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<DOCUMENT>

<TYPE>10KSB

<SEQUENCE>1

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-KSB

ANNUAL REPORT

UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED JUNE 30, 2005

COMMISSION FILE NUMBER 0-9355

CUBIC ENERGY, INC.

(Name of Small Business Issuer in its Charter)

TEXAS 87-0352095

(State of Incorporation) (I.R.S. Employer Identification No.)

9870 PLANO ROAD, DALLAS, TEXAS 75238

(Address of Principal Executive Offices)

972-686-0369

(Issuer's Telephone Number)

Securities Registered Pursuant To Section 12(g) of the Exchange Act:

COMMON STOCK, PAR VALUE $.05 PER SHARE

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, and (2) has

been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Check if there is no disclosure of delinquent filers in response to

Item 405 of Regulation S-B contained in this form, and no disclosure will be

contained, to the best of registrant's knowledge, in definitive proxy or

information statements incorporated by reference in Part III of this Form 10-KSB

or any amendment to this Form 10-KSB. [X]

Indicate by check mark whether the registrant is a shell company (as

defined in Rule 12b-2 of the Exchange Act. Yes [ ] No [X]

The issuer's revenues for the fiscal year ended June 30, 2005 were

$469,442.

As of June 30, 2005, the registrant had outstanding 35,161,976 shares

of common stock, $.05 par value, which is registrant's only class of common

stock. The aggregate market value of the common stock held by non-affiliates of

the registrant, computed by reference to the average bid and ask price and

shares outstanding, was approximately $19,577,473 as of September 19, 2005.

Shares of common stock held by each officer and director of the registrant and
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by each person who may be deemed to be an affiliate have been excluded. This

determination of affiliate status is not necessarily a conclusive determination

for other purposes.

Transitional Small Business Disclosure Format: Yes [ ] No [X]

<PAGE>

CUBIC ENERGY, INC.

TABLE OF CONTENTS Page

----

Item 1. Description of Business and Properties...........................1

Item 2. Description of Properties.......................................21

Item 3. Legal Proceedings...............................................21

Item 4. Submission of Matters to a Vote of Security Holders.............21

Item 5. Market for Common Equity and Related Stockholder Matters........22

Item 6. Management's Discussion and Analysis or Plan of Operations......23

Item 7. Financial Statements............................................26

Item 8. Changes In and Disagreements With Accountants on Accounting

and Financial Disclosure........................................26

Item 8A. Controls and Procedures.........................................26

Item 8B. Other Information...............................................26

Item 9. Directors, Executive Officers, Promoters and Control Persons;

Compliance with Section 16(a) of the Exchange

Act.............................................................27

Item 10. Executive Compensation..........................................29

Item 11. Security Ownership of Certain Beneficial Owners and Management

and Related Stockholder Matters.................................30

Item 12. Certain Relationships And Related Transactions..................32

Item 13. Exhibits........................................................34

Item 14. Principal Accountant Fees and Services..........................35

ii

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SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
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This report contains "forward-looking statements" within the meaning of Section

27A of the Securities Act of 1933, as amended, and Section 21E of the Securities

Exchange Act of 1934, as amended. Such forward-looking statements are based on

current expectations that involve a number of risks and uncertainties that could

cause actual results to differ materially from the results discussed in the

forward-looking statements. Generally, forward-looking statements include words

or phrases such as "management anticipates," "the Company believes," "the

Company anticipates," and words and phrases of similar impact. The

forward-looking statements are made pursuant to safe harbor provisions of the

Private Securities Litigation Reform Act of 1995. The factors that could cause

actual results to differ materially from the forward-looking statements include,

but are not limited to: (i) industry conditions and competition, (ii) the

cyclical nature of the industry, (iii) domestic and worldwide supplies and

demand for oil and gas, (iv) operational risks and insurance, (v) environmental

liabilities which may arise in the future which are not covered by insurance or

indemnity, (vi) the impact of current and future laws and government

regulations, as well as repeal or modification of same, affecting the oil and

gas industry and our operations in particular, (vii) production levels and other

activities of OPEC and other oil and gas producers, and the impact that the

above factors and other events have on the current and expected future pricing

of oil and natural gas, and (viii) the risks described from time to time in our

reports filed with the Securities and Exchange Commission.

iii

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PART I

Item 1. Description of Business and Properties.

GENERAL

Cubic Energy, Inc. is an independent energy company engaged in the

development and production of, and exploration for, crude oil and natural gas.

Our oil and gas assets are concentrated principally in Texas and Louisiana. At
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June 30, 2005, our total proved reserves were 85,986 BOE.

Our predecessor was incorporated in October 1978 in the State of Texas.

In March 1980, this entity was merged into a publicly held Utah corporation,

with the surviving entity being Roseland Oil and Gas, Inc., a Utah corporation.

In August 1991, Roseland Oil and Gas, Inc., the Utah corporation, was merged

into an Oklahoma corporation and we relocated our corporate offices from

Houston, Texas to Tulsa, Oklahoma. In October 1999, pursuant to approval of the

shareholders, Roseland Oil and Gas, Inc. was merged into Cubic Energy, Inc., a

Texas corporation. References to Cubic, Roseland or the Company include the

Company and our predecessors unless the context otherwise requires. Our

principal executive office is located at 9870 Plano Road, Dallas, Texas 75238,

and our telephone number is (972) 686-0369.

In December 1997, we entered into a Stock Purchase Agreement (the

"Agreement") pursuant to which the Company issued 12,500,000 shares of our

common stock in exchange for the conveyance to the Company of certain oil and

gas properties by Calvin A. Wallen, III and his affiliates. In connection with

the Stock Purchase Agreement, three of the five members of the Board of

Directors resigned and new directors were appointed, including Mr. Wallen, who

also became President and CEO of the Company.

DESCRIPTION OF BUSINESS

Prior to the Agreement, we focused primarily on the acquisition of

non-operated working interests and overriding royalty interests in oil and gas

properties. Subsequent to the Agreement in December 1997, we moved our

headquarters from Tulsa, Oklahoma to Garland, Texas in order to utilize an

affiliate's assembled team of experienced management whose substantial expertise

lay in acquisition, exploitation and development and the ability to manage both

operated and non-operated oil and gas properties. Current management believes

that the ability to operate our own properties will result in significant cost

savings to the Company. In addition, after reviewing our existing property

portfolio and refining our new business strategy, the management team initiated

a divestment strategy to dispose of our non-strategic assets in non-core areas

in order to concentrate on building core reserves. Pursuant to this strategy, we

are reviewing plans to acquire and develop properties in our core areas in Texas

and Louisiana, as well as establishing a drilling program for the drilling of

exploratory, development and infill wells, a strategy previously unavailable to

us due to the technical expertise and experience required and the lack of

available resources. We have made substantial progress in redirecting our

strategic business efforts and believe that attractive opportunities remain for

acquisition and development of our remaining and future assets.

On April 27, 2001, we completed an exchange offer pursuant to which we

acquired (i) certain direct working interests in producing oil and/or natural

gas wells (the "Working Interests") and (ii) all of the outstanding membership

units in four privately held limited liability companies and approximately 9.85%

of the membership interest in another privately held limited liability company,

all of which are engaged in oil and/or natural gas exploration and production.

The Working Interests consist of between 15% and 45% working interests in

fourteen (14) wells. The Working Interests are part of projects operated by

Tauren Exploration, Inc. ("Tauren"), an independent energy company, and Fossil

Operating, Inc. ("Fossil") acts as the operator for some of the properties. Mr.

Wallen is the sole shareholder, director and officer of Tauren and Fossil. The
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relationship between the Company and each of Tauren and Fossil were approved by

our disinterested directors. The exchange offer was made to and was accepted by

the various individual holders of the interests acquired. The Working Interests

and the properties held are located in Texas and Louisiana. The consideration

paid to the individuals who accepted the exchange offer was determined based on

our valuation of the reserves underlying the interests acquired. The value of

our common stock for purpose of the exchange offer was deemed to be $0.50 per

share. In connection with the exchange offer, we issued approximately 11,141,256

shares of our common stock. In addition, as consideration for services rendered

with respect to this exchange offer, C. K. Cooper & Company, Inc. and/or its

principals and employees, received 111,413 shares of our common stock.

Effective January 1, 2002, we entered into an agreement with Tauren

whereby (i) Tauren exchanged and traded the accounts receivable of $856,712 owed

by the Company for 856,712 shares of restricted Company common stock, (ii) the

Company attained ground floor opportunities from Tauren to participate in

Tauren's prospect and project inventory, and (iii) certain warrants were issued

to Tauren from the Company to acquire restricted Company common stock. A copy of

this agreement was filed with the Company's Form 10-QSB for the quarter ended

March 31, 2002.

In April 2002, the Company made the strategic decision not to renew the

Red Rock, Louisiana leaseholds, which action has had a substantial impact on the

income statement for the Company for the year ended June 30, 2002. Despite the

impact, we believe the decision not to re-new the leases will be to the ultimate

benefit of the Company.

On June 1, 2002, Tauren assigned certain oil and gas properties to the

Company for de minimis consideration. We already had an interest in some of the

properties assigned by Tauren.

On or about October 1, 2004, we closed a Securities Purchase Agreement

and issued $2,635,000 in principal amount of 7% Senior Secured Convertible

Debentures due September 30, 2009 (the "Debentures"), to a group of

institutional and high net worth investors. The Debentures are secured by the

collateral set forth in the Deed of Trust, Security Agreement, Assignment of

Production and Fixture Filing attached to our Form 8-K filed October 12, 2004.

The Debentures pay an annual interest rate of 7% on a quarterly basis and are

convertible into shares of our common stock at a price of $.50 per share. We

have the option to pay the interest on the Debentures in common stock. The

investors also received warrants to purchase an additional 2,635,000 shares of

common stock with an exercise price of $1.00 per share. During the fiscal year

ended June 30, 2005, $705,000 of debt had been converted into 1,410,000 shares

of common stock, and 145,137 shares of common stock were issued in lieu of cash

to pay interest.

We have allocated the proceeds from the issuance of the Debentures to

the warrants and the Debentures based on their relative fair market values at

the date of issuance. The value assigned to the warrants of $510,961 has been

recorded as an increase in additional paid in capital. The assignment of a value

to the warrants results in a loan discount being recorded for the same amount.

The discount is being amortized over the original five year term of the

Debentures as additional interest expense.
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We incurred loan costs of $264,300 on the issuance of the Debentures

and warrants. The amount allocable to the Debentures of $213,049 has been

capitalized and is being amortized over the term of the Debentures. Amortization

of loan costs was $28,258 for the year ended June 30, 2005.

The proceeds of the Debentures have primarily been used for the

acquisition of interests in oil and gas properties. Through December 31, 2004,

we incurred acquisition and development costs of $1,418,996 on properties with

unproved reserves. On or before March 31, 2005, we determined that the reserves

2

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acquired in this transaction were proved, and the associated acquisition and

development costs were transferred to proved properties and depletion has been

computed in accordance with the full cost method.

However, upon audit and further review, it has been determined that

approximately $1,053,000 in lease acquisition costs were improperly moved to the

proved category from the unproved category, and this amount has been

re-categorized to the unproved category. The March 31, 2005 Form 10-QSB for the

Company is being amended to re-categorize the assets between proved and

unproved, to restate the depletion and to restate the balance sheet accordingly.

The net effect of this amendment will not result in a change in our total

assets, but reflects a material change in asset classification. In addition, the

balance of the prepaid drilling costs, net of allocable expenses, as of June 30,

2005, are $303,667.

On or about January 11, 2005, we issued 1,531,661 shares of common

stock to Caravel Resources Energy Fund 2003-II, L.P. (the "Partnership") in

exchange for a 0.1914575033 working interest in the Kraemer 24-1 Well, Desoto

Parish, Township 14 N, Range 15 W, Section 24 (the "Well"). The Company also

issued 468,339 shares of common stock to Mr. Wallen in exchange for a

0.0585424967 working interest in the Well. The common stock closed at a price of

$0.90 on January 10, 2005. The shares of common stock were issued by the Company

in reliance upon an exemption from registration set forth in Section 4(2) of the

Securities Act of 1933, as amended, which exempts transactions by an issuer not

involving a public offering.

PRINCIPAL OIL AND GAS PROPERTIES

The following table summarizes certain information with respect to our

principal areas of operation at June 30, 2005.

Percent Present

Oil Gas of Proved Value

Areas (Bbl) (Mcf) Reserves (Disc @ 10%)

----- ----- ----- --------- ------------

Louisiana 360 297,796 65% $690,800

Texas 688 211,829 35% $380,300

--------------------------------------------------------------------------------

Total 1048 509,625 100% $1,071,100
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Our Texas properties are situated in Palo Pinto, Eastland and Callahan

Counties. Our Louisiana properties are situated in Caddo Parish and in Desoto

Parish. At June 30, 2005, the Texas properties contained the majority of our

proved reserves; however, it is anticipated that of our existing properties the

ones in Louisiana will eventually contain the majority of our proved reserves.

The Texas properties consist primarily of wells acquired by the Company in

several transactions between 1991 and 2002 and through overriding royalty

interests reserved in farm-out agreements in 1998 and 1999. The Louisiana

properties were acquired on or about October 1, 2004 and January 11, 2005 in

transactions described herein.

In June 1998, we agreed to a farm-out agreement with Cummings Company,

reserving a 6.25% overriding royalty interest in any wells drilled under that

agreement. As of June 30, 2000, Cummings had completed its drilling program on

the farmed out interest and completed four wells, the Reagan 11-1, Reagan 11-2,

Reagan 11-3 and the Reagan 11-4.

In addition, on December 10, 1998, we entered into an agreement with

Tauren that provides for Tauren to drill on our Section 11 in Palo Pinto County,

Texas. The agreement grants Tauren a farm-out with Cubic retaining a 7.5%

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overriding royalty interest. The agreement also provides for a preferential

right in the event that Tauren, at some later date, decides to dispose of a part

or all of their interest in the drilled wells.

Our net production for the fiscal year ending June 30, 2005 for all of

the Company wells averaged approximately 185 Mcf of natural gas per day and 1

barrel of oil per day.

EXPLORATION ACTIVITIES

Our strategy with respect to our domestic exploration program seeks to

maintain a balanced portfolio of drilling opportunities that range from lower

risk, field extension wells to higher risk, high reserve potential prospects.

Our focus is primarily on exploration opportunities that can benefit from

advanced technologies, including 3-D seismic, designed to reduce risks and

increase success rates. We develop prospects in-house at an affiliate and

through strategic alliances with exploration companies that have expertise in

specific target areas. In addition, we evaluate some externally generated

prospects and plan to participate in some of these opportunities to enhance our

portfolio.

We are currently focusing our domestic exploration activities to

develop our undeveloped leasehold opportunities in Louisiana and Texas.

Currently we have exploration opportunities and seek to acquire additional

leasehold interests in Caddo and Desoto Parishes, Louisiana, and in Palo Pinto,

Callahan and Eastland Counties in Texas. These areas are a part of geologic

studies utilizing regional trend surface analysis, 2-D and 3-D seismic data, AVO

analysis and/or vast sub-surface control. Prospects have been developed from

4,000-10,500 feet in depth in the Cotton Valley, Hosston, Gloyd, Pettet, Paluxy,

Strawn sandstone, Bend conglomerate and Caddo limestone.
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We also have included an acquisition strategy to our business plan that

would allow us to capitalize on producing oil and gas acquisition targets.

MARKETING OF PRODUCTION

Crude Oil and Natural Gas

Our production consists mainly of natural gas. We market our operated

production of natural gas to two purchasers (i) in Texas, Enbridge Gathering,

LP, as successor to Devon Gas Services LP, and (ii) in Louisiana, Crosstex Gulf

Coast Marketing, Ltd. We sell our crude oil and condensate production at or near

the well site, although in some cases it is gathered by us or others and

delivered to a central point of sale. Our crude oil and condensate production is

transported by truck or by pipeline and is typically committed to arrangements

having a term of one year or less. We have not engaged in crude oil hedging or

trading activities. We utilize short-term gas contracts with prices that are

related to market conditions in varying degrees and have not engaged in natural

gas hedging or futures trading.

We believe we would be able to locate alternate purchasers in the event

of the loss of any one of these purchasers, and that any such loss would not

have a material adverse effect on our financial condition or results of

operations. Revenue from the sale of natural gas totaled $447,470 for the fiscal

year ended June 30, 2005 and represented 95% of our total oil and gas revenues

for that fiscal year.

Price Considerations

Crude oil prices are established in a highly liquid, international

market, with average crude oil prices that we receive generally fluctuating with

changes in the futures price established on the NYMEX for West Texas

Intermediate Crude Oil ("NYMEX-WTI"). The average crude oil price per Bbl

received by us in fiscal year 2005 was $43.42.

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<TABLE>

<CAPTION>

Natural gas prices in the geographical areas in which we operate are

closely tied to established price indices which are heavily influenced by

national and regional supply and demand factors and the futures price per MMBTU

for natural gas delivered at Henry Hub, Louisiana established on the NYMEX

("NYMEX-Henry Hub"). At times, these indices correlate closely with the

NYMEX-Henry Hub price, but often there are significant variances between the

NYMEX-Henry Hub price and the indices used to price our natural gas. Average

natural gas prices received by us in each of our operating areas generally

fluctuate with changes in these established indices. The average natural gas

price per Mcf received by us in fiscal 2005 was $6.61.

OIL AND GAS RESERVES

The following tables set forth the proved developed, proved

non-producing and undeveloped reserves at June 30, 2005, the estimated future

net revenues from such proved reserves and the Present Value and Standardized
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Measure of Discounted Future Net Cash Flows attributable to our reserves at June

30, 2005, 2004 and 2003:

10%

Category Oil (Bbls) Gas (Mcf) Total (Mcfe) Income

Discount

------------ ------------ ------------ -------------

------------

<S> <C> <C> <C> <C>

<C>

Proved Producing 989 250,889 262,757 $ 616,200

$ 478,300

Proved Non-Producing 59 258,736 259,444 $ 1286,100

$ 592,800

Proved Undeveloped -- -- -- --

--

</TABLE>

AT JUNE 30,

------------------------------------

2005 2004 2003

---------- ---------- ----------

Proved Reserves:

Oil (Bbl).................... 1048 0 0

Gas (Mcf).................... 509,625 311,098 330,409

BOE............................... 85,986 51,850 55,068

Estimated future net revenues..... $1,902,300 $975,468 $1,098,147

(before income tax) .........

