlement with Lenward Caraway in the near future provided funds are available.

On January 29, 2007, an action was commenced in the District Court of Dallas County, Texas, by CDM Resources Management, Ltd. against Terax for breach of contract. The Plaintiff alleges that Terax has failed to pay for
certain goods, merchandise, or services sold to Terax. The complaint is seeking $73,601 allegedly owed to the Plaintiff, interest, and attorneys fees. Terax plans to respond to CDMs lawsuit in a timely manner but plans to reach a
settlement with CDM Resources in the near future provided funds are available.

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

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

Item 3. Defaults Upon Senior Securities.

On May 12, 2006, Terax issued a promissory note in the principal
  amount of $2,500,000 (the Note) 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 is due and payable in 71,429 shares of Teraxs common
  stock at closing. The Note is secured by a security interest in all of Terax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 Terax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. During the six months ended December 31, 2006,
  Terax has accrued $157,534 in interest. The total interest accrued to date
  is $199,486. On January 19, 2007, Terax received notice of default from
  the lender and a demand for payment.

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

None

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: February 20, 2007 | By:               
|                        |                   
|                        |                   
|                        |                   
|                        |                   

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