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                                  United States
                       Securities and Exchange Commission
                              Washington, DC 20549

                                   FORM 10-KSB

[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
     1934

                   For the fiscal year ended December 31, 2007

[ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
     OF 1934

                         Commission File Number: 0-31483


                               TERRA SYSTEMS, INC.
              (Exact name of small business issuer in its charter)

                         UTAH                              87-0476073
           -------------------------------            -------------------
           (State or other jurisdiction of             (I.R.S. Employer
            incorporation or organization)            Identification No.)

      7001 South 900 East, Ste 260, Midvale, Utah            84047
      -------------------------------------------          ----------
        (Address of principal executive offices)           (Zip Code)

                   Issuer's telephone number: (801) 208-1289
                                              --------------

Securities registered under Section 12(b) of the Exchange Act:   None.

Securities registered under Section 12(g) of the Exchange Act:

                            Common, $0.001 par value
                            ------------------------
                                (Title of Class)

Check whether the issuer is not required to file reports  pursuant to Section 13
or 15(d) of the Exchange Act [ ]

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 [ ]

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure  will be contained,  to
the  best  of  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

State issuer's revenue for the fiscal year ended December 31, 2007: $149,994


As of April  14,  2008,  when this  report  was  prepared,  the  registrant  had
53,246,806 shares of common stock outstanding. The aggregate market value of the
38,441,167  shares of voting  stock held by  non-affiliates  as of that date was
approximately $4,612,940.

Documents incorporated by reference: None.

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


<PAGE>


           Large accelerated filer |_|   Accelerated filer         |_|

           Non-accelerated filer   |_|   Smaller reporting company |X|
























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                                TABLE OF CONTENTS

                                     PART I

Item 1.   Description of Business                                              4
Item 2.   Description of Property                                             12
Item 3.   Legal Proceedings                                                   12
Item 4.   Submission of Matters to a Vote of Security Holders                 12

                                     PART II

Item 5.   Market for Common Equity, Related Stockholder Matters and
           Small Business Issuer Purchases of Equity Securities               12
Item 6.   Management's Discussion and Analysis or Plan of Operation           14
Item 7.   Financial Statements                                                15
Item 8.   Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosure                                           16
Item 8A.  Controls and Procedures                                             16
Item 8B.  Other Information                                                   17

                                    PART III

Item 9.   Directors, Executive Officers, Promoters Control Persons
           and Corporate Governance; Compliance with Section 16(a)
           of the Exchange Act                                                17

Item 10.  Executive Compensation                                              19

Item 11.  Security Ownership of Certain Beneficial Owners and Management
           and Related Stockholder Matters                                    22

Item 12.  Certain Relationships and Related Transactions, and Director
           Independence                                                       23

Item 13.  Exhibits                                                            24

Item 14.  Principal Accountant Fees and Services                              24

Signatures                                                                    26









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         PART I

Item 1.  Description of Business

         Historical Overview

         Terra  Systems,  Inc.  (the  "Company"  or "we")  was  formed as a Utah
corporation on February 17, 1996,  under the name Terra Systems,  Inc., and is a
development-stage  company whose primary business purpose is the development and
commercialization of a pneumatic conveyance system to handle materials in a bulk
state.

         On May 1, 1996, we merged with Xullux, Inc., a Utah corporation. In the
merger,  our shareholders  received  48,000,000 shares of Xullux common stock in
exchange  for  their  shares  of  Terra  Systems  common  stock.  Following  the
reorganization,  Xullux changed its name to Terra Systems,  Inc. In this report,
reference to the terms  "Terra  Systems,"  "we," "us," "our," and "the  Company"
refer  collectively  to Terra Systems,  Inc., and its  predecessors,  unless the
context clearly indicates otherwise.

         Our common  stock began  trading in July 1996 and was quoted  under the
ticker  symbol  "TSYI" on the OTC Bulletin  Board in 2001. On November 15, 2001,
the stock ceased to trade on the OTC Bulletin  Board,  and began  trading on the
Pink Sheets under the ticker symbol TSYI.PK.  In September 2006, our stock began
trading again on the OTC Bulletin Board under the ticker symbol "TSYI".

         Products

         Our principal product is a low-pressure  pneumatic  conveyance  system.
Low-pressure  systems  such as our  system  are  used  in  connection  with  the
pulverization,  moisture control,  classification,  transport, and processing of
bulk materials in a number of basic industries.

         Our system  relies on a slow moving,  laminar flow gas bearing to allow
for the  transportation  of material through a carrying duct. A laminar flow gas
bearing is formed  when the air in the center of a pipeline is  surrounded  by a
slow moving  turbulent  flow  boundary  air layer next to the inside wall of the
pipe. It is referred to as a boundary  because it acts to insulate the pipe from
severe abrasive  contact with the transported  material.  The amount of wear and
tear or erosion on the inside of a pipe  caused by the flow of a given  material
is referred to in the industry as the abrasion  signature.  Our process  reduces
this abrasion  signature because the material being transported is caught up and
carried by the faster moving gas in the center of the pipe. Unlike high-pressure
conveyance systems, low-pressure systems do not allow for the build-up or caking
of  material  inside the  containment  pipe.  In  pneumatic  conveyance,  caking
typically  occurs when dust combines with moisture and starts to gradually build
up on the inside wall of the pipe.

         Competing  high-pressure  pneumatic  conveyance  systems  rely  on  the
compression  of air for  operation.  When the air is  compressed,  the  moisture
contained in the air collects inside the pipe. These pressurized systems have to
be enclosed and can only purge  moisture at the end of their  conveyance  cycle.
The material  they carry  becomes  exposed to this  moisture,  which may lead to
caking.  On the other hand, a low-pressure  system like ours operates in an open
environment.  This allows the material being transported to breathe any moisture
out during the transportation process.

         Many of our components are pre-fabricated with final assembly occurring
at the client's site. In most cases,  we bill the client an hourly or daily rate
for  constructing  a system  that will vary in cost  based on the  customization
involved  for each  client and their  unique  requirements.  For  example,  some
applications may require only product drying before going to an existing milling
operation.  Thus, our equipment  could provide simply the product drying service
onsite.

         The prospective markets for our industrial particle accelerator include
power generation, mining, agriculture,  environmental,  ceramics,  construction,
and  materials  transportation.  We  believe  that  because  of the  nature  and
flexibility of our process,  many bulk materials used in basic industries can be
economically separated, classified, and otherwise processed.

         In addition to our  patented  pneumatic  conveyance  system,  we hold a
license for the patent pending "Clean Coke  Technology" of Combustion  Resources
LLC  ("Combustion  Resources").  The license  agreement  requires  that we begin


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paying a $300,000  per year  minimum  royalty  beginning  in the year 2010.  The
royalty is set as a fixed  percentage of the net operating  profit realized from
the licensed Clean Coke Technology, subject to a maximum amount of $3 million in
any one year.  We believe  that the Clean Coke  Technology  can be  utilized  to
produce  coke that  qualifies  under IRC  Section  45K for the tax  credit  from
alternative  fuels provided a plant utilizing the Clean Coke Technology is built
and placed in service by December 31, 2009. The Section 45K credit is subject to
reduction as the Federal reference price of oil increases. We believe that there
will be opportunities  to realize positive  economic returns from the Clean Coke
Technology  regardless  of the  incentive  available  from the  Section  45K tax
credit.

         Combustion  Resources,  the College of Eastern  Utah's  Western  Energy
Training  Center,  and the Company were successful in obtaining a Federal Center
of Excellence  grant to develop the process controls for the system at its pilot
plant (see below) in Price, Utah.

         During 2007,  we were  contracted  by  Combustion  Resources,  and have
worked with them to build and operate a pilot briquetting plant in Price,  Utah.
The pilot plant has a theoretical capacity of 1 ton per hour. The plant has been
used to agglomerate  carbon black.  Carbon black is a very  fine-sized  material
that is difficult to handle in its unagglomerated  state. The plant has produced
162 tons of agglomerated carbon black to-date,  all of which has been shipped to
a major industrial  customer for testing at its production  plant. The Company's
revenue for 2007 has been generated from this activity. Until the results of the
test are known,  the pilot  plant  will be  utilized  to develop  the Clean Coke
Technology process controls mentioned above.

         Distribution, Marketing, and Customer Relations

         Our  marketing  strategy  is to promote,  advertise  and  increase  our
technology  visibility  and attract new  customers  through  multiple  channels,
including:

         o        Developing strategic alliances;
         o        Establishing our technology name; and
         o        Direct marketing to existing and potential customers.

         We believe that the use of multiple  marketing channels will reduce our
reliance on any one source for obtaining  customers.  This, in turn,  will lower
costs and maximize technology awareness.

         Strategic alliances

         In the past we have tried to develop  strategic  alliances  with better
capitalized  companies  that we thought  would jointly  develop our  technology.
Though we did enter into various agreements with these companies, we were unable
to obtain licensing agreements or sales of our Pneumatic  Accelerator System. We
have had difficulty  delivering  our technology in an acceptable  state to these
partners because of our limited access to capital.  We do not currently have any
strategic  alliances.  We  do,  however,   believe  that  future  joint  venture
relationships  will  allow  us  to  gain  additional   insight,   expertise  and
penetration  into markets where joint venture  partners  already operate and may
serve to increase our revenue and income growth.  We expect to review  potential
strategic alliance  candidates and to enter into agreements in the future should
we feel these alliances would be in the best interest of the company.

         Establish our technology

         We cannot  guarantee  that we will be able to  successfully  market and
distribute  our services or  technologies  in either the United  States or other
countries,  and the  failure  to do so  could  have  an  adverse  effect  on our
operations. We believe that building awareness of the Terra Systems technologies
are important in establishing and expanding our customer base. We currently have
a web site (www.tsyi.com) and will use traditional media as our revenues permit,
to  attract  new  customers.  The  information  on  our  website  should  not be
considered part of this report on Form 10-KSB.

         Direct marketing

         Through  the  date of this  report,  our  marketing  activity  has been
largely word-of-mouth  referrals,  on-site  demonstrations,  as well as contacts


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generated  from our web site. We currently  have two  demonstrations  that could
significantly  impact our future  results.  The first is the  application of our
pneumatic  accelerator  system to the coal  recovery  operations at the Hiawatha
mine site in Hiawatha,  Utah. The second is the Western Energy  Training  Center
(WETC) pilot clean coke plant near Helper,  Utah.  Both projects are expected to
be in the early phases of operation during the second or third quarter of 2008.

         We  believe  that our  ability  to  establish  and  maintain  long-term
relationships with our customers and encourage repeat business depends, in part,
on the strength of our customer  support and service  operations  and staff.  We
value frequent communication with and feedback from our customers to continually
improve our  services.  We focus on  designing  high  quality  applications  and
engineered  products that are designed to address  specific  customer needs. Our
operating  results may  fluctuate due to factors such as the addition or loss of
significant customers.

         Industry Background and Competitive Conditions

         Nearly  all  bulk  materials  used in basic  industries  can or must be
separated,  pulverized,  classified, or otherwise enhanced.  Opportunities exist
for many  applications  in both organic and  inorganic  materials in an array of
large   industries,    including   power   generation,    mining,   agriculture,
environmental,  ceramics,  construction, and materials transportation.  Our main
competition  consists of companies  providing or engaging in traditional methods
of pulverization and transport of bulk materials; these include manufacturers of
roller  mills and ball  mills.  We  believe  that we compete on the basis of the
unique nature of our technology.  Our competitors are generally  larger,  better
funded and possess  greater name  recognition  and reputation in the market than
Terra  Systems.  There  is  no  assurance  that  we  will  be  able  to  compete
successfully against these larger players in the industry.

         Raw Materials and Suppliers

         We do not purchase or supply raw materials.  Numerous raw materials are
used to conduct on-site  demonstrations  on the effectiveness of our process and
equipment;  however,  our prospective  customers provide these materials.  These
materials  used  in  on-site   demonstrations  include  rice,  coal,  coal  ash,
limestone,  gypsum,  agricultural  waste and other materials  containing various
heavy minerals, such as gold, silver, and platinum.


         The  following  is  a  partial  list  of  major  industries  where  our
technologies  could be adopted or utilized,  possible uses in the industries and
the potential benefits of the use of our technology:

         o        Coal
                  o        Reduce moisture
                  o        Reduce ash
                  o        Increased Btu value
                  o        Micropulverize (80% of coal throughput ground down to
                           325 mesh)
                  o        Transport
                  o        Reclaim from gob piles

         o        Electric Power Generation With Coal
                  o        Reduce air pollution  emissions,  especially nitrogen
                           oxides ("NOX")
                  o        See "Coal" above
                  o        Contain fugitive dust

         o        Agriculture
                  o        Rice, coarse grains, sugar
                           o        Drying
                  o        Soil conditioning
                           o        Restore depleted trace minerals

         o        Environmental
                  o        Extract/dry/remove  waste  from
                           o        Food processing


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                           o        Industry
                           o        Radioactive materials

         o        Mining
                  o        Precious metals
                           o        Classify and concentrate desired ores

         o        Construction
                  o        Cement and concrete

         o        Ceramics
                  o        Micropulverize

         o        Transportation
                  o        Waterways
                  o        Dredging
                  o        Loading/unloading/transloading

         o        Metallurgical Coke
                  o        Custom coke blends
                  o        Custom coke sizes

Patents

         We have  licensed  technology  for clean coke  production  from a third
party and we own one patent,  U.S. Patent No. 6,170,768,  covering our pneumatic
accelerator,  which was granted  January 9, 2001. We expect that we will upgrade
this patent or file additional  applications  as developments  are made with our
technology. We rely upon a combination of patents,  copyright protection,  trade
secrets,   know-how,   continuing   technological   innovation   and   licensing
opportunities  to develop and  maintain  our  competitive  position.  Our future
prospects depend in part on our ability to obtain and maintain patent protection
for our  technology.  We also  need to  continue  to  preserve  our  copyrights,
trademarks  and  trade  secrets  and we  must  operate  without  infringing  the
proprietary rights of third parties.

         We cannot  guarantee  that any of our future patent  applications  will
result  in  issued  patents,  nor  can we  assure  that  we  will  develop  more
proprietary  technologies that are patentable.  Patents issued may not provide a
basis for  commercially  viable  products  or may not  provide  any  competitive
advantages.  Third  parties could  challenge our patents.  The patents of others
could limit our ability to use some of our  processes  or  technologies.  Any of
these  situations  could have a  material  adverse  effect on our  ability to do
business.  We cannot prevent  others from  independently  developing  similar or
alternative  technologies,  duplicating any of our technologies,  or, if patents
are issued to us,  designing  around our patented  technologies.  We could incur
substantial costs in litigation if we are required to defend ourselves in patent
suits  brought by third parties or if we initiate  these suits against  possible
infringers of our patent rights.

         Others  may have  filed and in the  future  are  likely to file  patent
applications that are similar or identical to ours. To determine the priority of
inventions,  we may have to participate in interference  proceedings declared by
the United States Patent and Trademark Office. Those proceedings could result in
substantial  cost to us.  We  cannot  ensure  that any such  third-party  patent
application  will not have  priority over ours.  Additionally,  the laws of some
foreign  countries  may not protect our patent and other  intellectual  property
rights to the same extent as the laws of the United States.

         Our future  prospects  also depend in part on our  neither-  infringing
patents or  proprietary  rights of third parties nor breaching any licenses that
may relate to our  technologies  and products.  We cannot guarantee that we will
not infringe the patents, licenses or other proprietary rights of third parties.
We could in the future receive notices claiming  infringement from third parties
as well as  invitations to take licenses under  third-party  patents.  Any legal
action  against  our  strategic  partners  or us that claim  damages and seek to
enjoin  commercial  activities  relating to the affected  products and processes
could subject us to potential  liability for damages.  Those legal actions could
also  require  our  strategic  partners  or us to obtain a  license  in order to
continue to manufacture or market the affected products and processes. We cannot
ensure that our strategic  partners or we would prevail in any action. We cannot
ensure that any license,  including licenses proposed by third parties, required


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under any patent would be available on terms that are  commercially  acceptable,
if at all. We have not  conducted an  exhaustive  patent  search,  and we cannot
ensure  that  patents  do not  exist or could  not be filed  that  would  have a
material adverse effect on our ability to develop and market our products. If we
become involved in such  litigation,  it could consume a substantial  portion of
our  managerial  and financial  resources,  which would have a material  adverse
effect  on  our  business,  financial  condition,  results  of  operations,  and
relationships with corporate partners.

         We  attempt  to  control  the  disclosure  and  use of our  proprietary
technology,  know-how  and  trade  secrets  under  agreements  with the  parties
involved.  However,  we cannot ensure that others will honor all confidentiality
agreements.  We cannot prevent others from  independently  developing similar or
superior technology, nor can we prevent disputes that could arise concerning the
ownership of intellectual property.

         Government Regulation

         We are not  currently  subject to direct  regulation by any domestic or
foreign  governmental  agency,  other than  regulations  applicable  to business
generally,  export control laws, and laws or regulations  directly applicable to
the industry.  We are required to ensure the enforcement of the Occupational and
Health Administration (OSHA) regulations.