Standardized Measure (1)... $1,071,100 $731,913 $798,381

Proved developed reserves: .......

Oil (Bbl) ................... 1048 0 0

Gas (Mcf) .................. 509,625 311,098 330,409

BOE .............................. 85,986 51,850 55,068

Estimated future net revenues .... $1,092,300 $975,468 $1,098,147

(before income tax)..........

Present Value .................... $1,071,100 $731,913 $798,381

Standardized Measure (1) ......... $1,071,100 $731,913 $798,381

Weighted average sales prices:....

Oil (Bbl) ................... $42.43 $32.16 $26.20

Gas (Mcf) ................... $6.61 $5.55 $4.91

-----------------------------

(1) The Standardized Measure of Discounted Future Net Cash Flows prepared

by the Company represents the present value (using an annual discount

rate of 10%) of estimated future net revenues from the production of

proved reserves, after giving effect to income taxes. See the

Supplemental Financial Information attached to the Financial Statements

of the Company included elsewhere in this Report for additional

information regarding the disclosure of the Standardized Measure

information in accordance with the provisions of Statement of Financial

Accounting Standards ("SFAS") No. 69, "Disclosures about Oil and Gas

Producing Activities."

5
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All information set forth in this Report relating to our proved

reserves, estimated future net revenues and present values is taken from reports

prepared by the Houston, Texas office of Netherland Sewell & Associates, Inc.

("NSA"), our new independent, petroleum engineering firm. The estimates of this

engineering firm were based upon review of production histories and other

geological, economic, ownership and engineering data provided by the Company. No

reports on our reserves have been filed with any federal agency. In accordance

with guidelines of the SEC, our estimates of proved reserves and the future net

revenues from which Present Values are derived are made using year end oil and

gas sales prices held constant throughout the life of the properties (except to

the extent a contract specifically provides otherwise). Operating costs,

development costs and certain production-related taxes were deducted in arriving

at estimated future net revenues, but such costs do not include debt service or

general and administrative expenses.

The reserve report from NSA showed a dramatic downward variance from

the expectations of management for the Company in proved reserves, as NSA

re-classified some thought to be proved reserves as possible or probable. The

Company and its management believe that the significance of this variance in

reserves is overridden in the investor confidence inspired by our association

with NSA.

There are numerous uncertainties inherent in estimating oil and gas

reserves and their values, including many factors beyond our control. The

reserve data set forth in this Report represents estimates only. Reservoir

engineering is a subjective process of estimating the sizes of underground

accumulations of oil and gas that cannot be measured in an exact manner. The

accuracy of any reserve estimate is a function of the quality of available data,

engineering and geological interpretation, and judgment. As a result, estimates

of different engineers, including those used by us, may vary. In addition,

estimates of reserves are subject to revision based upon actual production,

results of future development, exploitation and exploration activities,

prevailing oil and gas prices, operating costs and other factors, which

revisions may be material. Accordingly, reserve estimates are often different

from the quantities of oil and gas that are ultimately recovered and are highly

dependent upon the accuracy of the assumptions upon which they are based. There

can be no assurance that these estimates are accurate predictions of our oil and

gas reserves or their values. Estimates with respect to proved reserves that may

be developed and produced in the future are often based upon volumetric

calculations and upon analogy to similar types of reserves rather than actual

production history. Estimates based on these methods are generally less reliable

than those based on actual production history.

Subsequent evaluation of the same reserves based upon production

history will result in variations, which may be substantial, in the estimated

reserves.

NET PRODUCTION, SALES PRICES AND COSTS

The following table presents certain information with respect to oil

and gas production, prices and costs attributable to all oil and gas property

interests owned by us for the period ended June 30, 2004.

YEAR ENDED YEAR ENDED

JUNE 30, 2005 JUNE 30, 2004
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------------- -------------

PRODUCTION VOLUMES:

Oil (Bbl) .................................. 506 562

Gas (Mcf) ................................. 67,744 71,804

WEIGHTED AVERAGE SALES PRICES:

Oil (per Bbl) ............................. $43.42 $32.16

Gas (per Mcf) ............................. $6.61 $5.55

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SELECTED EXPENSES PER BOE:

Lease operating ........................... $23.15 $14.88

Depreciation, Depletion & Amortization.... $30.90 $ 8.36

General and administrative ................ $33.47 $19.16

PRODUCTIVE WELLS AND ACREAGE

Productive Wells

The following table sets forth our domestic productive wells at June

30, 2005:

OIL GAS TOTAL

----------------- ----------------- -----------------

Gross Net Gross Net Gross Net

----- --- ----- --- ----- ---

0 0 17 13.65 17 13.65

Acreage

The following table sets forth our undeveloped and developed gross and

net leasehold acreage at June 30, 2005. Undeveloped acreage includes leased

acres on which wells have not been drilled or completed to a point that would

permit the production of commercial quantities of oil and gas, regardless of

whether or not such acreage contains proved reserves.

Undeveloped Developed TOTAL

----------------- ----------------- -----------------

Gross Net Gross Net Gross Net

----- --- ----- --- ----- ---

4928 1232 1122 939 6050 2171

All the leases for the undeveloped acreage summarized in the preceding

table will expire at the end of their respective primary terms unless prior to

that date the existing leases are renewed or production has been obtained from

the acreage subject to the lease, in which event the lease will remain in effect

until the cessation of production. As is customary in the industry, we generally

acquire oil and gas acreage without any warranty of title except as to claims

made by, through or under the transferor. Although we have title to developed

acreage examined prior to acquisition in those cases in which the economic

significance of the acreage justifies the cost, there can be no assurance that
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losses will not result from title defects or from defects in the assignment of

leasehold rights. In many instances, title opinions may not be obtained if in

our judgment it would be uneconomical or impractical to do so.

OPERATIONS

We are not the operator of our wells, but in most or all cases Fossil,

an entity related to Mr. Wallen, is the operator.

We have contract relationships with petroleum engineers, geologists and

other operations and production specialists who we believe will be able to

improve production rates, increase reserves and/or lower the cost of operating

our oil and gas properties.

Oil and gas properties are customarily operated under the terms of a

joint operating agreement, which provides for reimbursement of the operator's

direct expenses and monthly per well supervision fees. Per well supervision fees

vary widely depending on the geographic location and producing formation of the

well, whether the well produces oil or gas and other factors.

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EMPLOYEES

At June 30, 2005, the Company had no full time employees. In January

2002, the Company entered into a new contract with an affiliate controlled by

Mr. Wallen to provide certain technical administration and management services

needed to conduct its business. The terms of the contract provided for personnel

to be contracted at the affiliates true cost; which is more favorable to the

Company than would be available from an unaffiliated third party.

FACILITIES

The Company's principal executive and administrative offices are

located at 9870 Plano Road, Dallas, Texas. The offices are subleased from an

affiliate controlled by Mr. Wallen and the offices are owned by this affiliate.

The monthly amount charged to the Company is based on actual costs of materials

and man-hours of the affiliates that are used pursuant to the terms of the

agreement. The Company believes that there is other appropriate space available

in the event the Company should terminate its current leasing arrangement.
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RISK FACTORS

You should carefully consider the following risk factors, in addition

to the other information set forth in this Report, before investing in shares of

our common stock. Each of these risk factors could adversely affect our

business, operating results and financial condition, as well as adversely affect

the value of an investment in our common stock. Some information in this Report

may contain "forward-looking" statements that discuss future expectations of our

financial condition and results of operation. The risk factors noted in this

section and other factors could cause our actual results to differ materially

from those contained in any forward-looking statements.

We face significant competition, and many of our competitors have

resources in excess of our available resources.

The oil and gas industry is highly competitive. We encounter

competition from other oil and gas companies in all areas of our operations,

including the acquisition of producing properties and sale of crude oil and

natural gas. Our competitors include major integrated oil and gas companies and

numerous independent oil and gas companies, individuals and drilling and income

programs. Many of our competitors are large, well established companies with

substantially larger operating staffs and greater capital resources than us.

Such companies may be able to pay more for productive oil and gas properties and

exploratory prospects and to define, evaluate, bid for and purchase a greater

number of properties and prospects than our financial or human resources permit.

Our ability to acquire additional properties and to discover reserves in the

future will depend upon our ability to evaluate and select suitable properties

and to consummate transactions in this highly competitive environment.

Exploratory drilling is a speculative activity that may not result in

commercially productive reserves and may require expenditures in excess of

budgeted amounts.

Drilling activities are subject to many risks, including the risk that

no commercially productive oil or gas reservoirs will be encountered. There can

be no assurance that new wells drilled by us will be productive or that we will

recover all or any portion of our investment. Drilling for oil and gas may

involve unprofitable efforts, not only from dry wells, but also from wells that

are productive but do not produce sufficient net revenues to return a profit

after drilling, operating and other costs. The cost of drilling, completing and

operating wells is often uncertain. Our drilling operations may be curtailed,

delayed or canceled as a result of a variety of factors, many of which are

beyond its control, including economic conditions, mechanical problems, pressure

or irregularities in formations, title problems, weather conditions, compliance

with governmental requirements and shortages in or delays in the delivery of

equipment and services. Such equipment shortages and delays sometimes involve

drilling rigs where inclement weather prohibits the movement of land rigs

causing a high demand for rigs by a large number of companies during a

relatively short period of time. Our future drilling activities may not be

successful. Lack of drilling success could have a material adverse effect on our
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financial condition and results of operations.

Our operations are also subject to all the hazards and risks normally

incident to the development, exploitation, production and transportation of, and

the exploration for, oil and gas, including unusual or unexpected geologic

formations, pressures, down hole fires, mechanical failures, blowouts,

explosions, uncontrollable flows of oil, gas or well fluids and pollution and

other environmental risks. These hazards could result in substantial losses to

us due to injury and loss of life, severe damage to and destruction of property

and equipment, pollution and other environmental damage and suspension of

operations. We participate in insurance coverage maintained by the operator of

its wells, although there can be no assurances that such coverage will be

sufficient to prevent a material adverse effect to us in such events.

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We have a limited operating history in a capital-intensive business,

and we will have a need for additional funds.

From our inception through December 1997, we were engaged principally

in non-operating activities. While our new management has extensive experience

in oil and gas exploration and operating activities, we have had very limited

experience in these operations. Our business is highly capital-intensive

requiring continuous development and acquisition of oil and gas reserves. In

addition, capital is required to operate and expand our oil and gas field

operations and purchase equipment. At June 30, 2005, we had working capital of

$576,294. As a result of our determination to operate in the future, our working

capital requirements may be expected to increase significantly over prior

periods. We anticipate that we will be able to meet our cash requirements for

the next 12 months. However, if such plans or assumptions change or prove to be

inaccurate, we could be required to seek additional financing sooner than

currently anticipated.

On October 6, 2004, we closed a Securities Purchase Agreement and

issued $2,635,000 in principal amount of 7% Senior Secured Convertible

Debentures due September 30, 2009 to a group of institutional and high net worth

investors. Proceeds from the sale of the Debentures will be used to acquire a

25% interest in the Kraemer 24 #1 well located in the Bethany-Longstreet play of

Northern Louisiana and the development of such play, including spudding two

additional wells, which is anticipated to occur by the end of the year. The

Debentures pay an annual interest rate of 7% on a quarterly basis and are

convertible into shares of our common stock at a price of $0.50 per share. We

have the option to pay the interest on the Debentures in our common stock. The

investors also received warrants to purchase an additional 2,635,000 shares of

common stock with an exercise price of $1.00. We have no commitments to obtain

any additional debt or equity financing and there can be no assurance that

additional funds will be available, when required, on terms favorable to us. Any

future issuances of equity securities would likely result in dilution to our

then existing shareholders while the incurring of additional indebtedness would

result in increased interest expense and debt service changes. See "Management's

Discussion and Analysis or Plan of Operations."

We have a history of operating losses and may not be profitable in the

future.
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We incurred losses before income tax provisions of $(784,526) and

$(114,116) for the fiscal years ended June 30, 2005 and 2004. Our accumulated

deficit as of June 30, 2005 was $(10,752,868). We do not have a bank line of

credit. We have funded our operating losses, acquisitions and expansion costs

primarily through a combination of private offerings of convertible debt, exempt

transactions, equity securities and proceeds from the exercise of warrants. Our

success in obtaining the necessary capital resources to fund future costs

associated with our operations and expansion plans is dependent upon our ability

to: (i) increase revenues through acquisitions and recovery of our proved

producing and proved developed non-producing oil and gas reserves; (ii) maintain

effective cost controls at the corporate administrative office and in field

operations; and (iii) obtain the exercise of outstanding warrants. However, even

if we achieve some success with our plans, there can be no assurance that we

will be able to generate sufficient revenues to achieve significant profitable

operations or fund our expansion plans. See "Management's Discussion and

Analysis or Plan of Operations."

We have substantial capital requirements necessary for undeveloped

properties for which we may not be able to obtain adequate financing.

The vast majority of our oil and gas reserves are classified as proved

reserves. Recovery of the Company's future proved undeveloped reserves will

require significant capital expenditures. Our management estimates that

aggregate capital expenditures of approximately $3,000,000 will be required to

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fully develop some of these reserves in the next twelve months. No assurance can

be given that our estimates of capital expenditures will prove accurate, that

our financing sources will be sufficient to fully fund our planned development

activities or that development activities will be either successful or in

accordance with our schedule. Additionally, any significant decrease in oil and

gas prices or any significant increase in the cost of development could result

in a significant reduction in the number of wells drilled and/or reworked. No

assurance can be given that any wells will produce oil or gas in commercially

profitable quantities.

Development of our properties will require additional capital

resources. We have no commitments to obtain any additional debt or equity

financing and there can be no assurance that additional financing will be

available, when required, on favorable terms to us. The inability to obtain

additional financing could have a material adverse effect on us, including

requiring us to curtail significantly our oil and gas acquisition and

development plans or farm-out development of our properties. Any additional

financing may involve substantial dilution to the interests of our shareholders

at that time. See "Management's Discussion and Analysis or Plan of Operations."

Oil and natural gas prices fluctuate widely and low prices could have a

material adverse impact on our business and financial results.

Our revenues, profitability and the carrying value of its oil and gas

properties are substantially dependent upon prevailing prices of, and demand

for, oil and gas and the costs of acquiring, finding, developing and producing
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reserves. Our ability to obtain borrowing capacity, to repay future

indebtedness, and to obtain additional capital on favorable terms is also

substantially dependent upon oil and gas prices. Historically, the markets for

oil and gas have been volatile and are likely to continue to be volatile in the

future. Prices for oil and gas are subject to wide fluctuations in response to:

(i) relatively minor changes in the supply of, and demand for, oil and gas; (ii)

market uncertainty; and (iii) a variety of additional factors, all of which are

beyond our control. These factors include domestic and foreign political

conditions, the price and availability of domestic and imported oil and gas, the

level of consumer and industrial demand, weather, domestic and foreign

government relations, the price and availability of alternative fuels and

overall economic conditions. Furthermore, the marketability of our production

depends in part upon the availability, proximity and capacity of gathering

systems, pipelines and processing facilities. Volatility in oil and gas prices

could affect our ability to market our production through such systems,

pipelines or facilities. Substantially all of our gas production is currently

sold to one gas marketing firm on a month-to-month basis at prevailing spot

market prices. Oil prices remained subject to unpredictable political and

economic forces during fiscal 2003, fiscal 2004 and fiscal 2005, and experienced

fluctuations similar to those seen in natural gas prices for the year. We

believe that oil prices will continue to fluctuate in response to changes in the

policies of the Organization of Petroleum Exporting Countries ("OPEC"), changes

in demand from many Asian countries, current events in the Middle East, security

threats to the United States, and other factors associated with the world

political and economic environment. As a result of the many uncertainties

associated with levels of production maintained by OPEC and other oil producing

countries, the availabilities of worldwide energy supplies and competitive

relationships and consumer perceptions of various energy sources, we are unable

to predict what changes will occur in crude oil and natural gas prices.

We are subject to uncertainties in reserve estimates and future net

cash flows.

This prospectus contains estimates of our oil and gas reserves and the

future net cash flows from those reserves, which have been prepared by certain

independent petroleum consultants. There are numerous uncertainties inherent in

estimating quantities of reserves of oil and gas and in projecting future rates

of production and the timing of development expenditures, including many factors

beyond our control. The reserve estimates in this prospectus are based on

various assumptions, including, for example, constant oil and gas prices,

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operating expenses, capital expenditures and the availability of funds, and,

therefore, are inherently imprecise indications of future net cash flows. Actual

future production, cash flows, taxes, operating expenses, development

expenditures and quantities of recoverable oil and gas reserves may vary

substantially from those assumed in the estimates. Any significant variance in

these assumptions could materially affect the estimated quantity and value of

reserves set forth in this prospectus. Additionally, our reserves may be subject

to downward or upward revision based upon actual production performance, results

of future development and exploration, prevailing oil and gas prices and other

factors, many of which are beyond our control.
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The present value of future net reserves discounted at 10% (the

"PV-10") of proved reserves referred to in this prospectus should not be

construed as the current market value of the estimated proved reserves of oil

and gas attributable to our properties. In accordance with applicable

requirements of the SEC, the estimated discounted future net cash flows from

proved reserves are generally based on prices and costs as of the date of the

estimate, whereas actual future prices and costs may be materially higher or

lower. Actual future net cash flows also will be affected by: (i) the timing of

both production and related expenses; (ii) changes in consumption levels; and

(iii) governmental regulations or taxation. In addition, the calculation of the

present value of the future net cash flows using a 10% discount as required by

the SEC is not necessarily the most appropriate discount factor based on

interest rates in effect from time to time and risks associated with our

reserves or the oil and gas industry in general. Furthermore, our reserves may

be subject to downward or upward revision based upon actual production, results

of future development, supply and demand for oil and gas, prevailing oil and gas

prices and other factors. See "Properties - Oil and Gas Reserves."

We are subject to various operating and other casualty risks that could

result in liability exposure or the loss of production and revenues.

Our oil and gas business involves a variety of operating risks,

including, but not limited to, unexpected formations or pressures,

uncontrollable flows of oil, gas, brine or well fluids into the environment

(including groundwater contamination), blowouts, fires, explosions, pollution

and other risks, any of which could result in personal injuries, loss of life,

damage to properties and substantial losses. Although we carry insurance at

levels that we believe are reasonable, we are not fully insured against all

risks. We do not carry business interruption insurance. Losses and liabilities

arising from uninsured or under-insured events could have a material adverse

effect on our financial condition and operations.

