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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 July 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 September 16, 2008, the Registrant had 36,753,200 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 three months ended July 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

|                                                     |   | (Unaudited) |   |   | (Audited)  |  
|---------------------------------------------------- | - | ----------- | - | - | ---------- | -
|                                                     |   | JULY 31,    |   |   | APRIL 30,  |  
|                                                     |   | 2008        |   |   | 2008       |  
|                                                     |   |             |   |   |            |  
|ASSETS                                               |  
|                                                     |   |             |   |   |            |  
|Current Assets:                                      |   |             |   |   |            |  
|Cash                                                 | $ | 20,729      |   | $ | 100        |  
|Receivable 
      Trust                             |   | 5,751       |   |   | 13,775     |  
|Notes Receivable                                     |   | 218,925     |   |   | 214,892    |  
|                                                     |   |             |   |   |            |  
|Total Current Assets                                 |   | 245,405     |   |   | 228,767    |  
|                                                     |   |             |   |   |            |  
|Other Asset  Investment                             |   | -0-         |   |   | -0-        |  
|                                                     |   |             |   |   |            |  
|TOTAL ASSETS                                         | $ | 245,405     |   | $ | 228,767    |  
|                                                     |   |             |   |   |            |  
|                                                     |   |             |   |   |            |  
|LIABILITIES AND STOCKHOLDERS'
      EQUITY (DEFICIT) |  
|                                                     |   |             |   |   |            |  
|Current Liabilities:                                 |   |             |   |   |            |  
|Accounts Payable and                                 |   |             |   |   |            |  
|Accrued Expenses                                     | $ | 48,519      |   | $ | 48,393     |  
|Due to Shareholder                                   |   | 86,100      |   |   | 95,100     |  
|Common Stock
      Payable                           |   | 57,000      |   |   | -0-        |  
|                                                     |   |             |   |   |            |  
|Total Current Liabilities                            |   | 191,619     |   |   | 143,493    |  
|                                                     |   |             |   |   |            |  
|Stockholders' Equity:                                |   |             |   |   |            |  
|Common Stock, $0.001 par value                       |   |             |   |   |            |  
|400,000,000 shares authorized,                       |   |             |   |   |            |  
|36,753,200 shares issued                             |   | 36,753      |   |   | 36,753     |  
|Additional Paid
      in Capital                     |   | 1,572,142   |   |   | 1,572,142  |  
|Deficit Accumulated During                           |   |             |   |   |            |  
|the Exploration Stage                                |   | (1,555,109  | ) |   | (1,523,621 | )
|                                                     |   |             |   |   |            |  
|Total Stockholders' Equity (Deficit)                 |   | 53,786      |   |   | 85,274     |  
|                                                     |   |             |   |   |            |  
|TOTAL LIABILITIES AND                                |   |             |   |   |            |  
|STOCKHOLDERS' EQUITY (DEFICIT)                       | $ | 245,405     |   | $ | 228,767    |  

See Notes to Financial Statements.

F-1

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

|                           |   | THREE MONTHS ENDED  |   |   | INCEPTION to        |  
|-------------------------- | - | ------------------- | - | - | ------------------- | -
|                           |   | JULY
      31, 2008 |   |   | JULY
      31, 2007 |  
|Revenues                   | $ | -0-                 |   | $ | -0-                 |  
|Operating Expenses         |   | (35,521             | ) |   | (47,310             | )
|Loss Before Other Income   |   |                     |   |   |                     |  
|And Expenses               |   | (35,521             | ) |   | (47,310             | )
|Other Income               |   |                     |   |   |                     |  
|Interest Income            |   | 4,033               |   |   | 2,882               |  
|Other Expense              |   |                     |   |   |                     |  
|Unrealized Loss            |   |                     |   |   |                     |  
|on Investment              |   | -0-                 |   |   | -0-                 |  
|Loss Before Provision for  |   |                     |   |   |                     |  
|Income Taxes               |   | (31,488             | ) |   | (44,428             | )
|Provision for Income Taxes |   | -0-                 |   |   | -0-                 |  
|Net Loss                   |   | (31,488             | ) |   | (44,428             | )
|Accumulated Deficit,       |   |                     |   |   |                     |  
|Beginning of Period        |   | (1,523,621          | ) |   | (1,423,171          | )
|Accumulated Deficit,       |   |                     |   |   |                     |  
|End of Period              | $ | (1,555,109          | ) | $ | (1,467,599          | )
|                           |   |                     |   |   |                     |  
|Net Loss per Share         | $ | (0.00               | ) | $ | (0.00               | )
|Weighted Average           |   |                     |   |   |                     |  
|Shares Outstanding         |   | 36,753,200          |   |   | 35,468,200          |  

See Notes to Financial Statements.