         We believe that we have complied in all material respects with the laws
and  regulations  governing the industry and that compliance with such laws will
not have a material effect on our operations. However, various federal and state
agencies may propose new  legislation  that may  adversely  affect our business,
financial condition and results of operations.  We are not aware of any probable
government regulations that may adversely affect our business.

         Research and Development Activities

         Our  success and ability to compete  will be  dependent  in part on the
protection  of our  existing and  potential  patents,  trademarks,  trade names,
service marks, and other  proprietary  rights.  Thus, a majority of our research
and development efforts has been focused on product  development,  testing,  and
patent application.

         We seek to continue developing our products internally through research
and development or if appropriate,  through strategic  partnerships.  We expect,
however, that if we can purchase or license products,  services, or technologies
from third  parties at a  reasonable  cost,  we will do so in order to avoid the
time  and  expense   involved  in  developing   such  products,   services,   or
technologies.

         Employees

         As of December 31, 2007, we had two full-time employees,  one part-time
employee,  and three  consultants  and advisors.  There were no organized  labor
agreements or union agreements between Terra Systems, Inc. and our employees. We
believe that  relations  with our  employees  have been and will  continue to be
good.

RISK FACTORS

         We  have a  history  of  losses  and  had  an  accumulated  deficit  of
approximately $24,023,323 as of December 31, 2007, and approximately $19,190,814
as  of  December  31,  2006.  If  we  do  not  become   profitable  or  maintain
profitability in the future, we may not be able to continue to operate.

         We incurred net losses of approximately $24,023,323 for the period from
February  1996  through  December  31,  2007.  We  expect to  continue  to incur
substantial net losses in the foreseeable future. If we do not become profitable
within the time frame  expected  by  investors,  the market  price of our common
stock  likely will  decline.  If we continue to incur net losses,  we may not be
able to  maintain or  increase  our number of  employees  or our  investment  in
capital equipment,  sales, marketing,  and research and development programs. We
do  not  know  when  or  if  we  will  become  profitable.   If  we  do  achieve
profitability,  we may not sustain or increase profitability in the future. As a
result, we may not be able to continue to operate.


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         Our limited  operating  history  makes it difficult  to predict  future
results.

         Our  business  model is still  emerging,  and the  revenue  and  income
potential of our business and market are unproven.  We have a limited  operating
history  on which to base  estimates  for  future  performance.  Our  technology
represents a new approach to the challenges  presented in our selected  markets,
which to date have been dominated by established companies with longer operating
histories. Although we expect that ongoing negotiations with potential customers
may result in the  finalization  of feasibility  study and licensing  agreements
that would result in revenues and cash flows, there is no assurance that we will
be successful in those negotiations. Key markets within our industry may fail to
adopt  our  proprietary  technologies  and  products,  or we may  not be able to
establish  distribution  channels.  Any  evaluation  of  our  business  and  our
prospects must be considered in light of our limited  operating  history and the
risks and uncertainties  often encountered by companies in their early stages of
development.

         Technological  and other  developments  in our  markets  may render our
technologies  and products  obsolete or limit our ability to  penetrate  our key
markets.

         Technological change,  continuing process development,  and new product
introductions may affect the markets for our products.  Our success will depend,
in part, upon our continued  ability to manufacture  products that meet changing
customer needs,  successfully  anticipate or respond to technological changes in
manufacturing  processes  on a  cost-effective  and timely basis and enhance and
expand  our  existing  product  offerings.  Current  competitors  or new  market
entrants may develop new products with features that could adversely  affect the
competitive  position of our  products.  We have invested and continue to invest
substantial  resources in research and  development in an effort to improve upon
our existing  processes.  However,  there can be no  assurance  that our process
development   efforts  will  be   successful   or  that  the  emergence  of  new
technologies,  industry standards,  or customer requirements will not render our
technology,  equipment,  or processes obsolete or uncompetitive.  Any failure or
delay in  accomplishing  these goals could have a material adverse effect on our
business,  results of operations,  and financial condition.  In addition, to the
extent that we determine  that new  manufacturing  equipment  or  processes  are
required  to remain  competitive,  the  acquisition  and  implementation  of the
technologies,   equipment,   and  processes   required  are  likely  to  require
significant capital investment.

         Our reliance  upon  intellectual  property  licenses from third parties
limits the  control we have over  aspects of our  business  development  and may
increase the expense of doing  business,  which would reduce  profitability.  In
addition,  the  possibility of our  infringing  upon the  intellectual  property
rights of third parties may result in litigation and divert the attention of our
management, adversely affecting our business.

         We may rely on intellectual  property licenses from third parties,  and
may be required to license  additional  products or services in the future,  for
use in the general  operations of our business plan. We cannot assure that these
third party licenses will be available or will continue to be available to us on
acceptable  terms,  if at all.  The  inability to enter into and maintain any of
these licenses could have a material  adverse effect on our business,  financial
condition,  or operating results. In addition,  policing unauthorized use of our
proprietary  and other  intellectual  property  rights could be expensive if not
difficult or impossible.

         Additionally,  we cannot  guarantee  that third  parties will not bring
claims of copyright or trademark  infringement against us, or claim that aspects
of our processes or other features  violate a patent they may hold. There can be
no  assurance  that third  parties  will not claim that we have  misappropriated
their  creative ideas or formats or otherwise  infringed upon their  proprietary
rights.  Any  claims  of  infringement,  with or  without  merit,  could be time
consuming to defend,  result in costly litigation,  divert management attention,
or require us to enter into  costly  royalty or  licensing  arrangements.  These
potentialities  could have a material adverse effect on our business,  financial
condition, or operating results.

         Our audited  financial  statements have been prepared on the assumption
that we will  continue as a going  concern.  If we fail to continue in business,
you would lose your investment.

         Our independent registered public accounting firm has issued its report
dated April 14, 2008,  that includes an explanatory  paragraph  stating that our
deficit in working capital,  negative cash flows from  operations,  shareholders
deficit and  recurring net losses raise  substantial  doubt about our ability to


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continue as a going concern.  If we are not successful in generating  additional
sales,  reducing  expenses,  or  obtaining  additional  financing  through  this
offering  or  otherwise,  we  may be  required  to  scale  back  or  discontinue
operations,  in which case our investors could lose all or substantially  all of
their investment.

         If we  are to be  competitive,  we  need  to  attract  and  retain  key
personnel.  Our  financial  resources  are  limited,  and it may be difficult to
attract and retain personnel who are or would be instrumental to our success.

         Our future success depends  significantly  on the continued  service of
our senior  management.  The familiarity of these  individuals with the industry
makes them especially  critical to our success.  The loss of the services of one
or more  of our key  employees  could  have a  material  adverse  effect  on our
business.  We do not currently  have key man insurance on any of our  employees,
but we do anticipate  obtaining that insurance in the future. Our future success
also  depends on our  ability to attract  and retain  highly  qualified  design,
technical,  sales,  marketing,   customer  service,  and  management  personnel.
Competition for these personnel is intense, and we cannot guarantee that we will
be able to attract or retain a sufficient  number of highly qualified  employees
in the  future.  The lack of  qualified  management  personnel  could  limit our
ability to grow our business and may limit our ability to effectively compete in
our markets.

         We have been unable to pay our senior  management  on a current  basis,
and have lost the  services of a past officer  because of our  inability to keep
current.  Additionally,  we have  had to rely on the  financial  support  of our
officers and directors in the past,  but cannot  provide any assurance that this
will continue in the future.  Without the  continuance of such past  cooperation
and support,  we may be required to  discontinue  operations,  in which case our
investors could lose all or substantially all of their investment.

         Our  inability to  effectively  manage  growth may increase the cost of
doing business or result in inefficiencies  that would reduce cash available for
growth and prevent us from becoming profitable.

         To execute our business plan, we must grow  significantly.  This growth
will  place a  significant  strain on our  personnel,  management  systems,  and
resources.   We   expect   that  the   number   of  our   employees,   including
management-level employees, will continue to increase in the foreseeable future,
and  that  we may  need  additional  office  space  and  expanded  technological
infrastructure.  Failure to manage growth effectively will materially  adversely
affect our business, results of operations, and financial condition.

         We may not be able to obtain sufficient patent protection,  which could
harm our competitive position and increase our expenses.

         Our success and ability to compete depends to a significant degree upon
the  protection  of our  proprietary  technology.  Currently,  one of our patent
applications  has been  allowed.  These legal  protections  afford only  limited
protection  for our  technology,  and the rights  that may be granted  under any
future patents that may be issued may not provide competitive  advantages to us.
Patent  protection in foreign  countries may be limited or unavailable  where we
need this protection. It is possible that:

         o        competitors may independently  develop similar technologies or
                  design around our patents;

         o        patents  issued to us may not be broad  enough to protect  our
                  proprietary rights; and

         o        any issued patent could be successfully challenged.

         The  occurrence of any of these factors could result in the  diminution
or loss of our  protected  intellectual  property,  which  could have a material
adverse impact on our business.

         Our stock is  considered  a penny  stock.  Penny  stocks are subject to
special  regulations,  which may make them more  difficult  to trade on the open
market.

         As of the date of this  Report,  our common stock was traded on the OTC
Bulletin Board under the ticker symbol "TSYI."  Securities on the Bulletin Board
market are generally more  difficult to trade than those on the NASDAQ  National


                                       10
<PAGE>


Market,  the NASDAQ Small Cap Market or the major stock exchanges.  In addition,
accurate price quotations are more difficult to obtain. Additionally, our common
stock is subject to special regulations governing the sale of penny stock.

         A "penny  stock," is  defined  by  regulations  of the  Securities  and
Exchange Commission as an equity security with a market price of less than $5.00
per share.  However, an equity security with a market price under $5.00 will not
be considered a penny stock if it fits within any of the  following  exceptions,
which are not applicable to our securities:

         o        The  equity  security  is  listed  on  NASDAQ  or  a  national
                  securities exchange;

         o        The  issuer  of the  equity  security  has been in  continuous
                  operation  for less than three  years,  and either has (a) net
                  tangible assets of at least $5,000,000,  or (b) average annual
                  revenue of at least $6,000,000; or

         o        The  issuer  of the  equity  security  has been in  continuous
                  operation  for more than  three  years,  and has net  tangible
                  assets of at least $2,000,000.

         If you buy or sell a penny stock,  these  regulations  require that you
receive,  prior to the  transaction,  a  disclosure  explaining  the penny stock
market and associated risks.  Furthermore,  trading in our common stock would be
subject to Rule 15g-9 of the  Exchange  Act,  which  relates to  non-NASDAQ  and
non-exchange  listed securities.  Under this rule,  broker-dealers who recommend
our  securities  to persons  other than  established  customers  and  accredited
investors  must  make  a  special  written  suitability  determination  for  the
purchaser and receive the purchaser's  written  agreement to a transaction prior
to sale.

         Penny stock  regulations  will tend to reduce  market  liquidity of our
common stock,  because they limit the  broker-dealers'  ability to trade,  and a
purchaser's  ability to sell the stock in the secondary market. The low price of
our common  stock will have a negative  effect on the amount and  percentage  of
transaction costs paid by individual  shareholders.  The low price of our common
stock  may also  limit  our  ability  to raise  additional  capital  by  issuing
additional  shares.  There are several  reasons for these  effects.  First,  the
internal  policies of many  institutional  investors  prohibit  the  purchase of
low-priced stocks. Second, many brokerage houses do not permit low-priced stocks
to be used as  collateral  for margin  accounts  or to be  purchased  on margin.
Third, some brokerage house policies and practices tend to discourage individual
brokers from dealing in low-priced  stocks.  Finally,  broker's  commissions  on
low-priced  stocks usually represent a higher percentage of the stock price than
commissions  on higher priced stocks.  As a result,  our  shareholders  will pay
transaction  costs that are a higher  percentage of their total share value than
if our share price were substantially higher.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

         Some of the statements under "Risk Factors,"  "Management's  Discussion
and Analysis or Plan of  Operation,"  "Business,"  and  elsewhere in this report
constitute forward-looking  statements.  These statements involve risks known to
us,  significant  uncertainties,  and other  factors  which may cause our actual
results,  levels of activity,  performance,  or  achievements  to be  materially
different  from  any  future  results,  levels  of  activity,   performance,  or
achievements expressed or implied by those forward-looking statements.

         You can  identify  forward-looking  statements  by the use of the words
"may," "will," "should," "could," "expects," "plans," "anticipates," "believes,"
"estimates,"  "predicts," "intends,"  "potential,"  "proposed," or "continue" or
the negative of those terms.  Additionally,  statements relating to our business
plans,  financial  projections,  capital needs,  business  development,  capital
raising and business  strategies may also consist of or contain  forward-looking
statements.  Such forward-looking statements are only predictions. In evaluating
these statements,  you should specifically  consider various factors,  including
the risks outlined  above.  These factors may cause our actual results to differ
materially from any forward-looking statement.

         Although   we  believe   that  the   expectations   reflected   in  the
forward-looking  statements are reasonable,  we cannot guarantee future results,
levels of activity,  performance  or  achievements.  We  expressly  disclaim any
obligation or intention to update any forward-looking statement.


                                       11
<PAGE>


Item 2.  Description of Property

         Terra Systems,  Inc.,  occupies  office space located at 7001 South 900
East, Ste 260. Terra Systems, Inc., is renting approximately 2300 square feet of
space. The Company, through its joint venture,  Mountain Island Energy Holdings,
LLC, shares in the ownership of 423 acres of land near Soda Springs,  Idaho. The
land is  strategically  located  near  existing  industrial  facilities  and key
infrastructure.  We  believe  that  these  properties  and  facilities  will  be
sufficient for our needs for the foreseeable future.

Item 3.  Legal Proceedings

         None

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

         None.


                                     PART II

Item 5.  Market  for  Common  Equity,  Related  Stockholder  Matters  and  Small
         Business Issuer Purchases of Equity Securities

         MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

         Market for Common Stock  continued on the OTC Bulletin  Board under the
symbol TSYI

                                               High       Low
                  2007
                   1st Quarter                 $0.40     $0.28
                   2nd Quarter                 $0.32     $0.21
                   3rd Quarter                 $0.29     $0.12
                   4th Quarter                 $0.23     $0.14

                  2006
                   1st Quarter                 $0.80     $0.64
                   2nd Quarter                 $0.80     $0.45
                   3rd Quarter(1)              $0.65     $0.35
                   4th Quarter                 $0.50     $0.34

                  2005
                   1st Quarter                 $2.05     $0.30
                   2d Quarter                  $1.01     $0.65
                   3d Quarter                  $1.02     $0.81
                   4th Quarter                 $0.99     $0.60

(1)In  September  2006,  our stock began trading on the OTC bulletin Board under
the ticker symbol "TSYI".

         The source of these  high and low  prices  was the Pink  Sheets and OTC
Bulletin Board. These quotations  reflect  inter-dealer  prices,  without retail
mark-up, mark-down or commission and may not represent actual transactions.  The
high and low prices  listed have been rounded up to the next highest two decimal
places.

         The  market  price  of the  common  stock  is  subject  to  significant
fluctuations in response to variations in the our quarterly  operating  results,
general trends in the market for our technologies,  and other factors, over many
of which we have little or no control. In addition,  broad market  fluctuations,
as well as general economic,  business and political  conditions,  may adversely
affect the market for our common  stock,  regardless  of our actual or projected
performance.  On December 31, 2007, the closing bid price of the common stock as
reported by the OTC Bulletin Board was $0.15 per share.


                                       12
<PAGE>


         Holders

         As of December 31, 2007, there were  approximately  291 shareholders of
record of our common stock.

         Dividend Policy

         We have not paid cash  dividends  on our common stock and do not intend
to pay any cash dividends in the foreseeable future.

Sales of Unregistered Securities

         The following sets forth certain information for all securities we sold
during the past three years without registration under the Securities Act.


2005
         During the twelve months ending  December 31, 2005,  the Company issued
2,350,000  shares of common  stock at $0.10 per share for  proceeds of $235,000;
600,000  shares of common  stock at a price of $0.08 per share for  proceeds  of
$50,000;  700,000  shares  of  common  stock at a price of $0.07  per  share for
proceeds  of  $50,000;  125,000  shares of common  stock at a price of $0.20 per
share for  proceeds of  $25,000;  700,000  shares of common  stock at a price of
$0.25 per share for  proceeds of  $175,000;  60,000  shares of common stock at a
price of $0.50 per share for proceeds of $30,000; 350,000 shares of common stock
at a price of $0.30 per share or  $105,000  for  satisfaction  of debt;  100,000
shares of common stock at a price of $0.85 per share or $85,000 for satisfaction
of debt;  543,091  shares  of  common  stock at a price  of $0.75  per  share or
$407,318 for financing fees;  508,936 shares of common stock at a price of $0.75
per share or $381,702 for settlement of debt;  1,302,743  shares of common stock
at a price of $0.80 per  share or  $1,042,194  for  settlement  of debt;  90,000
shares of common  stock at a price of $0.81 per share or  $72,900  for  services
rendered;  1,270,000  shares  of  common  stock at a price of $0.95 per share or
$1,206,500 for services rendered; 2,697,257 shares of common stock at a price of
$0.80 per share or  $2,157,806  for services  rendered;  25,000 shares of common
stock as a price of $0.86 per share or $21,500  for  services  rendered;  52,941
share of  common  stock at a price of $0.81 per share or  $42,882  for  services
rendered; 50,001 shares of common stock at a price of $0.84 per share or $41,999
for services  rendered;  200,000  shares of common stock at a price of $0.75 per
share or $150,000 for  services  rendered;  878,048  shares of common stock at a
price of $0.93 per share or $816,585 in connection with an acquisition;  255,812
shares of common  stock at a price of $0.86 per share or $220,000 in  connection
with an acquisition.

