Terax Energy 10QSB 2007 Q3 Quarterly report (small business)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10QSB

(Mark One)

[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period endedMarch, 31, 2007

[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ____________ to ______________

Commission file number333-72230

TERAX ENERGY, INC.
(Name of Small Business Issuer in Its Charter)

Nevada	88-0475757
(State of Incorporation)	(IRS Employer Identification No.)

13355 Noel Road
1370 One Galleria Tower
Dallas, TX 75240
(Address of Principal Executive Offices)

(972) 503-0900
(Issuer's Telephone Number)

______________________________________________________________
(Former 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 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 shell Terax (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]

As of May 15, 2007, Terax had 3,685,256 shares of its par value $0.001 common stock issued and outstanding.

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

Quarterly Report on Form 10-QSB for the
Quarterly Period Ending March 31, 2007

Table of Contents

PART I.FINANCIAL INFORMATION			3

	Item 1.	Financial Statements	3

		Consolidated Balance Sheets: March 31, 2007 and June 30, 2006 (Unaudited)	3

		Consolidated Statements of Operations: Three and Nine Months Ended March 31, 2007 and 2006 (Unaudited)	4

		Statements of Cash Flows: Nine Months Ended March 31, 2007 and 2006 (Unaudited)	5

		Notes to Unaudited Consolidated Financial Information: March 31, 2007	6

	Item 2.	Plan of Operation	11

	Item 3.	Controls and Procedures	18

PART II.OTHER INFORMATION			18

	Item 1.	Legal Proceedings	18

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21

	Item 3.	Defaults Upon Senior Securities	22

	Item 4.	Submission of Matters to a Vote of Security Holders	22

	Item 5.	Other Information	22

	Item 6.	Exhibits	22

Signatures			23

Terax Energy, Inc.
Consolidated Balance Sheet
(Unaudited)

		March 31,			June 30,
		2007			2006

ASSETS

Current assets:
Cash	$	10,647		$	779,872
Prepaid expenses, and advances to operators		3,576			559,669
Total current assets		14,223			1,339,541

Property, Plant and Equipment:
Oil and natural gas properties, successful efforts method of accounting:
Proved properties, net of accumulated depletion and impairment		724,220			718,967
Unproved properties not being amortized, net of impairment		9,843,838			9,591,386
Pipeline and gathering system, net of accumulated depreciation		5,386,277			5,767,339
Furniture and equipment, net of accumulated depreciation		73,199			128,083
Total property, plant and equipment		16,027,534			16,205,775

Other assets		12,471			12,471
Total assets	$	16,054,228		$	17,557,787

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
Accounts payable and accrued expense	$	6,065,311		$	5,144,658
Accrued liabilities		1,010,821			436,586
Short term debt		2,600,000			2,500,000
Derivative liability		47,299			16,458,719
Total current liabilities		9,723,431			24,539,963

Asset retirement obligation		24,539			24,399

Stockholders' equity (deficit):
Preferred stock, $0.001 par value, 250,000		-			-
shares authorized, zero shares issued and outstanding
Common stock, $0.001 par value, 15,000,000		3,067			3,029
shares authorized, 3,066,583 and 3,028,951 shares
issued and outstanding at March 31, 2007 and June 30, 2006
Additional paid-in capital		16,151,009			16,098,052
Accumulated deficit		(9,847,818	)		(23,107,656	)

Total stockholders' equity (deficit)		6,306,258			(7,006,575	)

Total liabilities and stockholders' equity (deficit)	$	16,054,228		$	17,557,787

See accompanying notes to the consolidated financial statements.

Terax Energy, Inc.
Consolidated Statements of Operations
(Unaudited)

		Three-Months Ended						Nine-Months Ended
		March 31,						March 31,
		2007			2006			2007			2006

Revenue	$	-		$	-		$	189,139		$	-

Expenses:
Depreciation and depletion expense		151,131			7,475			513,963			10,864
Impairment of oil and gas properties		-			-			998,911			-
General and administrative expenses		244,437			832,228			1,573,933			2,472,748
Total expenses		395,568			839,703			3,086,807			2,483,612

Net operating (loss)		(395,568	)		(839,703	)		(2,897,668	)		(2,483,612	)

Other income (expense):
Dividend income		-			43,902			3,262			74,841
Interest (expense)		(99,645	)		(460,702	)		(257,179	)		(493,251	)
Gain (loss) on derivative liability		37,522			(18,535,627	)		16,411,419			(18,535,627	)
Other		-			(243	)		-			(25,878	)
Other income (expense)		(62,123	)		(18,952,670	)		16,157,502			(18,979,915	)

Net income (loss)	$	(457,691	)	$	(19,792,373	)	$	13,259,834		$	(21,463,527	)

Basic and diluted net income (loss) per share	$	(0.15	)	$	(6.98	)	$	4.36		$	(8.10	)

Weighted average number of
common shares outstanding
basic and diluted		3,061,081			2,837,047			3,040,186			2,650,325

See accompanying notes to the consolidated financial statements.

