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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 **September 30, 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 November 17, 2006, the Company had 60,591,529 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 September 30, 2006

Table of Contents

|PART I. FINANCIAL INFORMATION |        
|----------------------------- | -------
|                              |        
|                              | Item 1.
|                              |        
|                              |        
|                              |        
|                              |        
|                              |        
|                              |        
|                              |        
|                              |        
|                              |        
|                              | Item 2.
|                              |        
|                              | Item 3.
|                              |        
|PART II. OTHER INFORMATION    |        
|                              |        
|                              | Item 1.
|                              |        
|                              | Item 2.
|                              |        
|                              | Item 3.
|                              |        
|                              | Item 4.
|                              |        
|                              | Item 5.
|                              |        
|                              | Item 6.
|                              |        
|Signatures                    | 20     

2

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Terax Energy, Inc. Consolidated Balance
Sheet(Unaudited)

|                                                                                 |   | September 30, |   |   | June 30,    |  
|-------------------------------------------------------------------------------- | - | ------------- | - | - | ----------- | -
|                                                                                 |   | 2006          |   |   | 2006        |  
|ASSETS                                                                           |   |               |   |   |             |  
|Current assets:                                                                  |   |               |   |   |             |  
|Cash                                                                             | $ | 174,849       |   | $ | 779,872     |  
|Prepaid expenses, and advances
      to operators                                |   | 140,444       |   |   | 559,669     |  
|Total current assets                                                             |   | 315,293       |   |   | 1,339,541   |  
|Property, Plant and Equipment:                                                   |   |               |   |   |             |  
|Oil and natural
      gas properties, successful efforts method of accounting:   |   |               |   |   |             |  
|Proved properties, net of
      impairment                                       |   | 722,254       |   |   | 718,967     |  
|Unproved
      properties not being amortized, net of impairment                 |   | 9,734,703     |   |   | 9,591,386   |  
|Pipeline and gathering system,
      net of accumulated depreciation of $345,783 |   | 5,671,420     |   |   | 5,767,339   |  
|Furniture and
      equipment, net of accumulated depreciation $33,619           |   | 115,345       |   |   | 128,083     |  
|Total property,
      plant and equipment                                        |   | 16,243,722    |   |   | 16,205,775  |  
|Other assets                                                                     |   | 12,471        |   |   | 12,471      |  
|Total Assets                                                                     | $ | 16,571,486    |   | $ | 17,557,787  |  
|                                                                                 |   |               |   |   |             |  
|LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                                   |   |               |   |   |             |  
|Current liabilities:                                                             |   |               |   |   |             |  
|Accounts payable and accrued
      expense                                       | $ | 6,011,346     |   | $ | 5,144,658   |  
|Accrued
      liabilities                                                        |   | 713,444       |   |   | 436,586     |  
|Short term debt                                                                  |   | 2,500,000     |   |   | 2,500,000   |  
|Derivative ability                                                               |   | 2,137,852     |   |   | 16,458,719  |  
|Total current
      liabilities                                                  |   | 11,362,642    |   |   | 24,539,963  |  
|Asset retirement obligation                                                      |   | 26,718        |   |   | 24,399      |  
|Stockholders' equity (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                                |   |               |   |   |             |  
|shares
      authorized, 60,591,529 and 60,579,029 shares                        |   |               |   |   |             |  
|issued
      and outstanding at September 30, 2006 and June 30, 2006             |   | 60,592        |   |   | 60,579      |  
|Additional paid-in capital                                                       |   | 16,046,864    |   |   | 16,040,502  |  
|Accumulated
      deficit                                                        |   | (10,925,330   | ) |   | (23,107,656 | )
|Total stockholder's
      equity (deficit)                                       |   | 5,182,126     |   |   | (7,006,575  | )
|Total
      liabilities and stockholders' equity (deficit)                       | $ | 16,571,486    |   | $ | 17,557,787  |  

See accompanying notes to the consolidated financial statements.

