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** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-K**

 

**ANNUAL REPORT**

**PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**FOR THE FISCAL YEAR ENDEDJUNE 30, 2008**

**COMMISSION FILE NUMBER0-9355**

 

**CUBIC ENERGY, INC.**

(ExactName of Registrant as Specified in itsCharter)

 

| **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**

(Registrant’s Telephone Number)

 

Securities registered pursuant toSection 12(b) of the Act:

 

| **Title of Class**  | ** ** | **Name of Exchange on Which Registered** |
|-------------------------------|------------|-------------------------------------------------------------------|
| Common Stock, $0.05 par value |       | The American Stock Exchange                                       |

 

Securities registered under Section 12(g) ofthe Exchange Act: **None**

 

Indicate by check mark if registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes o   No x

 

Indicate by check mark if registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o   No x

 

Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes x   No o

 

Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K is not containedherein and will not be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in Part IIIof this Form 10-K or any amendment to this Form 10-K. x

 

Indicate by check mark whether theregistrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definition of “largeaccelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act. Check one:

 
| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer o |   | Smaller reporting company x |
|---------------------------|--------|---------------------|--------|-------------------------|--------|-----------------------------|

 

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

 

Based upon the closing sales price on theOver-The-Counter Bulletin Board on December 31, 2007, the last businessday of the registrant’s most recently completed second fiscal quarter, theaggregate market value of common stock, par value $0.05 per share, held bynon-affiliates, was $41,668,810. As of September 1, 2008, the registranthad outstanding 60,335,564 shares of common stock, which is the Registrant’sonly class of common stock.

 

DOCUMENTS INCORPORATED BY REFERENCE: None.

 

 

 

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**SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATIONREFORM ACT OF 1995**

 

Thisreport contains “forward-looking statements” within the meaning ofSection 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended (the“Exchange Act”). Such forward-looking statements are based on currentexpectations that involve a number of risks and uncertainties that could causeactual results to differ materially from the results discussed in theforward-looking statements. Generally, forward-looking statements include wordsor phrases such as “management anticipates,” “the Company believes,” “the Companyanticipates,” and words and phrases of similar impact. The forward-lookingstatements are made pursuant to safe harbor provisions of the PrivateSecurities Litigation Reform Act of 1995. The factors that could cause actualresults to differ materially from the forward-looking statements include, butare not limited to: (i) industry conditions and competition, (ii) thecyclical nature of the industry, (iii) domestic and worldwide supplies anddemand for oil and gas, (iv) operational risks and insurance, (v) environmentalliabilities which may arise in the future which are not covered by insurance orindemnity, (vi) the impact of current and future laws and governmentregulations, as well as repeal or modification of same, affecting the oil andgas industry and our operations in particular, (vii) production levels andother activities of OPEC and other oil and gas producers, and the impact thatthe above factors and other events have on the current and expected futurepricing of oil and natural gas, and (viii) the risks described from timeto time in our reports filed with the Securities and Exchange Commission.

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**AVAILABILITY OF INFORMATION**

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**We file periodic reports and proxy statements with theSecurities and Exchange Commission (the “SEC”). The public may read and copyany materials we file with the SEC at the SEC’s Public Reference Room at100 F Street N.E., Washington, D.C. 20549. The public may obtain informationabout the operation of the Public Reference Room by calling the SEC at1-800-SEC-0330. We file our reports with the SEC electronically. The SECmaintains a website at www.sec.gov that contains reports, proxy and informationstatements, and other information regarding Cubic Energy, Inc. and othercompanies that file electronically with the SEC.**

** **

**Our website address is www.cubicenergyinc.com. We makeavailable on our website free of charge copies of our annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K andamendments to those reports filed or furnished pursuant to Section 13(a) ofthe Exchange Act as soon as reasonably possible after we electronically file orfurnish such material with the SEC.**

 

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**CUBICENERGY, INC.**

 

**TABLE OF CONTENTS**

 
|              |                                                                                                                 | **Page** |
|-------------------|----------------------------------------------------------------------------------------------------------------------|----------|
| **PART I**   |                                                                                                                 |     |
| Item 1.      | Business                                                                                                             | 1        |
| Item 1A.     | Risk Factors                                                                                                         | 16       |
| Item 1B.     | Unresolved  Staff Comments                                                                                           | 25       |
| Item 2.      | Properties                                                                                                           | 25       |
| Item 3.      | Legal Proceedings                                                                                                    | 25       |
| Item 4.      | Submission  of Matters to a Vote of Security Holders                                                                 | 25       |
|              |                                                                                                                 |     |
| **PART II**  |                                                                                                                 |     |
| Item 5.           | Market for  Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases  of Equity Securities | 26       |
| Item 6.           | Selected  Financial Data                                                                                             | 30       |
| Item 7.      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                          | 31       |
| Item 7A.          | Quantitative  and Qualitative Disclosures About Market Risk                                                          | 41       |
| Item 8.      | Financial  Statements and Supplementary Data                                                                         | 41       |
| Item 9.      | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                                | 41       |
| Item 9A.          | Controls and  Procedures                                                                                             | 41       |
| Item 9B.          | Other Information                                                                                                    | 43       |
|              |                                                                                                                 |     |
| **PART III** |                                                                                                                 |     |
| Item 10.          | Directors,  Executive Officers and Corporate Governance                                                              | 44       |
| Item 11.     | Executive  Compensation                                                                                              | 46       |
| Item 12.     | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                     | 53       |
| Item 13.     | Certain  Relationships and Related Transactions, and Director Independence                                           | 54       |
| Item 14.     | Principal  Accountant Fees and Services                                                                              | 55       |
|              |                                                                                                                 |     |
| **PART IV**  |                                                                                                                 |     |
| Item 15.     | Exhibits  and Financial Statement Schedules                                                                          | 57       |

 

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**PART I**

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**Item 1.    Business.**

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**GENERAL**

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Cubic Energy, Inc.(referred to as “Cubic”, “we”, “our, “us” or the “Company”) is an independentenergy company engaged in the development and production of, and explorationfor, crude oil, natural gas and natural gas liquids. Our oil and gas assets areconcentrated principally in Texas and Louisiana. At June 30, 2008, ourtotal proved reserves were 6,623,417 Mcfe.

 

Ourpredecessor was incorporated in October 1978. Cubic was incorporated in1999 in the State of Texas. Our principal executive office is located at 9870Plano 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 whichthe Company issued 12,500,000 shares of our common stock in exchange for theconveyance to the Company of certain oil and gas properties by Calvin A. Wallen, IIIand his affiliates. In connection with the Agreement, three of the five membersof the Board of Directors resigned and new directors were appointed, including Mr. Wallen,who also became President and CEO of the Company.

 

**DESCRIPTION OFBUSINESS**

 

Prior to theAgreement, we focused primarily on the acquisition of non-operated workinginterests and overriding royalty interests in oil and gas properties.Subsequent to the Agreement in December 1997, we moved our headquartersfrom Tulsa, Oklahoma to Garland, Texas in order to utilize an affiliate’sassembled team of experienced management whose substantial expertise lay inacquisition, exploitation and development and the ability to manage bothoperated and non-operated oil and gas properties. Current management believesthat the ability to operate the vast majority of our own properties, throughthis affiliate, will result in significant cost savings to the Company. Inaddition, after reviewing our existing property portfolio and refining our newbusiness strategy, the management team initiated a divestment strategy todispose of our non-strategic assets in non-core areas in order to concentrateon building core reserves. Pursuant to this strategy, we have acquiredadditional properties in our core areas, primarily in Louisiana, as well asestablishing a drilling program for the drilling of exploratory, development andinfill wells, a strategy previously unavailable to us due to the technicalexpertise and experience required and the lack of available resources. We havemade substantial progress in redirecting our strategic business efforts andbelieve that attractive opportunities remain for acquisition and development ofour remaining and future assets.

 

On or about October 1, 2004, we closed aSecurities 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. TheDebentures were secured by the collateral set forth in the Deed of Trust,Security Agreement, Assignment of Production and Fixture Filing attached to ourForm 8-K filed October 12, 2004. The Debentures paid an annualinterest rate of 7% on a quarterly basis and were convertible into shares ofour common stock at a price of $0.50 per share. We had the option to pay theinterest on the Debentures in common stock. The investors also receivedwarrants to purchase an additional 2,635,000 shares of common stock with anexercise price of $1.00 per share. All of the above-referenced warrants hadbeen exercised at June 30, 2008. The proceeds of the Debentures were usedprimarily for the acquisition of interests in oil and gas properties. TheDebentures were retired on February 6, 2006, as set forth below.

 

On or about January 11,2005, we issued 1,531,661 shares of common stock to Caravel Resources EnergyFund 2003-II, L.P. (the “Partnership”) in exchange for a 0.1914575033 workinginterest 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 

 

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of commonstock to Mr. Wallen in exchange for a 0.0585424967 working interest in theWell. The common stock closed at a price of $0.90 on January 10, 2005.

 

On December 16,2005, the Company entered into a Securities Purchase Agreement and issued2,500,000 common shares at a price of $0.80 per share and issued warrants, withfive year expirations, for the purchase of up to 1,000,000 shares of Companycommon stock at an exercise price of $1.00 per share. The proceeds of theoffering were used for exploratory drilling and working capital.

 

OnFebruary 6, 2006, Cubic entered into a Credit Agreement with Petro CapitalV, L.P. (“Petro Capital”) pursuant to which Petro Capital advanced to theCompany $5,500,000. The indebtedness bore interest at a rate of 12.5% perannum, was to mature on February 6, 2009 and was secured by substantiallyall of the assets of the Company. Approximately $1,800,000 of the funded amountwas used to retire the Debentures described above. In connection with thefunding under the Credit Agreement, the Company issued to Petro Capital andPetro Capital Securities, LLC, warrants, with five-year expirations, for thepurchase of up to 1,833,334 and 250,000 shares, respectively, of Company commonstock at an exercise price of $1.00 per share. Pursuant to the anti-dilution adjustmentprovisions applicable to such warrants, the exercise price applicable to283,334 of such warrants held by Petro Capital and 250,000 of suchwarrants held by Petro Capital Securities, LLC that had not been exercised asof June 30, 2008 is currently $0.9758 per share. The senior debt held byPetro Capital was retired on March 5, 2007, with proceeds from a newsenior debt issue, as set forth below.

 

Concurrently,on February 6, 2006, the Company entered into a Purchase Agreement withTauren Exploration, Inc. (“Tauren”), an entity wholly owned by Calvin A.Wallen III, the Company’s Chairman of the Board and Chief Executive Officer,with respect to the purchase by the Company of certain Cotton Valley leaseholdinterests (approximately 11,000 gross acres; 5,000 net acres) held by Tauren.Pursuant to the Purchase Agreement, the Company acquired from Tauren a 35%working interest in approximately 2,400 acres and a 49% working interest inapproximately 8,500 acres located in DeSoto and Caddo Parishes, Louisiana,along with an associated Area of Mutual Interest (“AMI”) and the right toacquire at “cost” (as defined in the Purchase Agreement) a working interest inall additional mineral leases obtained by Tauren in the AMI, in exchange for (a) $3,500,000in cash, (b) 2,500,000 unregistered shares of Company common stock, (c) anunsecured 12.5% short-term promissory note in the amount of $1,300,000, whichnote was convertible into Company common stock at a conversion price of $0.80per share (the “Tauren Note”), and (d) a drilling credit of $2,100,000.

 

On July 28,2006, Cubic entered into and consummated transactions pursuant to Subscriptionand Registration Rights Agreements (the “July 2006 SubscriptionAgreements”) with certain investors that are unaffiliated with the Company (the“Investors”). Pursuant to the July 2006 Subscription Agreements, theInvestors paid aggregate consideration of $2,100,000 to the Company for3,000,000 shares of the Company’s common stock and warrants, exercisablethrough July 31, 2011, into 1,500,000 shares of common stock at $0.70 pershare. Pursuantto the anti-dilution adjustment provisions applicable to such warrants, theexercise price applicable to 1,500,000 of such warrants that had notbeen exercised as of June 30, 2008 is currently $0.6885 per share. Inaddition to reimbursement of certain expenses incurred in connection with thisoffering, the Company agreed to pay 2% of the aggregate consideration, in cash,plus 150,000 shares of common stock valued at $0.70 per share, to a placementagent.

 

OnDecember 15, 2006, the Company entered into Subscription and RegistrationsRights Agreements (the “December 2006 Subscription Agreements”) withcertain investors. One of the investors, William Bruggeman (and entitiesaffiliated with him), was the beneficial owner, prior to this transaction, ofapproximately 23.0% of the common stock of the Company. Another investor, BobClements, is a director of the Company. The remaining investors had no materialrelationship with the Company. Pursuant to the December 2006 SubscriptionAgreements, the investors paid aggregate consideration of $3,940,000 to theCompany for 7,880,000 shares of the Company’s common stock and warrantsexercisable into 3,940,000 shares of common stock. The warrants are exercisablethrough November 30, 2011, at $0.70 per share.

 

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OnMarch 5, 2007, Cubic entered into a Credit Agreement with Wells FargoEnergy Capital, Inc. (“Wells Fargo”) providing for a revolving creditfacility of $20,000,000 (the “Revolving Note”) and a convertible term loan of$5,000,000 (the “Term Loan”; and together with the Revolving Note, the “CreditFacility”). The indebtedness bears interest at a fluctuating rate equal to thesum of the Wells Fargo Bank prime rate plus two percent (2%) per annum, matureson March 1, 2010, and is secured by substantially all of the assets of theCompany. Approximately $5,000,000 of the funded amount was used, together withcash on hand, to retire the Company’s previously outstanding senior debt thatwas due February 6, 2009, described above.

 

TheTerm Loan of $5,000,000 is convertible into 5,000,000 shares of Cubic commonstock at a conversion price of $1.00 per share. The Revolving Note is subjectto a borrowing base (the “Borrowing Base”), initially set at $4,000,000, and issubject to periodic review. On July 27, 2007, Wells Fargo increased theCompany’s Borrowing Base to $6,600,000 in order to fund the drilling and casingcosts of two new wells in the Company’s Johnson Branch acreage in Caddo Parish,Louisiana. On September 7, 2007, Wells Fargo increased the Company’sBorrowing Base to $8,600,000 in order to fund the remaining drilling and casingcosts of five wells drilled since the beginning of fiscal 2008, the drillingand casing costs of two new wells, and the costs of installing agathering/sales line and associated equipment in the Company’s Johnson Branchacreage. On November 19, 2007, Wells Fargo increased the Company’sBorrowing Base to $14,500,000 in order to fund the completion costs and casingof eight wells already successfully drilled and the drilling of four additionalwells located in the Company’s Johnson Branch acreage. On May 8, 2008,Wells Fargo increased the Company’s Borrowing Base to $20,000,000 in order tofund the completion costs and casing of the four recently-drilled wells locatedin the Company’s Johnson Branch acreage (including two vertical wells drilledinto the Bossier/Haynesville shales) and the drilling of two additional wellslocated in the Company’s Bethany Longstreet acreage in Caddo and DeSotoParishes.

 

The terms of the CreditFacility, among other things, prohibit the Company from merging with anothercompany or paying dividends, and limit additional indebtedness, sales ofcertain assets and investments. Upon the repayment in full of the CreditFacility, and with respect to certain properties, upon the occurrence of theconditions set forth in Section 2.14 of the Credit Agreement, the Companyagreed to convey a net profits interest to Wells Fargo in an amount equal to 5%of Cubic’s net interest in certain of its Louisiana properties.

 

On May 6,2008, the Company issued a subordinated promissory note in the amount of$2,000,000 (the “Subordinated Note”) to Diversified Dynamics Corporation (the“Lender”), an entity controlled by William Bruggeman who beneficially owns morethan 5% of the common stock of the Company. The Subordinated Note bearsinterest at a fluctuating rate equal to the sum of the prime rate plus twopercent (2%) per annum, and matures on April 30, 2010. As considerationfor the loan made by the Lender pursuant to the Subordinated Note, the Companyagreed to convey to the Lender, upon the repayment in full of the indebtednessevidenced by the Subordinated Note and the repayment in full of the seniorindebtedness evidenced by the Credit Facility with Wells Fargo, an undivided0.375% (0.375 of one percent) net profits interest in the future production ofhydrocarbons from or attributable to Cubic’s net interest in its Louisianaproperties. The proceeds of the Subordinated Note are being used for generalcorporate and working capital purposes.

 

Issuing theSubordinated Note required the consent of the holder of the Company’s seniorindebtedness, Wells Fargo, which consent it granted on May 5, 2008.Subsequently, on May 8, 2008, the Credit Facility with Wells Fargo wasamended by the First Amendment to the Credit Agreement (the “First Amendment”).Material provisions of the First Amendment included the following: (i) theCompany may not prepay all or any part of the principal balance outstanding onthe Term Loan prior to its maturity on March 1, 2010; and (ii) the amountof the Borrowing Base was increased to $20,000,000, which amount was fullydrawn upon, subsequent to the end of fiscal 2008, on August 20, 2008.

 

The shares ofcommon stock and warrants described in the aforementioned transactions wereissued by the Company in reliance upon an exemption from registration set forthin Regulation D and/or Section 4(2) of the Securities Act of 1933, asamended, which exempts transactions by an issuer not involving a publicoffering.

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**PRINCIPALOIL AND GAS PROPERTIES**

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The followingtable summarizes certain information with respect to our principal areas ofoperation at June 30, 2008:

 
| ** ** | ** ** | **Proved Reserves**        | ** ** | ** ** | ** ** | ** **         | ** ** |
|------------|------------|---------------------------------|------------|------------|------------|--------------------|------------|
| ** ** | ** ** | **Oil & Natural** | ** ** | ** ** | ** ** | **Total Gas** | ** ** | **Percent** | ** ** | **Present Value** | ** ** |
| ** ** | ** ** | **Gas Liquids**            | ** ** | **Gas**    | ** ** | **Equivalent**     | ** ** | **of Proved** | ** ** | **(Discounted** | ** ** |
| **Area**   | ** ** | **(Bbls)**                      | ** ** | **(Mcf)**  | ** ** | **(Mcfe)**         | ** ** | **Reserves** | ** ** | **@ 10%)** | ** ** |
| Louisiana  |       | 88,756                          |       | 5,980,119  |       | 6,512,655          |       | 98.3 | % | $ | 32,698,257 |   |
| Texas      |       | 192                             |       | 109,610    |       | 110,762            |       | 1.7 | % | 412,399 |   |
| Total      |       | 88,948                          |       | 6,089,729  |       | 6,623,417          |       | 100.0 | % | $ | 33,110,656 |   |

 

Our Texasproperties are situated in Palo Pinto, Eastland and Callahan Counties. OurLouisiana properties are situated in Caddo Parish and in DeSoto Parish. At June 30,2008, the Louisiana properties contained the vast majority of our provedreserves, a situation that is expected to continue. The Texas propertiesconsist primarily of wells acquired by the Company in several transactionsbetween 1991 and 2002 and through overriding royalty interests reserved infarm-out agreements in 1998 and 1999. The vast majority of the Louisianaproperties were acquired on or about October 1, 2004, January 11,2005 and February 6, 2006.

 

Our netproduction for the fiscal year ended June 30, 2008 for all of the Companywells averaged approximately 624 Mcf of natural gas per day, 5 barrels of oilper day and 122 gallons of natural gas liquids per day as compared toapproximately 193 Mcf of natural gas per day, 3 barrels of oil per day and zerogallons of natural gas liquids per day in the fiscal year ended June 30,2007.

 

**EXPLORATIONACTIVITIES**

** **

Our strategywith respect to our domestic exploration program seeks to maintain a balancedportfolio of drilling opportunities that range from lower risk, field extensionwells to higher risk, high reserve potential prospects. Our focus is primarilyon exploration opportunities that can benefit from advanced technologies,including 3-D seismic, designed to reduce risks and increase success rates. Wedevelop prospects in-house with an affiliate and through strategic allianceswith exploration companies that have expertise in specific target areas. Inaddition, we evaluate some externally generated prospects and plan toparticipate in some of these opportunities to enhance our portfolio.

 

We arecurrently focusing our domestic exploration activities to develop ourundeveloped leasehold opportunities in Louisiana and Texas. Currently we haveexploration opportunities and seek to acquire additional leasehold interests inCaddo and DeSoto Parishes in Louisiana, and in Palo Pinto, Callahan andEastland Counties in Texas.  These areasare a part of geologic studies utilizing regional trend surface analysis, 2-Dand 3-D seismic data, AVO analysis and/or vast sub-surface control. Prospectshave been developed from approximately 4,000 to 12,000 feet in depth in the:Bossier/Haynesville shales; Cotton Valley, Hosston, Gloyd, Pettet, Paluxy, andStrawn sandstones; Bend conglomerate; and Caddo limestone.

 

**RECENT DEVELOPMENTS**

 

Near the endof fiscal 2007, utilizing funds provided under the Credit Facility with WellsFargo, we began accelerating our drilling pace. To illustrate, while we drilledthree wells in fiscal 2007, we drilled 12 wells to total depth, began thedrilling of a thirteenth well and completed 10 wells for production duringfiscal 2008. Since the end of fiscal 2008, we have drilled our fourth and fifthwells into the Bossier/Haynesville shales, and 

 

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completedfour wells for production that reached total depth in fiscal 2008, includingthe Hudson 10-1 and the Daniels 3-1, which were drilled into theBossier/Haynesville shales.

 

On September 25,2007, the Company announced the results of three new wells delineating largeimpact reserves in the Cotton Valley interval. Preliminary log analysis,performed by an independent reservoir engineer, for the three wells drilled inCubic’s Johnson Branch acreage (T15N, R15W) of Caddo Parish, Louisiana,determined the following results: a) the Tabor 4-1 well drilled to a totaldepth of 10,550’ and logged 163 feet of net pay in the Cotton Valley betweendepths of 8,901’-9,798’; b) the McDonnell 8-1 well drilled to a total depth of10,500’ and logged 142 feet of net pay in the Cotton Valley between depths of8,907’-9,803’; and c) the Luttrell 7-1 well drilled to a total depth of 10,522’and logged 113 feet of net pay in the Cotton Valley between depths of8,880’-9,648’. The aggregate net pay thickness in the three wells is 418 feet.In addition, Cubic is carefully analyzing Hosston intervals found in these newwells.

 

DuringJanuary 2008, the Company completed and brought online for production sixpreviously drilled wells and reached total drilling depth on two new wells inthe Company’s Johnson Branch acreage. On January 30, 2008, the Companyannounced that one of these two new wells, the Hudson 10-1, was control flowdrilled through the Bossier/Haynesville shales to a total depth of 11,650 feet,and that third-party mud logs showed a 1,100 foot interval of shale gas in theHudson 10-1 well. During February 2008, the Company completed and broughtonline for production the two new wells drilled in the Company’s Johnson Branchacreage during January 2008.

 

Subsequentto the end of the fiscal year ended June 30, 2008, during July andAugust, 2008, the Company completed for production four wells in its JohnsonBranch acreage, two of which were completed in the Bossier/Haynesville shales,bringing the Company’s number of producing wells in Louisiana to 20. Also, sincethe end of fiscal 2008, Cubic has drilled two wells, the Estes 7-1 and the RedOak Timber 5-1 (our fourth and fifth wells to be drilled into theBossier/Haynesville shales), to total depth of approximately 11,950 feet intothe Bossier/Haynesville shales in its Bethany Longstreet acreage. Cubic has a35% working interest in both wells. The Estes 7-1 was drilled using a casingprogram with 7 5/8” pipe for the intermediate string, which will allow theCompany to drill horizontally into the Bossier/Haynesville shales at a laterdate, after being vertically completed initially in the Cotton Valleyformation.

 

As of September 1,2008, the Company had successfully drilled 22 wells in northwest Louisiana with20 having been completed as producers of hydrocarbons; the two other wells areawaiting completion. As of such date, 10 Johnson Branch wells have beencompleted as hydrocarbon producers in the Cotton Valley sandstones and two intothe Bossier/Haynesville shales. Cubic has a 49% working interest in its JohnsonBranch acreage. Seven miles to the South, in its Bethany Longstreet acreage,Cubic has eight wells producing from the Cotton Valley and Hosston formations.Cubic has a 25% working interest in seven of these producing wells, and a 35%working interest in the Estes 8-1 well. Work is ongoing at the BethanyLongstreet and Johnson Branch wells to increase the average daily productionfrom these areas. We also anticipate that we will complete and fracturestimulate additional zones of certain Johnson Branch wells.

 

Cubichas developed its infrastructure in Johnson Branch with approximately 16 milesof gathering lines and pipeline constructed for its currently producing wellsand any further completions. In addition, a Johnson Branch tap, common pointand compression facility were completed in November 2007 and are currentlyoperational. The Company also owns two taps in its Bethany Longstreet acreage.

 

Recentincreased oil and natural gas drilling activity in East Texas and NorthwestLouisiana has resulted in increased demand for drilling rigs and other oilfieldequipment and services. At various times, we have and may continue toexperience occasional or prolonged shortages or unavailability of drillingrigs, drill pipe and other material used in oil and gas drilling andcompleting. Such unavailability could result in increased costs, delays intiming of anticipated development or cause interests in undeveloped oil andnatural gas leases to lapse.

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**MARKETINGOF PRODUCTION**

 

**CrudeOil and Natural Gas**

 

Ourproduction consists mainly of natural gas. We market our operated production ofnatural gas to three purchasers (i) in Texas, Enbridge G & P, LP,and (ii) in Louisiana, EROC Gathering Company, LP and NGTS, LP. In fiscal2007, we also marketed our production of natural gas, in Louisiana, to CrosstexGulf Coast Marketing, Ltd., but no longer do so. We sell our crude oil andcondensate production at or near the well-site, although in some cases it isgathered by us or others and delivered to a central point of sale. Our crudeoil and condensate production is transported by truck or by pipeline and istypically committed to arrangements having a term of one year or less. We havenot engaged in crude oil hedging or trading activities. We utilize short-termgas contracts with prices that are related to market conditions in varyingdegrees and have not engaged in natural gas hedging or futures trading.

 

We believe wewould be able to locate alternate purchasers in the event of the loss of anyone of these purchasers, and that any such loss would not have a materialadverse effect on our financial condition or results of operations. Revenuefrom the sale of natural gas totaled $2,056,519 for fiscal 2008 and represented89% of our total oil and gas revenues for that fiscal year.

 

**Price Considerations**

 

Crude oilprices are established in a highly liquid, international market, with averagecrude oil prices that we receive generally fluctuating with changes in thefutures price established on the NYMEX for West Texas Intermediate Crude Oil(“NYMEX-WTI”). The average crude oil price per Bbl received by us in fiscal2008 was $102.17 as compared to $61.68 in fiscal 2007.

 

Natural gasand natural gas liquids prices in the geographical areas in which we operateare closely tied to established price indices which are heavily influenced bynational and regional supply and demand factors and the futures price per MMBtufor natural gas delivered at Henry Hub, Louisiana established on the NYMEX(“NYMEX-Henry Hub”). At times, these indices correlate closely with theNYMEX-Henry Hub price, but often there are significant variances between theNYMEX-Henry Hub price and the indices used to price our natural gas. Averagenatural gas prices received by us in each of our operating areas generallyfluctuate with changes in these established indices. The average natural gasprice per Mcf received by us in fiscal 2008 was $9.01 as compared to $7.44 infiscal 2007. The average natural gas liquids price per gallon received by us infiscal 2008 was $1.66; we produced no natural gas liquids volumes in fiscal2007.

