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Terra Systems Corp · 10QSB · For 6/30/03

Filed On 4/10/06 11:47am ET · SEC File 0-31483 · Accession Number 1096906-6-264

  As Of               Filer                 Filing     As/For/On Docs:Pgs              Issuer               Agent

 4/10/06  Terra Systems Corp                10QSB       6/30/03    5:18                                     Southridge Svcs LLC/FA

Quarterly Report -- Small Business · Form 10-QSB
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10QSB       Terra Systems Corp June 2003 10-Qsb                   12     46K 
 2: EX-31.1     Certification per Sarbanes-Oxley Act (Section 302)     2±     7K 
 3: EX-31.2     Certification per Sarbanes-Oxley Act (Section 302)     2±     7K 
 4: EX-32.1     Certification per Sarbanes-Oxley Act (Section 906)     1      5K 
 5: EX-32.2     Certification per Sarbanes-Oxley Act (Section 906)     1      5K

10QSB · Terra Systems Corp June 2003 10-Qsb
Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (RTF, XML, et al.) Controls and Procedures Defaults on Senior Securities Exhibits Financial Statements Legal Proceedings Management's Discussion and Plan of Operation Other Information Unregistered Sales of Equity Securities and Use of Proceeds
1	1st Page
3	Item I. Financial Statements
8	Item 2. Management's Discussion and Plan of Operation
10	Item 3. Controls and Procedures
"	Item 1. Legal Proceedings
11	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
"	Item 3. Defaults on Senior Securities
"	Item 4. Other Information
"	Item 5. Exhibits

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 United States
Securities and Exchange Commission
Washington, DC 20549

 FORM 10-QSB

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

For quarterly period ended June 30, 2003                      

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

 Commission File Number: 0-31483

TERRA SYSTEMS CORP
------------------
(Exact name of registrant as specified in its charter)

UTAH
----
 (State or other jurisdiction of incorporation or organization

87-0476073
----------
(I.R.S. Employer Identification No.)

 7001 South 900 East, Ste 260, Midvale, Utah 84047
 -------------------------------------------------
(Address of principal executive offices)

 5912 West 11600 South, Payson, Utah 84651
 -----------------------------------------
 (Prior Address)

(801) 208-1289
--------------
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12 (b) of the Act:   None.            

Securities registered pursuant to section 12(g) of the Exchange Act:            
Common, $0.001 par value                                                        

Check 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. (1) Yes     No  X  (2) 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.                                

Class  Common  Stock,  $0.001 par value  Outstanding  as of December  28,  2005:
41,302,288                                                                      

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

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Terra Systems Corp

 Form 10-QSB
For The Quarter Ending June 30, 2003

Part I. Financial Information                                               Page
                                                                            ----
Item 1.  Financial Statements                                           

Consolidated Balance Sheets as of June 30 2003 and    
              December 31, 2002 (Unaudited)                                  2

Consolidated  Statements of Operations  for the Three 
and Six Months  ended June 30, 2003,  and 2002,  and
for the Cumulative Period February 17, 1996 (Date of
             Inception) through June 30 2003 (Unaudited)                     3

Consolidated Statements of Cash Flows for the Six     
Months ended June 30, 2003, and 2002 and for the  
Cumulative Period February 17, 1996 (Date of      
              Inception) through June 30, 2003 (Unaudited)                   4

            Notes to the Unaudited Consolidated Financial Statements         5

   Item 2.  Management's Discussion and Plan of Operation                    7

   Item 3.  Controls and Procedures                                          9

Part II.     Other Information                                                  

   Item 1.  Legal Proceedings                                                9

   Item 2.  Unregistered Sales of Equity Securities and Used of Proceeds    10

   Item 3.  Defaults on Senior Securities                                   10

   Item 4.  Other Information                                               10

   Item 5.  Exhibits                                                        10

   Signatures                                                               11

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PART I. FINANCIAL INFORMATION                                                   