3

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

|                                                     |   | Three-Months Ended |  
|---------------------------------------------------- | - | ------------------ | -
|                                                     |   | September 30,      |  
|                                                     |   | 2006               |  
|                                                     |   |                    |  
|Revenue                                              | $ | 189,139            |  
|                                                     |   |                    |  
|Expenses:                                            |   |                    |  
|Lease operating expenses                             |   | 319,559            |  
|Depreciation expense                                 |   | 200,127            |  
|Impairment of oil &
      gas properties             |   | 998,911            |  
|General
      and administrative expenses            |   | 732,559            |  
|Total expenses                                       |   | 2,251,156          |  
|                                                     |   |                    |  
|Net operating loss                                   |   | (2,062,017         | )
|                                                     |   |                    |  
|Other income (expense):                              |   |                    |  
|Dividend
      income                                |   | 2,244              |  
|Interest (expense)                                   |   | (78,767            | )
|Gain on
      derivative liability                   |   | 14,320,866         |  
|Other
      income (expenses)                        |   | 14,244,343         |  
|                                                     |   |                    |  
|Net income (loss)                                    | $ | 12,182,326         |  
|                                                     |   |                    |  
|Net income (loss) per share - basic and Fully iluted | $ | 0.20               |  
|                                                     |   |                    |  
|Weighted average number of                           |   |                    |  
|common
      shares outstanding                      |   |                    |  
|basic and fully diluted                              |   | 60,580,242         |  

See accompanying notes to the consolidated financial statements.

4

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

|                                                             |   | For the Three-Months Ended |  
|------------------------------------------------------------ | - | -------------------------- | -
|                                                             |   | September 30,              |  
|                                                             |   | 2006                       |  
|Cash flows from operating activities:                        |   |                            |  
|Net income (loss)                                            | $ | 12,182,326                 |  
|Adjustments to reconcile net income:                         |   |                            |  
|Shares issued for compensation                               |   | 6,375                      |  
|Asset retirement
      obligations                           |   | 2,319                      |  
|Depreciation, depletion and
      amortization               |   | 197,808                    |  
|Impairment
      oil and gas properties                      |   | 998,911                    |  
|Unrealized gain on derivative
      liability                |   | (14,320,866                | )
|Changes in current assets and liabilities:                   |   |                            |  
|Decrease in prepaid expenses
      and advances to operators |   | 419,225                    |  
|Increase
      in accounts payable                           |   | (8,572                     | )
|Increase in accrued liabilities                              |   | 277,281                    |  
|Net cash provided used in operating activities               |   | (245,193                   | )
|                                                             |   |                            |  
|Cash flows from investing activities                         |   |                            |  
|Purchases of
      oil and gas leases                        |   | -                          |  
|Investments
      in drilling and equipment                  |   | (305,696                   | )
|Investments in pipeline and
      gathering system           |   | (54,134                    | )
|Net cash used in investing activities                        |   | (359,830                   | )
|                                                             |   |                            |  
|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                              |   | (605,023                   | )
|Cash  beginning of period                                   |   | 779,872                    |  
|Cash  ending of period                                      | $ | 174,849                    |  
|                                                             |   |                            |  
|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 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 $10,925,330 and
  has insufficient working capital to meet operating needs for the next twelve
  months as of September 30, 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 of sale 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

Sale of Securities

On February 7, 2006, Terax entered into securities purchase
  agreements to sell 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.
  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

6

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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.

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 Teraxs stock was trading in the $1.75 range and
represents an approximate 30% discount to the market price at that time. The fair value of the warrants, as determined using the Black Scholes pricing model, issued to the placement agent was $1,198,353 and was recorded as an equity issuance
cost and is reflected in the balance sheet as a reduction to paid-in capital.

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 Company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 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.
  Terax is required to record the unrealized changes in fair value in subsequent
  periods as an adjustment to the current liability with unrealized changes in
  the fair value of the derivative reflected in the statement of operations as
  (gain)/loss on derivative liabilities. Terax 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 Terax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 excess of the fair value of the warrants over the allocated purchase price
  was $19,946,193, of which $1,198,353 representing the fair value of the warrants
  issued to the placement agent was recorded as an equity issuance cost and is
  reflected in the balance sheet as a reduction to the paid in capital and the
  remaining $18,747,840 was recorded in the statement of operations as a loss
  on derivative liability. 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 aterm of 5 years. At September 30, 2006, the
  fair value of the warrants was again determined utilizing the Black Scholes
  valuation model.