Terax Energy, Inc.
Consolidated Statements of Cash Flows
(Unaudited)

		For the Nine-Months Ended
		March 31,
		2007			2006
Cash flows from operating activities:
Net income (loss)	$	13,259,834		$	(21,463,527	)
Adjustments to reconcile net loss :
Shares issued for compensation		52,995			-
Shares issued for interest expense		-			375,000
Asset retirement obligations		2,319			-
Depreciation, depletion and amortization		513,963			10,864
Impairment of oil and gas properties		998,911			-
Write off of fixed assets		4,753
Unrealized (gain) loss on derivative liability		(16,411,419	)		18,535,627
Changes in current assets and liabilities:
Increase and decrease in prepaid expenses and operator advances		556,093			21,070
Increase in accounts payable		45,393			1,575,780
Increase in accrued liabilities		571,953			966,486
Decrease in deposits		-			(12,471	)
Net cash used in operating activities		(405,205	)		8,829

Cash flows from investing activities
Purchases of oil and gas leases		(252,451	)		(4,458,606	)
Investments in drilling and equipment		(160,265	)		(11,165,540	)
Investments in pipeline and gathering system		(70,534	)		(3,486,405	)
Investments in furniture and fixtures		-			(145,446	)
Disposition of equipment and automobile		19,230			-
Net cash used in investing activities		(464,020	)		(19,255,997	)

Cash flows from financing activities
Proceeds from notes payable		100,000			7,825,000
Payments on notes payable		-			(7,825,000	)
Issuance of common stock, net of offering cost		-			22,249,880
Net cash provided by financing activities		100,000			22,249,880

Net (decrease) increase in cash		(769,225	)		3,002,712
Cash – beginning of period		779,872			16,614
Cash – ending of period	$	10,647		$	3,019,326

Supplemental disclosures:
Interest paid	$	-		$	118,251
Income taxes paid	$	-		$	-
Non-cash transactions:

Terax Energy, Inc.

Notes to Unaudited Interim Consolidated Financial Statements

Note 1 - Basis of Presentation

The consolidated interim financial statements included herein are presented in accordance with United States generally accepted accounting principles, and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for the period ended June 30, 2006 as reported in Form 10-KSB have been omitted.

These statements reflect all adjustments, consisting of normal recurring adjustments which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these consolidated interim financial statements be read in conjunction with the financial statements of Terax for the period ended June 30, 2006 and notes thereto included in Terax’s Form 10-KSB.

Note 2 – Going Concern

Terax's financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities and commitments in the normal course of business for the foreseeable future. Since inception, Terax has accumulated losses aggregating to $9,847,818, negative working capital of $9,709,208 and has insufficient working capital to meet operating needs for the next twelve months as of March 31, 2007, all of which raise substantial doubt about Terax's ability to continue as a going concern.

Terax has numerous litigation related matters, see Note 6 for details, which also raise significant doubt about Terax’s ability to continue as a going concern.

Management's plans for Terax's continued existence include selling additional stock, the sale of assets, or borrowing additional funds to pay current accounts payable, short-term debt, and overhead expenses. In addition, Terax will need to raise additional capital for development of its properties or enter into joint ventures with other operators in order to execute its business plan.

Terax’s future success is dependent upon its ability to achieve profitable operations, generate cash from operating activities, and obtain additional financing. There is no assurance that Terax will be able to generate sufficient cash from operations, sell additional shares of common stock, or borrow additional funds.

Terax's inability to obtain additional cash could have a material adverse effect on its financial position, results of operations, and its ability to continue in existence. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Note 3 – Stockholder’s Equity

Reverse stock split

On January 29, 2007, a 1 to 20 (one to twenty) reverse split of Terax’s common shares was implemented which resulted in 3,066,583 outstanding common shares at February 20, 2007. The total authorized common and preferred shares were also adjusted which resulted in authorized shares of 15,000,000 and 250,000, respectively.All outstanding warrants were also adjusted on a 1 to 20 (one to twenty) ratio and the strike price was increased 20 (twenty) times the original strike price. All share and per share information has been retroactively restated in the consolidated financial statements to reflect the reverse stock split.

Sale of Securities

On February 7, 2006, Terax entered into a series of securities purchase agreements to sell units consisting of common stock and warrants to four institutional investors for the sale of an aggregate of 640,280 shares of Terax’s common stock and warrants to purchase an additional 640,280 shares of common stock, for an aggregate purchase price of $16,007,000. The unit purchase price of the common stock and corresponding warrant was $1.25 per unit. The warrants are exercisable at an exercise price of $1.50 per share and expire on February 6, 2011. Terax has the right to require exercise of all of the warrants in the event that (i) a registration statement registering the resale of the warrants is then in effect and (ii) the volume weighted average trading price per share of Terax’s common stock for each of the previous thirty trading days is in excess of $2.50 per share.

With respect to the February 7, 2006 private placement, Terax also entered into registration rights agreements with the investors to register the resale of the shares of common stock sold in the offering and issuable upon exercise of the warrants. Subject to the terms of the registration rights agreement, Terax is required to file the registration statement with the Securities and Exchange Commission within 30 days of the closing, to use its best efforts to cause the Registration Statement to be declared effective under the Securities Act of 1933 (the “Act”) within 60 days following the closing date of the offering, or 120 days following the closing of the offering if the registration statement is reviewed by the Securities and Exchange Commission. In the event the registration statement is not filed or declared effective when due, Terax is obligated to pay the investors liquidated damages in the amount of 1.5% of the purchase price for each month in which Terax is in default.

Terax is accounting for the warrants associated with the sale of its common stock in the February 7, 2006 private placement in accordance with SFAS 133 “Accounting for Derivative instruments and Hedging Activities” and EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Terax’s Own Stock”. The accounting treatment of these derivative financial instruments requires that Terax record the derivatives at their fair values as of the date of the sale of the common stock and at fair value as of each subsequent balance sheet date as a liability.

At March 31, 2007 the fair value of the warrants was determined utilizing the Black Scholes valuation model. The fair value of the warrants at March 31, 2007 was $47,299. The significant assumptions used in the valuation were: the exercise price as noted above; Terax’s common stock price on March 31, 2007, which was $.26 per share; expected volatility of 84.42%; risk free interest rate of approximately 4.5%, and a term of three years and ten months. The resulting unrealized change in fair value of $16,411,419 from June 30, 2006 to March 31, 2007 was recorded in the statement of operations as a gain on derivative liability resulting in a net gain on derivative liability for the period of $16,411,419.

Securities Issued for Compensation

On September 21, 2006, Terax issued 625 shares of common stock to a former Director as compensation. The share price of the stock on September 21, 2006, was $0.51 per share and therefore $6,375 was recorded in equity and general and administrative expenses.