Item I. Financial Statements                                                    

 TERRA SYSTEMS, INC AND SUBSIDIARY
 (A Development Stage Company)
 CONSOLIDATED BALANCE SHEETS
 (UNAUDITED)

                                                       June 30,     December 31,
                                                     2003           2002
                                                    -----------    -----------
Current Assets                                                                  
 Cash                                              $        173   $      3,395
 Receivables                                             79,065              -
                                                   ------------   ------------
   Total Current Assets                                  79,238          3,395
                                                   ------------   ------------

Property and Equipment                                                          
 Land                                                    15,000              -
 Furniture and equipment                                451,809        451,809
 Office building                                         18,500         12,500
 Software                                                10,380         10,380
  Less:  Accumulated depreciation                       (441,582)      (420,976)
                                                   ------------   ------------
   Net Property and Equipment                            54,107         53,713
                                                   ------------   ------------

Total Assets                                        $    133,345   $     57,108 
                                                   ============   ============

LIABILITIES AND STOCKHOLDERS' DEFICIT                                           

Current Liabilities                                                             
 Accounts payable                                  $    601,766   $    467,849
 Accounts payable to related parties                    403,929        379,429
 Accrued liabilities                                  1,053,688        970,485
 Accrued interest payable to related parties            393,480        373,563
 Legal settlements                                      185,000              -
 Capital lease obligation to related party              237,954        237,954
 Notes payable to stockholders - current portion        602,267        625,267
                                                   ------------   ------------
   Total Current Liabilities                          3,478,084      3,054,547
                                                   ------------   ------------

Stockholders' Deficit                                                           
Common stock - $0.001 par value; 100,000,000                                
shares authorized; 23,359,167 and 22,791,880                              
  shares issued and outstanding, respectively            23,359         22,792
 Additional paid-in capital                           6,714,589      6,626,567
  Accumulated deficit                                (10,082,687)    (9,646,798)
                                                   ------------   ------------
    Total Stockholders' Deficit                       (3,344,739)    (2,997,439)
                                                   ------------   ------------

Total Liabilities and Stockholders' Deficit         $    133,345   $     57,108 
                                                   ============   ============

 See accompanying notes to condensed consolidated financial statements

 2

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                                                        · Enlarge/Download Table

                                        TERRA SYSTEMS, INC AND SUBSIDIARY                                       
                                          (A Development Stage Company)                                         
                                      CONSOLIDATED STATEMENTS OF OPERATIONS                                     
                                                   (UNAUDITED)                                                  

                                                                                                  From Inception
                                                                                                      of the    
                                                                                                   Development  
                                                                                                     Stage on   
                                                                                                    February 17,
                                      For the Three Months              For the Six Months             1996     
                                          Ended June 30,                   Ended June 30,             Through   
                                   ----------------------------    ----------------------------       June 30,  
                                       2003            2002            2003            2002             2003    
                                   ------------    ------------    ------------    ------------    ------------ 
                                                                                                                

Revenues                           $     75,861    $          -    $     75,861         $     -    $    572,237 
Cost of Revenues                         41,458               -          41,458               -         405,277 
                                   ------------    ------------    ------------    ------------    ------------ 

  Gross Profit                           34,403               -          34,403               -         166,960 
                                   ------------    ------------    ------------    ------------    ------------ 

Operating Expenses                                                                                              
  Research and development               35,217          42,519          65,624          81,834       1,863,135 
  General and administrative             92,327          80,796         344,056         135,091       6,758,113 
  Depreciation and amortization          10,303          16,456          20,606          32,912         751,463 
                                   ------------    ------------    ------------    ------------    ------------ 
    Total Operating Expenses            137,847         139,771         430,286         249,837       9,372,711 
                                   ------------    ------------    ------------    ------------    ------------ 

    Loss from Operations               (103,444)       (139,771)       (395,883)       (249,837)     (9,205,751)
                                   ------------    ------------    ------------    ------------    ------------ 