2006
         During the twelve months ending  December 31, 2006,  the Company issued
342,401  shares of common  stock at $0.30 per share for  proceeds  of  $102,720;
500,000  shares of common  stock at a price of $0.50 per share for  proceeds  of
$250,000;  28,572  shares  of  common  stock at a price of $0.35  per  share for
proceeds  of  $10,000;  312,500  shares of  common  stock at $0.20 per share for
proceeds of $62,500; 65,000 shares of common stock at a price of $0.65 per share
for financing fees and interest valued at $42,250; 70,311 shares of common stock
valued at $0.65 per share or $45,702 for satisfaction of debt;  64,284 shares of
common stock at a price of $0.75 per share or $48,213 for services rendered.

2007
         During 2007, the Company issued  1,000,000  shares of common stock at a
price of $0.20 per share for  proceeds  of  $200,000;  250,000  shares of common
stock at a price of $0.15 per share for proceeds of $37,500; 1,200,000 shares of
common  stock at a price of $0.10 per share for  proceeds of  $120,000;  500,000
shares of common stock for proceeds of $50,000 to an  individual  who  exercised
his options to purchase  common  stock at an exercise  price of $0.10 per share;
3,000,000 shares of common stock to employees for services rendered with a value
of $901,500  at a price of $0.30 per share;  40,000  shares of common  stock for
financing fees of $14,000 at a price of $0.35 per share; 90,000 shares of common
stock for  satisfaction  of accounts  payable of $30,000 at a price of $0.33 per
share;  1,587,700 shares of common stock, at a price of $0.41 per share, for the
satisfaction of accounts  payable of $28,500,  related party payable of $92,203,
accrued  wages of  $255,000,  accrued  interest of $162,645  and note payable to


                                       13
<PAGE>


stockholders of $115,874;  550,000 shares of common stock for  satisfaction of a
note  payable to stock  holder of $50,000 and  interest  expense of $43,500 at a
price of $0.17 per share.  Additionally,  the Company issued 2,218,750 shares of
common stock in satisfaction of certain stock purchase rights.

         The sales of shares to the  buyers  were made in  privately  negotiated
transactions  relying on Section 4(2) of the 1933 Act, and rules and regulations
promulgated  thereunder,  as transactions not involving any public offering.  No
advertising  or  general  solicitation  was  employed  in  the  issuance  of the
securities.

         The Company did not purchase any shares of its securities during 2007.

Item 6.  Management's Discussion and Analysis or Plan of Operation

         You should read the following  description  of our financial  condition
and results of operations in conjunction with the audited  financial  statements
and the  notes  thereto  included  elsewhere  in this  report.  This  discussion
contains forward-looking statements based upon current expectations that involve
risks and uncertainties. Any statements contained herein that are not statements
of historical fact may be deemed to be  forward-looking  statements.  Our actual
results  and the timing of  business  events may differ  significantly  from the
results discussed in the forward-looking statements.  Factors that might cause a
discrepancy  include, but are not limited to, those discussed in "Risk Factors,"
"Business," and elsewhere in this report.

General

         Terra Systems was  incorporated  in Utah on February 17, 1996, and is a
development-stage   company.   Our  primary  business  is  the  development  and
commercialization  of our patented pneumatic  accelerator.  This device is a gas
linear  particle  accelerator  that conveys and processes bulk materials at high
velocity in a particle isolate state,  using air as the medium of movement.  The
traditional and more costly medium for processing  bulk materials is water.  Our
technology operates efficiently at ambient temperatures and at low pressures and
does not use water. We believe that most if not all,  organic and inorganic bulk
materials used in basic industries  (such as coal,  gypsum,  black sands,  corn,
rice,  and wheat)  can be more  economically  separated  and  classified  by our
dry-process  technology.  This  capability  facilitates  a number of  associated
procedures, including: drying, micropulverizing, mixing, forming, conveying, and
loading.  In addition,  bulk  materials can be  beneficiated  in important  ways
including   moisture   reduction,   ash   reduction,   Btu   enhancement,    and
electro-customization.  We believe our system can perform multiple tasks,  needs
less  maintenance,   requires  no  chemical  additives,   and  can  improve  the
surrounding environmental quality.

         Our  success and ability to compete  will be  dependent  in part on the
protection  of our  existing and  potential  patents,  trademarks,  trade names,
service marks, and other  proprietary  rights.  Thus, a majority of our research
and development efforts have been focused on product  development,  testing, and
patent application.

         We seek to continue developing our products internally through research
and development,  or if appropriate,  through  strategic  alliances.  We expect,
however, that if we can purchase or license products,  services, or technologies
from third  parties at a  reasonable  cost,  we will do so in order to avoid the
time  and  expense   involved  in  developing  these  products,   services,   or
technologies.

Results of Operations

Twelve months ended  December 31, 2007 compared to twelve months ended  December
31, 2006

         From  inception  through  December 31, 2007,  we have  incurred  losses
totaling $24,023,323 and generated revenues of $768,136 from operations.  During
the years ended  December 31, 2007 and 2006,  we had $ 149,994 and $45,897 sales
revenues  respectively.  This factor,  among others,  raises  substantial  doubt
concerning our ability to continue as a going concern.  We intend to use capital
and debt financing as needed to supplement the cash flows that we expect will be
provided by licensing agreements. Our primary source of capital historically has
been through the sale of our securities.

         Realization  of licensing of our  technology  and sales of our products
and services is vital to  operations.  We may not be able to continue as a going
concern without realizing  additional sales or raising  additional  capital.  We


                                       14
<PAGE>


cannot  guarantee  that we will be able  to  compete  successfully  or that  the
competitive pressures we may face will not have a material adverse effect on our
business, results of operations and financial condition. Additionally,  superior
competitive products could force us out of business.

         Our net loss for the year ended  December  31,  2007 was  approximately
$4,832,509,  compared to a net loss for the year ended  December  31,  2006,  of
approximately  $1,412,231.  The net loss was attributable to lower than expected
revenues  from sales of our  products  and  services.  Our expenses for the year
ending December 31, 2007, were approximately  $4,881,042 of which  approximately
97% were  general  and  administrative  expenses.  The  increase  in general and
administrative  expenses in 2007 was due to the issuance of 5,218,750  shares of
common stock valued at $1,895,775 for services and financing fees. Also,  during
2007 the Company recognized  $2,257,161 in expense relating to stock options and
warrants  granted  during the year. Our expenses for the year ended December 31,
2006, were approximately $1,424,476, of which approximately 91% were general and
administrative.   For  the  year  ended  December  31,  2007,  depreciation  and
amortization  expense  was $8,531  compared  to  depreciation  and  amortization
expense of $8,532 for the year ended December 31, 2006.

         Future Business

         We see  opportunities  for our  technology  and business in an array of
large   industries,    including   power   generation,    agriculture,   mining,
environmental,   construction,   ceramics,  and  materials  transportation.   We
anticipate  that we will generate  revenues  through the sale of our proprietary
equipment, fees, royalties, and profit sharing from licensing of our technology.

         We are continuing discussions with PacifiCorp regarding pulverized coal
processing for the utility  industry.  We have been working with  management and
engineering  personnel in the preliminary product design and development stages.
A major objective of the proposed  strategic  business  alliance with PacifiCorp
will be to  design a  system  that  has the  ability  to  produce  low ash,  low
moisture,  and ultra fine coal, that enhances the combustion  process and reduce
unburned carbon and nitrogen oxide ("NOx") emissions.

         Liquidity and Capital Resources

         Given our current  negative cash flows,  it will be difficult for Terra
Systems to continue as a going concern. It will be necessary to raise additional
funds.  Funds could be  generated  through the issuance of  additional  stock or
through the sale of existing plant and office equipment. We have available to us
a $500,000  line of credit  that is  guaranteed  by two  members of our board of
directors,  but the use of such  funds are  limited  to the  development  of the
Hiawatha coal recovery project, and the continuing  availability of this line is
contingent on achieving  acceptable progress on that project,  including its use
as a feedstock for the clean coke pilot plant.

         As mentioned in our audited financial statements included with our Form
10-KSB, our audited consolidated  financial statements have been prepared on the
assumption that we will continue as a going concern. Our product line is limited
and it has been  necessary  to rely upon  financing  from the sale of our equity
securities to sustain  operations.  Additional  financing will be required if we
are to continue as a going concern. If additional  financing cannot be obtained,
we may be required to scale back or discontinue  operations.  Even if additional
financing  is  available  there  can be no  assurance  that it will be on  terms
favorable  to us.  In any  event,  this  additional  financing  will  result  in
immediate and possible substantial dilution to existing shareholders.


Item 7.  Financial Statements

         Audited  financial   statements  for  the  twelve-month  period  ending
December 31, 2007, are attached.

         Report of Independent Registered Public Accounting Firm             F-1

         Consolidated Balance Sheets- December 31, 2007 and 2006             F-2


                                       15
<PAGE>


         Consolidated Statements of Operations for the Years Ended
          December 31, 2007 and 2006 and for the Cumulative Period
          February 17, 1996 (Date of Inception), through December
          31, 2007                                                           F-3

         Consolidated Statement of Changes in Stockholders' Deficit
          for the Period February 17, 1996(Date of Inception),
          through December 31, 2007                                          F-4

         Consolidated  Statements of Cash Flows for the Years Ended
          December 31, 2007 and 2006, and for the Cumulative Period
          February 17, 1996 (Date of Inception), through December
          31, 2007                                                           F-7

         Notes to Consolidated Financial Statements                          F-8


Item 8.  Changes  in  and  Disagreements  with  Accountants  on  Accounting  and
         Financial Disclosure

         None.

Item 8A.Controls and Procedures

Management's Report On Internal Control Over Financial Reporting

         Management is responsible for  establishing  and  maintaining  adequate
internal control over financial reporting as defined in Rule 13a-15(f) under the
Exchange Act. This rule defines internal  control over financial  reporting as a
process  designed by, or under the supervision of, the Company's Chief Executive
Officer and a consultant  performing services for the Company commonly performed
by a chief financial  officer,  to provide  reasonable  assurance  regarding the
reliability of financial  reporting and the preparation of financial  statements
for external  purposes in accordance  with U.S. GAAP. Our internal  control over
financial reporting includes those policies and procedures that:

         o        Pertain to the  maintenance  of records  that,  in  reasonable
                  detail,  accurately  and fairly reflect the  transactions  and
                  dispositions of the assets of the Company;

         o        Provide reasonable assurance that transactions are recorded as
                  necessary to permit  preparation  of financial  statements  in
                  accordance with U.S. GAAP, and that receipts and  expenditures
                  of  the  Company  are  being  made  only  in  accordance  with
                  authorizations of management and directors of the Company; and

         o        Provide reasonable  assurance  regarding  prevention or timely
                  detection of unauthorized  acquisition,  use or disposition of
                  the Company's  assets that could have a material effect on the
                  financial statements.

         Because of its inherent  limitations,  internal  control over financial
reporting may not prevent or detect misstatements.  In addition,  projections of
any evaluation of  effectiveness  to future periods are subject to the risk that
controls may become  inadequate  because of changes in  conditions,  or that the
degree of compliance with the policies or procedures may deteriorate.

         With  the   participation  of  the  Chief  Executive  Officer  and  the
consultant  performing  services for the Company  commonly  performed by a chief
financial officer,  our management  conducted an evaluation of the effectiveness
of our internal  control over  financial  reporting as of December 31, 2007.  In
making its  assessment,  management  used the criteria  established  in Internal
Control--Integrated   Framework   issued   by  the   Committee   of   Sponsoring
Organizations  of  the  Treadway  Commission.  Based  on  this  evaluation,  our
management has concluded that our internal control over financial  reporting was
not effective as of December 31, 2007, as the result of a material weakness. The
material weakness consisted primarily of inadequate staffing and supervision, as
discussed above.

          As a result of these factors,  the Company's Chief  Executive  Officer
 and the consultant  performing services for the Company commonly performed by a
 chief financial officer have concluded that the Company's internal controls and
 procedures are not effective as of the period covered by this report.


                                       16
<PAGE>


Remediation of Material Weakness

         As noted above,  the size of the Company prevents it from being able to
employ sufficient  resources to enable the Company to have adequate  segregation
of duties within its internal  control  system.  Management is required to apply
its judgment in evaluating the  cost-benefit  relationship of possible  controls
and procedures.  In order to address the deficiency,  management has implemented
tighter cash flow controls and set-up a centralized  computer system to maintain
the accounting  records.  Management will continue to work to address and remedy
the material weakness as the position of the Company permits.

Limitations on the Effectiveness of Internal Controls

         Our  management,   including  our  Chief  Executive   Officer  and  the
consultant  performing  services for the Company  commonly  performed by a chief
financial officer,  does not expect that our disclosure  controls and procedures
or our  internal  control  over  financial  reporting  are or will be capable of
preventing or detecting all errors or all fraud.  Any control system,  no matter
how well  designed and  operated,  can provide only  reasonable,  not  absolute,
assurance  that the control  system's  objectives  will be met.  The design of a
control  system must reflect the fact that there are resource  constraints,  and
the benefits of controls  must be considered  relative to their costs.  Further,
because of the inherent  limitations  in all control  systems,  no evaluation of
controls can provide  absolute  assurance  that  misstatements,  due to error or
fraud will not occur or that all control issues and instances of fraud,  if any,
within the company have been detected.  These inherent  limitations  include the
realities that judgments in  decision-making  can be faulty and that  breakdowns
may occur because of simple error or mistake.  Controls can also be circumvented
by the individual acts of some persons,  by collusion of two or more people,  or
by  management  override  of  controls.  The design of any system of controls is
based in part on certain  assumptions about the likelihood of future events, and
there can be no assurance  that any design will succeed in achieving  its stated
goals under all potential  future  conditions.  Projections of any evaluation of
controls effectiveness to future periods are subject to risk.


Item 8B.   Other Information

         None.



                                    PART III

Item 9.  Directors, Executive Officers,Promoters, Control Persons, and Corporate
         Governance; Compliance with Section 16(a) of the Exchange Act

MANAGEMENT

         The following table sets forth information about our board of directors
and management team as of December 31, 2007.



Name                         Age    Position
------------------------     ---    ------------------------------------
Clayton D. Timothy           61     Chief Executive Officer and Director
George W. Ford               62     President and Director
L. Kent Harmon               53     Vice President and Director
Mitchell Hart                50     Vice President and Director
Reynold Roeder               49     Director and Chairman of the Board
Frederick W Buckman, Sr.     62     Director
J.R. Key                     62     Director


                                       17
<PAGE>


         Clayton D Timothy,  Director and Chief  Executive  Officer- Mr. Timothy
has an Associates  Degree in Mine  Maintenance from the College of Eastern Utah.
His career has evolved around coal mining, initially as a miner, subsequently as
a  foreman  and in more  recent  years  as  entrepreneur  and  executive  in the
development and  implementation  of  technological  innovations in the field. In
this span of experiences,  he has considerable experience in handling industrial
bulk materials. From 1990-1994, he was Executive Vice President of Environmental
Technologies Group, Inc. (ETGP) of Lehi, Utah, which pioneered and implemented a
patented technology,  which agglomerated coal fines. The process became patented
and qualified as a synthetic  fuel,  entitling it to Section 29  Investment  Tax
Credit status.  ETGP was eventually renamed Covol  Technologies,  Inc., and more
than two dozen plants were built to utilize the coal fines technology. From 1994
to 1996, he was Vice President of Industrial Management and Engineering, also in
Lehi, UT. He was the founder of TSYI in 1996.

         George W. Ford,  Director and  President of Terra  Systems,  Inc. - Mr.
Ford served as Principal  Scientist/Vice President of Science and Technology for
Headwaters,  Inc., a publicly  traded company  (NYSE:  HW), from June 1998 until
joining Terra  Systems,  Inc., in May, 2005. He also served as Vice President of
Research and  Development of Headwaters  from August 1993 through June 1998. Mr.
Ford served as a director of Headwaters  from August 1993 until  resigning  from
the Board in February 1997 in favor of establishing an outside Board.  From 1982
to 1993, Mr. Ford was employed at Ballard  Medical  Products,  Inc., in research
and development,  principally in the biomedical  field. He holds 27 national and
international patents covering a wide variety of technologies. He has functioned
as an  independent  consultant  working on  projects  in  computer  programming,
medical  product  device  design and process  polymer  chemistry  design for the
energy  industry.  Mr.  Ford is a member  of the  American  Association  for the
Advancement of Science, and the Iron and Steel Society.