Note 4 – Oil and Gas Properties

Impairment of Oil and Gas Properties

The long-lived assets of the Company, which are subject to evaluation, consist primarily of oil and gas properties. During the nine months ended March 31, 2007, the Company recorded an impairment loss of $998,911 on proved producing oil and gas properties.

Asset Retirement Obligations

Terax follows the provisions of Financial Accounting Standards Board Statement No. 143, Accounting for Asset Retirement Obligations (SFAS No. 143). This accounting standard requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement.

Following is a reconciliation of the asset retirement obligation liability as of March 31, 2007:

Asset retirement obligation at June 30, 2006	$	24,399
Liabilities incurred		-
Liabilities settled		-
Accretion expense		140
Asset retirement obligation at March 31, 2007	$	24,539

Note 5 – Note Payable

On May 12, 2006, Terax issued a promissory note in the principal amount of $2,500,000 to an investor. The note bears interest at the rate of 12.5% per annum, payable on repayment of the Note. The Note is due on demand after December 31, 2006. In addition, interest in the amount of $125,000 is due and payable in 71,429 shares of Terax’s common stock at closing. The note is secured by a security interest in all of Terax’s oil and gas leases and pipeline right of ways and easements in Erath County, Texas, as well as well and pipeline equipment and personal property, contracts and agreements, and production from Terax’s wells located on the leases. In the Event of Default, the holder of the note has the right but not the obligation to seek remedies for repayment of the notes including but not limited to foreclosure and sale of the secured assets. During the nine months ended March 31, 2007, Terax has accrued $255,069 in interest. The total interest accrued to date is $297,021. On January 19, 2007, Terax received a notice of default and a demand letter from the lender seeking repayment in full on the outstanding note. See management’s plans to address this and other liquidity issues discussed in Note 2 above.

On January 23, 2007, the Company issued a demand note in the principal amount of $500,000 (the “Note”) to Century Capital Management, Ltd., which is controlled by Andrew Hromyk, a director of Terax Energy, Inc. The initial advance under the agreement was $100,000. The Note bears interest at prime rate plus three percent (3%) per annum, payable on repayment of the Note. The Note is due on demand by the lender. The Note is secured by a security interest in all of the Company’s oil and gas leases and pipeline right of ways and easements in Comanche County, Texas. In the Event of Default, the holder of the Note has the right, but not the obligation, to seek remedies for repayment of the Note including but not limited to foreclosure and sale of the secured assets. As of March 31, 2007, approximately $2,111 in interest has been accrued and unpaid.

Note 6 – Other Obligations

Registration Obligation

Subject to the terms of the registration rights agreement, Terax was required to file the registration statement with the Securities and Exchange Commission within 30 days of the closing, to use its best efforts to cause the Registration Statement to be declared effective under the Securities Act of 1933 (the “Act”) within 60 days following the closing date of the offering, or 120 days following the closing of the offering if the registration statement is reviewed by the Securities and Exchange Commission. In the event the registration statement is not filed or declared effective when due, Terax is obligated to pay the investors liquidated damages in the amount of 1.5% of the purchase price for each month in which Terax is in default.

The date the registration needed to become effective with the Securities and Exchange Commission to avoid any registration penalty was June 7, 2006. However, Terax did not get the registration effective with the Securities and Exchange Commission until August 14, 2006. As a result Terax has incurred a total registration penalty of $536,783 which has been accrued as of March 31, 2007.

Litigation

On July 20, 2006, an action was commenced in the District Court of Erath County, Texas, against Terax by Centex Pipeline Construction, Inc. for failure to pay for services performed, breach of contract and to foreclose on Centex’s mechanic lien. The Complaint alleges that Terax and Centex entered into an agreement to install certain components of a gas pipeline gathering system on Terax’s Mitchell Ranch property in Erath County, Texas. The Complaint further alleges that Centex completed work on June 5, 2006 and that Terax has failed to pay certain outstanding invoices. Centex has filed a mechanic’s lien to create a security interest against the gathering line and compressor station. Centex is seeking damages in the amount of $510,319 plus interest, attorney fees and entry of an Order of Sale directing the sale by public auction of the property covered by Centex’s mechanic lien.

On December 13, 2006, Centex obtained a judgment against Terax which provided that any payments to Centex were to be made to Centex and the bank which has an interest in Centex’s receivable from Terax. Provided Terax can get the funds, it’s our plan is to seek a settlement with Centex and its bank.

On August 28, 2006, an action was commenced in the District Court of Travis County, Texas, against Terax, Andrew Hromyk and Starr County Energy, Inc. by Sam Warren and Tennessee Eastern Oil & Gas, Inc. for damages for breach of a personal services contract with the Plaintiffs, or in the alternative, based upon the doctrine of quantum merit, for value of services which Plaintiffs allegedly rendered to Defendants. The complaint alleges that in early 2006, Tennessee Eastern and Starr County entered into an agreement to purchase certain oil and gas properties located in Tennessee, which agreement was terminated. The complaint alleges that Hromyk continued discussions with Plaintiff Warren and indicated that a lawsuit filed against Terax by William Rhea was impeding the potential sale of the Tennessee property, at which point, Warren offered to assist with settling the William Rhea lawsuit. The complaint further alleged that Plaintiffs negotiated and mediated a settlement of the William Rhea lawsuit and that after the lawsuit was settled, the Defendants breached their agreement to purchase the Tennessee property for $5.7 million. The Plaintiffs are seeking a judgment against the Defendants in the amount of $5.7 million and attorneys’ fees and expenses and costs of court.

On November 10, 2006, the Plaintiff and the Defendants met for negotiations and reached a settlement agreement subject to documentation. Terax will agree to pay $50,000 for settlement of all claims against Terax. To date the settlement has not been finalized and no payments have been made to the Plaintiff.

