TSYI Terra Systems Inc (CE)

United States
Securities and Exchange Commission
Washington, DC 20549

FORM 10-Q

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

For quarterly period ended March 31, 2008

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

Commission File Number: 0-31483

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

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 _X__ No ___ (2) Yes __X__ No ____

Indicate by check mark whether the registrant is a large accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer", and "smaller reporting company" in Rule 12b-2 of the exchange act.

Large accelerated filer |_| Accelerated filer |_|

Non-accelerated filer |_| Smaller reporting company |X|

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 May 15, 2008: 55,236,806

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

Terra Systems, Inc.

Form 10-Q
For The Quarter Ending March 31, 2008

 Item 1. Financial Statements

 Condensed Consolidated Balance Sheets as of
 March 31, 2008, and December 31, 2007
 (Unaudited) 2

 Condensed Consolidated Statements of
 Operations for the Three Months ended
 March 31, 2008 and 2007, and for the
 Cumulative Period February 17, 1996
 (Date of Inception), through March 31,
 2008 (Unaudited) 3

 Condensed Consolidated Statements of Cash
 Flows for the Three Months ended March 31,
 2008 and 2007 and for the Cumulative
 Period February 17, 1996 (Date of Inception),
 through March 31, 2008 (Unaudited) 4

 Notes to the Unaudited Condensed Consolidated
 Financial Statements 5

 Item 2. Management's Discussion and Plan of Operation 8

 Item 3. Quantitative and Qualitative Disclosure About
 Market Risk 11

 Item 4. Controls and Procedures 11

Part II. Other Information

 Item 1. Legal Proceedings 11

 Item 2. Unregistered Sales of Equity Securities and
 Use of Proceeds 12

 Item 3. Defaults Upon Senior Securities 12

 Item 4. Submission of Matters to a Vote of Security
 Holders 12

 Item 5. Other Information 12

 Item 6. Exhibits 12

 Signatures 13

PART I. FINANCIAL INFORMATION

Item I. Financial Statements

TERRA SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

 March 31, December 31,
 2008 2007
 -------------- --------------
 ASSETS
Current Assets
 Cash $ 26,807 $ 30,692
 Stock subscription receivable 200,000 -
 Other current assets 9,879 13,894
 -------------- --------------
 Total Current Assets 236,686 44,586
 -------------- --------------

Property and Equipment
 Furniture and equipment 582,407 582,407
 Software 10,380 10,380
 Less: Accumulated depreciation (484,792) (482,659)
 -------------- --------------
 Net Property and Equipment 107,995 110,128
 -------------- --------------

Investment in joint venture 392,251 392,251
 -------------- --------------
Total Assets $ 736,932 $ 546,965
 ============== ==============

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities
 Accounts payable $ 429,705 $ 431,857
 Bank line of credit 52,930 43,805
 Deferred grant revenue 109,000 -
 Accounts payable to related parties 105,242 105,242
 Accrued liabilities 295,952 285,263
 Accrued interest to related parties 264,073 243,956
 Notes payable to stockholders 804,680 804,680
 -------------- --------------
 Total Current Liabilities 2,061,582 1,914,803
 -------------- --------------

Stockholders' Deficit
 Common stock - $0.001 par value;
 100,000,000 shares authorized;
 55,236,806 and 53,111,806 issued
 and outstanding, respectively 55,234 53,109
 Additional paid-in capital 23,200,022 22,602,376
 Deficit accumulated during development
 stage (24,579,906) (24,023,323)
 -------------- --------------
 Total Stockholders' Deficit (1,324,650) (1,367,838)
 -------------- --------------

Total Liabilities and Stockholders' Deficit $ 736,932 $ 546,965
 ============== ==============

See accompanying notes to condensed consolidated financial statements.

