---

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2009

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

For the transition period from ________ to ________

COMMISSION FILE NUMBER 000-50569

TERRACE VENTURES INC.(Exact name of registrant as specified in its charter)

|NEVADA                                           | 91-2147101                          
|------------------------------------------------ | ------------------------------------
|(State or other jurisdiction of incorporation or | (I.R.S. Employer Identification No.)
|organization)                                    |                                     
|                                                 |                                     
|Suite 202, 810 Peace Portal Drive,               |                                     
|Blaine, WA                                       | 98230                               
|(Address of principal executive offices)         | (Zip Code)                          

(360) 220-5218(Registrants telephone
number, including area code)

Not Applicable(Former name, former
address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 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. [X]Yes[ ] No

Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.

|Large accelerated filer [   ] |                                                     | Accelerated
      filer                    
       [   ]
|----------------------------- | --------------------------------------------------- | --------------------------------------------------------
|Non-accelerated filer   [   ] | (Do not check if
      a smaller reporting company) | Smaller reporting company[X]                            

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

Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date:
As of March 9, 2009, the Registrant had 46,753,200 shares of
commonstock outstanding.

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PART I - FINANCIAL INFORMATION

ITEM
1.           FINANCIAL
STATEMENTS.

The accompanying unaudited financial statements have been
prepared in accordance with the instructions to Form 10-Q and Rule 8-03 of
Regulation S-X, and, therefore, do not include all information and footnotes
necessary for a complete presentation of financial position, results of
operations, cash flows, and stockholders' equity in conformity with generally
accepted accounting principles. In the opinion of management, all adjustments
considered necessary for a fair presentation of the results of operations and
financial position have been included and all such adjustments are of a normal
recurring nature. Operating results for the nine months ended January 31, 2009
are not necessarily indicative of the results that can be expected for the year
ending April 30, 2009.

As used in this Quarterly Report, the terms we, us, our,
Terrace, and the Company mean Terrace Ventures Inc. unless otherwise
indicated. All dollar amounts in this Quarterly Report are expressed in U.S.
dollars, unless otherwise indicated.

2

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Report of Independent Registered Public Accounting
  Firm

To the Board of Directors 
  Terrace Ventures Inc.

We have reviewed the accompanying balance sheet of Terrace
  Ventures Inc. as of January 31, 2009, and the statements of operations and
  accumulated deficit, changes in stockholders equity (deficit), and statements
  of cash flows for the nine month periods ended January 31, 2009 and January 31,
  2008, and for the period February 20, 2001 (date of inception) to January 31,
  2009. These interim financial statements are the responsibility of the
  management of Terrace Ventures Inc.

We conducted our review in accordance with the standards of the
  Public Company Accounting Oversight Board (United States). A review of interim
  financial information consists principally of applying analytical procedures and
  making inquiries of persons responsible for financial and accounting matters. It
  is substantially less in scope than an audit conducted in accordance with the
  standards of the Public Company Accounting Oversight Board (United States), the
  objective of which is the expression of an opinion regarding the financial
  statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material
  modifications that should be made to the accompanying interim financial
  statements in order for them to be in conformity with accounting principles
  generally accepted in the United States of America.

Our review was made for the purpose of expressing limited
  assurance that there are no material modifications that should be made to the
  financial statements in order for them to be in conformity with U.S. generally
  accepted accounting principles. The supplemental statement of operating expenses
  is presented for the purposes of additional analysis and is not a required part
  of the basic financial statements. Such information has been subjected to the
  inquiry and analytical procedures applied in the review of the basic financial
  statements, and we are not aware of any material modifications that should be
  made thereto.

The accompanying financial statements have been prepared
  assuming that the Company will continue as a going concern. As discussed in Note
  5 to the financial statements, the Company has suffered recurring losses from
  operations, which raise substantial doubt about its ability to continue as a
  going concern. The financial statements do not include any adjustments that
  might result from the outcome of this uncertainty.

We have previously audited, in accordance with standards of the
  Public Company Accounting Oversight Board (United States), the balance sheet of
  Terrace Ventures Inc. as of April 30, 2008, and the related statements of
  operations and accumulated deficit, changes in stockholders equity (deficit),
  and cash flows for the year then ended (not presented herein); and in our report
  dated July 18, 2008, we expressed an unqualified opinion on those financial
  statements which included an explanatory paragraph describing Terrace Ventures
  Inc.s ability to continue as a going concern as described in Note 5 to the
  financial statements. In our opinion, the information set forth in the
  accompanying balance sheet as of April 30, 2008 is fairly stated, in all
  material respects, in relation to the balance sheet from which it has been
  derived.

/s/ Sarna & Company

Sarna & Company, Certified Public Accountants 
  Westlake
  Village, California 
  March 5, 2009

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TERRACE VENTURES INC.(AN EXPLORATION STAGE
    COMPANY) 
    BALANCE SHEET

|                                                     |   | (Unaudited)      |   |   | (Audited)      |  
|---------------------------------------------------- | - | ---------------- | - | - | -------------- | -
|                                                     |   | January 31, 2009 |   |   | April 30, 2008 |  
|                                                     |   |                  |   |   |                |  
|ASSETS                                               |   |                  |   |   |                |  
|                                                     |   |                  |   |   |                |  
|Current Assets:                                      |   |                  |   |   |                |  
|Cash                                                 | $ | 522              |   | $ | 100            |  
|Trust
      Account Receivable                       |   | -0-              |   |   | 13,775         |  
|Notes Receivable                                     |   | -0-              |   |   | 214,892        |  
|Loan
      Receivable                                |   | 4,500            |   |   | -0-            |  
|                                                     |   |                  |   |   |                |  
|Total
      Current Assets                           |   | 5,022            |   |   | 228,767        |  
|                                                     |   |                  |   |   |                |  
|Other Asset - Investment                             |   | -0-              |   |   | -0-            |  
|                                                     |   |                  |   |   |                |  
|TOTAL ASSETS                                         | $ | 5,022            |   | $ | 228,767        |  
|                                                     |   |                  |   |   |                |  
|LIABILITIES AND
      STOCKHOLDERS' EQUITY/(DEFICIT) |   |                  |   |   |                |  
|                                                     |   |                  |   |   |                |  
|Current Liabilities:                                 |   |                  |   |   |                |  
|Accounts Payable and                                 |   |                  |   |   |                |  
|Accrued Expenses                                     | $ | 24,330           |   | $ | 48,393         |  
|Stock Subscriptions
      Received                   |   | 5,000            |   |   | -0-            |  
|Due to
      Shareholders                            |   | -0-              |   |   | 95,100         |  
|                                                     |   |                  |   |   |                |  
|Total Current Liabilities                            |   | 29,330           |   |   | 143,393        |  
|                                                     |   |                  |   |   |                |  
|Stockholders' Deficit:                               |   |                  |   |   |                |  
|Common Stock, $0.001 par
      value                 |   |                  |   |   |                |  
|400,000,000 shares authorized,                       |   |                  |   |   |                |  
|46,753,200 and 36,753,200                            |   |                  |   |   |                |  
|shares issued                                        |   | 46,753           |   |   | 36,753         |  
|Additional Paid in
      Capital                     |   | 1,762,142        |   |   | 1,572,142      |  
|Deficit
      Accumulated During                     |   |                  |   |   |                |  
|the
      Exploration Stage                          |   | (1,833,203       | ) |   | (1,523,621     | )
|                                                     |   |                  |   |   |                |  
|Total Stockholders' Equity/(Deficit)                 |   | (24,308          | ) |   | 85,274         |  
|                                                     |   |                  |   |   |                |  
|TOTAL LIABILITIES AND                                |   |                  |   |   |                |  
|STOCKHOLDERS'
      EQUITY/(DEFICIT)                 | $ | 5,022            |   | $ | 228,767        |  