The fair value of the warrants at September 30, 2006 was $2,137,852.
  The significant assumptions used in the valuation were: the exercise price as
  noted above; Terax’s common stock price on September 30, 2006, which was
  $0.40; expected volatility of 84.22%; risk free interest rate of approximately
  4.6%, and a term of four years and four months. The resulting unrealized change
  in fair value of $14,320,866 from June 30, 2006 to September 30, 2006 was recorded
  in the statement of operations as a gain on derivative liability.

7

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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.

Following is a reconciliation of the asset retirement obligation
  liability for the three months ended September 30, 2006:

|Asset retirement obligation at July 1, 2006             | $ | 24,399 | 
|------------------------------------------------------- | - | ------ | 
|Liabilities incurred                                    |   | -      | 
|Liabilities settled                                     |   | -      | 
|Accretion expense                                       |   | 2,319  | 
|Asset retirement obligation at September
      30, 2006 | $ | 26,718 | 

Note 5 Other Obligations

Registration Obligation

8

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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
  was 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,
  the registration statement was not declared effective until August 14, 2006.
  As a result Terax has incurred a total registration penalty of $536,783 which
  has been accrued as of September 30, 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 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
  have filed a mechanic’s lien to create a security interest against the
  gathering line and compressor station. The Plaintiff’s are 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.

Terax has filed a general denial and a Counterclaim and third-party
  claim for declaratory judgment in response to Centex’s petition and has
  requested discovery. A motion for summary judgment filed by Centex is pending.

Provided Terax can obtain the funds, it is our plan is to seek
  a settlement with Centex and it’s bank provided that Terax can be assured
  that no subcontractors will file liens on Terax’s property and that Terax
  has no risk of liability to Centex’s bank for not making all payments
  directly to the bank. Alternatively, Terax may ask the court to accept a payment
  of funds into the registry of the court in order to protect Terax from further
  liability and cost.

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 Plaintiff’s
  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.

9

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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’s, attorney
  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 Terax has failed to pay for certain
  goods, merchandise, or services sold to Terax. The complaint is seeking $11,200
  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
  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 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 BJ Services lawsuit in a timely manner but plans to reach a settlement
  with BJ Services in the near future provided funds are available.

On November 3, 2006, Terax was notified that BJ Services filed
  a Motion for Summary Judgment with the court. A hearing for the motion has not
  been set.

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 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 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 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 $49,287 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 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 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 Riviera lawsuit in a timely manner but 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 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 Baker Hughes lawsuit in a timely manner but
  plans to reach a settlement with Baker Hughes in the near future provided funds
  are available.

10

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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 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 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 $113,488 plus interest and allegedly owed to the Plaintiff’s
  attorney 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 November 9, 2006, an action was commenced in the District Court of Erath
  County, Texas , by Red River Well Service, Ltd, Shale Tank Truck, LP, and Bell
  Supply I, LP (“the Plaintiff’s”) against Terax for breach
  of contract and foreclosure of lien. The Plaintiff’s alleges that Terax
  has failed to pay for certain goods, merchandise, or services sold to Terax.
  The complaint is seeking $279,078 plus interest and allegedly owed to the Plaintiff’s
  attorney fees and an order of foreclosure of Plaintiff’s lien. Terax plans
  to respond to the Plaintiff’s lawsuit in a timely manner but plans to
  reach a settlement with Plaintiff’s in the near future provided funds
  are available.

