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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

FORM 10-QSB

x Quarterly Report
  pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended July 31, 2005

 ̈ Transition
  Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934 For the
  transition period 
  ________ to ________

Commission File Number 000-50569

TERRACE VENTURES INC.(Name
of small business issuer in its charter)

|NEVADA                                           | 91-2147101                          
|------------------------------------------------ | ------------------------------------
|(State or other jurisdiction of incorporation or | (I.R.S. Employer Identification No.)
|organization)                                    |                                     
|                                                 |                                     
|                                                 |                                     
|810 PEACE PORTAL DRIVE, SUITE 202                |                                     
|BLAINE, WA                                       | 98230                               
|(Address of principal executive offices)         | (Zip Code)                          

(360) 332-1752Issuer's telephone number

NOT APPLICABLEFormer name, former address and
former fiscal year, if changed since last report

Check whether the issuer (1) filed all reports required to be
  filed by Section 13 or 15(d) of the Exchange Act during the past twelve 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 xNo  ̈

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

State the number of shares outstanding of each of the
issuer's classes of common equity, as of the latest practicable date:As of
September 16, 2005, the Issuer had 7,042,500Shares of Common Stock
outstanding.

Transitional Small Business Disclosure Format (check one): Yes  ̈ No x

1

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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-QSB and Item 310(b) of
Regulation S-B, 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 three months ended July 31, 2005 are
not necessarily indicative of the results that can be expected for the year
ending April 30, 2006.

2

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TERRACE VENTURES INC.

FINANCIAL STATEMENTS

JULY 31, 2005 AND JULY 31, 2004



F-i

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INDEX TO FINANCIAL STATEMENTS

|                                                      | Page     
|----------------------------------------------------- | ---------
|                                                      |          
|Accountants'
      Review Report                      | F-1      
|                                                      |          
|Financial Statements:                                 |          
|                                                      |          
|Balance
      Sheet                                   | F-2      
|                                                      |          
|Statement
      of Operations and Accumulated Deficit | F-3      
|                                                      |          
|Statement
      of Changes in Stockholders Equity    | F-4      
|                                                      |          
|Statement
      of Cash Flows                         | F-5      
|                                                      |          
|Notes
      to Financial Statements                   | F-6 - F-9
|                                                      |          
|Supplemental Statement:                               |          
|                                                      |          
|Statement
      of Operating Expenses                 | F-11     

F-ii

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Report of Independent Registered Public Accounting Firm

To the Board of Directors
  Terrace Ventures Inc.

We have reviewed the accompanying balance sheet of Terrace Ventures
  Inc., an exploration stage company, as of July 31, 2005, and the related statements
  of operations and accumulated deficit, changes in stockholders’ equity,
  and statement of cash flows for the three months then ended. All information
  included in these financial statements is the representation of the management
  of Terrace Ventures Inc.

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

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

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

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

/s/ Sarna & Company

Sarna & Company,
  Certified Public Accountants
  Westlake Village, California
  September 14, 2005

F-1

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

|ASSETS                                                 |  
|------------------------------------------------------ | -
|                                                       |  
|                                                       |  
|                                                       |  
|Current Assets                                         |  
|Cash                                                   | $
|                                                       |  
|Total Current Assets                                   | $
|                                                       |  
|TOTAL ASSETS                                           | $
|                                                       |  
|                                                       |  
|LIABILITIES AND STOCKHOLDERS
      EQUITY (DEFICIENCY |  
|                                                       |  
|Current Liabilities                                    |  
|Cash Overdraft                                         | $
|Accounts
      Payable and Accrued Expenses            |  
|                                                       |  
|Total Current
      Liabilities                        | $
|                                                       |  
|                                                       |  
|Stockholders' Equity                                   |  
|Common
      Stock, $0.001 per value                   |  
|100,000,000 shares authorized,                         |  
|7,042,500 shares issued                                |  
|Additional Paid In
      Capital                       |  
|Accumulated
      Deficit                              |  
|                                                       |  
|Total Stockholders'
      Equity (Deficit)             |  
|                                                       |  
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY             | $