TERRA SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

 From
 Inception
 of the
 Development
 Stage on
 February 17,
 1996
 For the Three Months Through
 Ended March 31, March 31,
 2008 2007 2008
 ------------- -------------- --------------


Revenues $ - $ 56,639 $ 768,136

Cost of revenues - 40,429 564,904
 ------------- -------------- --------------

 Gross Profit - 16,210 203,232
 ------------- -------------- --------------

Operating Expenses
 Research and development 22,869 - 2,086,865
 General and administrative 510,266 1,022,261 20,257,752
 Depreciation and amortization 2,133 2,133 805,765
 ------------- -------------- --------------
 Total Operating Expenses 535,268 1,024,394 23,150,382

 Loss from Operations (535,268) (1,008,184) (22,947,150)

Nonoperating Income/(Expenses)
 Other Income - - 87,446
 Interest expense (21,315) (34,117) (1,553,195)
 Interest income - - 1,709
 Gain from relief of debt - - 64,284
 Loss on sale of securities - - (99,000)
 Gain (loss) on sale of assets - - (134,000)
 ------------- -------------- --------------

 Net Nonoperating Expenses (21,315) (34,117) (1,632,756)
 ------------- -------------- --------------

Net Loss $ (556,583) $ (1,042,301) $ (24,579,906)
 ============= ============== ==============

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

Weighted Average Shares
 Outstanding 53,179,114 44,358,226
 ============= ==============

See accompanying notes to condensed consolidated financial statements.

TERRA SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

 From
 Inception
 of the
 Development
 Stage on
 February 17,
 1996
 For the Three Months Through
 Ended March 31, March 31,
 2008 2007 2008
 ------------- -------------- --------------

Cash Flows from Operating
 Activities:
 Net loss $ (556,583) $ (1,042,301) $ (24,579,906)
 Adjustments to reconcile net
 loss to net cash used in
 operating activities:
 Depreciation and
 amortization 2,133 2,133 805,765
 Gain from debt relief - - (64,284)
 Loss on sale of investment
 securities - - 99,000
 (Gain) Loss on disposal
 of assets - - 139,000
 Stock compensation 387,271 978,001 13,832,950
 Write off of stock
 subscription - - 22,750
 Common stock issued for
 financing fees - 14,000 529,203
 Changes in current assets
 and liabilities:
 Accounts receivable - (21,639) -
 Other current assets 4,015 (2,676) (9,879)
 Accounts payable (2,152) (32,777) 926,462
 Accounts payable -
 related party - - 608,330
 Accrued liabilities 10,689 (25,738) 1,660,109
 Accrued legal settlement
 expense - - 44,967
 Accrued interest payable 20,117 20,117 807,694
 ------------- -------------- --------------

 Net Cash Used in Operating
 Activities (134,510) (110,880) (5,177,839)
 ------------- -------------- --------------

Cash Flows from Investing
 Activities:
 Purchase of equipment and land - - (1,003,049)
 Advances to related party - - (290,328)
 Organization costs paid - - (4,755)
 Proceeds from sale of assets - - 367,715
 ------------- -------------- --------------

 Net Cash Used in Investing
 Activities - - (930,417)
 ------------- -------------- --------------

Cash Flows from Financing
 Activities:
 Proceeds from bank line of
 credit 9,125 - 52,930
 Proceeds from grant 109,000 - 109,000
 Proceeds from borrowings -
 stockholders - - 1,690,111
 Payments on borrowings -
 stockholders - - (385,730)
 Proceeds from stock issuance
 and subscriptions 12,500 100,001 4,854,392
 Payments on capital leases - - (185,640)
 ------------- -------------- --------------

 Net Cash Provided by
 (Used in) Financing
 Activities 130,625 100,001 6,135,063
 ------------- -------------- --------------

Net Increase (Decrease) in Cash (3,885) (10,879) 26,807

Cash at Beginning of Period 30,692 52,091 -
 ------------- -------------- --------------

Cash at End of Period $ 26,807 $ 41,212 $ 26,807
 ============= ============== ==============

Supplemental Cash Flow
 Information:
 Cash paid for interest $ 1,098 $ -
Non Cash Investing and Financing
 Activities:
 Conversion of liabilities to
 equity $ - $ 684,222
 Shares issued as a
 subscription receivable $ 200,000

See accompanying notes to condensed consolidated financial statements.

TERRA SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 - INTERIM FINANCIAL STATEMENTS

The accompanying financial statements have been prepared by Terra Systems, Inc., and its subsidiaries (collectively 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, 2007. 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, 2008.

NOTE 2 - 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 three-month period ended March 31, 2008, the Company incurred net loss of $556,583. As of March 31, 2008, the Company's losses accumulated from inception totaled $24,579,906. 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.