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**OILAND GAS RESERVES**

** **

The followingtables set forth the proved developed, proved non-producing and provedundeveloped reserves at June 30, 2008, the estimated future net cash flowsfrom such proved reserves and the Standardized Measure of Discounted Future NetCash Flows attributable to our reserves at June 30, 2008, 2007 and 2006:

 
| ** **                | ** ** | **Oil & Natural** | ** ** | ** ** | ** ** | **Total Gas** | ** ** | **Estimated**       | ** ** | ** **   | ** ** |
|---------------------------|------------|---------------------------------|------------|------------|------------|--------------------|------------|---------------------|------------|--------------|------------|
| ** **                | ** ** | **Gas Liquids**            | ** ** | **Gas**    | ** ** | **Equivalent**     | ** ** | **Future Net** | ** ** | **10%**      | ** ** |
| **Category**              | ** ** | **(Bbls)**                      | ** ** | **(Mcf)**  | ** ** | **(Mcfe)**         | ** ** | **Cash Flows** | ** ** | **Discount** | ** ** |
| Proved Producing          |       | 7,604                           |       | 527,691    |       | 573,315            |       | $                   | 4,440,000  |         | $          | 3,592,292 |   |
| Proved Non-Producing      |       | 16,041                          |       | 491,585    |       | 587,831            |       | 4,970,338           |       | 4,319,269    |       |
| Proved Developed Reserves |       | 23,645                          |       | 1,019,276  |       | 1,161,146          |       | $                   | 9,410,338  |         | $          | 7,911,561 |   |
| Proved Undeveloped        |       | 65,303                          |       | 5,070,453  |       | 5,462,271          |       | 37,656,434          |       | 25,199,095   |       |
| Total Proved Reserves     |       | 88,948                          |       | 6,089,729  |       | 6,623,417          |       | $                   | 47,066,772 |         | $          | 33,110,656 |   |

 
| ** **                                           | ** ** | **At June 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------|------------|
| ** **                                           | ** ** | **2008**                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Proved Developed Reserves:**                       |       |                      |       |   |   |   |   |
| Oil & Natural Gas Liquids (Bbls)            |       | 23,645                    |       | 3,062 |   | 2,893 |   |
| Gas (Mcf)                                            |       | 1,019,276                 |       | 1,037,238 |   | 807,057 |   |
| Mcfe                                                 |       | 1,161,146                 |       | 1,055,610 |   | 824,415 |   |
| Estimated future net cash flows (before  income tax) |       | $                         | 9,410,338  |   | $ | 4,694,571 |   | $ | 2,841,088 |   |
| Standardized Measure (1)                             |       | $                         | 7,911,561  |   | $ | 3,704,011 |   | $ | 2,343,348 |   |
|                                                 |       |                      |       |   |   |   |   |
| **Proved Undeveloped Reserves:**                     |       |                      |       |   |   |   |   |
| Oil & Natural Gas Liquids (Bbls)            |       | 65,303                    |       | 9,768 |   | 5,970 |   |
| Gas (Mcf)                                            |       | 5,070,453                 |       | 3,204,813 |   | 1,989,843 |   |
| Mcfe                                                 |       | 5,462,271                 |       | 3,263,421 |   | 2,025,663 |   |
| Estimated future net cash flows (before  income tax) |       | $                         | 37,656,434 |   | $ | 6,926,991 |   | $ | 6,050,495 |   |
| Standardized Measure (1)                             |       | $                         | 25,199,095 |   | $ | 3,125,699 |   | $ | 4,104,037 |   |
|                                                 |       |                      |       |   |   |   |   |
| **Total Proved Reserves:**                           |       |                      |       |   |   |   |   |
| Oil & Natural Gas Liquids (Bbls)            |       | 88,948                    |       | 12,830 |   | 8,863 |   |
| Gas (Mcf)                                            |       | 6,089,729                 |       | 4,242,051 |   | 2,796,900 |   |
| Mcfe                                                 |       | 6,623,417                 |       | 4,319,031 |   | 2,850,078 |   |
| Estimated future net cash flows (before  income tax) |       | $                         | 47,066,772 |   | $ | 11,621,562 |   | $ | 8,891,583 |   |
| Standardized Measure (1)                             |       | $                         | 33,110,656 |   | $ | 6,829,710 |   | $ | 6,447,385 |   |
|                                                 |       |                      |       |   |   |   |   |
| **Average price used to calculate reserves:**        |       |                      |       |   |   |   |   |
| Oil (per Bbl)                                        |       | $                         | 138.80     |   | $ | 64.46 |   | $ | 70.09 |   |
| Natural Gas Liquids (per Bbl)                        |       | $                         | 93.86      |   | n/a |   | n/a |   |
| Gas (per Mcf)                                        |       | $                         | 14.10      |   | $ | 7.06 |   | $ | 5.55 |   |

 

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*(1)**                              *The Standardized Measure of Discounted Future Net Cash Flowsprepared by the Company represents the present value (using an annual discountrate of 10%) of estimated future net cash flows from the production of provedreserves, after giving effect to income taxes. See “Note J - Oil and gasreserves information (unaudited)” in the Notes to the Financial Statements ofthe Company included elsewhere in this Report for additional informationregarding the disclosure of the Standardized Measure information in accordancewith the provisions of Statement of Financial Accounting Standards (“FAS”) No. 69(“FAS No. 69”), *“Disclosures about Oil andGas Producing Activities.”*

 

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Theinformation set forth in this Report relating to our proved reserves, estimatedfuture net cash flows and Present Values is taken from reports prepared by theDallas office of RPS Scotia, Inc., an independent, petroleum engineeringfirm, for fiscal years 2008, 2007 and 2006. The estimates of this independentpetroleum engineering firm were based upon review of production histories andother geological, economic, ownership and engineering data provided by theCompany. Information with respect to approximately 2% of the total provedreserves as of June 30, 2008, was prepared in-house and was not reviewedby an independent engineering firm. No reports on our reserves have been filedwith any federal agency. In accordance with guidelines of the SEC, ourestimates of proved reserves and the future net revenues from which presentvalues are derived are made using year end oil and gas sales prices heldconstant throughout the life of the properties (except to the extent a contractspecifically provides otherwise). Operating costs, development costs andcertain production-related taxes were deducted in arriving at estimated futurenet cash flows, but such costs do not include debt service or general andadministrative expenses.

 

There arenumerous uncertainties inherent in estimating oil and gas reserves and theirvalues, including many factors beyond our control. The reserve data set forthin this Report represents estimates only. Reservoir engineering is a subjectiveprocess of estimating the sizes of underground accumulations of oil and gasthat cannot be measured in an exact manner. The accuracy of any reserveestimate is a function of the quality of available data, engineering andgeological interpretation, and judgment. As a result, estimates of differentengineers, including those used by us, may vary. In addition, estimates ofreserves are subject to revision based upon actual production, results offuture development, exploitation and exploration activities, prevailing oil andgas prices, operating costs and other factors, which revisions may be material.Accordingly, reserve estimates are often different from the quantities of oiland gas that are ultimately recovered and are highly dependent upon theaccuracy of the assumptions upon which they are based. There can be noassurance that these estimates are accurate predictions of our oil and gasreserves or their values. Estimates with respect to proved reserves that may bedeveloped and produced in the future are often based upon volumetriccalculations and upon analogy to similar types of reserves rather than actualproduction history. Estimates based on these methods are generally lessreliable than those based on actual production history. Subsequent evaluationof the same reserves based upon production history will result in variations,which may be substantial, in the estimated reserves.

 

**CostsIncurred**

 

The followingtable shows certain information regarding the costs incurred by us in ourproperty acquisition, development and exploratory activities during the periodsindicated.

 
| ** **                 | ** ** | **Year Ended June 30,** | ** ** |
|----------------------------|------------|----------------------------------------|------------|
| ** **                 | ** ** | **2008**                               | ** ** | **2007** | ** ** | **2006** | ** ** |
| Property acquisition costs |       | $                                      | 394,675    |   | $ | 481,229 |   | $ | 6,176,766 |   |
| Exploratory costs          |       | 14,030,615                             |       | 2,759,794 |   | 808,678 |   |
| Development costs          |       | 916,613                                |       | 966,879 |   | 1,323,243 |   |
| Total                      |       | $                                      | 15,341,903 |   | $ | 4,207,902 |   | $ | 8,308,687 |   |

 

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**DrillingResults**

 

We drilled orparticipated in the drilling of wells as set out in the table below for theperiods indicated. The table was completed based upon the date drillingcommenced. We did not acquire any wells during these periods. You should notconsider the results of prior drilling activities as necessarily indicative offuture performance, nor should you assume that there is necessarily anycorrelation between the number of productive wells drilled and the oil and naturalgas reserves generated by those wells.

 
| ** **             | ** ** | **Year Ended June 30,** | ** ** |
|------------------------|------------|----------------------------------------|------------|
| ** **             | ** ** | **2008**                               | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **             | ** ** | **Gross**                              | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** |
| **Development wells:** |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Productive             |       | —                                 |       | — |   | — |   | — |   | — |   | — |   |
| Dry                    |       | —                                 |       | — |   | — |   | — |   | — |   | — |   |
| Total development      |       | —                                 |       | — |   | — |   | — |   | — |   | — |   |
| ** **             |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| **Exploratory wells:** |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Productive             |       | 12                                     |       | 5.88 |   | 3 |   | 0.85 |   | 2 |   | 0.50 |   |
| Dry                    |       | —                                 |       | — |   | — |   | — |   | — |   | — |   |
| Total exploratory      |       | 12                                     |       | 5.88 |   | 3 |   | 0.85 |   | 2 |   | 0.50 |   |
| ** **             |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| **Total wells:**       |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Productive             |       | 12                                     |       | 5.88 |   | 3 |   | 0.85 |   | 2 |   | 0.50 |   |
| Dry                    |       | —                                 |       | — |   | — |   | — |   | — |   | — |   |
| Total wells            |       | 12                                     |       | 5.88 |   | 3 |   | 0.85 |   | 2 |   | 0.50 |   |

 

**NETPRODUCTION, SALES PRICES AND COSTS**

 

**The following table presentscertain information with respect to production, prices and costs attributableto all oil and gas property interests owned by us for the fiscal years ended June 30,2008, 2007 and 2006:**

** **
| ** **                                              | ** ** | **Year Ended June 30,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                              | ** ** | **2008**                               | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Production Volumes:**                                 |       |                                   |       |   |   |   |   |
| Oil (Bbl)                                               |       | 1,682                                  |       | 967 |   | 1,047 |   |
| Natural gas liquids (gallons)                           |       | 44,476                                 |       | — |   | — |   |
| Natural gas (Mcf)                                       |       | 228,219                                |       | 70,412 |   | 53,516 |   |
| Total oil, natural gas liquids, and natural  gas (Mcfe) |       | 244,665                                |       | 76,214 |   | 59,798 |   |
|                                                    |       |                                   |       |   |   |   |   |
| **Weighted Average Sales Prices:**                      |       |                                   |       |   |   |   |   |
| Oil (per Bbl)                                           |       | $                                      | 102.17     |   | $ | 61.68 |   | $ | 59.90 |   |
| Natural gas liquids (per gallon)                        |       | $                                      | 1.66       |   | n/a |   | n/a |   |
| Natural gas (per Mcf)                                   |       | $                                      | 9.01       |   | $ | 7.44 |   | $ | 8.34 |   |
|                                                    |       |                                   |       |   |   |   |   |   |   |   |
| **Selected Expenses per Mcfe:**                         |       |                                   |       |   |   |   |   |
| Production costs                                        |       | $                                      | 3.60       |   | $ | 4.18 |   | $ | 5.05 |   |
| Workover expenses (non-recurring)                       |       | $                                      | 0.11       |   | $ | 1.40 |   | $ | — |   |
| Severance taxes                                         |       | $                                      | 0.29       |   | $ | 0.39 |   | $ | 0.39 |   |
| Other revenue deductions                                |       | $                                      | 0.75       |   | $ | 0.35 |   | $ | 0.22 |   |
| Total lease operating expenses                          |       | $                                      | 4.75       |   | $ | 6.32 |   | $ | 5.66 |   |
| General and administrative expenses                     |       | $                                      | 10.17      |   | $ | 17.39 |   | $ | 23.42 |   |
| Depreciation, depletion and amortization                |       | $                                      | 8.79       |   | $ | 4.76 |   | $ | 3.00 |   |

 

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**PRODUCTIVE WELLS AND ACREAGE**

 

**ProductiveWells**

 

The followingtable sets forth our domestic productive wells at June 30, 2008:

 
| **Oil**   | ** ** | **Gas** | ** ** | **Total** | ** ** |
|-----------|------------|---------|------------|-----------|------------|
| **Gross** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** |
| —    |       | —  |       | 32        |       | 18.42 |   | 32 |   | 18.42 |   |

 

**Acreage**

 

The followingtable sets forth our undeveloped and developed gross and net leasehold acreageat June 30, 2008. Undeveloped acreage includes leased acres on which wellshave not been drilled or completed to a point that would permit the productionof commercial quantities of oil and gas, regardless of whether or not suchacreage contains proved reserves.

 
| **Undeveloped** | ** ** | **Developed** | ** ** | **TOTAL** | ** ** |
|-----------------|------------|---------------|------------|-----------|------------|
| **Gross**       | ** ** | **Net**       | ** ** | **Gross** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** |
| 6,272           |       | 1,941         |       | 8,439     |       | 4,210 |   | 14,711 |   | 6,151 |   |

 

As iscustomary in the industry, we generally acquire oil and gas acreage without anywarranty of title except as to claims made by, through or under the transferor.Although we have title to developed acreage examined prior to acquisition inthose cases in which the economic significance of the acreage justifies thecost, there can be no assurance that losses will not result from title defectsor from defects in the assignment of leasehold rights.

 

**OPERATIONS**

 

Oiland gas properties are customarily operated under the terms of a jointoperating agreement, which provides for reimbursement of the operator’s directexpenses and monthly per well supervision fees. Per well supervision fees varywidely depending on the geographic location and producing formation of thewell, whether the well produces oil or gas and other factors. We are not theoperator of our wells, but, in all cases, except for three wells in NorthwestLouisiana in which we have minor working interests, and which are operated byChesapeake Energy Corp., Fossil Operating, Inc. (“Fossil”), an entitywholly owned by Mr. Wallen, is the operator. Fossil charges the Company,without mark-up, for the Company’s working interest portion of the directoperating costs and overhead costs (which are comprised of administrative,supervision, office services and warehousing costs) that Fossil incurs withrespect to our wells.

 

We havecontract relationships with petroleum engineers, geologists and otheroperations and production specialists who we believe will be able to improveproduction rates, increase reserves and/or lower the cost of operating our oiland gas properties.

 

**EMPLOYEES**

 

At September 1,2008, the Company had 10 employees, four (4) full-time and six (6) part-time.We regularly use independent consultants and contractors to perform variousprofessional services, including well-site supervision, design, construction,permitting and environmental assessment. We use independent contractors toperform field and on-site production operation services.

 

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**FACILITIES**

 

The Company’sprincipal executive and administrative offices are located at 9870 Plano Road,Dallas, Texas. The offices are subleased on a month-to-month basis from anaffiliate controlled by Mr. Wallen and the offices are owned by thisaffiliate. The average monthly amount charged to the Company during the yearended June 30, 2008, was $2,229. The Company believes that there is otherappropriate space available in the event the Company should terminate itscurrent leasing arrangement.

 

**COMPETITION**

 

**Wecompete with major integrated oil and natural gas companies and independent oiland natural gas companies in all areas of operation. In particular, we competefor property acquisitions and for the equipment and labor required to operateand develop these properties. Most of our competitors have substantiallygreater financial and other resources than we have. In addition, largercompetitors may be able to absorb the burden of any changes in federal, stateand local laws and regulations more easily than we can, which could adverselyaffect our competitive position. These competitors may be able to pay more forexploratory prospects and may be able to define, evaluate, bid for and purchasea greater number of properties and prospects than we can. Further, ourcompetitors may have technological advantages and may be able to implement newtechnologies more rapidly than we can. Our ability to explore for natural gasand oil prospects and to acquire additional properties in the future willdepend on our ability to conduct operations, to evaluate and select suitableproperties and to consummate transactions in this highly competitiveenvironment. In addition, most of our competitors have operated for a muchlonger time than we have and have demonstrated the ability to operate throughindustry cycles.**

** **

**Recentincreased oil and natural gas drilling activity in East Texas and NorthwestLouisiana has resulted in increased demand for drilling rigs and other oilfieldequipment and services. At various times, we have and may continue toexperienced temporary or prolonged shortages or unavailability of drillingrigs, drill pipe and other material used in oil and gas drilling andcompleting. Such unavailability could result in increased costs, delays intiming of anticipated development or cause interests in undeveloped oil andnatural gas leases to lapse.**

** **

**GLOSSARY OF CERTAIN OIL AND GAS TERMS**

** **

The followingare abbreviations and definitions of terms commonly used in the oil and gasindustry, many of which are used in this Report.

 

“**Bbl**” means abarrel of 42 U.S. gallons, used herein in reference to oil or other liquidhydrocarbons.

 

**“B****cf**” means billion cubic feet.

 

**“Bcfe”**meansBcf of natural gas equivalent; determined using the ratio of one Bbl of oil orcondensate to six Mcf of natural gas.

 

“**Btu**” means British thermal unit, whichmeans the quantity of heat required to raise the temperature of one pound ofwater by one degree Fahrenheit.

 

**“Casing”** means a type of pipe that is used forencasing a smaller diameter carrier pipe for installation in a well.  Casing is used to send off fluids from thehole or keep a hole from caving in.

 

**“CoiledTubing”** meansa continuous, jointless hollow steel cylinder that is stored on a reel and canbe uncoiled or coiled repeatedly as required; coiled tubing is increasinglybeing used in well completion and servicing instead of traditional tubing,which is made up of joined sections of pipe.

 

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“**Completion**” means the installation ofpermanent equipment for the production of oil or gas.

 

**“CompressorStation”** meansa facility in which the pressure of natural gas is raised to facilitate itstransmission through pipelines.

 

**“Condensate”** means hydrocarbons naturally occurring inthe gaseous phase in a reservoir that condense to become a liquid at thesurface due to the change in pressure and temperature.

 

**“CubicFoot”** meansthe volume of gas that fills one cubic foot of space under standard temperatureand pressure conditions.  Standardpressure is 14.73 psi and standard temperature is 60 degrees Fahrenheit.

 

“**Developed Acreage**” means the number ofacres that are allocated or assignable to producing wells or wells capable ofproduction.

 

“**Development Drilling**” or “**Development Well**” means a well drilledwithin the proved area of an oil or gas reservoir to the depth of astratigraphic horizon known to be productive.

 

“**Dry****Hole**”or “**Dry****Well**” means a well found to be incapable of producinghydrocarbons in sufficient quantities to justify completion as an oil and gaswell.

 

**“EstimatedFuture Net Cash Flows”** means estimated future gross cash flows to be generated fromthe production of proved reserves, net of estimated production, futuredevelopment costs, and future abandonment costs, using prices and costs ineffect as of the date of the report or estimate, without giving effect tonon-property related expenses such as general and administrative expenses, debtservice and future income tax expense or to deprecation, depletion andamortization.

 

“**Exploration**” is the act of searching forpotential sub-surface reservoirs of gas or oil. Methods include the use of magnetometers, gravity meters, seismicexploration, surface mapping, and the drilling of exploratory test wells (knownas “wildcats”).

 

“**Exploratory Drilling**” or “**Exploratory Well**” means a well drilled tofind and produce oil or gas reserves not classified as proved, to find a newproduction reservoir in a field previously found to be productive of oil or gasin another reservoir or to extend a known reservoir.

 

“**Farm-In**” or “**Farm-Out**” means an agreement pursuant to which the owner of aworking interest in an oil and gas lease assigns the working interest or aportion 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 earnits interest in the acreage. The assignor usually retains a royalty or reversionaryinterest in the lease. The interest received by an assignee is a “farm-in” andthe assignor issues a “farm-out.”

 

 “**Gas**” means natural gas.

 

“**Gathering System**” means a system ofpipelines, compressor stations and any other related facilities that gathersnatural gas from a supply region and transports it to the major transmissionsystems.

 

“**Gross**” when used with respect to acres orwells, means the total acres or wells in which we have a working interest.

 

“**Horizontal Drilling**” means drilling a well that deviatesfrom the vertical and travels horizontally through a prospective reservoir.

 

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“**Hydrocarbons**” means an organic chemicalcompound of hydrogen and carbon. Hydrocarbons are a large class of liquid, solid or gaseous organiccompounds, which are the basis of almost all petroleum products.

 

“**Infill Drilling**” means drilling of anadditional well or wells provided for by an existing spacing order to moreadequately drain a reservoir.

 

“**Landman**” means an employee or agent of anoil and gas company whose primary duties are formulating and carrying outexploration strategies and managing an oil and gas company’s relations with itslandowners and partners, including securing and administering oil and gasleases and other agreements.

 

“**Lease**” means a formal agreement between twoor more parties where the owner of the land grants another party the right todrill and produce hydrocarbons in exchange for payment.

 

**“Log”**or **“Logging”** means a record of information about theperformance of some thing or some process. In the oil field, a variety of logs are used in the drilling andcompletion of oil and gas wells.

 

“**Mcf**” meansthousand cubic feet.

 

**“Mcfe”**meansMcf of natural gas equivalent; determined using the ratio of one Bbl of oil orcondensate to six Mcf of natural gas.

 

“**Midstream**” means activity involving theprocessing, storage and transportation sectors of the petroleum industry.

 

“**MMBtu**” means onemillion Btus.

 

**“MMcf”** means one million cubic feet.

 

**“MMcfe”** means MMcf of natural gas equivalent,determined using the ratio of one Bbl of oil or condensate to six Mcf ofnatural gas.

 

“**Mud**” usually means a colloidal suspensionof clays in water along with chemical additives that is circulated through thewellbore during rotary drilling.

 

**“NaturalGas Liquids”** means liquid hydrocarbons which have been extracted fromnatural gas (e.g., ethane, propane, butane and natural gasoline).

 

 “**Net**” when usedwith respect to acres or wells, refers to gross acres or wells multiplied, ineach case, by the percentage working interest owned by the Company.

 

“**Net Production**” means production that isowned by the Company less royalties and production due others.

 

“**Operator**” means the individual or companyresponsible for the exploration, development and production of an oil or gaswell or lease.

 

 “**Pipeline**”means all parts of a physical facility through which gas is transported,including pipe, valves and other appendages attached to the pipe, compressorunits, metering stations, regulator stations, delivery stations, holders, andfabricated assemblies.

 

 “**PresentValue**”****or “**PV-10**” when used with respect to oil and gas reserves, is thepre-tax present value, discounted at an annual rate of 10%, of the estimatedfuture gross revenues to be generated from the production of proved reservescalculated in accordance with the guidelines of the SEC, net of estimatedproduction and 

 

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futuredevelopment costs, using prices and costs as of the date of estimation withoutfuture escalation (except to the extent a contract specifically providesotherwise), without giving effect to non-property related expenses such asgeneral and administrative expenses, debt service, future income tax expenseand depreciation, depletion and amortization.

 

“**Productive Wells**” or “**Producing Wells**” consist of producing wellsand wells capable of production, including natural gas wells waiting onpipeline connections.

 

“**Proved Developed Reserves**” means reservesthat can be expected to be recovered through existing wells with existing equipmentand operating methods. Additional oil and gas expected to be obtained throughthe application of fluid injection or other improved recovery techniques forsupplementing the natural forces and mechanisms of primary recovery will beincluded as “proved developed reserves” only after testing by a pilot projector after the operation of an installed program has confirmed through productionresponse that increased recovery will be achieved.

 

“**Proved Reserves**” means the estimatedquantities of crude oil, natural gas and natural gas liquids which uponanalysis of geological and engineering data appear with reasonable certainty tobe recoverable in future years from known reservoirs under existing economicand operating conditions (i.e., prices and costs as of the date the estimate ismade). Prices include consideration of changes in existing prices provided onlyby contractual arrangements, but not on escalations based upon futureconditions. Reservoirs are considered proved if either actual production or conclusiveformation tests support economic producibility. The area of a reservoirconsidered proved includes (a) that portion delineated by drilling anddefined by gas-oil and/or oil-water contacts, if any; and (b) theimmediately adjoining portions not yet drilled, but which can be reasonablyjudged as economically productive on the basis of available geological andengineering data. In the absence of information on fluid contacts, the lowestknown structural occurrence of hydrocarbons controls the lower proved limit ofthe reservoir. Reserves which can be produced economically through applicationof improved recovery techniques (such as fluid injection) are included in the“proved” classification when successful testing by a pilot project, or theoperation of an installed program in the reservoir, provides support for theengineering analysis on which the project or program was based. Estimates ofproved reserves do not include the following: (a) oil that may becomeavailable from known reservoirs but is classified separately as “indicatedadditional reserves”; (b) crude oil, natural gas and natural gas liquids,the recovery of which is subject to reasonable doubt because of uncertainty asto geology, reservoir characteristics or economic factors; (c) crude oil,natural gas and natural gas liquids that may occur in undrilled prospects; and (d) crudeoil, natural gas and natural gas liquids that may be recovered from oil shales,coal, gilsonite and other such resources.

 

“**Proved Undeveloped Reserves**” means reservesthat are recovered from new wells on undrilled acreage, or from existing wellswhere a relatively major expenditure is required for completion. Reserves onundrilled acreage shall be limited to those drilling units offsettingproductive units that are reasonably certain of production when drilled. Provedreserves for other undrilled units can be claimed only where it can bedemonstrated with certainty that there is continuity of production from theexisting productive formation. Under no circumstances should estimates forproved undeveloped reserves be attributable to any acreage for which anapplication of fluid injection or other improved recovery technique iscontemplated, unless such techniques have been proved effective by actual testsin the area and in the same reservoir.

 

“**Recompletion**” means the completion forproduction of an existing well bore in another formation from that in which thewell has been previously completed.

 

“**Reserves**” meansproved reserves.

 

“**Reservoir**” means a porous and permeableunderground formation containing a natural accumulation of producible oiland/or gas that is confined by impermeable rock or water barriers and isindividual and separate from other reservoirs.

 

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“**Royalty**” means an interest in an oil andgas lease that gives the owner of the interest the right to receive a portionof the production from the leased acreage (or of the proceeds of the salethereof), but generally does not require the owner to pay any portion of thecosts of drilling or operating the wells on the leased acreage. Royalties maybe either landowner’s royalties, which are reserved by the owner of the leasedacreage at the time the lease is granted, or overriding royalties, which areusually reserved by an owner of the leasehold in connection with a transfer toa subsequent owner.

 

**“Sandstone”** means rock composed mainly of sand-sizedparticles or fragments of the mineral quartz, which, because these grains arerigid, will withstand tremendous pressures without being compacted.

 

“**Set Casing**” means the installation of steelpipe or casing in a wellbore.  Anaccompanying operation is the cementing of the casing in place by surroundingit with a wall of cement extending for all or a portion of the depth of thewell.

 

“**Shale**” means a type of rock composed ofcommon clay or mud.  When clay iscompacted under great pressure and temperature deep in the earth, water containedin the clay is expelled, and clay turns into shale.

 

 “**SPE**” meansSociety of Petroleum Engineers.

 

“**Spud**” means the first or initial act ofboring of the hole in drilling of an oil or gas well.

 

“**Surface Casing**” means the first string ofcasing put into a well.  Surface casingis cemented into bedrock and serves to shut out shallow water formations and asa foundation for well control during drilling operations.

 

“**2-D Seismic**” means an advanced technologymethod by which a cross-section of the earth’s subsurface is created throughthe interpretation of reflecting seismic data collected along a single sourceprofile.

 

“**3-D Seismic**” means an advanced technologymethod by which a three dimensional image of the earth’s subsurface is createdthrough the interpretation of reflection seismic data collected over a surfacegrid. 3-D seismic surveys allow for a more detailed understanding of thesubsurface than do conventional surveys and contribute significantly to fieldappraisal, development and production.

 

**“Tcf”** means trillion cubic feet.

 

**“Tubing”** is small diameter pipe, threaded at bothends, that is lowered into a completed well. Oil and gas are produced through a string of tubing (which can beperiodically removed for maintenance).