See Notes to Financial Statements

F-2

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

|                           |   | THREE MONTHS        |   |   | THREE MONTHS        |   |   |                     |  
|-------------------------- | - | ------------------- | - | - | ------------------- | - | - | ------------------- | -
|                           |   | ENDED               |   |   | ENDED               |   |   | INCEPTION to        |  
|                           |   | JULY
      31, 2005 |   |   | JULY
      31, 2004 |   |   | JULY
      31, 2005 |  
|Revenues                   | $ | 0                   |   | $ | 0                   |   | $ | 0                   |  
|                           |   |                     |   |   |                     |   |   |                     |  
|Operating Expenses         |   | (4,730              | ) |   | (7,568              | ) |   | (139,208            | )
|                           |   |                     |   |   |                     |   |   |                     |  
|Loss Before Provision for  |   | (4,730              | ) |   | (7,568              | ) |   | (139,208            | )
|Income Taxes               |   |                     |   |   |                     |   |   |                     |  
|                           |   |                     |   |   |                     |   |   |                     |  
|Provision for Income Taxes |   | (0                  | ) |   | (0                  | ) |   | (0                  | )
|                           |   |                     |   |   |                     |   |   |                     |  
|Net Loss                   |   | (4,730              | ) |   | (7,568              | ) |   | (139,208            | )
|                           |   |                     |   |   |                     |   |   |                     |  
|Deficit, Beginning         |   |                     |   |   |                     |   |   |                     |  
|of Period                  |   | (134,478            | ) |   | (96,946             | ) |   | (0                  | )
|                           |   |                     |   |   |                     |   |   |                     |  
|Accumulated Deficit, End   |   |                     |   |   |                     |   |   |                     |  
|of Period                  | $ | (139,208            | ) | $ | (104,514            | ) | $ | (139,208            | )
|                           |   |                     |   |   |                     |   |   |                     |  
|Net Loss per Share         | $ | (0.001              | ) | $ | (0.01               | ) | $ | (0.021              | )
|                           |   |                     |   |   |                     |   |   |                     |  
|Weighted Average           |   |                     |   |   |                     |   |   |                     |  
|Shares
      Outstanding   |   | 7,042,500           |   |   | 7,042,500           |   |   | 6,721,315           |  

See Notes to Financial Statements

F-3

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

|                      |  | Common Stock |  |   | Additional |  |   | Accumulated |  |   | Total    |  
|--------------------- |  | ------------ |  | - | ---------- |  | - | ----------- |  | - | -------- | -
|                      |  |              |  |   | Dollar     |  |   | Paid in     |  |   | Deficit  |  
|                      |  | Shares       |  |   | Amount     |  |   | Capital     |  |   |          |  
|Inception             |  |              |  |   |            |  |   |             |  |   |          |  
|February 20, 2001     |  | ----         |  | $ | ----       |  | $ | ----        |  | $ | ----     |  
|                      |  |              |  |   |            |  |   |             |  |   |          |  
|Common Stock Issued   |  |              |  |   |            |  |   |             |  |   |          |  
|$0.001 per share      |  |              |  |   |            |  |   |             |  |   |          |  
|April 9, 2001         |  | 4,000,000    |  |   | 400        |  |   | 3,600       |  |   | ----     |  
|                      |  |              |  |   |            |  |   |             |  |   |          |  
|Net Loss,             |  |              |  |   |            |  |   |             |  |   |          |  
|April 30,
      2001  |  | ----         |  |   | ----       |  |   | ----        |  |   | (1,410   | )
|                      |  |              |  |   |            |  |   |             |  |   |          |  
|Balances              |  |              |  |   |            |  |   |             |  |   |          |  
|April 30, 2001        |  | 4,000,000    |  |   | 400        |  |   | 3,600       |  |   | (1,410   | )
|                      |  |              |  |   |            |  |   |             |  |   |          |  
|Common Stock Issued   |  |              |  |   |            |  |   |             |  |   |          |  
|$0.01 per
      share |  |              |  |   |            |  |   |             |  |   |          |  
|August 15, 2001       |  | 2,500,000    |  |   | 250        |  |   | 24,750      |  |   | ----     |  
|                      |  |              |  |   |            |  |   |             |  |   |          |  
|Net Loss,             |  |              |  |   |            |  |   |             |  |   |          |  
|April 30,
      2002  |  | ----         |  |   | ----       |  |   | ----        |  |   | (19,196  | )
|                      |  |              |  |   |            |  |   |             |  |   |          |  
|Balances              |  |              |  |   |            |  |   |             |  |   |          |  
|April 30, 2002        |  | 6,500,000    |  |   | 650        |  |   | 28,350      |  |   | (20,606  | )
|                      |  |              |  |   |            |  |   |             |  |   |          |  
|Common Stock Issued   |  |              |  |   |            |  |   |             |  |   |          |  
|$0.10 per
      share |  |              |  |   |            |  |   |             |  |   |          |  
|September 30, 2002    |  | 142,500      |  |   | 14         |  |   | 14,236      |  |   | ----     |  
|                      |  |              |  |   |            |  |   |             |  |   |          |  
|Net Loss,             |  |              |  |   |            |  |   |             |  |   |          |  
|April 30,
      2003  |  | ----         |  |   | ----       |  |   | ----        |  |   | (17,632  | )
|                      |  |              |  |   |            |  |   |             |  |   |          |  
|Balances              |  |              |  |   |            |  |   |             |  |   |          |  
|April 30, 2003        |  | 6,642,500    |  |   | 664        |  |   | 42,586      |  |   | (38,238  | )
|                      |  |              |  |   |            |  |   |             |  |   |          |  
|Common Stock Issued   |  |              |  |   |            |  |   |             |  |   |          |  
|$0.10 per
      share |  |              |  |   |            |  |   |             |  |   |          |  
|November 6, 2003      |  | 400,000      |  |   | 40         |  |   | 39,960      |  |   | ----     |  
|                      |  |              |  |   |            |  |   |             |  |   |          |  
|Net Loss,             |  |              |  |   |            |  |   |             |  |   |          |  
|April 30,
      2004  |  | ----         |  |   | ----       |  |   | ----        |  |   | (58,708  | )
|                      |  |              |  |   |            |  |   |             |  |   |          |  
|Balances              |  |              |  |   |            |  |   |             |  |   |          |  
|April 30, 2004        |  | 7,042,500    |  |   | 704        |  |   | 82,546      |  |   | (96,946  | )
|                      |  |              |  |   |            |  |   |             |  |   |          |  
|Net Loss,             |  |              |  |   |            |  |   |             |  |   |          |  
|April 30,
      2005  |  | ----         |  |   | ----       |  |   | ----        |  |   | (37,532  | )
|                      |  |              |  |   |            |  |   |             |  |   |          |  
|Balances              |  |              |  |   |            |  |   |             |  |   |          |  
|April 30, 2005        |  | 7,042,500    |  |   | 704        |  |   | 82,546      |  |   | (134,478 | )
|                      |  |              |  |   |            |  |   |             |  |   |          |  
|Net Loss,             |  |              |  |   |            |  |   |             |  |   |          |  
|July 31, 2005         |  | ----         |  |   | ----       |  |   | ----        |  |   | (4,730   | )
|                      |  |              |  |   |            |  |   |             |  |   |          |  
|Balances              |  |              |  |   |            |  |   |             |  |   |          |  
|July 31, 2005         |  | 7,042,500    |  | $ | 704        |  | $ | 82,546      |  | $ | (139,208 | )