From time to time, due primarily to contract terms, pipeline

interruptions or weather conditions, the producing wells in which we own an

interest have been subject to production curtailments. The curtailments range

from production being partially restricted to wells being completely shut-in.

The duration of curtailments varies from a few days to several months. In most

cases, we are provided only limited notice as to when production will be

curtailed and the duration of such curtailments. We are not currently

experiencing any material curtailment of our production.

We intend to increase our development and, to a lesser extent,

exploration activities. Exploration drilling and, to a lesser extent,

development drilling of oil and gas reserves involve a high degree of risk that

no commercial production will be obtained and/or that production will be

insufficient to recover drilling and completion costs. The cost of drilling,

completing and operating wells is often uncertain. Our drilling operations may

be curtailed, delayed or canceled as a result of numerous factors, including

title problems, weather conditions, compliance with governmental requirements

and shortages or delays in the delivery of equipment. Furthermore, completion of

a well does not assure a profit on the investment or a recovery of drilling,

completion and operating costs.

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Our business may suffer if we lose key personnel.

We depend to a large extent on the services of Calvin A. Wallen, III,

our President, Chairman of the Board, and Chief Executive Officer. The loss of

the services of Mr. Wallen would have a material adverse effect on our

operations. We have not entered into any employment contracts with our executive

officer and have not obtained key personnel life insurance on Mr. Wallen.

Certain of our affiliates control a majority of our outstanding common

stock, which may affect your vote as a shareholder.

Our executive officers, directors and their affiliates and certain 5%

shareholders hold approximately 60% of our outstanding shares of common stock.

As a result, officers, directors and their affiliates and such shareholders have

the ability to exert significant influence over our business affairs, including

the ability to control the election of directors and results of voting on all

matters requiring shareholder approval. This concentration of voting power may

delay or prevent a potential change in control.

Certain of our affiliates have engaged in business transactions with

the Company, which may result in conflicts of interest.

Certain officers, directors and related parties, including entities

controlled by Mr. Wallen, the President and Chief Executive Officer, have

engaged in business transactions with the Company which were not the result of

arm's length negotiations between independent parties. Our management believes

that the terms of these transactions were as favorable to us as those that could

have been obtained from unaffiliated parties under similar circumstances. All

future transactions between us and our affiliates will be on terms no less

favorable than could be obtained from unaffiliated third parties and will be

approved by a majority of the disinterested members of our Board of Directors.

The liquidity, market price and volume of our stock is volatile, and

our stock is subject to certain penny stock rules.

Our common stock is traded on the Over-the-Counter Bulletin Board ("OTC

BB"). The liquidity of our common stock may be adversely affected, and

purchasers of our common stock may have difficulty selling our common stock, if

our common stock does not continue to trade in that or another suitable trading

market.

There is presently only a limited public market for our common stock,

and there is no assurance that a ready public market for our securities will

develop. It is likely that any market that develops for our common stock will be

highly volatile and that the trading volume in such market will be limited. The

trading price of our common stock could be subject to wide fluctuations in

response to quarter-to-quarter variations in our operating results,

announcements of our drilling results and other events or factors. In addition,

the U.S. stock market has from time to time experienced extreme price and volume

fluctuations that have affected the market price for many companies and which

often have been unrelated to the operating performance of these companies. These

broad market fluctuations may adversely affect the market price of our

securities.

The trading price of our common stock is below $5.00 per share. As long

as the trading price of our common stock remains below $5.00 per share, trading
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in our common stock is subject to the requirements of certain rules under the

Exchange Act which require additional disclosure by broker-dealers in connection

with any trades generally involving any non-NASDAQ equity security that has a

market price of less than $5.00 per share, subject to certain exceptions. Such

rules require the delivery, prior to any penny stock transaction, of a

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disclosure schedule explaining the penny stock market and the associated risks,

and impose various sales practice requirements on broker-dealers who sell penny

stocks to persons other than established customers and accredited investors. For

these types of transactions, the broker-dealer must make a special suitability

determination for the purchaser and have received the purchaser's written

consent to the transaction prior to sale. The additional burdens imposed upon

broker-dealers by such requirements may discourage broker-dealers from effecting

transactions in our common stock, which could severely limit the market

liquidity of our common stock.

We may experience adverse consequences because of required

indemnification of officers and directors.

Provisions of our Articles of Incorporation and Bylaws provide that we

will indemnify any director and officer as to those liabilities and on those

terms and conditions to the fullest extent of Texas law. Further, we may

purchase and maintain insurance on behalf of any such persons whether or not we

would have the power to indemnify such person against the liability insured

against. The foregoing could result in substantial expenditures by us and

prevent any recovery from our officers, directors, agents and employees for

losses incurred by us as a result of their actions. Further, the SEC takes the

position that indemnification against liability under the Securities Act is

against the public policy as expressed in the Securities Act, and is, therefore,

unenforceable.

Certain anti-takeover provisions may discourage a change in control.

Provisions of Texas law and our Articles of Incorporation and Bylaws

may have the effect of delaying or preventing a change in control or acquisition

of our Company. Our Articles of Incorporation and Bylaws include provisions for

a classified Board of Directors (although we do not currently have a classified

board), "blank check" preferred stock (the terms of which may be fixed by our

Board of Directors without shareholder approval), purported limits on

shareholder action by written consent in lieu of a meeting, and certain

procedural requirements governing shareholder meetings. These provisions could

have the effect of delaying or preventing a change in control of our Company.

We do not intend to declare dividends in the foreseeable future.

Our Board of Directors presently intends to retain all of our earnings

for the expansion of our business. We therefore does not anticipate the

distribution of cash dividends in the foreseeable future. Any future decision of

our Board of Directors to pay cash dividends will depend, among other factors,

upon our earnings, financial position and cash requirements.

We may not have satisfactory title to our properties.
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Our contract land professionals have reviewed title records or other

title review materials relating to substantially all of our producing

properties. The title investigation performed by us prior to acquiring

undeveloped properties is thorough, but less rigorous than that conducted prior

to drilling, consistent with industry standards. We believe we have satisfactory

title to all our producing properties in accordance with standards generally

accepted in the oil and gas industry. Our properties are subject to customary

royalty interests, liens incident to operating agreements, liens for current

taxes and other burdens, which we believe do not materially interfere with the

use of or affect the value of such properties. At June 30, 2005, our leaseholds

for some of our net acreage were being kept in force by virtue of production on

that acreage in paying quantities. The remaining net acreage was held by lease

rentals and similar provisions and requires production in paying quantities

prior to expiration of various time periods to avoid lease termination.

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We expect to make acquisitions of oil and gas properties from time to

time subject to available resources. In making an acquisition, we generally

focus most of our title and valuation efforts on the more significant

properties. It is generally not feasible for us to review in-depth every

property we purchase and all records with respect to such properties. However,

even an in-depth review of properties and records may not necessarily reveal

existing or potential problems, nor will it permit us to become familiar enough

with the properties to assess fully their deficiencies and capabilities.

Evaluation of future recoverable reserves of oil and gas, which is an integral

part of the property selection process, is a process that depends upon

evaluation of existing geological, engineering and production data, some or all

of which may prove to be unreliable or not indicative of future performance. To

the extent the seller does not operate the properties, obtaining access to

properties and records may be more difficult. Even when problems are identified,

the seller may not be willing or financially able to give contractual protection

against such problems, and we may decide to assume environmental and other

liabilities in connection with acquired properties.

We are subject to various governmental regulations which may cause us

to incur substantial costs.

Our operations are affected from time to time in varying degrees by

political developments and federal, state and local laws and regulations. In

particular, oil and gas production and related operations are or have been

subject to price controls, taxes and other laws and regulations relating to the

oil and gas industry. Failure to comply with such laws and regulations can

result in substantial penalties. The regulatory burden on the oil and gas

industry increases our cost of doing business and affects our profitability.

Although we believe we are in substantial compliance with all applicable laws

and regulations, because such laws and regulations are frequently amended or

reinterpreted, we are unable to predict the future cost or impact of complying

with such laws and regulations.

Sales of natural gas by us are not regulated and are generally made at

market prices. However, the Federal Energy Regulatory Commission ("FERC")

regulates interstate natural gas transportation rates and service conditions,
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which affect the marketing of natural gas produced by us, as well as the

revenues received by us for sales of such production. Sales of our natural gas

currently are made at uncontrolled market prices, subject to applicable contract

provisions and price fluctuations that normally attend sales of commodity

products.

Since the mid-1980's, the FERC has issued a series of orders,

culminating in Order Nos. 636, 636-A and 636-B ("Order 636"), that have

significantly altered the marketing and transportation of natural gas. Order 636

mandated a fundamental restructuring of interstate pipeline sales and

transportation service, including the unbundling by interstate pipelines of the

sale, transportation, storage and other components of the city-gate sales

services such pipelines previously performed. One of the FERC's purposes in

issuing the orders was to increase competition within all phases of the natural

gas industry. Order 636 and subsequent FERC orders issued in individual pipeline

restructuring proceedings have been the subject of appeals, and the courts have

largely upheld Order 636. Because further review of certain of these orders is

still possible, and other appeals may be pending, it is difficult to exactly

predict the ultimate impact of the orders on us and our natural gas marketing

efforts. Generally, Order 636 has eliminated or substantially reduced the

interstate pipelines' traditional role as wholesalers of natural gas, and has

substantially increased competition and volatility in natural gas markets.

While significant regulatory uncertainty remains, Order 636 may

ultimately enhance our ability to market and transport our natural gas, although

it may also subject us to greater competition, more restrictive pipeline

imbalance tolerances and greater associated penalties for violation of such

tolerances.

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The FERC has announced several important transportation-related policy

statements and proposed rule changes, including the appropriate manner in which

interstate pipelines release capacity under Order 636 and, more recently, the

price which shippers can charge for their released capacity. In addition, in

1995, the FERC issued a policy statement on how interstate natural gas pipelines

can recover the costs of new pipeline facilities. In January 1997, the FERC

issued a policy statement and a request for comments concerning alternatives to

its traditional cost-of-service rate making methodology. A number of pipelines

have obtained FERC authorization to charge negotiated rates as one such

alternative. While any additional FERC action on these matters would affect us

only indirectly, these policy statements and proposed rule changes are intended

to further enhance competition in natural gas markets. We cannot predict what

action the FERC will take on these matters, nor can we predict whether the

FERC's actions will achieve its stated goal of increasing competition in natural

gas markets. However, we do not believe that we will be treated materially

differently than other natural gas producers and marketers with which we

compete.

The price we receive from the sale of oil is affected by the cost of

transporting such products to market. Effective January 1, 1995, the FERC

implemented regulations establishing an indexing system for transportation rates

for oil pipelines, which, generally, would index such rates to inflation,

subject to certain conditions and limitations. These regulations could increase
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the cost of transporting oil by interstate pipelines, although the most recent

adjustment generally decreased rates. These regulations have generally been

approved on judicial review. We are not able to predict with certainty the

effect, if any, of these regulations on its operations. However, the regulations

may increase transportation costs or reduce wellhead prices for oil.

The State of Texas and many other states require permits for drilling

operations, drilling bonds and reports concerning operations and impose other

requirements relating to the exploration for and production of oil and gas. Such

states also have statutes or regulations addressing conservation matters,

including provisions for the unitization or pooling of oil and gas properties,

the establishment of maximum rates of production from wells and the regulation

of spacing, plugging and abandonment of such wells. The statutes and regulations

of certain states limit the rate at which oil and gas can be produced from our

properties. However, we do not believe we will be affected materially

differently by these statutes and regulations than any other similarly situated

oil and gas company.

We are subject to various environmental risks which may cause us to

incur substantial costs.

Our operations and properties are subject to extensive and changing

federal, state and local laws and regulations relating to environmental

protection, including the generation, storage, handling and transportation of

oil and gas and the discharge of materials into the environment, and relating to

safety and health. The recent trend in environmental legislation and regulation

generally is toward stricter standards, and this trend will likely continue.

These laws and regulations may require the acquisition of a permit or other

authorization before construction or drilling commences and for certain other

activities; limit or prohibit construction, drilling and other activities on

certain lands lying within wilderness and other protected areas; and impose

substantial liabilities for pollution resulting from our operations. The permits

required for our various operations are subject to revocation, modification and

renewal by issuing authorities. Governmental authorities have the power to

enforce compliance with their regulations, and violations are subject to fines,

penalties or injunctions. In the opinion of management, we are in substantial

compliance with current applicable environmental laws and regulations, and we

have no material commitments for capital expenditures to comply with existing

environmental requirements. Nevertheless, changes in existing environmental laws

and regulations or in interpretations thereof could have a significant impact on

us. The impact of such changes, however, would not likely be any more burdensome

to us than to any other similarly situated oil and gas company.

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The Comprehensive Environmental Response, Compensation, and Liability

Act ("CERCLA"), also known as the "Superfund" law, and similar state laws impose

liability, without regard to fault or the legality of the original conduct, on

certain classes of persons that are considered to have contributed to the

release of a "hazardous substance" into the environment. These persons include

the owner or operator of the disposal site or sites where the release occurred

and companies that disposed or arranged for the disposal of the hazardous

substances found at the site. Persons who are or were responsible for releases

of hazardous substances under CERCLA may be subject to joint and several
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liability for the costs of cleaning up the hazardous substances that have been

released into the environment and for damages to natural resources. Furthermore,

neighboring landowners and other third parties may file claims for personal

injury and property damage allegedly caused by the hazardous substances released

into the environment.

We generate typical oil and gas field wastes, including hazardous

wastes that are subject to the federal Resources Conservation and Recovery Act

and comparable state statutes. The United States Environmental Protection Agency

and various state agencies have limited the approved methods of disposal for

certain hazardous and non-hazardous wastes. Furthermore, certain wastes

generated by our oil and gas operations that are currently exempt from

regulation as "hazardous wastes" may in the future be designated as "hazardous

wastes," and therefore be subject to more rigorous and costly operating and

disposal requirements.

The Oil Pollution Act ("OPA") imposes a variety of requirements on

responsible parties for onshore and offshore oil and gas facilities and vessels

related to the prevention of oil spills and liability for damages resulting from

such spills in waters of the United States. The "responsible party" includes the

owner or operator of an onshore facility or vessel or the lessee or permittee

of, or the holder of a right of use and easement for, the area where an onshore

facility is located. OPA assigns liability to each responsible party for oil

spill removal costs and a variety of public and private damages from oil spills.

Few defenses exist to the liability for oil spills imposed by OPA. OPA also

imposes financial responsibility requirements. Failure to comply with ongoing

requirements or inadequate cooperation in a spill event may subject a

responsible party to civil or criminal enforcement actions.

We own or lease properties that for many years have produced oil and

gas. We also own natural gas gathering systems. It is not uncommon for such

properties to be contaminated with hydrocarbons. Although we or previous owners

of these interests may have used operating and disposal practices that were

standard in the industry at the time, hydrocarbons or other wastes may have been

disposed of or released on or under the properties or on or under other

locations where such wastes have been taken for disposal. These properties may

be subject to federal or state requirements that could require us to remove any

such wastes or to remediate the resulting contamination. All of our properties

are operated by third parties over whom we have limited control. Notwithstanding

our lack of control over properties operated by others, the failure of the

previous owners or operators to comply with applicable environmental regulations

may, in certain circumstances, adversely impact us.

We may be responsible for additional costs in connection with

abandonment of properties.

We are responsible for payment of plugging and abandonment costs on its

oil and gas properties pro rata to our working interest. Based on our

experience, we anticipate that the ultimate aggregate salvage value of lease and

well equipment located on our properties will exceed the costs of abandoning

such properties. There can be no assurance, however, that we will be successful

in avoiding additional expenses in connection with the abandonment of any of our

properties. In addition, abandonment costs and their timing may change due to

many factors, including actual production results, inflation rates and changes

in environmental laws and regulations.
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GLOSSARY OF OIL AND GAS TERMS

The following are abbreviations and definitions of terms commonly used

in the oil and gas industry that are used in this Report.

"BBL" means a barrel of 42 U.S. gallons.

"BOE" means barrels of oil equivalent; converting volumes of natural

gas to oil equivalent volumes using a ratio of six Mcf of natural gas to one Bbl

of oil.

"BTU" means British Thermal Units. British Thermal Unit means the

quantity of heat required to raise the temperature of one pound of water by one

degree Fahrenheit.

"Completion" means the installation of permanent equipment for the

production of oil or gas.

"Development Well" means a well drilled within the proved area of an

oil or gas reservoir to the depth of a stratigraphic horizon known to be

productive.

"Dry Hole" or "Dry Well" means a well found to be incapable of

producing hydrocarbons in sufficient quantities such that proceeds from the sale

of such production exceed production expenses and taxes.

"Exploratory Well" means a well drilled to find and produce oil or gas

reserves not classified as proved, to find a new production reservoir in a field

previously found to be productive of oil or gas in another reservoir or to

extend a known reservoir.

"Farm-Out" means an agreement pursuant to which the owner of a working

interest in an oil and gas lease assigns the working interest or a portion

thereof to another party who desires to drill on the leased acreage. Generally,

the assignee is required to drill one or more wells in order to earn its

interest in the acreage. The assignor usually retains a royalty or reversionary

interest in the lease. The interest received by an assignee is a "farm-in" and

the assignor issues a "farm-out."

"Farm-In" see "Farm-Out" above.

"Gas" means natural gas.

"Gross" when used with respect to acres or wells, refers to the total

acres or wells in which we have a working interest.

"Infill Drilling" means drilling of an additional well or wells

provided for by an existing spacing order to more adequately drain a reservoir.

"MCF" means thousand cubic feet.

"Net" when used with respect to acres or wells, refers to gross acres

or wells multiplied, in each case, by the percentage working interest owned by
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the Company.

"Net Production" means production that is owned by the Company less

royalties and production due others.

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"Operator" means the individual or company responsible for the

exploration, development and production of an oil or gas well or lease.

"Present Value" ("PV") when used with respect to oil and gas reserves,

means the estimated future gross revenues to be generated from the production of

proved reserves calculated in accordance with the guidelines of the SEC, net of

estimated production and future development costs, using prices and costs as of

the date of estimation without future escalation (except to the extent a

contract specifically provides otherwise), without giving effect to non-property

related expenses such as general and administrative expenses, debt service,

future income tax expense and depreciation, depletion and amortization, and

discounted using an annual discount rate of 10%.

"Productive Wells" or "Producing Wells" consist of producing wells and

wells capable of production, including wells waiting on pipeline connections.