Nonoperating Income/(Expenses)                                                                                  
  Interest expense                      (15,785)        (16,145)        (40,006)        (32,398)       (556,902)
  Interest income                             -               -               -               -           1,709 
  Gain from relief of debt                    -               -               -               -          64,284 
  Loss on sale of securities                  -               -               -               -         (99,000)
  Gain or (Loss) on sale of assets            -               -               -           5,000        (287,027)
                                   ------------    ------------    ------------    ------------    ------------ 

    Net Nonoperating Expenses           (15,785)        (16,145)        (40,006)        (27,398)       (876,936)
                                   ------------    ------------    ------------    ------------    ------------ 

Net Loss                           $   (119,229)   $   (155,916)   $   (435,889)   $   (277,235)   $(10,082,687)
                                   ============    ============    ============    ============    ============ 

Basic and Diluted Loss                                                                                          
  Per Share                        $      (0.01)   $      (0.01)   $      (0.02)   $      (0.01)                
                                   ============    ============    ============    ============                 

Weighted Average Shares                                                                                         
  Outstanding                        23,270,318      21,894,202      23,206,179      21,915,585                 
                                   ============    ============    ============    ============                 

                      See accompanying notes to condensed consolidated financial statements                     

                                                        3                                                       

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 TERRA SYSTEMS, INC AND SUBSIDIARY
 (A Development Stage Company)
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
                                                                  From
                                                                 Inception
                                                                  of the
                                                                 Development
                                                                  Stage on
                                                                  February 17,
                                   For the Six Months Ended       1996
                                            June 30,             Through
                                    -------------------------     June 30,
                                      2003         2002           2003
                                      -----------   -----------   ------------

Cash Flows from Operating Activities:                                           
  Net loss                             $  (435,889)  $  (277,235)   (10,082,687)
Adjustments to reconcile net loss                                           
to net cash used in operating                                             
activities:                                                               
   Depreciation and amortization           20,606        32,912        751,464
    Gain from debt relief                        -             -        (64,284)
Loss on sale of investment                                              
    securities                                  -             -         99,000
   Loss (gain) on disposal of assets            -        (5,000)       292,027
   Stock based compensation                45,500             -      2,842,022
   Write off of stock subscription              -             -         22,750
   Financing fees                           8,090             -          8,090
Changes in current assets and                                               
liabilities:                                                              
    Receivables                            (79,065)          500        (79,065)
   Accounts payable                       133,915        98,584        820,021
   Accounts payable - related party        24,500       (17,628)       396,340
   Accrued liabilities                     83,204        88,358      1,093,626
   Accrued litigation expense             185,000             -        185,000
   Accrued interest payable                54,917        31,398        428,480
                                      -----------   -----------   ------------

Net Cash Provided by (Used in)                                              
   Operating Activities                     40,778       (48,111)    (3,287,216)
                                      -----------   -----------   ------------

Cash Flows from Investing Activities:                                           
  Purchase of equipment                    (21,000)            -       (695,964)
  Organization costs paid                        -             -         (4,755)
 Proceeds from sale of assets                   -         5,000        117,715
                                      -----------   -----------   ------------

Net Cash Provided by (Used in)                                              
   Investing Activities                    (21,000)        5,000       (583,004)
                                      -----------   -----------   ------------

Cash Flows from Financing Activities:                                           
Proceeds from borrowings -                                                  
  stockholders                                  -             -        870,111
Payments on borrowings -                                                    
   stockholders                            (23,000)            -       (172,750)
Proceeds from stock issuance and                                            
  subscriptions                                 -        62,500      3,358,672
  Payments on capital leases                     -             -       (185,640)
                                      -----------   -----------   ------------

Net Cash Provided by (Used in)                                              
  Financing Activities                    (23,000)       62,500      3,870,393
                                      -----------   -----------   ------------

Net Increase (Decrease) in Cash             (3,222)       19,389            173 

Cash at Beginning of Period                  3,395            75              - 
                                      -----------   -----------   ------------