On September 22, 2006, an action was commenced in the District Court of Erath County, Texas, by Geosite, Inc. against Terax and Bill Chester for breach of contract and foreclosure of lien. The Plaintiff alleges that Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $10,930 allegedly owed to the Plaintiff, interest, and attorney’s fees and an order of foreclosure of Plaintiff’s lien. Terax has responded to the Geosite lawsuit in a timely manner but plans to reach a settlement with Geosite in the near future provided funds are available.

On October 3, 2006, an action was commenced in the District Court of Erath County, Texas, by Digital Mud Logging, LLC against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges that Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $11,200 allegedly owed to the Plaintiff, interest, and attorney’s fees and an order of foreclosure of Plaintiff’s lien. Terax has responded to the Digital Mud Logging, LLC lawsuit in a timely manner but plans to reach a settlement with Digital Mud in the near future provided funds are available

On October 5, 2006, an action was commenced in the District Court of Erath County, Texas, by BJ Services Company, USA against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges that Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $475,844 allegedly owed to the Plaintiff, interest, and attorney’s fees and an order of foreclosure of Plaintiff’s lien. Terax has responded to the BJ Services lawsuit in a timely manner.

On November 3, 2006, Terax was notified that BJ Services filed a Motion for Summary Judgment with the court. On December 7, 2006, the court issued an abstract of judgment in favor of BJ Services Company; Terax plans to reach a settlement with BJ Services in the near future provided the funds are available.

On October 10, 2006, an action was commenced in the District Court of Erath County, Texas, by J.D. Fields & Company, Inc. against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges that Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $305,216 allegedly owed to the Plaintiff, interest, and attorney’s fees and an order of foreclosure of Plaintiff’s lien. Terax has responded to the J. D. Fields lawsuit in a timely manner but plans to reach a settlement with J.D. Fields in the near future provided funds are available.

On January 8, 2007, J.D. Fields filed a motion for a summary judgment with the court and hearing has been set for February 27, 2007.

On October 18, 2006, an action was commenced in the District Court of Erath County, Texas, by Schlumberger Technology Corporation against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges that Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $49,288 allegedly owed to the Plaintiff, interest, and attorney’s fees and an order of foreclosure of Plaintiff’s lien. Terax has responded to the Schlumberger lawsuit in a timely manner but plans to reach a settlement with Schlumberger in the near future provided funds are available.

On October 19, 2006, an action was commenced in the Precinct 3, Place 3, Justice of the Peace Court, Dallas County, Texas, by Riviera Finance of Texas, Inc. on behalf of NTX Roadrunner Transportation, LLC against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges that Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $3,938 allegedly owed to the Plaintiff, interest, and attorney’s fees and an order of foreclosure of Plaintiff’s lien. The court set a hearing on January 18, 2007, and on January 30, 2007, the court issued a default judgment. Terax plans to reach a settlement with Riviera in the near future provided funds are available.

On October 19, 2006, an action was commenced in the District Court of Erath County, Texas, by Baker Hughes Oilfield Operations, Inc. against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges that Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $55,523 allegedly owed to the Plaintiff, interest, and attorney’s fees and an order of foreclosure of Plaintiff’s lien. Terax has responded to the Baker Hughes lawsuit in a timely manner but plans to reach a settlement with Baker Hughes in the near future provided funds are available.

On October 26, 2006, an action was commenced in the District Court of Erath County, Texas, by Jay Mills Contracting, Inc. against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges that Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $72,979 allegedly owed to the Plaintiff, interest, and attorney’s fees and an order of foreclosure of Plaintiff’s lien. Terax has responded to the Jay Mills lawsuit in a timely manner but plans to reach a settlement with Jay Mills in the near future provided funds are available.

On November 2, 2006, an action was commenced in the County Court at Law No.2, Dallas County, Texas, by Leam Drilling Systems, Inc. against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges that Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $113,489 allegedly owed to the Plaintiff, interest, and attorney’s fees and an order of foreclosure of Plaintiff’s lien. Terax plans to respond to the Leam Drilling lawsuit in a timely manner but plans to reach a settlement with Leam Drilling in the near future provided funds are available. On December 21, 2006, the court set a non jury trial for June 19, 2007.

On November 8, 2006, an action was commenced in the District Court of Erath County, Texas, by Ideal Energy Directional Drilling Services, Inc. against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges that Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $52,500 allegedly owed to the Plaintiff, interest, and attorney’s fees and an order of foreclosure of Plaintiff’s lien. Terax has responded to the Ideal lawsuit in a timely manner but plans to reach a settlement with Ideal Energy Directional Drilling in the near future provided funds are available.

On November 9, 2006, an action was commenced in the District Court of Erath County, Texas, by Red River Well Service, Ltd, Mercer Well Service, Basin Tool, Shale Tank Truck, LP, and Bell Supply I, LP (“the Plaintiffs”) against Terax for breach of contract and foreclosure of lien. The Plaintiffs alleges that Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $279,078 allegedly owed to the Plaintiff, interest, and attorney’s fees and an order of foreclosure of Plaintiffs lien. Terax plans to respond to the Plaintiffs lawsuit in a timely manner but plans to reach a settlement with Plaintiffs in the near future provided funds are available.

On December 5, 2006, an action was commenced in the County Court at Law No.2 in Midland County, Texas, by Alliance Drilling Fluids, LLC against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges that Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $18,890 allegedly owed to the Plaintiff, interest and attorney’s fees and an order of foreclosure of Plaintiff’s lien. Terax has responded to the Alliance lawsuit in a timely manner, but plans to reach a settlement with Alliance Drilling Fluids in the near future provided funds are available.

On December 10, 2006, an action was commenced in the District Court of Erath County, Texas, by Brett Construction Company, Inc. against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges that Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $16,852 allegedly owed to the Plaintiff, interest attorney’s fees and an order of foreclosure of Plaintiff’s lien. Terax has responded to the Brett lawsuit in a timely manner but plans to reach a settlement with Brett Construction in the near future provided funds are available.