"Proved Developed Reserves" means reserves that can be expected to be

recovered through existing wells with existing equipment and operating methods.

Additional oil and gas expected to be obtained through the application of fluid

injection or other improved recovery techniques for supplementing the natural

forces and mechanisms of primary recovery will be included as "proved developed

reserves" only after testing by a pilot project or after the operation of an

installed program has confirmed through production response that increased

recovery will be achieved.

"Proved Reserves" means the estimated quantities of crude oil and

natural gas which upon analysis of geological and engineering data appear with

reasonable certainty to be recoverable in future years from known reservoirs

under existing economic and operating conditions, i.e., prices and costs as of

the date the estimate is made. Prices include consideration of changes in

existing prices provided only by contractual arrangements, but not on

escalations based upon future conditions.

(i) Reservoirs are considered proved if either actual production

or conclusive formation tests support economic producibility.

The area of a reservoir considered proved includes (A) that

portion delineated by drilling and defined by gas-oil and/or

oil-water contacts, if any; and (B) the immediately adjoining

portions not yet drilled, but which can be reasonably judged

as economically productive on the basis of available

geological and engineering data. In the absence of information

on fluid contacts, the lowest known structural occurrence of

hydrocarbons controls the lower proved limit of the reservoir.

(ii) Reserves which can be produced economically through

application of improved recovery techniques (such as fluid

injection) are included in the "proved" classification when
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successful testing by a pilot project, or the operation of an

installed program in the reservoir, provides support for the

engineering analysis on which the project or program was

based.

(iii) Estimates of proved reserves do not include the following: (A)

oil that may become available from known reservoirs but is

classified Separately as "indicated additional reserves"; (B)

crude oil and natural gas, the recovery of which is subject to

reasonable doubt because of uncertainty as to geology,

reservoir characteristics or economic factors; (C) crude oil

and natural gas that may occur in undrilled prospects; and (D)

crude oil and natural gas that may be recovered from oil

shales, coal, gilsonite and other such resources.

"Proved Undeveloped Reserves" means reserves that are recovered from

new wells on undrilled acreage, or from existing wells where a relatively major

expenditure is required for completion. Reserves on undrilled acreage shall be

limited to those drilling units offsetting productive units that are reasonably

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certain of production when drilled. Proved reserves for other undrilled units

can be claimed only where it can be demonstrated with certainty that there is

continuity of production from the existing productive formation. Under no

circumstances should estimates for proved undeveloped reserves be attributable

to any acreage for which an application of fluid injection or other improved

recovery technique is contemplated, unless such techniques have been proved

effective by actual tests in the area and in the same reservoir.

"Recompletion" means the completion for production of an existing well

bore in another formation from that in which the well has been previously

completed.

"Reserves" means proved reserves.

"Reservoir" means a porous and permeable underground formation

containing a natural accumulation of producible oil and/or gas that is confined

by impermeable rock or water barriers and is individual and separate from other

reservoirs.

"Royalty" means an interest in an oil and gas lease that gives the

owner of the interest the right to receive a portion of the production from the

leased acreage (or of the proceeds of the sale thereof), but generally does not

require the owner to pay any portion of the costs of drilling or operating the

wells on the leased acreage. Royalties may be either landowner's royalties,

which are reserved by the owner of the leased acreage at the time the lease is

granted, or overriding royalties, which are usually reserved by an owner of the

leasehold in connection with a transfer to a subsequent owner.

"2-D Seismic" means an advanced technology method by which a

cross-section of the earth's subsurface is created through the interpretation of

reflecting seismic data collected along a single source profile.
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"3-D Seismic" means an advanced technology method by which a three

dimensional image of the earth's subsurface is created through the

interpretation of reflection seismic data collected over a surface grid. 3-D

seismic surveys allow for a more detailed understanding of the subsurface than

do conventional surveys and contribute significantly to field appraisal,

development and production.

"Working Interest" means an interest in an oil and gas lease that gives

the owner of the interest the right to drill for and produce oil and gas on the

leased acreage and requires the owner to pay a share of the costs of drilling

and production operations. The share of production to which a working interest

owner is entitled will always be smaller than the share of costs that the

working interest owner is required to bear, with the balance of the production

accruing to the owners of royalties.

"Workover" means operations on a producing well to restore or increase

production.

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Item 2. Description of Properties.

See "Description of Business and Properties."

Item 3. Legal Proceedings.

The Company had filed suit in the 29th Judicial District Court in Palo

Pinto County, Texas, styled "Roseland Oil and Gas, Inc. v. William Vandever, et

al," bringing suit against Clifford Kees, William Vandever and various persons,

seeking a judicial determination that all grants of preferential rights in the

Reagan Section 11 and 12 are void. This lawsuit was filed on April 26, 1999. All

section 11 preferential rights were returned to the Company on or about January

2002. However, Clifford Kees was to retain his 1% override interest in these

Reagan Lease Sections.

Clifford Kees then moved to trial against on the claim of attorney fees

owed to him for the prosecution of this lawsuit. The trial was heard on

September 25, 2002, with Kees requesting in excess of $200,000.00 in attorney

fees and costs. In June of 2003, The Court re-opened the trial as to attorney

fees and costs, to allow Kees to put on additional evidence, and such trial was

re-convened on June 19, 2003.

On July 15, 2003, the Court entered a Judgment in favor of Kees and as

against the Company for approximately $112,000.00. The Company believed the

Judgment should not stand and appealed the Judgment. On or about, September 17,

2004, the Eastland Court Of Appeals issued its ruling, modifying the amounts

owed by the Company under the Judgment to $59,000.00.

The Company was been denied a Re-Hearing as to clarification and a
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further reduction of the Judgment. The Company filed a Petition For Review with

the Texas Supreme Court that was Denied on or about January 21, 2005.

The Company had put into the registry of the Court a cash bond in the

amount of $92,500. On or about March 14, 2005, the Trial Court issued a final

ruling which ordered for Cubic to pay out to Kees $83,725.78 of the monies in

the registry of the Court, with $8,774.22 of the monies in the registry of The

Court refunded to Cubic.

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

Not Applicable.

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PART II

Item 5. Market for Common Equity and Related Stockholder Matters.

Common Stock and Market

The Company is traded on the OTC BB, with the trading symbol "QBIK".

At June 30, 2005, there were 35,161,976 shares of common stock

outstanding held by approximately 874 shareholders of record.

In the fall of 1999, Roseland Oil and Gas, Inc. was merged into Cubic

Energy, Inc., a Texas corporation and a wholly owned subsidiary of Roseland Oil

and Gas, Inc. Under its Articles of Incorporation, Cubic is authorized to issue

one class of 50,000,000 common shares, par value $0.05 per share, and one class

of 10,000,000 preferred shares, par value $0.01 per share. An exchange of one

common share of Roseland for one common share of Cubic was effectuated in the

merger. At the time of the merger, and as of June 30, 2005, there were no

preferred shares of the Company outstanding.

Common Stock Price Range

The following table shows, for the periods indicated, the range of high

and low bid information for our common stock as reported by the OTC BB. Any

market for our common stock should be considered sporadic, illiquid and highly

volatile. Prices reflect inter-dealer quotations, without adjustment for retail
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markup, markdowns or commissions, and may not represent actual transactions. Our

common stock's trading range during the periods indicated is as follows:

------------------------------------------------- ---------- ----------

Fiscal Year 2003 High Low

------------------------------------------------- ---------- ----------

1st quarter $0.52 $0.30

------------------------------------------------- ---------- ----------

2nd quarter $0.49 $0.18

------------------------------------------------- ---------- ----------

3rd quarter $0.75 $0.28

------------------------------------------------- ---------- ----------

4th quarter $0.45 $0.25

------------------------------------------------- ---------- ----------

------------------------------------------------- ---------- ----------

Fiscal Year 2004 High Low

------------------------------------------------- ---------- ----------

1st quarter $0.45 $0.20

------------------------------------------------- ---------- ----------

2nd quarter $0.30 $0.11

------------------------------------------------- ---------- ----------

3rd quarter $0.60 $0.25

------------------------------------------------- ---------- ----------

4th quarter $1.00 $0.35

------------------------------------------------- ---------- ----------

------------------------------------------------- ---------- ----------

Fiscal Year 2005 High Low

------------------------------------------------- ---------- ----------

1st quarter $0.71 $0.30

------------------------------------------------- ---------- ----------

2nd quarter $0.72 $0.40

------------------------------------------------- ---------- ----------

3rd quarter $1.99 $0.85

------------------------------------------------- ---------- ----------

4th quarter $1.75 $1.01

------------------------------------------------- ---------- ----------

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Dividend Policy

We have neither declared nor paid any dividends on our common stock

since our inception. Presently, we intend to retain our earnings, if any, to

provide funds for expansion of our business. Therefore, we do not anticipate

declaring or paying cash dividends on our common stock in the foreseeable

future. Any future dividends will be subject to the discretion of our Board of

Directors and will depend upon, among other things, future earnings, our

operating and financial condition, our capital requirements, debt obligation

agreements, general business conditions and other pertinent facts.
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Item 6. Management's Discussion and Analysis or Plan of Operations.

The following discussion is intended to assist in an understanding of

the Company's historical financial position and results of operations for each

year in the two-year period ended June 30, 2005. The Company's Financial

Statements and notes thereto included elsewhere in this Report contain detailed

information that should be referred to in conjunction with the following

discussion.

General

The Company's future results of operations and growth are substantially

dependent upon (i) its ability to acquire or find and successfully develop

additional oil and gas reserves and (ii) the prevailing prices for oil and gas.

We have an inventory of exploration drilling locations to pursue after the

fiscal year ending June 30, 2005. If we are unable to economically acquire or

find significant new reserves for development and exploitation, the Company's

oil and gas production, and thus its revenues, would likely decline gradually as

its reserves are produced. In addition, oil and gas prices are dependent upon

numerous factors beyond the Company's control, such as economic, political and

regulatory developments and competition from other sources of energy. The oil

and gas markets have historically been very volatile, and any significant and

extended decline in the price of oil or gas would have a material adverse effect

on the Company's financial condition and results of operations, and could result

in a reduction in the carrying value of the Company's proved reserves and

adversely affect its access to capital.

THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION CONTAINS

FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES

ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,

AS AMENDED. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE

FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS DESCRIBED HEREIN AND

IN OTHER DOCUMENTS. READERS SHOULD CAREFULLY REVIEW THE RISK FACTORS DESCRIBED

IN THIS ANNUAL REPORT AND THE DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH

THE SECURITIES AND EXCHANGE COMMISSION.

The reserve report from NSA showed a dramatic downward variance from

the expectations of management for the Company in proved reserves, as NSA

re-classified some thought to be proved reserves as possible or probable. The

Company and its management believe that the significance of this variance in

reserves is overridden in the investor confidence inspired by our association

with NSA. Due to a significant price increase for both oil and natural gas

subsequent to fiscal year end, this decrease in reserves was not subject to a

ceiling test write-down.

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RESULTS OF OPERATIONS

Comparison of Fiscal 2005 to Fiscal 2004 Revenues

HISTORICALLY PRESENTED:
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OIL AND GAS SALES increased 13% to $469,442 in the fiscal year ended

June 30, 2005 ("fiscal 2005") from $414,741 in the fiscal year ended June 30,

2004 ("fiscal 2004"), due to higher oil and gas prices.

Costs and Expenses

HISTORICALLY PRESENTED:

PRODUCTION AND OPERATING EXPENSE increased 46% to $273,074 in the year

ended June 30, 2005 ("fiscal 2005") from $186,465 in the year ended June 30,

2004 ("fiscal 2004") due to bringing additional wells on line.

HISTORICALLY PRESENTED:

DEPRECIATION, DEPLETION AND AMORTIZATION increased 348% to $364,496 in

fiscal 2005 from $104,735 in fiscal 2004. The increase was primarily due to an

increase in costs in the full-cost pool.

HISTORICALLY PRESENTED:

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE ("G&A") increased 64% to

$394,827 in the year ended June 30, 2005 ("fiscal 2005") from $240,022 in the

year ended June 30, 2004 ("fiscal 2004") because officer stock grants were

expensed at a higher average stock price.

HISTORICALLY PRESENTED:

INTEREST EXPENSE increased to $193,313 in the year ended June 30, 2005

("fiscal 2005") from $75 in the year ended June 30, 2004 ("fiscal 2004") due to

borrowing $2,635,000 on or about October 1, 2004.

HISTORICALLY PRESENTED:

GAIN ON SALE OF ASSETS was $0 in the years ended June 30, 2005 ("fiscal

2005") and ended June 30, 2004 ("fiscal 2004") because no assets were sold in

either year.

Net Income

HISTORICALLY PRESENTED:

Net loss increased to reflect a loss of $784,526 in fiscal 2005 from a

loss of $114,116 in fiscal 2004 as a result of increased interest expense,

increased depreciation, depletion and amortization, and increased expenses.

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Liquidity and Capital Resources

Overview

The Company's primary financial resource is its oil and gas reserves.

The Company does not have any credit facilities to supplement its internally

generated cash flow as a source of financing for its capital expenditure
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programs. Product prices, over which we have no control, have a significant

impact on revenues from production and the value of such reserves and thereby on

the Company's borrowing capacity in the event the Company determines to borrow

funds. Within the confines of product pricing, the Company must be able to find

and develop or acquire oil and gas reserves in a cost effective manner in order

to generate sufficient financial resources through internal means to complete

the financing of its capital expenditure program.

The Company had net working capital of $576,294 at June 30, 2005.

The following discussion sets forth the Company's current plans for

capital expenditures in fiscal 2006, and the expected capital resources needed

to finance such plans.

Capital Expenditures

At the present time, the Company anticipates an increase to spending on

exploration and development activities during fiscal 2006 through the

development of strategic alliances that will position the Company to take

advantage of possible acquisition objectives that will fit into the Company's

core activity areas of oil and gas production.

The Company will increase its planned activities for fiscal 2006 if

product prices remain strong and if we are able to obtain the capital resources

necessary to finance such activities. See "BUSINESS - DRILLING, EXPLORATION AND

PRODUCTION ACTIVITIES."

Working Capital and Cash Flow

HISTORICALLY PRESENTED:

During fiscal 2005, the Company generated cash flow from operating

activities of $(185,085).

The Company's working capital increased to $576,294 at June 30, 2005

from $143,031 at June 30, 2004, due to a balance remaining from the $2,635,000

borrowed on or about October 1, 2004.

Capital Resources

The Company cannot be certain that the funds which will be available

from completed and pending sales of assets, and as combined with operating cash

flow, will be adequate to fund the projected capital expenditures for fiscal

2006. However, because future cash flows and the availability of borrowings are

subject to a number of variables, such as prevailing prices of oil and gas,

actual production from existing and newly-completed wells, the Company's success

in developing and producing new reserves, and the uncertainty with respect to

the amount of funds which may ultimately be required to finance the Company's

exploration program, there can be no assurance that the Company's capital

resources will be sufficient to sustain the Company's exploratory and

development activities.

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If funds available from asset sales, and as combined with operating

cash flow, are not sufficient to fund its anticipated levels of capital

expenditures, the Company will be required to seek alternative forms of capital

resources, including the sale of other assets and the issuance of debt or equity

securities. Although the Company believes it will be able to obtain funds

pursuant to one or more of these alternatives, if needed, management cannot be

assured that any such capital resources will be available to the Company. If

additional capital resources are needed, but we are unable to obtain such

capital resources on a timely basis, the Company may not be able to maintain a

level of liquidity sufficient to meet its obligations as they mature or to

implement its capital expenditures or develop its assets.

Inflation

Although the level of inflation affects certain of the Company's costs

and expenses, inflation did not have a significant effect on the Company's

results of operations during fiscal 2004.

Information Systems For The Year 2000

The Company completed implementation of a "Year 2000 Plan" in the

fiscal year ended June 30, 2000; and through June 30, 2005, the Company

experienced no effects of its information systems from "Y2K." Though not

expected, it is still possible that "Y2K" issues could have a material effect on

the operations, productivity, and profitability of the Company.

Item 7. Financial Statements.

The Report of Independent Accountants, Financial Statements and any

supplementary financial data required by this Item are set forth on pages F-1

through F-20 of this Report and are incorporated herein by reference.

Item 8. Changes In and Disagreements With Accountants on Accounting and

Financial Disclosure.

None.

Item 8A. Controls and Procedures.

Our principal executive and financial officer have concluded, based on

their evaluation as of the end of the period covered by this report, that our

disclosure controls and procedures under Rule 13a-15 of the Exchange Act, are

effective to ensure that information we are required to disclose in the reports

we file or submit under the Exchange Act is recorded, processed, summarized and

reported within the time periods specified in the SEC's rules and forms, and

include controls and procedures designed to ensure that information we are

required to disclose in such reports is accumulated and communicated to

management, including our principle executive and financial officer, as

appropriate to allow timely decisions regarding required disclosure. Subsequent

to our evaluation, there were no significant changes in internal controls or

other factors that could significantly affect these internal controls.

We maintain a system of internal control over financial reporting.

There has been no change in our internal control over financial reporting that

occurred during our fourth fiscal quarter that has materially affected, or is

reasonably likely to materially affect, our internal control over financial

reporting.
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Item 8B. Other Information.

None.

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PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance

with Section 16(a) of the Exchange Act.

The following table sets forth the name and age of each director and

executive officer and the period during which each has served as a director of

the Company:

Directors and Executive Officers

The following table provides information concerning each of our

executive officers and directors as of June 30, 2005:

Director

Name Age Position with Cubic Since

---- --- ------------------- -----

Calvin A. Wallen, III 50 Chairman of the Board, President and 1997

Chief Executive Officer

Jon S. Ross 41 Director, Chief Financial Officer and 1998

Secretary

Gene C. Howard 77 Director 1991

Herbert A. Bayer 55 Director 2003

Bob L. Clements 63 Director 2004

Alexander Montano 34 Director 2004

CALVIN A. WALLEN, III has served as the President and Chief Executive

Officer of the Company since December 1997, and as Chairman of the Board of

Directors since June 1999. Mr. Wallen has over 20 years of experience in the oil

and gas industry working as a drilling and petroleum engineer. He was employed

by Superior Oil and various other drilling contractors including Resource, Tom

Brown and Rowan International. He assisted in the design and construction of

several land rigs with advanced drilling systems and has domestic and

international experience in drilling engineering. While employed by Rowan

International, Mr. Wallen gained experience in drilling high angle directional

wells at Prudhoe Bay on contract to Arco. In 1982, Mr. Wallen began acquiring

and developing oil and gas properties, forming a production company that has

evolved into Tauren Exploration, Inc. Mr. Wallen did his undergraduate studies

at Texas A&M University in College Station, Texas.