         L. Kent Harmon, Director and Vice President, Technical Development--Mr.
Harmon has a broad  background in the theory and practice of materials  science.
Immediately  prior to  joining  TSYI,  he was  President  of  Metredyne  Imaging
Services,  Buena Park,  CA, a private  company.  Metredyne  created and marketed
diagnostic  systems that quantified the extent of physical  impairment caused by
work-related injuries. Mr. Harmon was a founder of TSYI in 1996.

         Mitchell J. Hart, P.E., Director,  Vice President,  Operations of Terra
Systems,  Inc and President of Mountain  Island Energy,  LLC- Mr. Hart served as
Senior  Specialist/Project  Manager for Monsanto  Company from June,  1986 until
joining Terra  Systems,  Inc., in June 2005.  During that time, he managed large
capital projects, directed permitting teams, and provided raw material technical
support to Monsanto's plants in Soda Springs, Idaho, and Rock Springs,  Wyoming.
Prior to joining Monsanto, Mr. Hart worked as a Senior Mining Engineer for Shell
Oil Company,  developing new mining projects along the Gulf Coast,  the hills of
eastern Ohio and the Powder River Basin of Wyoming.  He also worked  underground
coal  in  central  Illinois  for  Turris  Coal  Company.   He  is  a  registered
Professional  Engineer and holds Professional  Miner  designation.  Mr. Hart was
granted  certification  as  a  Glass  Production  Technologist,  a  Refractories
Manufacturing  Technologist,  and a Ceramic Manufacturing  Technologist from the
American Ceramic Society.  Mr. Hart is the President of the Association of Idaho
Cities   (which   represents   176   member   cities   in   Idaho),   serves  as
Secretary/Treasurer of the Southeast Idaho Council of Governments, and is in his
third term as a member of the Soda Springs City Council. He previously served as
a member of the Board of Trustees of Joint School District #150 in Soda Springs.
He is a member of the Society of Mining  Engineers,  of AIME,  and the  National
Mining Association.

         Frederick  W.  Buckman,  Sr.,  Director  - Mr.  Buckman  has  extensive
experience in leadership.  Buckman was a co-founder and former  Chairman and CEO
of Trans-Elect,  Inc., the first  independent  owner and developer of electrical
transmission  systems in the U.S. From 1994 to 1998, Buckman served as President
and Chief Executive Officer of PacifiCorp. Prior to joining PacifiCorp,  Buckman
was President and Chief  Executive  Officer of Consumers  Power Co., the utility
subsidiary  of CMS  Energy.  Buckman  serves  as a member  of the board and Lead
Director of StanCorp  Financial Group (NYSE:SFG).  He also serves as a member of
the board of InfraSource Services, Inc. (NYSE:IFS) and MMC Energy (OTC BB:MMCN).
A graduate of the  University  of Michigan  with a bachelor's  degree in science
engineering,  Buckman  received his  doctorate in nuclear  engineering  from the
Massachusetts  Institute of  Technology  and  attended  the advanced  management
program at Harvard Business School.


                                       18
<PAGE>


         Reynold Roeder,  Director and Chairman of the Board - Mr. Roeder brings
over 25 years experience in operations,  accounting, finance, investment banking
and  strategic  planning with Portland  Family of Funds,  United Fund  Advisors,
LECTRIX  LLC,  PacifiCorp,  and  Deloitte  &  Touche.  Mr.  Roeder's  management
experience   includes  building  several   organizations  from  the  ground  up,
structuring and negotiating large scale transactions and helping create industry
standards in IRC Section 29 tax credits for synthetic  fuels produced from coal.
Mr. Roeder serves on the Board of Directors of Raser Technologies (NYSE Arca:RZ)
and is the CEO of LECTRIX LLC, a developer of merchant  electrical  transmission
lines, and CEO of United Fund Advisors,  an investment banking firm specializing
in tax credit transactions.  During his career, Mr. Roeder has held CPA licenses
in the states of New York,  California  and Oregon.  Mr. Roeder  graduated  with
honors in Business Administration from Portland State University.

         J.R.  Key,  Director - Mr. Key has served in various  senior  positions
during  his  career.  He served  as  superintendent  for  Bankhead  Mining  Co.,
Jefferson Coal Co. and Cobb Coal Company in Alabama.  He was General  Manager of
P.V.  Mining Co. in  Indiana.  He later  served as Vice  President  and  General
Manager of Bridger  Coal Co. in Wyoming.  From 1994 to 1997 he held the position
of Director of  Technical  Services at InterWest  Mining  Company (a division of
PacifiCorp)  in Salt Lake  City.  Mr.  Key  became  involved  in the  Section 29
projects with PacifiCorp in 1996. He presently  oversees  operations of the four
synfuels plants for Synfuel  Management,  LLC. Mr. Key has over 35 years of coal
industry experience.


Compliance with Section 16(a) of the Exchange Act

         None of the Company's executive officers or directors filed Forms 5 for
the year ended December 31, 2007.  During the twelve months ending  December 31,
2007 executive officers or directors sold no securities.

Code of Ethics

         The  Company  is in the  process  of  adopting a code of ethics for our
principal  executive and financial  officers.  In the meantime,  our  management
intends to promote honest and ethical  conduct,  full and fair disclosure in our
reports  to the  SEC,  and  compliance  with  applicable  governmental  laws and
regulations.

         There have been no changes to the procedures by which security  holders
may recommend  nominees to the Company's  board of directors.  As of the date of
this  Report,  the Company did not have a  nominating  committee of the board of
directors, and the board of directors performed that role.

         As of the date of this Report,  the Company had both an audit committee
and a compensation  committee of the board of directors.  The Audit Committee is
comprised of Frederick  Buckman Sr.,  Reynold Roeder,  and Jerry Robert Key. Mr.
Roeder chairs the audit committee and serves as its designated financial expert.
The  Compensation  Committee  is comprised  of  Frederick  Buckman Sr.,  Reynold
Roeder, and Jerry Robert Key. Mr. Buckman serves as Chairman of the compensation
committee. Messrs. Buckman, Roeder, and Key are independent directors within the
meaning of that term under applicable  Securities and Exchange Commission rules.
As of the date of this report the audit  committee is in the process of adopting
a charter.


Item 10.   Executive Compensation

EXECUTIVE COMPENSATION

         The  Company's  compensation  program is designed to encompass  several
factors  in  determining  the  compensation  of the  Company's  names  executive
officers.  The following are the main objectives of the compensation program for
the Company's named executive officers:
         o        Retain qualified officers
         o        Provide overall corporate  direction for the officers and also
                  to provide direction that is specific to officer's  respective
                  areas of  authority.  The level of  compensation  amongst  the
                  officer group, in relation to one another,  is also considered
                  in order to maintain a high level of  satisfaction  within the
                  leadership  group.  We  consider  the  relationship  that  the


                                       19
<PAGE>


                  officers maintain to be one of the most important  elements of
                  the leadership group.
         o        Provide a performance incentive for the officers.

         The Company's  compensation  program is designed to reward the officers
in the following areas:
         o        achievement of specific goals;
         o        professional education and development;
         o        creativity  in the form of  innovative  ideas and analysis for
                  new programs and projects;
         o        new program implementation;
         o        attainment of company goals, budgets, and objectives;
         o        results oriented determination and organization;
         o        positive and supportive direction for company personnel; and
         o        community involvement.

         As of the date of this Report,  there were three principal  elements of
named  executive  officer  compensation.  The Board of Directors  determines the
portion of  compensation  allocated  to each element for each  individual  named
executive officer. The discussions of compensation practices and policies are of
historical  practices  and  policies.  Our Board of  Directors  is  expected  to
continue  these policies and  practices,  but will  reevaluate the practices and
policies as it considers advisable.

         The elements of the compensation program include:
         o        Base salary;
         o        Stock options and stock awards
         o        Employee benefits in the form of:
                  o        Health and dental insurance
                  o        Life insurance
         o        Other de minimis benefits

         Base salary

         Base  salary is intended to provide  competitive  compensation  for job
performance and to attract and retain  qualified named executive  officers.  The
base salary level is determined by considering  several factors  inherent in the
market place such as: the size of the company;  the prevailing salary levels for
the  particular  office  or  position;  prevailing  salary  levels  in  a  given
geographic  locale; and the qualifications and experience of the named executive
officer. Due to limited working capital, our executives have allowed the Company
to defer a  substantial  portion  of their  base  salary,  but are not under any
obligation to continue to do so.

         Stock options and stock awards

         Stock  ownership  is provided to enable  named  executive  officers and
directors to participate in the success of the Company.  The direct or potential
ownership of stock will also provide the incentive to expand the  involvement of
the named  executive  officer to  include,  and  therefore  be  mindful  of, the
perspective of stockholders of the Company.

         Employee benefits

         Several of the employee  benefits for the named executive  officers are
selected to provide  security for the named  executive  officers.  Most notably,
insurance  coverage for health,  life,  and  liability are intended to provide a
level of protection to that will enable the named executive officers to function
without  having  the  distraction  of having to manage  undue  risk.  The health
insurance also provides access to preventative  medical care which will help the
named executive  officers function at a high energy level, to manage job related
stress,  and  contribute  to the  overall  well  being  of the  named  executive
officers, all of which contribute to an enhanced job performance.

         Other de minimis benefits

         Other de minimis employee  benefits such as cell phones,  parking,  and
auto usage  reimbursements  are directly  related to job functions but contain a


                                       20
<PAGE>


personal  use  element,  which  is  considered  to be a  goodwill  gesture  that
contributes to enhanced job performance.

         As discussed  above,  the Board of Directors  determines the portion of
compensation  allocated  to each  element for each  individual  named  executive
officer.  As  a  general  rule,  salary  is  competitively  based  while  giving
consideration to employee retention,  qualifications,  performance,  and general
market  conditions.  Typically,  stock  options are based on the current  market
value of the option and how that will contribute to the overall  compensation of
the named executive  officer.  Consideration  is also given to the fact that the
option has the potential for an  appreciated  future value.  As such, the future
value  may be the most  significant  factor of the  option,  but it is also more
difficult to quantify as a benefit to the named executive officer.

         Accordingly,  in determining the compensation  program for the Company,
as well as setting the compensation for each named executive officer,  the Board
of  Directors  attempts to attract the interest of the named  executive  officer
within in the  constraints of a compensation  package that is fair and equitable
to all parties involved.

         This table provides summary information concerning  compensation earned
by or paid  to  each  named  executive  officer  for  services  rendered  in all
capacities to us during fiscal year 2007.


<TABLE>
<CAPTION>
                                                     SUMMARY COMPENSATION TABLE

                                                                      Non-Equity         Change in
                                                                      Incentive       Pesion Value and
                                 Salary           Stock     Option       Plan       Deferred Compensation    All Other
Name and                         (1)(2)   Bonus   Awards    Grants   Compensation          Earnings         Compensation    Total
Position                  Year     $        $        $         $           $                  $                   $           $
------------------------------------------------------------------------------------------------------------------------------------
<S>                       <C>    <C>      <C>     <C>       <C>      <C>            <C>                     <C>            <C>
Clayton Timothy,          2006   120,000    -           -      -           -                  -                   -        120,000
 Chief Exective Officer   2007   120,000    -           -      -           -                  -                   -        120,000
------------------------------------------------------------------------------------------------------------------------------------
George W. Ford.           2006   120,000    -           -      -           -                  -                   -        120,000
 President                2007   120,000    -     450,000      -           -                  -                   -        570,000
------------------------------------------------------------------------------------------------------------------------------------
Mitchell J. Hart,         2006   120,000    -           -      -           -                  -                   -        120,000
 Vice President           2007   110,000    -     450,000      -           -                  -                   -        560,000
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)During 2006 actual  compensation paid to each named officer was $110,000 with
$10,000 each being accrued as a liability.
(2) During 2007 actual  compensation paid to each named officer was $45,000 each
with $75,000 being accrued as a liability.  Mr. Hart ceased  employment with the
Company on November 30,2007 accordlingly $65,000 was accrued for him

         The following table provides summary information concerning outstanding
equity awards for named executive officers as of December 31, 2007.

<TABLE>
<CAPTION>

                              OUTSTANDING EQUITY AWARDS AT FISCAL 2007 YEAR-END

                                                         Option Awards
                           --------------------------------------------------------------------------------

                                                             Equity Incentive
                            Number of       Number of          Plan Awards:
                           Securities      Securities           Number of
                           Underlying      Underlying           Securities
                           Unxercised      Unxercised           Underlying           Option        Option
                           Options (#)     Options (#)         Unexercised          Exercise     Expiration
Name and Position          Exercisable    Unexercisable      Unearned Options        Price          Date
------------------------------------------------------------------------------------------------------------
<S>                        <C>            <C>                <C>                    <C>          <C>
Clayton Timothy, Chief
Executive Officer            300,000               -                 -                0.10       17-May-08
------------------------------------------------------------------------------------------------------------
George W. Ford. President    228,572         571,428                 -                0.38       30-Nov-25
------------------------------------------------------------------------------------------------------------
Mitchell J. Hart, Vice
President                    228,572         571,428                 -                0.38       30-Nov-25
------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                          Stock Awards
                           --------------------------------------------------------------------------------
                                                                                        Equity Incentive
                                                               Equity Incentive            Plan Awards:
                             Number of       Market value         Plan Awards:        Market or payout value
                          Shares or Units    of Shares or      Number of Unearned      of unearned Shares,
                           of Stock that    Units of Stock   Shares, Units or other       Units or other
                              Have not       that have not    rights that have not     rights that have not
                               vested           vested               vested                   vested
Name and Position               (#)               ($)                 (#)                      ($)
------------------------------------------------------------------------------------------------------------
<S>                       <C>               <C>              <C>                       <C>
Clayton Timothy, Chief
Executive Officer                -                 -                   -                        -
------------------------------------------------------------------------------------------------------------
George W. Ford. President        -                 -                   -                        -
------------------------------------------------------------------------------------------------------------
Mitchell J. Hart, Vice
President                        -                 -                   -                        -
------------------------------------------------------------------------------------------------------------
</TABLE>


                                       21
<PAGE>


         Stock Options Granted In 2007

         During 2007,  the Company  granted  options to purchase an aggregate of
10,000,000  shares  of  common  stock  to four  individuals,  three  of whom are
directors of the Company, discussed below, and one of whom was a consultant. The
options have an exercise  price of $0.28 to $0.33 per share,  and an  expiration
date through June 2014.

         Reynold Roeder, Frederick Buckman Sr., and Jerry Robert Key, each, as a
Director,   received  3,000,000  of  the  options  described  in  the  preceding
paragraph.

         Compensation of Directors

         Directors  who also serve as  executive  officers  do not  receive  any
additional compensation for their services as directors.  Non-employee directors
are not paid an annual fee for services as board members.


Item 11. Security  Ownership  of  Certain  Beneficial  Owners and Management and
         Related Stockholder Matters

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table provides information regarding beneficial ownership
of our common stock as of December 31, 2007, by:

         o        Each  person or entity  known to us to own  beneficially  more
                  than 5% of our common stock;

         o        Each of the named executive officers;

         o        Each of our directors; and

         o        All executive officers and directors as a group.

         The following  table  assumes the  applicable  percentage  ownership is
based on 53,111,806  shares of common stock outstanding as of December 31, 2007;
4,690,478  shares of common  stock  options  that are  exercisable  and  531,514
warrants to purchase shares of common stock.

         Beneficial  ownership is determined  based on the rules and regulations
of the  Securities  and Exchange  Commission.  In computing the number of shares
beneficially  owned by a person and the  percentage  ownership  of that  person,
shares  of  common  stock  subject  to  options  held by that  person  that  are
exercisable or exercisable within 60 days of the date of this Report are counted
as outstanding.  These shares,  however,  are not counted as outstanding for the
purposes of computing the  percentage  ownership of any other person.  Except as
indicated in the  footnotes to this table and pursuant to  applicable  community
property  laws,  each  shareholder  named  in the  table  has  sole  voting  and
investment   power  with  respect  to  the  shares  set  forth   opposite   that
shareholder's name. Unless otherwise noted, the address of each beneficial owner
listed below is c/o Terra Systems,  7001 South 900 East, Ste 260, Midvale,  Utah
84047.