See Notes to Financial Statements

F-4

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

|                                |   | THREE MONTHS |   |   | THREE MONTHS |   |   |               |  
|------------------------------- | - | ------------ | - | - | ------------ | - | - | ------------- | -
|                                |   | ENDED        |   |   | ENDED        |   |   | INCEPTION to  |  
|                                |   | JULY31, 2005 |   |   | JULY31, 2004 |   |   | JULY 31, 2005 |  
|                                |   |              |   |   |              |   |   |               |  
|Cash Flows from                 |   |              |   |   |              |   |   |               |  
|Operating Activities:           |   |              |   |   |              |   |   |               |  
|                                |   |              |   |   |              |   |   |               |  
|Net Loss                        | $ | (4,730       | ) | $ | (7,568       | ) | $ | (139,208      | )
|Increase (Decrease) in:         |   |              |   |   |              |   |   |               |  
|Cash Overdraft                  |   | 8            |   |   | -0-          |   |   | 8             |  
|Accounts Payable                |   | 4,700        |   |   | (2,006       | ) |   | 55,950        |  
|                                |   |              |   |   |              |   |   |               |  
|Net Cash Used by                |   |              |   |   |              |   |   |               |  
|Operating Activities            |   | (22          | ) |   | (9,574       | ) |   | (83,250       | )
|                                |   |              |   |   |              |   |   |               |  
|Cash Flows from                 |   |              |   |   |              |   |   |               |  
|Investing
      Activities:     |   | -0-          |   |   | -0-          |   |   | -0-           |  
|                                |   |              |   |   |              |   |   |               |  
|Cash Flows from                 |   |              |   |   |              |   |   |               |  
|Financing Activities:           |   |              |   |   |              |   |   |               |  
|                                |   |              |   |   |              |   |   |               |  
|Proceeds Received               |   |              |   |   |              |   |   |               |  
|Issuance
      of Common Stock  |   | -0-          |   |   | -0-          |   |   | 83,250        |  
|                                |   |              |   |   |              |   |   |               |  
|Cash Provided by                |   |              |   |   |              |   |   |               |  
|Financing Activities            |   | -0-          |   |   | -0-          |   |   | 83,250        |  
|                                |   |              |   |   |              |   |   |               |  
|                                |   |              |   |   |              |   |   |               |  
|Net Increase (Decrease) in Cash |   | (22          | ) |   | (9,574       | ) |   | -0-           |  
|                                |   |              |   |   |              |   |   |               |  
|Cash at Beginning of Period     |   | 22           |   |   | 13,134       |   |   | -0-           |  
|                                |   |              |   |   |              |   |   |               |  
|Cash at End of Period           | $ | -0-          |   | $ | 3,560        |   | $ | -0-           |  

See Notes to Financial Statements

F-5

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

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

No stock options have been issued by Terrace Ventures Inc. Accordingly,
  no pro forma compensation expense is reported in these financial statements.

F-6

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

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-7

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

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

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 July 31,
  2005 and July 31, 2004 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.

F-8

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

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.

The 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 $139,208 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 financial statements of the Company
  do not include any adjustments that may result from the outcome of these aforementioned
  uncertainties.