 

“**Upstream**” means the sector of the petroleumindustry involving exploration and production.

 

**“UndevelopedAcreage”** meanslease acreage on which wells have not been drilled or completed to a point thatwould permit the production of commercial quantities of oil and natural gasregardless of whether such acreage contains proved reserves.

 

“**Working Interest**” means an interest in anoil and gas lease that gives the owner of the interest the right to drill forand produce oil and gas on the leased acreage and requires the owner to pay ashare of the costs of drilling and production operations. The share ofproduction to which a working interest owner is entitled will always be smallerthan 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 producingwell to restore or increase production.

 

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**Item 1A. Risk Factors.**

** **

Youshould carefully consider the following risk factors, in addition to the otherinformation set forth in this Report, before investing in shares of our commonstock. Each of these risk factors could adversely affect our business,operating results and financial condition, as well as adversely affect thevalue of an investment in our common stock. Some information in this Report maycontain “forward-looking” statements that discuss future expectations of ourfinancial condition and results of operation. The risk factors noted in thissection and other factors could cause our actual results to differ materiallyfrom 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 andgas industry is highly competitive. We encounter competition from other oil andgas companies in all areas of our operations, including the acquisition ofproducing properties and sale of crude oil, natural gas and natural gasliquids. Our competitors include major integrated oil and gas companies andnumerous independent oil and gas companies, individuals and drilling and incomeprograms. Many of our competitors are large, well established companies withsubstantially larger operating staffs and greater capital resources than us.Such companies may be able to pay more for productive oil and gas properties andexploratory prospects and to define, evaluate, bid for and purchase a greaternumber of properties and prospects than our financial or human resourcespermit. Our ability to acquire additional properties and to discover reservesin the future will depend upon our ability to evaluate and select suitableproperties and to consummate transactions in this highly competitiveenvironment.

 

***Weface increased competition for available drilling rigs and other oilfieldequipment and services, which could increase our costs, cause our drillingprogram to be delayed or cause our leases to lapse.***

 

Recentincreased oil and natural gas drilling activity in East Texas and NorthwestLouisiana has resulted in increased demand for drilling rigs and other oilfieldequipment and services. At various times, we have and may continue toexperience temporary or prolonged shortages or unavailability of drilling rigs,drill pipe and other material used in oil and gas drilling and completing. Suchunavailability could result in increased costs, delays in timing of anticipateddevelopment or cause interests in undeveloped oil and natural gas leases tolapse.

 

***Exploratory drilling is a speculative activity that may not result in commercially productive reserves and may require expenditures in excess of budgeted amounts.***

 

Drillingactivities are subject to many risks, including the risk that no commerciallyproductive oil or gas reservoirs will be encountered. There can be no assurancethat new wells drilled by us will be productive or that we will recover all orany portion of our investment. Drilling for oil and gas may involveunprofitable efforts, not only from dry wells, but also from wells that areproductive but do not produce sufficient net revenues to return a profit afterdrilling, operating and other costs. The cost of drilling, completing andoperating wells is often uncertain. Our drilling operations may be curtailed,delayed or canceled as a result of a variety of factors, many of which arebeyond our 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 thedelivery of equipment and services. Such equipment shortages and delayssometimes involve drilling rigs where inclement weather prohibits the movementof land rigs causing a high demand for rigs by a large number of companiesduring a relatively short period of time. Our future drilling activities maynot be successful. Lack of drilling success could have a material adverseeffect on our financial condition and results of operations.

 

Ouroperations are also subject to all the hazards and risks normally incident tothe development, exploitation, production and transportation of, and theexploration for, oil and gas, including unusual or unexpected geologic 

 

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formations,pressures, down hole fires, mechanical failures, blowouts, explosions,uncontrollable flows of oil, gas or well fluids and pollution and otherenvironmental risks. These hazards could result in substantial losses to us dueto injury and loss of life, severe damage to and destruction of property andequipment, pollution and other environmental damage and suspension ofoperations. We participate in insurance coverage maintained by the operator ofour wells, although there can be no assurances that such coverage will besufficient to prevent a material adverse effect to us if any of the foregoingevents occur.

 

***We are in a capital-intensive business and we will need additionalfunds.***

 

Ourbusiness is highly capital-intensive requiring continuous development and acquisitionof oil and gas reserves. In addition, capital is required to operate and expandour oil and gas field operations, purchase equipment and to fund our drillingprogram.

 

AtJune 30, 2008, we had working capital of $1,746,741. On March 5,2007, Cubic entered into the aforementioned Credit Agreement with Wells Fargoproviding for the $20,000,000 Revolving Note and the Term Loan of $5,000,000 inorder to fund the drilling of new wells. On May 6, 2008, the Companyissued the aforementioned $2,000,000 Subordinated Note to Diversified DynamicsCorporation. Subsequent to the end of fiscal 2008, on August 20, 2008, theCompany increased its borrowings under the Revolving Note from $16,827,800 at June 30,2008 to the full amount of the borrowing base of $20,000,000. As a result, theCompany has no additional availability under the aforementioned CreditFacility.  In addition, the entireprincipal amount of the Subordinated Note was funded at the time of itsissuance, and no additional borrowings are provided thereunder. Therefore, theCompany’s capital requirements must be satisfied through operations, additionalborrowings under new or renegotiated credit arrangements, or the issuance ofequity securities.  There can be noassurance that any of these sources of capital will be available or sufficientto satisfy the Company’s capital requirements.

 

Wehave experienced and will continue to experience significant capitalexpenditures and working capital requirements, principally as a result of ourdrilling program. We expect that we will require additional financing, inaddition to cash generated from operations, to fund our expected growth. Therecan be no assurance, however, that additional financing will be available onacceptable terms or at all. In the event that additional capital resources areunavailable, we may curtail drilling, development and other activities or beforced to sell some of our assets on an untimely or unfavorable basis.Additionally, failure to drill on certain of our leasehold interests couldresult in the forfeiture of our interest.

 

Anyfuture issuances of equity securities would likely result in dilution to ourthen existing shareholders while incurring additional indebtedness would resultin increased interest expense and debt service charges. See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”

 

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

 

We incurredlosses before income tax provisions of $(5,128,453) and $(5,800,774) for thefiscal years ended June 30, 2008 and 2007, respectively. Our accumulateddeficit as of June 30, 2008 was $(24,451,145). Historically, we havefunded our operating losses, acquisitions and drilling costs primarily througha combination of private offerings of convertible debt, senior secured debt,and equity securities; however, on March 5, 2007 we established a$20,000,000 bank line of credit with Wells Fargo under the terms of the CreditFacility described elsewhere herein, the primary purpose of which is to funddrilling costs. The line of credit with Wells Fargo was fully drawn upon,subsequent to the end of fiscal 2008, on August 20, 2008. Our success inobtaining the necessary capital resources to fund future costs associated withour operations and drilling plans is dependent upon our ability to: (i) increaserevenues through acquisitions and recovery of our proved producing and proveddeveloped non-producing oil and gas reserves; (ii) maintain effective costcontrols at the corporate administrative office and in field operations; and (iii) obtainadditional financing, including through the exercise of outstanding warrants.However, even if we achieve some success with our plans, there can be no 

 

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assurancethat we will be able to generate sufficient revenues to achieve significantprofitable operations or to fund our drilling plans. See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”

 

***We have substantial capital requirements necessary for undeveloped properties for which we may not be able to obtain adequate financing.***

 

Themajority of our oil and gas reserves are undeveloped. At June 30, 2008, wehad proved undeveloped reserves of 5,462,271 Mcfe, which representapproximately 82% of our total proved reserves of 6,623,417 Mcfe. Recovery ofthe Company’s future undeveloped reserves will require significant capitalexpenditures to further develop these reserves during fiscal year 2009. Noassurance can be given that our financing sources will be sufficient to fullyfund our planned development activities or that development activities will beeither successful or in accordance with our schedule. Additionally, anysignificant decrease in oil and gas prices or any significant increase in thecost of development could result in a significant reduction in the number ofwells drilled and/or reworked. No assurance can be given that any wells willproduce oil or gas in commercially profitable quantities.

 

Developmentof our properties will require additional capital resources. Subsequent to theend of fiscal 2008, we have fully drawn upon the aforementioned $20,000,000 revolvingcredit facility with Wells Fargo Energy Capital, and the aforementioned$2,000,000 Subordinated Note was fully funded at the time of its issuance in May 2008.We have no commitments to obtain any additional debt or equity financing andthere can be no assurance that additional financing will be available, whenrequired, on favorable terms to us. The inability to borrow under the revolvingcredit facility or obtain additional financing could have a material adverseeffect on us, including requiring us to curtail significantly our oil and gasdevelopment plans or farm-out development of our properties. Any additionalfinancing may involve substantial dilution to the interests of our shareholdersat that time. See “Management’s Discussion and Analysis of Financial Conditionand Results of Operations.”

 

***Servicing our debt requires a significant amount ofcash, and we may not have sufficient cash flow from our business to pay oursubstantial debt.***

 

Ourability to make scheduled payments of the principal of, to pay interest on orto refinance our indebtedness depends on our future performance, which issubject to economic, financial, competitive and other factors beyond ourcontrol. Our business may not continue to generate cash flow from operations inthe future sufficient to service our debt and make necessary capitalexpenditures. If we are unable to generate such cash flow, we may be requiredto adopt one or more alternatives, such as selling assets, restructuring debtor obtaining additional equity capital on terms that may be onerous or highlydilutive. Our ability to refinance our indebtedness will depend on the capitalmarkets and our financial condition at such time, as well as the value of ourproperties. We may not be able to engage in any of these activities or engagein these activities on desirable terms, which could result in a default on ourdebt obligations and have an adverse effect on the market price of our equitysecurities.

 

***Oil and natural gas prices fluctuate widely and low prices could have a material adverse impact on our business and financial results.***

 

Ourrevenues, profitability and the carrying value of our oil and gas propertiesare substantially dependent upon prevailing prices of, and demand for, oil andgas and the costs of acquiring, finding, developing and producing reserves. Ourability to obtain borrowing capacity, to repay future indebtedness, and toobtain additional capital on favorable terms is also substantially dependentupon oil and gas prices. Historically, the markets for oil and gas have beenvolatile and are likely to continue to be volatile in the future. Prices foroil and gas are subject to wide fluctuations in response to: (i) relativelyminor changes in the supply of, and demand for, oil and gas; (ii) marketuncertainty; and (iii) a variety of additional factors, all of which arebeyond our control. These factors include domestic and foreign politicalconditions, the price and availability of domestic and imported oil and 

 

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gas,the level of consumer and industrial demand, weather, domestic and foreigngovernment relations, the price and availability of alternative fuels andoverall economic conditions. Furthermore, the marketability of our productiondepends in part upon the availability, proximity and capacity of gatheringsystems, pipelines and processing facilities. Volatility in oil and gas pricescould affect our ability to market our production through such systems,pipelines or facilities. Substantially all of our natural gas production iscurrently sold to two gas marketing firms on a month-to-month basis atprevailing spot market prices. Oil prices remained subject to unpredictablepolitical and economic forces during fiscal years 2008, 2007 and 2006, andexperienced fluctuations similar to those seen in natural gas prices for theyear. We believe that oil and gas prices will continue to fluctuate in responseto changes in the policies of the Organization of Petroleum Exporting Countries(“OPEC”), changes in demand from many Asian countries and other emergingeconomies, current events in the Middle East, security threats to the UnitedStates, and other factors associated with the world political and economicenvironment. As a result of the many uncertainties associated with levels ofproduction maintained by OPEC and other oil producing countries, theavailabilities of worldwide energy supplies and competitive relationships andconsumer perceptions of various energy sources, we are unable to predict whatchanges will occur in crude oil, natural gas and natural gas liquids prices.

 

***We are subject to uncertainties in reserve estimates and future net cash flows.***

 

This report containsestimates of our oil and gas reserves and the future net cash flows from thosereserves, which have been prepared by certain independent petroleumconsultants. There are numerous uncertainties inherent in estimating quantitiesof reserves of oil and gas and in projecting future rates of production and thetiming of development expenditures, including many factors beyond our control.The reserve estimates in this report are based on various assumptions,including, for example, constant oil and gas prices, operating expenses,capital expenditures and the availability of funds, and, therefore, areinherently imprecise indications of future net cash flows. Actual futureproduction, cash flows, taxes, operating expenses, development expenditures andquantities of recoverable oil and gas reserves may vary substantially fromthose assumed in the estimates. Any significant variance in these assumptionscould materially affect the estimated quantity and value of reserves set forthin this report. Additionally, our reserves may be subject to downward or upwardrevision based upon actual production performance, results of futuredevelopment and exploration, prevailing oil and gas prices and other factors,many of which are beyond our control.

 

Thepresent value of future net reserves discounted at 10% (the “PV-10”) of provedreserves referred to in this report should not be construed as the currentmarket value of the estimated proved reserves of oil and gas attributable toour properties. In accordance with applicable requirements of the SEC, theestimated discounted future net cash flows from proved reserves are generallybased on prices and costs as of the date of the estimate, whereas actual futureprices and costs may be materially higher or lower. Actual future net cashflows also will be affected by: (i) the timing of both production andrelated expenses; (ii) changes in consumption levels; and (iii) governmentalregulations or taxation. In addition, the calculation of the present value ofthe future net cash flows using a 10% discount as required by the SEC is notnecessarily the most appropriate discount factor based on interest rates ineffect from time to time and risks associated with our reserves or the oil andgas industry in general. Furthermore, our reserves may be subject to downwardor upward revision based upon actual production, results of future development,supply and demand for oil and gas, prevailing oil and gas prices and otherfactors. See “Description of Business and 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.***

 

Ouroil and gas business involves a variety of operating risks, including, but notlimited to, unexpected formations or pressures, uncontrollable flows of oil,gas, brine or well fluids into the environment (including groundwatercontamination), blowouts, fires, explosions, pollution and other risks, any ofwhich could result in personal injuries, loss of life, damage to properties andsubstantial losses. Although we carry insurance at levels that we believe arereasonable, we are not fully insured against all risks. We do not carrybusiness interruption 

 

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insurance.Losses and liabilities arising from uninsured or under-insured events couldhave a material adverse effect on our financial condition and operations.

 

Fromtime to time, due primarily to contract terms, pipeline interruptions orweather conditions, the producing wells in which we own an interest have beensubject to production curtailments. The curtailments range from productionbeing partially restricted to wells being completely shut-in. The duration ofcurtailments varies from a few days to several months. In most cases, we areprovided only limited notice as to when production will be curtailed and theduration of such curtailments. We are not currently experiencing any materialcurtailment of our production.

 

Weintend to continue our development and exploration activities.  Exploratory drilling and, to a lesser extent,development drilling of oil and gas reserves involve a high degree of risk thatno commercial production will be obtained and/or that production will beinsufficient to recover drilling and completion costs. The cost of drilling,completing and operating wells is often uncertain. Our drilling operations maybe curtailed, delayed or canceled as a result of numerous factors, includingtitle problems, weather conditions, compliance with governmental requirementsand shortages or delays in the delivery of equipment. Furthermore, completionof a well does not assure a profit on the investment or a recovery of drilling,completion and operating costs.

 

***Our business may suffer if we lose key personnel.***

 

We depend to a large extent on the services ofCalvin A. Wallen, III, our President, Chairman of the Board, and ChiefExecutive Officer. The loss of the services of Mr. Wallen would have amaterial adverse effect on our operations. We have not obtained key personnellife insurance on Mr. Wallen.

 

***Certain of our affiliates control a majority of our outstanding common stock, which may affect other shareholders’ ability to influence matters submitted to a vote of shareholders.***

 

Asof September 1, 2008, our executive officers, directors and theiraffiliates and certain 5% shareholders hold approximately 59% of ouroutstanding shares of common stock. As a result, officers, directors and theiraffiliates and such shareholders have the ability to exert significantinfluence or control over our business affairs, including the ability tocontrol the election of directors and results of voting on all mattersrequiring shareholder approval. This concentration of voting power may delay orprevent a potential change in control.

 

***Certain of our affiliates have engaged in businesstransactions with the Company, which may result in conflicts of interest.***

 

Certainofficers, directors and related parties, including entities controlled by Mr. Wallen,the President and Chief Executive Officer, have engaged in businesstransactions with the Company which were not the result of arm’s lengthnegotiations between independent parties. Our management believes that theterms of these transactions were as favorable to us as those that could havebeen obtained from unaffiliated parties under similar circumstances. All futuretransactions between us and our affiliates will be on terms no less favorablethan could be obtained from unaffiliated third parties and will be approved bya majority of the disinterested members of our Board of Directors.

 

***The liquidity, market price and volume of our stock are volatile, andour stock is subject to certain penny stock rules.***

 

Ourcommon stock is traded on the American Stock Exchange (the “AMEX”). Theliquidity of our common stock may be adversely affected, and purchasers of ourcommon stock may have difficulty selling our common stock, if our common stockdoes not continue to trade in that or another suitable trading market.

 

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Thereis presently only a limited public market for our common stock, and there is noassurance that a ready public market for our securities will develop. It islikely that any market that develops for our common stock will be highlyvolatile and that the trading volume in such market will be limited. As of September 1,2008, the trading price of our common stock was below $5.00 per share. Thetrading price of our common stock could be subject to wide fluctuations inresponse 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 andvolume fluctuations that have affected the market price for many companies andwhich often have been unrelated to the operating performance of thesecompanies. These broad market fluctuations may adversely affect the marketprice of our securities.

 

***We may experience adverse consequencesbecause of required indemnification of officers and directors.***

 

Provisions of our Articles of Incorporation and Bylaws providethat we will indemnify any director and officer as to liabilities incurred intheir capacity as a director or officer and on those terms and conditions setforth therein to the fullest extent of Texas law. Further, we may purchase andmaintain insurance on behalf of any such persons whether or not we would havethe power to indemnify such person against the liability insured against. Theforegoing could result in substantial expenditures by us and prevent anyrecovery from our officers, directors, agents and employees for losses incurredby us as a result of their actions.

 

***Certain anti-takeover provisions may discourage achange in control.***

 

Provisionsof Texas law and our Articles of Incorporation and Bylaws may have the effectof delaying or preventing a change in control or acquisition of our Company.Our Articles of Incorporation and Bylaws include provisions for a classifiedBoard 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 ofDirectors without shareholder approval), purported limits on shareholder actionby written consent in lieu of a meeting, and certain procedural requirementsgoverning shareholder meetings. These provisions could have the effect ofdelaying or preventing a change in control of our Company.

 

***We do not intendto declare dividends in the foreseeable future.***

 

OurBoard of Directors presently intends to retain all of our earnings for theexpansion of our business. We therefore do not anticipate the distribution ofcash dividends in the foreseeable future. Any future decision of our Board ofDirectors to pay cash dividends will depend, among other factors, upon ourearnings, financial position and cash requirements.

 

***Ourinternal controls over financial reporting may not be effective, which couldhave a significant and adverse effect on our business.***

 

Section 404 of theSarbanes-Oxley Act of 2002 and the related rules and regulations of theSecurities and Exchange Commission, which we collectively refer to as Section 404,require us to evaluate our internal controls over financial reporting to allowmanagement to report on those internal controls as of the end of each year beginningin fiscal 2008. Section 404 will also require our independent registeredpublic accounting firm to attest to the effectiveness of our internal controlsover financial reporting in future periods. Effective internal controls arenecessary for us to produce reliable financial reports and are important in oureffort to prevent financial fraud. In the course of our Section 404evaluations, we may identify conditions that may result in significantdeficiencies or material weaknesses and we may conclude that enhancements,modifications or changes to our internal controls are necessary or desirable.Implementing any such matters would divert the attention of our management,could involve significant costs, and may negatively impact our results ofoperations.

 

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We note that there areinherent limitations on the effectiveness of internal controls, as they cannotprevent collusion, management override or failure of human judgment. If we failto maintain an effective system of internal controls or if management or ourindependent registered public accounting firm were to discover materialweaknesses in our internal controls, we may be unable to produce reliablefinancial reports or prevent fraud, and it could harm our financial conditionand results of operations, result in a loss of investor confidence andnegatively impact our share price.

 

***We may not have satisfactory title to ourproperties.***

 

Ourcontract land professionals have reviewed title records or other title reviewmaterials relating to substantially all of our producing properties. The titleinvestigation performed by us prior to acquiring undeveloped properties isthorough, but less rigorous than that conducted prior to drilling, consistentwith industry standards. A title opinion obtained on the drill site prior todrilling does not necessarily ensure satisfactory title. We believe we havesatisfactory title to all our producing properties in accordance with standardsgenerally accepted in the oil and gas industry. Our properties are subject tocustomary royalty interests, liens incident to operating agreements, liens forcurrent taxes and other burdens, which we believe do not materially interferewith the use of or affect the value of such properties. At June 30, 2008,our leaseholds for some of our net acreage were being kept in force by virtueof production on that acreage in paying quantities. The remaining net acreagewas held by lease rentals and similar provisions and requires production inpaying quantities prior to expiration of various time periods to avoid leasetermination. In the normal course of our business, title defects of varyingdegrees will arise, and, if practicable, reasonable efforts will be made tocure any such defects.

 

TheCompany may make acquisitions of oil and gas properties from time to timesubject to available resources. In making an acquisition, we generally focusmost of our title and valuation efforts on the more significant properties. Itis generally not feasible for us to perform an in-depth review of everyproperty we purchase and all records with respect to such properties. However,even an in-depth review of properties and records may not necessarily revealexisting or potential problems, nor will it permit us to become familiar enoughwith the properties to assess fully their deficiencies and capabilities. To theextent the seller does not operate the properties, obtaining access toproperties and records may be more difficult. Even when problems areidentified, the seller may not be willing or financially able to givecontractual protection against such problems, and we may decide to assumeenvironmental 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 invarying degrees by political developments and federal, state and local laws andregulations. In particular, oil and gas production and related operations areor have been subject to price controls, taxes and other laws and regulationsrelating to the oil and gas industry. Failure to comply with such laws andregulations can result in substantial penalties. The regulatory burden on theoil and gas industry increases our cost of doing business and affects ourprofitability. Although we believe we are in substantial compliance with allapplicable laws and regulations, because such laws and regulations arefrequently amended or reinterpreted, we are unable to predict the future costor impact of complying with such laws and regulations.

 

Salesof natural gas by us are not regulated and are generally made at market prices.However, the Federal Energy Regulatory Commission (“FERC”) regulates interstatenatural gas transportation rates and service conditions, which affect themarketing of natural gas produced by us, as well as the revenues received by usfor sales of such production. Sales of our natural gas currently are made atuncontrolled market prices, subject to applicable contract provisions and pricefluctuations that normally attend sales of commodity products.

 

Sincethe mid-1980’s, the FERC has issued a series of orders, culminating in OrderNos. 636, 636-A, 636-B and 636-C (“Order 636”), that have significantly alteredthe marketing and transportation of natural gas. Order 636 

 

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mandateda fundamental restructuring of interstate pipeline sales and transportationservice, including the unbundling by interstate pipelines of the sale,transportation, storage and other components of the city-gate sales servicessuch pipelines previously performed. One of the FERC’s purposes in issuing theorders was to increase competition within all phases of the natural gasindustry. Order 636 and subsequent FERC orders issued in individual pipelinerestructuring proceedings have been the subject of appeals, and the courts havelargely upheld Order 636. Because further review of certain of these orders isstill possible, and other appeals may be pending, it is difficult to predictthe ultimate impact of the orders on us and our natural gas marketing efforts.Generally, Order 636 has eliminated or substantially reduced the interstatepipelines’ traditional role as wholesalers of natural gas, and hassubstantially increased competition and volatility in natural gas markets.

 

Whilesignificant regulatory uncertainty remains, Order 636 may ultimately enhanceour ability to market and transport our natural gas, although it may alsosubject us to greater competition, more restrictive pipeline imbalance tolerancesand greater associated penalties for violation of such tolerances.

 

The FERC hasannounced several important transportation-related policy statements andproposed rule changes, including the appropriate manner in whichinterstate pipelines release capacity under Order 636 and, more recently, theprice which shippers can charge for their released capacity. In addition, in1995, the FERC issued a policy statement on how interstate natural gaspipelines can recover the costs of new pipeline facilities. In January 1997,the FERC issued a policy statement and a request for comments concerningalternatives to its traditional cost-of-service rate making methodology. Anumber of pipelines have obtained FERC authorization to charge negotiated ratesas one such alternative. While any additional FERC action on these matterswould affect us only indirectly, these policy statements and proposed rule changesare intended to further enhance competition in natural gas markets. We cannotpredict what action the FERC will take on these matters, nor can we predictwhether the FERC’s actions will achieve its stated goal of increasingcompetition in natural gas markets. However, we do not believe that we will betreated materially differently than other natural gas producers and marketerswith which we compete.

 

The price wereceive from the sale of oil is affected by the cost of transporting suchproducts to market. Effective January 1, 1995, the FERC implementedregulations establishing an indexing system for transportation rates for oilpipelines, which, generally, would index such rates to inflation, subject tocertain conditions and limitations. These regulations could increase the costof transporting oil by interstate pipelines, although the most recentadjustment generally decreased rates. These regulations have generally beenapproved on judicial review. We are not able to predict with certainty theeffect, if any, of these regulations on our operations. However, theregulations may increase transportation costs or reduce wellhead prices foroil.

 

The ultimateimpact of the complex rules and regulations issued by the FERC since themid-1980’s cannot be predicted. We cannot predict what further action the FERCwill take on these matters. We do not believe that we will be affected by anyaction taken materially differently than other natural gas producers, gatherersand marketers with which we compete.

 

Additionalproposals and proceedings that might affect the natural gas industry arefrequently made before Congress, the FERC and the courts. The natural gasindustry historically has been very heavily regulated; therefore, there is noassurance that the less stringent regulatory approach recently pursued by theFERC and Congress will continue.

 

Our sales ofcrude oil and condensate are currently not regulated and are made at marketprices. In a number of instances, however, the ability to transport and sellsuch products are dependent on pipelines whose rates, terms and conditions ofservice are subject to FERC jurisdiction under the Interstate Commerce Act.However, we do not believe that these regulations affect us any differentlythan other crude oil producers.

 

The States ofTexas and Louisiana and many other states require permits for drillingoperations, drilling bonds and reports concerning operations and impose otherrequirements relating to the exploration for and production 

 

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of oil andgas. Such states also have statutes or regulations addressing conservationmatters, including provisions for the unitization or pooling of oil and gasproperties, the establishment of maximum rates of production from wells and theregulation of spacing, plugging and abandonment of such wells. The statutes andregulations of certain states limit the rate at which oil and gas can beproduced from our properties. However, we do not believe we will be affectedmaterially differently by these statutes and regulations than any othersimilarly situated oil and gas company.

 

***We are subject to various environmental risks which may cause us toincur substantial costs.***

*** ***

Ouroperations and properties are subject to extensive and changing federal, stateand local laws and regulations relating to environmental protection, includingthe generation, storage, handling and transportation of oil and gas and thedischarge of materials into the environment, and relating to safety and health.The recent trend in environmental legislation and regulation generally istoward stricter standards, and this trend will likely continue. These laws andregulations may require the acquisition of a permit or other authorizationbefore construction or drilling commences and for certain other activities;limit or prohibit construction, drilling and other activities on certain landslying within wilderness and other protected areas; and impose substantialliabilities for pollution resulting from our operations. The permits requiredfor our various operations are subject to revocation, modification and renewalby issuing authorities. Governmental authorities have the power to enforcecompliance with their regulations, and violations are subject to fines,penalties or injunctions. In the opinion of management, we are in substantialcompliance with current applicable environmental laws and regulations, and wehave no material commitments for capital expenditures to comply with existingenvironmental requirements. Nevertheless, changes in existing environmentallaws and regulations or in interpretations thereof could have a significantimpact on us. The impact of such changes, however, would not likely be any moreburdensome to us than to any other similarly situated oil and gas company.