See Notes to Financial Statements

2

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TERRACE VENTURES INC.(AN EXPLORATION STAGE
    COMPANY) 
    STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT(Unaudited)

THREE MONTHS ENDED
      
      
      NINE MONTHS ENDEDJANUARY 31,
      
      
      JANUARY 31,
      
      
      INCEPTION to2009
      
      
      2008
      
      
      2009
      
      
      2008
      
      
      JANUARY 31, 2009Revenues
      $
      -0-
      
      $
      -0-
      
      $
      -0-
      
      $
      -0-
      
      $
      -0-Operating Expenses
      
      (244,205
      )
      
      (17,730
      )
      
      (309,582
      )
      
      (94,997
      )
      
      (818,714
      )Loss Before OtherIncome and Expenses
      
      (244,205
      )
      
      (17,730
      )
      
      (309,582
      )
      
      (94,997
      )
      
      (818,714
      )Other Income:Interest Income
      
      -0-
      
      
      4,033
      
      
      -0-
      
      
      10,947
      
      
      14,491Other Expense:Unrealized LossOn Investment
      
      -0-
      
      
      -0-
      
      
      -0-
      
      
      -0-
      
      
      (1,028,980
      )Loss Before Provisionfor Income Taxes
      
      (244,205
      )
      
      (13,697
      )
      
      (309,582
      )
      
      (84,050
      )
      
      (1,833,203
      )Provision forIncome Taxes
      
      -0-
      
      
      -0-
      
      
      -0-
      
      
      -0-
      
      
      -0-Net Loss
      
      (244,205
      )
      
      (13,697
      )
      
      (309,582
      )
      
      (84,050
      )
      
      (1,833,203
      )Accumulated Deficit,Beginning of Period
      
      (1,588,998
      )
      
      (1,493,524
      )
      
      (1,523,621
      )
      
      (1,423,171
      )
      
      -0-Accumulated Deficit,End of Period
      $
      (1,833,203
      )
      $
      (1,507,221
      )
      $
      (1,833,203
      )
      $
      (1,507,221
      )
      $
      (1,833,203
      )Net Loss per Share
      $
      (0.01
      )
      $
      (0.00
      )
      $
      (0.01
      )
      $
      (0.00
      )
      $
      (0.06
      )Weighted AverageShares Outstanding
      
      46,753,200
      
      
      36,753,200
      
      
      41,753,200
      
      
      36,324,867
      
      
      29,487,566


See Notes to Financial Statements

3

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TERRACE VENTURES INC.(AN EXPLORATION STAGE
    COMPANY)STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) 
    (Unaudited)

|                    |  |              |  |   |            |  |   |            |  |   | Deficit     |   |   |                 |  
|------------------- |  | ------------ |  | - | ---------- |  | - | ---------- |  | - | ----------- | - | - | --------------- | -
|                    |  |              |  |   |            |  |   |            |  |   | Accumulated |   |   |                 |  
|                    |  | Common Stock |  |   | Additional |  |   | During the |  |   | Total       |  
|                    |  |              |  |   | Dollar     |  |   | Paid in    |  |   | Exploration |   |   | Stockholders'   |  
|                    |  | Shares       |  |   | Amount     |  |   | Capital    |  |   | Stage       |   |   | Equity(Deficit) |  
|Inception           |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|February 20, 2001   |  | ----         |  | $ | ----       |  | $ | ----       |  | $ | ----        |   | $ | ----            |  
|                    |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|Common Stock Issued |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|$0.001 per share    |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|April 9, 2001       |  | 4,000,000    |  |   | 4,000      |  |   | ----       |  |   | ----        |   |   | 4,000           |  
|                    |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|Net Loss,           |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|April 30, 2001      |  | ----         |  |   | ----       |  |   | ----       |  |   | (1,410      | ) |   | (1,410          | )
|                    |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|Balances            |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|April 30, 2001      |  | 4,000,000    |  |   | 4,000      |  |   | ----       |  |   | (1,410      | ) |   | 2,590           |  
|                    |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|Common Stock Issued |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|$0.01 per share     |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|August 15, 2001     |  | 2,500,000    |  |   | 2,500      |  |   | 22,500     |  |   | ----        |   |   | 25,000          |  
|                    |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|Net Loss,           |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|April 30, 2002      |  | ----         |  |   | ----       |  |   | ----       |  |   | (19,196     | ) |   | (19,196         | )
|                    |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|Balances            |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|April 30, 2002      |  | 6,500,000    |  |   | 6,500      |  |   | 22,500     |  |   | (20,606     | ) |   | 8,394           |  
|                    |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|Common Stock Issued |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|$0.10 per share     |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|September 30, 2002  |  | 142,500      |  |   | 143        |  |   | 14,107     |  |   | ----        |   |   | 14,250          |  
|                    |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|Net Loss,           |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|April 30, 2003      |  | ----         |  |   | ----       |  |   | ----       |  |   | (17,632     | ) |   | (17,632         | )
|                    |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|Balances            |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|April 30, 2003      |  | 6,642,500    |  |   | 6,643      |  |   | 36,607     |  |   | (38,238     | ) |   | 5,012           |  
|                    |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|Common Stock Issued |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|$0.10 per share     |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|November 6, 2003    |  | 400,000      |  |   | 400        |  |   | 39,600     |  |   | ----        |   |   | 40,000          |  
|                    |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|Net Loss,           |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|April 30, 2004      |  | ----         |  |   | ----       |  |   | ----       |  |   | (58,708     | ) |   | (58,708         | )
|                    |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|Balances            |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|April 30, 2004      |  | 7,042,500    |  |   | 7,043      |  |   | 76,207     |  |   | (96,946     | ) |   | (13,696         | )
|                    |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|Net Loss,           |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|April 30, 2005      |  | ----         |  |   | ----       |  |   | ----       |  |   | (37,532     | ) |   | (37,532         | )
|                    |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|Balances            |  |              |  |   |            |  |   |            |  |   |             |   |   |                 |  
|April 30, 2005      |  | 7,042,500    |  |   | 7,043      |  |   | 76,207     |  |   | (134,478    | ) |   | (51,228         | )

See Notes to Financial Statements

4

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TERRACE VENTURES INC.(AN EXPLORATION STAGE
    COMPANY)STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) 
    CONTINUED 
    (Unaudited)

DeficitAccumulatedCommon Stock
      
      
      Additional
      
      
      During the
      
      
      TotalDollar
      
      
      Paid in
      
      
      Exploration
      
      
      Stockholders'Shares
      
      
      Amount
      
      
      Capital
      
      
      Stage
      
      
      Equity (Deficit)Balances, April 30, 2005
      
      7,042,500
      
      
      704
      
      
      82,546
      
      
      (134,478
      )
      
