---

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 October 31, 2008

[   ] 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. Yes
[X]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). Yes [X]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 December 18, 2008, the Registrant had 46,753,200 shares
ofcommon stock 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 six months ended October 31, 2008
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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TERRACE VENTURES INC.(AN EXPLORATION STAGE
    COMPANY) 
    BALANCE SHEET

|ASSETS                                         |  
|---------------------------------------------- | -
|                                               |  
|                                               |  
|                                               |  
|                                               |  
|Current Assets:                                |  
|Cash                                           | $
|Trust Account Receivable                       |  
|Notes Receivable                               |  
|Receivable from Shareholders                   |  
|                                               |  
|Total
      Current Assets                     |  
|                                               |  
|Other Asset - Investment                       |  
|                                               |  
|TOTAL ASSETS                                   | $
|                                               |  
|                                               |  
|LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICIT) |  
|                                               |  
|Current Liabilities:                           |  
|Accounts Payable and                           |  
|Accrued Expenses                               | $
|Due to Shareholders                            |  
|                                               |  
|Total Current Liabilities                      |  
|                                               |  
|Stockholders' Deficit:                         |  
|Common Stock, $0.001 par value                 |  
|400,000,000
      shares authorized,           |  
|46,753,200 and 36,753,200                      |  
|shares
      issued                            |  
|Additional Paid in Capital                     |  
|Deficit Accumulated During                     |  
|the Exploration Stage                          |  
|                                               |  
|Total Stockholders' Equity/(Deficit)           |  
|                                               |  
|TOTAL LIABILITIES AND                          |  
|STOCKHOLDERS' EQUITY/(DEFICIT)                 | $

See Notes to Financial Statements

F-2

---

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

|                      |   | THREE MONTHS ENDED |   |   | SIX MONTHS ENDED |   |   | INCEPTION to |  
|--------------------- | - | ------------------ | - | - | ---------------- | - | - | ------------ | -
|                      |   | OCTOBER 31,        |   |   | OCTOBER 31,      |   |   | OCTOBER 31,  |  
|                      |   | 2008               |   |   | 2007             |   |   | 2008         |  
|                      |   |                    |   |   |                  |   |   |              |  
|Revenues              | $ | -0-                |   | $ | -0-              |   | $ | -0-          |  
|                      |   |                    |   |   |                  |   |   |              |  
|Operating Expenses    |   | (29,856            | ) |   | (29,957          | ) |   | (65,377      | )
|                      |   |                    |   |   |                  |   |   |              |  
|Loss Before Other     |   |                    |   |   |                  |   |   |              |  
|Income and Expenses   |   | (29,856            | ) |   | (29,957          | ) |   | (65,377      | )
|                      |   |                    |   |   |                  |   |   |              |  
|Other Income:         |   |                    |   |   |                  |   |   |              |  
|Interest Income       |   | 4,033              |   |   | 4,032            |   |   | 8,066        |  
|                      |   |                    |   |   |                  |   |   |              |  
|Other Expense:        |   |                    |   |   |                  |   |   |              |  
|Unrealized Loss       |   |                    |   |   |                  |   |   |              |  
|On Investment         |   | -0-                |   |   | -0-              |   |   | -0-          |  
|                      |   |                    |   |   |                  |   |   |              |  
|Loss Before Provision |   |                    |   |   |                  |   |   |              |  
|for Income Taxes      |   | (25,823            | ) |   | (25,925          | ) |   | (57,311      | )
|                      |   |                    |   |   |                  |   |   |              |  
|Provision for         |   |                    |   |   |                  |   |   |              |  
|Income Taxes          |   | -0-                |   |   | -0-              |   |   | -0-          |  
|                      |   |                    |   |   |                  |   |   |              |  
|Net Loss              |   | (25,823            | ) |   | (25,925          | ) |   | (57,311      | )
|                      |   |                    |   |   |                  |   |   |              |  
|Accumulated Deficit,  |   |                    |   |   |                  |   |   |              |  
|Beginning of Period   |   | (1,555,109         | ) |   | (1,467,599       | ) |   | (1,523,621   | )
|                      |   |                    |   |   |                  |   |   |              |  
|Accumulated Deficit,  |   |                    |   |   |                  |   |   |              |  
|End of Period         | $ | (1,580,932         | ) | $ | (1,493,524       | ) | $ | (1,580,932   | )
|                      |   |                    |   |   |                  |   |   |              |  
|                      |   |                    |   |   |                  |   |   |              |  
|Net Loss per Share    | $ | (0.00              | ) | $ | (0.00            | ) | $ | (0.00        | )
|                      |   |                    |   |   |                  |   |   |              |  
|Weighted Average      |   |                    |   |   |                  |   |   |              |  
|Shares Outstanding    |   | 41,753,200         |   |   | 36,753,200       |   |   | 39,253,200   |  