On January 29, 2007, Brett Construction filed a motion for summary judgment with the court but Terax plans to reach a settlement with Brett Construction in the near future provided funds are available.

On December 26, 2006, an action was commenced in the District Court of Erath County, Texas, by Alamo Field Services, Inc. against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges that Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $142,195 allegedly owed to the Plaintiff, interest, and attorney’s fees and an order of foreclosure of Plaintiff’s lien. Terax has responded to the Alamo lawsuit in a timely manner but plans to reach a settlement with Alamo Field Services in the near future provided funds are available.

On January 3, 2007, an action was commenced in the District Court of Erath County, Texas, by Integrated Production Services, LLC. against Terax for breach of contract and foreclosure of its lien. The Plaintiff alleges that Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $200,800 allegedly owed to the Plaintiff, interest, and attorney’s fees and an order of foreclosure of Plaintiff’s lien. Terax has responded to the Integrated lawsuit in a timely manner

but plans to reach a settlement with Integrated Production Services in the near future provided funds are available.

On January 8, 2007, an action was commenced in the District Court of Erath County, Texas, by Mangum’s Oilfield Services, Inc. against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges that Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $25,955 plus interest and allegedly owed to the Plaintiff’s attorney fees and an order of foreclosure of Plaintiff’s lien. Terax has responded to the Mangum’s lawsuit in a timely manner but plans to reach a settlement with Mangum’s Oilfield Services in the near future provided funds are available.

On January 10, 2007, an action was commenced in the District Court of Erath County, Texas, by Lenward Caraway Enterprises, LLC. against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges that Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $116,617 allegedly owed to the Plaintiff, interest, and attorney’s fees. Terax has responded to the Lenward Caraway lawsuit in a timely manner but plans to reach a settlement with Lenward Caraway in the near future provided funds are available.

On January 29, 2007, an action was commenced in the District Court of Dallas County, Texas, by CDM Resources Management, Ltd. against Terax for breach of contract. The Plaintiff alleges that Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $73,601 allegedly owed to the Plaintiff, interest, and attorney’s fees. Terax plans to respond to CDM’s lawsuit in a timely manner but plans to reach a settlement with CDM Resources in the near future provided funds are available.

Note 7 – Subsequent Events

On April 26, 2007, Terax entered into a Purchase and Sale Agreement with Westar Oil, Inc. (“Westar”) pursuant to which the Company agreed to sell approximately 3.8 million shares of its common stock to Westar. The 3.8 million shares will be approximately 55% of the total outstanding and issued shares of the Company once the transaction is completed. At the initial closing, Terax sold 618,000 common shares at a price of $0.21 per share for a consideration of $129,780. Pursuant to the terms of the Purchase and Sale Agreement a second closing will be held, provided that as of July 15, 2007, there shall not be any bankruptcy or insolvency proceeding against the Company, pursuant to which Terax will sell to Westar the remaining 3,182,000 share of common stock a price of $0.21 per share or total of $668,220. Westar has represented that the shares are for investment purposes and there is no provision in the agreement for registration of the shares. As part of the agreement, Terax agreed to elect Westar’s nominee for a Director and Chief Executive Officer of the Company.

ITEM 2. PLAN OF OPERATIONS

Forward-Looking Statements

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objections of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements or belief; and any statements of assumptions underlying any of the foregoing.

Forward-looking statements may include the words “may”, “could”, “estimate”, “intend”, “continue”, “believe”, “expect” or “anticipate” or other similar words. These forward-looking statements present our

estimates and assumptions only as of the date of this report. Except for our ongoing securities laws, we do not intend, and undertake no obligation, to update any forward-looking statement.

Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. The factors impacting these risks and uncertainties include, but are not limited to:

	o	increased competitive pressures from existing competitors and new entrants;

	o	increases in interest rates or our cost of borrowing or a default under any material debt agreements;

	o	deterioration in general or regional economic conditions;

	o	adverse state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with respect to existing operations;

	o	loss of customers or sales weakness;

	o	inability to achieve future sales levels or other operating results;

	o	fluctuations of oil and gas prices;

	o	the unavailability of funds for capital expenditures; and

	o	operational inefficiencies in distribution or other systems.

For a detailed description of these and other factors that could cause actual results to differ materially from those expressed in any forward-looking statement, please see “Factors That May Affect Our Results of Operation” in this document and in our Report on Form 10-KSB for the period ended June 30, 2006.

Overview

We are an oil and gas exploration, development and production company. Our properties are located in the Fort Worth Basin. Our corporate strategy is to continue building value in Terax through the development and acquisition of gas and oil assets that exhibit consistent, predictable, and long-lived production. Our current focus is exploring the gas reserves located in the Barnett Shale formations of the Fort Worth Basin.

We have consolidated mineral lease positions in both Erath and Comanche counties. Our current focus is on the development and production of our Erath County properties. We have begun the evaluation process of our Comanche County properties but any further evaluation will require Terax to resolve its financial situation.

We may seek acquisition opportunities which compliment our current focus. We intend to fund our development activity primarily through proceeds from various private placements sufficient enough to evaluate our mineral leases.

Our revenue, profitability, and future growth rate depend substantially on factors beyond our control, such as economic, political, and regulatory developments and competition from other sources of energy. Oil and natural gas prices historically have been volatile and may fluctuate widely in the future. Sustained periods of low prices for oil or natural gas could materially and adversely affect our financial position, our results of operations, the quantities of oil and natural gas reserves that we can economically produce and our access to capital.

Results of Operations

Third Quarter of 2007 Compared to Third Quarter of 2006

The following overview provides a summary of key information concerning our financial results for the third quarter of our fiscal year ending June 30, 2007.