F-2

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

DeficitAccumulatedCommon Stock
      
      
      Additional
      
      
      During the
      
      
      TotalDollar
      
      
      Paid in
      
      
      Exploration
      
      
      Stockholders'Shares
      
      
      Amount
      
      
      Capital
      
      
      Stage
      
      
      Equity (Deficit)Inception,February 20, 2001
      
      ----
      
      $
      ----
      
      $
      ----
      
      $
      ----
      
      $
      ----Common Stock Issued$0.001 per shareApril 9, 2001
      
      4,000,000
      
      
      400
      
      
      3,600
      
      
      ----
      
      
      4,000Net Loss, Period EndedApril 30, 2001
      
      ----
      
      
      ----
      
      
      ----
      
      
      (1,410
      )
      
      (1,410
      )Balances, April 30, 2001
      
      4,000,000
      
      
      400
      
      
      3,600
      
      
      (1,410
      )
      
      2,590Common Stock Issued$0.01 per shareAugust 15, 2001
      
      2,500,000
      
      
      250
      
      
      24,750
      
      
      ----
      
      
      25,000Net Loss, Period EndedApril 30, 2002
      
      ----
      
      
      ----
      
      
      ----
      
      
      (19,196
      )
      
      (19,196
      )Balances, April 30, 2002
      
      6,500,000
      
      
      650
      
      
      28,350
      
      
      (20,606
      )
      
      8,394Common Stock Issued$0.10 per shareSeptember 30, 2002
      
      142,500
      
      
      14
      
      
      14,236
      
      
      ----
      
      
      14,250Net Loss, Period EndedApril 30, 2003
      
      ----
      
      
      ----
      
      
      ----
      
      
      (17,632
      )
      
      (17,632
      )Balances, April 30, 2003
      
      6,642,500
      
      
      664
      
      
      42,586
      
      
      (38,238
      )
      
      5,012Common Stock Issued$0.10 per shareNovember 6, 2003
      
      400,000
      
      
      40
      
      
      39,960
      
      
      ----
      
      
      40,000Net Loss, Period EndedApril 30, 2004
      
      ----
      
      
      ----
      
      
      ----
      
      
      (58,708
      )
      
      (58,708
      )Balances, April 30, 2004
      
      7,042,500
      
      
      704
      
      
      82,546
      
      
      (96,946
      )
      
      (13,696
      )Net Loss, Period EndedApril 30, 2005
      
      ----
      
      
      ----
      
      
      ----
      
      
      (37,532
      )
      
      (37,532
      )Balances, April 30, 2005
      
      7,042,500
      
      
      704
      
      
      82,546
      
      
      (134,478
      )
      
      (51,228
      )


See Notes to Financial Statements.

F-3

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

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


See Notes to Financial Statements.

F-4

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

DeficitAccumulatedCommon Stock
      
      
      Additional
      
      
      During the
      
      
      TotalDollar
      
      
      Paid in
      
      
      Exploration
      
      
      Stockholders'Shares
      
      
      Amount
      
      
      Capital
      
      
      Stage
      
      
      Equity (Deficit)BalancesApril 30, 2007
      
      34,183,200
      
      $
      34,183
      
      $
      1,317,387
      
      $
      (1,423,171
      )
      $
      (71,601
      )Common Stock Issued$0.10 per shareJuly 12, 2007
      
      2,570,000
      
      
      2,570
      
      
      254,755
      
      
      ----
      
      
      257,325Net Loss, Period EndedApril 30, 2008
      
      ----
      
      
      ----
      
      
      ----
      
      
      (100,450
      )
      
      (100,450
      )BalancesApril 30, 2008
      
      36,753,200
      
      $
      36,753
      
      $
      1,572,142
      
      $
      (1,523,621
      )
      $
      85,274Net Loss, Period EndedJuly 31, 2008
      
      ----
      
      
      ----
      
      
      ----
      
      
      (31,488
      )
      
      (31,488
      )BalancesJuly 31, 2008
      
      36,753,200
      
      $
      36,753
      
      $
      1,572,142
      
      $
      (1,555,109
      )
      $
      53,786


See Notes to Financial Statements.