Cash at End of Period                  $       173   $    19,464   $        173 
                                      ===========   ===========   ============

Supplemental Cash Flow Information:                                             
Cash paid for interest               $         -   $         -              
Non Cash Investing and Financing                                                
Activities:                                                                   
Conversion of liabilities to equity  $    35,000   $    25,000              

 See accompanying notes to condensed consolidated financial statements

4 

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 TERRA SYSTEMS, INC AND SUBSIDIARY
 (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)

NOTE 1 - INTERIM FINANCIAL STATEMENTS                                           

         The  accompanying  financial  statements  have  been  prepared  by  the
Company,  and are  unaudited.  In the opinion of  management,  the  accompanying
unaudited  financial  statements  contain  all  necessary  adjustments  for fair
presentation,  consisting of normal  recurring  adjustments  except as disclosed
herein.                                                                         

         The  accompanying  unaudited  interim  financial  statements  have been
condensed  pursuant to the rules and  regulations of the Securities and Exchange
Commission; therefore, certain information and disclosures generally included in
financial statements have been condensed or omitted.  These financial statements
should be read in connection  with the  Company's  annual  financial  statements
included in the Company's  annual report on Form 10-KSB as of December 31, 2002.
The  financial  position  and  results  of  operations  of the  interim  periods
presented are not  necessarily  indicative of the results to be expected for the
year ended December 31, 2003                                                    

NOTE 2 - RELATED PARTY TRANSACTIONS                                             

         The Company entered into capital and operating lease obligations with a
company under common ownership. The Company has violated its lease agreements by
being delinquent in its payments regarding these leases. As of June 30 2003, the
Company owed this related party  $540,132 in delinquent  rent,  executory  fees,
late fees, and accrued interest, sales tax, and cash advances.  Certain officers
of the  Company  have from time to time  advanced  the  Company  funds  used for
operating expenses. All amounts are due on demand with no interest. In addition,
the Company has notes payable  outstanding and accrued interest  payable.  As of
June 30, 2003, the Company owed these officers $1,097,498.  Total amounts due to
related  parties  as  shown  on the  balance  sheet  as of  June  30,  2003  are
$1,637,630.                                                                     

NOTE 3 - STOCKHOLDERS' DEFICIT                                                  

         Common Stock Issued for Services - During the six months ended June 30,
2003,  the Company issued 324,287 shares of common stock for proceeds of $45,500
or $0.14 to $0.15 per share.                                                    

         Common  Stock Issued for  financing  fees - During the six months ended
June 30, 2003,  the Company  issued  43,000 shares of common stock for financing
fees of $8,090 or $0.17 to $0.20 per share.                                     

NOTE 4 - CONTINGENCIES                                                          

         Threatened Litigation -- The Company and certain officers and directors
of the Company  received  notice from a litigant's  legal  counsel of threatened
litigation in 1999.  The litigant  contended that certain  current  officers and
directors  held and sold a number of Xullux  shares that were free trading prior
to the merger of Xullux and Terra  Systems.  The litigant  alleged that the sale
may have impacted the value of the litigant's Terra Systems restricted  publicly
issued  shares  in the  company.  The  litigant  claimed  that  the  defendant's
ownership and alleged sale of Xullux stock was not disclosed to him at or during
the time he contributed  certain assets and other  equipment to Terra Systems in
exchange for the Terra Systems  restricted  stock. The litigant sought to return
125,000 shares to Terra Systems for value and sought other monetary and punitive
damages in an amount of not less than $1,500,000  including additional costs and
attorney's fees.                                                                

         In June 2003,  the Company  entered  into a  Settlement  Agreement  and

5 

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 TERRA SYSTEMS, INC AND SUBSIDIARY
 (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)

Mutual Release of All Claims pertaining to these claims.  Terms of the agreement
were to issue  200,000  shares of restricted  stock to the  plaintiff  valued at
$26,000  or $0.13  per  share and would be  deducted  from  amounts  owed by the
Company to a former officer. In addition to the stock, another officer deeded to
the plaintiff  one-half  interest in an industrial  building that was personally
owned by the officer.  The value of the one-half  interest was  determined to be
$150,000.  The Company agreed to reimburse the officer $150,000 for the interest
given up. The Company also  executed a note to the  plaintiff  for the amount of
$22,000,  which was due on October 1, 2003.  If the note was not paid by October
1, 2003 it would go into default and the Company would owe $35,000.  The Company
defaulted on the original note and $35,000 was paid in March 2005.              