      (51,228
      )Common Stock Issued$1.00 per shareNovember 23,2005
      
      500,000
      
      
      50
      
      
      499,950
      
      
      ----
      
      
      500,0004-for-1 Stock Split,December 19, 2005
      
      22,627,500
      
      
      29,416
      
      
      (29,416
      )
      
      ----
      
      
      ----Common Stock Issued$0.25 per shareFebruary 3, 2006
      
      400,000
      
      
      400
      
      
      99,600
      
      
      ----
      
      
      100,000Common Stock Issued$0.25 per shareMarch 13, 2006
      
      380,000
      
      
      380
      
      
      94,620
      
      
      ----
      
      
      95,000Common Stock Issued$0.25 per shareMarch 31, 2006
      
      999,920
      
      
      1,000
      
      
      248,980
      
      
      ----
      
      
      249,980Net Loss, Period EndedApril 30, 2006
      
      ----
      
      
      ----
      
      
      ----
      
      
      (987,633
      )
      
      (987,633
      )BalancesApril 30, 2006
      
      31,949,920
      
      
      31,950
      
      
      996,280
      
      
      (1,122,111
      )
      
      (93,881
      )Common Stock Issued$0.25 per shareMay 24, 2006
      
      220,080
      
      
      220
      
      
      54,800
      
      
      ----
      
      
      55,020Common Stock Issued$0.30 per shareJune 5, 2006
      
      335,000
      
      
      335
      
      
      100,165
      
      
      ----
      
      
      100,500Common Stock Issued$0.10 per shareJanuary 23, 2007
      
      1,678,200
      
      
      1,678
      
      
      166,142
      
      
      ----
      
      
      167,820Net Loss, Period EndedApril 30, 2007
      
      ----
      
      
      ----
      
      
      ----
      
      
      (301,060
      )
      
      (301,060
      )BalancesApril 30, 2007
      
      34,183,200
      
      
      34,183
      
      
      1,317,387
      
      
      (1,423,171
      )
      
      (71,601
      )


See Notes to Financial Statements

5

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TERRACE VENTURES INC.(AN EXPLORATION STAGE
    COMPANY)STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) - CONTINUED

DeficitAccumulatedCommon Stock
      
      
      Additional
      
      
      During the
      
      
      TotalDollar
      
      
      Paid in
      
      
      Exploration
      
      
      Stockholders'Shares
      
      
      Amount
      
      
      Capital
      
      
      Stage
      
      
      Equity (Deficit)BalancesApril 30, 2007
      
      34,183,200
      
      $
      34,183
      
      $
      1,317,387
      
      $
      (1,423,171
      )
      $
      (71,601
      )Common Stock Issued$0.10 per shareJuly 12, 2007
      
      2,570,000
      
      
      2,570
      
      
      254,755
      
      
      ----
      
      
      257,325Net Loss, Period EndedApril 30, 2008
      
      ----
      
      
      ----
      
      
      ----
      
      
      (100,450
      )
      
      (100,450
      )BalancesApril 30, 2008
      
      36,753,200
      
      $
      36,753
      
      $
      1,572,142
      
      $
      (1,523,621
      )
      $
      85,274Common Stock Issued$0.10 per shareOctober 10, 2008
      
      10,000,000
      
      
      10,000
      
      
      190,000
      
      
      ----
      
      
      200,000Net Loss, Period EndedJanuary 31, 2009
      
      ----
      
      
      ----
      
      
      ----
      
      
      (72,691
      )
      
      (72,691
      )BalancesJanuary 31, 2009
      
      46,753,200
      
      $
      46,753
      
      $
      1,762,142
      
      $
      (1,596,312
      )
      $
      212,583


See Notes to Financial Statements.

6

---

TERRACE VENTURES INC.(AN EXPLORATION STAGE
    COMPANY) 
    STATEMENT OF CASH FLOWS(Unaudited)

|                                    |   | NINE MONTHS ENDED |   |   |              |  
|----------------------------------- | - | ----------------- | - | - | ------------ | -
|                                    |   | JANUARY  31,      |   |   | INCEPTION to |  
|                                    |   | 2009              |   |   | 2008         |  
|                                    |   |                   |   |   |              |  
|Cash Flows from                     |   |                   |   |   |              |  
|Operating Activities:               |   |                   |   |   |              |  
|                                    |   |                   |   |   |              |  
|Net Loss                            | $ | (309,582          | ) | $ | (84,050      | )
|                                    |   |                   |   |   |              |  
|Adjustments to Reconcile Net        |   |                   |   |   |              |  
|Income to Net Cash Provided/(Used)  |   |                   |   |   |              |  
|by Operating Activities:            |   |                   |   |   |              |  
|Unrealized
      Loss on Investment |   | -0-               |   |   | -0-          |  
|(Increase)/Decrease in:             |   |                   |   |   |              |  
|Trust Account Receivable            |   | 13,775            |   |   | (2,450       | )
|Notes Receivable                    |   | 214,892           |   |   | (190,947     | )
|Increase(Decrease)
      in:        |   |                   |   |   |              |  
|Accounts Payable                    |   | (24,063           | ) |   | 30,497       |  
|                                    |   |                   |   |   |              |  
|Net Cash Provided/(Used)            |   |                   |   |   |              |  
|by Operating Activities             |   | (104,978          | ) |   | (246,950     | )
|                                    |   |                   |   |   |              |  
|Cash Flows from                     |   |                   |   |   |              |  
|Investing Activities:               |   |                   |   |   |              |  
|                                    |   |                   |   |   |              |  
|Stock Investment                    |   | -0-               |   |   | -0-          |  
|                                    |   |                   |   |   |              |  
|Net Cash Used                       |   |                   |   |   |              |  
|by Investing Activities             |   | -0-               |   |   | -0-          |  
|                                    |   |                   |   |   |              |  
|Cash Flows from                     |   |                   |   |   |              |  
|Financing Activities:               |   |                   |   |   |              |  
|                                    |   |                   |   |   |              |  
|Loans from Shareholders             |   | 41,000            |   |   | 15,000       |  
|Payments on Loans                   |   | (140,600          | ) |   | (11,295      | )
|Proceeds Related to                 |   |                   |   |   |              |  
|Issuance of
      Common Stock      |   | 205,000           |   |   | 151,000      |  
|                                    |   |                   |   |   |              |  
|Net Cash
      Provided by          |   |                   |   |   |              |  
|Financing Activities                |   | 105,400           |   |   | 154,705      |  
|                                    |   |                   |   |   |              |  
|                                    |   |                   |   |   |              |  
|Net Increase (Decrease) in Cash     | $ | 422               |   | $ | (92,245      | )
|                                    |   |                   |   |   |              |  
|Cash at Beginning of Period         |   | 100               |   |   | 92,275       |  
|                                    |   |                   |   |   |              |  
|Cash at End of Period               | $ | 522               |   | $ | 30           |  

See Notes to Financial Statements

7

---

TERRACE VENTURES INC.(AN EXPLORATION STAGE
    COMPANY) 
    NOTES TO FINANCIAL STATEMENTS(Unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

Terrace Ventures Inc. was incorporated on February 20, 2001 in
  the state of Nevada. The Company acquires and develops certain mineral rights in
  Canada.