F-5

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

|                                  |   | THREE MONTHS ENDED  |   |   | INCEPTION to        |  
|--------------------------------- | - | ------------------- | - | - | ------------------- | -
|                                  |   | JULY
      31, 2008 |   |   | JULY
      31, 2007 |  
|Cash Flows from                   |   |                     |   |   |                     |  
|Operating Activities:             |   |                     |   |   |                     |  
|                                  |   |                     |   |   |                     |  
|Net Loss                          | $ | (31,488             | ) | $ | (44,428             | )
|Adjustments to Reconcile Net Loss |   |                     |   |   |                     |  
|To Net Cash Provided/(Used) by    |   |                     |   |   |                     |  
|Operating Activities:             |   |                     |   |   |                     |  
|Unrealized Loss on Investment     |   | -0-                 |   |   | -0-                 |  
|(Increase)/Decrease
      in:     |   |                     |   |   |                     |  
|Trust Account Receivable          |   | 8,024               |   |   | 1,046               |  
|Notes
      Receivable            |   | (4,033              | ) |   | (182,882            | )
|Increase/(Decrease) in:           |   |                     |   |   |                     |  
|Accounts
      Payable            |   | 126                 |   |   | (2,687              | )
|                                  |   |                     |   |   |                     |  
|Net Cash Used by                  |   |                     |   |   |                     |  
|Operating Activities              |   | (27,371             | ) |   | (228,951            | )
|                                  |   |                     |   |   |                     |  
|Cash Flows from                   |   |                     |   |   |                     |  
|Investing Activities:             |   |                     |   |   |                     |  
|                                  |   |                     |   |   |                     |  
|Investment in Stock               |   | -0-                 |   |   | -0-                 |  
|                                  |   |                     |   |   |                     |  
|Net Cash Used by                  |   |                     |   |   |                     |  
|Investing Activities              |   | -0-                 |   |   | -0-                 |  
|                                  |   |                     |   |   |                     |  
|Cash Flows from                   |   |                     |   |   |                     |  
|Financing Activities:             |   |                     |   |   |                     |  
|                                  |   |                     |   |   |                     |  
|Loans from Shareholders           |   | 41,000              |   |   | -0-                 |  
|Payments on Loans                 |   | (50,000             | ) |   | (11,295             | )
|Proceeds from Issuance of         |   |                     |   |   |                     |  
|Common Stock                      |   | 57,000              |   |   | 151,000             |  
|                                  |   |                     |   |   |                     |  
|Net Cash Provided by              |   |                     |   |   |                     |  
|Financing
      Activities        |   | 48,000              |   |   | 139,705             |  
|                                  |   |                     |   |   |                     |  
|Net Increase (Decrease) in Cash   |   | 20,629              |   |   | (89,246             | )
|                                  |   |                     |   |   |                     |  
|Cash at Beginning of Period       |   | 100                 |   |   | 92,275              |  
|                                  |   |                     |   |   |                     |  
|Cash at End of Period             | $ | 20,729              |   | $ | 3,029               |  

See Notes to Financial Statements.

F-6

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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-7

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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-8

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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 July 31,
  2008 and July 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-9

---

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 $1,555,109 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-10

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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 July 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 $18,925, 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 of two years from
  closing.

As of July 31, 2008, $57,000 was received as advances on the
  purchase of 2,850,000 Units under these private placements, and is reflected in
  the financial statements as Common Stock Payable.

On July 9, 2008, the Company entered into an interim agreement
  with Pyro Pharmaceuticals, Inc., 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-11

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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 October 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-12