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;

11

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| | 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 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

First Quarter of 2007 Compared to First Quarter of 2006

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

|                                 |   | Three Months  |  |   | Three Months  |  |   | Increase   | 
|-------------------------------- | - | ------------- |  | - | ------------- |  | - | ---------- | 
|                                 |   | September 30, |  |   | September 30, |  |   | (Decrease) | 
|                                 |   | 2006          |  |   | 2005          |  |   |            | 
|Revenue                          | $ | 189,139       |  | $ | -             |  | $ | 189,139    | 
|                                 |   |               |  |   |               |  |   |            | 
|Expenses:                        |   |               |  |   |               |  |   |            | 
|Lease operating expenses         |   | 319,559       |  |   | -             |  |   | 319,559    | 
|Depletion and
      depreciation |   | 200,127       |  |   | -             |  |   | 200,127    | 
|Impairment of properties         |   | 998,911       |  |   | -             |  |   | 998,911    | 
|General and
      administrative |   | 732,559       |  |   | 506,189       |  |   | 226,370    | 
|Total expenses                   |   | 2,251,156     |  |   | 506,189       |  |   | 1,744,967  | 

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|Loss from operations         |   | (2,062,017 | ) |   | (506,189 | ) |   | 1,555,828  |  
|---------------------------- | - | ---------- | - | - | -------- | - | - | ---------- | -
|                             |   |            |   |   |          |   |   |            |  
|Other income (expense):      |   |            |   |   |          |   |   |            |  
|Dividend income              |   | 2,244      |   |   | 14,122   |   |   | (11,878    | )
|Interest expenses            |   | (78,767    | ) |   | (1,110   | ) |   | (77,657    | )
|Gain on derivative liability |   | 14,320,866 |   |   | -        |   |   | 14,320,866 |  
|Net income ( loss)           | $ | 12,182,326 |   | $ | (493,177 | ) | $ | 12,675,503 |  

Revenue

Total revenue for the first quarter 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.

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 quarter of 2006.

The general and administrative Expenses for the first quarter of 2007 as compared
  to the first quarter of 2006 were $732,559 and $506,189, respectively, for an
  increase of $226,370. The increase in general and administrative expenses is
  due to the accrual of registration rights penalty in the first quarter of $355,224
  offset by a reduction in investor relations cost and professional fees.

Other Income (Expense)

Dividend income for the first quarter of 2007 and 2006 was $2,244
  and $14,122, respectively, for a decrease of $11,878 which was the result of
  a decrease in funds available in an interest bearing account.

Interest expense for the first quarter of 2007 and 2006 was $78,767 and $1,110,
  respectively, for an increase of $77,657. During the first quarter of 2007 the
  outstanding debt was $2,500,000 compared to $325,000 in the first quarter of
  2006. The rate of interest for the debt in the first quarter of 2007 was considerably
  higher than the interest on the debt in the first quarter of 2006.

The gain on derivative liability in the first quarter was $14,320,866. The
  Company had no gain or loss on derivative liability in the first quarter of
  2006.

During the prior year, we evaluated the commercial viability of a portion of
  our property in Erath County. The four wells were deemed to be non-commercial
  which had a negative impact on the value of the wells drilled. During the first
  quarter, we recognized $72,567 in producing impairments and $926,344 in non-producing
  impairment of property.

Net Income

Our net income for the first quarter of 2007 was $12,182,326
  compared to a net loss of $493,177 for the first quarter of 2006, for an increase
  of $12,675,503. Of the gain, $14,320,866 was attributable to non-cash income
  associated with a gain on derivative liability offset by $200,127 non-cash costs
  associated with depletion and deprecation expenses.

Liquidity and Capital Resources

As of September 30, 2006 we had a net working capital deficit
  of $11,047,349 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 $8,909,497 at September 30, 2006 and $6,741,703
  at June 30, 2006. The $12,153,073 increase in our working capital position was
  primarily attributable to the decrease in derivative liability of $14,320,866
  and a decrease in accounts payable of $8,572, offset by a decrease in prepaid
  expense and advances to operators of $419,225, and an increase in accrued liabilities
  of $277,281.

Net cash flow used in operations was $245,193 for the three months ended September
  30, 2006. The primary use of cash in operating activities was to fund our net
  loss. Net cash used in investing activities for the three months was $359,830
  and primarily consisted of an increase in investment in drilling and equipment
  of $305,696 and an investment in pipeline and gathering system of $54,134, compared
  to a $2,213,484 in purchases of oil and gas leases for the three months ended
  September 30, 2005.