The Company is 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 intends to use capital and debt financing as needed to supplement the cash flows that potentially could be generated through the successful negotiation of agreements. In addition, the Company is in the process of demonstrating "clean coke" technology that it has licensed and developing production scale projects based on that technology.

NOTE 3 - LOSS PER COMMON SHARE

Basic loss per share is computed by dividing net loss applicable to common shareholders by the weighted-average number of shares outstanding during the period. Dilutive loss per share reflects the potential dilution that could occur if all contracts to issue common stock were converted into common stock except for those that are anti-dilutive.

For the three months ending March 31, 2008, the Company had 12,500,000 stock options and 6,294,014 of warrants that were not included in the computation of diluted net loss per common share as their effect would have been anti-dilutive, thereby decreasing the net loss per common share.

For the three months ending March 31, 2007, the Company had 4,000,000 stock options and 812,867 warrants that that were not included in the computation of diluted net loss per common share as their effect would have been anti-dilutive, thereby decreasing the net loss per common share.

NOTE 4 - STOCK BASED COMPENSATION

The Company had no stock option grants during the three months ended March 31, 2008. For the three months ended March 31, 2008 and 2007, the Company calculated compensation expense of $387,271 and $76,501 respectively, related to stock options.

A summary of stock option activity for the three months ended March 31, 2008, is presented below:

TERRA SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 Weighted
 Weighted Average
 Shares Average Remaining Aggregate
 Under Exercise Contractual Intrinsic
 Option Price Life Value
 ------------ ------------- -------------- --------------
Outstanding at
December 31, 2007 12,500,000 $ 0.30
 Granted -
 Exercised -
 Forfeited -
 Expired -
 ------------

Outstanding at
March 31, 2008 12,500,000 $ 0.30 7.14 years $ 665,000
 ============

Exercisable at
March 31, 2008 4,690,478 $ 0.26 6.07 years $ 458,333
 ============

As of March 31, 2008, there was approximately $927,644 of unrecognized compensation cost related to stock options that will be recognized over a weighted average period of 1.7 years.

Stock Warrants

A summary of stock warrants at March 31, 2008 is presented below

 Weighted
 Weighted Average
 Shares Average Remaining
 Under Exercise Contractual
 Warrants Price Life
 ------------- -------------- --------------
Outstanding at December 31,
 2007 3,244,381 $ 0.61
 Granted 3,187,500 0.67
 Exercised -
 Forfeited -
 Expired (137,867) $ 0.30
 -------------

Outstanding at March 31, 2008 6,294,014 $ 0.64 1.86 years
 =============

Exercisable at March 31, 2008 1,306,514 $ 0.54 4.5 years
 =============

NOTE 5 - RELATED PARTY TRANSACTIONS

Certain officers and shareholders of the Company have from time to time settled operating expenses on behalf of the Company. As of March 31, 2008, the Company owed these officers $105,242. All amounts are due on demand and bear no interest.

The Company has notes payable to shareholders and officers. These notes bear interest at 10% and are currently due. As of March 31, 2008, the amount due under these notes payable was $804,860. During the three months ended March 31, 2008, the Company accrued interest on the notes of $20,117. As of March 31, 2008, the accrued interest due was $264,073.

TERRA SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 6 - BANK LINE OF CREDIT

The Company entered into a $500,000 line of credit with US Bank N.A. (the "Bank") on November 1, 2007. The line of credit is guaranteed by two directors (the "Guarantors"). The Guarantors are indemnified by each of the other Directors and officers of the Company serving on the Board of Directors. The line of credit bears interest at Bank prime plus 50 basis points and expires on April 30, 2009. The credit agreement includes a limitation on other indebtedness and guarantees. As of March 31, 2008 the Company had drawn $52,930 on the line of credit

NOTE 7 - STOCKHOLDERS' DEFICIT

Common Stock Issued for Cash - During the three months ended March 31, 2008, the Company issued 125,000 shares of common stock and 187,500 warrants to purchase common stock, with an exercise price ranging from $0.50 to $1.00 per share for proceeds of $12,500; 125,000 warrants vest in July 2008 and expire in January 2009; 62,500 warrants vest in January 2009 and expire in January 2010. The proceeds were allocated $8,541 to common stock and $3,959 to the warrants, based on their relative fair values on the date of issuance. The fair value of the warrants was determined by the Black-Scholes option pricing model using the following assumptions: estimated volatility of 118.08% estimated risk-free interest rate of 2.27% estimated yield of 0% and estimated term of 1.33 years.