See Notes to Financial Statements

F-3

---

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

|                    |              |  |   |            |  |   |            |  |   | Deficit       |   |   |           |  
|------------------- | ------------ |  | - | ---------- |  | - | ---------- |  | - | ------------- | - | - | --------- | -
|                    |              |  |   |            |  |   |            |  |   | Accumulated   |   |   | Total     |  
|                    | Common Stock |  |   | Additional |  |   | During the |  |   | Stockholders' |  
|                    |              |  |   | Dollar     |  |   | Paid in    |  |   | Exploration   |   |   | Equity    |  
|                    | Shares       |  |   | Amount     |  |   | Capital    |  |   | Stage         |   |   | (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

F-4

---

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

|                         |              |  |  |            |  |  |            |   |  | Deficit       |   |  |           |  
|------------------------ | ------------ |  |  | ---------- |  |  | ---------- | - |  | ------------- | - |  | --------- | -
|                         |              |  |  |            |  |  |            |   |  | Accumulated   |   |  | Total     |  
|                         | Common Stock |  |  | Additional |  |  | During the |   |  | Stockholders' |  
|                         |              |  |  | Dollar     |  |  | Paid in    |   |  | Exploration   |   |  | Equity    |  
|                         | Shares       |  |  | Amount     |  |  | Capital    |   |  | Stage         |   |  | (Deficit) |  
|                         |              |  |  |            |  |  |            |   |  |               |   |  |           |  
|Balances, April 30, 2005 | 7,042,500    |  |  | 704        |  |  | 82,546     |   |  | (134,478      | ) |  | (51,228   | )
|                         |              |  |  |            |  |  |            |   |  |               |   |  |           |  
|Common Stock Issued      |              |  |  |            |  |  |            |   |  |               |   |  |           |  
|$1.00 per share          |              |  |  |            |  |  |            |   |  |               |   |  |           |  
|November 23,2005         | 500,000      |  |  | 50         |  |  | 499,950    |   |  | ----          |   |  | 500,000   |  
|                         |              |  |  |            |  |  |            |   |  |               |   |  |           |  
|4-for-1 Stock Split,     |              |  |  |            |  |  |            |   |  |               |   |  |           |  
|December 19, 2005        | 22,627,500   |  |  | 29,416     |  |  | (29,416    | ) |  | ----          |   |  | ----      |  
|                         |              |  |  |            |  |  |            |   |  |               |   |  |           |  
|Common Stock Issued      |              |  |  |            |  |  |            |   |  |               |   |  |           |  
|$0.25 per share          |              |  |  |            |  |  |            |   |  |               |   |  |           |  
|February 3, 2006         | 400,000      |  |  | 400        |  |  | 99,600     |   |  | ----          |   |  | 100,000   |  
|Common Stock Issued      |              |  |  |            |  |  |            |   |  |               |   |  |           |  
|$0.25 per share          |              |  |  |            |  |  |            |   |  |               |   |  |           |  
|March 13, 2006           | 380,000      |  |  | 380        |  |  | 94,620     |   |  | ----          |   |  | 95,000    |  
|                         |              |  |  |            |  |  |            |   |  |               |   |  |           |  
|Common Stock Issued      |              |  |  |            |  |  |            |   |  |               |   |  |           |  
|$0.25 per share          |              |  |  |            |  |  |            |   |  |               |   |  |           |  
|March 31, 2006           | 999,920      |  |  | 1,000      |  |  | 248,980    |   |  | ----          |   |  | 249,980   |  
|                         |              |  |  |            |  |  |            |   |  |               |   |  |           |  
|Net Loss, Period Ended   |              |  |  |            |  |  |            |   |  |               |   |  |           |  
|April 30, 2006           | ----         |  |  | ----       |  |  | ----       |   |  | (987,633      | ) |  | (987,633  | )
|                         |              |  |  |            |  |  |            |   |  |               |   |  |           |  
|Balances                 |              |  |  |            |  |  |            |   |  |               |   |  |           |  
|April 30, 2006           | 31,949,920   |  |  | 31,950     |  |  | 996,280    |   |  | (1,122,111    | ) |  | (93,881   | )
|                         |              |  |  |            |  |  |            |   |  |               |   |  |           |  
|Common Stock Issued      |              |  |  |            |  |  |            |   |  |               |   |  |           |  
|$0.25 per share          |              |  |  |            |  |  |            |   |  |               |   |  |           |  
|May 24, 2006             | 220,080      |  |  | 220        |  |  | 54,800     |   |  | ----          |   |  | 55,020    |  
|                         |              |  |  |            |  |  |            |   |  |               |   |  |           |  
|Common Stock Issued      |              |  |  |            |  |  |            |   |  |               |   |  |           |  
|$0.30 per share          |              |  |  |            |  |  |            |   |  |               |   |  |           |  
|June 5, 2006             | 335,000      |  |  | 335        |  |  | 100,165    |   |  | ----          |   |  | 100,500   |  
|                         |              |  |  |            |  |  |            |   |  |               |   |  |           |  
|Common Stock Issued      |              |  |  |            |  |  |            |   |  |               |   |  |           |  
|$0.10 per share          |              |  |  |            |  |  |            |   |  |               |   |  |           |  
|January 23, 2007         | 1,678,200    |  |  | 1,678      |  |  | 166,142    |   |  | ----          |   |  | 167,820   |  
|                         |              |  |  |            |  |  |            |   |  |               |   |  |           |  
|Net Loss, Period Ended   |              |  |  |            |  |  |            |   |  |               |   |  |           |  
|April 30, 2007           | ----         |  |  | ----       |  |  | ----       |   |  | (301,060      | ) |  | (301,060  | )
|                         |              |  |  |            |  |  |            |   |  |               |   |  |           |  
|Balances                 |              |  |  |            |  |  |            |   |  |               |   |  |           |  
|April 30, 2007           | 34,183,200   |  |  | 34,183     |  |  | 1,317,387  |   |  | (1,423,171    | ) |  | (71,601   | )