Basis of Presentation

The Company reports revenue and expenses using the accrual
  method of accounting for financial and tax reporting purposes.

Use of Estimates

Management uses estimates and assumptions in preparing these
  financial statements in accordance with generally accepted accounting
  principles. Those estimates and assumptions affect the reported amounts of
  assets and liabilities, the disclosure of contingent assets and liabilities, and
  the reported revenues and expenses.

Exploration Stage Company

The Company has been in the exploration stage since its
  formation and has not yet realized any revenues from its planned operations. The
  Company is primarily engaged in the acquisition and exploration of mining
  properties. Upon the location of commercially minable reserves, the Company
  plans to prepare for mineral extraction and enter the development stage.

Pro Forma Compensation Expense

The Company accounts for options and restricted stock granted
  to employees and directors in accordance with the fair value method of SFAS No.
  123, Accounting for Stock-Based Compensation (SFAS No. 123), as amended
  by SFAS No. 148, Accounting for Stock-Based Compensation Transition and
    Disclosure an amendment of FASB Statement No. 123 and related
  interpretations. As such, compensation expense is recorded on stock option and
  restricted stock grants based on the fair value of the options or restricted
  stock granted, which is estimated on the date of grant using the Black-Scholes
  option-pricing model for stock options granted, and is recognized on a
  straight-line basis over the vesting period.

8

---

TERRACE VENTURES INC. 
  (AN EXPLORATION STAGE COMPANY) 
  NOTES TO FINANCIAL STATEMENTS (CONTINUED) 
  (Unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
  CONTINUED

Mineral Property Acquisition and Exploration Costs

The Company expenses all costs related to the acquisition and
  exploration of mineral properties in which it has secured exploration rights
  prior to establishment of proven and probable reserves. To date, the Company has
  not established the commercial feasibility of any exploration prospects,
  therefore, all costs are being expensed.

Depreciation, Amortization and Capitalization

The Company records depreciation and amortization when
  appropriate using both straight-line and declining balance methods over the
  estimated useful life of the assets (five to seven years). Expenditures for
  maintenance and repairs are charged to expense as incurred. Additions, major
  renewals and replacements that increase the property's useful life are
  capitalized. Property sold or retired, together with the related accumulated
  depreciation, is removed from the appropriate accounts and the resultant gain or
  loss is included in net income.

Income Taxes

The Company accounts for its income taxes in accordance with
  Statement of Financial Accounting Standards No. 109, "Accounting for Income
  Taxes". Under Statement 109, a liability method is used whereby deferred tax
  assets and liabilities are determined based on temporary differences between
  basis used for financial reporting and income tax reporting purposes. Income
  taxes are provided based on tax rates in effect at the time such temporary
  differences are expected to reverse. A valuation allowance is provided for
  certain deferred tax assets if it is more likely than not, that the Company will
  not realize the tax assets through future operations.

Fair Value of Financial Instruments

Financial accounting Standards Statement No. 107, "Disclosures
  About Fair Value of Financial Instruments", requires the Company to disclose,
  when reasonably attainable, the fair market values of its assets and liabilities
  which are deemed to be financial instruments. The Company's financial
  instruments consist primarily of cash and certain investments.

9

---

TERRACE VENTURES INC. 
  (AN EXPLORATION STAGE COMPANY) 
  NOTES TO FINANCIAL STATEMENTS (CONTINUED) 
  (Unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
  CONTINUED

Investments

Investments that are purchased in other companies are valued at
  cost less any impairment in the value that is other than temporary in nature.

Per Share Information

The Company computes per share information by dividing the net
  loss for the period presented by the weighted average number of shares
  outstanding during such period.

NOTE 2 - PROVISION FOR INCOME TAXES

The provision for income taxes for the periods ended January
  31, 2009 and January 31, 2008 represents the minimum state income tax expense of
  the Company, which is not considered significant.

NOTE 3 - COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company currently rents administrative office space under a
  monthly renewable contract.

Litigation

The Company is not presently involved in any litigation.

NOTE 4 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Recently issued accounting pronouncements will have no
  significant impact on the Company and its reporting methods.

NOTE 5  GOING CONCERN

Future issuances of the Companys equity or debt securities
  will be required in order for the Company to continue to finance its operations
  and continue as a going concern. The Companys present revenues are insufficient
  to meet operating expenses.

10

---

TERRACE VENTURES INC. 
  (AN EXPLORATION STAGE COMPANY) 
  NOTES TO FINANCIAL STATEMENTS (CONTINUED) 
  (Unaudited)

NOTE 5  GOING CONCERN - CONTINUED

The consolidated financial statements of the Company have been
  prepared assuming that the Company will continue as a going concern, which
  contemplates, among other things, the realization of assets and the satisfaction
  of liabilities in the normal course of business. The Company has incurred
  cumulative net losses of $1,833,203 since its inception and requires capital for
  its contemplated operational and marketing activities to take place. The
  Company's ability to raise additional capital through the future issuances of
  common stock is unknown. The obtainment of additional financing, the successful
  development of the Company's contemplated plan of operations, and its
  transition, ultimately, to the attainment of profitable operations are necessary
  for the Company to continue operations. The ability to successfully resolve
  these factors raise substantial doubt about the Company's ability to continue as
  a going concern. The consolidated financial statements of the Company do not
  include any adjustments that may result from the outcome of these aforementioned
  uncertainties.

NOTE 6  MERGER AGREEMENT/STOCK ISSUANCES

On February 28, 2007, the Company entered into a letter of
  intent with Solara Technologies, Inc. (Solara), a private British Columbia
  company engaged in the development of both hardware and software for the self
  service vending industry. Under the terms of the letter of intent the closing of
  the merger was subject to a number of conditions, including delivery of all
  financial statements of Solara required under applicable securities rules, the
  Company providing Solara with a loan of $200,000 (the Solara Loan) prior to
  closing of the merger, the parties entering into a formal agreement outlining
  the terms of the merger no later than March 15, 2007, and each of the parties
  satisfactorily completing their respective due diligence review.

On March 7, 2007, the Company approved a private placement of
  up to 5,000,000 shares of the Companys common stock at a price of $0.10 per
  share to fund the Solara Loan and for working capital purposes. This offering
  was made to non-US investors pursuant to Regulation S of the United States
  Securities Act of 1933. As of April 30, 2007, $145,925 representing advances on
  1,460,000 shares was received and is reflected in the financial statements as
  Common Stock Payable. Subsequent to April 30, 2007, an additional $111,400 was
  received, for a total stock liability of 2,570,000 shares, all of which were
  issued on July 12, 2007 for a total contribution of $257,325.

11

---

TERRACE VENTURES INC. 
  (AN EXPLORATION STAGE COMPANY) 
  NOTES TO FINANCIAL STATEMENTS (CONTINUED) 
  (Unaudited)

NOTE 6  MERGER AGREEMENT/STOCK ISSUANCES - CONTINUED

On August 10, 2007 the Companys board of directors determined
  not to proceed with the proposed merger with Solara based on the results of its
  review of the due diligence materials provided by Solara to the Company. As a
  result of this, the Company has requested that Solara repay all monies advanced
  to Solara by the Company. Management believes that advances made in accordance
  with this loan agreement are still recoverable.