Shareholder                                 Shares Beneficially    Percentage of
                                                   Owned             Ownership

Clayton Timothy
Chief Executive Officer, Director               4,076,465(1)           7.63%

George W. Ford
President, Director                             2,487,037(2)           4.66%

L. Kent Harmon
Vice President, Director                        2,850,000(1)           5.34%


                                       22
<PAGE>


Mitchell Hart
Vice President, Director                        2,012,037(2)           3.77%

Frederick Buckman Sr.
Director                                        2,265,757(3)           4.09%

Jerry Robert Key
Director                                        2,000,000(4)           3.63%

Reynold  Roeder, Director and Chairman of
the Board                                       5,047,007(5)           9.11%

All Executive Officers and Directors as
A group (7 individuals)                        20,738,303(6)           34.16%

(1)      Shares  beneficially  owned  include  options to purchase up to 300,000
         shares.
(2)      Shares  beneficially  owned  include  options to purchase up to 228,572
         shares.
(3)      Shares  beneficially  owned include options to purchase up to 2,000,000
         shares and a warrant to purchase 265,757 shares.
(4)      Shares  beneficially  owned include options to purchase up to 2,000,000
         shares.
(5)      Shares  beneficially  owned  includes  2,781,250  shares,   options  to
         purchase up to an additional 2,000,000 shares and a warrant to purchase
         265,757  shares.  Mr.  Roeder owns the  securities  jointly  with Wendy
         Roeder.
(6)      Shares  beneficially  owned include options to purchase up to 7,057,144
         shares and warrants to purchase 531,514 shares.

Securities Authorized Under Equity Compensation Plans

         As of December 31, 2007, the Company had no equity  compensation  plans
or option plans.

Item 12. Certain   Relationships   and   Related   Transactions,   and  Director
         Independence

         As of the date of this Report, the Company's common stock traded on the
OTC Bulletin Board (the "Bulletin Board"). The Bulletin Board does not impose on
the  Company  standards  relating  to  director  independence  or the  makeup of
committees with independent  directors,  or provide definitions of independence.
Nevertheless,  the Company has  undertaken to appoint three  individuals  to its
Board of Directors,  Messrs. Buckman, Key, and Roeder, who are independent under
the NASDAQ Marketplace Rules and those standards applicable to companies trading
on NASDAQ.

Specifically, none of Mr. Buckman, Mr. Key, or Mr. Roeder:

         -        has been any time during the past three years  employed by the
                  Company or by any parent or subsidiary of the Company;

         -        has  accepted  or  has  a  family   member  who  accepted  any
                  compensation  from the Company in excess of $60,000 during any
                  period of twelve  consecutive  months  within the three  years
                  preceding  the  determination  of  independence,   other  than
                  compensation for board or board committee service;

         -        is a family  member  of an  individual  who is, or at any time
                  during the past three years was, employed by the Company as an
                  executive officer;

         -        is,  or has a  Family  Member  who  is,  a  partner  in,  or a
                  controlling  shareholder  or  an  executive  officer  of,  any
                  organization  to which the  Company  made,  or from  which the
                  company  received,  payments  for  property or services in the
                  current or any of the past three  fiscal  years that exceed 5%
                  of the recipient's  consolidated gross revenues for that year,
                  or $200,000, whichever is more:


                                       23
<PAGE>


         -        is, or has a family  member who is,  employed as an  executive
                  officer of another  entity  where at any time  during the past
                  three years any of the executive officers of the Company serve
                  on the compensation committee of such other entity; or

         -        is, or has a family  member  who is, a current  partner of the
                  Company's outside auditor, or was a partner or employee of the
                  Company's outside auditor who worked on the Company's audit at
                  any time during any of the past three years.


Item 13. Exhibits

Exhibit No.    Title of Document
-----------    -----------------

2              Articles of Merger of Terra  Systems,  Inc.,  with and into Terra
               Merger  Subsidiary,  Inc.,  incorporated  by  reference  from the
               Company's  Form 10-SB,  filed with the Commission on September 6,
               2000.
3.1            Amended and Restated  Articles of Incorporation of Terra Systems,
               Inc., formerly known as Xullux,  Inc.,  incorporated by reference
               from the  Company's  Form  10-SB,  filed with the  Commission  on
               September 6, 2000.
3.2            Articles  of  Incorporation  of Terra  Merger  Subsidiary,  Inc.,
               incorporated  by reference from the Company's  Form 10-SB,  filed
               with the Commission on September 6, 2000.
3.4            Revised Bylaws of Terra Systems,  Inc. (formerly known as Xullux,
               Inc.),  incorporated  by reference from the Company's Form 10-SB,
               filed with the Commission on September 6, 2000.
10.1           Agreement Between Terra Systems, Inc., and XCEL Associates, Inc.,
               dated March 29, 2000,  incorporated  by reference  from Amendment
               No. 1 to the Company's  Form 10-SB,  filed with the Commission on
               December 1, 2000.
10.2           Memorandum  of  Affiliation   between  the  Company  and  Clayton
               Timothy, dated May 12, 2005 (filed as an exhibit to the Company's
               Annual Report on Form 10-KSB filed April 17, 2006)
10.3           Memorandum of Affiliation  between the Company and George W. Ford
               Jr.,  dated May 12,  2005  (filed as an exhibit to the  Company's
               Annual Report on Form 10-KSB filed April 17, 2006)
10.4           Memorandum  of  Affiliation  between the Company and  Mitchell J.
               Hart,  dated May 12, 2005  (filed as an exhibit to the  Company's
               Annual Report on Form 10-KSB filed April 17, 2006)

31.1           Rule 13a-14(a)/15d-14(a) Certification
31.2           Rule 13a-14(a)/15d-14(a) Certification
32.1           Section 1350 Certification
32.2           Section 1350 Certification

99.1           Stock Issuance with A Call Option Vesting Schedule & Stock Issued
               for Services - Non  Employees,  incorporated  by  reference  from
               Amendment  No. 1 to the  Company's  Form  10-SB,  filed  with the
               Commission on December 1, 2000.

Item 14. Principal Accountant Fees and Services

         Audit Fees

         Audit  fees  billed  during  2007 and 2006 were  $33,994  and  $52,000,
respectively.

         Audit-related Fees

         Not applicable.


                                       24
<PAGE>



         Tax Fees

         Not applicable.

         All Other Fees

         Not applicable.

         Audit Committee Policies and Procedures

         As of the date of this report the audit  committee is in the process of
adopting a charter.























                                       25
<PAGE>


SIGNATURES

In accordance  with Section 13 or 15(d) of the Securities  Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.


Date: April 14, 2008

                TERRA SYSTEMS, INC.



                           By:  /s/ Clayton Timothy
                                -----------------------------------------------
                                Clayton Timothy
                                CEO
                                (Principal Executive Officer)



                           By:  /s/ Mark Faerber
                                -----------------------------------------------
                                Mark Faerber
                                Consultant performing services for the Company
                                commonly performed by a chief financial officer


In  accordance  with the  Exchange  Act this report has been signed below by the
following  persons on behalf of the  registrant and in the capacities and on the
dates indicated.

Date: April  14, 2008

/s/ George W. Ford
------------------------------------
Name: George W. Ford
Director


/s/ Mitchell Hart
------------------------------------
Name: Mitchell Hart
Director


/s/ L. Kent Harmon
------------------------------------
Name: L. Kent Harmon
Director


/s/ Reynold Roeder
------------------------------------
Name: Reynold Roeder
Director


/s/ Frederick Buckman Sr.
------------------------------------
Name: Frederick Buckman Sr.
Director


/s/ Jerry Robert Key
------------------------------------
Name: Jerry Robert Key
Director


                                       26
<PAGE>








                      TERRA SYSTEMS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)






             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                                       AND
                        CONSOLIDATED FINANCIAL STATEMENTS






                           December 31, 2007 and 2006








<PAGE>


                      TERRA SYSTEMS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)


                                TABLE OF CONTENTS



Report of Independent Registered Public Accounting Firm                      F-1

Consolidated Balance Sheets - December 31, 2007 and 2006                     F-2

Consolidated Statements of Operations for the Years Ended
   December 31, 2007 and 2006, and for the Cumulative Period
   February 17, 1996 (Date of Inception), through December 31, 2007          F-3

Consolidated Statement of Changes in Stockholders' Deficit
   for the Period February 17, 1996 (Date of Inception), through
   December 31, 2007                                                         F-4

Consolidated  Statements of Cash Flows for the Years Ended December 31,
   2007 and 2006, and for the Cumulative Period
   February 17, 1996 (Date of Inception), through December 31, 2007          F-7

Notes to Consolidated Financial Statements                                   F-8













<PAGE>


HANSEN, BARNETT & MAXWELL, P.C.
   A Professional Corporation
  CERTIFIED PUBLIC ACCOUNTANTS             Registered with the Public Company
   5 Triad Center, Suite 750                   Accounting Oversight Board
 Salt Lake City, UT 84180-1128
     Phone: (801) 532-2200
      Fax: (801) 532-7944
        www.hbmcpas.com



             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Shareholders
Terra Systems, Inc. and Subsidiaries


We have audited the accompanying  consolidated  balance sheets of Terra Systems,
Inc. and Subsidiaries (a development  stage company) as of December 31, 2007 and
2006,  and the related  consolidated  statements  of  operations,  stockholders'
deficit,  and cash flows for the years ended  December 31, 2007 and 2006 and for
the  cumulative  period  from  February  17,  1996 (date of  inception)  through
December 31, 2007.  These  financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audits to  obtain  reasonable  assurance  about  whether  the
financial  statements  are free of  material  misstatement.  The  company is not
required  to have,  nor were we engaged  to  perform,  an audit of its  internal
control over financial reporting.  Our audit included  consideration of internal
control over financial  reporting as a basis for designing audit procedures that
are appropriate in the  circumstances,  but not for the purpose of expressing an
opinion on the  effectiveness  of the company's  internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a  test  basis,  evidence  supporting  the  amounts  and  disclosures  in the
financial statements. An audit also includes assessing the accounting principles
used and  significant  estimates made by  management,  as well as evaluating the
overall financial statement  presentation.  We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Terra Systems, Inc.
and  Subsidiaries  as of  December  31,  2007 and 2006,  and the  results of its
operations  and its cash flows for the years then ended and for the period  from
February 17, 1996  through  December 31, 2007,  in  conformity  with  accounting
principles generally accepted in the United States.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company will continue as a going  concern.  The Company has incurred  losses and
negative cash flows from  operations  during each of the two years in the period
ended  December 31, 2007 and from  inception  through  December 31, 2007.  As of
December 31, 2007,  the Company had an accumulated  deficit of  $24,023,323  and
negative working capital of $1,870,217.  These matters raise  substantial  doubt
about the Company's ability to continue as a going concern.  Management's  plans
concerning these matters are also described in Note 1. The financial  statements
do not  include  any  adjustments  that might  result  from the  outcome of this
uncertainty.

As  explained  in Note 1 and Note 6 to the  consolidated  financial  statements,
effective January 1, 2006, the Company adopted Statement of Financial Accounting
Standards123(R) "Share-Based Payment".



                                              HANSEN, BARNETT & MAXWELL, P.C.
Salt Lake City, Utah
April 14, 2008


                                      F-1
<PAGE>

                        TERRA SYSTEMS, INC AND SUBSIDIARY
                          (A Development Stage Company)
                           CONSOLIDATED BALANCE SHEETS

                                                    December 31,   December 31,
                                                       2007           2006
                                                    ------------   ------------
ASSETS
Current Assets
     Cash                                           $     30,692   $     52,091
     Other current assets                                 13,894          5,391
                                                    ------------   ------------
            Total Current Assets                          44,586         57,482
                                                    ------------   ------------

Property and Equipment
     Furniture and equipment                             582,407        582,407
     Software                                             10,380         10,380
     Less:  Accumulated depreciation                    (482,659)      (474,128)
                                                    ------------   ------------
            Net Property and Equipment                   110,128        118,659
                                                    ------------   ------------


Investment in joint venture                              392,251        392,251
                                                    ------------   ------------
Total Assets                                        $    546,965   $    568,392
                                                    ============   ============

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities
     Accounts payable                               $    431,857   $    531,087
     Bank line of credit                                  43,805              -
     Accounts payable to related parties                 105,242        197,445
     Accrued liabilities                                 285,263        331,935
     Accrued interest to related parties                 243,956        326,133
     Notes payable to stockholders                       804,680        970,554
                                                    ------------   ------------
            Total Current Liabilities                  1,914,803      2,357,154
                                                    ------------   ------------

Stockholders' Deficit
     Common stock - $0.001 par value;
       100,000,000 shares authorized;
       53,111,806 and 42,675,356 issued
       and outstanding, respectively                      53,109         42,672
     Additional paid-in capital                       22,602,376     17,359,380
     Deficit accumulated during development stage    (24,023,323)   (19,190,814)
                                                    ------------   ------------
            Total Stockholders' Deficit               (1,367,838)    (1,788,762)
                                                    ------------   ------------

Total Liabilities and Stockholders' Deficit         $    546,965   $    568,392
                                                    ============   ============


     See accompanying notes to condensed consolidated financial statements.

                                      F-2
<PAGE>

                      TERRA SYSTEMS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                  From Inception
                                                                      of the
                                                                    Development
                                                                     Stage on
                                                                    February 17,
                                        For the Year Ended             1996
                                           December 31,               Through
                                   ----------------------------     December 31,
                                       2007            2006            2007
                                   ------------    ------------    ------------

Revenues                           $    149,994    $     45,897    $    768,136
Cost of Revenues                        114,659          44,968         564,904
                                   ------------    ------------    ------------

  Gross Profit                           35,335             929         203,232
                                   ------------    ------------    ------------

Operating Expenses
  Research and development                    -               -       2,063,996
  General and administrative          4,731,644       1,296,669      19,747,486
  Depreciation and amortization           8,531           8,532         803,632
                                   ------------    ------------    ------------
     Total Operating Expenses         4,740,175       1,305,201      22,615,114
                                   ------------    ------------    ------------

     Loss from Operations            (4,704,840)     (1,304,272)    (22,411,882)
                                   ------------    ------------    ------------

Nonoperating Income/(Expenses)
  Other income                           13,198          12,245          87,446
  Interest expense                     (140,867)       (120,204)     (1,531,880)
  Interest income                             -               -           1,709
  Gain from settlement of debt                -               -          64,284
  Loss on sale of securities                  -               -         (99,000)
  Gain (loss) on sale of assets               -               -        (134,000)
                                   ------------    ------------    ------------

  Net Nonoperating Expenses            (127,669)       (107,959)     (1,611,441)
                                   ------------    ------------    ------------

Net Loss                           $ (4,832,509)   $ (1,412,231)   $(24,023,323)
                                   ============    ============    ============

Basic and Diluted Loss
  Per Share                        $      (0.10)   $      (0.03)
                                   ============    ============

Weighted Average Shares
  Outstanding                        48,060,906      42,072,927
                                   ============    ============


     See accompanying notes to condensed consolidated financial statements.