See Notes to Financial Statements

F-5

---

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

|                       |              |  |   |            |  |   |            |  |   | Deficit       |   |   |           |  
|---------------------- | ------------ |  | - | ---------- |  | - | ---------- |  | - | ------------- | - | - | --------- | -
|                       |              |  |   |            |  |   |            |  |   | Accumulated   |   |   | Total     |  
|                       | Common Stock |  |   | Additional |  |   | During the |  |   | Stockholders' |  
|                       |              |  |   | Dollar     |  |   | Paid in    |  |   | Exploration   |   |   | Equity    |  
|                       | Shares       |  |   | Amount     |  |   | Capital    |  |   | Stage         |   |   | (Deficit) |  
|                       |              |  |   |            |  |   |            |  |   |               |   |   |           |  
|                       |              |  |   |            |  |   |            |  |   |               |   |   |           |  
|Balances               |              |  |   |            |  |   |            |  |   |               |   |   |           |  
|April 30, 2007         | 34,183,200   |  | $ | 34,183     |  | $ | 1,317,387  |  | $ | (1,423,171    | ) | $ | (71,601   | )
|                       |              |  |   |            |  |   |            |  |   |               |   |   |           |  
|Common Stock Issued    |              |  |   |            |  |   |            |  |   |               |   |   |           |  
|$0.10 per share        |              |  |   |            |  |   |            |  |   |               |   |   |           |  
|July 12, 2007          | 2,570,000    |  |   | 2,570      |  |   | 254,755    |  |   | ----          |   |   | 257,325   |  
|                       |              |  |   |            |  |   |            |  |   |               |   |   |           |  
|Net Loss, Period Ended |              |  |   |            |  |   |            |  |   |               |   |   |           |  
|April 30, 2008         | ----         |  |   | ----       |  |   | ----       |  |   | (100,450      | ) |   | (100,450  | )
|                       |              |  |   |            |  |   |            |  |   |               |   |   |           |  
|Balances               |              |  |   |            |  |   |            |  |   |               |   |   |           |  
|April 30, 2008         | 36,753,200   |  | $ | 36,753     |  | $ | 1,572,142  |  | $ | (1,523,621    | ) | $ | 85,274    |  
|                       |              |  |   |            |  |   |            |  |   |               |   |   |           |  
|Common Stock Issued    |              |  |   |            |  |   |            |  |   |               |   |   |           |  
|$0.10 per share        |              |  |   |            |  |   |            |  |   |               |   |   |           |  
|October 10, 2008       | 10,000,000   |  |   | 10,000     |  |   | 190,000    |  |   | ----          |   |   | 200,000   |  
|                       |              |  |   |            |  |   |            |  |   |               |   |   |           |  
|Net Loss, Period Ended |              |  |   |            |  |   |            |  |   |               |   |   |           |  
|October 31, 2008       | ----         |  |   | ----       |  |   | ----       |  |   | (57,311       | ) |   | (57,311   | )
|                       |              |  |   |            |  |   |            |  |   |               |   |   |           |  
|Balances               |              |  |   |            |  |   |            |  |   |               |   |   |           |  
|October 31, 2008       | 44,753,200   |  | $ | 46,753     |  | $ | 1,762,142  |  | $ | (1,580,932    | ) | $ | 227,963   |  