		Three Months			Three Months			Increase
		March 31, 2007			March 31, 2006			(Decrease)
Revenue	$	-		$	-		$	-

Expenses:
Depletion and depreciation		151,131			7,475			143,656
Impairment of properties		-			-			-
General and administrative		244,437			832,228			(587,791	)
Total expenses		395,568			839,703			(444,135	)

(Loss) from operations		(395,568	)		(839,703	)		444,134

Other income (expense):
Dividend income		-			43,902			(43,902	)
Interest expenses		(99,645	)		(460,702	)		361,057
Other		-			(243	)		243
Gain (loss) on derivative liability		37,522			(18,535,627	)		18,573,149
Net Income( loss)	$	(457,691	)		(19,792,373	)		19,334,682

Revenue

Terax had no revenue for the third quarter of fiscal 2007 and 2006. Production on Terax’s properties did not begin until the fourth quarter of 2006. In August and September 2006 Terax shut in all of its production due to its financial situation.

Expenses

Operations on Terax’s oil and gas properties did not begin until the fourth quarter of 2006 and all production was shut in during August and September 2006. Terax did not incur any lease operating, depletion and depreciation, or impairment expenses on oil and gas properties for the third quarter of 2006 and no lease operating expenses or impairment expenses on oil and gas properties were incurred in third quarter of 2007.

General and administrative expenses for the third quarter of 2007 as compared to the third quarter of 2006 were $244,437 and $832,228, respectively, for a decrease of $587,791. The decrease in general and administrative expenses was primarily due to a reduction in professional fees in the third quarter of 2007 of $387,324 compared to 2006.

Other Income (Expense)

Dividend income for the third quarter of 2007 and 2006 was $nil and $43,902, respectively, for a decrease of $43,902 which was the result of a decrease in funds available in an interest bearing account.

Interest expense for the third quarter of 2007 and 2006 was $99,645 and $460,702, respectively, for a decrease of $361,057. During the third quarter of 2007and 2006 the outstanding debt was $2,500,000 and $5,000,000, respectively, but the debt in the third quarter of 2006 was outstanding for only part of the

quarter. The rate of interest for the debts in the third quarter of 2007 and 2006 was approximately the same but the debt holder in 2006 was issued stock with a value of $375,000 in addition to the interest earned.

The gain on derivative liability in the third quarter of 2007 was $37,522 compared to a loss of $18,535,627 in the third quarter of 2006 for decrease of $18,573,149.

Net Income (Loss)

Our net loss for the third quarter of 2007 was $457,691 compared to a net loss of $19,792,373 for the third quarter of 2006, for an decrease in net loss of $19,334,682. Of this decrease in net loss, $18,573,149 was attributable to non-cash gain associated with derivative liability offset by $143,656 increase in non-cash cost associated with depletion and depreciation expenses.

First Nine Months of 2007 Compared to First Nine Months of 2006

The following overview provides a summary of key information concerning our financial results for the first nine months of our fiscal year ending June 30, 2007.

		Nine Months			Nine Months			Increase
		March 31, 2007			March 31, 2006			(Decrease)
Revenue	$	189,139		$	-		$	189,139

Expenses:
Depletion and depreciation		513,963			10,864			503,099
Impairment of properties		998,911			-			998,911
General and administrative		1,573,933			2,472,748			(898,815	)
Total expenses		3,086,807			2,483,612			603,195

(Loss) from operations		(2,897,668	)		(2,483,612	)		(414,056	)

Other income (expense):
Dividend income		3,262			74,841			(71,579	)
Interest expenses		(257,179	)		(493,251	)		236,072
Other		-			(25,878	)		25,878
Gain (Loss) on derivative		16,411,419			(18,535,627	)		34,947,046
liability

Net Income ( loss)	$	13,259,834			(21,463,527	)	$	34,723,361

Revenue

Total revenue for the first nine months of 2007 and 2006 was $189,139 and $0, respectively. Production on the Company’s properties did not begin until the fourth quarter of 2006. In August and September 2006 Terax shut in all of its production due to its financial situation.

Expenses

Operations on the Company’s oil and gas properties did not begin until the fourth quarter of 2006. Therefore the Company did not incur any lease operating, depletion and deprecation, and impairment expenses for the first nine months of 2006.

General and administrative expenses for the first nine months of 2007 as compared to the first nine months of 2006 were $1,573,933 and $2,472,748, respectively, for a decrease of $898,815. The decrease in general and administrative expenses is due primarily to severance payment to a former officer in the first nine months of 2006.

Other Income (Expense)

Dividend income for the first nine months of 2007 and 2006 was $3,262 and $74,841, respectively, for a decrease of $71,579 which was the result of a decrease in funds available in an interest bearing account.

Interest expense for the first nine months of 2007 and 2006 was $257,179 and $493,251, respectively, for a decrease of $236,072. During the first nine months of 2007 and 2006 the outstanding debt was $2,500,000 and $5,000,000, respectively, but the debt was outstanding for only part of the quarter in 2006. The rate of interest for the debt in the first nine months of 2007 was the same as the interest rate on the debt in the first nine months of 2006. The rate of interest for the debts in the third quarter of 2007 and 2006 was approximately the same but the debt holder in 2006 was issued stock with a value of $375,000 in addition to the interest earned.

The gain on derivative liability in the first nine months of 2007 was $16,411,419 compared to a loss of $18,535,627 for an increase of $34,947,046.

Net Income (Loss)

Our net income for the first nine months of 2007 was $13,259,834 compared to a net loss of $21,463,527 for the first nine months of 2006, for an increase in the income of $34,723,361. Of this increase, $34,947,046 was attributable to non-cash income associated with derivative liability offset by $503,099 non-cash cost associated with depletion and depreciation expenses.