                                      F-3
<PAGE>
<TABLE>
<CAPTION>
                                           TERRA SYSTEMS, INC. AND SUBSIDIARY
                                             (A Development Stage Company)
                               CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT

                                                                                             Deficit
                                                           Common                          Accumulated
                           Common Stock        Additional   Stock    Subscrip-  Deferred   During the       Total
                       ---------------------    Paid-In    Subscrip-   tion      Compen-   Development   Stockholders'
                        Shares      Amount      Capital     tions    Receivable  sation      Stage          Deficit
----------------------------------------------------------------------------------------------------------------------
<S>                    <C>         <C>        <C>          <C>       <C>       <C>        <C>            <C>
Balance - February 17,
  1996 (Inception)              -  $      -   $         -  $      -  $      -  $       -  $           -  $           -
Shares issued to
  founders
   March 1996 -
    $0.00 per share    48,000,000    48,000       (47,520)        -         -          -              -            480
Shares issued to
  acquire Xullux
   May 1996 - $0.00
    per share           2,955,100     2,955        (2,955)        -         -          -              -              -
Common stock
  subscriptions July
  1996 through
  September 1996                -         -             -   196,000         -          -              -        196,000
Shares issued for
  marketable
  securities
   September 1996 -
     $0.80 per share       19,000        19        15,181   174,800         -          -              -        190,000
Shares issued for cash
   September 1996 -
     $0.80  to $1.00
     per share            706,500       707       667,793    10,000         -          -              -        678,500
   October 1996 -
    $0.80 per share       350,000       350       279,650         -         -          -              -        280,000
   November 1996 -
    $1.75 per share        12,000        12        20,988         -         -          -              -         21,000
   December 1996 -
    $1.75 to $2.00
    per share              57,500        58       103,692         -         -          -              -        103,750
   January 1997 -
    $1.00 to $1.75
    per share             126,000       126       145,374         -         -          -              -        145,500
   February 1997 -
    $1.00 per share       100,000       100        99,900         -         -          -              -        100,000
   March 1997 - $1.75
    per share              25,413        25        44,448         -         -          -              -         44,473
   April 1997 - $2.00
    per share               7,500         8        14,992         -         -          -              -         15,000
   May 1997 - $1.00
    per share             100,000       100        99,900         -         -          -              -        100,000
   June 1997 - $1.00
    per share              90,000        90        89,910         -         -          -              -         90,000
   August 1997 - $0.50
    to $1.00 per share     70,000        70        44,930         -         -          -              -         45,000
   October 1997 -
    $1.00 per share        25,000        25        24,975         -         -          -              -         25,000
   November 1997 -
    $0.72 to $0.80 per
    share                 172,399       173       128,243         -         -          -              -        128,416
   December 1997 -
    $0.80 per share        84,375        84        67,416         -         -          -              -         67,500
   April 1998 - $0.50
    to $0.73 per share    239,502       240       146,671         -         -          -              -        146,911
   May 1998 - $0.75 to
    $0.80 per share        38,333        38        29,962         -         -          -              -         30,000
   June 1998 - $0.75
    per share              30,146        30        22,579         -         -          -              -         22,609
   July 1998 - $0.36
    to $0.73 per share    236,846       237       119,368         -         -          -              -        119,605
   August 1998 - $0.50
    per share              20,000        20         9,980         -         -          -              -         10,000
   November 1998 -
    $0.30 to $0.33 per
    share                  78,000        78        24,772         -         -          -              -         24,850
   December 1998 -
    $0.32 to $0.33 per
    share                  72,900        73        23,664         -         -          -              -         23,737
   January 1999 -
    $0.50 per share       100,000       100        49,900         -         -          -              -         50,000
   April 1999 - $0.25
    per share              20,000        20         4,980         -         -          -              -          5,000
   May 1999 - $0.50
    per share              20,000        20         9,980         -         -          -              -         10,000
   June 1999 - $0.50
    per share             100,000       100        49,900         -         -          -              -         50,000
   July 1999 - $0.25
    per share             200,000       200        50,260         -         -          -              -         50,460
   September 1999 -
    $0.40 and $0.50
    per share             145,000       145        59,855         -         -          -              -         60,000
   October 1999 -
    $0.50 per share        60,000        60        29,940         -         -          -              -         30,000
   December 1999 -
    $0.50 per share        60,000        60        29,940         -         -          -              -         30,000
   January 2000 -
    $0.25 per share        12,000        12         2,988         -         -          -              -          3,000
   February 2000 -
    $0.25 per share        40,000        40         9,960         -         -          -              -         10,000
   March 2000 -
    $0.25 per share       139,340       140        34,696         -         -          -              -         34,836
   April 2000 -
    $0.30 per share        33,333        33         9,967         -         -          -              -         10,000
   July 2000 -
    $0.25 per share        32,000        32         7,968         -         -          -              -          8,000
   August 2000 -
    $0.25 per share       120,000       120        29,880         -         -          -              -         30,000
   January 2001 -
    $0.20 per share       100,000       100        19,900         -         -          -              -         20,000
   May 2001 - $0.20 to
    $0.25 per share       150,000       150        30,350         -         -          -              -         30,500
   June 2001 - $0.25
    per share              10,000        10         2,490         -         -          -              -          2,500
   July 2001 - $0.19
    per share              32,000        32         6,014         -         -          -              -          6,046
   August 2001 - $0.10
    per share             500,000       500        49,500         -         -          -              -         50,000
   November 2001 -
    $0.20 to $0.23 per
    share                 680,434       680       139,320         -  (100,000)         -              -         40,000
   March 2002 - $0.15
    per share              75,000        75        11,175         -         -          -              -         11,250
   July 2003 - $0.10
    per share             175,000       175        17,325         -         -          -              -         17,500
   November 2003 -
    $0.20 per share       125,000       125        24,875         -         -          -              -         25,000
   April 2004 - $0.14
    per share              84,500        85        11,915         -         -          -              -         12,000
   June 2004 - $0.14
    per share              35,500        36         4,964         -         -          -              -          5,000
   June 2004 - $0.19
    per share              84,210        84        15,916         -         -          -              -         16,000
   December 2004 -
    $0.33 per share        30,000        30         9,970         -         -          -              -         10,000
   February 2005 -
    $0.10 per share       100,000       100         9,900         -         -          -              -         10,000
   March 2005 - $0.10
    per share           2,250,000     2,250       222,750         -         -          -              -        225,000
   March 2005 - $0.20
    per share             125,000       125        24,875         -         -          -              -         25,000
   March 2005 - $0.08
    per share             600,000       600        49,400         -         -          -              -         50,000
   March 2005 - $0.07
    per share             700,000       700        49,300         -         -          -              -         50,000
   July 2005 - $0.25
    per share             400,000       400        99,600         -         -          -              -        100,000
   December 2005 -
    $0.25 per share       300,000       300        74,700         -         -          -              -         75,000
   December 2005 -
    $0.50 per share        60,000        60        29,940         -         -          -              -         30,000
Shares issued in
  satisfaction of
  subscription
  agreements
   October - December
    1996 $0.80 to
    $1.00 per share       246,000       245       205,755  (206,000)        -          -              -              -
   December 1996 -
    $0.76 per share       231,000       231       174,569  (174,800)        -          -              -              -
Shares issued for
  current and future
  services
   May 1997 - $1.00
    per share              75,000        75        74,850         -         -    (74,925)             -              -
   March 1998 -
    $1.13 per share       350,000       350       393,400         -         -   (393,750)             -              -
   March 1999 -
    $0.50 per share       106,286       106        53,083         -         -          -              -         53,189
   June 1999 - $0.50
    per share              60,000        60        29,940         -         -          -              -         30,000
   September 1999 -
    $0.70 to $0.97 per
    share                  63,000        63        49,257         -         -    (19,320)             -         30,000
   December 1999 -
    $0.60 per share        50,000        50        29,950         -         -          -              -         30,000


                         See accompanying notes to condensed consolidated financial statements.

                                                          F-4
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                                           TERRA SYSTEMS, INC. AND SUBSIDIARY
                                             (A Development Stage Company)
                               CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
                                                      (CONTINUED)


                                                                                             Deficit
                                                           Common                          Accumulated
                           Common Stock        Additional   Stock    Subscrip-  Deferred   During the       Total
                       ---------------------    Paid-In    Subscrip-   tion      Compen-   Development   Stockholders'
                        Shares      Amount      Capital     tions    Receivable  sation      Stage          Deficit
----------------------------------------------------------------------------------------------------------------------
<S>                    <C>         <C>        <C>          <C>       <C>       <C>        <C>            <C>
   March 2000 - $0.50
    per share              60,000        60        29,940         -         -          -              -         30,000
   May 2000 - $0.48
    per share              62,920        63        29,937         -         -          -              -         30,000
   July 2000 - $1.00
    per share              15,000        15        14,985         -         -          -              -         15,000
   September 2000 -
    $0.25 per share       122,400       122        29,878         -         -          -              -         30,000
   October 2000 -
    $0.25 per share        75,000        75        18,675         -         -          -              -         18,750
   December 2000 -
    $0.39 per share        99,338        99        38,901         -         -          -              -         39,000
   January 2001 -
    $0.50 per share        12,500        13         6,238         -         -          -              -          6,251
   March 2001 -
    $0.50 per share        60,000        60        29,940         -         -          -              -         30,000
   June 2001 -
    $0.40 per share        97,500        98        38,902         -         -          -              -         39,000
   September 2001 -
    $0.20 per share       500,000       500        99,500         -         -          -              -        100,000
   October 2001 -
    $0.20 per share       530,000       530       105,470         -         -          -              -        106,000
   November 2001 -
    $0.15 per share       180,000       180        26,820         -         -          -              -         27,000
   July  2002- $0.18
    to $0.19 per share    504,529       505        92,195         -         -          -              -         92,700
   November 2002 -
    $0.16 to $0.17 per
    share                 501,766       501        82,799         -         -          -              -         83,300
   March 2003 - $0.14
    per share             314,287       314        43,686         -         -          -              -         44,000
   May 2003- $0.15 per
    share                  10,000        10         1,490         -         -          -              -          1,500
   October 2003- $0.19
    to $0.28 per share    982,141       982       265,476         -         -          -              -        266,458
   April 2004 - $0.28
    per share             375,000       375       107,625         -         -          -              -        108,000
   August 2004 - $0.22
    per share             204,546       204        61,161         -         -          -              -         61,365
   April 2005 - $0.81
    per share              90,000        90        72,810         -         -          -              -         72,900
   May 2005 - $0.95
    per share           1,270,000     1,270     1,205,230         -         -          -              -      1,206,500
   May 2005 - $0.80
    per share           2,697,257     2,697     2,155,109         -         -          -              -      2,157,806
   July 2005 - $0.86
    per share              25,000        25        21,475         -         -          -              -         21,500
   July 2005 - $0.81
    per share              52,941        53        42,829         -         -          -              -         42,882
   October 2005 -
    $0.84 per share        50,001        50        41,949         -         -          -              -         41,999
   December 2005 -
    $0.75 per share       200,000       200       149,800         -         -          -              -        150,000
Shares issued for
  financing fees
   March 2003 - $0.17
    to $0.20 per share     43,000        43         8,047         -         -          -              -          8,090
   July 2003 - $0.18
    per share              31,500        32         5,639         -         -          -              -          5,671
   August 2003 - $0.18
    per share               7,000         7         1,253         -         -          -              -          1,260
   September 2003 -
    $0.18 per share        10,000        10         1,790         -         -          -              -          1,800
   October 2003 -
    $0.18 per share        25,000        25         4,475         -         -          -              -          4,500
   May 2004 - $0.30
    per share               2,713         3           811         -         -          -              -            814
   December 2005 -
    $0.75 per share       543,091       543       406,775         -         -          -              -        407,318
Shares issued for
  settlement of
  liabilities
   January 1999 -
    $0.25 per share       200,000       200        49,800         -         -          -              -         50,000
   February 2002-
    $0.51 per share        49,020        49        24,951         -         -          -              -         25,000
   June 2003 - $0.18
    per share             200,000       200        34,800         -         -          -              -         35,000
   December 2003 -
    $0.36 per share     1,326,216     1,326       476,112         -         -          -              -        477,438
   November 2003 -
    $0.25 per share        40,000        40         9,960         -         -          -              -         10,000
   May 2004 - $0.25
    per share             635,966       635       158,355         -         -          -              -        158,990
   December 2004 -
   $0.30 per share        900,000       900       269,100         -                    -              -        270,000
   February 2005 -
    $0.30 per share       350,000       350       104,650         -         -          -              -        105,000
   April 2005 - $0.85
    per share             100,000       100        84,900         -         -          -              -         85,000
   May 2005 - $0.80
    per share           1,302,743     1,303     1,040,891         -         -          -              -      1,042,194
   December 2005 -
    $0.75 per share       508,936       509       381,193         -         -          -              -        381,702
Exercise of share
  rights
   May 2000 - $0.25
    per share (cash)      400,000       400        99,600         -         -          -              -        100,000
   October 2000 -
    $0.25 per share
    (cash)                300,000       300        59,700         -         -          -              -         60,000
   November 2000 -
    $0.20 per share
    (services)            225,000       225        44,775         -         -          -              -         45,000
   December 2000 -
    $0.20 per share
    (cash)                 75,000        75        14,925         -         -          -              -         15,000
Exercise of stock
  options
   April 2000 - $0.20
    per share
    (conversion of
    debt)                 500,000       500        99,500         -         -          -              -        100,000
   December 2000 -
    $0.20 per share
    (cash)                 25,000        25         4,975         -         -          -              -          5,000
   January 2001 -
    $0.20-$0.25 per
    share                 825,000       825       166,675         -         -          -              -        167,500
Share redemptions
   September 1996 - no
    consideration      (3,000,000)   (3,000)        3,000         -         -          -              -              -
   December 1996 -
    $0.001 per share  (36,775,000)  (36,775)            -         -         -          -              -        (36,775)
   December 1999 -
    $1.13 per share      (100,000)     (100)     (112,300)        -         -    112,400              -              -
   March 2000 - $1.13
    per share             (50,000)      (50)      (56,150)        -         -     56,200              -              -
Shares issued as part
  of land acquisition
   August  2005 -
    $0.93 per share       878,048       878       815,707         -         -          -              -        816,585
   August 2005 - $0.86
    per share             255,812       256       219,744         -         -          -              -        220,000
Payment on
 subscription
 receivable                     -         -             -         -    51,250          -              -         51,250
Return of shares in
 satisfaction of
 subscription
 receivable              (130,000)     (130)      (25,870)        -    26,000          -              -              -
Write off subscription
  receivable balance            -         -             -         -    22,750          -              -         22,750
Compensation from
  grant of stock
  rights and options            -         -     1,106,626         -         -          -              -      1,106,626
Consulting expense
  from grant of share
  right                         -         -       818,500         -         -          -              -        818,500
Amortization of
  deferred
  compensation                  -         -             -         -         -    319,395              -        319,395
Compensation relating
  to intrinsic value
  of stock options              -         -       728,331         -         -          -              -        728,331
Net loss from February
   17, 1996 through
   December 31, 2005            -         -             -         -         -          -    (17,778,583)   (17,778,583)
                      -----------  --------   -----------  --------  -------- ----------  -------------  -------------

Balance December 31,
  2005                 41,292,288    41,292    16,333,170         -         -          -    (17,778,583)    (1,404,121)

                         See accompanying notes to condensed consolidated financial statements.

                                                          F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                           TERRA SYSTEMS, INC. AND SUBSIDIARY
                                             (A Development Stage Company)
                               CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
                                                      (CONTINUED)


                                                                                             Deficit
                                                           Common                          Accumulated
                           Common Stock        Additional   Stock    Subscrip-  Deferred   During the       Total
                       ---------------------    Paid-In    Subscrip-   tion      Compen-   Development   Stockholders'
                        Shares      Amount      Capital     tions    Receivable  sation      Stage          Deficit
----------------------------------------------------------------------------------------------------------------------
<S>                    <C>         <C>        <C>          <C>       <C>       <C>        <C>            <C>

Shares issued for
  services
   March 2006 - $0.75
    per share              64,284        63        48,150         -         -          -              -         48,213
Shares issued in
  satisfaction of
  liabilities and
  interest
   January 2006 -
    $0.65 per share        70,311        70        45,632         -         -          -              -         45,702
Shares issued for
  financing fees
   January 2006 -
    $0.65 per share        65,000        65        42,185         -         -          -              -         42,250
Shares issued for cash
   March 2006 - $0.30
    per share             242,400       242        72,478         -         -          -              -         72,720
   June 2006 - $0.30
    per share              33,334        33         9,967         -         -          -              -         10,000
   June 2006 - $0.50
    per share             500,000       500       249,500         -         -          -              -        250,000
   July 2006 - $0.35
    per share              28,572        29         9,971         -         -          -              -         10,000
   July 2006 - $0.30
    per share              66,667        66        19,934         -         -          -              -         20,000
   September 2006 -
    $0.20 per share       312,500       312        62,188         -         -          -              -         62,500
Compensation relating
  to fair value of
  stock options                 -         -       466,205         -         -          -              -        466,205
Net loss for period             -         -             -         -         -          -     (1,412,231)    (1,412,231)
                      -----------  --------   -----------  --------  -------- ----------  -------------  -------------

Balance December 31,
  2006                 42,675,356  $ 42,672   $17,359,380  $      -  $      - $        -  $ (19,190,814) $  (1,788,762)

Shares issued for
  services
   March 2007 -
    $0.20 per share     3,000,000     3,000       897,000         -         -          -              -        900,000
Shares issued in
  satisfaction of
  liabilities and
  interest
   January 2007 -
    $0.35 per share     1,677,700     1,678       684,044         -         -          -              -        685,722
   November 2007 -
    $0.17 per share       550,000       550        92,950         -         -          -              -         93,500
Shares issued for
  financing fees
   February 2007 -
    $0.35 per share        40,000        40        13,960         -         -          -              -         14,000
Shares issued for
  cash
   March 2007 -
    $0.20 per share       500,000       500        99,501         -         -          -              -        100,001
   April 2007 -
    $0.15 per share       250,000       250        37,250         -         -          -              -         37,500
   June 2007 -
    $0.20 per share       500,000       500        99,500         -         -          -              -        100,000
   November 2007 -
    $0.10 per share       450,000       450        44,550         -         -          -              -         45,000
   December 2007 -
    $0.10 per share       750,000       750        74,250         -         -          -              -         75,000
Exercise of stock
  options
   July 2007 -
    $0.10 per share       500,000       500        49,500         -         -          -              -         50,000
Shares issued for
  compensation
   November 2007        2,218,750     2,219        (2,219)                                                           -
Compensation relating
  to amendment of
  stock right                                     995,775                                                      995,775
Compensation relating
  to guarentee of
  line of credit                                   94,774                                                       94,774
Compensation relating
  to fair value of
  stock options                 -         -     2,062,161         -         -          -              -      2,062,161
Net loss for period             -         -             -         -         -          -     (4,832,509)    (4,832,509)
                      -----------  --------   -----------  --------  -------- ----------  -------------  -------------

Balance December 31,
  2007                 53,111,806  $ 53,109   $22,602,376  $      -  $      - $        -  $ (24,023,323) $  (1,367,838)
                      ===========  ========   ===========  ========  ======== ==========  =============  =============


                         See accompanying notes to condensed consolidated financial statements.