NOTE 5 - BUSINESS CONDITION                                                     

         The  accompanying  financial  statements  have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of  liabilities in the normal course of business.  During the six-month  periods
ended June 30, 2003 and 2002,  the Company  incurred  net losses of $435,889 and
$277,235,  respectively.  As of June 30, 2003, the Company's losses  accumulated
from inception totaled $10,082,687.  These factors, among others,  indicate that
the Company may be unable to continue as a going concern for a reasonable period
of time. The financial statements do not include any adjustments relating to the
recoverability  and  classification  of recorded asset amounts or the amount and
classification  of  liabilities  that might be  necessary  should the Company be
unable to continue as a going  concern.  The Company's  ability to continue as a
going concern is dependent upon its ability to generate  sufficient cash flow to
meet its obligations on a timely basis, to obtain additional financing as may be
required, and ultimately to attain successful operations.                       

         During the quarter ended June 30, 2003, the Company's management was in
the process of  negotiating  various  agreements to perform  research on and the
development of pneumatic  conveyance systems to handle materials in a bulk state
in industrial  research and processing.  Management also intended to use capital
and debt financing as needed to supplement the cash flows that potentially could
be generated  through the  successful  negotiation  of  agreements.  The Company
entered into an  agreement  with a  corporation  for  consultation  and advisory
services  related to  business  management  and  marketing.  As a result of this
agreement,  the Company  received  $205,500 for the issuance of common stock and
options.  This  agreement  allowed  for  additional  cash  proceeds  through the
issuance of additional common stock and options.                                

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Item 2.  Management's Discussion and Plan of Operation                          

Special Cautionary Statement Regarding Forward-Looking Statements               

         This Quarterly  Report contains  forward-looking  statements  about our
business,  financial  condition,  and prospects that reflect our assumptions and
beliefs based on information currently available.  We can give no assurance that
the expectations indicated by these forward-looking statements will be realized.
If any of our  assumptions  should prove  incorrect,  or if any of the risks and
uncertainties  underlying  those  expectations  should  materialize,  our actual
results  may differ  materially  from  those  indicated  by the  forward-looking
statements.                                                                     

         The key  factors  that are not within our  control  and that may have a
direct bearing on operating results include,  but are not limited to, acceptance
of our services,  our ability to expand our customer  base, our ability to raise
capital in the  future,  the  retention  of key  employees,  and  changes in the
regulation of our industry.                                                     

         There  may be other  risks  and  circumstances  that we are  unable  to
predict.  When used in this Quarterly Report,  the words "believes,"  "expects,"
"intends,"  "plans,"  "anticipates,"  "estimates"  and similar  expressions  are
intended  to identify  forward-looking  statements,  although  there may be some
forward-looking   statements   not   accompanied  by  these   expressions.   All
forward-looking statements are intended to be covered by the safe harbor created
by Section 21E of the Securities Exchange Act of 1934.                          

         NOTE:  This  Quarterly  Report for the period ended June 30, 2003,  was
prepared in December 2005 and January  2006,  in  connection  with the Company's
efforts to become current in its public reporting.                              