As of October 31, 2008, a total of $200,000 was loaned to
  Solara, and is reflected in the financial statements, along with accrued
  interest receivable in the amount of $22,958, as Notes Receivable.

On February 13, 2008, the Companys Board of Directors approved
  an offering to be completed pursuant to the provisions of Regulation S of the
  Securities Act of up to 10,000,000 Units, with each Unit consisting of one share
  of common stock of the Company and one share purchase warrant. Each warrant will
  be exercisable at a price of $0.03 per share for a period up to two years from
  closing. On September 22, 2008, the Company completed this private placement of
  10,000,000 Units, for total proceeds of $200,000.

On July 9, 2008, the Company entered into an interim agreement
  with Pyro Pharmaceuticals, Inc. (Pyro), a privately held Delaware corporation
  engaged in the business of developing therapeutics against multi-drug resistant
  infectious microorganisms.

Under the terms of the Interim Agreement, the Company and Pyro
  agreed to complete a business combination of the two companies such that
  following completion of the business combination the shareholders of Pyro,
  immediately prior to the business combination, would own 60% of the issued and
  outstanding shares of the Company and the shareholders of Company, immediately
  prior to the business combination and after giving effect to a proposed $2.5
  million private placement referred to below, would hold 40% of the Company. In
  addition, the Company agreed to pay the reasonable legal and accounting costs of
  Pyro in connection with the preparation and closing of a definitive agreement.
  Upon execution of the Interim Agreement, the Company advanced an initial $10,000
  to Pyro for the above noted legal and accounting costs.

12

---

TERRACE VENTURES INC. 
  (AN EXPLORATION STAGE COMPANY) 
  NOTES TO FINANCIAL STATEMENTS (CONTINUED) 
  (Unaudited)

NOTE 6  MERGER AGREEMENT/STOCK ISSUANCES  CONTINUED

The closing of the business combination was subject to a number
  of conditions, including, among other conditions: (i) the Company completing a
  private placement of 25,000,000 units for total proceeds of $2,500,000; (ii)
  delivery of all financial statements of Pyro required under applicable
  securities rules; (iii) each party satisfactorily completing its due diligence
  review of Pyro; and (iv) the approval of the shareholders of Pyro. Under the
  terms of the Interim Agreement, the parties were required to enter into a formal
  agreement no later than December 31, 2008.

On July 15, 2008, the Companys Board of Directors approved a
  private placement offering of up to 12,500,000 units at a price of $0.10 per
  Unit, with each Unit consisting of one share of the Companys common stock and
  one share purchase warrant. Each whole warrant entitled the holder to purchase
  an additional share of common stock exercisable for a period of 12 months at a
  price of $0.15 per share. The offering was to be made in the United States to
  persons who are accredited investors as defined in Regulation D of the
  Securities Act of 1933.

The Companys Board of Directors also approved a concurrent
  private placement offering of up to 12,500,000 Units to persons who are not
  U.S. Persons as defined in Regulation S of the Securities Act of 1933. The
  Units would be identical to those to be offered under the U.S. Private Placement
  as described above.

The proceeds of the U.S. Private Placement and the Foreign
  Private Placement offerings were to be used to meet the closing conditions of
  the proposed business combination between the Company and Pyro. The Company was
  unable to raise the required financing as of December 31, 2008 and as a result,
  was unable to complete the business combination with Pyro. In addition, the
  Companys Board of Directors rescinded these proposed private placement
  offerings.

13

---

TERRACE VENTURES INC.(AN EXPLORATION STAGE
    COMPANY) 
    NOTES TO FINANCIAL STATEMENTS (CONTINUED) 
    (Unaudited)

NOTE 6  MERGER AGREEMENT/STOCK ISSUANCES  CONTINUED

On January 22, 2009, the Companys Board of Directors approved
  a private placement offering of up to 7,500,000 Units at a price of $0.02 per
  Unit, with each Unit consisting of one share of the Companys common stock and
  one share purchase warrant. Each whole warrant entitles the holder to purchase
  an additional share of common stock exercisable for a period of two years at a
  price of $0.03 per share. The offering is to be made to persons who are not
  U.S. Persons as defined in Regulation S of the Securities Act of 1933.

As of January 31, 2009, a total of $5,000 was received as an
  advance on the purchase of 250,000 Units under this private placement, and is
  reflected in the financial statements as Stock Subscriptions Received.

NOTE 7  STOCK OPTIONS

On March 21, 2006, the Company entered into a stock option
  agreement with a director of the Company. The options provided for the purchase
  of 200,000 shares of Company common stock at $0.27 per share. Compensation cost
  for stock options is measured as the excess, if any, of the estimated fair
  market value of the Companys stock at the date of grant over the amount the
  recipient must pay to acquire the stock. At the date of grant, fair market value
  approximated the strike price. The options expired on March 21, 2008.

14

---













SUPPLEMENTAL STATEMENT

---

TERRACE VENTURES INC.(AN EXPLORATION STAGE
    COMPANY) 
    STATEMENTS OF OPERATING EXPENSES(Unaudited)

THREE MONTHS ENDED
      
      
      NINE MONTHS ENDEDJANUARY 31,
      
      
      JANUARY 31,
      
      
      INCEPTION to2009
      
      
      2008
      
      
      2009
      
      
      2008
      
      
      JANUARY 31, 2009Operating Expenses:Accounting & Audit
      $
      4,080
      
      $
      3,840
      
      $
      20,040
      
      $
      26,640
      
      $
      102,700Bad Debts
      
      214,892
      
      
      -0-
      
      
      214,892
      
      
      -0-
      
      
      214,892Bank Charges
      
      20
      
      
      43
      
      
      76
      
      
      90
      
      
      419Consulting
      
      -0-
      
      
      -0-
      
      
      -0-
      
      
      5,900
      
      
      114,150Exploration and Development
      
      -0-
      
      
      -0-
      
      
      -0-
      
      
      -0-
      
      
      24,266Legal
      
      15,607
      
      
      4,308
      
      
      44,987
      
      
      33,044
      
      
      194,673Office Administration
      
      7,500
      
      
      7,500
      
      
      22,500
      
      
      22,500
      
      
      107,100Office Expenses
      
      43
      
      
      -0-
      
      
      290
      
      
      250
      
      
      4,221Regulatory Expenses/Fees
      
      661
      
      
      747
      
      
      2,614
      
      
      1,966
      
      
      24,679Rent
      
      750
      
      
      750
      
      
      2,250
      
      
      2,250
      
      
      22,200Telephone
      
      652
      
      
      302
      
      
      1,245
      
      
      2,117
      
      
      4,706Travel & Entertainment
      
      -0-
      
      
      240
      
      
      688
      
      
      240
      
      
      4,708Total Operating Expenses
      $
      244,205
      
      $
      17,730
      
      $
      309,582
      
      $
      94,997
      
      $
      818,714


See Notes to Financial Statements

16

---

ITEM
2.           MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Cautionary Statement Regarding Forward-Looking Statements

Certain statements contained in this Quarterly Report
constitute "forward-looking statements. These statements, identified by words
such as plan, "anticipate," "believe," "estimate," "should," "expect" and
similar expressions include our expectations and objectives regarding our future
financial position, operating results and business strategy. These statements
reflect the current views of management with respect to future events and are
subject to risks, uncertainties and other factors that may cause our actual
results, performance or achievements, or industry results, to be materially
different from those described in the forward-looking statements. Such risks and
uncertainties include those set forth under the caption "Part II  Item 1A. Risk
Factors" and elsewhere in this Quarterly Report. We do not intend to update the
forward-looking information to reflect actual results or changes in the factors
affecting such forward-looking information. We advise you to carefully review
the reports and documents, particularly our Annual Reports, Quarterly Reports
and Current Reports, that we file from time to time with the United States
Securities and Exchange Commission (the SEC).