13

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There was no net cash provided by financing activities during
  the three months ended September 30, 2006, compared to $7,105,000 provided from
  the sale of stock for the three months ended September 30, 2005. The cash provided
  in the three months ended September 30, 2005 was from both equity and debt financings.
  From August 8, 2005 through September 14, 2005, the Company issued 739,000 Units
  at a price of $10.00 per Unit for gross proceeds to the Company 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 a price of $1.75. During the quarter
  ended September 30, 2005, the Company borrowed $325,000 bearing interest at
  6% per annum. The note and $1,110 in interest was repaid during the quarter.

Our liquidity has continued to be adversely affected during the three months
  ended September 30, 2006, due to not being able to secure additional financing
  to fund the operations of the Company. Since the three months ended September
  30, 2006 the Company 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 over the course of
the next twelve months. If the Company 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 overhead expenses and current liabilities. If the Company is
successful in securing sufficient capital to repay its creditors, the Company
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 the Company 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

14

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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 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 addition lump sum payment to the leaseholder, as provided
for in each lease. If oil and gas production is not established within the
additional two years period, the lease is returned to the leaseholder and we
have no additional rights to the lease.

As of September 30, 2006, we had assets of $16,571,486, and $11,389,360
  in liabilities, resulting in a stockholders’ equity of $5,182,126.

Significant changes in the number of employees

During the three month period ended September 30, 2006 there
  were reductions in the number of employees and full-time consultants. The number
  of employees were reduced from 4 to 3 and the numbers of full-time consultants
  were reduced from 6 to 2.

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

Off-Balance Sheet Arrangements

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

Critical Accounting Policies and Estimates

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

Revenue Recognition

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

Successful Efforts Method of Accounting

We account for our oil and natural gas operations using the successful
  efforts method of accounting. Under this method, all costs associated with property
  acquisition, exploration, and development of oil and gas reserves are capitalized.
  Costs capitalized include acquisition costs, geological and geophysical expenditures,
  lease rentals on undeveloped properties and cost of drilling and equipping productive
  wells. In the event we do not find proved

15

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

|b) | 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 the Company 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 the Company
and Centex entered into an agreement for to install certain components of a gas
pipeline gathering system on the Companys Mitchell Ranch property in Erath
County, Texas. The Complaint further alleges that the Plaintiff completed work
on June 5, 2006 and that the Company has failed to pay certain outstanding
invoices. The Plaintiffs have filed a mechanics lien to create a security
interest against the gathering line and compressor station. The Plaintiffs are
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.

Terax
has filed a general denial and a Counterclaim and third-party claim for
declaratory judgment in response to Centexs petition and has requested
discovery. A motion for summary judgment filed by Centex is pending.

Provided
  the Company can get the funds its our plan is to seek a settlement with Centex
  and its bank provided that the Company can be assured that no subcontractors
  will file liens on Teraxs property and that Terax has no risk of liability
  to Centexs bank for not making all payments directly to the bank. Alternatively,
  the Company may ask the court to accept a payment of funds into the registry
  of the court in order to protect Terax from further liability and cost.

16

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On
August 28, 2006, an action was commenced in the District Court of Travis County,
Texas, against the Company, 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 Plaintiffs 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 the Company 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.

On September 22, 2006, an action was commenced in the District
Court of Erath County, Texas, by Geosite, Inc. against the Company and Bill
Chester for breach of contract and foreclosure of lien. The Plaintiff alleges
that the Company has failed to pay for certain goods, merchandise, or services
sold to the Company. The complaint is seeking $10,930 allegedly owed to the
Plaintiffs, attorney fees and an order of foreclosure of Plaintiffs lien. The
Company 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 the Company for
  breach of contract and foreclosure of lien. The Plaintiff alleges that the Company
  has failed to pay for certain goods, merchandise, or services sold to the Company.
  The complaint is seeking $11,200 plus interest and allegedly owed to the Plaintiff’s
  attorney fees and an order of foreclosure of Plaintiff’s lien. The Company
  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 the Company for
  breach of contract and foreclosure of lien. The Plaintiff alleges that the Company
  has failed to pay for certain goods, merchandise, or services sold to the Company.
  The complaint is seeking $475,844 plus interest and allegedly owed to the Plaintiff’s
  attorney fees and an order of foreclosure of Plaintiff’s lien. The Company
  has responded to the BJ Services lawsuit in a timely manner but plans to reach
  a settlement with BJ Services in the near future provided funds are available.