See Notes to Financial Statements.

F-6

---

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

|                                   |   | SIX MONTHS ENDED |   |   | INCEPTION to |  
|---------------------------------- | - | ---------------- | - | - | ------------ | -
|                                   |   | OCTOBER 31,      |   |   | OCTOBER 31,  |  
|                                   |   | 2008             |   |   | 2007         |  
|                                   |   |                  |   |   |              |  
|Cash Flows from                    |   |                  |   |   |              |  
|Operating Activities:              |   |                  |   |   |              |  
|                                   |   |                  |   |   |              |  
|Net Loss                           | $ | (57,311          | ) | $ | (70,353      | )
|                                   |   |                  |   |   |              |  
|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           |   | (5,972           | ) |   | 2,288        |  
|Notes Receivable                   |   | (8,066           | ) |   | (186,914     | )
|Prepaid Expenses                   |   | -0-              |   |   | -0-          |  
|Increase(Decrease)
      in:       |   |                  |   |   |              |  
|Accounts Payable                   |   | (22,425          | ) |   | 23,198       |  
|                                   |   |                  |   |   |              |  
|Net Cash Provided/(Used)           |   |                  |   |   |              |  
|by Operating Activities            |   | (93,774          | ) |   | (231,781     | )
|                                   |   |                  |   |   |              |  
|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           |   |   | -0-          |  
|Payments on Loans                  |   | (146,000         | ) |   | (11,295      | )
|Proceeds Related to                |   |                  |   |   |              |  
|Issuance of Common Stock           |   | 200,000          |   |   | 151,000      |  
|                                   |   |                  |   |   |              |  
|Net Cash
      Provided by         |   |                  |   |   |              |  
|Financing Activities               |   | 95,000           |   |   | 139,705      |  
|                                   |   |                  |   |   |              |  
|                                   |   |                  |   |   |              |  
|Net Increase (Decrease) in Cash    | $ | 1,226            |   | $ | (92,076      | )
|                                   |   |                  |   |   |              |  
|Cash at Beginning of Period        |   | 100              |   |   | 92,275       |  
|                                   |   |                  |   |   |              |  
|Cash at End of Period              | $ | 1,326            |   | $ | 199          |  

See Notes to Financial Statements

F-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.

F-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.

F-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 October
  31, 2008 and October 31, 2007 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.

F-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 $1,580,932 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.

F-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
  have 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, will 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, will 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.

F-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 is 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 are 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 entitles 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 will 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 have 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 will 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 are to be used to meet the closing conditions of the
  proposed business combination between the Company and Pyro.

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.