JON S. ROSS has served as a director of the Company since April 1998

and as Secretary since November 1998. Since 1989, Mr. Ross has been a practicing

attorney in Dallas, Texas specializing in the representation of over eighty

corporate entities within the past fifteen years. He has served on several

community and not-for-profit committees and Boards and has been asked to speak

to corporate and civic leaders on a variety of corporate law topics. Mr. Ross
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graduated from St. Mark's School of Texas with honors in 1982 and graduated from

the University of Texas at Austin in 1986 with a B.B.A. in Accounting. He then

graduated from the University of Texas School of Law in 1989 attaining a Juris

Doctorate degree.

GENE C. HOWARD is the Senior Partner of the law firm of Howard,

Widdows, and Bufogle, P.C. of Tulsa, Oklahoma and has been engaged primarily in

the private practice of law over the past thirty-five years. Mr. Howard served

in the Oklahoma State Senate from 1964 through 1982 and was President Pro Tem

from 1975 through 1981. In addition, he served as the Chairman of the Board of

Farmers and Exchange Bank from 1972 through 1991 and on the Board of Directors

of Local Federal Bank of Oklahoma. Mr. Howard is a Director of the Oklahoma

State Education and Employment Group Insurance Board and presently acts as

Chairman. Mr. Howard served as Director of EntreCap and Hinderliter corporations

from 1991 to August of 1992. He is also Chairman of the Board of Philadelphia

Mortgage Trust ("PMT").

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HERBERT A. BAYER has served as a director of Cubic Energy, Inc. since

May, 2003. Mr. Bayer is uniquely positioned to help in the growth of the company

and increase shareholder value. His career over the last 20 years has lead him

to be the top salesman for ITRON. He has worked with Investor Owned utilities,

Government Run Municipalities and Electric Cooperatives. He has served as Vice

President of two companies and on Board of Directors of a third. His major

course of study at Indiana State University was Business Management and has

broadened his knowledge base with additional study in courses such as Miller

Heiman Strategic Selling, IBM Management, Dale Carnegie, Professional Management

Techniques, Contract Negotiations and Human Relations. Mr. Bayer is currently

the Director of Client Services for Communications and Information Solutions for

CH2M HILL, a $3.5 billion world-wide company. He is working in Global

Information Systems mainly in the Homeland Security market. His work experience

includes work in Electronic Meter Reading, Automatic Meter Reading, Load

Research, Internet Applications and Customer Information.

BOB L. CLEMENTS joined the Company's board of directors in February

2004. Mr. Clements was born and raised in Texas. Mr. Clements has a degree in

the OPM Program from the Harvard Business School. Mr. Clements has been in the

wholesale food and restaurant business for over thirty years, currently

controlling the largest independent producer of stuffed jalapenos and corn dogs

as well as two successful restaurants in the Rockwall, Texas area. Mr. Clements

has served and currently serves on a variety of profit and charitable committees

and boards.

ALEXANDER MONTANO is President of C. K. Cooper & Company, Inc., an

investment banking boutique. Mr. Montano has managed the energy practice at C.

K. Cooper & Company, Inc. since 1997 and has completed over $500 million worth

of investment banking transactions during this time. Prior to this, Mr. Montano

was an oil and gas industry analyst, where he was recognized by several leading

publications, including Zacks, as a five star analyst, The Wall Street Journal

in their "Best on The Street" special edition in 2003 and by Starmine Research.

Prior to 1996, Mr. Montano was director of Research at Brookstreet Securities

where he specialized in following early stage energy issues. Mr. Montano has

been a recognized speaker at various conferences on energy-related topics and is
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a member of the IPAA. Mr. Montano attended the University of Southern California

and Chapman University. Mr. Montano also serves on the board of directors of

CardioVascular BioThereputics, Inc.

There are no family relationships among any of the directors or

executive officers of the Company. See "Certain Relationships and Related

Transactions" for a description of transactions between the Company and its

directors, executive officers or their affiliates.

Audit Committee; Financial Expert

The Audit Committee is comprised of Messrs. Howard (Chairman), Clements

and Bayer. All of the members of the Audit Committee are "independent" under the

rules of the SEC. The Board of Directors, after reviewing all of the relevant

facts, circumstances and attributes, has determined that Mr. Howard is the sole

"audit committee financial expert" on the Audit Committee.

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Exchange Act requires the Company's directors,

executive officers, and holders of more than 10% of the common stock to file

with the SEC reports of ownership changes in ownership of common stock. SEC

regulations require those directors, executive officers, and greater than 10%

shareholders to furnish the Company with copies of all Section 16(a) forms they

file.

28

<PAGE>

Based on the Company's review of reports, the Company believes that the

directors, executive officers, and greater than 10% shareholders complied with

all applicable Section 16(a) filing requirements.

Code of Ethics

The Company has adopted a Code of Ethics that applies to its directors,

officers and employees. The Company will provide a copy of its Code of Ethics,

without charge, to any stockholder who makes such request in writing to the

Company, attention: Secretary.

Item 10. Executive Compensation.

The total cash compensation for the three fiscal years ended June 30,

2005, for Calvin A. Wallen, III, the Company's current Chief Executive Officer

and Jon S. Ross, the Company's current Secretary is set forth below in the

following Summary Compensation Table. The Company has retained a Chief Financial

Officer, to be phased in to those duties by October 1, 2005. The cash

compensation for the Officers below did not commence until January 1, 2005. No

other person received cash compensation in excess of $100,000 during the fiscal

year ended June 30, 2005.

Summary Compensation Table

Fiscal Annual Other Annual

Name and Principal Position Year Salary Compensation
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--------------------------- ---- ------ ------------

Calvin A. Wallen, III, President and CEO 2005 $78,000 0

2004 0 0

2003 0 0

Jon S. Ross, Secretary 2005 $60,000 0

2004 0 0

2003 0 0

Warrants were granted to an affiliate of Calvin A. Wallen, III

effective January 1, 2002, as described in that agreement attached as an exhibit

to the March 31, 2002, Form 10-QSB, which have all expired.

Stock Grants

On September 12, 2003, the Directors of Cubic tentatively approved of a

Director and Officer compensation plan as follows: (i) Directors of record as of

June 1, 2003 would receive 24,000 restricted Cubic common shares (16,000 shares

per year, multiplied by 1.5 years) for years of prior service, (ii) the

President/CEO of Cubic would receive 45,000 restricted Cubic common shares

(30,000 share per year, multiplied by 1.5 years) for years of prior service,

(iii) the Secretary of Cubic would receive 22,500 restricted Cubic common shares

(15,000 shares per year, multiplied by 1.5 years) for prior years of service,

(iv) going forward, Directors would receive 16,000 restricted Cubic common

shares per year of service, (v) going forward, the President/CEO would receive

30,000 restricted Cubic common shares per year of service, (vi) going forward,

the Secretary would receive 15,000 restricted Cubic common shares per year of

service, (vii) Audit Committee members would receive 10,000 restricted Cubic

common shares per audit, and, (viii) any Compensation Committee member, should

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one be formed, would receive 3,000 restricted Cubic common shares per year of

service. On October 25, 2004, Cubic issued 155,000 common shares of stock to its

Officers and Directors pursuant to this plan. Based on a then market price of

$0.51 per share, Cubic recorded a compensation expense of $79,050 for the year;

which expense is recorded in the above financial statements as a selling,

general and administrative expense.

The following compensation plan was adopted on March 30, 2005, with

conditional Grants authorized on March 30, 2005 subject to Shareholder approval.

On March 30, 2005, the Compensation Committee for Cubic voted and authorized,

and then the Board Of Directors conditionally approved, all subject to

shareholder approval, these grants, in addition to all other grants previously

issued: (i) 150,000 un-registered shares to Calvin Wallen III, (ii) 100,000

un-registered shares to Jon Stuart Ross, (iii) 70,000 un-registered shares to

Rick Sepulvado, and (iv) 30,000 un-registered shares to Lindsey Tate Renteria.

Further, the Compensation Committee for Cubic voted and authorized, and then the

Board Of Directors conditionally approved, all subject to shareholder approval,

Director and Committee compensation as follows, in addition to all other grants

previously issued: (a) $1,000 cash compensation per Director for each actual

meeting held, (b) reimbursement for reasonable and necessary expenses, (c)

grants of 25,000 un-registered shares for yearly Director service, (d) grants of

8,000 un-registered shares for service on the Compensation Committee, and (e)
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grants of 14,000 un-registered shares for service for upcoming audit committee,

with the chairman to receive grants of 20,000 un-registered shares.

The Company has not recorded any compensation cost with respect to the

contingent issuance of stock under the above-referenced plan because of the

uncertainty involved in obtaining shareholder approval. Compensation cost will

be recognized once the plan has been formally approved and the shares are

issued.

Pro forma Information Related to Stock Options

The Company accounts for its stock-based employee compensation plans

under the recognition and measurement principles of APB Opinion No. 25,

Accounting for Stock Issued to Employees, and related interpretations. No stock

based employee compensation cost is reflected in net income, as all options

granted under those plans had an exercise price at least equal to the market of

the underlying common stock on the date of the grant.

Item 11. Security Ownership of Certain Beneficial Owners and Management and

Related Stockholder Matters.

The following table sets forth the number of shares of the Company's

common stock beneficially owned, as of June 30, 2005 by (i) each person known to

the Company to beneficially own more than 5% of the common stock of the Company

(the only class of voting securities now outstanding), (ii) each director and

executive officer, and (iii) all directors and executive officers as a group.

Unless otherwise indicated, the number of shares and percentage of ownership of

common stock for each of the stockholders set forth below assumes that shares of

common stock that the stockholder may acquire within sixty days of June 30, 2005

are outstanding.

Approximate

Name and Address Number of Shares Percent of Class

---------------- ---------------- ----------------

Calvin A. Wallen, III 9,685,712(1) 27.6%

9870 Plano Road

Dallas, TX 75238

William Bruggeman 10,307,303(2) 29.3%

20 Anemone Circle

North Oaks, MN 55127

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Gene Howard 408,245(3) 1.2%

2402 East 29th St.

Tulsa, OK 74114

302,000 *

Bob Clements

9870 Plano Road

Dallas, TX 75238
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194,287(4) *

Herbert Bayer

9870 Plano Road

Dallas, TX 75238

Alexander Montano 66,000(5) *

18300 Von Karman Avenue

Suite 700

Irving, CA 92612

Jon S. Ross 147,500(6) *

9870 Plano Road

Dallas, TX 75238

All officers and directors 10,803,744 30.8%

as a group (6 persons)

--------------------------------------

* - Less Than One Percent

(1) Includes 1,641,216 shares held by Tauren Exploration, Inc., an entity

controlled by Mr. Wallen, includes 500,000 shares held by spouse, and

includes 240,000 shares held by minor children.

(2) Includes 834,000 shares held by Diversified Dynamics Corp., a company

controlled by William Bruggeman; includes 120,000 shares owned by

Consumer Products Corp. in which Mr. Bruggeman's spouse, Ruth, is a

joint owner; and includes 8,913,303 shares held jointly by William

Bruggeman & Ruth Bruggeman as joint tenants with rights of

survivorship.

(3) Includes 322,245 shares are held by Mr. Howard's spouse, Belva, of

which Mr. Howard disclaims beneficial ownership.

(4) Includes 132, 287 shares held with spouse as joint tenants with rights

of survivorship.

(5) Includes 55,000 shares held by C. K. Cooper & Company, Inc. and 1000

shares held by minor children.

(6) Includes 3000 shares held by minor children.

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Item 12. Certain Relationships And Related Transactions.

In December 1997, the Company entered into a Stock Purchase Agreement

(the "Agreement") with Calvin A. Wallen, III or his designees, William Bruggeman

and Ruth Bruggeman, and Diversified Dynamics, Inc. (together, the "Buyers").

Pursuant to the Agreement, the Company issued (i) 7,000,000 shares of its common

stock to Calvin A. Wallen, III; (ii) 2,500,000 shares of common stock to

Earthstock Resources, Inc., all of the shares of which are owned by Mr. Wallen;
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(iii) 2,500,000 shares of common stock to William Bruggeman and Ruth Bruggeman

as joint tenants with rights of survivorship; and (iv) 500,000 shares of common

stock to Diversified Dynamics, which is controlled by the Bruggemans,

representing an aggregate of approximately 71.3% of the issued and outstanding

shares of common stock of the Company, with the shares issued to Mr. Wallen and

his affiliates representing approximately 54.2% of the issued and outstanding

shares of common stock of the Company. In exchange for the issuance of the

Shares, the Buyers conveyed to the Company the interests in certain oil and gas

properties owned by the Buyers, as well as the Buyers' entire interest in any

contracts, leases, records and insurance policies affecting such interests (the

"Consideration"). The amount of the Consideration was the result of an agreed

negotiation between the Buyers and the Company. Prior to the negotiation and

execution of the Agreement, there were no material relationships between the

Company or any affiliates, officers or directors of the Company, on the one

hand, and any of the Buyers, or any affiliates, officers or directors of any of

the Buyers, on the other hand.

On December 1, 1997, the Company entered into a contract with an

affiliate controlled by Calvin A. Wallen III, our Chairman of the Board, Chief

Executive Officer and President, to provide certain technical, administrative

and management services needed to conduct its business. The terms of the

contract provided for personnel to be contracted at current market rates in

effect at the time the agreement was executed. In addition, the offices are

subleased from an affiliate controlled by Mr. Wallen. The monthly amount charged

to the Company is based on actual costs of materials and man-hours of the

affiliates that are used pursuant to the terms of the agreement. As of January

1, 2002, the Company entered into a favorable arrangement with Mr. Wallen for

the continued provision of staff and services on a prorated and/or as needed

basis.

On December 10, 1998, the Company entered into an agreement with Tauren

that provides for Tauren to drill on the Company's Section 11 in Palo Pinto

County, Texas. The agreement grants Tauren a farm-out retaining a 7.5%

overriding royalty interest. The agreement also grants the Company preferential

rights in the event that Tauren, at some later date, decides to divest part or

all of their interests in the drilled wells. Tauren is an affiliate of Mr.

Wallen.

On April 27, 2001, the Company completed an exchange offer pursuant to

which it acquired (i) certain direct working interests in producing oil and/or

natural gas wells (the "Working Interests") and (ii) all of the outstanding

membership units in four privately held limited liability companies and

approximately 9.85% of the working interest in another privately held limited

liability company, all of which are engaged in oil and/or natural gas

exploration and production. The Working Interests consist of between 15% and 45%

working interests in fourteen (14) wells. The Working Interests are part of

projects operated by Tauren, an independent energy company, and Fossil acts as

the operator for some of the properties. Mr. Wallen is the sole shareholder,

director and officer of Tauren and Fossil. The relationship between the Company

and each of Tauren and Fossil were approved by the disinterested directors of

the Company. The exchange offer was made to and was accepted by the various

individual holders of the interests acquired. The Working Interests and the

properties held are located in Texas and Louisiana. The consideration paid to

the individuals who accepted the exchange offer was determined based on the

Company's valuation of the reserves underlying the interests acquired. The value
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of the Company's common stock for purpose of the exchange offer was deemed to be

$0.50 per share. In connection with the exchange offer, the Company issued

approximately 11,141,256 shares of the Company's common stock. In addition, as

consideration for services rendered with respect to this exchange offer, C. K.

Cooper & Company, Inc., and/or its principals and employees, received 111,413

shares of the Company's common stock.

Effective January 1, 2002, the Company entered into an Agreement with

Tauren whereby (i). Tauren exchanged and traded the accounts receivable of

$856,712 owed by the Company for 856,712 shares of restricted Company common

stock, (ii) the Company attained ground floor opportunities from Tauren to

participate in Tauren's prospect and project inventory, and (iii) certain

warrants were issued to Tauren from the Company to acquire restricted Company

common stock. A copy of this Agreement was filed with the Company's Form 10-QSB

for the period ended March 31, 2002.

In April, 2002, the Company made the strategic decision not to renew

the Red Rock Louisiana leaseholds, which action has had a substantial impact on

the June 30, 2002 income statement for the Company. Despite the impact, the

Company believes the decision not to renew the leases will be to the ultimate

benefit of the Company.

On June 1, 2002, Tauren assigned certain oil and gas properties to the

Company for de minimis consideration. The Company already had an interest in

some of the properties assigned for Tauren.

On or about October 1, 2004, Alexander Montano, prior to being a

Director of the Company, received a commission in connection with the Company's

$2,635,000 debt financing transaction.

On or about January 11, 2005, the Company issued 1,531,661 shares of

its common stock to Caravel Resources Energy Fund 2003-II, L.P. (the

"Partnership") in exchange for a 0.1914575033 working interest in the Kraemer

24-1 Well, Desoto Parish, Township 14 N, Range 15 W, Section 24 (the "Well").

The Company also issued 468,339 shares of its common stock to Calvin A. Wallen

III, the Company's Chairman of the Board, President and Chief Executive Officer,

in exchange for a 0.0585424967 working interest in the Well.
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Item 13. Exhibits.

Exhibit

No. Description

------- -----------

3.1 Articles of Incorporation (incorporated by reference to Exhibit

3.1 to the Registrant's Form 10-QSB for the period ended

September 30, 1999, filed with the SEC on November 23, 1999).

3.2 Bylaws (incorporated by reference to Exhibit 3.2 to the

Registrant's Form 10-KSB for the period ended June 30, 2000,

filed with the SEC on September 27, 2000).

10.1 Stock Purchase Agreement, dated December 7. 1997, among the

Company, Calvin A. Wallen, III or his designees, Diversified

Dynamics, William and Ruth Bruggeman (incorporated by reference

to Exhibit 2.1 to the Company's Current Report on Form 8-K,

filed with the SEC on December 24, 1997).

10.2 Agreement, dated as of January 1, 2002, between the Company and

Tauren Exploration, Inc. (incorporated by reference to Exhibit

10.1 of the Company's 10-QSB, filed with the SEC for the quarter

ended March 31, 2002, filed with the SEC on May 15, 2002).

10.3 Securities Purchase Agreement, effective as of September 30,

2004, among Cubic Energy, Inc. and each purchaser identified on

the signature pages thereto (incorporated by reference to

Exhibit 10.1 of the Company's Current Report on Form 8-K, filed

with the SEC on October 12, 2004).