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SUPPLEMENTAL STATEMENT





F-13

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

|                               |   | THREE MONTHS ENDED |  |   | INCEPTION to       | 
|------------------------------ | - | ------------------ |  | - | ------------------ | 
|                               |   | JULY
      31,2008 |  |   | JULY
      31,2007 | 
|                               |   |                    |  |   |                    | 
|Operating Expenses:            |   |                    |  |   |                    | 
|Accounting                     | $ | 12,000             |  | $ | 15,880             | 
|Bank Charges                   |   | 46                 |  |   | 17                 | 
|Consulting                     |   | -0-                |  |   | 5,900              | 
|Exploration Expense            |   | -0-                |  |   | -0-                | 
|Legal                          |   | 14,285             |  |   | 15,696             | 
|Office Administration          |   | 7,500              |  |   | 7,500              | 
|Office Expenses                |   | 208                |  |   | 250                | 
|Regulatory Expenses/Fees       |   | 119                |  |   | 383                | 
|Rent                           |   | 750                |  |   | 750                | 
|Telephone                      |   | -0-                |  |   | 934                | 
|Travel & Entertainment         |   | 613                |  |   | -0-                | 
|                               |   |                    |  |   |                    | 
|                               |   |                    |  |   |                    | 
|Total
      Operating Expenses | $ | 35,521             |  | $ | 47,310             | 

See Notes to Financial Statements.

F-14

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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. Until recently, we 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 below. There is no assurance that the proposed business
combination will be completed as planned or if at all.

RECENT CORPORATE DEVELOPMENTS

The following corporate developments occurred since our fiscal
year ended April 30, 2008:

|1. | On July 9, 2008, we entered into an interim agreement
      (the Interim Agreement) with Pyro, a privately held Delaware corporation
      engaged in the business of developing therapeutics against multi-drug
      resistant infectious microorganisms. See Pyro Pharmaceuticals Interim
      Agreement, below.                                                                                                                                                                                                                                                                                                                                                         
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2. | 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 of 1933 (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.                                                                                                                                                                                                                                                                                    

3

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|   | The proceeds of the U.S. Private Placement and the
      Foreign Private Placement offerings will be used to meet the closing
      conditions of the proposed business combination between us and Pyro. There
      is no assurance that the U.S. Private Placement or the Foreign Private
      Placement offerings or any part of them will be completed.                                                                                                                                                                                                   
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|3. | 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.

PYRO PHARMACEUTICALS INTERIM AGREEMENT

On July 9, 2008, we entered into an interim agreement (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 October 31, 2008. There is no assurance that the proposed transaction will
be completed as planned or at all.

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 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

4

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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 with Pyro by October 31, 2008. As a condition to completing the
business combination with Pyro, we will be required to raise $2,500,000 in
equity financing. There is no assurance that we will be able to complete the
proposed business combination with Pyro as planned or if at all.

Until recently, our plan of operation was to conduct mineral
exploration activities on the Peach Claim. However, on July 31, 2008, we decided
to allow our interest in the Peach Claim to lapse in order to focus our
financial resources on the completing the proposed business combination with
Pyro. As a result, we are unable to provide an estimate of our exact financial
needs for the next twelve months.

RESULTS OF OPERATIONS

|Three Months Summary    |   |                          |   |   |                     |   |  |                       | 
|----------------------- | - | ------------------------ | - | - | ------------------- | - |  | --------------------- | 
|                        |   | Three
      Months Ended |   |   | Percentage          |  
|                        |   | July
      31, 2008      |   |   | July
      31, 2007 |   |  | Increase / (Decrease) | 
|Revenue                 | $ | -                        |   | $ | -                   |   |  | n/a                   | 
|Operating Expenses      |   | (35,521                  | ) |   | (47,310             | ) |  | (24.9)%               | 
|Other Income - Interest |   | 4,033                    |   |   | 2,882               |   |  | 39.9%                 | 
|Net Loss                | $ | (31,488                  | ) | $ | (44,428             | ) |  | (29.1)%               | 

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.

Expenses

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

|             |   | Three Months
      Ended |  |   | Percentage          | 
|------------ | - | ------------------------ |  | - | ------------------- | 
|             |   | July
      31, 2008      |  |   | July
      31, 2007 | 
|Accounting   | $ | 12,000                   |  | $ | 15,880              | 
|Bank Charges |   | 46                       |  |   | 17                  | 

5

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|Consulting               |   | -      |  |   | 5,900  |  |  | (100)%  | 
|------------------------ | - | ------ |  | - | ------ |  |  | ------- | 
|Legal                    |   | 14,285 |  |   | 15,696 |  |  | (9.0)%  | 
|Office Administration    |   | 7,500  |  |   | 7,500  |  |  | n/a     | 
|Office Expenses          |   | 208    |  |   | 250    |  |  | (16.8)% | 
|Regulatory Expenses/Fees |   | 119    |  |   | 383    |  |  | (68.9)% | 
|Rent                     |   | 750    |  |   | 750    |  |  | n/a     | 
|Telephone                |   | -      |  |   | 934    |  |  | (100)%  | 
|Travel & Entertainment   |   | 613    |  |   | -      |  |  | n/a     | 
|Total Operating Expenses | $ | 35,521 |  | $ | 47,310 |  |  | (24.9)% | 