 

TheComprehensive Environmental Response, Compensation, and Liability Act(“CERCLA”), also known as the “Superfund” law, and similar state laws imposeliability, without regard to fault or the legality of the original conduct, oncertain classes of persons that are considered to have contributed to therelease of a “hazardous substance” into the environment. These persons includethe owner or operator of the disposal site or sites where the release occurredand companies that disposed or arranged for the disposal of the hazardoussubstances found at the site. Persons who are or were responsible for releasesof hazardous substances under CERCLA may be subject to joint and severalliability for the costs of cleaning up the hazardous substances that have been releasedinto the environment and for damages to natural resources. Furthermore,neighboring landowners and other third parties may file claims for personalinjury and property damage allegedly caused by the hazardous substancesreleased into the environment.

 

We generatetypical oil and gas field wastes, including hazardous wastes that are subjectto the federal Resources Conservation and Recovery Act and comparable statestatutes. The United States Environmental Protection Agency and various stateagencies have limited the approved methods of disposal for certain hazardousand non-hazardous wastes. Furthermore, certain wastes generated by our oil andgas operations that are currently exempt from regulation as “hazardous wastes”may in the future be designated as “hazardous wastes,” and therefore be subjectto more rigorous and costly operating and disposal requirements.

 

The OilPollution Act (“OPA”) imposes a variety of requirements on responsible partiesfor onshore and offshore oil and gas facilities and vessels related to theprevention of oil spills and liability for damages resulting from such spillsin waters of the United States. The “responsible party” includes the owner oroperator of an onshore facility or vessel or the lessee or permittee of, or theholder of a right of use and easement for, the area where an onshore facilityis located. OPA assigns liability to each responsible party for oil spillremoval costs and a variety of public and private damages from oil spills. Fewdefenses exist to the liability for oil spills imposed by OPA. OPA also imposesfinancial responsibility requirements. Failure to comply with ongoingrequirements or inadequate cooperation in a spill event may subject aresponsible party to civil or criminal enforcement actions.

 

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We own orlease properties that for many years have produced oil and gas. We also ownnatural gas gathering systems. It is not uncommon for such properties to becontaminated with hydrocarbons. Although we or previous owners of theseinterests may have used operating and disposal practices that were standard inthe industry at the time, hydrocarbons or other wastes may have been disposedof or released on or under the properties or on or under other locations wheresuch wastes have been taken for disposal. These properties may be subject tofederal or state requirements that could require us to remove any such wastesor to remediate the resulting contamination. All of our properties are operatedby third parties over whom we have limited control. Notwithstanding our lack ofcontrol over properties operated by others, the failure of the previous ownersor operators to comply with applicable environmental regulations may, incertain circumstances, adversely impact us.

 

***We may be responsible foradditional costs in connection with abandonment of properties.***

 

We are responsible for payment of plugging and abandonment costson our oil and gas properties pro rata to our working interest. Based on ourexperience, we anticipate that the ultimate aggregate salvage value of leaseand well equipment located on our properties will exceed the costs ofabandoning such properties. There can be no assurance, however, that we will besuccessful in avoiding additional expenses in connection with the abandonmentof any of our properties. In addition, abandonment costs and their timing maychange due to many factors, including actual production results, inflationrates and changes in environmental laws and regulations.

 

**Item 1B. UnresolvedStaff Comments.**

** **

None.

 

**Item 2. Properties.**

** **

A description of our properties is included in “Part I.Item 1. Business” and is incorporated herein by reference.

 

**Item 3. LegalProceedings.**

** **

There are nomaterial legal proceedings to which the Company is a party or to which itsproperties are subject.

 

**Item 4. Submission ofMatters to a Vote of Security Holders.**

** **

None.

 

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**PART II**

 

**Item 5. Market forRegistrant’s Common Equity, Related Stockholder Matters, and Issuer Purchasesof Equity Securities**

** **

**CommonStock and Market**

 

The commonstock of the Company is traded on the American Stock Exchange (the “AMEX”)under the trading symbol “QBC”. Prior to August 4, 2008, the common stockof the Company was traded on the Over-The-Counter Bulletin Board (the “OTCBB”)under the trading symbol “QBIK”.

 

AtSeptember 1, 2008, there were 60,335,564 shares of common stockoutstanding held by approximately 805 shareholders of record.

 

Under itsArticles of Incorporation, as amended, the Company is authorized to issue oneclass of up to 100,000,000 common shares, par value $0.05 per share, and oneclass of up to 10,000,000 preferred shares, par value $0.01 per share. As of September 1,2008, there were no preferred shares of the Company outstanding.

 

**Common Stock Price Range**

 

Thefollowing table shows, for the periods indicated, the range of high and lowclosing price information for our common stock as reported by the OTCBB. Anymarket for our common stock should be considered sporadic, illiquid and highlyvolatile. Prices reflect inter-dealer quotations, without adjustment for retailmarkup, markdowns or commissions, and may not represent actual transactions.Our common stock’s trading range during the periods indicated is as follows:

 
| **Fiscal Year 2007** | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------------------------|------------|----------|------------|---------|------------|
| 1st Quarter                    |       | $        | 0.90       |    | $          | 0.51 |   |
| 2nd Quarter                    |       | $        | 0.90       |    | $          | 0.46 |   |
| 3rd Quarter                    |       | $        | 0.90       |    | $          | 0.65 |   |
| 4th Quarter                    |       | $        | 1.46       |    | $          | 0.51 |   |

 
| **Fiscal Year 2008** | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------------------------|------------|----------|------------|---------|------------|
| 1st Quarter                    |       | $        | 1.35       |    | $          | 0.91 |   |
| 2nd Quarter                    |       | $        | 1.59       |    | $          | 1.00 |   |
| 3rd Quarter                    |       | $        | 3.04       |    | $          | 1.50 |   |
| 4th Quarter                    |       | $        | 4.19       |    | $          | 2.35 |   |

 

**Changesin Securities, Use of Proceeds and Issuer Purchases of Equity Securities**

 

Throughthe following exercises of warrants, we issued an aggregate of 1,173,693 sharesof common stock, which were not registered under the Securities Act of 1933, asamended, during the fourth quarter of fiscal 2008:

 

OnApril 1, 2008, 300,000 warrants were exercised by a warrant holder of theCompany and 203,704 shares of Company common stock were issued utilizing acashless exercise price of $3.04 per share, the closing price of the Company’scommon stock on the prior trading day.

 

OnApril 1, 2008, a warrant holder of the Company exercised warrants for100,000 shares of Company common stock, through the payment of $70,000 to theCompany.

 

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OnApril 2, 2008, 100,000 warrants were exercised by a warrant holder of theCompany and 65,150 shares of Company common stock were issued utilizing acashless exercise price of $2.80 per share, the closing price of the Company’scommon stock on the trading day prior to the date of the warrant holder’ssubscription notice, which date was March 31, 2008.

 

OnApril 2, 2008, 50,000 warrants were exercised by a warrant holder of theCompany and 33,291 shares of Company common stock were issued utilizing acashless exercise price of $2.92 per share, the closing price of the Company’scommon stock on the prior trading day.

 

OnApril 8, 2008, 5,000 warrants were exercised by a warrant holder of theCompany and 3,017 shares of Company common stock were issued utilizing acashless exercise price of $2.46 per share, the closing price of the Company’scommon stock on the prior trading day.

 

OnApril 10, 2008, 5,000 warrants were exercised by a warrant holder of theCompany and 3,193 shares of Company common stock were issued utilizing acashless exercise price of $2.70 per share, the closing price of the Company’scommon stock on the prior trading day.

 

OnApril 16, 2008, 5,000 warrants were exercised by a warrant holder of theCompany and 3,374 shares of Company common stock were issued utilizing acashless exercise price of $3.00 per share, the closing price of the Company’scommon stock on the prior trading day.

 

OnApril 18, 2008, a warrant holder of the Company exercised warrants for325,000 shares of Company common stock, through the payment of $317,135 to theCompany.

 

OnApril 21, 2008, a warrant holder of the Company exercised warrants for75,000 shares of Company common stock, through the payment of $73,185 to theCompany.

 

OnMay 14, 2008, a warrant holder of the Company exercised warrants for100,000 shares of Company common stock, through the payment of $97,580 to theCompany.

 

OnJune 18, 2008, 250,000 warrants were exercised by a warrant holder of theCompany and 186,964 shares of Company common stock were issued utilizing acashless exercise price of $3.87 per share, the closing price of the Company’scommon stock on the prior trading day.

 

OnMay 19, 2008, a warrant holder of the Company exercised warrants for25,000 shares of Company common stock, through the payment of $24,395 to theCompany.

 

OnMay 26, 2008, a warrant holder of the Company exercised warrants for50,000 shares of Company common stock, through the payment of $25,000 to theCompany.

 

Aggregateproceeds to the Company of the aforementioned warrant exercises were $607,295,all of which have been or will be used for working capital purposes.  The aforementioned issuances were made inreliance upon an exemption from registration set forth in Section 4(2) ofthe Securities Act of 1993, as amended, which exempts transactions by an issuernot involving a public offering.

 

Wedid not purchase any of our equity securities during the fourth quarter offiscal 2008.

 

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**ShareholderReturn Performance Graph**

 

Thefollowing graph compares the cumulative total shareholder returns of our commonstock during the five years ended June 30, 2008 with the cumulative totalshareholder returns of the AMEX Oil Index and a peer group of 16 oil and gasexploration and production companies comprised of Abraxas Petroleum Corp., TheMeridian Resources Corp., GMX Resources Inc., Petrohawk Energy Corp.,Chesapeake Energy Corp., Goodrich Petroleum Corp., Northern Oil & GasInc., Comstock Resources Inc., EXCO Resources Inc., Penn Virginia Corp., XTOEnergy Inc., Quicksilver Resources Inc., Range Resources Corp., EncoreAcquisition Co., Plains Exploration & Production Co., St. Mary Landand Exploration Co. (collectively referred to as the “Peer Group Index”). Thecomparison assumes an investment of $100 on June 30, 2003 in each of our commonstock, the AMEX Oil Index and the Peer Group Index.

 

****

 
| ** **              | ** ** | **6/30/2003** | ** ** | **6/30/2004** | ** ** | **6/30/2005** | ** ** | **6/30/2006** | ** ** | **6/30/2007** | ** ** | **6/30/2008** | ** ** |
|-------------------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|
| Cubic Energy, Inc. |       | $             | 100.00     |          | $          | 171.43        |       | $             | 288.57     |          | $          | 228.57        |       | $ | 380.00 |   | $ | 1,197.14 |   |
| AMEX Oil Index          |       | $             | 100.00     |          | $          | 134.58        |       | $             | 187.65     |          | $          | 243.51        |       | $ | 297.67 |   | $ | 324.16 |   |
| Peer Group Index        |       | $             | 100.00     |          | $          | 176.08        |       | $             | 274.54     |          | $          | 346.09        |       | $ | 380.94 |   | $ | 731.81 |   |

 

**DividendPolicy**

 

Wehave neither declared nor paid any dividends on our common stock since ourinception. Presently, we intend to retain our earnings, if any, to providefunds for expansion of our business. Therefore, we do not anticipate declaringor paying cash dividends on our common stock in the foreseeable future. Anyfuture dividends will be subject to the discretion of our Board of Directorsand will depend upon, among other things, future earnings, our operating andfinancial condition, our capital requirements, debt obligation agreements,general business conditions and other pertinent facts. Moreover, the terms of theCredit Facility prohibit the payment of dividends.

 

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**SecuritiesAuthorized for Issuance under Equity Compensation Plans**

 

Thefollowing table provides information as of June 30, 2008 with respect tocompensation plans (including individual compensation arrangements) under whichequity securities of the registrant are authorized for issuance:

 
| ** **                                              | ** ** | **Number of**             | ** ** | **Weighted**            | ** ** | ** **                        | ** ** |
|---------------------------------------------------------|------------|--------------------------------|------------|-------------------------|------------|-----------------------------------|------------|
| ** **                                              | ** ** | **securities to be** | ** ** | **average**             | ** ** | **Number of shares**    | ** ** |
| ** **                                              | ** ** | **issued upon**           | ** ** | **exercise price** | ** ** | **of common stock**     | ** ** |
| ** **                                              | ** ** | **exercise of**           | ** ** | **of outstanding** | ** ** | **remaining available**      | ** ** |
| ** **                                              | ** ** | **outstanding**                | ** ** | **options,**            | ** ** | **for future issuance** | ** ** |
| ** **                                              | ** ** | **options, warrants**     | ** ** | **warrants and**   | ** ** | **under equity**             | ** ** |
| ** **                                              | ** ** | **and rights**            | ** ** | **rights**              | ** ** | **compensation plans**       | ** ** |
| 2005 Stock Option Plan approved by  shareholders        |       | —                         |       | $                       | —     |                              | 1,341,500  |   |
| Equity compensation plans not approved by  shareholders |       | —                         |       | $                       | —     |                              | —     |   |
| Total                                                   |       | —                         |       |                    |       | 1,341,500                         |       |

 

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**Item 6. Selected FinancialData.**

** **

**The following table presents a summary of our financialinformation for the periods indicated. It should be read in conjunction withour Financial Statements and related notes (beginning on page F-1 at theend of this report) and other financial information included herein.**

** **
| ** **                                                         | ** ** | **Year ended June 30,** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------|------------|
| **(In thousands, except per share data)** | ** ** | **2008**                               | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Statements of Operations Data:**                                 | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total oil and gas sales revenues                                   |       | $                                      | 2,302      |   | $ | 583 |   | $ | 509 |   | $ | 469 |   | $ | 415 |   |
| Costs and expenses:                                                |       |                                   |       |   |   |   |   |   |   |   |   |
| Oil and gas production, operating and development  costs           |       | 1,163                                  |       | 481 |   | 338 |   | 273 |   | 186 |   |
| General and administrative expenses                                |       | 2,488                                  |       | 1,325 |   | 1,401 |   | 395 |   | 240 |   |
| Depreciation, depletion and amortization                           |       | 2,152                                  |       | 362 |   | 179 |   | 364 |   | 105 |   |
| Impairment loss on oil and gas properties                          |       | —                                 |       | 1,791 |   | — |   | — |   | — |   |
| Total costs and expenses                                           |       | 5,803                                  |       | 3,959 |   | 1,918 |   | 1,032 |   | 531 |   |
| Operating income (loss)                                            |       | (3,501                                 | )          | (3,376 | ) | (1,409 | ) | (563 | ) | (116 | ) |
| Non-operating income (expense):                                    |       |                                   |       |   |   |   |   |   |   |   |   |
| Other income, net                                                  |       | 46                                     |       | 38 |   | 6 |   | — |   | 2 |   |
| Interest expense, net                                              |       | (1,580                                 | )          | (1,279 | ) | (639 | ) | (193 | ) | (0 | ) |
| Amortization of loan costs                                         |       | (94                                    | )          | (101 | ) | (67 | ) | (28 | ) | — |   |
| Total non-operating income (expense)                               |       | (1,628                                 | )          | (1,342 | ) | (700 | ) | (221 | ) | 2 |   |
| Loss on extinguishment of debt, net                                |       | —                                 |       | (1,083 | ) | (660 | ) | — |   | — |   |
| Loss from operations before income taxes                           |       | (5,129                                 | )          | (5,801 | ) | (2,769 | ) | (784 | ) | (114 | ) |
| Income tax expense (benefit)                                       |       | —                                 |       | — |   | — |   | — |   | — |   |
| Net income (loss)                                                  |       | $                                      | (5,129     | ) | $ | (5,801 | ) | $ | (2,769 | ) | $ | (784 | ) | $ | (114 | ) |
| Net loss per common share - basic and  diluted                     |       | $                                      | (0.09      | ) | $ | (0.12 | ) | $ | (0.07 | ) | $ | (0.02 | ) | $ | (0.00 | ) |
| Weighted average common shares outstanding                         |       | 56,974                                 |       | 50,338 |   | 38,477 |   | 33,113 |   | 31,317 |   |
|                                                               |       |                                   |       |   |   |   |   |   |   |   |   |
| **Statements of Cash Flow Data:**                                  |       |                                   |       |   |   |   |   |   |   |   |   |
| Cash provided by (used in) operating  activities                   |       | $                                      | (1,234     | ) | $ | (1,802 | ) | $ | (964 | ) | $ | (185 | ) | $ | 76 |   |
| Cash provided by (used in) investing  activities                   |       | $                                      | (15,513    | ) | $ | (4,052 | ) | $ | (4,800 | ) | $ | (2,122 | ) | $ | — |   |
| Cash provided by (used in) financing  activities                   |       | $                                      | 15,768     |   | $ | 8,717 |   | $ | 5,765 |   | $ | 2,371 |   | $ | — |   |
|                                                               |       |                                   |       |   |   |   |   |   |   |   |   |
| **Balance Sheet Data (at end of period):**                         |       |                                   |       |   |   |   |   |   |   |   |   |
| Working capital (deficit)                                          |       | $                                      | 1,747      |   | $ | 2,607 |   | $ | (1,357 | ) | $ | 576 |   | $ | 143 |   |
| Oil and gas properties, and equipment, net                         |       | $                                      | 26,858     |   | $ | 13,666 |   | $ | 11,820 |   | $ | 3,687 |   | $ | 434 |   |
| Total assets                                                       |       | $                                      | 29,491     |   | $ | 18,108 |   | $ | 13,373 |   | $ | 4,415 |   | $ | 707 |   |
| Long-term liabilities, net of discounts                            |       | $                                      | 22,971     |   | $ | 7,627 |   | $ | 5,155 |   | $ | 1,612 |   | $ | — |   |
| Total liabilities                                                  |       | $                                      | 23,632     |   | $ | 9,313 |   | $ | 7,320 |   | $ | 1,631 |   | $ | 130 |   |
| Shareholders’ equity                                          |       | $                                      | 5,858      |   | $ | 8,795 |   | $ | 6,053 |   | $ | 2,784 |   | $ | 577 |   |
|                                                               |       |                                   |       |   |   |   |   |   |   |   |   |
| **Other Financial Data:**                                          |       |                                   |       |   |   |   |   |   |   |   |   |
| Non-cash stock-based compensation                                  |       | $                                      | 1,255      |   | $ | 490 |   | $ | 727 |   | $ | 79 |   | $ | 93 |   |

** **

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** **

**Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

** **

The followingdiscussion is intended to assist in an understanding of the Company’shistorical financial position and results of operations for each year in thethree-year period ended June 30, 2008. The Company’s Financial Statementsand notes thereto included elsewhere in this Report contain detailedinformation that should be referred to in conjunction with the followingdiscussion.

 

**General**

 

The Company’s future results of operations and growth aresubstantially dependent upon (i) its ability to acquire or find andsuccessfully develop additional oil and gas reserves and (ii) theprevailing prices for oil and gas. We have an inventory of drilling locationsto pursue after the fiscal year ended June 30, 2008. If we are unable toeconomically acquire or find significant new reserves for development andexploitation, the Company’s oil and gas production, and thus its revenues,would likely decline gradually as its reserves are produced. In addition, oiland gas prices are dependent upon numerous factors beyond the Company’scontrol, such as economic, political and regulatory developments andcompetition from other sources of energy. The oil and gas markets havehistorically been very volatile, and any significant and extended decline inthe price of oil or gas would have a material adverse effect on the Company’sfinancial condition and results of operations, and could result in a reductionin the carrying value of the Company’s proved reserves and adversely affect itsaccess to capital.

 

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**Summary Operating, Reserve and Other Data**

 

**The following table presents anunaudited summary of certain operating and oil and natural gas reserve data,and non-GAAP financial data for the periods indicated:**

** **
| ** **                               | ** ** | **Year ended June 30,** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **2008**                               | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Operating Data:**                      |       |                                   |       |   |   |   |   |   |   |   |   |
| Proved Reserves (Bcfe)                   |       | 6.6                                    |       | 4.3 |   | 2.9 |   | 0.5 |   | 0.3 |   |
| Production (Mcfe)                        |       | 244,665                                |       | 76,214 |   | 59,798 |   | 70,780 |   | 75,176 |   |
| Producing wells at end of period, gross  |       | 32                                     |       | 22 |   | 17 |   | 17 |   | 14 |   |
| Producing wells at end of period, net    |       | 18.42                                  |       | 14.42 |   | 13.07 |   | 13.65 |   | 12.90 |   |
| Acreage, gross                           |       | 14,711                                 |       | 17,542 |   | 16,913 |   | 6,050 |   | 930 |   |
| Acreage, net                             |       | 6,151                                  |       | 7,364 |   | 7,073 |   | 2,171 |   | 891 |   |
|                                     |       |                                   |       |   |   |   |   |   |   |   |   |
| **Production:**                          |       |                                   |       |   |   |   |   |   |   |   |   |
| Oil (Bbl)                                |       | 1,682                                  |       | 967 |   | 1,047 |   | 506 |   | 563 |   |
| Natural gas (Mcf)                        |       | 228,219                                |       | 70,412 |   | 53,516 |   | 67,744 |   | 71,804 |   |
| Natural gas liquids (gallons)            |       | 44,476                                 |       | — |   | — |   | — |   | — |   |
| Total oil, gas and liquids (Mcfe)        |       | 244,665                                |       | 76,214 |   | 59,798 |   | 70,780 |   | 75,182 |   |
| Average daily (Mcfe)                     |       | 668                                    |       | 209 |   | 164 |   | 194 |   | 205 |   |
|                                     |       |                                   |       |   |   |   |   |   |   |   |   |
| **Weighted Average Sales Prices:**       |       |                                   |       |   |   |   |   |   |   |   |   |
| Oil (per Bbl)                            |       | $                                      | 102.15     |   | $ | 61.68 |   | $ | 59.90 |   | $ | 43.32 |   | $ | 32.16 |   |
| Natural gas (per Mcf)                    |       | $                                      | 9.01       |   | $ | 7.44 |   | $ | 8.34 |   | $ | 6.61 |   | $ | 5.55 |   |
| Natural gas liquids (per gallon)         |       | $                                      | 1.66       |   | n/a |   | n/a |   | n/a |   | n/a |   |
| Natural gas equivalent (per Mcfe)        |       | $                                      | 9.41       |   | $ | 7.65 |   | $ | 8.51 |   | $ | 6.63 |   | $ | 5.52 |   |
|                                     |       |                                   |       |   |   |   |   |   |   |   |   |
| **Selected Expenses per Mcfe:**          |       |                                   |       |   |   |   |   |   |   |   |   |
| Production costs                         |       | $                                      | 3.60       |   | $ | 4.18 |   | $ | 5.05 |   | $ | 3.33 |   | $ | 1.92 |   |
| Workover expenses (non-recurring)        |       | $                                      | 0.11       |   | $ | 1.40 |   | $ | — |   | $ | 0.08 |   | $ | — |   |
| Severance taxes                          |       | $                                      | 0.29       |   | $ | 0.39 |   | $ | 0.39 |   | $ | 0.34 |   | $ | 0.32 |   |
| Other revenue deductions                 |       | $                                      | 0.75       |   | $ | 0.35 |   | $ | 0.22 |   | $ | 0.11 |   | $ | 0.24 |   |
| Total lease operating expenses           |       | $                                      | 4.75       |   | $ | 6.32 |   | $ | 5.66 |   | $ | 3.86 |   | $ | 2.48 |   |
|                                     |       |                                   |       |   |   |   |   |   |   |   |   |
| General and administrative expenses:     |       |                                   |       |   |   |   |   |   |   |   |   |
| Non-cash stock-based compensation        |       | $                                      | 5.13       |   | $ | 6.43 |   | $ | 12.15 |   | $ | 1.12 |   | $ | 1.24 |   |
| Other general and administrative         |       | $                                      | 5.04       |   | $ | 10.96 |   | $ | 11.27 |   | 4.46 |   | 1.95 |   |
| Total general and administrative         |       | $                                      | 10.17      |   | $ | 17.39 |   | $ | 23.42 |   | $ | 5.58 |   | $ | 3.19 |   |
|                                     |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Depreciation, depletion and amortization |       | $                                      | 8.80       |   | $ | 4.76 |   | $ | 3.00 |   | $ | 5.15 |   | $ | 1.39 |   |

** **

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** **

**RESULTSOF OPERATIONS**

** **

## ***Comparison of Fiscal 2008 to Fiscal 2007***

## *** ***

## ***Revenues***

## *** ***

OIL AND GASSALES increased 295% to $2,302,310 for fiscal 2008 from $583,416 for fiscal2007 primarily due to higher gas volumes resulting from an average ofapproximately 13 (gross) wells being on-line in Louisiana in fiscal 2008 versusapproximately three and one-half wells in fiscal 2007, and a 21% increase inthe weighted average sales price for gas (per Mcf).

 

### **Costs and Expenses**

### ** **

OIL AND GASPRODUCTION, OPERATING AND DEVELOPMENT COSTS (also referred to as “LEASE OPERATINGEXPENSES” elsewhere herein) increased 142% to $1,162,489 (50% of oil and gassales) for fiscal 2008 from $481,145 (82% of oil and gas sales) for fiscal 2007primarily due to more wells being on-line in Louisiana, which resulted in: a$307,551 increase in salt water hauling and disposal costs; $126,992 in commonfacility expenses for production from the Company’s Johnson Branch wells, whichdid not occur in the prior year period; a $46,470 increase in contract laborcosts; a $41,998 increase in state taxes on production (also referred to as“severance taxes” elsewhere herein); and a $156,998 increase in costspassed-through to the Company by the purchaser of the Company’s gas. Such costsare deducted from the Company’s gross revenue by the purchaser and include, butare not limited to: costs to market the Company’s gas, compression fees, andthe cost of fuel used by the purchaser to convey the Company’s gas. Theseincreases were somewhat offset by a $79,867 drop in non-recurring workoverexpenses.

 

GENERAL ANDADMINISTRATIVE EXPENSES (“G&A”) increased 88% to $2,488,133 for fiscal 2008from $1,325,192 in fiscal 2007 as a result of: a $765,537 increase in non-cashstock compensation expense related primarily to appreciation of the Company’scommon stock price, a 29% increase in the number of shares of common stockgranted versus the prior year period, and full recognition in fiscal 2008 ofstock compensation issued during that year, which vested immediately with noforfeiture provisions, rather than amortization over the four quarters of theservice period; a $141,689 increase in cash compensation expense resulting froman increase in the number of employees; a $39,583 increase in reserve reportexpenses; a $15,428 increase in fees paid to our outside directors; and thefollowing expenses, which occurred in fiscal 2008 but did not occur in theprior year period: $60,000 in contracted professional services fees related tomanagement’s assessment of the Company’s internal controls over financialreporting required by Section 404(a) of the Sarbanes-Oxley Act of2002; $76,507 in marketing expenses; $51,030 in expense for directors’ andofficers’ insurance; and, $23,082 in corporate fees related to the Company’sannual shareholders’ meeting. These increases were partially offset by a$36,279 decrease in legal fees due to non-recurrence of: the preparation ofdocuments and filings related to a private placement of shares of the Company’scommon stock in December 2006 and the transacting of the March 2007debt issue.

 

DEPRECIATION, DEPLETION AND AMORTIZATION (“DD&A”) increased 494% to$2,152,096 in fiscal 2008 from $362,434 in fiscal 2007 primarily due to an$11,281,505, or 278%, increase in capital expenditures in fiscal 2008 relatedto the acquisition and development of oil and gas properties.

 

IMPAIRMENT OF OIL AND GAS PROPERTIES decreased to $0 in fiscal2008 from $1,790,882 in fiscal 2007. The fiscal 2007 impairment resulted from adownward revision of our reserve estimates, which was effected by the followingevents: (i) we experienced delays related to third party providers in ourBethany Longstreet acreage, including not receiving contracted-for compressionservices, which temporarily delayed our ability to produce from these wells; (ii) wedid not effectuate final completion of certain wells due to a shift in ourfocus to the development of our Johnson Branch acreage in Caddo Parish,Louisiana; and, (iii) the lack of 

 

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production history in wells recently brought online lead to asharper decline curve being utilized by RPS Scotia, Inc. in formulatingthe reserve estimates.