Liquidity and Capital Resources

As of March 31, 2007 we had a net working capital deficit of $9,709,208 compared to a net working capital deficit of $23,200,422 at year end June 30, 2006. If the non-cash derivative liability is not considered, the working capital deficit would be $9,661,909 at March 31, 2007 and $6,741,703 at June 30, 2006. The $13,491,214 increase in our working capital position was primarily attributable to the decrease in derivative liability of $16,411,419, offset by a decrease in prepaid expense and advances to operators of $556,093, an increase in accounts payable of $920,653 and an increase in accrued liabilities of $574,235.

Net cash flow used in operations was $405,205 for the nine months ended March 31, 2007. The primary use of cash in operating activities was to fund our net loss. Net cash used in investing activities for the nine months was $464,020 and primarily consisted of an increase in purchases of oil and gas leases of $252,451, an increase in investment in drilling and equipment, and an investment in pipeline and gathering system of $160,265, compared to $19,110,551 in purchases of oil and gas leases, drilling and equipment; and pipeline and gathering for the nine months ended March 31, 2006.

There was $100,000 in net cash provided by financing activities during the nine months ended March 31, 2007, compared to $22,249,880 provided from the sale of stock for the nine months ended March 31, 2006. The cash provided in the nine months ended March 31, 2006 was from both equity and debt financings. From August 8, 2005 through September 14, 2005, Terax issued 739,000 Units at a price of $10.00 per Unit for gross proceeds to Terax of $7,390,000. Each Unit consisted of eight shares of our common stock (each a “Unit Share”) and four non-transferable share purchase warrants (each a “Unit Warrant”). Each Unit Warrant is exercisable into one share of our common stock (each a “Warrant Share”) at an exercise price of $1.75 per share. During the nine months ended March 31, 2006, Terax borrowed $325,000 bearing interest at 6% per annum and $7,500,000 bearing interest at 12.5% per annum. The notes had interest of $493,251 during the first nine months of 2006. In May 2006, Terax borrowed $2,500,000 which was still outstanding at March 31, 2007. The interest rate on the $2,500,000

is 12.5% per annum and the note had accrued interest of $297,021 at March 31, 2007. On January 19, 2007, Terax received notice of default from the lender and a demand for payment.

Our liquidity has continued to be adversely affected during the nine months ended March 31, 2007, due to Terax not being able to secure additional financing to fund its operations. Since March 31, 2007, Terax has continued to seek financing for its operations but has been unsuccessful.

Terax has numerous litigation related matters which also raise significant doubt about Terax’s ability to continue as a going concern.

Satisfaction of our cash obligations for the next 12 months

Our current capital resources, together with our expected cash flow from operations, are not sufficient to continue and maintain our operations (including resolution of amounts relating to pending litigation discussed elsewhere in this document) over the course of the next twelve months. If Terax does not secure additional financing in the near term it will be forced to seek other alternatives including the sale of assets to repay its current creditors. This includes resources for the payment of our anticipated overhead expenses and current liabilities. If Terax is successful in securing sufficient capital to repay its creditors, it will need additional capital to continue its operations and evaluate its properties. We would, therefore, continue to seek to raise capital over the next 12 months as we attempt to finance the development of our existing projects and in order to fund our future growth and exploration activities. This may take the form of either debt-based financing, or sale of equity securities. If we are unable to obtain additional funds when we need them or if we cannot obtain funds on terms favorable to us, we may need to delay, scale back, or eliminate plans for further development efforts.

Our oil and gas properties have been shut-in until Terax can resolve its current working capital deficit. We have no significant history of earnings or cash flow from our operations. A critical component of our operating plan impacting our continued existence is to efficiently manage the costs associated with exploratory drilling efforts, our ability to obtain additional capital through additional equity and/or debt financing, and joint venture or working interest partnerships will also be important to our expansion plans. In the event we experience any significant problems assimilating acquired assets into our operations or cannot obtain the necessary capital to pursue our strategic plan, we may have to significantly curtail our operations. This would materially impact our ability to continue operations.

We will need additional capital to proceed with the current phase of our operations and the continued field development of our Erath County properties.

Over the next twelve months, our existing capital combined with cash flow from operations will not be sufficient to sustain operations and our planned expansion.

We believe we will continue to incur operating losses over the next twelve months. Our lack of operating history makes predictions of future operating results difficult to ascertain. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development and production, particularly companies in the oil and gas industry. Such risks include, but are not limited to, an evolving and unpredictable business model and the management of growth. To address these risks we must, among other things, implement and successfully execute our business and marketing strategy, continue to develop and upgrade technology and products, respond to competitive developments, and attract, retain and motivate qualified personnel. There can be no assurance that we will be successful in addressing such risks, and the failure to do so can have a material adverse effect on our business prospects, financial condition, and results of operations.

All of the leases purchased by Terax are paid up oil and gas leases which do not require future payments. If we begin production of oil or natural gas on a lease before the end of the primary lease term, we may retain that lease without additional cost. If production is established, we are required to pay the leaseholder a portion of the oil or gas production as “royalty payments” which range from 16.66% to

21.5% . If production is not established during the primary term of the lease, in most cases, we have the right but not the obligation to extend the lease for an additional 2 years in Erath and an additional 3 years in Comanche by making an additional lump sum payment to the leaseholder, as provided for in each lease. If oil and gas production is not established within the additional two years period, the lease is returned to the leaseholder and we have no additional rights to the lease.

As of March 31, 2007, we had assets of $16,054,228, and $9,747,970 in liabilities, resulting in a stockholders’ equity of $6,306,258.

Significant changes in the number of employees

During the nine month period ended March 31, 2007, there were reductions in the number of employees and full-time consultants. The number of employees has been reduced from 4 to 2 and the numbers of full-time consultants were reduced from 6 to none.

Our desired personnel structure could be divided into three broad categories: management and professional, administrative, and project field personnel. As in most small companies, the divisions between these three categories are somewhat indistinct, as employees are engaged in various functions as projects and work loads demand.