General                                                                         

         Terra Systems was  incorporated  in Utah on February 16, 1996, and is a
development-stage   company.   Our  primary  business  is  the  development  and
commercialization  of our patented pneumatic  accelerator.  This device is a gas
linear  particle  accelerator  that conveys and processes bulk materials at high
velocity in a particle isolate state,  using air as the medium of movement.  The
traditional and more costly medium for processing  bulk materials is water.  Our
technology operates efficiently at ambient temperatures and at low pressures and
does not use water.  We believe that most if not all organic and inorganic  bulk
materials used in basic industries  (such as coal,  gypsum,  black sands,  corn,
rice,  and wheat)  can be more  economically  separated  and  classified  by our
dry-process  technology.  This  capability  facilitates  a number of  associated
procedures, including: drying, micropulverizing, mixing, forming, conveying, and
loading.  In addition,  bulk  materials can be  beneficiated  in important  ways
including   moisture   reduction,   ash   reduction,   Btu   enhancement,    and
electro-customization.  Our  system  can  perform  multiple  tasks,  needs  less
maintenance,  requires no chemical  additives,  and can improve the  surrounding
environmental quality.                                                          

         Our  success and ability to compete  will be  dependent  in part on the
protection  of our  existing and  potential  patents,  trademarks,  trade names,
service marks, and other  proprietary  rights.  Thus, a majority of our research
and development efforts have been focused on product  development,  testing, and
patent application.                                                             

         We seek to continue developing our products internally through research
and development, or if appropriate,  through strategic partnerships.  We expect,
however, that if we can purchase or license products,  services, or technologies
from third  parties at a  reasonable  cost,  we will do so in order to avoid the
time  and  expense   involved  in  developing  these  products,   services,   or
technologies.                                                                   

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Results of Operations                                                           

Six months ended June 30, 2003 compared to the six months ended June 30, 2002   

         From inception  through June 30, 2003, we have incurred losses totaling
$10,082,687 and generated  revenues of $572,237 from operations.  During the six
months  ended June 30,  2003,  we had sales  revenues of $75,861  compared to $0
revenue during the same period during 2002.  This factor,  among others,  raises
substantial  doubt  concerning  our ability to continue as a going  concern.  We
intend to use capital and debt  financing as needed to supplement the cash flows
that we expect will be provided by licensing  agreements.  Our primary source of
capital  historically  has been  through the sale of our  securities,  including
sales made upon the exercise of stock options granted to XCEL Associates,  Inc.,
and under an agreement dated March 29, 2000.                                    

         Realization  of  sales  of  our  products  and  services  is  vital  to
operations.  We may not be able to continue as a going concern without realizing
additional sales or raising additional capital. We cannot guarantee that we will
be able to compete  successfully or that the  competitive  pressures we may face
will not have a material  adverse effect on our business,  results of operations
and financial  condition.  Additionally,  a superior  competitive  product could
force us out of business.                                                       

         While we have been able to generate  testing  and  product  development
revenues since inception, we have been limited in the scope of potential clients
that could be contacted until our patent  application  was approved.  In January
2001,  we  received  notification  that we had  been  awarded  a  patent  on our
Pneumatic  Accelerator.  We expect that this will  enhance our ability to pursue
and enter into project development contracts.                                   

         Our net loss for the six months ended June 30, 2003, was  approximately
$435,889,  compared  to a net loss for the six months  ended June 30,  2002,  of
approximately  $277,235.  The net loss was  attributable  to lower than expected
revenues  from sales of our  products  and  services.  Our  expenses for the six
months ended June 30, 2003, were approximately  $470,292 of which  approximately
73% were general and administrative.  Our expenses for the six months ended June
30, 2002 were approximately  $277,235,  of which  approximately 49% were general
and  administrative.  For the six months ended June 30, 2003,  depreciation  and
amortization  expense was $20,606,  compared to  depreciation  and  amortization
expense of $32,912 for the six months ended June 30, 2002.                      

         Since  inception,  we have realized  minimal  revenues while  incurring
normal fixed overhead and debt service costs.  This operating trend is projected
to continue for at least the remaining period of fiscal 2003.                   