 

INTEREST EXPENSE, INCLUDING AMORTIZATION OFLOAN DISCOUNT increased 24% to $1,579,452 in fiscal 2008 from $1,278,721 infiscal 2007 primarily due to an increase in debt (before discounts) to$23,827,800 at June 30, 2008 from $9,000,000 at June 30, 2007. Thisincrease resulted from the repayment of a $1,300,000 note held by Tauren on February 2,2007 from the proceeds of a December 2006 equity offering, and theretirement of $5,500,000 of indebtedness held by Petro Capital V. L.P. on March 5,2007 via the borrowing of $5,000,000 pursuant to the aforementioned Wells FargoCredit Facility’s senior convertible term loan, subsequent draws ofapproximately $16,827,800 on a related revolving line of credit, and theborrowing of $2,000,000 under the terms of the May 6, 2008 SubordinatedNote. The weighted average debt balance (before discounts) for fiscal 2008 was$16,494,613 as compared to $6,467,579 in fiscal 2007. The Credit Facility withWells Fargo also resulted in a loan discount being recorded. The discount isbeing amortized over the original three-year term of the debt as additionalinterest expense with $516,030 being recorded in fiscal 2008 as compared to$164,961 in fiscal 2007. Such increases were somewhat offset by thecapitalization of interest expense tothe full cost pool for oil and gas properties of $330,608 in fiscal 2008as compared to zero in fiscal 2007.

 

LOSS ONEXTINGUISHMENT OF DEBT was $0 in fiscal 2008 as compared to $1,082,887 infiscal 2007 due to there being no retirement of debt in fiscal 2008. On March 5,2007, the senior debt held by Petro Capital was retired with proceedsfrom the Credit Facility with Wells Fargo. In connection with this retirement,the Company recorded a loss on extinguishment of debt in the amount of$(1,082,887) in fiscal 2007. Such amount included the write-off of deferredloan costs ($235,898), and the write-off of the remaining loan discount($846,989).

 

## ***Comparison of Fiscal 2007 to Fiscal 2006***

## *** ***

## ***Revenues***

## *** ***

OIL AND GASSALES increased 15% to $583,416 in fiscal 2007 from $508,925 in fiscal 2006,due primarily to a 27% increase in oil and gas production, which was partiallyoffset by an 11% decrease in the weighted average sales prices for gas (perMcf).

 

### **Costs and Expenses**

### ** **

OIL AND GASPRODUCTION, OPERATING AND DEVELOPMENT COSTS (also referred to as “LEASEOPERATING EXPENSES” elsewhere herein) increased 42% to $481,145 in fiscal 2007from $338,239 in fiscal 2006 due primarily to greater activity resulting frommore wells being brought on-line in Louisiana.

 

GENERAL ANDADMINISTRATIVE EXPENSES (“G&A”) decreased 5% to $1,325,192 in fiscal 2007from $1,400,482 in fiscal 2006 primarily as a result of a $266,700 decrease innon-cash compensation expense related to stock grants to officers anddirectors.  Such decrease was partiallyoffset by a $128,736 increase in compensation expenses resulting from anincrease in the number of employees.

 

DEPRECIATION, DEPLETION AND AMORTIZATION (“DD&A”) increased102% to $362,434 in fiscal 2007 from $179,237 in fiscal 2006. The increase wasprimarily due to a $2,595,469, or 143%, increase in capital expenditures infiscal 2006 related to the acquisition and development of oil and gasproperties.

 

IMPAIRMENT OF OIL AND GAS PROPERTIES increased to $1,790,882 infiscal 2007 from $0 in fiscal 2006. The impairment resulted from a downwardrevision of our reserve estimates, which was effected by the following events: (i) weexperienced delays related to third party providers in our Bethany Longstreetacreage, including not receiving contracted-for compression services, whichtemporarily delayed our ability to produce 

 

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from these wells; (ii) we did not effectuate finalcompletion of certain wells due to a short-term shift in our focus to thedevelopment of our Johnson Branch acreage in Caddo Parish, Louisiana; and, (iii) thelack of production history in wells recently brought online lead to a sharperdecline curve being utilized by The Scotia Group, Inc. in formulating thereserve estimates.

 

INTERESTEXPENSE, INCLUDING AMORTIZATION OF LOANDISCOUNT increased 100% to $1,278,721 in fiscal 2007 from $638,800 infiscal 2006 due to the increase in debt as a result of the $5,500,000 of PetroCapital debt being in place for eight months in fiscal 2007 as compared to fourmonths in fiscal 2006; and, the borrowing of $5,000,000 pursuant to a newsenior convertible term loan on March 5, 2007, and subsequent draws ofapproximately $4,000,000 on a related revolving line of credit, with WellsFargo. The Credit Facility with Wells Fargo also resulted in a loan discountbeing recorded. The weighted averagedebt balance (before discounts) for fiscal 2007 was $6,467,579 as compared to$3,786,247 in fiscal 2006. The discount is being amortized over theoriginal three-year term of the debt as additional interest expense with$164,961 being recorded in fiscal 2007.

 

LOSS ONEXTINGUISHMENT OF DEBT increased 64% to $1,082,887 from $660,330 in fiscal2007. On March 5,2007, the senior debt held by Petro Capital was retired with proceedsfrom the Credit Facility with Wells Fargo. In connection with this retirement, the Company recorded a loss onextinguishment of debt in the amount of $(1,082,887) in fiscal 2007.  Such amount includes the write-off ofdeferred loan costs ($235,898), and the write-off of the remaining loandiscount ($846,989).  In fiscal 2006, the remainingDebentures were retired with proceeds from the then-new senior debt issue heldby Petro Capital.  In connection withthis retirement, the Company recorded a loss on extinguishment of debt in theamount of $(660,330) in fiscal 2006. Such amount included the write-off of deferred loan costs ($99,204), thewrite-off of the remaining loan discount ($237,931), and a prepayment penaltyand associated legal fees ($323,195).

 

**Liquidityand Capital Resources**

 

### **Overview**

### ** **

The Company’s primary resource is its oil and gasreserves. The Company has entered into a senior credit facility, but suchfacility is not expected to supplement the Company’s internally generated cashflow as a source of financing for its general working capital purposes. Productprices, over which we have no control, have a significant impact on revenuesfrom production and the value of such reserves and thereby on the Company’sborrowing capacity in the event the Company determines to borrow additionalfunds. Within the confines of product pricing, the Company must be able to findand develop or acquire oil and gas reserves in a cost effective manner in orderto generate sufficient financial resources through internal means to completethe financing of its capital expenditure program.

 

AtJune 30, 2008, the Company had working capital of $1,746,741. On July 28and December 15, 2006, we raised $2,100,000 and $3,940,000, respectively,through the private placement of common stock. On March 5, 2007, Cubicentered into a Credit Agreement with Wells Fargo providing for the CreditFacility, which consists of a convertible term loan of $5,000,000 and arevolving credit facility of $20,000,000 in order to fund the drilling andcompletion of new wells. On May 6, 2008, the Company issued a subordinatedpromissory note in the amount of $2,000,000 to Diversified Dynamics Corporation(see “Notes to Financial Statements – Note E – Long-term debt” elsewhereherein).

 

During thetwelve months ended June 30, 2008, the Company used cash flows fromoperating activities of $1,233,829 as compared to $1,802,068 in fiscal 2007.Cash flow from operations is dependent on our ability to increase productionthrough our development and exploratory activities and the price received foroil and natural gas.

 

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### **Working Capital andCash Flow**

 

The Company’s working capital decreased to$1,746,741 at June 30, 2008 from $2,606,796 at June 30, 2007,primarily due to capital expenditures of $15,341,903 related to the drillingand completion of new wells and the aforementioned $1,233,829 use of cash fromoperating activities in fiscal 2008. These uses of cash were somewhat offset bythe borrowing of $12,827,800 on the aforementioned revolving line of creditwith Wells Fargo, the borrowing of $2,000,000 under the aforementionedsubordinated promissory note issued to Diversified  Dynamics Corporation and $1,110,295 inproceeds from the issuance of stock, resulting from the exercise of warrants,during fiscal 2008.

 

TheCompany’s working capital increased to $2,606,796 at June 30, 2007 from adeficit of $(1,357,230) at June 30, 2006, primarily due to an increase incash and cash equivalents resulting from the borrowing of approximately$9,000,000 on the aforementioned Credit Facility with Wells Fargo, which wassomewhat offset by capital expenditures of $4,060,398 related to the drillingand completion of new wells and a cash flow deficit from operating activitiesof $(1,802,068) during fiscal 2007.

 

### **Capital Expenditures**

 

Themajority of our oil and gas reserves are undeveloped. As such, recovery of theCompany’s future undeveloped proved reserves will require significant capitalexpenditures. Our management estimates that aggregate capital expendituresranging from a minimum of approximately $6,000,000 (from currently availablefunds and projected cash from operating activities) to a maximum ofapproximately $36,000,000 (subject to the availability of additional financing)will be made to further develop these reserves during fiscal 2009. Moreover,additional capital expenditures may be required for exploratory drilling on ourundeveloped acreage. The Company may increase its planned activities for fiscal2009 if product prices improve and if we are able to obtain the additionalcapital resources necessary to finance such activities. However, to the extentthat: i) we are not able to raise additional capital; or ii) drilling rigs,drill pipe and other material used in oil and gas drilling and completing areunavailable, our capital expenditures will be restricted.

 

### **Capital Resources**

 

TheCompany plans to fund its development and exploratory activities through cashon hand (which was approximately $5 million as of the date of this filing),cash provided from operations; the potential exercises of warrants for cash;and one of, or a combination of, the following potential transactions: aprivate placement of common stock; a public offering of common stock; a jointventure with a more well-financed industry partner in which we would farm-out ato-be-determined percentage of our working interests in certain properties; ora disposition of assets.

 

Whilewe expect production from the wells drilled and completed in fiscal 2006, 2007,2008 and subsequent to the end of fiscal 2008 to provide cash flow to supportadditional drilling in fiscal 2009, the Company cannot be certain that adequatefunds will be available from cash on hand, operating cash flow, the exercise ofwarrants, and the aforementioned potential transactions to fully fund theprojected capital expenditures for fiscal 2009. Additionally, because futurecash flows, the availability of borrowings, and the ability to consummate theaforementioned potential transactions are subject to a number of variables,such as prevailing prices of oil and gas, actual production from existing andnewly-completed wells, the Company’s success in developing and producing newreserves, the uncertainty of financial markets and joint venture and merger andacquisition activity, and the uncertainty with respect to the amount of fundswhich may ultimately be required to finance the Company’s development andexploration program, there can be no assurance that the Company’s capitalresources will be sufficient to sustain the Company’s development andexploratory activities.

 

Althoughthe Company believes it will be able to obtain funds pursuant to theabove-mentioned alternatives, management cannot be assured that such capitalresources will be available to the Company. If we are unable to 

 

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obtainsuch capital resources on a timely basis, the Company may curtail its planneddevelopment and exploratory activities.

 

### **Subsequent Events**

 

Subsequentto the end of fiscal 2008, during July and August, 2008, the Companycompleted for production four wells in its Johnson Branch acreage, two of whichwere completed in the Bossier/Haynesville shales, bringing the Company’s numberof producing wells in Louisiana to 20. Also, since the end of fiscal 2008,Cubic has drilled two wells, the Estes 7-1 and the Red Oak Timber 5-1 (ourfourth and fifth wells to be drilled into the Bossier/Haynesville shales), tototal depth of approximately 11,950 feet into the Bossier/Haynesville shales inits Bethany Longstreet acreage. Cubic has a 35% working interest in both wells.The Estes 7-1 was drilled using a casing program with 7 5/8” pipe for the intermediatestring, which will allow the Company to drill horizontally into theBossier/Haynesville shales at a later date, after being vertically completedinitially in the Cotton Valley formation.

 

Asof September 1, 2008, the Company had successfully drilled 22 wells innorthwest Louisiana with 20 having been completed as producers of hydrocarbons;the two other wells are awaiting completion. As of such date, 10 Johnson Branchwells have been completed as hydrocarbon producers in the Cotton Valley sandstonesand two into the Bossier/Haynesville shales. Cubic has a 49% working interestin its Johnson Branch acreage. Seven miles to the South, in its BethanyLongstreet acreage, Cubic has eight wells producing from the Cotton Valley andHosston formations. Cubic has a 25% working interest in seven of theseproducing wells, and a 35% working interest in the Estes 8-1 well. Work isongoing at the Bethany Longstreet and Johnson Branch wells to increase theaverage daily production from these areas. We also anticipate that we willcomplete and fracture stimulate additional zones of certain Johnson Branchwells.

 

Giventhe forgoing subsequent events, the Company does not believe that the downwardrevisions in estimates taken in the fiscal 2008 and 2007 reserve reports(please also see Item 1. Business – “DESCRIPTION OF BUSINESS” and Item 1.Business – “OIL AND GAS RESERVES”, and Notes to Financial Statements, “Note J -Oil and gas reserves information (unaudited)”) will have a material impact onthe Company’s future prospects.

 

All of the Company’s Louisiana acreage lies atop thecenter of what is known in our industry as the “Haynesville Shale Play” (whichwe refer to as the “Bossier/Haynesville shales” elsewhere herein), which isbelieved in our industry to be one of the most prolific field discoveries inthe United States. The discovery of the existence of the Bossier/Haynesvilleshale formations in the Company’s acreage mandated that we redirect capital infiscal 2008 to protect our rights to this formation, which took spending awayfrom the maximization of development of the Cotton Valley formation in ourBethany Longstreet and Johnson Branch fields.

 

Our first round of drilling was undertaken tomaximize retention of our lease rights to develop our Johnson Branch andBethany Longstreet acreage. Infrastructure costs have required greater capitaloutlay than anticipated. This variance, coupled with increases in overalldrilling and completion costs, had an effect on the completion techniques thatwe utilized in fiscal 2008. While it is in the Company’s future developmentplans to re-complete this first round of producing wells at a later date, theCompany’s focus has changed from maximizing production and reserves in thefirst round of drilling to holding acreage and preserving capital forpotentially much greater production and reserves from the emerging HaynesvilleShale Play.

 

The majority of the Company’s unproven acreage liesin our Johnson Branch field. Reservoir analysis produced by a third-partyengineer for the Johnson Branch acreage indicates a prolific and economicBossier/Haynesville shale formation and a productive and economic Cotton Valleyformation. Wells drilled by the Company subsequent to the end of fiscal 2008into the Bossier/Haynesville shale formation in our Bethany Longstreet fieldseem to indicate the same productive formation characteristics as compared tothe wells drilled into the Bossier/Haynesville shales in our Johnson Branchacreage. Moreover, horizontal Cotton Valley formation wells drilled by ourcompetitors in the Bethany Longstreet field have demonstrated productivecharacteristics.

 

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Accordingly, while work undertaken by the Companysubsequent to the end of fiscal 2008 has allowed us to improve our completiontechniques for vertical Cotton Valley wells in our Bethany Longstreet andJohnson Branch fields, going forward, the Company contemplates horizontaldrilling of all its Cotton Valley and Bossier/Haynesville wells.

 

The redirection of the Company’s focus outlinedabove impacted the Company’s proved reserves amounts for the fiscal year ended June 30,2008 as follows: (i) only horizontal wells for the Cotton Valley sandstoneand Bossier/Haynesville shale formations are now contemplated, which resultedin the loss of Proved Undeveloped (“PUD”) reserves for certain Cotton Valleywells that had previously been allowed with a vertical drilling program; and (ii) thelack of production history information as of June 30, 2008 for horizontalCotton Valley and horizontal Bossier/Haynesville shale wells adversely impactedassumptions regarding both initial production rates and production declinecurves used in calculating the Company’s reserve estimates. The Companybelieves that proceeding at a more measured drilling pace for fiscal 2009 willallow the Company to take advantage of improved completion techniques, and,pursuant to the data filed subsequent to the end of fiscal 2008 by ourcompetitors with respect to productive wells in the Haynesville Shale Play,that the two wells drilled and the four wells completed subsequent to the endof fiscal 2008 (see Item1. Business – “RECENT DEVELOPMENTS”elsewhere herein) will result in a significant increase in reserves for fiscal2009.

 

**Critical Accounting Policies**

 

Thepreparation of the financial statements requires us to make a number ofestimates and assumptions relating to the reported amounts of assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the period. When alternatives exist among variousaccounting methods, the choice of accounting method can have a significantimpact on reported amounts. The following is a discussion of our accountingestimates and judgments which management believes are most significant in itsapplication of generally accepted accounting principles used in the preparationof the financial statements.

 

***Impairment of long-lived assets and long-livedassets to be disposed of***

 

TheCompany has adopted the provisions of the Financial Accounting Standards Board’s(the “FASB”) Statement of Financial Accounting Standards (“FAS”) No. 144 (“FASNo. 144”), *Accounting for the Impairment or Disposal ofLong-Lived Assets* effective for periods beginning July 1, 2002,and thereafter. FAS No. 144 replaces FAS No. 121, and, among othermatters, addresses financial accounting and reporting for the impairment ordisposal of long-lived assets. FAS No. 144 retains the basic provisions ofFAS No. 121, but broadens its scope and establishes a single model forlong-lived assets to be disposed of by sale. In addition, the Company issubject to the rules of the Securities and Exchange Commission withrespect to impairment of oil and gas properties accounted for under the fullcost method of accounting, as described below.

 

***Full cost method of accounting for oil and gasproperties***

 

TheCompany has adopted the full cost method of accounting for oil and gasproperties. Management believes adoption of the full cost method moreaccurately reflects management’s exploration objectives and results byincluding all costs incurred as integral for the acquisition, discovery anddevelopment of whatever reserves ultimately result from its efforts as a whole.Under the full cost method of accounting, all costs associated withacquisition, exploration and development of oil and gas reserves, includingsuch costs as leasehold acquisition costs, interest costs related toexploratory and development activities, and directly related overhead costs,are capitalized into the full cost pool.

 

Allcapitalized costs of oil and gas properties, including the estimated futurecosts to develop proved reserves, are amortized on the unit-of-productionmethod using estimates of proved reserves. Investments in unproved propertiesand major development projects are not amortized until proved reservesassociated with the projects 

 

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canbe determined or until impairment occurs. If the results of an assessmentindicate that the properties are impaired, the amount of the impairment isadded to the capitalized costs to be amortized.

 

Inaddition, the capitalized costs are subject to a “full cost ceiling test,”which generally limits such costs to the aggregate of the “estimated presentvalue” (discounted at a 10 percent (10%) interest rate) of future net revenuesfrom proved reserves, based on current economic and operating conditions, plusthe lower of cost or fair market value of unproved properties.

 

Salesof proved and unproved properties are accounted for as adjustments ofcapitalized costs with no gain or loss recognized, unless such adjustmentswould significantly alter the relationship between capitalized costs and provedreserves of oil and gas, in which case the gain or loss is recognized inincome.

 

***Oil and gas revenues***

 

TheCompany recognizes oil and gas revenues when oil and gas production is sold toa purchaser at a fixed or determinable price, when delivery has occurred andtitle has transferred, and if collectability of the revenue is probable.Delivery occurs and title is transferred when production has been delivered toa purchaser’s pipeline or truck. As a result of the numerous requirementsnecessary to gather information from purchasers or various measurementlocations, calculate volumes produced, perform field and wellhead allocationsand distribute and disburse funds to various working interest partners androyalty owners, the collection of revenues from oil and gas production may takeup to 60 days following the month of production. Therefore, we make accrualsfor revenues and accounts receivable based on estimates of our share ofproduction. Since the settlement process may take 30 to 60 days following themonth of actual production, our financial results include estimates ofproduction and revenues for the related time period. We record any differences,which historically have not been significant, between the actual amountsultimately received and the original estimates in the period they becomefinalized. Differences between sales and production volumes during the yearsended June 30, 2008, 2007 and 2006 were not significant.

 

***Use of estimates***

 

Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the amounts reported in the financial statements and accompanyingnotes. Actual results could differ from those estimates.

 

***Certain significant estimates***

 

Management’sestimates of oil and gas reserves are based on various assumptions, includingconstant oil and gas prices. It is reasonably possible that a future event inthe near term could cause the estimates to change and such changes could have asevere impact. Actual future production, cash flows, taxes, operating expenses,development expenditures and quantities of recoverable oil and gas reserves mayvary substantially from those assumed in the estimates. The accuracy of anyreserve estimate is a function of the quality of available data, engineeringand geological interpretation, and judgment. Subsequent evaluation of the samereserves based upon production history will result in variations, which may besubstantial, in the estimated reserves. While it is at least reasonablypossible that the estimates above will change materially in the near term, noestimate can be made of the range of possible changes that might occur.

 

***Stock-based compensation***

 

TheCompany accounts for its stock-based employee compensation plans pursuant toFAS No. 123R, *Share-Based Payment*,which is a revision of FAS No. 123, *Accounting for Stock-BasedCompensation*, and supersedes Accounting Principles Board (“APB”)Opinion No. 25, *Accounting for StockIssued to Employees* (“APB No. 25”). This FAS requires theCompany to recognize compensation costs related to stock-based payment 

 

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transactions(i.e., the granting of stock options and warrants, and awards of unregisteredshares of common stock) in the financial statements. With limited exceptions,the amount of compensation is measured based on the grant-date fair value ofthe equity issued. Compensation cost is recognized over the period that anemployee provides services in exchange for the award. This new standard becameeffective for awards that are granted, modified or settled in cash in interimand annual financial periods beginning after June 30, 2006.

 

**Other Accounting Policies and Recent Accounting Pronouncements**

 

Pleasesee “Notes to Financial Statements – Note B – Significant accounting policies”elsewhere herein.

 

**Inflation**

** **

**Although the level of inflation affects certain of theCompany’s costs and expenses, inflation did not have a significant effect onthe Company’s results of operations during fiscal 2008.**

** **

**Related Party Transactions**

** **

**A description of our related party transactions is includedin “Note F – Related party transactions” in the Notes to the FinancialStatements of the Company included elsewhere in this Report, and isincorporated herein by reference.**

** **

**Off-Balance SheetArrangements**

** **

**We do not currently use any off-balance sheet arrangementsto enhance our liquidity and capital resource positions, or for any otherpurpose.**

 

**Forward-Looking Statementsand Safe Harbor Provisions**

 

This report contains “forward-looking statements”within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended. Such forward-looking statements are based on current expectations thatinvolve a number of risks and uncertainties that could cause actual results todiffer materially from the results discussed in the forward-looking statements.Generally, forward-looking statements include words or phrases such as “managementanticipates,” “the Company believes,” “the Company anticipates,” and words andphrases of similar impact. The forward-looking statements are made pursuant tosafe harbor provisions of the Private Securities Litigation’s Reform Act of1995.

 

**The factors that could cause actual results to differmaterially from the forward-looking statements include, but are not limited to:(i) industry conditions and competition, (ii) the cyclical nature ofthe industry, (iii) domestic and worldwide supplies and demand for oil andgas, (iv) operational risks and insurance, (v) environmentalliabilities which may arise in the future which**are not covered by insurance or indemnity, (vi) the impact ofcurrent and future laws and government regulations, as well as repeal ormodification of same, affecting the oil and gas industry and the Company’soperations in particular, (vii) production levels and other activities ofOPEC and other oil and gas producers, and the impact that the above factors andother events have on the current and expected future pricing of oil and naturalgas, and (viii) the risks described from time to time in the Company’sreports filed with the Securities and Exchange Commission.**

 

**The forward-looking statements in this report are subjectto all the risks and uncertainties which are described in this document. We mayalso make material acquisitions or divestitures or enter into financingtransactions. None of these events can be predicted with certainty and are nottaken into consideration in the forward-looking statements.**

 

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**For all of these reasons, actual results may varymaterially from the forward-looking statements and we cannot assure you thatthe assumptions used are necessarily the most likely. We will not necessarilyupdate any forward looking statements to reflect events or circumstancesoccurring after the date the statement is made except as may be required byfederal securities laws.**

 

**There are a number of risks that may affect our futureoperating results and financial condition. See “Item 1A. Risk Factors.”**

 

**Item 7A. Quantitative andQualitative Disclosures About Market Risk.**

 

**Commodity Price Risk**

 

**We are subject to price fluctuations for natural gas andcrude oil. Prices received for natural gas sold on the spot market are volatiledue primarily to seasonality of demand and other factors beyond our control.Reductions in crude oil, natural gas and natural gas liquids prices could havea material adverse effect on our financial position, results of operations andquantities of reserves recoverable on an economic basis. Any reduction inreserves, including reductions due to price fluctuations, can adversely affectour liquidity and our ability to obtain capital for our acquisition anddevelopment activities. To date, we have not entered into futures contracts orother hedging agreements to manage the commodity price risk for a portion ofour production.**

** **

**Interest Rate Risk**

** **

**As of June 30, 2008, we had $23,827,800 of long-termdebt outstanding under our Credit Facility and the Subordinated Note, each ofwhich matures in fiscal 2010 and bears interest at the prime rate plus 2.0%. Asa result, our interest costs fluctuate based on short-term interest rates.Based on the aforementioned borrowings outstanding at June 30, 2008, a 100basis point change in interest rates would change our annual interest expenseby approximately $238,828. We had no interest rate derivatives during fiscal2008.**

** **

**Item 8.    Financial Statements and Supplementary Data.**

 

The Report of Independent Accountants, FinancialStatements and any supplementary financial data required by this Item are setforth on pages F-1 through F-37 of this Report and are incorporated hereinby reference.

 

**Item 9.    Changes in and Disagreements withAccountants on Accounting and Financial Disclosure.**

** **

None.

 

**Item 9A. Controls andProcedures.**

** **

**Conclusion Regarding the Effectiveness of Disclosure Controlsand Procedures**

 

Underthe supervision and with the participation of our management, including ourprincipal executive officer and principal financial officer, we conducted anevaluation of our disclosure controls and procedures, as such term is definedin Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as ofthe end of the period covered by this report. Based on this evaluation, ourprincipal executive officer and our principal financial officer concluded thatour disclosure controls and procedures were effective to provide reasonableassurance that information required to be disclosed by us in reports we file orsubmit under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms, and isaccumulated and communicated to our management, including our principalexecutive officer and principal financial officer, as appropriate to allowtimely decisions regarding required disclosures.

 

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**Management’s Report on Internal Control Over FinancialReporting**

 

Ourmanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting, as such term is defined in Rules 13(a)-15(f) ofthe Securities Exchange Act of 1934, as amended. Under the supervision and withthe participation of our management, including our principal executive officerand principal financial officer, we conducted an assessment, including testing,of the effectiveness of our internal control over financial reporting as of June 30,2008 based on the criteria set forth in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. Our system of internal control overfinancial reporting is designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples. Our internal control over financial reporting includes thosepolicies and procedures that (i) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of our assets; (ii) provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat our receipts and expenditures are being made only in accordance withauthorizations of our management and directors; and (iii) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of our assets that could have a materialeffect on the financial statements.

 

Basedon our evaluation under the criteria set forth in *Internal Control—Integrated Framework*, our managementconcluded that our internal control over financial reporting was effective asof June 30, 2008. This Annual Report does not include an attestationreport of our independent registered public accounting firm regarding internalcontrol over financial reporting. We were not required to have, nor have weengaged our independent registered public accounting firm to perform, an auditon our internal control over financial reporting pursuant to the rules ofthe Securities and Exchange Commission that permit us to provide onlymanagement’s report in this Annual Report.