During the three months ended July 31, 2008, our operating
expenses primarily consisted of accounting expenses, legal expenses and office
administration expenses. The decrease in our expenses for the three months ended
July 31, 2008 as compared to the comparative period in 2007 is primarily due to
the decreases in accounting, legal and consulting 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.

Our consulting expenses decreased substantially as the
consulting fees paid to two former officers terminated as a result of their
resignation.

LIQUIDITY AND CAPITAL RESOURCES

|Working Capital                         |   |                        |   |   |                         |   |  |                       | 
|--------------------------------------- | - | ---------------------- | - | - | ----------------------- | - |  | --------------------- | 
|                                        |   |                        |   |   |                         |   |  | Percentage            | 
|                                        |   | At
      July 31, 2008 |   |   | At
      April 30, 2008 |   |  | Increase / (Decrease) | 
|Current Assets                          | $ | 245,405                |   | $ | 228,767                 |   |  | 7.3%                  | 
|Current Liabilities                     |   | (191,619               | ) |   | (143,493                | ) |  | 33.5%                 | 
|Working Capital Surplus
      (Deficit) | $ | 53,786                 |   | $ | 85,274                  |   |  | (36.9)%               | 

|Cash Flows                                    |   |                     |   |   |                     |  
|--------------------------------------------- | - | ------------------- | - | - | ------------------- | -
|                                              |   | Three Months Ended  |  
|                                              |   | July
      31, 2008 |   |   | July
      31, 2007 |  
|Net Cash Used by Operating Activities         | $ | (27,371             | ) | $ | (228,951            | )
|Net Cash From Investing Activities            |   | -                   |   |   | -                   |  
|Net Cash Provided By Financing Activities     |   | 48,000              |   |   | 139,705             |  
|Net Increase (Decrease) in Cash During Period | $ | 20,629              |   | $ | (89,246             | )

We had cash on hand of $20,729 and a working capital surplus of
$53,786 as of July 31, 2008 compared to a working capital surplus of $85,274 as
of April 30, 2008.

As of the date of hereof, we have received proceeds from the
sale of 10,000,000 units under our $0.02 per unit private placement offering. To
date, no securities have been issued under this private placement. We anticipate
that this private placement will be completed in the near future.

6

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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.

Our board of directors has approved a private placement
offering of up to 12,500,000 units at a price of $0.10 per unit to U.S.
residents who are accredited investors as such term is defined in Regulation D
of the Securities Act and a concurrent private placement of 12,500,000 units on
the same terms to persons who are not U.S. persons as such term is defined
under Regulation S of the Securities Act. The U.S. Private Placement and the
Foreign Private Placement are described above in further detail under the
heading Recent Corporate Developments.

The above does not constitute an offer to sell or a
solicitation of an offer to buy any of the Companys securities in the United
States. The securities have not been registered under the United States
Securities Act of 1933, as amended and may not be offered or sold within the
United States or to U.S. persons unless an exemption from such registration is
available.

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

OFF-BALANCE SHEET ARRANGEMENTS

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

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with
United States generally accepted accounting principles requires our management
to make estimates and assumptions that affect the

7

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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 July 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 statements contained in
our Quarterly Report on Form 10-Q for the quarter ended July 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.

8

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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
July 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 July 31, 2008, we had cash in the amount of $20,729. 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. There is no assurance that the
private placement offerings or any part of them will be completed. If we are
unable to complete the private placement offerings, we will be unable to
complete the proposed transactions 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 $1,555,109 for the period from
February 20, 2001 (inception) to July 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.

None.

ITEM
3.              
DEFAULTS UPON SENIOR SECURITIES.

None.

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

No matters were submitted to our security holders during our
fiscal quarter ended July 31, 2008.

ITEM
5.              
OTHER INFORMATION.

None.

11

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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)                                                                                                                
|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.                        
|           |                                                                                                                         

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

---