F-9

---



SUPPLEMENTAL STATEMENT

F-10

---



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

|                               |   | THREE MONTHS |  |   | THREE MONTHS |  |   |               | 
|------------------------------ | - | ------------ |  | - | ------------ |  | - | ------------- | 
|                               |   | ENDED        |  |   | ENDED        |  |   | INCEPTION to  | 
|                               |   | JULY31, 2005 |  |   | JULY31, 2004 |  |   | JULY 31, 2005 | 
|Operating Expenses:            |   |              |  |   |              |  |   |               | 
|                               |   |              |  |   |              |  |   |               | 
|Accounting                     | $ | -0-          |  | $ | 2,000        |  | $ | 24,660        | 
|Exploration Expense            |   | -0-          |  |   | -0-          |  |   | 24,266        | 
|Legal                          |   | 913          |  |   | 2,994        |  |   | 43,012        | 
|Office Administration          |   | 3,000        |  |   | 1,500        |  |   | 23,500        | 
|Office Expenses                |   | 67           |  |   | -0-          |  |   | 1,684         | 
|Regulatory Expenses/Fees       |   | -0-          |  |   | -0-          |  |   | 6,041         | 
|Rent                           |   | 750          |  |   | 750          |  |   | 11,700        | 
|Telephone                      |   | -0-          |  |   | -0-          |  |   | 1,344         | 
|Travel &
      Entertainment   |   | -0-          |  |   | 324          |  |   | 3,001         | 
|                               |   |              |  |   |              |  |   |               | 
|Total
      Operating Expenses | $ | 4,730        |  | $ | 7,568        |  | $ | 139,208       | 

See Notes to Financial Statements

F-11

---

|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN
      OF OPERATION
|------- | ---------------------------------------------------------------

As used in this Quarterly Report on Form 10-QSB, the terms
"we", "us", "our", Terrace and our company mean Terrace Ventures Inc. unless
otherwise indicated. All dollar amounts in this quarterly report are in U.S.
dollars unless otherwise stated.

FORWARD LOOKING STATEMENTS

The information in this discussion contains forward-looking
statements. These forward-looking statements involve risks and uncertainties,
including statements regarding our capital needs, business strategy and
expectations. Any statements contained herein that are not statements of
historical facts may be deemed to be forward-looking statements. In some cases,
you can identify forward-looking statements by terminology such as may,
will, should, expect, plan, intend, anticipate, believe,
estimate, predict, potential or continue, the negative of such terms or
other comparable terminology. Actual events or results may differ materially. In
evaluating these statements, you should consider various factors, including the
risks discussed below, and, from time to time, in other reports we file with the
United States Securities and Exchange Commission (the SEC), including our
Annual Report on Form 10-KSB for the year ended April 30, 2005. These factors
may cause our actual results to differ materially from any forward-looking
statement.

OVERVIEW

We are an exploration stage company engaged in the acquisition
and exploration of mineral properties. We own a 100% undivided interest in a
mineral claim that we refer to as the Peach mineral claim (the Peach Claim)
located in the Nicola, Simalkameen and Osoyoos Mining Divisions of the Province
of British Columbia, Canada. Our plan of operation is to carry out exploration
work on the Peach Claim in order to ascertain whether it possesses deposits of
gold. Further exploration of the Peach Claim is required before a final
determination as to its viability can be made. No commercially viable mineral
deposit may exist on our mineral claim. We can provide no assurance that the
Peach Claim contains a mineral deposit until appropriate exploratory work is
done and an evaluation based on that work concludes further work programs are
justified. At this time, we have no reserves on our mineral claim.

Acquisition of the Peach Mineral Claim

We purchased the Peach Claim property from Don Archibald for
cash consideration of $5,000 pursuant to a purchase agreement dated August 15,
2001.

Description of Peach Mineral Claim

The Peach Claim property is comprised of one mineral claim with
a total area of approximately 1,236 acres, located in Nicola, Simalkameen and
Osoyoos Mining Divisions, approximately 40 kilometres west of Kelowna, British
Columbia, Canada, see Figure 1 below. The claim is accessible by a gravel
road. We obtained information on the area from the British Columbia Department
of Mines and Geological Consultants in 2001. We believed the timing was
opportune at that time to obtain this property at the price paid.

Current State of Exploration

Our mineral claim presently does not have any mineral reserves.
The property that is the subject to our mineral claim is undeveloped and does
not contain any open-pit or underground mines. There is no plant or equipment
located on the property that is the subject of the mineral claim. Power is

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readily available from nearby transmission lines. Water in sufficient quantities for drilling is available from nearby streams and lakes.

We have only recently commenced exploration of the Peach Claim and this exploration is currently in the preliminary stages. Our planned exploration program is exploratory in nature and no mineral reserves may ever be found.