 

**Changes in Internal Control Over Financial Reporting**

 

Subsequentto our evaluation, there were no changes in internal controls or other factorsthat could materially affect, or are reasonably likely to materially affect,these internal controls. We maintain a system of internal control overfinancial reporting. There were no changes in our internal control overfinancial reporting during the fourth quarter of fiscal 2008 that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

**Inherent Limitations on Internal Control**

 

Acontrol system, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the control systemare met. Further, the benefits of controls must be considered relative to theircosts. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, have been detected. These inherent limitationsinclude the realities that judgments in decision making can be faulty, and thatbreakdowns can occur because of simple errors. Additionally, controls can becircumvented by the individual acts of some persons, by collusion of two ormore people, or by management override of the control. The design of any systemof controls is also based in part upon certain assumptions about the likelihoodof future events, and there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions. Because of theinherent limitations in a cost-effective control system, misstatements due toerror or fraud may occur and not be detected.

 

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**Certifications**

 

Ourchief executive officer and chief financial officer have completed thecertifications required to be filed as an Exhibit to this Report (seeExhibits 31.1 and 31.2) relating to the design of our disclosure controls andprocedures and the design of our internal control over financial reporting.

 

**Item 9B. Other Information.**

 

None.

 

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**PART III**

 

**Item 10. Directors,Executive Officers and Corporate Governance.**

 

**Directors and Executive Officers**

 

Thefollowing table provides information concerning each of our executive officersand directors as of September 1, 2008:

 
| **Name**                   | ** ** | **Age** | ** ** | **Position(s) Held with Cubic**                | ** ** | **Director  Since** | ** ** |
|----------------------------|------------|---------|------------|---------------------------------------------------------------|------------|---------------------|------------|
| Calvin A. Wallen, III |       | 53      |       | Chairman of  the Board, President and Chief Executive Officer |       | 1997                |       |
|                       |       |    |       |                                                          |       |                |       |
| Scott D. Guffey            |       | 44      |       | Chief  Financial Officer                                      |       | n/a                 |       |
|                       |       |    |       |                                                          |       |                |       |
| Jon S. Ross                |       | 44      |       | Corporate  Secretary and Director                             |       | 1998                |       |
|                       |       |    |       |                                                          |       |                |       |
| Gene C. Howard             |       | 81      |       | Director                                                      |       | 1991                |       |
|                       |       |    |       |                                                          |       |                |       |
| Herbert A. Bayer           |       | 59      |       | Director                                                      |       | 2003                |       |
|                       |       |    |       |                                                          |       |                |       |
| Bob L. Clements            |       | 65      |       | Director                                                      |       | 2004                |       |

 

CALVIN A. WALLEN, III has served as thePresident and Chief Executive Officer of the Company since December 1997,and as Chairman of the Board of Directors since June 1999. Mr. Wallenhas over 20 years of experience in the oil and gas industry working as adrilling and petroleum engineer. Prior to joining Cubic, Mr. Wallen wasemployed by Superior Oil and various other drilling contractors includingResource, Tom Brown and Rowan International. Mr. Wallen assisted in thedesign and construction of several land rigs with advanced drilling systems andhas domestic and international experience in drilling engineering. Whileemployed by Rowan International, Mr. Wallen gained experience in drillinghigh angle directional wells at Prudhoe Bay on contract to Arco. In 1982, Mr. Wallenbegan acquiring and developing oil and gas properties, forming a productioncompany that has evolved into Tauren Exploration, Inc. Mr. Wallenattended Texas A&M University at College Station, Texas.

 

SCOTT D. GUFFEY joined the Company in August 2007as Chief Financial Officer and brings more than 20 years of corporate finance-relatedexperience to the Company. Prior to joining Cubic, Mr. Guffey served from2000 through 2006 as Vice President of Corporate Finance for venturecapital-backed BenefitMall Inc., a leading broker services provider that wasacquired by Allied Capital in late 2006. Prior to joining BenefitMall, Mr. Guffeyserved as Vice President of Finance, Mergers & Acquisitions (“M&A”)and Investor Relations for publicly-traded Aegis Communications Group, Inc.from 1997 through 2000. Before joining Aegis, he was Vice President ofInvestment Banking with Principal Financial Securities, Inc. for threeyears, and has seven years of Financial Planning & Analysis andM&A experience with Electronic Data Systems Corporation. Mr. Guffeyholds an M.B.A from Southern Methodist University’s Cox School of Business anda B.A. in Economics from the University of Virginia.

 

JON S. ROSS has served as a director of theCompany since April 1998 and as Secretary since November 1998. Since1989, Mr. Ross has been a practicing attorney in Dallas, Texasrepresenting over 80 business entities. He has served on several community andnot-for-profit committees and boards and has been asked to speak to corporateand civic leaders on a variety of corporate law topics. Mr. Ross graduatedfrom St. Mark’s School of Texas with honors in 1982 and graduated from theUniversity of Texas at Austin in 1986 with a B.B.A. in Accounting. He thengraduated from the University of Texas School of Law in 1989 attaining a JurisDoctorate degree.

 

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GENE C. HOWARD is the Senior Partner of the lawfirm of Howard, Widdows, and Bufogle, P.C. of Tulsa, Oklahoma and has beenengaged primarily in the private practice of law over the past thirty-fiveyears. Mr. Howard served in the Oklahoma State Senate from 1964 through1982 and was President Pro Tem from 1975 through 1981. In addition, he servedas the Chairman of the Board of Farmers and Exchange Bank from 1972 through1991 and on the Board of Directors of Local Federal Bank of Oklahoma. Mr. Howardis a Director of the Oklahoma State Education and Employment Group InsuranceBoard and presently acts as Chairman. Mr. Howard served as Director ofEntreCap Financial Corporation and Hinderliter Construction, Inc. from1991 to August of 1992. He is also Chairman of the Board of PhiladelphiaMortgage Trust.

 

HERBERTA. BAYER has served as a director of Cubic Energy, Inc. since May 2003.From 2006 to 2008, Mr. Bayer served as Global Director of Wi-Fi andMunicipal Markets for SmartSynch, Inc., which provides GPRS and Wi-FiSmart Metering Technology for Smart Grid Deployments for the electric utilityindustry. Prior to joining SmartSynch, Mr. Bayer served as Director ofClient Services for CH2M HILL, an engineering, construction and operationscompany, from 2005 to 2006, and National Director of Sales for Hexagram Inc.from 2003 to 2005. During his career, Mr. Bayer has worked withinvestor-owned utilities, government-run municipalities and electriccooperatives. His work experience includes work in Electronic Meter Reading,Automatic Meter Reading, Load Research, Internet Applications, and Wi-FiNetwork Systems. Mr. Bayer’s major course of study at Indiana StateUniversity was Business Management.

 

BOBL. CLEMENTS joined the Company’s board of directors in February 2004. Mr. Clementshas a degree in the OPM Program from the Harvard Business School. Mr. Clementshas been in the wholesale food and restaurant business for over thirty years,currently controlling the largest independent producer of stuffed jalapenos andcorn dogs as well as two successful restaurants in the Rockwall, Texas area. Mr. Clementshas served and currently serves on a variety of profit and charitablecommittees and boards.

 

There are no familyrelationships among any of the directors or executive officers of the Company.See “Certain Relationships and Related Transactions” for a description oftransactions between the Company and its directors, executive officers or theiraffiliates.

 

**Audit Committee; Financial Expert**

 

The Audit Committee iscomprised of Messrs. Howard (Chairman), Clements and Bayer. All of themembers of the Audit Committee are “independent” under the rules of theSEC. The Board of Directors, after reviewing all of the relevant facts,circumstances and attributes, has determined that Mr. Howard is the sole “auditcommittee financial expert” on the Audit Committee.

 

**Compliancewith Section 16(a) of the Exchange Act**

## *** ***

Section 16(a) ofthe Exchange Act requires the Company’s directors, executive officers, andholders of more than 10% of the common stock to file with the SEC reports ofownership and changes in ownership of common stock. SEC regulations requirethose directors, executive officers, and greater than 10% shareholders tofurnish the Company with copies of all Section 16(a) forms they file.Based on the Company’s review of reports, the Company believes that thedirectors, executive officers, and greater than 10% shareholders complied withall applicable Section 16(a) filing requirements during fiscal 2008.

 

**Code of Ethics**

 

TheCompany has adopted a Code of Ethics that applies to its directors, officersand employees. The Company will provide a copy of its Code of Ethics, withoutcharge, to any stockholder who makes such request in writing to the Company,attention:  Secretary.

 

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**Item 11. ExecutiveCompensation.**

 

**CompensationDiscussion and Analysis**

 

***General*****.**OurBoard of Directors has established a Compensation Committee, comprised entirelyof independent non-employee directors, with authority to set all forms ofcompensation of our executive officers. Messrs. Bayer, Clements and Howardcomprised the Compensation Committee in fiscal 2008, with Mr. Howardserving as its Chairman. The Compensation Committee has overall responsibilityfor our executive compensation policies as provided in a written charteradopted by the Board of Directors. The Compensation Committee is empowered toreview and approve the annual compensation and compensation procedures for ourexecutives: the President and Chief Executive Officer, the Chief FinancialOfficer, and the Secretary. The Compensation Committee does not delegate any ofits functions to others in setting compensation.

 

When establishing basesalaries, cash bonuses and equity grants for each of the executives, theCompensation Committee considers the recommendations of the President and ChiefExecutive Officer and the Secretary, the executive’s role and contribution tothe management team, responsibilities and performance during the past year andfuture anticipated contributions, corporate performance, and the amount oftotal compensation paid to executives in similar positions, and performingsimilar functions, at other companies for which data was available, as providedby third party compensation studies. One such study, published in April 2007by Salary.com was a blind survey of over 1,000 companies located in the Dallasmetropolitan area in the “Energy & Utilities” industry with less than100 full-time equivalent employees. Another study, published in December 2004,included data from a survey of the following comparable companies: ArenaResources, Inc., ATP Oil & Gas, Berry Petroleum Company, CanadianSuperior Energy, Edge Petroleum, Goodrich Petroleum, Infinity Inc., PetroleumDevelopment Corp., The Meridian Resources Corp., and The Exploration Company.

 

The Compensation Committeerelies upon its judgment in making compensation decisions, after reviewing theCompany’s performance and evaluating each executive’s performance during theyear. The Committee generally does not adhere to formulas or necessarily reactto short-term changes in business performance in determining the amount and mixof compensation elements. We incorporate flexibility into our compensationprograms and in the assessment process to respond to and adjust for theevolving business environment.

 

***Compensation Philosophy*****.**TheCompensation Committee’s compensation philosophy is to reward executiveofficers for the achievement of short and long-term corporate objectives andfor individual performance. The objective of this philosophy is to provide abalance between short-term goals and long-term priorities to achieve immediateobjectives while also focusing on increasing shareholder value over the longterm. Also, to ensure that we are strategically and competitively positionedfor the future, the Compensation Committee has the discretion to attributesignificant weight to other factors in determining executive compensation, suchas maintaining competitiveness, pursuing growth opportunities and achievingother long-range business and operating objectives. The level of compensationshould also allow us to attract, motivate, and retain talented executiveofficers that contribute to our long-term success. The compensation of ourPresident and Chief Executive Officer and other executive officers is comprisedof cash compensation and long-term incentive compensation in the form of basesalary, discretionary bonuses and unregistered stock awards.

 

***Elements of Our Compensation Program and Why We Pay Each Element.***For fiscal 2008, our total compensation forexecutive officers consisted of base salary, bonuses and long-term incentivesin the form of common stock awards. In setting fiscal 2008 compensation, theCompensation Committee considered the specific factors discussed below:

 

*BaseSalary.*In settingthe executive officers’ base salaries, the Compensation Committee considers theachievement of corporate objectives as well as individual performance. Becausethe Compensation Committee believes that executive compensation should beviewed in terms of a balanced combination of cash compensation (i.e., basesalaries and bonuses) and long-term incentive (i.e., grants of unregisteredstock), base 

 

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salaries are targeted toapproximate the low end of the range of base salaries paid to executives ofsimilar companies for each position. To ensure that each executive is paidappropriately, the Compensation Committee considers the executive’s level ofresponsibility, prior experience, overall knowledge, contribution to businessresults, existing equity holdings, executive pay for similar positions in othercompanies, and executive pay within our company.

 

Basesalaries and base salary increases for our named executive officers in fiscal2008 were as follows:

 
| **Name**                   | ** ** | **Amount of  Base Salary  Increase for  Fiscal 2008** | ** ** | **Base Salary  for  Fiscal 2008** | ** ** |
|----------------------------|------------|---------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| Calvin A. Wallen, III |       | $                                                                         | 50,000     |                                        | $          | 200,000 |   |
|                       |       |                                                                      |       |                                        |       |
| Scott D. Guffey            |       | $                                                                         | —     |                                        | $          | 135,000 |   |
|                       |       |                                                                      |       |                                        |       |
| Jon S. Ross                |       | $                                                                         | 90,000     | (1)                                         | $          | 150,000 |   |

 

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(1)           Effective July 1, 2007, Mr. Ross transitioned from a part-timeemployee, being paid an annual base salary of $60,000, to a full-time employeeof the Company with a base salary of $100,000. His base salary was subsequentlyincreased to $150,000 on February 1, 2008.

 

*Discretionary Bonuses.*Executive bonuses are intended to linkexecutive compensation with the attainment of Company goals. The actual paymentof bonuses is primarily dependent upon the extent to which these Company-wideobjectives are achieved. Determination of executive bonus amounts is not madein accordance with a strict formula, but rather is based on objective datacombined with competitive ranges and internal policies and practices, includingan overall review of both individual and corporate performance. For fiscal year2008, bonuses to executives were primarily based upon the achievement ofcertain business objectives including progress in meeting our expected drillingand completion schedule, and the obtainment of additional financing. ThePresident and Chief Executive Officer has the discretion to recommend to theCompensation Committee to increase or decrease bonuses for all other executiveofficers, but any bonus amounts must be approved by the Compensation Committee.

 

*Long-Term Incentives**.*On December 29, 2005, the shareholders of the Company approved the2005 Stock Option Plan (the “Plan”) under which our executive officers may be, among other forms of compensation,compensated through grants of unregistered shares of our common stock and/orgrants of options to purchase shares of common stock. The Compensation Committeeapproves Plan grants that provide additional incentives and align theexecutives’ long-term interests with those of the shareholders of the Companyby tying executive compensation to the long-term performance of the Company’sstock price. Annual equity grants for our executives are typically approved inJanuary.

 

The Compensation Committeerecommends equity to be granted to an executive with respect to shares ofcommon stock based on the following principal elements including, but notlimited to:

 

·      President and Chief Executive Officer’s andSecretary’s recommendations;

 

·      Management role and contribution to themanagement team;

 

·      Job responsibilities and past performance;

 

·      Future anticipated contributions;

 

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·      Corporate performance; and

 

·      Existing equity holdings.

 

Determination of equitygrant amounts is not made in accordance with a formula, but rather is based onobjective data combined with competitive ranges, past internal policies andpractices and an overall review of both individual and corporate performance.Equity grants may also be made to new executives upon commencement ofemployment and, on occasion, to executives in connection with a significantchange in job responsibility. The Compensation Committee believes annual equitygrants more closely align the long-term interests of executives with those ofshareholders and assist in the retention of key executives. As such, thesegrants comprise the Company’s principal long-term incentive to executives.

 

**OtherCompensation Policies Affecting the Executive Officers**

 

*Compliancewith Section 162(m) of the Internal Revenue Code*. Section 162(m) disallows afederal income tax deduction to publicly held companies for certaincompensation paid to our Named Executive Officers to the extent thatcompensation exceeds $1 million per executive officer covered by Section 162(m) inany fiscal year. The limitation applies only to compensation that is notconsidered “performance based” as defined in the Section 162(m) rules.In designing our compensation programs, the Compensation Committee considersthe effect of Section 162(m) together with other factors relevant toour business needs. We have historically taken, and intend to continue taking,appropriate actions, to the extent we believe desirable, to preserve thedeductibility of annual incentive and long-term performance awards. However,the Compensation Committee has not adopted a policy that all compensation paidmust be tax-deductible and qualified under Section 162(m). We believe thatthe fiscal 2008 base salary, annual bonus and stock grants paid to theindividual executive officers covered by Section 162(m) will notexceed the Section 162(m) limit and will be fully deductible under Section 162(m).

 

*StockOwnership Requirements.*The Compensation Committee does not maintain a policy relating to stockownership guidelines or requirements for our executive officers because theCompensation Committee does not feel that it is necessary to impose such apolicy on our executive officers. If circumstances change, the CompensationCommittee will review whether such a policy is appropriate for executiveofficers.

 

*EmploymentAgreements.*On February 29,2008, the Company entered into employment agreements with its President andChief Executive Officer, Calvin A. Wallen, III, and Secretary, Jon S.Ross. The agreement with Mr. Wallen provides for a base salary of $200,000per year, while the agreement with Mr. Ross provides for a base salary of$150,000 per year. The other terms and conditions of the agreements aresubstantially consistent.

 

Both agreements provide fora term of employment of 36 months from the effective date of February 1,2008, which term shall be automatically extended by one additional month uponthe expiration of each month during the term; provided, that the Company mayterminate subsequent one-month extensions at any time. Each agreement issubject to early termination by the Company in the event that the employeedies, becomes totally disabled or commits an act constituting “Just Cause”under the agreement. The agreements provide that Just Cause includes, amongother things, the conviction of certain crimes, habitual neglect of his dutiesto the Company or other material breaches by the employee of the agreement.Each agreement also provides that the employee shall be permitted to terminatehis employment upon the occurrence of “Good Reason,” as defined in theagreement. The agreements provide that Good Reason includes, among otherthings, a material diminution in the employee’s authority, duties,responsibilities or salary, or the relocation of the Company’s principaloffices by more than 50 miles. If the employee’s employment is terminated by (a) theCompany other than due to the employee’s death, disability or Just Cause, or (b) theemployee for Good Reason, then the Company is required to pay all remainingsalary through the end of the then-current term. The foregoing severancepayment is subject to reduction under certain conditions.

 

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Thefollowing table sets forth the estimated amounts that would be payable to eachof the named executives upon a termination under the scenarios outlined above,excluding termination for Just Cause or on account of death or disability,assuming that such termination occurred on June 30, 2008. There can be noassurance that these scenarios would produce the same or similar results asthose disclosed if a termination occurs in the future.

 
| **Without Just Cause/For Good Reason** | ** ** | **Severance  Payment (1)** | ** ** | **Total** | ** ** |
|------------------------------------------------------------|------------|---------------------------------|------------|-----------|------------|
| Calvin A. Wallen, III                                 |       | $                               | 600,000    |      | $          | 600,000 |   |
|                                                       |       |                            |       |      |       |
| Jon S. Ross                                                |       | $                               | 450,000    |      | $          | 450,000 |   |

 

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(1)   Represents 36months of base salary.

 

**ChiefExecutive Officer Compensation**

 

Mr. Wallen received$170,833 in base salary for fiscal 2008. His annual base salary was increasedfrom $150,000 at the beginning of the fiscal year to $200,000, effective February 1,2008. Mr. Wallen received a common stock award of 150,000 unregisteredshares granted on January 31, 2008, which vested immediately. Rule 144promulgated under the Securities Act, which permits certain re-sales ofunregistered securities, currently requires that such securities be paid forand held for a minimum of six months before they may be resold.

 

**ChiefFinancial Officer Compensation**

 

Mr. Guffey’s annualbase salary for fiscal 2008 was $135,000, of which he received $116,492 becausehe was appointed Chief Financial Officer subsequent to the beginning of thefiscal year, on August 20, 2007. He received a common stock award of90,000 unregistered shares granted on August 20, 2007, which vested on aquarterly schedule with 18,750 shares vesting on each of November 20,2007, February 20, 2008 and May 20, 2008; and the remaining 33,750shares vesting, subsequent to the end of fiscal 2008, on August 20, 2008.

 

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**Summary Compensation Table**

 

The following table showsinformation regarding the compensation earned during the fiscal year ended June 30,2008 by our Chief Executive Officer, our current Chief Financial Officer, ourformer Chief Financial Officer and our other most highly compensated executiveofficer who was employed by us as of June 30, 2008 and whose totalcompensation exceeded $100,000 during that fiscal year (the “Named ExecutiveOfficers”):

 
| **Name and  Principal Position** | ** ** | **Fiscal  Year** | ** ** | **Salary** | ** ** | **Bonus** | ** ** | **Stock  Awards (1)** | ** ** | **All Other  Compensation (2)** | ** ** | **Total** | ** ** |
|--------------------------------------------|------------|------------------|------------|------------|------------|-----------|------------|----------------------------|------------|-------------------------------------------|------------|-----------|------------|
| Calvin A. Wallen, III                 |       | 2008             |       | $          | 170,833    |      | $          | —                     |       | $                                         | 241,500    |      | $          | 3,600 |   | $ | 415,933 |   |
| Chairman of the Board,                     |       | 2007             |       | $          | 150,000    |      | $          | —                     |       | $                                         | 120,000    |      | $          | 3,600 |   | $ | 273,600 |   |
| President and Chief                        |       |             |       |       |       |      |       |                       |       |                                      |       |      |       |
| Executive Officer                          |       |             |       |       |       |      |       |                       |       |                                      |       |      |       |
|                                       |       |             |       |       |       |      |       |                       |       |                                      |       |      |       |
| James L. Busby                             | (3)        | 2008             |       | $          | —     |      | $          | —                     |       | $                                         | —     |      | $          | — |   | $ | — |   |
| Former Chief Financial                     |       | 2007             |       | $          | 80,601     |      | $          | 2,100                      |       | $                                         | 60,000     |      | $          | 3,300 |   | $ | 146,001 |   |
| Officer                                    |       |             |       |       |       |      |       |                       |       |                                      |       |      |       |
|                                       |       |             |       |       |       |      |       |                       |       |                                      |       |      |       |
| Scott D. Guffey                            | (4)        | 2008             |       | $          | 116,492    |      | $          | 1,000                      |       | $                                         | 103,500    |      | $          | 3,300 |   | $ | 224,292 |   |
| Chief Financial Officer                    |       | 2007             |       | $          | —     |      | $          | —                     |       | $                                         | —     |      | $          | — |   | $ | — |   |
|                                       |       |             |       |       |       |      |       |                       |       |                                      |       |      |       |
| Jon S. Ross                                |       | 2008             |       | $          | 120,833    |      | $          | 2,000                      |       | $                                         | 161,000    |      | $          | 3,600 |   | $ | 287,433 |   |
| Secretary and Director                     | (5)        | 2007             |       | $          | 60,000     |      | $          | 23,000                     |       | $                                         | 38,000     |      | $          | 3,600 |   | $ | 124,600 |   |

 

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(1)           On January 31, 2008 we granted our Named Executive Officers a totalof 250,000 unregistered shares of common stock as follows: Mr. Wallen,150,000 shares; and Mr. Ross, 100,000 shares. These shares vestedimmediately on the grant date. On August 20, 2007, Mr. Guffey wasgranted 90,000 unregistered shares of common stock, which vested on a quarterlyschedule. On January 10, 2007 we granted our Named Executive Officers atotal of 272,500 unregistered shares of common stock as follows: Mr. Wallen,150,000 shares; Mr. Busby, 75,000 shares; and Mr. Ross, 47,500 shares.These shares vested immediately on the grant date.

(2)           All Other Compensation consists solely of a $300 per month reimbursementtowards each officer’s medical insurance premiums. The Company does not providegroup health insurance coverage to its employees.

(3)           Mr. Busby resigned as Cubic’s Chief Financial Officer effective May 18,2007.

(4)           Mr. Guffey was appointed Cubic’s Chief Financial Officer on August 20,2007.

(5)           Effective July 1, 2007, Mr. Ross transitioned from a part-timeemployee being paid an annual base salary of $60,000 to a full-time employee ofthe Company with an annual base salary of $100,000. His annual base salary wassubsequently increased to $150,000 on February 1, 2008.

 

**Fiscal2008 Grants of Plan-Based Awards**

 

The following table provides details regarding equity grants in fiscal2008 to the Named Executive Officers. No stock options were granted toexecutive officers last year and thus any reference to options in the tablebelow has been omitted.

** **
| **Name**                   | ** ** | **Grant Date**   | ** ** | **All Other Stock  Awards:  Number of Shares** | ** ** | **Grant Date  Fair Value of  Stock Award** | ** ** |
|----------------------------|------------|-----------------------|------------|--------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| Calvin A. Wallen, III |       | January 31, 2008 |       | 150,000                                                            |       | $                                                              | 241,500    |   |
| Scott D. Guffey            |       | August 20, 2007  |       | 90,000                                                             |       | $                                                              | 103,500    |   |
| Jon S. Ross                |       | January 31, 2008 |       | 100,000                                                            |       | $                                                              | 161,000    |   |

 

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**Stock Grants**

 

On January 10 and January 18, 2007,the Company issued 489,500 and 52,500 unregistered shares, respectively, to theofficers and directors, and key employees of the Company pursuant to the Plan.As of such dates, the aggregate market value of the common stock granted was$391,600 and $42,000, respectively, based on the last sale price on the OTCBulletin Board of the Company’s common stock. Such amounts were amortized tocompensation expense on a quarterly basis during calendar year 2007. Anadditional $30,000 was recorded when our former Chief Financial Officerresigned during fiscal 2007. Accordingly, $186,800 and $246,800 was recorded ascompensation expense and included in general and administrative expense for thefiscal years ended June 30, 2008 and 2007, respectively. The NamedExecutive Officers received the following grants: (i) 150,000 unregisteredshares to Calvin A. Wallen, III, (ii) 75,000 unregistered shares toJames L. Busby, and (iii) 47,500 unregistered shares to Jon S. Ross.

 

On August 20, 2007, the Company issued90,000 unregistered shares to the current Chief Financial Officer of theCompany pursuant to the Plan, with such grant subject to vesting in quarterlyinstallments over the following four quarters. As of such date, the aggregatemarket value of the common stock granted was $103,500 based on the then marketprice on the OTCBB of the Company’s common stock. Such amount is beingamortized to compensation expense on a quarterly basis during fiscal years 2008and 2009. Accordingly, $90,563 was recorded as compensation expense andincluded in general and administrative expenses for fiscal 2008. The remaining$12,937 will be amortized to compensation expense in the first quarter offiscal 2009, which ends September 30, 2008.

 

On January 31 and February 4, 2008,the Company issued 555,000 and 52,500 unregistered shares, respectively, to theofficers and directors, and key employees of the Company pursuant to the Plan.As of such dates, the aggregate market value of the common stock granted was$893,550 and $84,525 (a total of $978,075), respectively, based on thethen-market price on the OTCBB of the Company’s common stock. Recent SECguidance requires that immediately-vesting common stock grants with noforfeiture provisions be expensed at the time of grant rather than amortizedover the four quarters of the service period. Accordingly, the full $978,075was recorded as compensation expense and included in general and administrativeexpenses for the fiscal year ended June 30, 2008. The Named ExecutiveOfficers received the following grants: (i) 150,000 unregistered shares toCalvin A. Wallen, III, (ii) zero unregistered shares to Scott D.Guffey, and (iii) 100,000 unregistered shares to Jon S. Ross.

 

**Outstanding Equity Awards atFiscal Year-End**

 

The Company had no outstanding stock options at June 30, 2008,thus any reference to options in the table below has been omitted. The Companyhad the following unvested stock awards at the end of fiscal 2008:

 

| **Name**        | ** ** | **Number of Shares  of Stock That Have  Not Vested** | ** ** | **Market Value of  Shares of Stock That  Have Not Vested** | ** ** |
|-----------------|------------|------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| Scott D. Guffey |       | 33,750                                                                             |       | $                                                                                             | 141,413    |   |
|                 |            |                                                                                    |            |                                                                                               |            |  |

 

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**Option Exercises and StockVesting**

 

The following table sets forth dollar amounts realized pursuant to thevesting or exercise of equity-based award during the latest fiscal year. Nostock options were granted to executive officers last year and thus anyreference to options in the table below has been omitted.