Three  months  ended June 30, 2003  compared to the three  months ended June 30,
2002                                                                            

         During the  three-month  period  ending  June 30,  2003 our revenue was
$75,861,  compared to $0.00 for the three months  ended June 30,  2002.  Our net
loss for the three  months  ended June 30,  2003,  was  approximately  $119,229,
compared  to  a  net  loss  for  the  three  months  ended  June  30,  2002,  of
approximately  $155,916.  The net loss was  attributable  to lower than expected
revenues  from sales of our  products and  services.  Our expenses for the three
months ended June 30, 2003, were approximately  $153,632 of which  approximately
60% were  general and  administrative.  Our  expenses for the three months ended
June 30,  2002 were  approximately  $155,916,  of which  approximately  52% were
general  and  administrative.   For  the  three  months  ended  June  30,  2003,
depreciation and amortization expense was $10,303,  compared to depreciation and
amortization expense of $16,456 for the three months ended June 30, 2002.       

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Future Business                                                                 

         We see  opportunities  for our  technology  and business in an array of
large   industries,    including   power   generation,    agriculture,   mining,
environmental,   construction,   ceramics,  and  materials  transportation.   We
anticipate  that we will generate  revenues  through the sale of our proprietary
equipment, fees, royalties, and profit sharing from licensing of our technology.

Liquidity and Capital Resources                                                 

         Given our current  negative cash flows,  it will be difficult for Terra
Systems to continue as a going  concern.  While the recent  issuance of a patent
should  allow  us to more  aggressively  pursue  revenue,  and  cash  generating
contracts and  opportunities,  it may be necessary to raise  additional funds or
reduce cash  expenditures.  Funds  could be  generated  through the  issuance of
additional  stock or through  the sale of existing  plant and office  equipment.
Cash  expenditures  could  be eased  through  a  reduction  in  overhead  costs,
including but not limited to labor and associated employee benefits.            

         As mentioned in our audited financial statements included with our Form
10-KSB, our audited consolidated  financial statements have been prepared on the
assumption that we will continue as a going concern. Our product line is limited
and it has been  necessary  to rely upon  financing  from the sale of our equity
securities to sustain  operations.  Additional  financing will be required if we
are to continue as a going concern. If additional  financing cannot be obtained,
we may be required to scale back or discontinue  operations.  Even if additional
financing  is  available  there  can be no  assurance  that it will be on  terms
favorable  to us.  In any  event,  this  additional  financing  will  result  in
immediate and possible substantial dilution to existing shareholders.           

Item 3.  Controls and Procedures                                                

Evaluation of Disclosure Controls and Procedures.                               

         In December  2005, in connection  with the  preparation of this report,
our  Chief  Executive  Officer  and a  consultant  performing  certain  services
typically  performed by a chief  financial  officer  reviewed and  evaluated the
effectiveness of our disclosure  controls and procedures (as defined in Exchange
Act Rules  240.13a  14(c) and 15d 14(c)) as of the end of the period  covered by
this quarterly report. Based on that evaluation, they concluded that our current
disclosure  controls and  procedures  were  effective in providing  the material
information  required to be disclosed in the reports we file or submit under the
Exchange Act.                                                                   

         While  our  disclosure   controls  and  procedures  provide  reasonable
assurance that the appropriate  information will be available on a timely basis,
this  assurance is subject to  limitations  inherent in any control  system,  no
matter how well designed and administered.                                      

Changes in Internal Controls.                                                   

         There have been no significant  changes in our internal  controls or in
other factors that could  significantly  affect internal controls  subsequent to
the date we carried out this evaluation.                                        

 PART II - OTHER INFORMATION

Item 1.  Legal Proceedings                                                      

         Threatened Litigation -- The Company and certain officers and directors
of the Company  received  notice from a litigant's  legal  counsel of threatened
litigation in 1999.  The litigant  contended that certain  current  officers and