OVERVIEW

We were incorporated on February 20, 2001 under the laws of the
State of Nevada.

We do not have a business. We are currently seeking out and
evaluating alternative business opportunities. Our ability to seek out and
acquire an alternative business opportunity is subject to our obtaining
additional financing, of which there is no assurance.

RECENT CORPORATE DEVELOPMENTS

The following corporate developments occurred since our fiscal
quarter ended October 31, 2008:

|1. | On January 22, 2009, our Board of Directors approved a
      private placement offering of up to 7,500,000 units (the Units) at a
      price of $0.02 US per Unit, with each Unit consisting of one share of our
      common stock and one share purchase warrant. Each share purchase warrant
      entitles the holder to purchase an additional share of common stock
      exercisable for a period of two years at a price of $0.03 US per share.
      The private placement offering will be made to persons who are not U.S.
      Persons as defined in Regulation S. The proceeds of the private placement
      offering will be used to retire corporate indebtedness and for general
      corporate purposes. There is no assurance that the private placement
      offering or any part of it will be completed.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|2. | Due to current economic conditions, we were unable to
      raise the required financing by December 31, 2008 as required under the
      terms of the Interim Agreement dated July 2, 2008, and September 26, 2008,
      between the Company and Pyro Pharmaceuticals, Inc. (Pyro). As a result,
      we were unable to complete the business combination with Pyro and are now
      seeking other business opportunities.                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|3. | We wrote-off our notes receivable of $214,892 due to the
      substantial doubt of our ability to collect the loan. The notes receivable
      consisted of a loan of $200,000 to Solara Technologies, Inc. plus accrued
      interest at a rate of 8% per annum.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

3

---

PLAN OF OPERATION

Our plan of operation is to evaluate and seek out business
opportunities. As a result, we are unable to provide an estimate of our exact
financial needs for the next twelve months. As at January 31, 2009, we had cash
in the amount of $522. As such, we will require substantial financing in the
near future to meet our current obligations and to continue our operations. In
the event that we are successful in identifying a suitable business opportunity,
we anticipate that our financing needs will increase significantly.

RESULTS OF OPERATIONS

Three Months and Nine Months Summary

Three
        Months Ended
      
      
      Percentage
      
      
      Nine
        Months Ended
      
      
      PercentageJanuary
        31,
      
      
      Increase /
      
      
      January
        31,
      
      
      Increase /2009
      
      
      2008
      
      
      (Decrease)
      
      
      2009
      
      
      2008
      
      
      (Decrease)Revenue
      $
      -
      
      $
      -
      
      
      n/a
      
      $
      -
      
      $
      -
      
      
      n/aExpenses
      
      (244,205
      )
      
      (17,730
      )
      
      1,277.3%
      
      
      (309,582
      )
      
      (94,997
      )
      
      225.9%Other
      
      -
      
      
      4,033
      
      
      (100%)
      
      
      -
      
      
      10,947
      
      
      (100%)IncomeNet Loss
      $
      (244,205
      )
      $
      (13,697
      )
      
      1,682.9%
      
      $
      (309,582
      )
      $
      (84,050
      )
      
      268.3%


Revenues

We have not earned any revenues since our inception and we do
not anticipate earning revenues in the near future. We are an exploration stage
company and are presently seeking other business opportunities.

Expenses

The major components of our expenses for the three and nine
months ended January 31, 2009 and 2008 are outlined in the table below:

Three
        Months Ended
      
      
      Percentage
      
      
      Nine
        Months Ended
      
      
      PercentageJanuary
        31,
      
      
      Increase /
      
      
      January
        31,
      
      
      Increase /2009
      
      
      2008
      
      
      (Decrease)
      
      
      2009
      
      
      2008
      
      
      (Decrease)Accounting & Audit
      $
      4,080
      
      $
      3,840
      
      
      6.3%
      
      $
      20,040
      
      $
      26,640
      
      
      (24.8)%Bad Debts
      
      214,892
      
      
      -
      
      
      n/a
      
      
      214,892
      
      
      -
      
      
      n/aBank Charges
      
      20
      
      
      43
      
      
      (53.5)%
      
      
      76
      
      
      90
      
      
      (15.6)%Consulting
      
      -
      
      
      -
      
      
      n/a
      
      
      -
      
      
      5,900
      
      
      (100)%Legal
      
      15,607
      
      
      4,308
      
      
      262.3%
      
      
      44,987
      
      
      33,044
      
      
      36.1%Office
      
      7,500
      
      
      7,500
      
      
      n/a
      
      
      22,500
      
      
      22,500
      
      
      n/aAdministrationOffice Expenses
      
      43
      
      
      -
      
      
      n/a
      
      
      290
      
      
      250
      
      
      16.0%Regulatory
      
      661
      
      
      747
      
      
      (11.5)%
      
      
      2,614
      
      
      1,966
      
      
      33.0%Expenses/FeesRent
      
      750
      
      
      750
      
      
      n/a
      
      
      2,250
      
      
      2,250
      
      
      n/aTelephone
      
      652
      
      
      302
      
      
      115.9%
      
      
      1,245
      
      
      2,117
      
      
      (41.2)%Travel &
      
      -
      
      
      240
      
      
      (100)%
      
      
      688
      
      
      240
      
      
      186.7%EntertainmentTotal Expenses
      $
      244,205
      
      $
      17,730
      
      
      1,277.3%
      
      $
      309,582
      
      $
      94,997
      
      
      225.9%


4

---

During the three and nine months ended January 31, 2009, our
operating expenses primarily consisted of accounting expenses, legal expenses,
bad debts expenses and office administration expenses.

Expenses incurred for accounting and legal are in connection
with meeting our ongoing reporting obligations under the Exchange Act.

Bad debts expenses are in connection with the write-off of
notes receivable of $214,892. The notes receivable consisted of a loan of
$200,000 to Solara Technologies, Inc. plus accrued accrued interest at a rate of
8% per annum.

Office administration expenses consist of amounts incurred to
our sole executive officer and director for his management consulting services.