10.4 Form of 7% Senior Secured Convertible Debenture Due September

30, 2009 (incorporated by reference to Exhibit 10.2 of the

Company's Current Report on Form 8-K, filed with the SEC on

October 12, 2004).

10.5 Form of Common Stock Purchase Warrant (incorporated by reference

to Exhibit 10.3 of the Company's Current Report on Form 8-K,

filed with the SEC on October 12, 2004).

10.6 Registration Rights Agreement, effective as of September 30,

2004, among Cubic Energy, Inc. and the purchasers signatory

thereto (incorporated by reference to Exhibit 10.1 of the

Company's Current Report on Form 8-K, filed with the SEC on

October 12, 2004).

10.7 Deed of Trust, Security Agreement, Assignment of Production and

Fixture Filing, effective as of September 30, 2004, from Cubic

Energy, Inc. to Alex Montano, as Trustee, for the benefit of C.

K. Cooper & Company, as Lender on behalf of Investors of 7%

Senior Secured Convertible Debentures (incorporated by reference

to Exhibit 10.5 of the Company's Current Report on Form 8-K,

filed with the SEC on October 12, 2004).
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10.8 Agreement between the Company on one hand and Calvin A.Wallen,

III on the other hand (incorporated by reference to the

Company's 8-K filed on January 14, 2005).

23.1* Consent of Philip Vogel & Co., PC

31.1* Rule 13a-14(a)/15d-14(a) Certifications

32.1* Section 1350 Certifications

-----------------------------------

* Filed herewith.

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Item 14. Principal Accountant Fees and Services.

July 1, 2003-June 30, 2004 July 1, 2004-June 30, 2005

--------------------------- --------------------------

Audit Fees $16,000 $16,000

Audit-Quarterly Fees 6,100 $11,350

Tax Fees 2,800 $ 3,550

Registration Fees 1,750 $ 2,400

------- -------

Total $26,650 $33,300

======= =======

All of the foregoing services were rendered to the Company by Philip

Vogel & Co., PC, and were pre-approved by the Audit Committee.
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<PAGE>

SIGNATURES

In accordance with the Section 13 or 15(d) of the exchange act, the

registrant caused this report to be signed on its behalf by the undersigned,

thereunto duly authorized, on the 4th day of October, 2005.

CUBIC ENERGY, INC.

By: /s/ Calvin A. Wallen, III

--------------------------

Calvin A. Wallen, Iii

President And Chief

Executive Officer

By: /s/Jon Stuart Ross

--------------------------

Jon Stuart Ross

Chief Financial Officer

In accordance with the Exchange Act, this report has been signed below

by the following persons on behalf of the registrant and in the capacities and

on the dates indicated.

Signature Title Date

--------- ----- ----

/s/ Calvin A. Wallen, III President, Chief Executive October 4, 2005

-------------------------

Calvin A. Wallen, III Officer and Director

/s/ Jon Stuart Ross Chief Financial Officer, October 4, 2005

-------------------------

Jon Stuart Ross Director, Secretary

/s/ Gene Howard Director October 4, 2005

-------------------------

Gene Howard

/s/ Herbert A. Bayer Director October 4, 2005

-------------------------

Herbert A. Bayer

/s/ Bob Clements Director October 4, 2005

-------------------------

Bob Clements

/s/ Alex Montano Director October 4, 2005

-------------------------

Alex Montano
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<PAGE>

CUBIC ENERGY, INC.

FINANCIAL STATEMENTS

and

INDEPENDENT AUDITORS' REPORT

JUNE 30, 2005

<PAGE>

CUBIC ENERGY, INC.

FINANCIAL STATEMENTS

and

INDEPENDENT AUDITORS' REPORT

JUNE 30, 2005

C O N T E N T S

Page

Independent Auditors' Report................................................ 1
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Financial Statements:

Balance Sheets............................................................ 2

Statements of Operations.................................................. 3

Statements of Changes in Stockholders' Equity............................. 4

Statements of Cash Flows.................................................. 5

Notes to Financial Statements.............................................6-20

<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders

of Cubic Energy, Inc.

We have audited the balance sheets of Cubic Energy, Inc., a Texas corporation,

as of June 30, 2005 and 2004, and the related statements of operations, of

changes in stockholders' equity and of cash flows for each of the three years in

the period ended June 30, 2005. These financial statements are the

responsibility of the Company's management. Our responsibility is to express an

opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company

Accounting Oversight Board (United States). Those standards require that we plan

and perform the audits to obtain reasonable assurance about whether the

financial statements are free of material misstatement. An audit includes

examining, on a test basis, evidence supporting the amounts and disclosures in

the financial statements. An audit also includes assessing the accounting

principles used and significant estimates made by management, as well as

evaluating the overall financial statement presentation. We believe that our
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audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in

all material respects, the financial position of Cubic Energy, Inc. as of June

30, 2005 and 2004, and the results of its operations and its cash flows for each

of the three years in the period ended June 30, 2005, in conformity with

accounting principles generally accepted in the United States of America.

PHILIP VOGEL & CO. PC

Certified Public Accountants

Dallas, Texas

September 23, 2005

1

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CUBIC ENERGY, INC.

BALANCE SHEETS

JUNE 30, 2005 AND 2004

2005 2004

------------ ------------

Assets

Current assets:

Cash and cash equivalents $ 257,253 $ 193,213

Accounts receivable - trade 34,354 80,180

Prepaid drilling costs 303,666 --

------------ ------------

Total current assets $ 595,273 $ 273,393
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Property and equipment (at cost):

Oil and gas properties, full cost method:

Proved properties (including wells and

related equipment and facilities) $ 4,098,571 $ 1,537,625

Unproven properties 1,053,000 --

Office and other equipment 4,873 910

------------ ------------

$ 5,156,444 $ 1,538,535

Less accumulated depreciation, depletion

and amortization 1,469,345 1,104,849

------------ ------------

3,687,099 433,686

Other assets:

Deferred loan costs - net 132,639 --

------------ ------------

$ 4,415,011 $ 707,079

============ ============

2005 2004

------------ ------------

Liabilities and stockholders' equity

Current liabilities:

Accounts payable and accrued expenses $ 11,261 $ 126,764

Due to affiliates 7,717 3,598

------------ ------------

Total current liabilities $ 18,978 $ 130,362

Long-term liabilities

Debentures payable - net of discounts $ 1,611,886 $ --

------------ ------------

1,611,886 --

Commitments and contingencies (Note G)

Stockholders' equity:

Preferred stock - $.01 par value,

authorized 10,000,000 shares,

issued none $ -- $ --

Common stock - $.05 par value, authorized

50,000,000 shares, issued 35,161,963

shares in 2005 and 31,451,826 in 2004 1,758,100 1,572,592

Additional paid-in capital 11,778,915 8,972,467

Accumulated deficit (10,752,868) (9,968,342)

------------ ------------

Stockholders' equity 2,784,147 576,717

------------ ------------

$ 4,415,011 $ 707,079

============ ============
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The accompanying notes are an integral part of these statements.

2

<PAGE>

<TABLE>

<CAPTION>

CUBIC ENERGY, INC.

STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED JUNE 30, 2005, 2004 AND 2003

2005 2004

2003

----------- ----------- -

----------

<S> <C> <C>

<C>

Revenues:

Oil and gas sales $ 469,441 $ 414,741 $

356,636

----------- ----------- -

----------

Total revenues $ 469,441 $ 414,741 $

356,636

----------- ----------- -

----------

Costs and expenses:

Oil and gas production, operating and

development costs $ 273,074 $ 186,465 $

167,303

Selling, general and administrative expenses 394,827 240,022

175,201

Depreciation, depletion and amortization 364,496 104,735

119,249

----------- ----------- -

----------

Total costs and expenses $ 1,032,397 $ 531,222 $

461,753

----------- ----------- -

----------

Operating income (loss) $ (562,956) $ (116,481) $

(105,117)

----------- ----------- -

----------

Non-operating income (expense):

Legal judgment $ -- $ -- $

(112,000)

Other income -- 2,440
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--

Interest expense (193,313) (75)

(4)

Amortization of loan costs (28,257) --

--

----------- ----------- -

----------

Total non-operating income (expense): $ (221,570) $ 2,365 $

(112,004)

----------- ----------- -

----------

Income (loss) from operations before income taxes: $ (784,526) $ (114,116) $

(217,121)

Provision for income taxes -- --

--

----------- ----------- -

----------

Net loss $ (784,526) $ (114,116) $

(217,121)

=========== ===========

===========

Net loss per common share - basic and diluted $ (0.02) $ (0.00) $

(0.01)

=========== ===========

===========

</TABLE>

The accompanying notes are an integral part of these statements.

3

<PAGE>

<TABLE>

<CAPTION>

CUBIC ENERGY, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED JUNE 30, 2005, 2004 AND 2003

Common

Stock

Cumulative ------------------

---------

preferred Shares
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Par

stock outstanding

value

------------ ------------ ---

---------

<S> <C> <C> <C>

Balance, June 30, 2002 -- 31,180,326 $

1,559,017

Net loss, year ended June 30, 2003 -- --

--

------------ ------------ ---

---------

Balance, June 30, 2003 -- 31,180,326 $

1,559,017

Stock issued under compensation plan -- 271,500

13,575

Net loss, year ended June 30, 2004 -- --

--

------------ ------------ ---

---------

Balance, June 30, 2004 -- 31,451,826 $

1,572,592

Debt proceeds allocated to warrants -- --

--

Stock issued under compensation plan -- 155,000

7,750

Stock issued under convertible debenture -- 1,410,000

70,500

agreements

Stock issued in payment of interest obligations -- 145,137

7,258

Stock issued for acquisition of property interests -- 2,000,000

100,000

Net loss, year ended June 30, 2005 -- --

--

------------ ------------ ---

---------

Balance, June 30, 2005 -- 35,161,963 $

1,758,100

============ ============

============

Additional

Total

paid-in Accumulated

stockholders'

capital deficit

equity

------------ ------------ ---
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---------

Balance, June 30, 2002 $ 8,892,992 $ (9,637,105) $

814,904

Net loss, year ended June 30, 2003 -- (217,121)

(217,121)

------------ ------------ ---

---------

Balance, June 30, 2003 $ 8,892,992 $ (9,854,226) $

597,783

Stock issued under compensation plan 79,475 --

93,050

Net loss, year ended June 30, 2004 -- (114,116)

(114,116)

------------ ------------ ---

---------

Balance, June 30, 2004 $ 8,972,467 $ (9,968,342) $

576,717

Debt proceeds allocated to warrants 510,961 --

510,961

Stock issued under compensation plan 71,300 --

79,050

Stock issued under convertible debenture 406,006 --

476,506

agreements

Stock issued in payment of interest obligations 118,181 --

125,439

Stock issued for acquisition of property interests 1,700,000 --

1,800,000

Net loss, year ended June 30, 2005 -- (784,526)

(784,526)

------------ ------------ ---

---------

Balance, June 30, 2005 $ 11,778,915 $(10,752,868) $

2,784,147

============ ============

============

</TABLE>

The accompanying notes are an integral part of these statements.

4

<PAGE>

<TABLE>

<CAPTION>

CUBIC ENERGY, INC.
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STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED JUNE 30, 2005, 2004 AND 2003

2005 2004

2003

----------- -----------

-----------

<S> <C> <C>

<C>

Cash flows from operating activities:

Net (loss) $ (784,526) $ (114,116)

$ (217,121)

Adjustments to reconcile net (loss) to cash

provided (used) by operating activities:

Depreciation, depletion and amortization 460,509 104,735

119,249

Stock issued for interest 125,440

Stock issued for services 79,050 93,051

--

Change in assets and liabilities:

(Increase) decrease in accounts receivable 45,826 (22,050)

(18,002)

Increase (decrease) in loan from affiliates 4,119 3,418

(8,931)

Increase (decrease) in accounts payable

and accrued liabilities (115,503) 10,725

72,921

----------- -----------

-----------

Net cash provided (used) by operating activities $ (185,085) $ 75,763

$ (51,884)

----------- -----------

-----------

Cash flows from investing activities:

Acquisition and development of oil

and gas properties $(1,813,946) $ --

$ --

Purchase of office equipment (3,963) --

--

Advances on developments costs (303,666) --

--

----------- -----------

-----------

Net cash provided (used) by investing activities $(2,121,575) $ --

$ --

----------- -----------

-----------

Cash flows from financing activities:

Issuance of convertible debentures and warrants $ 2,635,000 $ --

$ --

Loan costs incurred on issuance of debentures (264,300) --
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--

----------- -----------

-----------

Net cash provided (used) by financing activities $ 2,370,700 $ --

$ --

----------- -----------

-----------

Net increase (decrease) in cash and cash equivalents $ 64,040 $ 75,763

$ (51,884)

Cash and cash equivalents:

Beginning of year 193,213 117,450

169,334

----------- -----------

-----------

End of year $ 257,253 $ 193,213

$ 117,450

=========== ===========

===========

</TABLE>

The accompanying notes are an integral part of these statements.

5

<PAGE>

CUBIC ENERGY, INC.

NOTES TO FINANCIAL STATEMENTS

Note A - Background and general:

Cubic Energy, Inc. ("Company") is engaged in domestic crude oil and natural

gas exploration, development and production, with primary emphasis on the

production of oil and gas reserves through acquisitions of proved, producing oil

and gas properties in the states of Texas, and Louisiana.

Note B - Significant accounting policies:

Cash equivalents

----------------

For purposes of the statements of cash flows, the Company considers all

certificates of deposit and other financial instruments with original

maturity dates of three months or less to be cash equivalents.
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Office and other equipment

--------------------------

Office and other equipment are stated at cost and depreciated by the

straight-line method over estimated useful lives ranging from five to seven

years. Depreciation and amortization of office and other equipment amounted

to $330, $-, and $-for the years ended June 30, 2005, 2004 and 2003,

respectively.

Full cost method of accounting for oil and gas properties

---------------------------------------------------------

The Company has adopted the full cost method of accounting for oil and

gas properties. Management believes adoption of the full cost method more

accurately reflects management's exploration objectives and results by

including all costs incurred as integral for the acquisition, discovery and

development of whatever reserves ultimately result from its efforts as a

whole. Under the full cost method of accounting, all costs associated with

acquisition, exploration and development of oil and gas reserves, including

directly related overhead costs, are capitalized.

All capitalized costs of oil and gas properties, including the estimated

future costs to develop proved reserves, are amortized on the

unit-of-production method using estimates of proved reserves. Investments in

unproved properties and major development projects are not amortized until

proved reserves associated with the projects can be determined or until

impairment occurs. If the results of an assessment indicate that the

properties are impaired, the amount of the impairment is added to the

capitalized costs to be amortized.

In addition, the capitalized costs are subject to a "full cost ceiling

test," which generally limits such costs to the aggregate of the "estimated

present value," discounted at a 10 percent interest rate of future net

revenues from proved reserves, based on current economic and operating

conditions, plus the lower of cost or fair market value of unproved

properties. An excess of the capitalized costs over the full costs ceiling

test limitation at June 30, 2005, was not charged against earnings because

of an increase in oil and gas prices subsequent to year end.

Sales of proved and unproved properties are accounted for as adjustments

of capitalized costs with no gain or loss recognized, unless such

adjustments would significantly alter the relationship between capitalized

costs and proved reserves of oil and gas, in which case the gain or loss is

recognized in income.

Depletion of producing oil and gas properties amounted to $364,166,

$104,735 and $119,249 for the years ended June 30, 2005, 2004 and 2003,

respectively.

Impairment of long-lived assets and long-lived assets to be disposed of

-----------------------------------------------------------------------

The Company has adopted the provisions of Statement of Financial

Accounting Standards (SFAS) No. 144, Accounting for the Impairment or

Disposal of Long-Lived Assets effective for periods beginning July 1, 2002,
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6

<PAGE>

CUBIC ENERGY, INC.

NOTES TO FINANCIAL STATEMENTS

and thereafter. SFAS 144 replaces SFAS 121, and, among other matters,

addresses financial accounting and reporting for the impairment or disposal

of long-lived assets. SFAS 144 retains the basic provisions of SFAS 121, but

broadens its scope and establishes a single model for long-lived assets to

be disposed of by sale. Management does not believe adoption of the

Statement had any effect on the financial statements of the Company. In

addition, the Company is subject to the rules of the Securities and Exchange

Commission with respect to impairment of oil and gas properties accounted

for under the full cost method of accounting, as described earlier.

Income taxes

------------

Income taxes are accounted for under the asset and liability method.

Deferred tax assets and liabilities are recognized for the future tax

consequences attributable to differences between the financial statement

carrying amounts of existing assets and liabilities and their respective tax

basis. Deferred tax assets and liabilities are measured using enacted tax

rates that will apply in the years in which those temporary differences are

expected to be recovered or settled. The effect on deferred tax assets and

liabilities of a change in tax rates is recognized in income in the period

that includes the enactment date.

Oil and gas revenue

-------------------

The Company recognizes oil and gas revenues by the sales method as oil

and gas production is sold. Differences between sales and production volumes

during the years ended June 30, 2005, 2004 and 2003 were not significant.

Earnings (loss) per common share

--------------------------------

The Company has adopted the provisions of Statement of Financial

Accounting Standards (SFAS) No. 128, Earnings per Share. SFAS No. 128

requires the presentation of basic earnings (loss) per share (EPS) and

diluted EPS. Basic EPS is calculated by dividing net income or loss

(available to common stockholders) by the weighted average number of common

shares outstanding for the period. Diluted EPS reflects the potential

dilution that could occur if securities or other contracts to issue common

stock, such as stock options, warrants, convertible preferred stock and

convertible debentures, were exercised or converted into common stock.

As discussed in Note E, there were no dilutive securities outstanding

during the years ended June 30, 2005, 2004 and 2003. The weighted average

number of common and common equivalent shares outstanding was 33,112,644,

31,316,222 and 31,180,326 for the years ended June 30, 2005, 2004 and 2003,
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respectively.

Concentration of credit risk

----------------------------

Financial instruments which potentially subject the Company to a

concentration of credit risk consists primarily of trade accounts receivable

with a variety of local, national, and international oil and natural gas

companies. Such credit risks are considered by management to be limited due

to the financial resources of the oil and natural gas companies.