June 2002 Exploration Program

Phase I of our exploration program was completed in June, 2002. The Phase I exploratory program was conducted by Mr. Reynolds over a period of three days and consisted of rock sampling and an assessment of areas previously reported to have potential
mineralization. On June 27, 2002, Mr. Reynolds, our consulting geologist, completed his review of Phase I work results on our Peach Claim and provided us with a report containing his conclusions. Mr. Reynolds concluded that the results were
favorable and he recommended we proceed to Phase II of our exploration program.

September 2004 Exploration Program

Phase II of our exploration program was designed to follow-up prospecting, sampling and mapping of the earlier exploration carried out by Fairfield Minerals Ltd. The target of the 2004 program was the location of a gold bearing quartz vein system
similar to the Siwash North deposit, previously found and bulk sampled by Fairfield. Using Fairfield assessment reports as guides, a program of follow-up sampling, prospecting and mapping was carried out over four areas of anomalous samples.  The
September 2004 exploration program was successful in locating gold mineralized quartz float and bedrock in areas with anomalous soil sample sites from surveys done by Fairfield Minerals Ltd. Our geologist concluded that further exploration work
should be undertaken on the Peach Property to assess its potential to host high grade gold mineralization within quartz (and sulphide) veins.  We budgeted to expend $5,000 on our planned exploration program over the next twelve months. We plan
to commence Phase III of our exploration program in late 2005 or early 2006 subject to our ability to obtain additional financing.

PLAN OF OPERATION

Our plan of operation is to conduct mineral exploration activities on the Peach Claim in order to assess whether this claim possesses commercially exploitable mineral deposits. Our exploration program is designed to explore for commercially viable
deposits of gold minerals. We have not, nor has any predecessor, identified any commercially exploitable reserves of these minerals on our mineral claim.

We engaged Mr. Reynolds, B.Sc. P.Eng., our geological consultant, to prepare a geological evaluation report on the Peach Claim. We received this report entitled "Geological Summary Report on the Peach Property" on September 25, 2001. This report
summarized the results of the history of the exploration of the mineral claim, the regional and local geology of the mineral claim and the mineralization and the geological formations identified as a result of the prior exploration.  The geological
report also gave conclusions regarding potential mineralization of the mineral claim and recommended a four phase exploration program on the mineral claim.

We completed Phase I of our planned four phase exploration program on the Peach Claim property in June, 2002. The total cost for the first phase was approximately $5,000. Following the successful completion of Phase I, our geologist recommended
that we complete a second phase consisting of geological prospecting, geological outcrop mapping, and detailed soil sampling in areas of interest. Phase II was completed in late 2004, at a cost of $7,500. Based on the results of Phase II of the
exploration program we determined to proceed with Phase III subject to obtaining additional financing.

4

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Our plan of operation is to proceed with Phase III of the
exploration of the Peach Claim in late 2005 or early 2006 subject to receiving
additional financing. A decision on proceeding beyond the planned Phase III will
be made by assessing whether the results of Phase III are sufficiently positive
to enable us to obtain the financing we will need for us to continue through
additional stages of the exploration program. This assessment will include an
assessment of the market for financing of mineral exploration projects at the
time of our assessment and an evaluation of our cash reserves after the
completion of Phase III. The decision whether or not to proceed will be based on
the recommendations of our geological consultant. The decision of the consultant
whether or not to recommend proceeding will be based on a number of factors,
including his subjective judgment and will depend primarily on the results of
the immediately preceding stage. It is impossible to quantify in advance what
will be sufficiently positive.

During this exploration stage, our president will only be
devoting approximately six hours per week of his time to our business. We do not
foresee this limited involvement as negatively impacting our company over the
next twelve months as all exploratory work has been and will continue to be
performed by outside consultants. Additionally, we will not have a need to hire
any employees over the next twelve months; nor do we plan to make any purchases
of equipment over the next twelve months due to reliance upon outside
consultants to provide all tools needed for the exploratory work being
conducted. Our total expenditures over the next twelve months are anticipated to
be approximately $15,000.

LIQUIDITY AND FINANCIAL CONDITION

|Working Capital           |                  |                   |           
|------------------------- | ---------------- | ----------------- | ----------
|                          |                  |                   | Percentage
|                          |                  |                   | Increase /
|                          | At July 31, 2005 | At April 30, 2005 | (Decrease)
|Current Assets            | $0               | $22               | (100%)    
|Current Liabilities       | $55,958          | $51,250           | (8.4%)    
|Working Capital (Deficit) | $(55,958)        | $(51,228)         | (8.4%)    

|Cash Flows                                           |                            |         
|---------------------------------------------------- | -------------------------- | --------
|                                                     | Three Months Ended July 31
|                                                     | 2005                       | 2004    
|Cash Flows from (used in)
      Operating Activities | $(22)                      | $(9,574)
|Cash Flows from (used in) Investing Activities       | $0                         | $0      
|Cash Flows from (used in)
      Financing Activities | $0                         | $0      
|Net Increase (decrease) in Cash During Period        | $(22 )                     | $(9,574)

We had cash on hand of $0 and a working capital deficit of
$55,958 as of July 31, 2005 compared to working capital deficit $51,228 as of
July 31, 2004. We anticipate that we will incur approximately $15,000for
operating expenses, including professional legal and accounting expenses
associated with our reporting requirements under the Exchange Act during the
next twelve months.