 

| **Name**                   | ** ** | **Number of Shares  Acquired on Vesting (1)** | ** ** | **Value Realized  on Vesting** | ** ** |
|----------------------------|------------|------------------------------------------------------------------------|------------|------------------------------------------|------------|
| Calvin A. Wallen, III |       | 150,000                                                                |       | $                                        | 241,500    |   |
| Scott D. Guffey            |       | 56,250                                                                 |       | $                                        | 100,313    |   |
| Jon S. Ross                |       | 100,000                                                                |       | $                                        | 161,000    |   |

 

----

(1)           Messrs. Wallenand Ross’s stock grants vested immediately. Mr. Guffey received a commonstock award of 90,000 unregistered shares granted on August 20, 2007,vesting on a quarterly schedule with 18,750 shares vesting on each of November 20,2007, February 20, 2008 and May 20, 2008, with the remaining 33,750shares of Mr. Guffey’s grant vesting subsequent to the end of fiscal 2008,on August 20, 2008.

 

**Information Related to Stock-Based Compensation**

 

The Company accounts for its stock-based employeecompensation plans pursuant to FAS No. 123R, *Share-BasedPayment*, which is a revision of FAS No. 123, *Accounting for Stock-Based Compensation,*and supersedes Accounting Principles Board (“APB”) Opinion No. 25,*Accounting for Stock Issued to Employees (“APB No. 25”)*. This Statement requires the Company torecognize compensation costs related to stock-based payment transactions (i.e.,the granting of stock options and warrants, and awards of unregistered sharesof common stock) in the financial statements. With limited exceptions, theamount of compensation cost is measured based on the grant-date fair value ofthe equity issued. Compensation cost is recognized over the period that anemployee provides services in exchange for the award. This new standard becameeffective for awards that are granted, modified or settled in cash in interimand annual financial periods beginning after June 30, 2006. See “StockGrants”.

 

**Non-Employee DirectorCompensation for Fiscal 2008**

** **
| **Name**         | ** ** | **Fees Earned  or Paid in  Cash (1)** | ** ** | **Stock  Awards (2)** | ** ** | **All Other  Compensation** | ** ** | **Total** | ** ** |
|------------------|------------|-----------------------------------------------------------|------------|----------------------------|------------|----------------------------------|------------|-----------|------------|
| Gene C. Howard   |       | $                                                         | 7,000      |                       | $          | 136,850                          |       | $         | —     |   | $ | 143,850 |   |
| Herbert A. Bayer |       | $                                                         | 7,000      |                       | $          | 120,750                          |       | $         | —     |   | $ | 127,750 |   |
| Bob L. Clements  |       | $                                                         | 7,000      |                       | $          | 120,750                          |       | $         | —     |   | $ | 127,750 |   |

 

----

(1)           Represents the amountof cash compensation earned in fiscal 2008 for Board and Committee service.Each non-employee director was paid a stipend of $1,000 for each Board ofDirectors or Committee meeting attended (whether in person or viateleconference) beginning with the January 29, 2008 Board meeting, withvarious meetings occurring on the same date being provided one stipend.

(2)           Each non-employeedirector received: 40,000 shares of common stock for service on the Board ofDirectors; 20,000 shares of common stock for service on the Audit Committee;and, 15,000 shares of common stock for service on the Compensation Committee. Mr. Howardreceived an additional 10,000 shares of common stock for serving as thefinancial expert and Chairman of the Audit Committee.

 

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**Item 12. SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters.**

** **

Thefollowing table sets forth the number of shares of the Company’s common stockbeneficially owned, as of September 1, 2008 by (i) each person knownto the Company to beneficially own more than 5% of the common stock of theCompany (the only class of voting securities now outstanding), (ii) eachdirector and executive officer, and (iii) all directors and executiveofficers as a group. Unless otherwise indicated, we consider all shares ofcommon stock that can be issued under convertible securities or warrantscurrently or within 60 days of September 1, 2008 to be outstanding for thepurpose of computing the percentage ownership of the person holding thosesecurities, but do not consider those securities to be outstanding forcomputing the percentage ownership of any other person. Each owner’s percentageis calculated by dividing the number of shares beneficially held by that ownerby the sum of 60,335,564 and the number of shares that owner has the right toacquire within 60 days.

 
| **Name and Address**                                                     | ** ** | **Number  of Shares** | ** ** | **Approximate  Percent of  Class (1)** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------|------------|--------------------------------------------------|------------|
| **5%  Stockholders**                                                               |       |                       |       |                                             |       |
| William Bruggeman  20 Anemone Circle, North Oaks, MN 55127                         |       | 17,498,897                 | (2)        | 28.0                                             | %          |
|                                                                               |       |                       |       |                                             |       |
| Wells Fargo Energy Capital, Inc.  1000 Louisiana 9th Floor, Houston, TX 77002 |       | 7,500,000                  | (3)        | 11.1                                             | %          |
|                                                                               |       |                       |       |                                             |       |
| Steven S. Bruggeman  5609 St. Albans Circle, Shoreview, MN 55126                   |       | 4,189,955                  | (4)        | 6.8                                              | %          |
|                                                                               |       |                       |       |                                             |       |
| George Karfunkel  9870 Plano Road, Dallas, TX 75238                                |       | 3,375,000                  | (5)        | 5.6                                              | %          |
|                                                                               |       |                       |       |                                             |       |
| **Named  Executive Officers and Directors**                                        |       |                       |       |                                             |       |
| Calvin A. Wallen, III  9870 Plano Road, Dallas, TX 75238                      |       | 11,615,972                 | (6)        | 19.2                                             | %          |
|                                                                               |       |                       |       |                                             |       |
| Bob L. Clements  9870 Plano Road, Dallas, TX 75238                                 |       | 807,527                    | (7)        | 1.3                                              | %          |
|                                                                               |       |                       |       |                                             |       |
| Gene C. Howard

2402 East 29th St., Tulsa, OK 74114                                |       | 630,180                    | (8)        | 1.0                                              | %          |
|                                                                               |       |                       |       |                                             |       |
| Jon S. Ross

9870 Plano Road, Dallas, TX 75238                                     |       | 468,000                    | (9)        | *                                                |       |
|                                                                               |       |                       |       |                                             |       |
| Herbert A. Bayer

9870 Plano Road, Dallas, TX 75238                                |       | 390,287                    | (10)       | *                                                |       |
|                                                                               |       |                       |       |                                             |       |
| Scott D. Guffey 9870

Plano Road, Dallas, TX 75238                                 |       | 90,000                     |       | *                                                |       |
|                                                                               |       |                       |       |                                             |       |
| All officers and directors as a group (6  persons)                                 |       | 14,001,966                 |       | 23.2                                             | %          |

 

----

* Denotes less than one percent

 
| (1) |   | Based on a total of 60,335,564 shares of Common Stock issued and  outstanding on September 1, 2008.                                                                                                               |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Includes 2,034,000 shares and warrants to purchase 600,000 shares  held by Diversified Dynamics Corporation, a company controlled by William  Bruggeman; 120,000 shares owned by Consumer Products Corp., in which Mr. |

 

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|   |   | Bruggeman’s spouse, Ruth, is a joint owner; and, 13,160,897 shares  and warrants to purchase 1,544,000 shares held jointly by William Bruggeman &  Ruth Bruggeman as joint tenants with rights of survivorship.                                                                                                                                                                                                                |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3)    |   | Includes warrants to purchase 2,500,000 shares and a promissory note  convertible into 5,000,000 shares.                                                                                                                                                                                                                                                                                                                                     |
| (4)    |   | Includes 901,955 shares held jointly by Steven S. Bruggeman and  Jacqueline Bruggeman as joint tenants with rights of survivorship; 48,000  shares and warrants to purchase 24,000 shares held by Jacqueline Bruggeman,  of which Steven S. Bruggeman disclaims beneficial ownership; 96,000 shares  and warrants to purchase 48,000 shares held by minor children; and, warrants  to purchase 1,024,000 shares held by Steven S. Bruggeman. |
| (5)    |   | Includes warrants to purchase 1,125,000 shares.                                                                                                                                                                                                                                                                                                                                                                                              |
| (6)    |   | Includes 1,414,000 shares and warrants to purchase 50,000 shares held  by Tauren Exploration, Inc., an entity controlled by Mr. Wallen;  500,000 shares held by spouse; and, 386,000 shares held by minor children.                                                                                                                                                                                                                |
| (7)    |   | Includes 109,527 shares held with spouse as joint tenants with rights  of survivorship; and, warrants to purchase 50,000 shares.                                                                                                                                                                                                                                                                                                             |
| (8)    |   | Includes 322,245 shares are held by Mr. Howard’s spouse, Belva,  of which Mr. Howard disclaims beneficial ownership.                                                                                                                                                                                                                                                                                                          |
| (9)    |   | Includes 6,000 shares held  by minor children.                                                                                                                                                                                                                                                                                                                                                                                               |
| (10)   |   | Includes 390,287 shares held with spouse as joint tenants with rights  of survivorship.                                                                                                                                                                                                                                                                                                                                                      |

 

**Item 13. CertainRelationships and Related Transactions, and Director Independence.**

** **

**CertainRelationships and Related Transactions**

 

OnFebruary 6, 2006 the Company entered into a Purchase Agreement with TaurenExploration, Inc., an entity wholly owned by Calvin A. Wallen III, theCompany’s Chairman of the Board and Chief Executive Officer, with respect tothe purchase by the Company of certain Cotton Valley leasehold interests(approximately 11,000 gross acres; 5,000 net acres) held by Tauren. Pursuant tothe Purchase Agreement, the Company acquired from Tauren a 35% working interestin approximately 2,400 acres and a 49% working interest in approximately 8,500acres located in DeSoto and Caddo Parishes, Louisiana, along with an associatedArea of Mutual Interest (“AMI”) and the right to acquire at “cost” (as definedin the Purchase Agreement) a working interest in all additional mineral leasesobtained by Tauren in the AMI, in exchange for (a) $3,500,000 in cash, (b) 2,500,000unregistered shares of Company common stock, (c) an unsecured 12.5%short-term promissory note in the amount of $1,300,000, which note wasconvertible into Company common stock at a conversion price of $0.80 per share,and (d) a drilling credit of $2,100,000. The consideration described abovewas determined based upon negotiations between Tauren and a Special Committeeof the Company’s directors, excluding Mr. Wallen. The Special Committeeobtained an opinion from its independent financial advisor with respect to thefairness, from a financial point of view, to the public stockholders of theCompany, of such transactions.

 

OnNovember 10, 2006, the maturity of the Tauren Note was extended to October 5,2007. In connection with the extension of the Tauren Note, the Company issuedto Tauren warrants, with three-year expirations, for the purchase of up to50,000 shares of Company common stock at an exercise price of $0.70 per share.

 

OnDecember 15, 2006, the Company entered into Subscription and RegistrationRights Agreements with certain investors. One of the investors, WilliamBruggeman (and entities affiliated with him) was the beneficial owner, prior tothis transaction, of approximately 23.0% of the common stock of the Company. Inthis transaction, Mr. Bruggeman (and entities affiliated with him)purchased an aggregate of 4,288,000 shares of common stock at a purchase priceof $0.50 per share, or an aggregate of $2,144,000. Mr. Bruggeman (andentities affiliated with him) received warrants to purchase 2,144,000 shares ofcommon stock with an exercise price of $0.70 per share. Another investor, BobClements, a director of the Company, purchased 100,000 shares of common stockat a purchase price of $0.50 per share, or an aggregate of $50,000. Mr. Clementsreceived warrants to purchase 50,000 shares of common stock with an exerciseprice of $0.70 per share. The consideration described above was determinedbased upon negotiations between the Company and various potential investors.

 

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OnMay 6, 2008, the Company issued a subordinated promissory note in theamount of $2,000,000 to Diversified Dynamics Corporation, an entity controlledby William Bruggeman who, at the time of such transaction, was the beneficialowner of approximately 28.9% of the common stock of the Company. TheSubordinated Note bears interest at a fluctuating rate equal to the sum of theprime rate plus two percent (2%) per annum, and matures on April 30, 2010.The Company is paying interest on the note on a monthly basis.

 

In addition, all but threewells in which the Company owns a working interest are operated by anaffiliated company, Fossil Operating, Inc. (“Fossil”), an entity wholly-ownedby the Company’s President and Chief Executive Officer, Calvin A. Wallen III. Inconsideration for Fossil serving as operator and to satisfy the Company’sworking interest obligations related to drilling costs and lease operatingexpenses, Cubic paid to Fossil an aggregate of $14,288,122, $4,120,012 and$1,077,354 during fiscal 2008, 2007 and 2006, respectively; and Fossil paidCubic an aggregate of $310,407, $384,659 and $460,323 during fiscal 2008, 2007and 2006, respectively for oil and gas sales. As of June 30, 2008, 2007and 2006, the Company owed Fossil $862,895, $1,659,786 and $1,196,203,respectively, for drilling costs and lease operating expenses, and was owed byFossil $450,669, $28,446 and $88,477, respectively, for oil and gas sales. TheCompany and Fossil have operating agreements with respect to all wells forwhich Fossil serves as operator.

 

Itis the Company’s policy that any transactions between us and related partieswill be on terms no less favorable than could be obtained from unaffiliatedthird parties and will be approved by a majority of the disinterested membersof our Board of Directors.

 

**DirectorIndependence**

 

Messrs. Howard,Clements and Bayer meet the independence standards for independent directorsunder the rules of the SEC and the rules of the American StockExchange as published in the American Stock Exchange’s Company Guide — CorporateGovernance Requirements.

 

**Item 14. PrincipalAccountant Fees and Services.**

 
| ** **         | ** ** | **July 1, 2007 -  June 30, 2008** | ** ** | **July 1, 2006 -  June 30, 2007** | ** ** |
|--------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| Audit fees         |       | $                                                          | 27,000     |                                                       | $          | 21,000 |   |
| Audit-related fees |       | 10,100                                                     |       | 8,500                                                      |       |
| Tax fees           |       | 4,180                                                      |       | 4,585                                                      |       |
| All other fees     |       | 3,400                                                      |       | 8,500                                                      |       |
| Total              |       | $                                                          | 44,680     |                                                       | $          | 42,585 |   |

 

**Audit Fees**

 

Aggregateaudit fees billed for professional services rendered by Philip Vogel &Co., PC were $27,000 for the year ended June 30, 2008 and $21,000 for theyear ended June 30, 2007. Such fees were primarily for professionalservices rendered for the audits of our consolidated financial statementsduring the fiscal years ended June 30, 2008 and 2007.

 

**Audit-Related Fees**

 

Aggregateaudit-related fees billed for professional services rendered by Philip Vogel &Co., PC were $10,100 for the year ended June 30, 2008 and $8,500 for theyear ended June 30, 2007. Such fees were for limited reviews of ourunaudited condensed consolidated interim financial statements.

 

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**Tax Fees**

 

Aggregate income taxcompliance and related services fees billed for professional services renderedby Philip Vogel & Co., PC were $4,180 for the year ended June 30,2008 and $4,585 for the year ended June 30, 2007.

 

**All Other Fees**

 

In addition to the feesdescribed above, aggregate fees of: $3,400 were billed by Philip Vogel &Co., PC during the year ended June 30, 2008, primarily for review of our Form SB-2registration statements and related amendments, attendance at our annualshareholders’ meeting, and for research regarding our compliance with Section 404of the Sarbanes-Oxley Act of 2002; and $8,500 were billed by Philip Vogel &Co., PC during the year ended June 30, 2007, primarily for review of our Form SB-2registration statements and related amendments, and for research regarding ouruse of shares of common stock as compensation.

 

**Audit Committee Pre-Approval Policies and Procedures**

 

In accordance with Companypolicy, any additional audit or non-audit services must be approved in advance.All of the foregoing professional services provided by Philip Vogel &Co., PC during the years ended June 30, 2008 and June 30, 2007 werepre-approved in accordance with the policies of our Audit Committee.

 

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**PART IV**

 

**Item 15. Exhibits andFinancial Statement Schedules.**

** **

**(a) (1) and(2) Financial Statements and Financial Statement Schedules**

 

 See “Index to Financial Statements” on page F-1.

 

**(a) (3) Exhibits**

 

Seethe Exhibit Index immediately preceding the Exhibits filed with thisreport.

 

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** **

**SIGNATURES**

** **

Pursuant to requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized, on September 29,2008.

 

 
|   | CUBIC  ENERGY, INC. |
|--------|---------------------|
|   |                |   |
|   |                |
|   | By:                 | /s/  Calvin A. Wallen, III |
|   |                | Calvin A. Wallen, III |
|   |                | President and Chief |
|   |                | Executive  Officer |
|   |                |   |
|   |                |   |
|   | By:                 | /s/  Scott D. Guffey |
|   |                | Scott  D. Guffey |
|   |                | Chief  Financial Officer |
|        |                     |  |  |

 

Pursuant to requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.

 
| **Signature**                   | ** ** | **Title**                   | ** ** | **Date**           |
|---------------------------------|------------|-----------------------------|------------|--------------------|
|                            |       |                        |       |               |
| /s/ Calvin  A. Wallen, III |       | President,  Chief Executive |       | September 29, |
| Calvin A.  Wallen, III     |       | Officer and  Director       |       | 2008               |
|                            |       |                        |       |               |
|                            |       |                        |       |               |
| /s/ Scott  D. Guffey            |       | Chief  Financial Officer    |       | September 29, |
| Scott D.  Guffey                |       | (principal  accounting      |       | 2008               |
|                            |       | officer)                    |       |               |
|                            |       |                        |       |               |
| /s/ Jon  Stuart Ross            |       | Secretary  and Director     |       | September 29, |
| Jon Stuart  Ross                |       |                        |       | 2008               |
|                            |       |                        |       |               |
| /s/ Gene  Howard                |       | Director                    |       | September 29, |
| Gene Howard                     |       |                        |       | 2008               |
|                            |       |                        |       |               |
| /s/ Herbert  A. Bayer           |       | Director                    |       | September 29, |
| Herbert A.  Bayer               |       |                        |       | 2008               |
|                            |       |                        |       |               |
| /s/ Bob  Clements               |       | Director                    |       | September 29, |
| Bob  Clements                   |       |                        |       | 2008               |

 

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Table of Contents

 

**CUBIC ENERGY, INC.**

 

INDEX TO FINANCIALSTATEMENTS

 

JUNE 30, 2008

 
| ** **                                                                    | **Page** |
|-------------------------------------------------------------------------------|----------|
|                                                                          |     |
| Independent  Auditors’ Report                                            | F-2      |
|                                                                          |     |
| Management’s  Annual Report on Internal Control over Financial Reporting | F-3      |
|                                                                          |     |
| Financial Statements:                                                         |     |
|                                                                          |     |
| Balance Sheets                                                                | F-4      |
|                                                                          |     |
| Statements of  Operations                                                     | F-5      |
|                                                                          |     |
| Statements of Changes in Stockholders’ Equity                            | F-6      |
|                                                                          |     |
| Statements  of Cash Flows                                                     | F-7      |
|                                                                          |     |
| Notes to Financial Statements                                                 | F-8      |
| Note A – Background and general                                          | F-8      |
| Note B – Significant accounting policies                                 | F-8      |
| Note  C – Stockholders’ equity                                      | F-19     |
| Note  D – Loss per common share                                          | F-22     |
| Note  E – Long-term debt                                                 | F-23     |
| Note F – Related party transactions                                      | F-25     |
| Note G – Income taxes                                                    | F-27     |
| Note H – Commitments and contingencies                                   | F-29     |
| Note I – Cost of oil and gas properties                                  | F-30     |
| Note J – Oil and gas reserves information (unaudited)                    | F-31     |
| Note K – Selected quarterly financial data (unaudited)                   | F-36     |
| Note  L – Subsequent events                                              | F-37     |

 

F-1

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Table of Contents

 

**INDEPENDENTAUDITORS’ REPORT**

 

**To the Board of Directors and Stockholders of Cubic Energy, Inc.,**

 

We have audited the balance sheets of Cubic Energy, Inc., a Texascorporation, as of June 30, 2008 and 2007, and the related statements ofoperations, of changes in stockholders’ equity and of cash flows for each ofthe three years in the period ended June 30, 2008. These financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audits to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of Cubic Energy, Inc.as of June 30, 2008 and 2007, and the results of its operations and itscash flows for each of the three years in the period ended June 30, 2008,in conformity with accounting principles generally accepted in the UnitedStates of America.

 

 
| ** **                   | ** ** | **PHILIP  VOGEL & CO. PC** |
|------------------------------|------------|-------------------------------------|
|                         |       |                                |
|                         |       |                                |
| ** **                   | ** ** | **Certified  Public Accountants**   |
|                         |       |                                |
| **Dallas,  Texas**           |       |                                |
|                         |       |                                |
| **September 24,  2008** |       |                                |

 

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**MANAGEMENT’SANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**

 

Ourmanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting, as such term is defined in Rules 13(a)-15(f) ofthe Securities Exchange Act of 1934, as amended. Under the supervision and withthe participation of our management, including our principal executive officerand principal financial officer, we conducted an assessment, including testing,of the effectiveness of our internal control over financial reporting as of June 30,2008 based on the criteria set forth in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. Our system of internal control overfinancial reporting is designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples. Our internal control over financial reporting includes thosepolicies and procedures that (i) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of our assets; (ii) provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financial statementsin accordance with generally accepted accounting principles, and that ourreceipts and expenditures are being made only in accordance with authorizationsof our management and directors; and (iii) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, ordisposition of our assets that could have a material effect on the financialstatements.

 

Basedon our evaluation under the criteria set forth in *Internal Control—Integrated Framework*, our managementconcluded that our internal control over financial reporting was effective asof June 30, 2008. This Annual Report does not include an attestationreport of our independent registered public accounting firm regarding internalcontrol over financial reporting. We were not required to have, nor have weengaged our independent registered public accounting firm to perform, an auditon our internal control over financial reporting pursuant to the rules ofthe Securities and Exchange Commission that permit us to provide onlymanagement’s report in this Annual Report.

 

Subsequent to ourevaluation, there were no changes in internal controls or other factors thatcould materially affect, or are reasonably likely to materially affect, theseinternal controls. We maintain a system of internal control over financialreporting. There were no changes in our internal control over financialreporting during the fourth quarter of fiscal 2008 that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

Acontrol system, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the control systemare met. Further, the benefits of controls must be considered relative to theircosts. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, have been detected. These inherent limitationsinclude the realities that judgments in decision making can be faulty, and thatbreakdowns can occur because of simple errors. Additionally, controls can becircumvented by the individual acts of some persons, by collusion of two ormore people, or by management override of the control. The design of any systemof controls is also based in part upon certain assumptions about the likelihoodof future events, and there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions. Because ofthe inherent limitations in a cost-effective control system, misstatements dueto error or fraud may occur and not be detected.

 

Ourchief executive officer and chief financial officer have completed thecertifications required to be filed as an Exhibit to this Report (seeExhibits 31.1 and 31.2) relating to the design of our disclosure controls andprocedures and the design of our internal control over financial reporting.

 

F-3

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**CUBIC ENERGY, INC.**

 

**BALANCE SHEETS**

**JUNE30, 2008 AND 2007**

 
| ** **                                                                                                             | ** ** | **2008**    | ** ** | **2007**    | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| **Assets**                                                                                                             |       |        |       |        |       |
| Current assets:                                                                                                        |       |        |       |        |       |
| Cash and cash equivalents                                                                                              |       | $           | 2,144,002  |        | $          | 3,122,273 |   |
| Accounts receivable - trade                                                                                            |       | 165,910     |       | 218,874     |       |
| Prepaid drilling costs                                                                                                 |       | 33,399      |       | 721,136     |       |
| Other prepaid expenses                                                                                                 |       | 65,344      |       | 231,232     |       |
| Total current assets                                                                                                   |       | 2,408,655   |       | 4,293,515   |       |
| Property and equipment (at cost):                                                                                      |       |        |       |        |       |
| Oil and gas properties, full cost method:                                                                              |       |        |       |        |       |
| Proved properties (including wells and  related equipment and facilities)                                              |       | 27,751,133  |       | 8,836,790   |       |
| Unproven properties                                                                                                    |       | 3,254,901   |       | 6,827,341   |       |
| Office and other equipment                                                                                             |       | 14,672      |       | 12,886      |       |
| Oil and gas properties, and equipment, at  cost                                                                        |       | 31,020,706  |       | 15,677,017  |       |
| Less accumulated depreciation, depletion  and amortization                                                             |       | 4,163,112   |       | 2,011,015   |       |
| Oil and gas properties, and equipment, net                                                                             |       | 26,857,594  |       | 13,666,002  |       |
| Other assets:                                                                                                          |       |        |       |        |       |
| Deferred loan costs - net                                                                                              |       | 224,434     |       | 148,724     |       |
| Total other assets                                                                                                     |       | 224,434     |       | 148,724     |       |
|                                                                                                                   |       | $           | 29,490,683 |        | $          | 18,108,241 |   |
| **Liabilities and stockholders’ equity**                                                                          |       |        |       |        |       |
| Current liabilities:                                                                                                   |       |        |       |        |       |
| Accounts payable and accrued expenses                                                                                  |       | $           | 250,630    |        | $          | 51,664 |   |
| Due to affiliates                                                                                                      |       | 411,284     |       | 1,635,055   |       |
| Total current liabilities                                                                                              |       | 661,914     |       | 1,686,719   |       |
| Long-term liabilities:                                                                                                 |       |        |       |        |       |
| Long-term debt, net of discounts                                                                                       |       | 22,970,570  |       | 7,626,739   |       |
| Total long-term liabilities                                                                                            |       | 22,970,570  |       | 7,626,739   |       |
| Commitments and contingencies (Note H)                                                                                 |       | —      |       | —      |       |
| Stockholders’ equity:                                                                                             |       |        |       |        |       |
| Preferred stock - $.01 par value,  authorized 10,000,000 shares, issued none                                           |       | —      |       | —      |       |
| Common stock - $.05 par value, authorized  100,000,000 shares, issued 58,853,064 in 2008 and 55,840,896 shares in 2007 |       | 2,942,654   |       | 2,792,046   |       |
| Additional paid-in capital                                                                                             |       | 27,366,690  |       | 25,325,429  |       |
| Accumulated deficit                                                                                                    |       | (24,451,145 | )          | (19,322,692 | )          |
| Stockholders’ equity                                                                                              |       | 5,858,199   |       | 8,794,783   |       |
|                                                                                                                   |       | $           | 29,490,683 |        | $          | 18,108,241 |   |

* *

*Theaccompanying notes are an integral part of these statements.*

 

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Table of Contents

 

**CUBICENERGY, INC.**

 