Reporting comprehensive income (loss) and operating segments

------------------------------------------------------------

The Company has adopted the provisions of SFAS No. 130, Reporting

Comprehensive Income and SFAS No. 131, Disclosure about Segments of an

Enterprise and Related Information. SFAS No. 130 requires that an enterprise

report, by major components and as a single total, the change in its net

assets during the period from nonowner sources. SFAS No. 131 establishes

annual and interim reporting standards for an enterprise's operating

segments and related disclosures about its products, services, geographic

areas and major customers. Adoption of SFAS No. 131 has had no impact on the

Company's financial position, results of operations, cash flows, or related

disclosures since the Company's operations are considered to be a single

segment.

7

<PAGE>

CUBIC ENERGY, INC.

NOTES TO FINANCIAL STATEMENTS

Use of estimates

----------------

The preparation of financial statements in conformity with generally

accepted accounting principles requires management to make estimates and

assumptions that affect the amounts reported in the financial statements and

accompanying notes. Actual results could differ from those estimates.

Certain significant estimates

-----------------------------

Management estimates included in these financial statements for which it

is reasonably possible that a future event in the near term could cause the

estimate to change and the change could have a severe impact are as follows:

Management's estimates of oil and gas reserves are based on various

assumptions, including constant oil and gas prices. Actual future

production, cash flows, taxes, operating expenses, development expenditures

and quantities of recoverable oil and gas reserves may vary substantially

from those assumed in the estimate. The accuracy of any reserve estimate is

a function of the quality of available data, engineering and geological
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interpretation, and judgment. Subsequent evaluation of the same reserves

based upon production history will result in variations, which may be

substantial, in the estimated reserves. While it is at least reasonably

possible that the estimates above will change materially in the near term,

no estimate can be made of the range of possible losses that might occur.

Fair value of financial instruments

-----------------------------------

The Company defines the fair value of a financial instrument as the

amount at which the instrument could be exchanged in a current transaction

between willing parties. Financial instruments included in the Company's

financial statements include cash and cash equivalents, short-term

investments, accounts receivable, other receivables, other assets, accounts

payable, notes payable and due to affiliates. Unless otherwise disclosed in

the notes to the financial statements, the carrying value of financial

instruments is considered to approximate fair value due to the short

maturity and characteristics of those instruments. The carrying value of

debt approximates fair value as terms approximate those currently available

for similar debt instruments.

Obligations associated with the retirement of assets

----------------------------------------------------

The Company has adopted the provisions of SFAS No. 143, Accounting for

Asset Retirement Obligations, effective July 1, 2002. SFAS No. 143 amended

SFAS No. 19, Financial Accounting and Reporting by Oil and Gas Producing

Companies, and, among other matters, addresses financial accounting and

reporting for legal obligations associated with the retirement of tangible

long-lived assets and the associated asset retirement costs. SFAS No. 143

requires that the fair value of a liability for an asset retirement

obligation be recognized in the period in which it is incurred, with the

associated asset retirement cost capitalized as part of the related asset

and allocated to expense over the asset's useful life.

This is a change from the approach taken under SFAS No. 19, whereby an

amount for an asset retirement obligation was recognized using a

cost-accumulation measurement approach. Under that approach, the obligation

was reported as a contra-asset recognized as part of depletion and

depreciation over the life of the asset without discounting. Management has

determined that adopting SFAS No. 143 has had no significant effect on the

company's financial statements since abandonment costs for which it is

responsible are not material.

Stock based compensation

------------------------

Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock

Issued to Employees, and related interpretations require that compensation

expense be recorded on the date of the grant of stock options and warrants

only if the current market price of the underlying stock exceeded the

exercise price. Alternatively, Statement of Financial Accounting Standards

(SFAS) No. 123, Accounting for Stock-Based Compensation, permits entities to

recognize, as expense over the vesting period, the fair value of all

stock-based awards on the date of grant. SFAS No. 123 allows entities to

continue to apply the provisions of APB Opinion No. 25 and provide proforma

net income and proforma earnings per share disclosures for employee stock
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option grants made in 1996 and future years as if the fair-valued-based

method defined in SFAS No. 123 had been applied. The Company has elected to

apply the provisions of APB Opinion No. 25 and provide the proforma

disclosure provisions of SFAS No. 123.

8

<PAGE>

CUBIC ENERGY, INC.

NOTES TO FINANCIAL STATEMENTS

In addition, the Company has adopted the provisions of Financial

Accounting Standards Board Interpretation (FIN) 44, Accounting for Certain

Transactions Involving Stock Compensation, which became effective July 1,

2000. FIN 44 clarifies the application of APB 25 for certain issues. Among

other issues, this interpretation clarifies the definition of an employee

for purposes of applying APB 25, the criteria for qualification of a plan as

compensatory, the consequences of modifications to the terms of a plan, and

the treatment of stock compensation issued to service providers who are not

employees. The issuance of this interpretation does not change the current

accounting policies of the Company, and has had no effect on the

accompanying financial statements.

In December 2002, the Financial Accounting Standards Board issued SFAS

No. 148, Accounting for Stock-Based Compensation - Transition and

Disclosure, which amends SFAS No. 123. SFAS No. 148 provides alternative

methods of transition for a voluntary change to the fair value based method

of accounting for stock-based compensation. In addition, SFAS No. 148 amends

the disclosure requirements of SFAS No. 123 to require more prominent and

more frequent disclosures in financial statements about the effects of

stock-based compensation. The transition guidance and annual disclosure

provisions are effective for years ending after December 15, 2002. The

interim disclosure provisions are effective financial reports containing

financial statements for interim periods beginning after December 15, 2002.

The transition rules of this standard are not applicable since the Company

continues to account for stock-based compensation under the guidance of APB

Opinion 25. The other requirements of this standard have been adopted by the

Company for periods beginning January 1, 2003. Disclosures required by this

statement are in Note J.

In December 2004, the Financial Accounting Standards Board issued SFAS

No. 123r, "Share-Based Payment," which is a revision of SFAS No. 123,

"Accounting for Stock-Based Compensation," and supersedes APB No. 25,

"Accounting for Stock Issued to Employees." This Statement will require the

Company to recognize compensation costs related to stock-based payment

transactions (i.e. granting of stock options and warrants) in the financial

statements. With limited exceptions, the amount of compensation cost will be

measured based on the grant-date fair value of the equity or liability

instruments issued. In addition, liability awards will be remeasured each

reporting period. Compensation cost will be recognized over the period that

an employee provides services in exchange for the award. This new standard

will be effective for awards that are granted, modified or settled in cash

in interim and annual financial periods beginning after June 30, 2006.

Management has not yet determined what impact this statement will have on
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the Company's financial position or results of operations.

Exit or disposal activities

---------------------------

In July 2002, the Financial Accounting Standards Board issued SFAS No.

146, Accounting for Cost Associated with Exit or Disposal Activities. SFAS

No. 146 requires companies to recognize costs associated with exit or

disposal activities when they are incurred rather than at the date of a

commitment to an exit or disposal plan. Examples of costs covered by the

standard include lease termination costs and certain employee severance

costs that are associated with a restructuring, discontinued operations, or

other exit or disposal activities. SFAS No. 146 is effective prospectively

for exit or disposal activities initiated after December 31, 2002, with

earlier adoption encouraged. No exit or disposal activities have been

entered into by management.

Financial instruments with characteristics of both liabilities and equity

-------------------------------------------------------------------------

In May 2003, the Financial Accounting Standards Board issued SFAS No.

150, Accounting for Certain Financial Instruments with Characteristics of

both Liabilities and Equity. SFAS No. 150 established standards for how a

company classifies and measures certain financial instruments with

characteristics of both liabilities and equity. The statement requires that

a company classify a financial instrument that is within its scope as a

liability (or an asset in some circumstances) if certain criteria are met.

Freestanding financial instruments that obligate the issuer to redeem the

holder's shares, or are indexed to such an obligation, and are settled in

cash or settled with shares meeting certain conditions would be treated as

liabilities. Many of those instruments were previously classified as equity.

9

<PAGE>

CUBIC ENERGY, INC.

NOTES TO FINANCIAL STATEMENTS

Guarantee of debt

-----------------

In November 2002, the Financial Accounting Standards Board issued

Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure

Requirements for Guarantees, Including Indirect Guarantees of Indebtedness

of Others, an Interpretation of FASB Statements No. 5, 57, and 107 and

Rescission of FASB Interpretation No. 34. FIN 45 clarifies the requirements

of SFAS No. 5, relating to the guarantor's accounting for, and disclosure

of, the issuance of certain types of guarantees. This Interpretation

clarifies that a guarantor is required to recognize, at the inception of

certain types of guarantees, a liability for the fair value of the

obligation undertaken in issuing the guarantee, and requires additional

disclosures on existing guarantees even if the likelihood of future

liability under the guarantees is deemed remote. The Company has not issued
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any guarantees and, therefore, the adoption of FIN 45 does not have a

significant impact on the Company's financial statements.

Variable interest entities

--------------------------

In January 2003, the Financial Accounting Standards Board issued

Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest

Entities, an Interpretation of ARB No. 51. FIN 46 states that if a business

enterprise has a controlling financial interest in a variable interest

entity as the primary beneficiary, the assets, liabilities and results of

the activities of the variable interest entity should be included in the

consolidated financial statements of the business enterprise. This

Interpretation explains how to identify variable interest entities and how

an enterprise assesses its interests in a variable interest entity to decide

whether to consolidate that entity. The primary beneficiary of a variable

interest entity would be required to consolidate if the other equity

investors in the entity do not have the characteristics of a controlling

financial interest or do not have sufficient equity at risk for the entity

to finance its activities without additional subordinated financial support

from other parties. FIN 46 applies immediately to variable interest entities

created after January 31, 2003, and to variable interest entities in which

an enterprise obtains an interest after that date. It applies in the first

fiscal year or interim period beginning after June 15, 2003, to variable

interest entities in which an enterprise holds a variable interest that it

acquired before February 1, 2003. The Company has no current contractual

relationships or other business relationships with variable interest

entities.

Note C - Stockholders' equity:

The Company's authorized capital is 50,000,000 shares of $0.05 par value

common stock and 10,000,000 shares of $0.01 par value preferred stock. No shares

of preferred stock are issued or outstanding at June 30, 2005 and 2004.

Warrants

--------

On January 1, 2002, the Company issued three series of warrants to

Tauren Exploration, Inc., an entity owned by the CEO and major stockholder

of the Company (see Note E). These warrants allowed Tauren to purchase

unregistered common shares in the Company as follows: 1) exercisable after

May 1, 2002, to purchase 125,000 unregistered common shares at an exercise

price of $1.00, which expired on April 30, 2003; 2) exercisable after May 1,

2003, to purchase 150,000 unregistered common shares at the exercise price

of $1.50, which expired on April 30, 2004; and 3) exercisable after May 1,

2004, to purchase 200,000 unregistered common shares at an exercise price of

$2.00, which expired on April 30, 2005. All warrants expired unexercised.

The weighted-average exercise price of all exercisable warrants at June 30,

2005 and 2004 was $0 and $2.00, respectively. The weighted-average exercise

price of all outstanding warrants at June 30, 2005 and 2004 was $0 and

$2.00, respectively.

On or about October 1, 2004, the Company closed a Securities Purchase

Agreement and issued $2,635,000 in principal amount of 7% Senior Secured

Convertible Debentures due September 30, 2009 (the "Debentures"), to a group
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of institutional and high net worth investors. The Debentures are secured by

the collateral set forth in the Deed of Trust, Security Agreement,

Assignment of Production and Fixture Filing attached to a Form 8-K filed

October 12, 2004. The Debentures pay an annual interest rate of 7% on a

quarterly basis and are convertible into shares of our common stock at a

price of $.50 per share. The Company has the option to pay the interest on

the Debentures in common stock. The investors also received warrants to

10

<PAGE>

CUBIC ENERGY, INC.

NOTES TO FINANCIAL STATEMENTS

purchase an additional 2,635,000 shares of common stock with an exercise

price of $1.00 per share. During the fiscal year ended June 30, 2005,

$705,000 of debt had been converted into 1,410,000 shares of common stock,

and 145,137 shares of common stock were issued in lieu of cash to pay

interest. None of the warrants have been exercised and all remain

outstanding at June 30, 2005.

The Company has allocated the proceeds from the issuance of the

Debentures to the warrants and the Debentures based on their relative fair

market values at the date of issuance. The value assigned to the warrants of

$510,961 has been recorded as an increase in additional paid in capital. The

assignment of a value to the warrants results in a loan discount being

recorded for the same amount. The discount is being amortized over the

original five year term of the Debentures as additional interest expense.

The Company incurred loan costs of $264,300 on the issuance of the

Debentures and warrants. The amount allocable to the Debentures of $213,049

has been capitalized and is being amortized over the term of the Debentures.

Amortization of loan costs was $28,258 for the year ended June 30, 2005.

The proceeds of the Debentures have primarily been used for the

acquisition of interests in oil and gas properties. Through December 31,

2004, Cubic incurred acquisition and development costs of $1,418,996 on

properties with unproved reserves. On or before March 31, 2005, management

determined that the reserves acquired in this transaction were proved, and

the associated acquisition and development costs were transferred to proved

properties and depletion has been computed in accordance with the full cost

method.

However, upon further review, it has been determined that approximately

$1,053,000 in lease acquisition costs were improperly moved to the proved

category from the unproved category, and this amount has been re-categorized

to the unproved category. The March 31, 2005, Form 10-QSB for the Company is

being amended to re-categorize the assets between proved and unproved, to

restate the depletion and to restate the balance sheet accordingly. The net

effect of this amendment will not result in a change in our total assets,

but reflects a material change in asset classification. In addition, the

balance of the prepaid drilling costs, net of allocable expenses, as of June
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30, 2005, is $303,667.

On or about January 11, 2005, the Company issued 1,531,661 shares of

common stock to Caravel Resources Energy Fund 2003-II, L.P. (the

"Partnership") in exchange for a 0.1914575033 working interest in the

Kraemer 24-1 Well, Desoto Parish, Township 14 N, Range 15 W, Section 24 (the

"Well"). The Company also issued 468,339 shares of common stock to Mr.

Wallen in exchange for a 0.0585424967 working interest in the Well. The

common stock closed at a price of $0.90 on January 10, 2005. The shares of

common stock were issued by the Company in reliance upon an exemption from

registration set forth in Section 4(2) of the Securities Act of 1933, as

amended, which exempts transactions by an issuer not involving a public

offering.

Stock-based compensation

------------------------

On September 12, 2003, the Directors of the Company approved a Director

and Officer compensation plan as follows: (i.) Directors of record as of

June 1, 2003 would receive 24,000 restricted Cubic common shares (16,000

shares per year, multiplied by 1.5 years) for years of prior service, (ii.)

the President/CEO of Cubic would receive 45,000 restricted Cubic common

shares (30,000 share per year, multiplied by 1.5 years) for years of prior

service, (iii.) the Secretary of Cubic would receive 22,500 restricted Cubic

common shares (15,000 shares per year, multiplied by 1.5 years) for prior

years of service, (iv.) going forward, Directors would receive 16,000

restricted Cubic common shares per year of service, (v.) going forward, the

President/CEO would receive 30,000 restricted Cubic common shares per year

of service, (vi.) going forward, the Secretary would receive 15,000

restricted Cubic common shares per year of service, (vii.) Audit Committee

members would receive 10,000 restricted Cubic common shares per audit, and,

(viii.) any Compensation Committee member, should one be formed, would

receive 3,000 restricted Cubic common shares per year of service.

On November 5, 2003 Cubic issued 116,500 common shares of stock to its

Officers and Directors pursuant to this plan. Based on a then market price

of $0.20 per share, Cubic recorded a compensation expense of $23,300; which

expense is recorded in the above financial statements as a selling, general

and administrative expense for the year ended June 30, 2004.

11

<PAGE>

<TABLE>

<CAPTION>

CUBIC ENERGY, INC.

NOTES TO FINANCIAL STATEMENTS

On February 9, 2004, Cubic issued 155,000 common shares of stock to its

Officers and Directors pursuant to this plan, for service during the current

fiscal year. Based on a then market price of $0.45 per share, Cubic recorded

a compensation expense of $69,750; which expense is recorded in the above

financial statements as a selling, general and administrative expense for
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the year ended June 30, 2004.

On October 25, 2004, Cubic issued 155,000 Common shares of stock to its

Officers and Directors pursuant to this plan. Based on a then market price

of $.51 per share, Cubic recorded a compensation expense of $79,050; which

expense is recorded in the above financial statements as a selling, general

and administrative expense for the year ended June 30, 2005.

The following compensation plan was adopted on March 30, 2005, with

conditional Grants authorized on March 30, 2005 subject to Shareholder

approval. On March 30, 2005, the Compensation Committee for Cubic voted and

authorized, and then the Board Of Directors conditionally approved, all

subject to shareholder approval, these grants, in addition to all other

grants previously issued: (i) 150,000 un-registered shares to Calvin Wallen

III, (ii) 100,000 un-registered shares to Jon Stuart Ross, (iii) 70,000

un-registered shares to Rick Sepulvado, and (iv) 30,000 un-registered shares

to Lindsey Tate Renteria. Further, the Compensation Committee for Cubic

voted and authorized, and then the Board Of Directors conditionally

approved, all subject to shareholder approval, Director and Committee

compensation as follows, in addition to all other grants previously issued:

(a) $1,000 cash compensation per Director for each actual meeting held, (b)

reimbursement for reasonable and necessary expenses, (c) grants of 25,000

un-registered shares for yearly Director service, (d) grants of 8,000

un-registered shares for service on the Compensation Committee, and (e)

grants of 14,000 un-registered shares for service for upcoming audit

committee, with the chairman to receive grants of 20,000 un-registered

shares. The Company has not recorded any compensation cost with respect to

the contingent issuance of stock under the above-referenced plan because of

the uncertainty involved in obtaining shareholder approval. Compensation

cost will be recognized once the plan has been formally approved and the

shares are issued.

Note D - Loss per common share:

Net loss per common share is computed as follows:

2005 2004 2003

----------- ----------- ----------

-

<S> <C> <C> <C>

Net loss attributable to stockholders $ (784,526) $ (114,116) $

(217,121)

Weighted average number of shares of

common stock 33,112,644 31,316,222

31,180,326

Income (loss) per common share $ (0.02) $ (0.00) $

(0.01)

</TABLE>

Potential dilutive securities (stock warrants, convertible debt) have not

been considered since the Company reported a net loss and, accordingly, their
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effects would be antidilutive.