We have not attained profitable operations and are dependent
upon obtaining financing to pursue any extensive exploration activities. For
these reasons our auditors stated in their report to our audited

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financial statements for the year ended April 30, 2005 that they have substantial doubt we will be able to continue as a going concern.

Financing Requirements

As at September 16, 2005, we had cash in the amount of $nil. Our current operating funds are not sufficient to complete the proposed exploration program and will be insufficient to complete the full exploration of the mineral claim and begin
mining efforts should the mineral claim prove commercially viable. Therefore, we will need to obtain additional financing in order to complete our full business plan. We currently do not have any operations and we have no income. Our plan of
operation calls for significant expenses in connection with the exploration of our mineral claim.  We do not have sufficient cash on hand to complete Phase III of our proposed exploration program. We also require additional financing to sustain our
business operations if we are not successful in earning revenues.

On September 6, 2005, our directors approved an offering of up to 750,000 shares of our common stock at a price of $0.10 per share to non-US investors pursuant to Regulation S of the Securities Act of 1933. Proceeds of the offering are intended
to fund our working capital requirements and further phases of our exploration program. There is no assurance that the offering or any part of it will be completed.

From inception to July 31, 2005, we have suffered aggregate losses in the amount of $139,208 and net cash outflows from operations.  We expect to continue to incur substantial losses until we complete the development of our business. For these
reasons our auditors stated in their report that they have substantial doubt we will be able to continue as a going concern. We may not be able to obtain financing when required to continue our operations. Obtaining additional financing is subject
to a number of factors, including the market prices for the mineral property and gold. These factors may make the timing, amount, terms or conditions of additional financing unavailable to us.

RISKS AND UNCERTAINTIES

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

We have incurred a net loss of $139,208 for the period from February 20, 2001 (inception) to July 31, 2005, 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.

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

Our current operating funds are sufficient to complete the proposed exploration program; however, they will be insufficient to complete the full exploration of the mineral claim and begin mining efforts should the mineral claim prove commercially
viable. Therefore, we will need to obtain additional financing in order to complete our full business plan. As at September 16, 2005, we had cash in the amount of $nil.  We currently do not have any operations and we have no income.  Our plan of
operation calls for significant expenses in connection with the exploration of our mineral claim. We do not have sufficient cash on hand to complete Phase III of our proposed exploration program. We also require additional financing to sustain our
business operations if we are not successful in earning revenues.  We currently do not have any arrangements for financing and we may not be able to obtain financing when required.  Obtaining additional financing would be subject to a number of
factors, including the market prices for the mineral property and gold. These factors may make the timing, amount, terms or conditions of additional financing unavailable to us.

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Since this is an exploration project, we face a high risk of business failure due to our inability to predict the success of our business.

We have just begun the initial stages of exploration of our mineral claim, and thus have no way to evaluate the likelihood that we will be able to operate the business successfully.  We were incorporated on February 20, 2001, and to date have been
involved primarily in organizational activities, the acquisition of the mineral claim, obtaining a summary geological report and performing certain limited work on our mineral claim. We have not earned any revenues to date.

Because of the unique difficulties and uncertainties inherent in mineral exploration ventures, we face a high risk of business failure.

You should be aware of the difficulties normally encountered by new mineral exploration companies and the high rate of failure of such enterprises. The likelihood of success must be considered in light of the problems, expenses, difficulties,
complications and delays encountered in connection with the exploration of the mineral properties that we plan to undertake. These potential problems include, but are not limited to, unanticipated problems relating to exploration, and additional
costs and expenses that may exceed current estimates.  The expenditures to be made by us in the exploration of the mineral claim may not result in the discovery of mineral deposits.  Problems such as unusual or unexpected formations and other
conditions are involved in mineral exploration and often result in unsuccessful exploration efforts.  If the results of our Phase III exploration do not reveal viable commercial mineralization, we may decide to abandon our claim and acquire new
claims for new exploration. The acquisition of additional claims will be dependent upon us possessing capital resources at the time in order to purchase such claims. If no funding is available, we may be forced to abandon our operations.

Because we anticipate our operating expenses will increase prior to our earning revenues, we may never achieve profitability.

Prior to completion of our exploration stage, we anticipate that we will incur increased operating expenses without realizing any revenues.  We therefore expect to incur significant losses into the foreseeable future.  We recognize that if we are
unable to generate significant revenues from the exploration of our mineral claim, we will not be able to earn profits or continue operations. There is no history upon which to base any assumption as to the likelihood that we will prove successful,
and we can provide no assurance that we will generate any revenues or ever achieve profitability. If we are unsuccessful in addressing these risks, our business will most likely fail.

Because of the inherent dangers involved in mineral exploration, there is a risk that we may incur liability or damages as we conduct our business.