F-13

---









SUPPLEMENTAL STATEMENT

---

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

THREE MONTHS ENDED
      
      
      SIX MONTHS ENDEDOCTOBER 31,
      
      
      OCTOBER 31,
      
      
      INCEPTION to2008
      
      
      2007
      
      
      2008
      
      
      2007
      
      
      OCTOBER 31, 2008Operating Expenses:Accounting & Audit
      $
      3,960
      
      $
      6,920
      
      $
      15,960
      
      $
      22,800
      
      $
      98,620Bank Charges
      
      10
      
      
      30
      
      
      56
      
      
      47
      
      
      399Consulting
      
      -0-
      
      
      -0-
      
      
      -0-
      
      
      5,900
      
      
      114,150Exploration and Development
      
      -0-
      
      
      -0-
      
      
      -0-
      
      
      -0-
      
      
      24,266Legal
      
      15,095
      
      
      13,040
      
      
      29,380
      
      
      28,736
      
      
      179,066Office Administration
      
      7,500
      
      
      7,500
      
      
      15,000
      
      
      15,000
      
      
      99,600Office Expenses
      
      39
      
      
      -0-
      
      
      247
      
      
      250
      
      
      4,178Regulatory Expenses/Fees
      
      1,834
      
      
      836
      
      
      1,953
      
      
      1,219
      
      
      24,018Rent
      
      750
      
      
      750
      
      
      1,500
      
      
      1,500
      
      
      21,450Telephone
      
      593
      
      
      881
      
      
      593
      
      
      1,815
      
      
      4,054Travel & Entertainment
      
      75
      
      
      -0-
      
      
      688
      
      
      -0-
      
      
      4,708Total Operating Expenses
      $
      29,856
      
      $
      29,957
      
      $
      65,377
      
      $
      77,267
      
      $
      574,509


See Notes to Financial Statements

F-15

---

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

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 previously owned a 100% undivided interest in a mineral
claim that we referred to as the Peach Mineral Claim (the Peach Claim) located
in the Nicola, Similkameen and Osoyoos Mining Divisions of the Province of
British Columbia, Canada. On July 31, 2008, we decided to allow our interest in
the Peach Claim to lapse in order to focus our resources on completing a
business combination with Pyro Pharmaceuticals, Inc. (Pyro), the details of
which are set out under the heading Pyro Pharmaceuticals Interim Agreement.
Our ability to complete the business combination with Pyro is contingent upon
our raising $2,500,000 in equity financing. However, due to current economic
conditions, it is unlikely that we will be able to raise such financing by
December 31, 2008. As a result, it is unlikely that we will be able to complete
the business combination with Pyro.

RECENT CORPORATE DEVELOPMENTS

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

|1. | On August 8, 2008, Gordon F. Burley entered into a share
      transfer agreement (the Share Transfer Agreement) with Howard Thomson,
      our sole executive officer and director. Under the terms of the Share
      Transfer Agreement, Mr. Burley sold 15,800,000 shares of our common stock
      to Mr. Thomson in consideration of the payment of $15,800 (the Share
      Transfer). As a result of the Share Transfer, Mr. Thomson now owns
      approximately 43.0% of our common stock, resulting in a change in control
      of the Company.                                                                                                                                                                                                                                                  
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2. | On September 22, 2008, we completed a private placement
      of 10,000,000 units at a price of $0.02 per unit for total proceeds of
      $200,000. Each unit is comprised of one share of our common stock and one
      share purchase warrant. Each share purchase warrant will entitle the
      holder to purchase one additional share of our common stock at a price of
      $0.03 per share for a period ending September 21, 2010. This private
      placement was completed pursuant to the provisions of Regulation S
      promulgated under the Securities Act of 1933 (the Securities Act). We
      did not engage in a distribution of this offering in the United States.
      The investors represented that they were not US persons as defined in
      Regulation S, and have provided

3

---

|   | representations indicating that they were acquiring our
      securities for investment purposes only and not with a view towards
      distribution.                                                                                                                                                                           
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                 
|3. | On September 26, 2008, we and Pyro, agreed to amend the
      terms of the interim agreement dated July 9, 2008 (the Interim
      Agreement) between the Company and Pyro. Under the terms of the amendment
      agreement dated September 26, 2008 between us and Pyro, the Interim
      Agreement was amended as follows:
|   |                                                                                                                                                                                                                                                                                                                                 
|   | (a)                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                 
|   | (b)                                                                                                                                                                                                                                                                                                                             

PYRO PHARMACEUTICALS INTERIM AGREEMENT

On July 9, 2008, we entered into an interim agreement, as
amended on September 26, 2008, (the Interim Agreement) with Pyro, a privately
held Delaware corporation engaged in the business of developing therapeutics
against multi-drug resistant infectious microorganisms. Pyro currently holds two
patents, under United States patent numbers 6,852,485 and 6,955,890, in
connection with its business. Pyro has also filed ten patent applications with
the United States Patent and Trademark Office. These patent applications are at
various stages of review within the United States Patent and Trademark Office
(the USPTO).