Note E - Related party transactions:

On December 10, 1998, the Company entered into an agreement with Tauren

Exploration Inc. ("Tauren") that provides for Tauren to drill on the Company's

Section 11 in Palo Pinto County, Texas. The agreement grants Tauren Exploration

Inc. a farm-out retaining a 7.5% overriding royalty interest. The agreement also

grants the Company preferential rights in the event that Tauren, at some later

date, decides to divest part or all of its interests in the drilled wells.

Calvin Wallen III is an officer, director and major stockholder of both the

Company and Tauren.

12

<PAGE>

CUBIC ENERGY, INC.

NOTES TO FINANCIAL STATEMENTS

Effective January 1, 2002, the Company entered into an agreement with Tauren

that provides for the following:

1) As of January 1, 2002, the Company owed Tauren $856,712, primarily

comprised of non-interest bearing advances the Company had received

over the course of several years. In exchange for the amounts owed

to it, Tauren accepted the transfer of 856,712 newly issued and

unregistered shares of common stock in the Company that had a market

price of $.70 per share.

2) The Company received the rights to participate in prospective oil

and gas projects in which Tauren owns a working interest.

3) The Company shall, as requested, have the future privilege of using

the general and administrative services of Tauren based on an agreed

pro rata cost.

4) The Company issued three series of warrants to Tauren as described

in Note C.

On December 1, 1997, the Company entered into a contract with Tauren to

provide the necessary technical, administrative and management expertise needed

to conduct its business. This agreement was renewed and revised on January 1,

2002. The Company has no full-time employees, and its offices are subleased from

Tauren. The monthly amount charged to the Company is based on actual costs of

materials and labor hours of Tauren that are used pursuant to the terms of the

agreement. Tauren also pays various organization costs and consulting fees on

behalf of the Company. As of June 30, 2005 and 2004, the Company owed Tauren

$3,598 and $178, respectively, which are included in accounts payable and

accrued expenses in the accompanying financial statements. Charges to the

Company under the contracts were $35,322, $45,938 and $83,628 for the years

ended June 30, 2005, 2004 and 2003, respectively.

In addition, the wells in which the Company owns a working interest are

operated by an affiliated company, Fossil Operating Inc. ("Fossil"), which is
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owned 100% by the Company's President and Chief Executive Officer, Calvin Wallen

III. As of June 30, 2005 and 2004, the Company owed Fossil $0, in lease

operating expenses and was owed by Fossil $34,354 and $78,887, respectively, for

oil and gas sales. The amounts owed by Fossil include revenue in the amount of

$30,104 earned on the Mosley well #25-1 which has been held in suspense until

filings are finalized. The amounts owed the Company are included in accounts

receivable - trade.

On or about January 11, 2005, the Company issued 1,531,661 shares of common

stock to Caravel Resources Energy Fund 2003-II, L.P. (the "Partnership") in

exchange for a 0.1914575033 working interest in the Kraemer 24-1 Well, Desoto

Parish, Township 14 N, Range 15 W, Section 24 (the "Well"). The Company also

issued 468,339 shares of common stock to Mr. Wallen in exchange for a

0.0585424967 working interest in the Well. The common stock closed at a price of

$0.90 on January 10, 2005. The shares of common stock were issued by the Company

in reliance upon an exemption from registration set forth in Section 4(2) of the

Securities Act of 1933, as amended, which exempts transactions by an issuer not

involving a public offering.

Note F - Income taxes:

Deferred tax assets and liabilities are computed by applying the effective

U.S. federal income tax rate to the gross amounts of temporary differences and

other tax attributes. Deferred tax assets and liabilities relating to state

income taxes are not material. In assessing the realizability of deferred tax

assets, management considers whether it is more likely than not that some

portion or all of the deferred tax assets will not be realized. The ultimate

realization of deferred tax assets is dependent upon the generation of future

taxable income during the periods in which those temporary differences become

deductible. Management considers the scheduled reversal of deferred tax

liabilities, projected future taxable income, and tax planning strategies in

making this assessment. As of June 30, 2005 and 2004, the Company believed it

was more likely than not that future tax benefits from net operating loss

carryforwards and other deferred tax assets would not be realizable through

generation of future taxable income; therefore, they were fully reserved.

13

<PAGE>

<TABLE>

<CAPTION>

CUBIC ENERGY, INC.

NOTES TO FINANCIAL STATEMENTS

The components of the net deferred federal income tax assets (liabilities)

at June 30 were as follows:

2005 2004

--------- ---------
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Deferred tax assets:

Net operating loss carryforwards $ 698,000 $ 500,200

Capital loss carryforwards 7,400 7,400

Accrued lawsuit settlement -- 16,800

--------- ---------

$ 705,400 $ 524,400

--------- ---------

Deferred tax liabilities:

Depletion basis of assets and related accounts $(103,600) $ (60,400)

--------- ---------

$(103,600) $ (60,400)

--------- ---------

Net deferred tax (liabilities) assets before

valuation allowance $ 601,800 $ 464,000

Valuation allowance (601,800) (464,000)

--------- ---------

Net deferred tax (liabilities) assets $ -- $ --

========= =========

The following table summarizes the difference between the actual tax

provision and the amounts obtained by applying the statutory tax rates to the

income or loss before income taxes for the years ended June 30, 2005, 2004 and

2003:

2005 2004

2003

--------- ---------

---------

<S> <C> <C>

<C>

Tax provision (benefit) calculated at statutory rate $(197,800) $ (38,800)

$ (73,800)

Losses not providing tax benefits 197,800 38,800

73,800

--------- ---------

---------

Current federal income tax provision $ -- $ --

$ --

========= =========

=========

Change in valuation allowance $ 137,800 $ 10,700

$ 29,400

========= =========

=========

</TABLE>
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14

<PAGE>

CUBIC ENERGY, INC.

NOTES TO FINANCIAL STATEMENTS

As of June 30, 2005, the Company had net operating loss carryforwards of

approximately $4,653,200, which are available to reduce future taxable income.

These carryforwards expire as follows:

Net operating

Year losses

------ -------------

2007 $ 128,500

2009 5,700

2011 431,100

2012 205,100

2013 639,800

2019 845,600

2020 297,100

2021 172,100

2022 15,400

2023 571,900

2024 22,600

2025 1,318,300

-------------

$ 4,653,200

=============

Note G - Commitments and contingencies:

Key personnel

-------------

The Company depends to a large extent on the services of Calvin A.

Wallen III, the Company's President, Chairman of the Board, and Chief

Executive Officer. The loss of the services of Mr. Wallen would have a

material adverse effect on the Company's operations. The Company has not

entered into any employment contracts with any of its executive officers.

Environmental matters

---------------------

The Company's operations and properties are subject to extensive and

changing federal, state, provincial and local laws and regulations relating

to environmental protection, including the generation, storage, handling and

transportation of oil and gas and the discharge of materials into the

environment. The Company generates typical oil and gas field wastes,

including hazardous wastes that are subject to the federal Resources

Conservation and Recovery Act and comparable state statutes. Furthermore,
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certain wastes generated by the Company's oil and gas operations that are

currently exempt from regulation as "hazardous wastes" may in the future be

designated as "hazardous wastes" and therefore be subject to more rigorous

and costly operating and disposal requirements. All of the Company's

properties are operated by third parties over whom the Company has limited

control. In addition to the Company's lack of control over properties

operated by others, the failure of previous owners or operators to comply

with applicable environmental regulations may, in certain circumstances,

adversely impact the Company.

Litigation matters

------------------

The Company had filed suit in the 29th Judicial District Court in Palo

Pinto County, Texas, styled "Roseland Oil and Gas, Inc. v. William Vandever,

et al," bringing suit against Clifford Kees, William Vandever and various

persons, seeking a judicial determination that all grants of preferential

rights in the Reagan Section 11 and 12 are void. This lawsuit was filed on

April 26, 1999. All section 11 preferential rights were returned to the

Company on or about January 2002. However, Clifford Kees was to retain his

1% override interest in these Reagan Lease Sections. Clifford Kees then

moved to trial against on the claim of attorney fees owed to him for the

prosecution of this lawsuit. The trial was heard on September 25, 2002, with

Kees requesting in excess of $200,000 in attorney fees and costs. In June of

2003, The Court re-opened the trial as to attorney fees and costs, to allow

15

<PAGE>

<TABLE>

<CAPTION>

CUBIC ENERGY, INC.

NOTES TO FINANCIAL STATEMENTS

Kees to put on additional evidence, and such trial was re-convened on June

19, 2003. On July 15, 2003, the Court entered a Judgment in favor of Kees

and as against the Company for approximately $112,000. The Company believed

the Judgment should not stand and appealed the Judgment. On or about,

September 17, 2004, the Eastland Court Of Appeals issued its ruling,

modifying the amounts owed by the Company under the Judgment to $59,000. The

Company was been denied a Re-Hearing as to clarification and a further

reduction of the Judgment. The Company filed a Petition For Review with the

Texas Supreme Court that was Denied on or about January 21, 2005.

The Company had put into the registry of the Court a cash bond in the

amount of $92,500. On or about March 14, 2005, the Trial Court issued a

final ruling which ordered for Cubic to pay out to Kees $83,726 of the

monies in the registry of the Court, with $8,774.22 of the monies in the

registry of The Court refunded to Cubic.

The Company was been denied a Re-Hearing as to clarification and a

further reduction of the Judgment. The Company filed a Petition For Review

with the Texas Supreme Court that was Denied on or about January 21, 2005.
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The Company had put into the registry of the Court a cash bond in the

amount of $92,500. On or about March 14, 2005, the Trial Court issued a

final ruling which ordered for Cubic to pay out to Kees $83,726 of the

monies in the registry of the Court, with $8,774 of the monies in the

registry of The Court refunded to Cubic.

Note H - Cost of oil and gas properties:

Costs incurred

--------------

Costs (capitalized and expensed) incurred in oil and gas property

acquisition, exploration, and development activities for the years ended

June 30, 2005, 2004 and 2003 were as follows:

2005 2004 2003

---------- ---------- ----------

Property acquisitions $2,880,000 $ -- $ --

Exploration 733,946 -- --

Development -- -- --

---------- ---------- ----------

$3,613,946 $ -- $ --

========== ========== ==========

Capitalized costs

The aggregate amounts of capitalized costs relating to oil and gas

producing activities and the aggregate amounts of the related accumulated

depreciation, depletion, and amortization at June 30, 2005, 2004 and 2003

were as follows:

2005 2004 2003

---------- ---------- ---------

-

<S> <C> <C> <C>

Proved properties $4,098,571 $1,537,625

$1,537,625

Unproved properties 1,053,000 -- --

---------- ---------- ---------

-

$5,151,571 $1,537,625

$1,537,625

Accumulated depreciation, depletion

and amortization 1,468,106 1,103,939

999,205

---------- ---------- ---------

-

Total properties $3,683,465 $ 433,686 $

538,420

Less: impairment of oil and gas properties

due to full cost ceiling test -- -- --
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---------- ---------- ---------

-

Net properties $3,683,465 $ 433,686 $

538,420

========== ==========

==========

</TABLE>

16

<PAGE>

<TABLE>

<CAPTION>

CUBIC ENERGY, INC.

NOTES TO FINANCIAL STATEMENTS

Results of operations

---------------------

The results of operations from oil and gas producing activities for the

years ended June 30, 2005, 2004 and 2003 were as follows:

2005 2004 2003

--------- --------- ---------

<S> <C> <C> <C>

Revenues:

Revenues $ 469,441 $ 414,741 $ 356,636

Preferred return -- -- --

--------- --------- ---------

$ 469,441 $ 414,741 $ 356,636

--------- --------- ---------

Expenses:

Production and development costs $ 273,074 $ 186,465 $ 167,303

Depreciation, depletion and amortization 364,496 104,735 119,249

--------- --------- ---------

$ 637,570 $ 291,200 $ 286,552

--------- --------- ---------

Results before income taxes $(168,129) $ 123,541 $ 70,084

Provision for income taxes -- -- --

--------- --------- ---------

Results of operations (excluding corporate

overhead and interest expense) $(168,129) $ 123,541 $ 70,084

========= ========= =========

</TABLE>
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Note I - Oil and gas reserves information (unaudited):

The estimates of proved oil and gas reserves utilized in the preparation of

the financial statements are estimated in accordance with guidelines established

by the Securities and Exchange Commission and the Financial Accounting Standards

Board, which require that reserve estimates be prepared under existing economic

and operating conditions with no provision for price and cost escalations over

prices and costs existing at year-end except by contractual arrangements.

The Company emphasizes that reserve estimates are inherently imprecise.

Accordingly, the estimates are expected to change as more current information

becomes available. The Company's policy is to amortize capitalized oil and gas

costs on the unit of production method, based upon these reserve estimates. It

is reasonably possible that, because of changes in market conditions or the

inherent imprecision of these reserve estimates, that the estimates of future

cash inflows, future gross revenues, the amount of oil and gas reserves, the

remaining estimated lives of the oil and gas properties, or any combination of

the above may be increased or reduced in the near term.

If reduced, the carrying amount of capitalized oil and gas properties may be

reduced materially in the near term.

17

<PAGE>

<TABLE>

<CAPTION>

CUBIC ENERGY, INC.

NOTES TO FINANCIAL STATEMENTS

The following unaudited table sets forth proved oil and gas reserves, all

within the United States, at June 30, 2005, 2004 and 2003 together with the

changes therein:

Natural Gas (Mcf)

--------------------------------

2005 2004 2003

-------- -------- --------

<S> <C> <C> <C>

Proved developed and undeveloped reserves:

Beginning of year 311,098 330,000 564,272

Revisions of previous estimates -- 52,902 (161,184)

Purchases of reserves in place 269,308 -- --

Extensions and discoveries -- -- --

Production (70,781) (71,804) (73,088)

Disposals of reserves in place -- -- --

-------- -------- --------

End of year 509,625 311,098 330,000
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======== ======== ========

Oil and condensate (Bbls)

--------------------------------

2005 2004 2003

-------- -------- --------

Proved developed and undeveloped reserves:

Beginning of year -- -- --

Revisions of previous estimates 1,194 -- --

Purchases of reserves in place 14 -- --

Extensions and discoveries 346 -- --

Production (506) -- --

Disposals of reserves in place -- -- --

-------- -------- --------

End of year 1,048 -- --

======== ======== ========

</TABLE>

Standardized measure of discounted future net cash flows relating to proved

reserves

--------------------------------------------------------------------------------

The standardized measure of discounted future net cash flows was calculated

by applying current year-end prices, considering fixed and determinable price

changes only to the extent provided by contractual arrangements or law, to

estimated future production, less future expenditures (based on current costs)

to be incurred in developing proved undeveloped and proved producing oil and gas

reserves, and future income taxes. The resulting future net cash flows were

discounted using a rate of 10 percent per annum (Table 1). The standardized

measure of discounted net cash flow amounts contained in the following

tabulation does not purport to represent the fair market value of the Company's

oil and gas proved by drilling or production history. There are significant

uncertainties inherent in estimating timing and amount of future costs. In

addition, the method of valuation utilized, is based on current prices and costs

and the use of 10 percent discount rate, and is not necessarily appropriate for

determining fair value (Table 2).

18

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<TABLE>

<CAPTION>

CUBIC ENERGY, INC.

NOTES TO FINANCIAL STATEMENTS

Standardized measure of discounted future net cash flows relating to proved

reserves (continued):
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--------------------------------------------------------------------------------

The following is the estimated standardized measure relating to proved oil

and gas reserves at June 30, 2005, 2004 and 2003:

Table 1 2005 2004

2003

------- ----------- ----------- -----

------

<S> <C> <C> <C>

Future cash flows $ 3,443,400 $ 2,059,245 $

1,893,067

Future production costs (1,303,300) (833,306)

(564,669)

Future development costs (23,900) --

--

Future severance tax expense (213,900) (250,473)

(230,251)

Future income taxes --

----------- ----------- -----

------

Future net cash flows $ 1,902,300 $ 975,466 $

1,098,147

Ten percent annual discount for estimated

timing of net cash flows (831,200) (243,553)

(299,766)

----------- ----------- -----

------

Standardized measure of

discounted future net cash flows $ 1,071,100 $ 731,913 $

798,381

=========== ===========

===========

Following is an analysis of changes in the estimated standardized measure of

proved reserves during the years ended June 30, 2005, 2004 and 2003:

Table 2 2005 2004

2003

----------- ----------- -----

------

Changes from:

Sale of oil and gas produced $ (196,368) $ (123,541) $

(114,795)

Net changes in prices and production costs (165,199) (43,462)

296,479

Extensions and discoveries 493,500 --

--
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Revision of previous quantity estimates (42,290) 122,601

(260,268)

Accretion of discounts 73,191 103,681

107,926

Net change in income taxes -- (33,565)

23,487

Purchases of reserves in place 197,300 --

--

Disposals of reserves in place -- --

--

Other (20,947) (92,182)

87,882

----------- ----------- -----

------

Change in standardized measure $ 339,187 $ (66,468) $

140,711

=========== ===========

===========

</TABLE>

19

<PAGE>

CUBIC ENERGY, INC.

NOTES TO FINANCIAL STATEMENTS

Note J - Proforma information related to stock warrants:

The per share weighted-average fair value of stock warrants granted during

the year ended June 30, 2002, was $0.29, on the date of grant, using the

Black-Scholes pricing model. There were no stock warrants granted during the

years ended June 30, 2005, 2004 and 2003.

2002

---------

Expected dividend yield 0.00%

Risk-free interest rate 1.80%

Expected life 1.7 years

Expected volatility 133.00%

The Company applies APB Opinion No. 25 in accounting for its stock warrants

issued to employees and directors, and, accordingly, has recognized no

compensation expense for stock warrants and options granted at exercise prices

at least equal to the market value of the Company's common stock. Had the
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Company determined compensation cost based on the fair value at the grant date

for its stock options under SFAS No. 123, the Company's net income and earnings

per share would have been reduced to the proforma amounts indicated below:

2005 2004 2003

---------- ---------- ---------

Net loss:

As reported $ (784,526) $ (114,116) $(217,121)

========== ========== =========

Proforma $ (802,026) $ (149,580) $(272,434)

========== ========== =========

Stock-based employee compensation:

As reported $ -- $ -- $ --

========== ========== =========

Proforma $ 17,500 $ 35,464 $ 55,313

========== ========== =========

Basic loss per common share:

As reported $ (0.02) $ (0.00) $ (0.01)

========== ========== =========

Proforma $ (0.02) $ (0.00) $ (0.01)

========== ========== =========

20

</TEXT>

</DOCUMENT>