The search for valuable minerals involves numerous hazards. As a result, we may become subject to liability for such hazards, including pollution, cave-ins and other hazards against which we cannot insure or against which we may elect not to insure.
At the present time we have no coverage to insure against these hazards. The payment of such liabilities may have a material adverse effect on our financial position.

Because access to our mineral claim may be restricted by inclement weather, we may be delayed in our exploration.

Access to the Peach Claim may be restricted through some of the year due to weather in the area. As a result, any attempt to test or explore the property is largely limited to the times when weather

7

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permits such activities. These limitations can result in significant delays in exploration efforts. Such delays can have a significant negative effect on our exploration efforts.

The property comprises one mineral claim with a total area of approximately 1,236 acres, located in Nicola, Simalkameen and Osoyoos Mining Divisions, approximately 40 kilometres west of Kelowna, British Columbia, Canada. This is an essentially
undeveloped area in British Columbia. The area consists of many mountains and lakes with heavy forestation. An unpaved gravel road is the only access.  Winters are often severe with rain, freezing rain, wind, and snow common between November and
March, making the road often unsafe and impassable for travel.

As we undertake exploration of our mineral claim, we will be subject to compliance with government regulation that may increase the anticipated cost of our exploration program.

There are several governmental regulations that materially restrict mineral exploration.  We will be subject to the laws of the Province of British Columbia as we carry out our exploration program. We may be required to obtain work permits, post
bonds and perform remediation work for any physical disturbance to the land in order to comply with these laws. While our planned exploration program budgets for regulatory compliance, there is a risk that new regulations could increase our costs of
doing business and prevent us from carrying out our exploration program.

Because our executive officers do not have formal training specific to the technicalities of mineral exploration, there is a higher risk our business will fail.

Mr. Gordon F. Burley and Mr. Ryan S. McCleery our executive officers and directors, do not have any formal training as geologists or in the technical aspects of management of a mineral exploration company. Our management lacks technical training and
experience with exploring for, starting, and operating a mine. With no direct training or experience in these areas, our management may not be fully aware of the specific requirements related to working within this industry.  Our management's
decisions and choices may not take into account standard engineering or managerial approaches mineral exploration companies commonly use. Consequently, our operations, earnings, and ultimate financial success could suffer irreparable harm due to
management's lack of experience in this industry.

Because our executive officers have only agreed to provide their services on a part-time basis, they may not be able or willing to devote a sufficient amount of time to our business operations, causing our business to fail.

Our directors and officers are employed on a full time basis by other companies. Because we are in the early stages of our business, Mr. Burley and Mr. McCleery will not be spending a significant amount of time on our business. Mr. Burley expects to
expend approximately 5 to 7 hours per week on our business. Mr. McCleery expects to spend approximately 6 to 8 hours per week on our business. Competing demands on Mr. Burley's and Mr. McCleerys time may lead to a divergence between their
interests and the interests of other shareholders.

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

The Securities and Exchange Commission (the SEC) has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00,
other than securities registered on certain national securities exchanges or quoted on the Nasdaq system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or quotation
system.

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Because our securities constitute "penny stocks" within the
meaning of the rules, the rules apply to us and to our securities. The rules may
further affect the ability of owners of shares to sell our securities in any
market that might develop for them. As long as the trading price of our common
stock is less than $5.00 per share, the common stock will be subject to rule
15g-9 under the Exchange Act. The penny stock rules require a broker-dealer,
prior to a transaction in a penny stock, to deliver a standardized risk
disclosure document prepared by the SEC, that:

|1. | contains a description of the nature and level of risk in
      the market for penny stocks in both public offerings and secondary
      trading;                                                                                        
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                          
|2. | contains a description of the broker's or dealer's duties
      to the customer and of the rights and remedies available to the customer
      with respect to a violation to such duties or other requirements of
      securities laws;
|   |                                                                                                                                                                                                                                          
|3. | contains a brief, clear, narrative description of a
      dealer market, including bid and ask prices for penny stocks and the
      significance of the spread between the bid and ask price;                                           
|   |                                                                                                                                                                                                                                          
|4. | contains a toll-free telephone number for inquiries on
      disciplinary actions;                                                                                                                                                       
|   |                                                                                                                                                                                                                                          
|5. | defines significant terms in the disclosure document or
      in the conduct of trading in penny stocks; and                                                                                                                             
|   |                                                                                                                                                                                                                                          
|6. | contains such other information and is in such form,
      including language, type, size and format, as the SEC shall require by
      rule or regulation.                                                                              

The broker-dealer also must provide, prior to effecting any
transaction in a penny stock, the customer with: (a) bid and offer quotations
for the penny stock; (b) the compensation of the broker-dealer and its
salesperson in the transaction; (c) the number of shares to which such bid and
ask prices apply, or other comparable information relating to the depth and
liquidity of the market for such stock; and (d) a monthly account statements
showing the market value of each penny stock held in the customer's account. In
addition, the penny stock rules require that prior to a transaction in a penny
stock not otherwise exempt from those rules; the broker-dealer must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written acknowledgment of the receipt
of a risk disclosure statement, a written agreement to transactions involving
penny stocks, and a signed and dated copy of a written suitably statement. These
disclosure requirements may have the effect of reducing the trading activity in
the secondary market for our stock.