On November 3, 2006, the Company was notified that BJ Services
filed a Motion for Summary Judgment with the court. A hearing for the motion has
not been set.

On October 10, 2006, an action was commenced in the District
  Court of Erath County, Texas, by J.D. Fields & Company, Inc. against the
  Company for breach of contract and foreclosure of lien. The Plaintiff alleges
  that the Company has failed to pay for certain goods, merchandise, or services
  sold to the Company. The complaint is seeking $305,216 plus interest and allegedly
  owed to the Plaintiff’s attorney fees and an order of foreclosure of Plaintiff’s
  lien. The Company 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 October 18, 2006, an action was commenced in the District
  Court of Erath County, Texas, by Schlumberger Technology Corporation against
  the Company for breach of contract and foreclosure of lien. The Plaintiff alleges
  that the Company has failed to pay for certain goods, merchandise, or services
  sold to the Company. The complaint is seeking $49,287 plus interest and allegedly
  owed to the Plaintiff’s attorney fees and an order of foreclosure of Plaintiff’s
  lien. The Company 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.

17

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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 the Company
  for breach of contract and foreclosure of lien. The Plaintiff alleges that the
  Company has failed to pay for certain goods, merchandise, or services sold to
  the Company. The complaint is seeking $3,938 plus interest and allegedly owed
  to the Plaintiff’s attorney fees and an order of foreclosure of Plaintiff’s
  lien. The Company 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

On October 19, 2006, an action was commenced in the District Court of Erath
  County, Texas, by Baker Hughes Oilfield Operations, Inc. against the Company
  for breach of contract and foreclosure of lien. The Plaintiff alleges that the
  Company has failed to pay for certain goods, merchandise, or services sold to
  the Company. The complaint is seeking $55,523 plus interest and allegedly owed
  to the Plaintiff’s attorney fees and an order of foreclosure of Plaintiff’s
  lien. The Company 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 the Company for breach
  of contract and foreclosure of lien. The Plaintiff alleges that the Company
  has failed to pay for certain goods, merchandise, or services sold to the Company.
  The complaint is seeking $72,979 plus interest and allegedly owed to the Plaintiff’s
  attorney fees and an order of foreclosure of Plaintiff’s lien. The Company
  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 the Company for
  breach of contract and foreclosure of lien. The Plaintiff alleges that the Company
  has failed to pay for certain goods, merchandise, or services sold to the Company.
  The complaint is seeking $113,488 plus interest and allegedly owed to the Plaintiff’s
  attorney fees and an order of foreclosure of Plaintiff’s lien. The Company
  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 November 9, 2006, an action was commenced in the District Court of Erath
  County, Texas , by Red River Well Service, Ltd, Shale Tank Truck, LP, and Bell
  Supply I, LP (“the Plaintiff’s”) against the Company for breach
  of contract and foreclosure of lien. The Plaintiff’s alleges that the
  Company has failed to pay for certain goods, merchandise, or services sold to
  the Company. The complaint is seeking $279,078 plus interest and allegedly owed
  to the Plaintiff’s attorney fees and an order of foreclosure of Plaintiff’s
  lien. The Company plans to respond to the Plaintiff’s lawsuit in a timely
  manner but plans to reach a settlement with Plaintiff’s 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 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.

18

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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)          

19

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SIGNATURES

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

|                        | TERAX ENERGY, INC.
|----------------------- | ------------------
|                        |                   
|                        |                   
|Date: November 20, 2006 | By:               
|                        |                   
|                        |                   

20

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