Common Stock Issued for Stock Subscription - During the three months ended March 31, 2008, the Company issued 2,000,000 shares of common stock and 3,000,000 warrants to purchase common stock, with exercise prices ranging from $0.50 to $1.00 per share for $200,000 subscription receivable; 2,000,000 warrants which vest in September 2008 and expire in March 2009 and 1,000,000 warrants which vest in March 2009 and expire in March 2010. The proceeds were allocated $64,089 to common stock and $ 135,911 to the warrants, based on their relative fair values on the date of issuance. The fair value of the warrants was determined by the Black-Scholes option pricing model using the following assumptions: estimated volatility of 127.7% estimated risk-free interest rate of 1.57% estimated yield of 0% and estimated term of 1.33 years. Cash for the stock issued was received in April 2008.

NOTE 8 - GRANTS

On March 19, 2008, the Company received from the Federal Center of Excellence a grant for the amount of $109,000. The funds are to be used to develop the process controls for the system at its clean coke pilot plant.

NOTE 9 - SUBSEQUENT EVENTS

On April 24, 2008 the Company borrowed $45,500 under the bank line of credit and purchased various equipment for use at the Company's Hiawatha coal recovery project.

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 products or 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. Additionally, statements concerning our projections, projected business strategies, projected revenues or performance, or future results may also constitute forward-looking statements. All forward-looking statements are intended to be covered by the safe harbor created by Section 21E of the Securities Exchange Act of 1934. We disclaim any obligation or intention to update any forward-looking statements.

General

Terra Systems was incorporated in Utah on February 17, 1996, and is a development-stage company. We are pursuing three primary businesses. The first of these 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, and electro-customization. Our system can perform multiple tasks, needs less maintenance, requires no chemical additives, and can improve the surrounding environmental quality.

The second business we are pursuing is clean coke technology. We have obtained the worldwide license to Combustion Resources LLC's ("Combustion Resources") clean coke technology. We believe that the carbon coke product produced by this process qualifies for tax credits under IRC Section 45K. The Energy Policy Act of 2005 (the "Energy Act") Section 1321 extended the date that facilities placed in service will qualify for this tax credit. We worked with the College of Eastern Utah to apply for and obtain an award of a Federal Center of Excellence grant under Section 404 of the Energy Act. This award will be used to further our development of this technology.

The third business we are pursuing is the agglomeration of carbon products. The material agglomerated may or may not be previously processed

utilizing our patented pneumatic accelerator technology. Initially, we are agglomerating carbon black, a very fine-sized material that poses significant material handling issues in its unagglomerated state.

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, trade secrets, 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.

Results of Operations

Three months ended March 31, 2008, compared to the three months ended March 31, 2007:

From inception through March 31, 2008, we have incurred losses totaling $24,579,906 and generated revenues of $768,136 from operations. During the three months ended March 31, 2008, we had no sales revenues. 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.

Realization of sales of our products and services is vital to operations. We may not be able to continue as a going concern without generating and 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 some 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. Since then we have been pursuing project development contracts and refining our design of the Pneumatic Accelerator. We have relocated our single Pneumatic Accelerator System to the Hiawatha coal recovery project site, located in Carbon county, Utah, and expect to begin operations thereof in the second quarter of 2008.

In addition, we were able to license the "Clean Coke Technology" of Combustion Resources LLC ("Combustion Resources"). The license agreement requires that the Company begin paying a $300,000 per year minimum royalty beginning in the year 2010. The royalty is set as a fixed percentage of the net operating profit realized from the licensed Clean Coke Technology, subject to a cap of $3 million in any one year. The Company believes that the Clean Coke Technology can be utilized to produce coke that qualify under IRC Section 45K for the tax credit from alternative fuels, provided a plant utilizing the Clean Coke Technology is built and placed in service by December 31, 2009. The Section 45K credit is subject to reduction as the Federal reference price of oil increases.

Combustion Resources, the College of Eastern Utah's Western Energy Training Center, and the Company were successful in obtaining a Federal Center of Excellence grant to develop the process controls for the system at its pilot plant (see below) in Price, Utah.