Under the terms of the Interim Agreement, we and Pyro have
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, will own 60% of our issued and
outstanding shares of common stock and our shareholders, immediately prior to
the business combination and after giving effect to a proposed $2.5 million
private placement referred to above, will hold 40%. In addition, we 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, we advanced an initial $10,000 to Pyro for the above noted legal and
accounting costs.

The closing of the business combination is subject to a number
of conditions, including, among other conditions: (i) our 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; and (iv)
the approval of the shareholders of Pyro. Under the terms of the Interim
Agreement, the parties are required to enter into a formal agreement no later
than December 31, 2008. Our ability to complete the business combination with
Pyro is contingent upon our raising $2,500,000 in equity financing. However, due
to current economic conditions, it is unlikely that we will be able to raise
such financing by December 31, 2008. As a result, it is unlikely that we will be
able to complete the business combination with Pyro.

Pyro's current operations consist exclusively of the
development of its intellectual property and prosecution of its patent
applications on file with the USPTO. Pyro has not commenced revenue producing
operations nor has it completed the development of its initial therapeutic
device or process. Pyro currently has limited operations and nominal assets.

Pyro Pharmaceuticals is in the business of developing
therapeutics for use against multi-drug resistant infectious microorganisms.
Pyro's focus is on diseases caused by bacteria, yeast, fungi, and

4

---

amitochondrial protists in which antibiotic resistance has
become a significant factor in the treatment of the disease, and where
alternative therapies are needed due to the inadequacies of current treatments.

Pyro believes that the inhibition of unique targets within an
essential metabolic pathway renders pathogenic microorganisms, non viable and/or
non infective (pathogenic). Furthermore, these targets are found only in
pathogenic microorganisms and not in mammals. Thus, inhibitors of the pathway
that act on a specific gene or enzyme (the unique target), become a selective
therapeutic agent against these pathogenic microorganisms. The identification of
these metabolic pathways, the specific target in the pathway, and the
development of pathway inhibitors (antibiotics) against these targets is the
business proposition of Pyro.

These inhibitors represent a new and novel approach to develop
  antibiotics that can kill certain pathogenic microorganisms, especially those
  resistant to current antibiotics. This novel class of antibiotics is different
  from conventional antibiotics because it is not based on the inhibiting of DNA,
  RNA, protein, or cell wall synthesis. This novel class is based on the disruption
  of a metabolic step that is required for the viability and/or infectivity of
  the pathogenic organism. These proposed new antibiotics will improve the morality
  and morbidity caused by a wide variety of pathogenic microorganisms, especially
  those that have exhibited multiple drug resistance.

PLAN OF OPERATION

Our plan of operation is to complete the proposed business
combination. Under the terms of the Interim Agreement, we will be required to
enter into a formal agreement with Pyro by December 31, 2008. The closing of the
business combination with Pyro is subject to the condition that we raise
$2,500,000 in equity financing. However, due to current economic conditions, it
is unlikely that we will be able to raise such financing by December 31, 2008.
As a result, it is unlikely that we will be able to complete the business
combination with Pyro.

RESULTS OF OPERATIONS

Three Months and Six Months Summary

Three
        Months Ended
      
      
      Percentage
      
      
      Six Months Ended
      
      
      PercentageOctober 31,
      
      
      October 31,
      
      
      Increase /
      
      
      October 31,
      
      
      October 31,
      
      
      Increase /2008
      
      
      2007
      
      
      (Decrease)
      
      
      2008
      
      
      2007
      
      
      (Decrease)Revenue
      $
      -
      
      $
      -
      
      
      n/a
      
      $
      -
      
      $
      -
      
      
      n/aExpenses
      
      (29,856
      )
      
      (29,957
      )
      
      (0.3)%
      
      
      (65,377
      )
      
      (77,267
      )
      
      (15.4)%Other
      
      4,033
      
      
      4,032
      
      
      0.0%
      
      
      8,066
      
      
      6,914
      
      
      16.7%IncomeNet Loss
      $
      (25,823
      )
      $
      (25,925
      )
      
      (0.4)%
      
      $
      (57,311
      )
      $
      (70,353
      )
      
      (18.5)%


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 to complete the proposed business combination
with Pyro.