LIQUIDITY AND CAPITAL RESOURCES

|Working Capital                         |   |                           |   |   |                         |   |  |                       | 
|--------------------------------------- | - | ------------------------- | - | - | ----------------------- | - |  | --------------------- | 
|                                        |   |                           |   |   |                         |   |  | Percentage            | 
|                                        |   | At
      January 31, 2009 |   |   | At
      April 30, 2008 |   |  | Increase / (Decrease) | 
|Current Assets                          | $ | 5,022                     |   | $ | 228,767                 |   |  | (97.8)%               | 
|Current Liabilities                     |   | (29,330                   | ) |   | (143,493                | ) |  | (79.6)%               | 
|Working Capital Surplus
      (Deficit) | $ | (24,308                   | ) | $ | 85,784                  |   |  | (128.3)%              | 

|Cash Flows                                    |   |                   |   |   |                  |  
|--------------------------------------------- | - | ----------------- | - | - | ---------------- | -
|                                              |   | Nine Months Ended |  
|                                              |   | January 31, 2009  |   |   | January 31, 2008 |  
|Net Cash Used by Operating Activities         | $ | (104,978          | ) | $ | (246,950         | )
|Net Cash From Investing Activities            |   | -                 |   |   | -                |  
|Net Cash Provided By Financing Activities     |   | 105,400           |   |   | 154,705          |  
|Net Increase (Decrease) in Cash During Period | $ | (422              | ) | $ | (92,245          | )

We had cash on hand of $522 and a working capital deficit of
$24,308 as of January 31, 2009 compared to a working capital surplus of $85,274
as of April 30, 2008. The decrease in our working capital is due to the fact
that we wrote-off a notes receivable of $214,892 during the quarter ended
January 31, 2009. During the nine months ended January 31, 2009, we completed
the sale of 10,000,000 units at a price of $0.02 per unit for gross proceeds of
$200,000.

Financing Requirements

Currently, we do not have sufficient financial resources to
acquire an alternative business opportunity. As such, our ability to complete
our plan of operation is dependent upon our ability to obtain additional
financing in the near term.

On January 22, 2009, our Board of Directors has approved a
private placement offering of up to 7,500,000 Units at a price of $0.02 US per
Unit, with each Unit consisting of one share of our common stock and one share
purchase warrant. Each share purchase warrant entitles the holder to purchase an
additional share of common stock exercisable for a period of two years at a
price of $0.03 US per share. The private placement offering will be made to
persons who are not U.S. Persons as defined in Regulation S. The proceeds of
the private placement offering will be used to retire corporate

5

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indebtedness and for general corporate purposes. There is no
assurance that the private placement offering or any part of it will be
completed.

We anticipate continuing to rely on equity sales of our common
shares in order to continue to fund our business operations. Issuances of
additional shares will result in dilution to our existing shareholders. There is
no assurance that we will achieve any additional sales of our equity securities
or arrange for debt or other financing to fund our business operations.

OFF-BALANCE SHEET ARRANGEMENTS

We have no significant off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to stockholders.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with
United States generally accepted accounting principles requires our management
to make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent 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.
Our management routinely makes judgments and estimates about the effects of
matters that are inherently uncertain.

Our significant accounting policies are disclosed in Note 1 to
the interim financial statements included in this Quarterly Report.

ITEM
3.           QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.

ITEM 4T.        CONTROLS
AND PROCEDURES.

Disclosure Controls and Procedures

We carried out an evaluation of the effectiveness of our
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) as of January 31, 2009 (the Evaluation Date). This evaluation
was carried out under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer. Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were not effective as of the Evaluation Date
as a result of the material weaknesses in internal control over financial
reporting discussed below.

Disclosure controls and procedures are those controls and
procedures that are designed to ensure that information required to be disclosed
in our reports filed or submitted under the Exchange Act are recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed in our reports filed under the Exchange

6

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Act is accumulated and communicated to management, including
our Chief Executive Officer and Chief Financial Officer, to allow timely
decisions regarding required disclosure.

Notwithstanding the assessment that our internal control over
financial reporting was not effective and that there were material weaknesses as
identified in this report, we believe that our financial statements contained in
our Quarterly Report on Form 10-Q for the quarter ended January 31, 2009 fairly
present our financial condition, results of operations and cash flows in all
material respects.

Material Weaknesses

Management assessed the effectiveness of our internal control
over financial reporting as of Evaluation Date and identified the following
material weaknesses:

Insufficient Resources:We have an inadequate number of
personnel with requisite expertise in the key functional areas of finance and
accounting.

Inadequate Segregation of Duties: We have an inadequate
number of personnel to properly implement control procedures.

Lack of Audit Committee & Outside Directors on the
Companys Board of Directors:We do not have a functioning audit committee
and outside directors on our Board of Directors, resulting in ineffective
oversight in the establishment and monitoring of required internal controls and
procedures.

Changes in Internal Control Over Financial Reporting

As of the Evaluation Date, there were no changes in our
internal control over financial reporting that occurred during the quarter ended
January 31, 2009 that have materially affected, or that are reasonably likely to
materially affect, our internal control over financial reporting.

7

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PART II - OTHER INFORMATION

ITEM
1.           LEGAL
PROCEEDINGS.

We are not a party to any other legal proceedings and, to our
knowledge, no other legal proceedings are pending, threatened or
contemplated.

ITEM 1A.        RISK
FACTORS.

The following are some of the important factors that could
affect our financial performance or could cause actual results to differ
materially from estimates contained in our forward-looking statements. We may
encounter risks in addition to those described below. Additional risks and
uncertainties not currently known to us, or that we currently deem to be
immaterial, may also impair or adversely affect our business, financial
condition or results of operation.

If we do not obtain additional financing, our business will
fail.

As at January 31, 2009, we had cash in the amount of $522.
Currently, we do not have a specific business plan, nor have we identified any
suitable alternative business opportunities. As such, our ability to obtain
additional financing may be substantially limited. If sufficient financing is
not available or obtainable, we may not be able to continue as a going concern
and investors may lose a substantial portion or all of their investment.

On January 22, 2009, our Board of Directors has approved a
private placement offering of up to 7,500,000 Units at a price of $0.02 US per
Unit, with each Unit consisting of one share of our common stock and one share
purchase warrant. Each share purchase warrant entitles the holder to purchase an
additional share of common stock exercisable for a period of two years at a
price of $0.03 US per share. The private placement offering will be made to
persons who are not U.S. Persons as defined in Regulation S. The proceeds of
the private placement offering will be used to retire corporate indebtedness and
for general corporate purposes. There is no assurance that the private placement
offering or any part of it will be completed

We have yet to attain profitable operations and because we
will need additional financing to continue our business operations, our
accountants believe that there is substantial doubt about our ability to
continue as a going concern.

We have incurred a net loss of $1,833,203 for the period from
February 20, 2001 (inception) to January 31, 2009 and have no revenues to date.
Our future is dependent upon our ability to obtain suitable business opportunity
and obtain substantial financing in order to meet our current obligations and to
continue our operations. These factors raise substantial doubt that we will be
able to continue as a going concern.

We may conduct further offerings in the future in which case
investors shareholdings will be diluted.

Since our inception, we have relied on equity sales of our
common stock to fund our operations. We may conduct additional equity offerings
in the future to finance any future business projects that we decide to
undertake. If common stock is issued in return for additional funds, the price
per share could be lower than that paid by our current stockholders. We
anticipate continuing to rely on equity sales of our common stock in order to
fund our business operations. If we issue additional stock, investors
percentage interest in us will be diluted. The result of this could reduce the
value of their stock.