As our business assets and our directors and officers are
located outside of the United States, investors may be limited in their ability
to enforce civil actions against our assets or our directors and officers.

Our business assets are located in Canada and our directors and
officers are residents of Canada. Consequently, it may be difficult for United
States investors to effect service of process within the United States upon our
assets or our directors or officers, or to realize in the United States upon
judgments of United States courts predicated upon civil liabilities under U.S.
Federal Securities Laws. A judgment of a U.S. court predicated solely upon such
civil liabilities may not be enforceable in Canada by a Canadian court if the
U.S. court in which the judgment was obtained had jurisdiction, as determined by
the Canadian court, in the matter. There is substantial doubt whether an
original action could be brought successfully in Canada against any of our
assets or our directors and officers predicated solely upon such civil
liabilities.

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Off-Balance Sheet Arrangements

We have no 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.

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|ITEM 3. | CONTROLS AND PROCEDURES
|------- | -----------------------

|(A) | Evaluation Of Disclosure Controls And
      Procedures
|--- | ------------------------------------------------------

As of the end of the period covered by this report, we carried
out an evaluation, under the supervision and with the participation of our
principal executive officer and principal financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Our disclosure controls and procedures are designed to provide a
reasonable level of assurance of achieving our disclosure control objectives.
Our principal executive officer and principal financial officer have concluded
that our disclosure controls and procedures are, in fact, effective at this
reasonable assurance level as of the period covered.

|(B) | Changes In Internal Controls Over Financial
      Reporting
|--- | -----------------------------------------------------------

In connection with the evaluation of our internal controls
during our last fiscal quarter, our principal executive officer and principal
financial officer have determined that there are no changes to our internal
controls over financial reporting that has materially affected, or is reasonably
likely to materially affect, our internal controls over financial reporting.

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PART II - OTHER INFORMATION

|ITEM 1. | LEGAL PROCEEDINGS                                                
|------- | -----------------------------------------------------------------
|        |                                                                  
|None.   |                                                                  
|        |                                                                  
|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND
      USE OF PROCEEDS
|        |                                                                  
|None.   |                                                                  
|        |                                                                  
|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES                                  
|        |                                                                  
|None.   |                                                                  
|        |                                                                  
|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS        
|        |                                                                  
|None.   |                                                                  
|        |                                                                  
|ITEM 5. | OTHER INFORMATION                                                

On September 6, 2005, our directors approved an offering of up
to 750,000 shares of our common stock at a price of $0.10 per share to non-US
investors pursuant to Regulation S of the Securities Act of 1933. Proceeds of
the offering are intended to fund our working capital requirements and further
phases of our exploration program. There is no assurance that the offering or
any part of it will be completed.

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|ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K.
|------- | ---------------------------------

The following exhibits are either provided with this Quarterly
Report on Form 10-QSB or are incorporated herein by reference:

|Exhibit |                                                                                                                                                               
|------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number  | Description of Exhibit                                                                                                                                        
|2.1     | Articles of Incorporation.(1)                                                                                                                                 
|2.2     | Bylaws.(1)                                                                                                                                                    
|6.1     | Mineral Claim Purchase Agreement dated
      August 15, 2001 between Terrace Ventures Inc. and Don Archibald.(1)                                              
|
|14.1    | Code of Ethics.(2)                                                                                                                                            
|31.1    | Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.                                               
|
|31.2    | Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.                                               
|
|32.1    | Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|32.2    | Certification
      of Chief Financial Officer 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 Annual Report
on Form 10-KSB filed on September 8, 2004.

REPORTS ON FORM 8-K

We did not file any Current Reports on Form 8-K during the
quarterly period ended July 31, 2005 nor did we file any Current Reports on Form
8-K since the quarterly period ended July 31, 2005.

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SIGNATURES

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

|                          |     | TERRACE VENTURES INC.                                 
|------------------------- | --- | ------------------------------------------------------
|                          |     |                                                       
|                          |     |                                                       
|                          | By: | /s/ Gordon F. Burley                                  
|Date:  September 19, 2005 |     | GORDON F. BURLEY                                      
|                          |     | President and Chief Executive
      Officer           
|                          |     | Director                                              
|                          |     | (Principal Executive Officer)                         
|                          |     |                                                       
|                          |     |                                                       
|                          |     |                                                       
|                          | By: | /s/ Ryan S. McCleery                                  
|Date:  September 19, 2005 |     | RYAN S. McCLEERY                                      
|                          |     | Secretary, Treasurer and Chief
      Financial Officer
|                          |     | Director                                              
|                          |     | (Principal Accounting Officer)                        

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