5

---

Expenses

The major components of our expenses for the three and six
months ended October 31, 2008 and 2007 are outlined in the table below:

Three
        Months Ended
      
      
      Percentage
      
      
      Six Months Ended
      
      
      PercentageOctober 31,
      
      
      October 31,
      
      
      Increase /
      
      
      October 31,
      
      
      October 31,
      
      
      Increase /2008
      
      
      2007
      
      
      (Decrease)
      
      
      2008
      
      
      2007
      
      
      (Decrease)Accounting
      $
      3,960
      
      $
      6,920
      
      
      (42.8)%
      
      $
      15,960
      
      $
      22,800
      
      
      (30.0)%Bank Charges
      
      10
      
      
      30
      
      
      (66.7)%
      
      
      56
      
      
      47
      
      
      19.1%Consulting
      
      -
      
      
      -
      
      
      n/a
      
      
      -
      
      
      5,900
      
      
      (100)%Legal
      
      15,095
      
      
      13,040
      
      
      15.8%
      
      
      29,380
      
      
      28,736
      
      
      (2.2)%Office
      
      7,500
      
      
      7,500
      
      
      0.0%
      
      
      15,000
      
      
      15,000
      
      
      0.0%AdministrationOffice Expenses
      
      39
      
      
      -
      
      
      n/a
      
      
      247
      
      
      250
      
      
      (1.2)%Regulatory
      
      1,834
      
      
      836
      
      
      119.4%
      
      
      1,953
      
      
      1,219
      
      
      60.2%Expenses/FeesRent
      
      750
      
      
      750
      
      
      0.0%
      
      
      1,500
      
      
      1,500
      
      
      0.0%Telephone
      
      593
      
      
      881
      
      
      (32.7)%
      
      
      593
      
      
      1,815
      
      
      (67.3)%Travel &
      
      75
      
      
      -
      
      
      n/a
      
      
      688
      
      
      -
      
      
      n/aEntertainmentTotal Operating Expenses
      $
      29,856
      
      $
      29,957
      
      
      (0.3)%
      
      $
      65,377
      
      $
      77,267
      
      
      (15.4)%


During the three months ended October 31, 2008, our operating
expenses primarily consisted of accounting expenses, legal expenses and office
administration expenses.

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

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
      October 31, 2008 |   |   | At
      April 30, 2008 |   |  | Increase / (Decrease) | 
|Current Assets                          | $ | 253,931                   |   | $ | 228,767                 |   |  | 11.0%                 | 
|Current Liabilities                     |   | (25,968                   | ) |   | (143,493                | ) |  | (81.9)%               | 
|Working Capital Surplus
      (Deficit) | $ | 227,963                   |   | $ | 85,274                  |   |  | 167.3%                | 

6

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|Cash Flows                                    |   |                  |   |   |                  |  
|--------------------------------------------- | - | ---------------- | - | - | ---------------- | -
|                                              |   | Six Months Ended |  
|                                              |   | October 31, 2008 |   |   | October 31, 2007 |  
|Net Cash Used by Operating Activities         | $ | (93,774          | ) | $ | (231,781         | )
|Net Cash From Investing Activities            |   | -                |   |   | -                |  
|Net Cash Provided By Financing Activities     |   | 95,000           |   |   | 139,705          |  
|Net Increase (Decrease) in Cash During Period | $ | 1,226            |   | $ | (92,076          | )

We had cash on hand of $1,326 and a working capital surplus of
$227,963 as of October 31, 2008 compared to a working capital surplus of $85,274
as of April 30, 2008. During the period ended October 31, 2008, we completed the
sale of 10,000,000 units at a price of $0.02 per unit for gross proceeds of
$200,000.

Loan Agreement with Solara Technologies Inc.