                                                          F-6
</TABLE>
<PAGE>

                      TERRA SYSTEMS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                  From Inception
                                                                      of the
                                                                   Development
                                                                     Stage on
                                         For the Year Ended        February 17,
                                             December 31,          1996 Through
                                      -------------------------    December 31,
                                          2007          2006           2007
                                      ------------  ------------   ------------

Cash Flows from Operating Activities:
 Net loss                             $ (4,832,509) $ (1,412,231)  $(24,023,323)
 Adjustments to reconcile net loss
  to net cash used in operating
  activities:
   Depreciation and amortization             8,531         8,532        803,632
   Gain from debt relief                         -             -        (64,284)
   Loss on sale of investment
    securities                                   -             -         99,000
   (Gain) loss on disposal of assets             -             -        139,000
   Stock compensation                    4,054,210       515,120     13,445,679
   Write off of stock subscription               -             -         22,750
   Common stock issued for financing
    fees                                    57,500        42,250        529,203
 Changes in current assets and
  liabilities:
   Other current assets                     (8,503)            4        (13,894)
   Accounts payable                        (40,730)      148,585        928,614
   Accounts payable - related party              -        75,000        608,330
   Accrued liabilities                     208,328        (3,931)     1,649,420
   Accrued legal settlement expense              -             -         44,967
   Accrued interest payable                 80,468        57,888        787,577
                                      ------------  ------------   ------------

 Net Cash Used in Operating
  Activities                              (472,705)     (568,783)    (5,043,329)
                                      ------------  ------------   ------------

Cash Flows from Investing Activities:
 Purchase of equipment                           -      (109,276)    (1,003,049)
 Advances to related party                       -             -       (290,328)
 Organization costs paid                         -             -         (4,755)
 Proceeds from sale of assets                    -             -        367,715
                                      ------------  ------------   ------------

  Net Cash Used in Investing
   Activities                                    -      (109,276)      (930,417)
                                      ------------  ------------   ------------

Cash Flows from Financing Activities:
 Proceeds from bank line of credit          43,805             -         43,805
 Proceeds from borrowings -
  stockholders                                   -       250,000      1,690,111
 Payments on borrowings -
  stockholders                                   -      (130,000)      (385,730)
 Proceeds from stock issuance and
  subscriptions                            407,501       425,220      4,841,892
 Payments on capital leases                      -             -       (185,640)
                                      ------------  ------------   ------------

  Net Cash Provided by Financing
   Activities                              451,306       545,220      6,004,438
                                      ------------  ------------   ------------

Net Increase (Decrease) in Cash            (21,399)     (132,839)        30,692

Cash at Beginning of Year                   52,091       184,930              -
                                      ------------  ------------   ------------

Cash at End of Year                   $     30,692  $     52,091   $     30,692
                                      ============  ============   ============

Supplemental Cash Flow Information:
  Cash paid for interest              $          -  $     20,000
Non Cash Investing and Financing
 Activities:
  Conversion of liabilities to
   common stock                       $    734,222  $     45,000
  Transfer of land to investment in
         joint venture                $          -  $    392,251

     See accompanying notes to condensed consolidated financial statements.

                                      F-7
<PAGE>

                      TERRA SYSTEMS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
                  POLICIES

         Organization--  Terra Systems,  Inc., was  incorporated on February 17,
1996,  pursuant  to the laws of the  State of  Utah.  It is a  development-stage
company whose primary business purpose is the development and  commercialization
of a  pneumatic  conveyance  system  to  handle  materials  in a bulk  state  in
industrial research and processing.

         Xullux,  Inc., was incorporated  under the laws of the State of Utah on
November 4, 1983, under the name of Bunker Research, Inc. It changed its name to
Diamond  Resources,  Inc. on May 15, 1984, and changed its name again to Xullux,
Inc., on August 6, 1988.  On May 1, 1996,  Xullux,  Inc.,  entered into a merger
agreement with Terra Systems, Inc., whereby Terra Systems, Inc., was merged into
a newly-formed subsidiary of Xullux, Inc., called Terra Merger Subsidiary,  Inc.
Following the reorganization,  Xullux,  Inc., changed its name to Terra Systems,
Inc.

         In September  2005 the Company  acquired the assets of Mountain  Island
Energy,   LLC.,  an  Idaho-based  company  (MIE).  At  the  time  of  the  asset
acquisition, MIE was not considered a business and consisted solely of land. The
prior  owners  of MIE  were  all  shareholders  and  officers  of  the  Company.
Therefore,  the land was valued at the original  owners'  basis.  See Note 8 for
details.

         Principles of  Consolidation--  The consolidated  financial  statements
include the accounts of Terra Systems,  Inc., and its wholly owned subsidiaries,
Terra Merger Subsidiary, Inc. and Mountain Island Energy, LLC. All inter-company
transactions  have been eliminated.  The consolidated  entities are collectively
referred to herein as the "Company" or "Terra Systems."

         Use  of  Estimates--  The   preparation  of  financial   statements  in
conformity with generally accepted accounting  principles requires management to
make estimates and  assumptions  that affect the reported  amounts of assets and
liabilities at the date of the financial  statements and the reported amounts of
revenues and expenses during the reporting  period.  Actual results could differ
from those estimates.

         Basis  of  Presentation--  The  accompanying   consolidated   financial
statements have been prepared on a going concern basis,  which  contemplates the
realization of assets and the  satisfaction  of liabilities in the normal course
of business.  As shown in the  consolidated  financial  statements for the years
ended December 31, 2007 and 2006, the Company  received  $149,994 and $45,897 in
revenue,  respectively  and incurred net losses of  $4,832,509  and  $1,412,231,
respectively. As of December 31, 2007, the Company had a working capital deficit
of $1,870,217. These factors raise substantial doubt about the Company's ability
to continue as a going concern for a reasonable period of time. The consolidated
financial   statements   do  not  include  any   adjustments   relating  to  the
recoverability   and  classification  of  recorded  assets  or  the  amount  and
classification  of  liabilities  that might be  necessary  should the Company be
unable to continue as a going  concern.  The Company's  continuation  as a going
concern is dependent upon its ability to generate  sufficient cash flows to meet
its  obligations  on a timely basis,  to obtain  additional  financing as may be
required, and ultimately to attain successful operations.

         The  Company's  management  is in the  process of  negotiating  various
agreements to perform  research on and the  development of pneumatic  conveyance
systems  to  handle  materials  in a  bulk  state  in  industrial  research  and
processing.  Management also intends to use capital and debt financing as needed
to supplement  the cash flows that  potentially  could be generated  through the
successful negotiation of agreements.


                                      F-8
<PAGE>

                      TERRA SYSTEMS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         Cash and Cash  Equivalents--  For  purposes  of the  statement  of cash
flows,  the Company  considers  all highly liquid debt  instruments  maturing in
three months or less to be cash equivalents.

         Property and  Equipment -- Property and  equipment are recorded at cost
and are depreciated using the straight-line  method based on the expected useful
lives of the assets that range from five to fifteen years.  Depreciation expense
for the  years  ended  December  31,  2007 and  2006,  was  $8,531  and  $8,532,
respectively.

         Long-Lived  Assets  -- The  carrying  value  of  long-lived  assets  is
evaluated   periodically  when  events  or  circumstances  indicate  a  possible
inability to recover the carrying amounts.  An impairment loss is recognized for
the excess of the carrying amount over the fair value of the assets.  Fair value
is  determined  based on  estimated  discounted  net future  cash flows or other
valuation  techniques  available in the  circumstances.  This analysis  involves
significant  management judgment to evaluate the capacity of an asset to perform
within  projections.  Based upon  these  analyses,  no  impairment  losses  were
recognized in the accompanying financial statements.

         Financial   Instruments  --  The  estimated  fair  value  of  financial
instruments  is not presented  because,  in  management's  opinion,  there is no
material  difference  between  carrying amounts and estimated fair values of the
financial  instruments  as presented in the  accompanying  balance  sheets.  The
carrying amounts  reported for notes payable  approximate fair value because the
underlying instruments are at interest rates which approximate market rates.

         Revenue  Recognition -- Revenue is recognized when products are shipped
or when services are performed.  The Company's revenues,  during 2007, primarily
have come from a consulting agreement with another corporation.

         Basic and  Diluted  Loss Per Share -- Basic  loss per  common  share is
computed by dividing net loss by the  weighted-average  number of common  shares
outstanding  during the period.  Diluted  loss per share is  calculated  to give
effect to  potentially  issuable  common  shares except during loss periods when
those  potentially  issuable common shares would decrease the loss per share. As
of December 31, 2007 and 2006,  there were 15,444,381 and 4,812,867  potentially
issuable common shares,  respectively,  which were excluded from the calculation
of diluted loss per common share as their effect would have been  anti-dilutive,
thereby decreasing the net loss per common share.

         Stock Based  Compensation  --  Effective  January 1, 2006,  the Company
adopted Statement of Financial Accounting Standards No. 123 (revised 2004) (SFAS
123R), using the modified prospective method. SFAS 123R requires the recognition
of the cost of employee  services  received  in exchange  for an award of equity
instruments in the financial  statements and is measured based on the grant date
fair value of the award.  SFAS 123R also requires the stock option  compensation
expense to be recognized over the period during which an employee is required to
provide service in exchange for the award (the vesting  period).  See Note 7 for
details.

         Recent  Accounting  Pronouncements  -- In September 2006, the Financial
Accounting  Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements,
which defines fair value,  establishes  a framework for measuring  fair value in
generally  accepted  accounting  principles and expands  disclosures  about fair
value  measurements.  SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007, and interim  periods  within those fiscal years.  In February
2008,  the FASB issued FASB Staff Position No 157-2 which extended the effective
date for certain  nonfinancial  assets and  nonfinancial  liabilities  to fiscal
years  beginning  after  November  15,  2008.  The  Company  does not expect the


                                      F-9
<PAGE>

                      TERRA SYSTEMS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


adoption of SFAS No. 157 to have a material impact on our consolidated financial
statements.  In February  2007,  the FASB  issued  SFAS No. 159,  The Fair Value
Option for  Financial  Assets and  Financial  Liabilities.  SFAS No. 159 permits
companies  to choose to measure many  financial  instruments  and certain  other
items at fair value.  SFAS No. 159 is effective for financial  statements issued
for fiscal years  beginning after November 15, 2007. The Company does not expect
the  adoption  of SFAS No.  159 to have a  material  impact on our  consolidated
financial statements.

         In  December  2007,  the  FASB  issued  SFAS  No.  141  (R),   Business
Combinations,  and  SFAS  No.  160,  Noncontrolling  Interests  in  Consolidated
Financial  Statements.  SFAS No. 141 (R)  requires  an  acquirer  to measure the
identifiable  assets acquired,  the liabilities  assumed and any non-controlling
interest  in the  acquire at their fair  values on the  acquisition  date,  with
goodwill being the excess value over the net identifiable assets acquired.  SFAS
No. 160  clarifies  that a  non-controlling  interest in a subsidiary  should be
reported as equity in the consolidated  financial  statements,  consolidated net
income  shall  be  adjusted  to  include  the  net  income   attributed  to  the
non-controlling interest and consolidated comprehensive income shall be adjusted
to include the comprehensive income attributed to the non-controlling  interest.
The  calculation  of  earnings  per share  will  continue  to be based on income
amounts  attributable  to the  parent.  SFAS No.  141 (R) and  SFAS No.  160 are
effective  for  financial  statements  issued for fiscal years  beginning  after
December  15,  2008.  Early  adoption  is  prohibited.  The  Company has not yet
determined the effect on our  consolidated  financial  statements,  if any, upon
adoption of SFAS No. 141 (R) or SFAS No. 160.

NOTE 2 - RELATED PARTY TRANSACTIONS

         Certain officers and shareholders of the Company have from time to time
advanced  operating  capital  and  settled  operating  expenses on behalf of the
Company. As of December 31, 2007 and 2006, the Company received advances of zero
and $115,000, respectively, and made payments in satisfaction of its obligations
worth  $92,203  and  $40,000,  respectively,  resulting  in  payables to related
parties of $105,242 and  $197,445,  respectively.  All amounts are due on demand
and bear no interest.

         As  further  discussed  in Note 5, the  Company  has notes  payable  to
shareholders  and  officers.  The Company did not  receive  proceeds  from these
individuals  during 2007.  During the year ended  December 31, 2007 and 2006 the
Company made payments of $165,874 and $130,000, respectively. As of December 31,
2007 and 2006, the amounts due were $804,680 and $970,554, respectively.

         During the years ended December 31, 2007 and 2006, the Company  accrued
interest on the notes of $80,468,  and  $77,888,  respectively.  During the year
ended December 31, 2007, the Company made interest  payments  totaling  $162,645
through the issuance of common stock.  During the year ended  December 31, 2006,
the Company made a cash payment of $20,000 related to this accrued interest.  As
of  December  31, 2007 and 2006,  the  accrued  interest  due was  $243,956  and
$326,133, respectively.


NOTE 3 - OPERATING LEASE OBLIGATION

         In September  2005, the Company  entered into a lease agreement to rent
2,328 square feet of office space for a period of three years.  During the years
ended December 31, 2007 and 2006,  the Company  incurred rent expense of $32,685
and $32,131  respectively.  Minimum payments for the remaining term of the lease
are $22,208 for 2008.


                                      F-10
<PAGE>

                      TERRA SYSTEMS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4 - LINE OF CREDIT

The  Company  entered  into a  $500,000  line of credit  with US Bank N.A.  (the
"Bank") on November 1, 2007.  The line of credit is  guaranteed by two directors
(the  "Guarantors").  As consideration for guaranteeing the line of credit,  the
Company issued 531,514 warrants to the Guarantors. The warrants vest immediately
and expire in  November  2017.  The fair value of the  warrants  was $94,774 and
charged to general and administrative expense. The fair value was computed using
the  Black-Scholes  pricing  model using the  following  assumptions:  estimated
volatility of 160%,  estimated risk-free rate of 4.23%, an estimated yield of 0%
and an estimated life of 10 years.  The Guarantors are also  indemnified by each
of the other  Directors  and  officers  of the  Company  serving on the Board of
Directors.

Draws  under the line of  credit  must be  approved  by Mr.  Roeder,  one of the
guarantors,  before being  eligible for funding by the Bank.  The line of credit
bears interest at Bank prime plus 50 basis points and expires on April 30, 2009.
The credit agreement includes a limitation on other indebtedness and guaranties.
As of December 31, 2007, the Company had drawn $43,805 on the line of credit.


NOTE 5 - NOTES PAYABLE TO STOCKHOLDERS

Notes payable to stockholders are as follows:

                                                              December 31,
                                                         -----------------------
                                                           2007           2006
                                                         --------       --------
Notes payable to stockholders, interest
 rate at 10% per annum payable monthly,
 notes are currently due                                 $253,135       $369,009


Notes payable to stockholders, no
 stated interest; settled November
 2007 through the issuance of stock                             -         50,000

Note payable to stockholder, interest
 rate at 10% per annum payable monthly,
 amounts are due on demand                                300,000        300,000

Note payable to  stockholder; interest
 rate at 10% per annum payable monthly,
 100,000 shares of common stock valued
 at $93,000 are accrued and to be issued
 as additional interest,note is due on
 demand                                                   250,000        250,000

Notes payable to stockholders for
 redemption of stock interest is 10% per
 annum payable monthly, due on demand                       1,545          1,545
                                                         --------       --------

Notes Payable to Stockholders                            $804,680       $970,554
                                                         ========       ========


NOTE 6 - STOCKHOLDERS' DEFICIT

         Common  Stock  Issued  for Cash --  During  2007,  the  Company  issued
1,575,000 shares of common stock and 1,900,000 warrants to purchase common stock
with  exercise  prices  ranging  from $0.50 to $1.00 per share for  proceeds  of
$195,000. 100,000 warrants vested immediately and expire in July 2008; 1,200,000
warrants vest in May 2008 and expire in November 2008;  600,000 warrants vest in
November 2008 and expire in November 2009. The proceeds were allocated  $152,191
to common stock and $42,809 to the warrants, based on their relative fair values


                                      F-11
<PAGE>

                      TERRA SYSTEMS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


on the date of issuance.  The fair value of the warrants was  determined  by the
Black-Scholes  option pricing model using the following  assumptions:  estimated
volatility of 115%, estimated risk-free interest rate of 3.23%,  estimated yield
of 0% and an estimated life of 1.31 years.

         During 2007, the Company also issued 875,000 shares of common stock for
proceeds  of  $162,501  or at prices  ranging  from $0.15 to $0.20 per share and
500,000  shares of common  stock for  proceeds of $50,000 to an  individual  who
exercised  options to purchase  common stock,  at an exercise price of $0.10 per
share.