8

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Because our stock is a penny stock, stockholders will be
more limited in their ability to sell their stock.

The shares of our common stock constitute penny stocks under
the Exchange Act. The shares will remain classified as a penny stock for the
foreseeable future. The classification as a penny stock makes it more difficult
for a broker/dealer to sell the stock into a secondary market, which makes it
more difficult for a purchaser to liquidate his or her investment. Any
broker/dealer engaged by the purchaser for the purpose of selling his or her
shares will be subject to rules 15g-1 through 15g-10 of the Exchange Act. Rather
than having to comply with these rules, some broker-dealers will refuse to
attempt to sell a penny stock.

The "penny stock" rules adopted by the SEC under the Exchange
Act subjects the sale of the shares of our common stock to certain regulations
which impose sales practice requirements on broker/dealers. For example,
brokers/dealers selling such securities must, prior to effecting the
transaction, provide their customers with a document that discloses the risks of
investing in such securities.

Legal remedies, which may be available to an investor in "penny
stocks, are as follows:

|(a) | if "penny stock" is sold to an investor in violation of
      his or her rights listed above, or other federal or states securities
      laws, the investor may be able to cancel his or her purchase and get his
      or her money back.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                            
|(b) | if the stocks are sold in a fraudulent manner, the
      investor may be able to sue the persons and firms that caused the fraud
      for damages.                                                                                        
|    |                                                                                                                                                                                                                                            
|(c) | if the investor has signed an arbitration agreement,
      however, he or she may have to pursue his or her claim through
      arbitration.                                                                                               

If the person purchasing the securities is someone other than
an accredited investor or an established customer of the broker/dealer, the
broker/dealer must also approve the potential customer's account by obtaining
information concerning the customer's financial situation, investment experience
and investment objectives. The broker/dealer must also make a determination
whether the transaction is suitable for the customer and whether the customer
has sufficient knowledge and experience in financial matters to be reasonably
expected to be capable of evaluating the risk of transactions in such
securities. Accordingly, the SEC's rules may limit the number of potential
purchasers of the shares of our common stock.

ITEM
2.           UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM
3.           DEFAULTS UPON
SENIOR SECURITIES.

None.

ITEM
4.           SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to our security holders during our
fiscal quarter ended January 31, 2009.

9

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ITEM
5.           OTHER
INFORMATION.

None.

ITEM
6.           EXHIBITS.

|Exhibit |                                                                                                                                                                                                                   
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number  | Description of Exhibit                                                                                                                                                                                            
|        |                                                                                                                                                                                                                   
|3.1     | Articles of
        Incorporation.(1)                                                                                                                                                                             
|        |                                                                                                                                                                                                                   
|3.2     | Certificate
        of Change to Authorized Capital effective December 19, 2005.(2)                                                                                                                               
|        |                                                                                                                                                                                                                   
|3.3     | Bylaws.(1)                                                                                                                                                                                                        
|        |                                                                                                                                                                                                                   
|10.1    | Mineral Claim
        Purchase Agreement dated August 15, 2001 between the Company and Don Archibald.(1)                                                                                                          
|        |                                                                                                                                                                                                                   
|10.2    | 2006 Stock Incentive
        Plan.(4)                                                                                                                                                                             
|        |                                                                                                                                                                                                                   
|10.3    | Stock Option
        Agreement between the Company and Howard Thomson dated March 31, 2006.(4)                                                                                                                    
|        |                                                                                                                                                                                                                   
|10.4    | Management Consulting
        Agreement dated March 21, 2006 between the Company and Howard Thomson.(4)                                                                                                           
|        |                                                                                                                                                                                                                   
|10.5    | Management Consulting
        Agreement with Ian Brodie.(5)                                                                                                                                                       
|        |                                                                                                                                                                                                                   
|10.6    | Management Consulting
        Agreement with Frank Anderson.(5)                                                                                                                                                   
|        |                                                                                                                                                                                                                   
|10.7    | Letter of Intent
        dated February 28, 2007 between the Company and Dorn Beattie.(6)                                                                                                                         
|        |                                                                                                                                                                                                                   
|10.8    | Loan Agreement
        dated May 18, 2007 between the Company and Solara Technologies Inc.(7)                                                                                                                     
|        |                                                                                                                                                                                                                   
|10.9    | Interim Agreement
        dated July 9, 2008 between the Company and Pyro Pharmaceuticals, Inc.(8)                                                                                                                
|        |                                                                                                                                                                                                                   
|10.10   | Amendment Agreement
        dated September 26, 2008 to the Interim Agreement dated July 9, 2008 between
        the Company and Pyro Pharmaceuticals, Inc.(9)                                                    
|        |                                                                                                                                                                                                                   
|14.1    | Code of Ethics.(3)                                                                                                                                                                                                
|        |                                                                                                                                                                                                                   
|31.1    | Certification
        of Chief Executive Officer and Chief Financial Officer pursuant to Section
        302 of the Sarbanes-Oxley Act of 2002.                                                                   
|        |                                                                                                                                                                                                                   
|32.1    | Certification
        of Chief Executive Officer and Chief Financial Officer pursuant to pursuant
        to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
        Act of 2002.

|**Notes:** |                                                                                                                         
|---------- | ------------------------------------------------------------------------------------------------------------------------
|(1)        | Filed with the SEC as an exhibit to our Registration
      Statement on Form 10-SB originally filed on February 2, 2004.
|(2)        | Filed with the SEC as an exhibit to our Current Report on
      Form 8-K filed on December 27, 2005.                    
|(3)        | Filed with the SEC as an exhibit to our Annual Report on
      Form 10-KSB filed on September 8, 2004.                  
|(4)        | Filed with the SEC as an exhibit to our Quarterly Report
      on Form 10-QSB filed on March 22, 2006.                  
|(5)        | Filed with the SEC as an exhibit to our Current Report on
      Form 8-K filed on October 11, 2006.                     
|(6)        | Filed with the SEC as an exhibit to our Current Report on
      Form 8-K filed on March 7, 2007.                        
|(7)        | Filed with the SEC as an exhibit to our Current Report on
      Form 8-K filed on May 24, 2007.                         
|(8)        | Filed with the SEC as an exhibit to our Current Report on
      Form 8-K filed on July 15, 2008.                        
|(9)        | Filed with the SEC as an exhibit to our Current Report on
      Form 8-K filed on October 2, 2008.                      
|           |                                                                                                                         

10

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|      |                      |  |     | TERRACE VENTURES INC.                                    
|----- | -------------------- |  | --- | ---------------------------------------------------------
|      |                      |  |     |                                                          
|      |                      |  |     |                                                          
|      |                      |  |     |                                                          
|Date: | March
      12, 2009 |  | By: | /s/
      Howard Thomson                                 
|      |                      |  |     | HOWARD THOMSON                                           
|      |                      |  |     | Chief Executive Officer, Chief Financial
      Officer,  
|      |                      |  |     | President, Secretary and Treasurer                       
|      |                      |  |     | (Principal Executive Officer & Principal
      Accounting
|      |                      |  |     | Officer)                                                 

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