Also during the prior year, we were contracted by Combustion Resources, and worked with them to build and operate a pilot briquetting plant in Price, Utah. The pilot plant has a theoretical capacity of 2 tons per hour. The plant has been used to agglomerate carbon black. Carbon black is a very fine-sized material that is difficult to handle in its unagglomerated state. The plant has

produced 162 tons of agglomerated carbon black to-date, all of which has been shipped to a major industrial customer for testing at its production plant. The Company's revenue for the prior year was generated from this activity. Until the results of the test are known, the pilot plant will be utilized to develop the Clean Coke Technology process controls mentioned above. We have recently completed several modifications that were necessary to enable us to utilize the plant for the production of clean coke. The most substantial of these modifications was the addition of a calcining oven. Which is used in the process to produce Clean Coke. We expect that the modified pilot plant will begin to run Clean Coke material near the end of the second quarter or the beginning of the third quarter. We anticipate that the modified plant will run Clean Coke material that will be used by various parties for testing in their production scale facilities.

Our net loss for the three months ended March 31, 2008, was $556,583, compared to a net loss for the three months ended March 31, 2007, of $1,042,301. Our expenses for the three months ended March 31, 2008, were $556,583 of which approximately 92% were general and administrative. Our expenses for the three months ended March 31, 2007, were $1,058,511 of which approximately 97% were general and administrative. For the three months ended March 31, 2008, depreciation and amortization expense was $2,133 compared to depreciation and amortization expense of $2,133 for the three months ended March 31, 2007.

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 2008.

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, products, fees, royalties, and profit sharing from licensing of our technology.

Besides the three primary businesses noted above, the Company is also pursuing potential energy projects through its subsidiary Mountain Island Energy, LLC, and its joint venture with United Fund Advisors, LLC, in Soda Springs, Idaho. Wind resource data is being collected at this site as part of the process of determining the feasibility of an approximate ten megawatt wind energy project.

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 issuance of a patent for our Pneumatic Accelerator Sysyem and the licensing of the Clean Coke technology should allow us to more aggressively pursue revenue, and cash generating contracts and opportunities, it will 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 annual report on Form 10-KSB, for the year ended December 31, 2007, 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. Quantitative and Qualitative Disclosures About Market Risk

Not applicable

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

The Company maintains a set of disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 (the "Exchange Act") Rules 13a-15(e) or 15d-15(e)) designed to ensure that information required to be disclosed by the Company in the reports filed under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to the Company's management, including the Company's chief executive officer and a consultant performing services for the Company commonly performed by a chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Based upon their evaluation as of the end of the period covered by this report, the Company's chief executive officer and a consultant performing services for the Company commonly performed by a chief financial officer concluded that the Company's disclosure controls and procedures were not effective to ensure that information required to be included in the Company's periodic SEC filings is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms.

The Company was advised by Hansen, Barnett & Maxwell, P.C., the Company's independent registered public accounting firm, that during their performance of audit procedures for fiscal year 2007, Hansen, Barnett & Maxwell, P.C. identified a material weakness as defined by the Public Company Accounting Oversight Board.

This deficiency consisted primarily of inadequate staffing and supervision that led to the untimely identification and resolution of accounting and disclosure matters and failure to perform timely and effective reviews. However, the size of the Company prevents it from being able to employ sufficient resources to enable the Company to have adequate segregation of duties within its internal control system. Management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Changes in Internal Controls over Financial Reporting.

In order to address the deficiency of inadequate staffing and supervision, management has implemented tighter cash flow controls and has set-up a centralized computer system to maintain the accounting records. Management will continue to monitor and review these remediation efforts.

Certifications of the Chief Executive Officer and the consultant performing services for the Company commonly performed by a chief financial officer regarding, among other items, disclosure controls and procedures are included immediately after the signature section of this Form 10-Q.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

None

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

During the three months ended March 31, 2008, the Company issued 125,000 shares of common stock for proceeds of $12,500 at a price of $0.10 per share and 2,000,000 shares of common stock for a subscription receivable of $200,000 at a price of $0.10 per share.

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

Item 3. Defaults Upon Senior Securities

None

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

None

Item 5. Other Information

None

Item 6. Exhibits

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

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: May 15. 2008


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

Date: May 15, 2008

Terra Systems (CE) (USOTC:TSYI)
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