         During  2006,  the Company  issued  775,734  shares of common stock and
812,867  warrants to purchase  common stock with  exercise  prices  ranging from
$0.30 to $1.25 per share for proceeds of $332,720. The warrants vest immediately
with 137,867 warrants  expiring in March 2008 and 675,000  warrants  expiring in
May 2009. The proceeds were allocated $160,817 to common stock and $171,903,  to
the warrants,  based on their relative fair values on the date of issuance.  The
fair value of the warrants was $356,924  determined by the Black-Scholes  option
pricing model using the following  assumptions:  estimated volatility of 110.80%
estimated  risk-free  interest rate of 5.17%  estimated  yield of 0% and life of
2.83 years.  During the year ended  December  31,  2006 the Company  also issued
312,500  shares of common  stock at a price of $0.20 per share for  proceeds  of
$62,500.

         Also during 2006,  the Company issued 95,239 shares of common stock for
proceeds of $30,000 or at prices ranging from $0.30 to $0.35 per share.

         Common Stock Issued for Services -- During the years ended December 31,
2007 and 2006, the Company issued 3,000,000 and 64,284 shares, respectively,  of
common  stock for  consulting  services.  The common  stock was valued at prices
ranging from $0.30 to $0.95 per share. For the years ended December 31, 2007 and
2006,  the  Company  charged  $901,500  and  $48,213  of  consulting  expense to
operations,  respectively. The shares were valued based on the fair value of the
Company's common stock on the date of issuance.

         Common Stock Issued for  Satisfaction  of Debt -- During the year ended
December 31, 2007 the Company issued 90,000 shares of common stock at a price of
$0.33 per share for  satisfaction  of  accounts  payable of  $30,000;  1,587,700
shares of common  stock,  at a price of $0.41 per  share,  for  satisfaction  of
accounts payable of $28,500,  related party payable of $92,203, accrued wages of
$255,000,  accrued  interest of $162,645  and a note payable to  stockholder  of
$115,874;  550,000  shares of common stock,  at a price of $0.17 per share,  for
satisfaction  of a note payable to stock holder of $50,000 and interest  expense
of $43,500.  During the year ending  December 31, 2006 the Company issued 70,311
of common stock for satisfaction of its obligations. The common stock was valued
at prices ranging from $0.30 to $0.85 per share. For the year ended December 31,
2006, the Company settled accounts payable of $45,702.

         Common  Stock  Issued  for  Financing  Fees -- During  the years  ended
December  31,  2007 and 2006,  the  Company  issued  40,000 and  65,000  shares,
respectively, of common stock for financing fees incurred during the period. The
common stock was valued at prices ranging from $0.35 to $0.75 per share. For the
years  ended  December  31, 2007 and 2006,  the Company  charged the $14,000 and
$42,250 of finance fee to interest expense.

         Common  Stock  Issued for  Settlement  of Stock  Purchase  Rights -- On
September 11, 2006,  the Company  executed a stock  purchase  agreement  with an
individual.  The original agreement gave the individual the right to purchase up
to five  million  shares of common  stock at a price of $0.20 per share  anytime
during the twelve-month  period ending September 11, 2007. For an additional six


                                      F-12
<PAGE>

                      TERRA SYSTEMS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


months the purchase price would be 50% of the closing market price averaged over
the five trading days prior to such purchase.  From September 2006 through March
2007,  under the  agreement,  562,500 shares were purchased for cash proceeds of
$112,500 and are included in the discussion of shares issued for cash above.  In
March 2007 the stock purchase  agreement was amended allowing the purchase price
could be paid either in cash or under a cashless exercise  feature.  The company
determined that the amendment  triggered a compensatory  event and the remaining
4,437,500  rights  should  be valued at their  then  fair  value and  considered
compensation.  The fair value of the  remaining  rights was $995,775  determined
using the  Black-Scholes  option pricing model using the following  assumptions:
estimated  volatility  of 116.74%,  estimated  risk-free  interest rate of 4.9%,
estimated yield of 0% and an expected life of 1 year.

In November 21, 2007 the individual  submitted a net issue  election  notice and
the  Company  issued the  individual  2,218,750  shares of common  stock for the
exercise of the  remaining  4,437,500  stock rights under the cashless  exercise
feature.

NOTE 7 - STOCK OPTIONS AND STOCK WARRANTS

STOCK OPTIONS

         Effective  January 1, 2006, the Company adopted  Statement of Financial
Accounting  Standards  No. 123 (revised  2004) (SFAS  123R),  using the modified
prospective  method.  SFAS 123R requires the recognition of the cost of employee
services  received  in  exchange  for an  award  of  equity  instruments  in the
financial  statements  and is measured based on the grant date fair value of the
award.  SFAS 123R also  requires  the stock  option  compensation  expense to be
recognized  over the period  during  which an  employee  is  required to provide
service in exchange for the award (the vesting  period).  Prior to adopting SFAS
123R, the Company accounted for stock-based  compensation plans under Accounting
Principles  Board  Opinion  ("APB")  No.  25,  "Accounting  for Stock  Issued to
Employees"  ("APB  25").  Under APB 25,  generally  no  compensation  expense is
recorded  when the terms of the award  are fixed and the  exercise  price of the
employee stock option equals or exceeds the fair value of the  underlying  stock
on the date of grant. The Company had adopted the  disclosure-only  provision of
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").

         For the year ended December 31, 2007 and 2006,  the Company  calculated
compensation  expense of $3,152,710 and $453,605  related to stock options which
will be recognized over the vesting period.  The overall effect of adopting SFAS
123R was an increase of net loss by $176,500 or $0.00 per share and  $218,954 or
$0.01 per share, during 2007 and 2006 respectively.

         For options  granted  subsequent  to the adoption  date of SFAS 123R on
January 1, 2006,  the fair value of each stock option grant will be estimated on
the date of grant using the Black-Scholes  option-pricing model. During the year
ended  December 31, 2007, the Company  granted  10,000,000  stock  options.  The
weighted  average  fair value of stock  options at the date of grant  during the
year ended  December  31,  2007,  was $0.27 per share.  The Company had no stock
option grants during the year ended December 31, 2006.


                                      F-13
<PAGE>

                      TERRA SYSTEMS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


A summary of stock  option  activity for the year ended  December  31, 2007,  is
presented below:

                                                       Weighted
                                          Weighted      Average
                             Shares       Average      Remaining     Aggregate
                             Under        Exercise    Contractual    Intrinsic
                             Option        Price         Life         Value
                           ----------     --------    -----------    ---------
Outstanding at
 December 31, 2005          4,500,000     $   0.20
    Granted                         -
    Exercised                       -
    Forfeited                       -
    Expired                  (500,000)    $   0.10
                           ----------
Outstanding at
 December 31, 2006          4,000,000     $   0.21
    Granted                10,000,000         0.31
    Exercised                (500,000)        0.10
    Forfeited                       -
    Expired                (1,000,000)    $   0.10
                           ----------

Outstanding at
 December 31, 2007         12,500,000     $   0.30     7.4 years     $ 45,000
                           ==========

Exercisable at
 December 31, 2007          4,690,478     $   0.26     6.3 years     $ 45,000
                           ==========
Exercisable at
 December 31, 2006          2,628,572     $   0.12
                           ==========

         The expected life of stock options  represents  the period of time that
the stock  options  granted are expected to be  outstanding  based on historical
exercise  trends.  The  expected  volatility  is based on the  historical  price
volatility of our common stock. The risk-free  interest rate represents the U.S.
Treasury  bill rate for the  expected  life of the related  stock  options.  The
dividend yield  represents our anticipated  cash dividend over the expected life
of the stock options.

         The following  are the  weighted-average  assumptions  used for options
granted during the year ended December 31, 2007 and 2006:

                                                 2007                2006
                                            ----------------    ---------------

Risk free interest rate                          4.57%               N/A
Expected life                                   7 years              N/A

Dividend yield                                     -                 N/A
Volatility                                      157.13%              N/A


         As  of  December  31,  2007,  there  was  approximately  $1,314,914  of
unrecognized  compensation cost related to stock options that will be recognized
over a weighted average period of 1.62 years.

         In May 2006,  the Company  changed  the  expiration  date on  1,500,000
options  from July 2006 to July 2007.  Using the  Black-Scholes  option  pricing
model and a risk free  interest  rate of 4.99%,  volatility  of  114.74%  and an
expected life of 1 year, it was determined that an additional expense of $12,600
was incurred.


                                      F-14
<PAGE>

                      TERRA SYSTEMS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Stock Warrants

         A summary of stock warrants at December 31, 2007 is presented below;


                                                       Weighted
                                          Weighted      Average
                             Shares       Average      Remaining
                             Under        Exercise    Contractual
                            Warrants       Price         Life
                           ----------     --------    -----------
Outstanding at
 December 31, 2005                  -     $      -
    Granted                   812,867     $   0.78
    Exercised                       -
    Expired                         -
                           ----------
Outstanding at
 December 31, 2006            812,867     $   0.78
    Granted                 2,431,541         0.56
    Exercised                       -
    Expired                         -
                           ----------

Outstanding at
 December 31, 2007          3,244,381     $   0.61     2.63 years
                           ==========

Exercisable at
 December 31, 2007          1,444,381     $   0.54     4.35 years
                           ==========
Exercisable at
 December 31, 2006            812,867     $   0.78
                           ==========


NOTE 8 - INVESTMENT IN JOINT VENTURES

         On June 29, 2006 the Company  entered  into a joint  venture  agreement
with United Fund Advisors,  L.L.C.  (UFA) of Portland Oregon, an entity in which
Reynold  Roeder,  a director of the Company has a 25% interest and serves as its
CEO. Under the agreement, a new entity, Mountain Island Energy Holdings,  L.L.C.
(MIEH)  was  formed.  MIEH was  formed for the  purpose  of  applying  to the US
Department  of the Treasury and US  Department of Energy for an award of federal
advanced  clean coal  project tax  credits  under  Section  48A of the  Internal
Revenue  Code.  UFA and the Company each own 50% of MIEH.  Under the  agreement,
Reynold  Roeder of UFA and  Mitchell  J. Hart of the  Company  serve as managing
directors of MIEH. Under the MIEH operating agreement,  UFA was required to make
capital  cash  contributions  to MIEH  totaling  $1,000  along with  agreed upon
services.  During the year ended December 31, 2006, UFA  contributed  $31,000 in
cash,  and services  valued at $170,000.  The Company,  in  accordance  with the
operating  agreement,  contributed  land and certain  professional  service work
related to the development of the land. During the year ended December 31, 2006,
the Company contributed land and development costs valued at $392,251.  MIEH had
no  substantial  operations  for the year ended  December 31, 2007.  The Company
accounts for this joint venture  interest under the equity method of accounting.
MIEH was  unsuccessful  in obtaining a Section 48A of the Internal  Revenue Code
award, but has been pursuing opportunities to develop or liquidate the land.

         MIEH and UFA also formed Sage Island  Energy,  LLC, a Delaware  limited
liability  company.  Sage  Island  Energy was  formed to respond to the  Wyoming
Infrastructure  Authority  Request for  Proposal,  which  sought to  establish a
public-private  partnership to develop a "clean coal" demonstration  project (or


                                      F-15
<PAGE>

                      TERRA SYSTEMS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


projects).  Sage Island  Energy was not selected  for the  project.  Sage Island
Energy had no substantial operations for the year ended December 31, 2007


NOTE 9 - INCOME TAXES

         There was no benefit or  provision  for income  taxes  during  2007 and
2006.  The  Company  also did not pay any income  taxes  during the years  ended
December 31, 2007 and 2006.  The  following  presents the  components of the net
deferred tax asset as of December 31, 2007 and 2006:

                                                       December 31,
                                               -----------------------------
                                                   2007              2006
                                               -----------       -----------
    Tax loss carry forward                     $ 6,184,645       $ 5,551,762
    Stock based compensation                     1,210,049           445,562
    Asset bases differences                        386,646           386,646
    Accrued and deferred compensation              105,625           116,815
    Other accruals                                  24,785            15,444
                                               -----------       -----------

       Total Deferred Tax Assets                 7,911,750         6,516,229

)      Less: valuation allowance                (7,911,750)       (6,516,229)
                                               -----------       -----------

       Net Deferred Tax Asset                         $  -               $ -
                                               ===========       ===========

The Company has net operating  loss carry forward of  approximately  $16,600,000
which expire from 2011 through 2027.

         The  following is a  reconciliation  of the amount of tax that would be
result from applying the federal rate to pretax income with provision for income
taxes for the years ending December 31, 2007 and 2006:

                                                     For the Years Ended
                                                         December 31,
                                                  ---------------------------
                                                     2007             2006
                                                  -----------     -----------

   Benefit at US federal statutory rate (34%)     $(1,643,053)    $  (480,159)
   Non deductible items                               407,274               -
   Deferred tax asset valuation change              1,395,521         526,762
   State benefit, net of federal effect              (159,742)        (46,603)
                                                  -----------     -----------

   Benefit from Income Taxes                      $         -     $         -
                                                  ===========     ===========


NOTE 10 - SIGNIFICANT FOURTH QUARTER ADJUSTMENT

As  mentioned  in Note 6, the Company  amended a stock right  agreement  for the
issuance of 4,437,500 common shares in March 2007 to include a cashless feature.
The Company initially accounted for the amendment as a financing transaction and
reported  no  accounting  effect.  As part of the  year end  procedures,  it was


                                      F-16
<PAGE>

                      TERRA SYSTEMS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


concluded  that this  amendment  was not a  financing  transaction  and was,  in
effect, an issuance of a compensation based stock warrant. The fair value of the
warrant,   using  March  2007  assumptions,   was  $995,775  determined  by  the
Black-Scholes  option pricing model using the following  assumptions;  estimated
volatility 116.74% estimated  risk-free interest rate of 4.9% estimated yield of
0%  and  a  life  of 1  year.  The  restatement  adjustments  to  the  Company's
consolidated  balance sheets (there was no effect to assets or liabilities)  and
statements of operations for the interim  periods ended March 31, 2007, June 30,
2007 and September 30, 2007 are summarized  below.  Restated  statements of cash
flows  for  the  interim  periods  have  not  been  presented.  The  restatement
adjustment had no effect on previously reported total cash flows from operating,
investing and financing activities:


                        Three Months Ended March 31, 2007
                                   (Unaudited)

                                 As Previously    Restatement
                                   Reported        Adjustment      As Restated
                                 ------------     ------------     ------------
Balance Sheet -
 Stockholders' Deficit
   Additional paid-in
    capital                      $ 19,130,386     $    995,775     $ 20,126,161
   Deficit accumulated
    during the
    development stage             (20,233,155)        (995,775)     (21,228,930)

   Total stockholders'
    deficit                      $ (1,054,839)    $          -     $ (1,054,839)

Statement of Operations
   General and
    administrative               $  1,022,261     $    995,775     $  2,018,036
   Operating expenses               1,024,394          995,775        2,020,169
   Loss from operations            (1,008,184)        (995,775)      (2,003,959)
   Net loss                        (1,042,301)        (995,775)      (2,038,076)
   Basic and diluted
    loss per share               $      (0.02)    $      (0.02)    $      (0.04)



                         Six Months Ended June 30, 2007
                                   (Unaudited)

                                 As Previously    Restatement
                                   Reported        Adjustment      As Restated
                                 ------------     ------------     ------------
Stockholders' Deficit
   Additional paid-in
    capital                      $ 20,469,743     $    995,775     $ 21,465,518
   Deficit accumulated
    during the
    development stage             (21,709,887)        (995,775)     (22,705,662)

   Total stockholders'
    deficit                      $ (1,191,504)    $          -     $ (1,191,504)

Statement of Operations
   General and
    administrative               $  2,507,071          995,775     $  3,502,846
   Operating expenses               2,511,337          995,775        3,507,112
   Loss from operations            (2,464,489)        (995,775)      (3,460,264)
   Net loss                        (2,519,073)        (995,775)      (3,514,848)
   Basic and diluted
    loss per share               $      (0.05)    $      (0.02)    $      (0.07)



                                      F-17
<PAGE>

                      TERRA SYSTEMS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                      Nine Months Ended September 30, 2007
                                   (Unaudited)

                                 As Previously    Restatement
                                   Reported        Adjustment      As Restated
                                 ------------     ------------     ------------
Stockholders' Deficit
   Additional paid-in
    capital                      $ 20,910,769     $    995,775     $ 21,906,544
   Deficit accumulated
    during the
    development stage             (22,308,443)        (995,775)     (23,304,218)

   Total stockholders'
    deficit                      $ (1,348,534)    $          -     $ (1,348,534)

Statement of Operations
   General and
    administrative               $  3,082,426          995,775     $  4,078,201
   Operating expenses               3,088,824          995,775        4,084,599
   Loss from operations            (3,044,197)        (995,775)      (4,039,972)
   Net loss                        (3,117,629)        (995,775)      (4,113,404)
   Basic and diluted
    loss per share               $      (0.07)    $      (0.02)    $      (0.09)




NOTE 11 - SUBSEQUENT EVENTS (UNAUDITED)

         On February 28, 2008, the Company issued 125,000 shares of common stock
for proceeds of $12,500 or $0.10 per share.  The shares were issued in privately
negotiated transactions.



















                                      F-18

--------------------------------------------------------------------------------