Off-Balance Sheet Arrangements

We do not have any 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 or operations, liquidity, capital expenditures or capital resources that is material to investors.

Critical Accounting Policies and Estimates

Our discussion of financial condition and results of operations is based upon the information reported in our financial statements. The preparation of these statements requires us to make assumptions and estimates that affect the reported amounts of assets, liabilities, revenues, and expenses as well as the disclosure of contingent assets and liabilities at the date of our financial statements. We base our assumptions and estimates on historical experience and other sources that we believe to be reasonable at the time. Actual results may vary from our estimates due to changes in circumstances, weather, politics, global economics, mechanical problems, general business conditions, and other factors. Our significant accounting policies are detailed in Note 1 to our financial statements included in our Annual Report. We have outlined below certain of these policies as being of particular importance to the portrayal of our financial position and results of operations and which require the application of significant judgment by our management.

Revenue Recognition

It is our policy to recognize revenue when production is sold to a purchaser at a fixed or determinable price.

Successful Efforts Method of Accounting

We account for our oil and natural gas operations using the successful efforts method of accounting. Under this method, all costs associated with property acquisition, exploration, and development of oil and gas reserves are capitalized. Costs capitalized include acquisition costs, geological and geophysical expenditures, lease rentals on undeveloped properties and cost of drilling and equipping productive wells. In the event we do not find proved reserves, geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed. All of our properties are located within the continental United States.

Oil and Natural Gas Reserve Quantities

Reserve quantities and the related estimates of future net cash flows affect our periodic calculations of depletion and impairment of our oil and natural gas properties. Proved oil and natural gas reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future periods from known reservoirs under existing economic and operating conditions. Reserve quantities and future cash flows included in the Form 10-KSB are prepared in accordance with guidelines established by the SEC and FASB.

ITEM 3. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures: As of the end of the period covered by this report, our management carried out an evaluation, under the supervision of our Chief Executive Officer and Principal Financial Officer of the effectiveness of the design and operation of our system of disclosure controls and procedures pursuant to the Securities and Exchange Act, Rule 13a- 15(e) an 15d-15(e) under the Exchange Act). Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and, Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Change in Internal controls: There were no changes in internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially effect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

On July 20, 2006, an action was commenced in the District Court of Erath County, Texas, against Terax by Centex Pipeline Construction, Inc. for failure to pay for services performed, breach of contract and to foreclose on Plaintiff’s mechanic lien. The Complaint alleges that Terax and Centex entered into an agreement for to install certain components of a gas pipeline gathering system on Terax’s Mitchell Ranch property in Erath County, Texas. The Complaint further alleges that the Plaintiff completed work on June 5, 2006 and that Terax has failed to pay certain outstanding invoices. The Plaintiff’s has filed a mechanic’s lien to create a security interest against the gathering line and compressor station. The Plaintiff’s is seeking damages in the amount of $510,319 plus interest, attorney fees and entry of an Order of Sale directing the sale by public auction of the property covered by the Plaintiff’s mechanic lien.

property, at which point, Warren offered to assist with settling the William Rhea lawsuit. The complaint further alleged that Plaintiffs negotiated and mediated a settlement of the William Rhea lawsuit and that after the lawsuit was settled, the Defendants breached their agreement to purchase the Tennessee property for $5.7 million. The Plaintiffs are seeking a judgment against the Defendants in the amount of $5.7 million and attorneys’ fees and expenses and costs of court.

On January 8, 2007, J.D. Fields filed a motion for a summary judgment with the court and hearing has been set for February 27, 2007.

On October 19, 2006, an action was commenced in the Precinct 3, Place 3, Justice of the Peace Court, Dallas County, Texas, by Riviera Finance of Texas, Inc. on behalf of NTX Roadrunner Transportation, LLC against Terax for breach of contract and foreclosure of lien. The Plaintiff alleges that Terax has failed to pay for certain goods, merchandise, or services sold to Terax. The complaint is seeking $3,938 allegedly owed to the Plaintiff, interest, and attorney’s fees and an order of foreclosure of Plaintiff’s lien. Terax has responded to the Riviera lawsuit in a timely manner but plans to reach a settlement with Riviera in the near future provided funds are available. The court set a hearing on January 18, 2007, and on January 30, 2007, the court issued a default judgment.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

During the period covered by this Report Terax has not sold any securities not registered under the Securities Act which were not previously reported in Form 8-K filings made by Terax.

Item 3. Defaults Upon Senior Securities.

On May 12, 2006, Terax issued a promissory note in the principal amount of $2,500,000 (the “Note”) to an investor. The Note bears interest at the rate of 12.5% per annum, payable on repayment of the Note. The Note is due on demand after December 31, 2006. In addition, interest in the amount of $125,000 is due and payable in 71,429 shares of Terax’s common stock at closing. The Note is secured by a security interest in all of Terax’s oil and gas leases and pipeline right of ways and easements in Erath County, Texas, as well as well and pipeline equipment and personal property, contracts and agreements, and production from Terax’s wells located on the leases. In the Event of Default, the holder of the note has the right but not the obligation to seek remedies for repayment of the notes including but not limited to foreclosure and sale of the secured assets. During the nine months ended March 31, 2007, Terax has accrued $255,068 in interest. The total interest accrued to date is $297,021. On January 19, 2007, Terax received notice of default from the lender and a demand for payment.

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

None

Item 5. Other Information.

None.

Item 6. Exhibits.

31.1	Certification of Chief Executive Officer and Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended

32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer and Principal Financial Officer)

SIGNATURES

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

	TERAX ENERGY, INC.


Date: May 15, 2007	By:/s/ Linda Contreras
	Linda Contreras
	Chief Executive Officer (Principal Executive Officer)
	and Principal Financial Officer

Terax Energy (TEXG) Inactive 10QSB2007 Q3 Quarterly report (small business)