On May 18, 2007, we entered into a loan agreement with Solara
Technologies, Inc. (Solara). Under the terms of the Loan Agreement, we loaned
a total of $200,000 to Solara. The loan matured on May 25, 2008, and accrues
interest at a rate of 8% per annum payable on maturity. The loan was made
pursuant to the terms of the letter of intent dated February 28, 2007 between
the Company and Solara. The loan was secured by an assignment of certain tax
credits which Solara represents that it is entitled to claim and receive and
have a value of not less than $200,000. Under the terms of the Loan Agreement,
Solara was required to: (i) enter into a formal merger agreement within 60 days
of the date of the Loan Agreement; (ii) obtain shareholder approval of the
proposed merger within 90 days of the date of the Loan Agreement; (iii) provide
required financial statements within 90 days of the Loan Agreement; and (iv)
complete the proposed merger within 120 days of the Loan Agreement. The formal
merger agreement was not entered into by the parties as required under the terms
of the Loan Agreement, and as a result, we have requested that Solara repay the
Loan. We are currently in discussions with Solara to determine a plan for the
repayment of the loan. Substantial doubt exists with respect to the ability of
Solara to repay the loan.

Financing Requirements

Currently, we do not have sufficient financial resources to
complete our plan of operation for the next twelve months. As such, our ability
to complete our plan of operation is dependent upon our ability to obtain
additional financing in the near term.

In order to meet the closing conditions of the Interim
Agreement with Pyro, we will be required to raise an additional $2,500,000. As
such, on July 15, 2008, our Board of Directors approved a private placement
offering of up to 12,500,000 units at a price of $0.10 US per unit (the U.S.
Private Placement), with each unit consisting of one share of our 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 12
months at a price of $0.15 US per share. The U.S. Private Placement offering
will be made in the United States to persons who are accredited investors as
defined in Regulation D of the Securities Act. Also on July 15, 2008, our 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 (the Foreign Private Placement). The units will be
identical to those to be offered under the U.S. Private Placement as described
above. There is no assurance that the U.S. Private Placement or the Foreign
Private Placement offerings or any part of them 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.

7

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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 October 31, 2008 (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 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

8

---

statements contained in our Quarterly Report on Form 10-Q for
the quarter ended October 31, 2008 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
October 31, 2008 that have materially affected, or that are reasonably likely to
materially affect, our internal control over financial reporting.

9

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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 October 31, 2008, we had cash in the amount of $1,326. In
order to meet the closing conditions of the Interim Agreement with Pyro, we will
be required to raise an additional $2,500,000. As such, our Board of Directors
approved two concurrent private placement offerings for the sale of an aggregate
of 25,000,000 for gross proceeds of $2,500,000. However, due to current economic
conditions, it is unlikely that we will be able to raise such financing by
December 31, 2008. As a result, it is unlikely that we will be able to complete
the business combination with Pyro.

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 $1,580,932 for the period from
February 20, 2001 (inception) to October 31, 2008 and have no revenues to date.
Our future is dependent upon our ability to obtain financing and upon future
profitable operations from the development of our mineral claim. 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.

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

10

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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.

On September 22, 2008, we completed a private placement of
10,000,000 units at a price of $0.02 per unit for total proceeds of $200,000.
Each unit is comprised of one share of our common stock and one share purchase
warrant. Each share purchase warrant will entitle the holder to purchase one
additional share of our common stock at a price of $0.03 per share for a period
ending September 21, 2010. This private placement was completed pursuant to the
provisions of Regulation S promulgated under the Securities Act. We did not
engage in a distribution of this offering in the United States. The investors
represented that they were not US persons as defined in Regulation S, and have
provided representations indicating that they were acquiring our securities for
investment purposes only and not with a view towards distribution.

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 October 31, 2008.

11

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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.                      
|           |                                                                                                                         

12

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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: | December 19, 2008 |  | By: | /s/ Howard Thomson                                       
|      |                   |  |     | HOWARD THOMSON                                           
|      |                   |  |     | Chief Executive Officer, Chief
      Financial Officer,  
|      |                   |  |     | President, Secretary and
      Treasurer                 
|      |                   |  |     | (Principal Executive Officer
      & Principal Accounting
|      |                   |  |     | Officer)                                                 

---