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directors  held and sold a number of Xullux  shares that were free trading prior
to the merger of Xullux and Terra  Systems.  The litigant  alleged that the sale
may have impacted the value of the litigant's Terra Systems restricted  publicly
issued  shares  in the  company.  The  litigant  claimed  that  the  defendant's
ownership and alleged sale of Xullux stock was not disclosed to him at or during
the time he contributed  certain assets and other  equipment to Terra Systems in
exchange for the Terra Systems  restricted  stock. The litigant sought to return
125,000 shares to Terra Systems for value and sought other monetary and punitive
damages in an amount of not less than $1,500,000  including additional costs and
attorney's fees.                                                                

         In June 2003,  the Company  entered  into a  Settlement  Agreement  and
Mutual Release of All Claims pertaining to these claims.  Terms of the agreement
were to issue  200,000  shares of restricted  stock to the  plaintiff  valued at
$26,000  or $0.13  per  share and would be  deducted  from  amounts  owed by the
Company to a former officer. In addition to the stock, another officer deeded to
the plaintiff  one-half  interest in an industrial  building that was personally
owned by the officer.  The value of the one-half  interest was  determined to be
$150,000.  The Company agreed to reimburse the officer $150,000 for the interest
given up. The Company also  executed a note to the  plaintiff  for the amount of
$22,000,  which was due on October 1, 2003.  If the note was not paid by October
1, 2003 it would go into default and the Company would owe $35,000.  The Company
defaulted on the original note and $35,000 was paid in March 2005.              

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

         During the three  months  ending  June 30th 2003,  the  company  issued
10,000 share of common  stock valued at $.15 for services and 200,000  shares of
common stock valued at $.18 per share for settlement of legal matters.          

         The issuance of shares was made in reliance on Section 4(2) of the 1933
Act, and rules and  regulations  promulgated  thereunder,  as a transaction  not
involving  any public  offering.  No  advertising  or general  solicitation  was
employed in the issuance of the securities.                                     

Item 3.  Defaults on Senior Securities                                          

None                                                          

Item 4.  Other Information                                                      

         As noted above, this Quarterly Report was prepared in December 2005 and
January 2006, in connection with the Company's  efforts to become current in its
periodic reporting.                                                             

Item 5.  Exhibits                                                               

None                                                                            

31.1     Section 302 Certification of Chief Executive Officer 
         31.2     Section 302  Certification  of Consultant  Performing  certain
                  services  for  the  Company  commonly  performed  by  a  Chief
Financial Officer                           
32.1     Section 1350 Certification                           
32.2     Section 1350 Certification                           

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SIGNATURES

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

Terra Systems, Inc.                                 

By:    /s/ Clayton Timothy                          
----------------------------------      
Clayton Timothy                         
CEO                                     

Date: March 30, 2006                                
----------------------------------      

By:    /s/ Mark Faerber                             
----------------------------------      
Mark Faerber                            
              Consultant performing certain services for the Company
       commonly performed by a Chief Financial Officer

Date: March 30, 2006                                
----------------------------------      

11

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Dates Referenced Herein and Documents Incorporated By Reference

		Referenced-On Page
This 10QSB Filing	Date	First	Last	Other Filings

	2/16/96	8
	2/17/96	2
	3/29/00	9
	6/30/02	2	9	10QSB
	12/31/02	2	6	10KSB
For The Period Ended	6/30/03	1	9
	10/1/03	7	11
	12/31/03	6
	12/28/05	1
	3/30/06	12
Filed On / Filed As Of	4/10/06			10QSB

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Terra Systems Corp · 10QSB · For 6/30/03

Filed On 4/10/06 11:47am ET · SEC File 0-31483 · Accession Number 1096906-6-264

Quarterly Report -- Small Business · Form 10-QSBFiling Table of Contents

10QSB · Terra Systems Corp June 2003 10-QsbDocument Table of Contents

Dates Referenced Herein and Documents Incorporated By Reference

Quarterly Report -- Small Business · Form 10-QSB
Filing Table of Contents

10QSB · Terra Systems Corp June 2003 10-Qsb
Document Table of Contents