**STATEMENTS OF OPERATIONS**

**FOR THEYEARS ENDED JUNE 30, 2008, 2007, AND 2006**

 
| ** **                                                 | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Revenues:                                                  |       |       |       |       |       |       |       |
| Oil and gas sales                                          |       | $          | 2,302,310  |       | $          | 583,416    |       | $ | 508,925 |   |
| Total revenues                                             |       | $          | 2,302,310  |       | $          | 583,416    |       | $ | 508,925 |   |
| Operating costs and expenses:                              |       |       |       |       |       |       |       |
| Oil and gas production, operating and development  costs   |       | 1,162,489  |       | 481,145    |       | 338,329    |       |
| General and administrative expenses                        |       | 2,488,133  |       | 1,325,192  |       | 1,400,482  |       |
| Depreciation, depletion and non-loan-related  amortization |       | 2,152,096  |       | 362,434    |       | 179,237    |       |
| Impairment loss on oil and gas properties                  |       | —     |       | 1,790,882  |       | —     |       |
| Total operating costs and expenses                         |       | 5,802,718  |       | 3,959,653  |       | 1,918,048  |       |
| Operating income (loss)                                    |       | (3,500,408 | )          | (3,376,237 | )          | (1,409,123 | )          |
|                                                       |       |       |       |       |       |       |       |
| Non-operating income (expense):                            |       |       |       |       |       |       |       |
| Other income                                               |       | 45,697     |       | 38,037     |       | 6,402      |       |
| Interest expense, including amortization of  loan discount |       | (1,579,452 | )          | (1,278,721 | )          | (638,800   | )          |
| Amortization of loan costs                                 |       | (94,290    | )          | (100,966   | )          | (67,199    | )          |
| Total non-operating income (expense)                       |       | (1,628,045 | )          | (1,341,650 | )          | (699,597   | )          |
| Loss on debt extinguishment                                |       | —     |       | (1,082,887 | )          | (660,330   | )          |
| Loss before income taxes                                   |       | (5,128,453 | )          | (5,800,774 | )          | (2,769,050 | )          |
| Provision for income taxes                                 |       | —     |       | —     |       | —     |       |
| Net loss                                                   |       | $          | (5,128,453 | )          | $          | (5,800,774 | )          | $ | (2,769,050 | ) |
| Net loss per common share - basic and  diluted             |       | $          | (0.09      | )          | $          | (0.12      | )          | $ | (0.07 | ) |
| Weighted average common shares outstanding                 |       | 56,974,407 |       | 50,338,450 |       | 38,477,353 |       |

 

*Theaccompanying notes are an integral part of these statements.*

 

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Table of Contents

 

**CUBICENERGY, INC.**

 

**STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

**FOR THEYEARS ENDED JUNE 30, 2008, 2007, AND 2006**

 
| ** **                                           | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | ** **  | ** ** | **Total**       | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|----------------|------------|-------------|------------|-----------------|------------|
| ** **                                           | ** ** | **Shares**            | ** ** | **Par**        | ** ** | **paid-in** | ** ** | **Accumulated** | ** ** | **stockholders’** | ** ** |
| ** **                                           | ** ** | **outstanding**       | ** ** | **value**      | ** ** | **capital** | ** ** | **deficit**     | ** ** | **equity** | ** ** |
| **Balance at June 30, 2005**                    |       | 35,161,963            |       | $              | 1,758,100  |        | $          | 11,778,915      |       | $ | (10,752,868 | ) | $ | 2,784,147 |   |
| Stock issued for acquisition of property  interests  |       | 2,500,000             |       | 125,000        |       | 1,175,000   |       | —          |       | 1,300,000 |   |
| Stock issued under compensation plan                 |       | 1,169,000             |       | 58,450         |       | 911,320     |       | —          |       | 969,770 |   |
| Stock issued for working capital                     |       | 2,679,000             |       | 133,950        |       | 1,786,836   |       | —          |       | 1,920,786 |   |
| Stock issued under convertible debenture  agreements |       | 900,000               |       | 45,000         |       | 354,626     |       | —          |       | 399,626 |   |
| Warrants issued for debt costs                       |       | —                |       | —         |       | 208,333     |       | —          |       | 208,333 |   |
| Debt proceeds allocated to warrants                  |       | —                |       | —         |       | 1,203,752   |       | —          |       | 1,203,752 |   |
| Stock issued in payment of interest  obligations     |       | 40,805                |       | 2,040          |       | 34,002      |       | —          |       | 36,042 |   |
| Net loss, year ended June 30, 2006              |       | —                |       | —         |       | —      |       | (2,769,050      | )          | (2,769,050 | ) |
| **Balance at June 30, 2006**                    |       | 42,450,768            |       | $              | 2,122,540  |        | $          | 17,452,784      |       | $ | (13,521,918 | ) | $ | 6,053,406 |   |
| Stock issued under compensation plan                 |       | 542,000               |       | 27,100         |       | 406,500     |       | —          |       | 433,600 |   |
| Stock issued for working capital                     |       | 10,880,000            |       | 544,000        |       | 5,496,000   |       | —          |       | 6,040,000 |   |
| Stock issued for placement fee                       |       | 150,000               |       | 7,500          |       | (7,500      | )          | —          |       | — |   |
| Stock issued for warrant exercises                   |       | 1,818,128             |       | 90,906         |       | 726,594     |       | —          |       | 817,500 |   |
| Debt proceeds allocated to warrants                  |       | —                |       | —         |       | 1,251,051   |       | —          |       | 1,251,051 |   |
| Net loss, year ended June 30, 2007              |       | —                |       | —         |       | —      |       | (5,800,774      | )          | (5,800,774 | ) |
| **Balance at June 30, 2007**                    |       | 55,840,896            |       | $              | 2,792,046  |        | $          | 25,325,429      |       | $ | (19,322,692 | ) | $ | 8,794,783 |   |
| Stock issued under compensation plan                 |       | 697,500               |       | 34,875         |       | 1,046,700   |       | —          |       | 1,081,575 |   |
| Stock issued for warrant exercises                   |       | 2,314,665             |       | 115,733        |       | 994,561     |       | —          |       | 1,110,294 |   |
| Other                                                |       | 3                     |       | —         |       | —      |       | —          |       | — |   |
| Net loss, year ended June 30, 2008              |       | —                |       | —         |       | —      |       | (5,128,453      | )          | (5,128,453 | ) |
| **Balance at June 30, 2008**                    |       | 58,853,064            |       | $              | 2,942,654  |        | $          | 27,366,690      |       | $ | (24,451,145 | ) | $ | 5,858,199 |   |

 

*Theaccompanying notes are an integral part of these statements.*

 

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Table of Contents

 

**CUBICENERGY, INC.**

 

**STATEMENTS OF CASH FLOWS**

**FOR THEYEARS ENDED JUNE 30, 2008, 2007, AND 2006**

 
| ** **                                                                            | ** ** | **2008**    | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------|------------|------------|------------|------------|------------|
| **Cash flows from operating activities:**                                             |       |        |       |       |       |       |       |
| Net (loss)                                                                            |       | $           | (5,128,453 | )          | $          | (5,800,774 | )          | $ | (2,769,050 | ) |
| Adjustments to reconcile net (loss) to cash  provided (used) by operating activities: |       |        |       |       |       |       |       |
| Depreciation, depletion and amortization                                              |       | 2,762,417   |       | 545,261    |       | 465,519    |       |
| Impairment loss                                                                       |       | —      |       | 1,790,882  |       | —     |       |
| Stock issued for interest                                                             |       | —      |       | —     |       | 36,042     |       |
| Stock issued for compensation                                                         |       | 1,255,437   |       | 489,900    |       | 726,670    |       |
| Write-off deferred loan costs                                                         |       | —      |       | 318,999    |       | 99,203     |       |
| Write-off note payable discount                                                       |       | —      |       | 1,145,359  |       | 237,931    |       |
| Change in assets and liabilities:                                                     |       |        |       |       |       |       |       |
| (Increase) decrease in accounts receivable  - trade                                   |       | 52,964      |       | (177,194   | )          | (7,326     | )          |
| (Increase) decrease in other prepaid  expenses                                        |       | (7,974      | )          | (44,432    | )          | —     |       |
| Increase (decrease) in accounts payable and  accrued liabilities                      |       | 198,966     |       | (113,964   | )          | 154,367    |       |
| Increase (decrease) in due to affiliates                                              |       | (367,186    | )          | 43,895     |       | 92,771     |       |
| Net cash provided (used) by operating  activities                                     |       | (1,233,829  | )          | (1,802,068 | )          | (963,873   | )          |
| **Cash flows from investing activities:**                                             |       |        |       |       |       |       |       |
| Acquisition and development of oil and gas  properties                                |       | (15,341,903 | )          | (4,060,398 | )          | (4,502,186 | )          |
| Increase (decrease) in capital portion of  due to affiliates                          |       | (856,585    | )          | 43,895     |       | 92,771     |       |
| Purchase of office equipment                                                          |       | (1,786      | )          | (5,010     | )          | (3,003     | )          |
| (Increase) decrease in advances on  development costs                                 |       | 687,737     |       | (456,913   | )          | 39,443     |       |
| (Increase) decrease in cash restricted by  debt                                       |       | —      |       | 401,723    |       | (401,723   | )          |
| (Increase) decrease in other assets                                                   |       | —      |       | 25,000     |       | (25,000    | )          |
| Net cash provided (used) by investing  activities                                     |       | (15,512,537 | )          | (4,051,703 | )          | (4,799,698 | )          |
| **Cash flows from financing activities:**                                             |       |        |       |       |       |       |       |
| Issuance of common stock, net                                                         |       | 1,110,295   |       | 6,857,500  |       | 2,020,786  |       |
| Proceeds from credit facility                                                         |       | 12,827,800  |       | —     |       | —     |       |
| Issuance of subordinated debt                                                         |       | 2,000,000   |       | —     |       | —     |       |
| Issuance of convertible debt and warrants                                             |       | —      |       | 9,000,000  |       | 5,500,000  |       |
| Repayment of debt                                                                     |       | —      |       | (5,500,000 | )          | (1,480,000 | )          |
| Payment of note payable to affiliate                                                  |       | —      |       | (1,300,000 | )          | —     |       |
| Loan costs incurred and other                                                         |       | (170,000    | )          | (240,613   | )          | (275,311   | )          |
| Repayment of advances                                                                 |       | —      |       | (100,000   | )          | —     |       |
| Net cash provided (used) by financing  activities                                     |       | 15,768,095  |       | 8,716,887  |       | 5,765,475  |       |
| **Net increase (decrease) in cash and cash  equivalents**                             |       | $           | (978,271   | )          | $          | 2,863,116  |       | $ | 1,904 |   |
| **Cash and cash equivalents:**                                                        |       |        |       |       |       |       |       |
| Beginning of year                                                                     |       | 3,122,273   |       | 259,157    |       | 257,253    |       |
| End of year                                                                           |       | $           | 2,144,002  |       | $          | 3,122,273  |       | $ | 259,157 |   |
| Other information:                                                                    |       |        |       |       |       |       |       |
| Cash interest paid on debt                                                            |       | $           | 1,394,009  |       | $          | 815,286    |       | $ | 419,485 |   |
| Non-cash investing and financing  activities:                                         |       |        |       |       |       |       |       |
| Acquisition of property with stock issue                                              |       | $           | —     |       | $          | —     |       | $ | 1,300,000 |   |
| Acquisition of property with debt issue                                               |       | $           | —     |       | $          | —     |       | $ | 2,599,274 |   |

 

*Theaccompanying notes are an integral part of these statements.*

 

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**CUBICENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**Note A - Background andgeneral:**

 

Cubic Energy, Inc. (“Company”) is engaged in domestic crude oil,natural gas and natural gas liquids exploration, development and production,with primary emphasis on the production of oil and gas reserves through theacquisition and development of proved, producing oil and gas properties in thestates of Texas and Louisiana.

 

**Note B- Significant accounting policies:**

 

**Cash equivalents**

 

For purposes of the statements of cash flows, the Company considers allcertificates of deposit and other financial instruments with original maturitydates of three months or less to be cash equivalents.

 

**Office and other equipment**

 

Office and other equipment are stated at cost and depreciated by thestraight-line method over estimated useful lives ranging from five to sevenyears. Depreciation and amortization of office and other equipment amounted to$2,526, $1,524 and $1,173 forthe years ended June 30, 2008, 2007 and 2006, respectively.

 

**Impairment of long-lived assets and long-lived assets to be disposed of**

 

TheCompany has adopted the provisions of the Financial Accounting StandardsBoard’s (the “FASB”) Statement of Financial Accounting Standards (“FAS”) No. 144(“FAS No. 144”),*Accounting for theImpairment or Disposal of Long-Lived Assets*effective for periodsbeginning July 1, 2002, and thereafter. FAS No. 144 replaces FAS No. 121,and, among other matters, addresses financial accounting and reporting for theimpairment or disposal of long-lived assets. FAS No. 144 retains the basicprovisions of FAS No. 121, but broadens its scope and establishes a singlemodel for long-lived assets to be disposed of by sale. In addition, the Companyis subject to the rules of the Securities and Exchange Commission withrespect to impairment of oil and gas properties accounted for under the fullcost method of accounting, as described below.

 

**Full cost method of accounting for oil and gas properties**

 

TheCompany has adopted the full cost method of accounting for oil and gasproperties. Management believes adoption of the full cost method moreaccurately reflects management’s exploration objectives and results byincluding all costs incurred as integral for the acquisition, discovery anddevelopment of whatever reserves ultimately result from its efforts as a whole.Under the full cost method of accounting, all costs associated withacquisition, exploration and development of oil and gas reserves, includingsuch costs as leasehold acquisition costs, interest costs related toexploratory and development activities, and directly related overhead costs,are capitalized into the full cost pool.

 

All capitalized costs of oil and gas properties, including theestimated future costs to develop proved reserves, are amortized on theunit-of-production method using estimates of proved reserves. Investments inunproved properties and major development projects are not amortized untilproved reserves associated with the projects can be determined or until impairmentoccurs. If the results of an assessment indicate that the properties areimpaired, the amount of the impairment is added to the capitalized costs to beamortized.

 

F-8

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Table of Contents

 

**CUBICENERGY, INC.**

 

**NOTESTO FINANCIAL STATEMENTS**

 

Inaddition, the capitalized costs are subject to a “full cost ceiling test,”which generally limits such costs to the aggregate of the “estimated presentvalue” (discounted at a 10 percent (10%) interest rate) of future net revenuesfrom proved reserves, based on current economic and operating conditions, plusthe lower of cost or fair market value of unproved properties. Accordingly, noimpairment of oil and gas properties charge was recorded in fiscal 2008, and$1,790,882 was recorded for fiscal 2007; however, an excess of the capitalizedcosts over the full cost ceiling test limitation at June 30, 2006 was notcharged against earnings for fiscal 2006 because of an increase in oil and gasprices subsequent to year end.

 

Sales of proved and unproved properties are accounted for asadjustments of capitalized costs with no gain or loss recognized, unless suchadjustments would significantly alter the relationship between capitalizedcosts and proved reserves of oil and gas, in which case the gain or loss isrecognized in income.

 

Depletion of producing oil and gas properties amounted to $2,149,570,$360,910 and $178,064 for the years ended June 30, 2008, 2007 and 2006,respectively.

 

**Income taxes**

 

Income taxes are accounted for under the asset and liability method.Deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbasis. Deferred tax assets and liabilities are measured using enacted tax ratesthat will apply in the years in which those temporary differences are expectedto be recovered or settled. The effect on deferred tax assets and liabilitiesof a change in tax rates is recognized in income in the period that includesthe enactment date.

 

In September 2005, theEmerging Issues Task Force (“EITF”) reached a consensus on Issue No. 05-08,*Income Tax Consequences of Issuing Convertible Debtwith a Beneficial Conversion Feature* (“EITF 05-08”). Under EITF05-08, the issuance of convertible debt with a beneficial conversion featureresults in a temporary difference for purposes of applying FAS No. 109, *Accounting for Income Taxes*. The deferred taxes recognizedfor the temporary difference should be recorded as an adjustment to paid-incapital. EITF 98-05, *Accounting for ConvertibleSecurities with Beneficial Conversion Features or Contingently AdjustableConversion Ratios*, and EITF 00-27, *Applicationof Issue No. 98-05 to Certain Convertible Instruments*, requirethat the non-detachable conversion feature of a convertible debt security beaccounted for separately if it is a beneficial conversion feature. A beneficialconversion feature is recognized and measured by allocating to additionalpaid-in capital a portion of the proceeds equal to the conversion feature’sintrinsic value. A discount on the convertible debt is recognized for the amountthat is allocated to additional paid-in capital. The debt discount is accretedfrom the date of issuance to the stated redemption date of the convertibleinstrument or through the earliest conversion date if the instrument does nothave a stated redemption date. The U.S. Federal Income Tax Code includes theentire amount of proceeds received at issuance as the tax basis of theconvertible debt security. The adoption of EITF 05-08 has had no impact on theCompany’s financial statements because none of the conversion features embeddedin the Company’s notes payable is considered beneficial.

 

In July 2006, the FASBissued Interpretation No. 48 (“FIN No. 48”), *Accountingfor Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109*,which clarifies the accounting for uncertainty in tax positions. FIN No. 48requires that the Company recognize in the financial statements the impact of atax position if that position is more likely than not of being sustained uponaudit, based on the technical merits of the position. FIN No. 48 becameeffective for fiscal years beginning after December 15, 2006. The adoptionof FIN No. 48 has had no impact on the Company’s financial statements.

 

F-9

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Tableof Contents

 

**CUBICENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**Oil and gas revenues**

 

The Company recognizes oil and gas revenues when oil and gas productionis sold to a purchaser at a fixed or determinable price, when delivery hasoccurred and title has transferred, and if collectability of the revenue isprobable. Delivery occurs and title is transferred when production has beendelivered to a purchaser’s pipeline or truck. As a result of the numerousrequirements necessary to gather information from purchasers or variousmeasurement locations, calculate volumes produced, perform field and wellheadallocations and distribute and disburse funds to various working interestpartners and royalty owners, the collection of revenues from oil and gasproduction may take up to 60 days following the month of production. Therefore,we make accruals for revenues and accounts receivable based on estimates of ourshare of production. Since the settlement process may take 30 to 60 daysfollowing the month of actual production, our financial results includeestimates of production and revenues for the related time period. We record anydifferences, which historically have not been significant, between the actual amountsultimately received and the original estimates in the period they becomefinalized. Differences between sales and production volumes during the yearsended June 30, 2008, 2007 and 2006 were not significant.

 

**Earnings (loss) per common share**

 

The Company has adopted the provisions of FAS No. 128, *Earnings per Share*. FAS No. 128 requires thepresentation of basic earnings (loss) per share (EPS) and diluted EPS. BasicEPS is calculated by dividing net income or loss (available to commonstockholders) by the weighted average number of common shares outstanding forthe period. Diluted EPS reflects the potential dilution that could occur ifsecurities or other contracts to issue common stock, such as stock options,warrants, convertible preferred stock and convertible debentures, wereexercised or converted into common stock.

 

As discussed in Note E, there were no dilutive securities outstandingduring the years ended June 30, 2008, 2007 and 2006. The weighted averagenumber of common and common equivalent shares outstanding was 56,974,407,50,338,450 and 38,477,353 for the years ended June 30, 2008, 2007 and2006, respectively.

 

**Concentration of credit risk**

 

Financial instruments which potentially subject the Company to aconcentration of credit risk consists primarily of trade accounts receivablewith a variety of local, national, and international oil and natural gascompanies. Such credit risks are considered by management to be limited due tothe financial resources of the oil and natural gas companies.

 

The Company had cash balances of approximately $2,150,437, at June 30,2008, in one banking institution; such amount is in excess of the federallyinsured amount of $100,000 for each institution. This balance is beforeconsidering outstanding items.

 

F-10

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Tableof Contents

 

**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**Reporting comprehensive income (loss) and operating segments**

 

The Company has adopted the provisions of FAS No. 130, *Reporting Comprehensive Income*, and FAS No. 131, *Disclosure about Segments of an Enterprise and Related Information*.FAS No. 130 requires that an enterprise report, by major components and asa single total, the change in its net assets during the period from non-ownersources. FAS No. 131 establishes annual and interim reporting standardsfor an enterprise’s operating segments and related disclosures about itsproducts, services, geographic areas and major customers. Adoption of FAS No. 130and FAS No. 131 has had no impact on the Company’s financial position,results of operations, cash flows, or related disclosures because the Company’soperations are considered to be a single segment.

 

**Use ofestimates**

 

The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes. Actual results could differ from those estimates.

 

**Certainsignificant estimates**

 

Management’s estimates of oil and gas reserves are based on variousassumptions, including constant oil and gas prices. It is reasonably possiblethat a future event in the near term could cause the estimates to change andsuch changes could have a severe impact. Actual future production, cash flows,taxes, operating expenses, development expenditures and quantities ofrecoverable oil and gas reserves may vary substantially from those assumed inthe estimate. The accuracy of any reserve estimate is a function of the qualityof available data, engineering and geological interpretation, and judgment.Subsequent evaluation of the same reserves based upon production history willresult in variations, which may be substantial, in the estimated reserves.While it is at least reasonably possible that the estimates above will changematerially in the near term, no estimate can be made of the range of possiblechanges that might occur.

 

**Fairvalue of financial instruments**

 

The Company defines the fair value of a financial instrument as theamount at which the instrument could be exchanged in a current transactionbetween willing parties. Financial instruments included in the Company’sfinancial statements include cash and cash equivalents, short-term investments,accounts receivable, other receivables, other assets, accounts payable, notespayable and due to affiliates. Unless otherwise disclosed in the notes to thefinancial statements, the carrying value of financial instruments is consideredto approximate fair value due to the short maturity and characteristics ofthose instruments. The carrying value of debt approximates fair value as termsapproximate those currently available for similar debt instruments.

 

F-11

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Tableof Contents

 

**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**Assetretirement obligations**

 

The Company has adopted the provisions of FAS No. 143, *Accounting for Asset Retirement Obligations*, effective July 1,2002. FAS No. 143 amended FAS No. 19, *FinancialAccounting and Reporting by Oil and Gas Producing Companies*, and,among other matters, addresses financial accounting and reporting for legalobligations associated with the retirement of tangible long-lived assets andthe associated asset retirement costs. FAS No. 143 requires that the fairvalue of a liability for an asset retirement obligation be recognized in theperiod in which it is incurred, with the associated asset retirement costcapitalized as part of the related asset and allocated to expense over theasset’s useful life.

 

This is a change from the approach taken under FAS No. 19, wherebyan amount for an asset retirement obligation was recognized using acost-accumulation measurement approach. Under that approach, the obligation wasreported as a contra-asset recognized as part of depletion and depreciationover the life of the asset without discounting. Management has determined thatadopting FAS No. 143 has had no significant effect on the Company’sfinancial statements since abandonment costs for which it is responsible arenot material.

 

In March 2005, the FASBissued FASB Interpretation No. 47 (“FIN No. 47”), *Accounting for Conditional Asset Retirement Obligations*. FINNo. 47 clarifies that a conditional asset retirement obligation, as usedin FAS No. 143, refers to a legal obligation to perform an assetretirement activity in which the timing or method of the settlement areconditional on a future event that may or may not be within the control of theentity. Accordingly, an entity is required to recognize a liability for thefair value of a conditional asset retirement obligation if the fair value canbe reasonably estimated. FIN No. 47 is effective no later than fiscalyears ending after December 15, 2005. The adoption of FIN No. 47 hashad no impact on the financial statements of the Company.

 

**Stock-basedcompensation**

 

The Company accounts for its stock-basedemployee compensation plans pursuant to FAS No. 123R, *Share-BasedPayment*, which is a revision of FAS No. 123, *Accounting for Stock-Based Compensation,*and supersedes Accounting Principles Board (“APB”) Opinion No. 25,*Accounting for Stock Issued to Employees (“APB No. 25”)*. This FAS requires the Company to recognizecompensation costs related to stock-based payment transactions (i.e., thegranting of stock options and warrants, and awards of unregistered shares ofcommon stock) in the financial statements. With limited exceptions, the amountof compensation is measured based on the grant-date fair value of the equityissued. Compensation cost is recognized over the period that an employeeprovides services in exchange for the award. This new standard became effectivefor awards that are granted, modified or settled in cash in interim and annualfinancial periods beginning after June 30, 2006.

 

Prior to adopting FAS No. 123R, the Company applied APB No. 25and related interpretations, which required that compensation expense berecorded on the date of the grant of stock options and warrants only if thecurrent market price of the underlying stock exceeded the exercise price.Alternatively, FAS No. 123R permits entities to recognize, as expense overthe vesting period, the fair value of all stock-based awards on the date ofgrant. No retroactive or cumulative effect adjustments were required upon theCompany’s adoption of SFAS No. 123R.

 

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Tableof Contents

 

**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

In December 2002, the FASB issued FAS No. 148, *Accounting for Stock-Based Compensation - Transition and Disclosure*,which amends FAS No. 123. FAS No. 148 provides alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based compensation. In addition, FAS No. 148 amends thedisclosure requirements of FAS No. 123 to require more prominent and morefrequent disclosures in financial statements about the effects of stock-basedcompensation. The transition guidance and annual disclosure provisions areeffective for years ending after December 15, 2002. The interim disclosureprovisions became effective for financial reports containing financialstatements for interim periods beginning after December 15, 2002. Theother requirements of this standard have been adopted by the Company forperiods beginning January 1, 2003.

 

Additionally,in August 2005, the FASB issued FASB Staff Position (“FSP”) No. 123R-1(“FSP1”), *Classification and Measurement of FreestandingFinancial Instruments Originally Issued in Exchange for Employee Services underFASB Statement No. 123(R)*. In FSP1, the FASB decided to deferthe requirements in FAS No. 123 that make a freestanding financialinstrument subject to the recognition and measurement requirements of otherGAAP when the rights conveyed by the instrument are no longer dependent on theholder being an employee. In October 2005, the FASB issued FSP No. 123R-2(“FSP2”), *Practical Accommodation to the Application of GrantDate as Defined in FASB Statement No. 123(R)*. In FSP2, the FASBis providing companies with a “practical accommodation” when determining thegrant date of an award that is subject to the accounting provisions in FAS No. 123R.In November 2005, the FASB issued FSP No. 123R-3 (“FSP3”), *Transition Election Related to Accounting for the Tax Effects ofShare-Based Payment Awards*. FSP3 provides an elective alternativemethod that establishes a computational component to arrive at the beginningbalance of the accumulated paid-in capital pool related to employeecompensation and a simplified method to determine the subsequent impact on the accumulatedpaid-in capital pool of employee awards that are fully vested and outstandingupon the adoption of FAS No. 123R.

 

InFebruary 2006, the FASB issued FSP No. 123R-4 (“FSP4”), *Classification of Options and Similar Instruments Issued as EmployeeCompensation That Allow for Cash Settlement upon the Occurrence of a ContingentEvent*, which concludes that a cash settlement feature that can beexercised only upon the occurrence of a contingent event that is outside theemployee’s control does not become a liability until it becomes probable thatthe event will occur. An option or similar instrument that is classified asequity, but subsequently becomes a liability because the contingent cashsettlement event is probable of occurring, shall be accounted for similar tomodification from an equity to liability award. To the extent that theliability exceeds the amount previously recognized in equity, the excess isrecognized as compensation cost. The total recognized compensation cost for anaward with a contingent cash settlement feature shall at least equal the fairvalue of the award at the grant date. FSP4 is applicable only for options orsimilar instruments issued as part of employee compensation arrangements. Theguidance in FSP1, FSP2, FSP3 and FSP4 has been applied concurrent with ouradoption of FAS No. 123R.

 

F-13

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Tableof Contents

 

**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

InMarch 2005, the SEC published Staff Accounting Bulletin No. 107 (“SABNo. 107”). The interpretations in this staff accounting bulletin expressthe views of the staff regarding the interaction between FAS No. 123R andcertain SEC rules and regulations and provide the staff’s views regardingthe valuation of share-based payment arrangements for public companies. Inparticular, SAB No. 107 provides guidance related to share-based paymenttransactions with non-employees, the transition from non-public to publicentity status, valuation methods (including assumptions such as expectedvolatility and expected term), the accounting for certain redeemable financialinstruments issued under share-based payment arrangements, the classificationof compensation expense, non-GAAP financial measures, first-time adoption ofFAS No. 123R in an interim period, capitalization of compensation costrelated to share-based payment arrangements, the accounting for income taxeffects of share-based payment arrangements upon adoption of FAS No. 123R,the modification of employee share options prior to adoption of FAS No. 123Rand disclosures in Management’s Discussion and Analysis subsequent to adoptionof FAS No. 123R. The provisions of SAB No. 107 became effective withour adoption of FAS No. 123R.

 

Inperiods prior to fiscal 2007, the Company applied APB No. 25 in accountingfor its stock warrants issued to employees and directors, and, accordingly, hasrecognized no compensation expense for stock warrants and options granted atexercise prices at least equal to the market value of the Company’s commonstock. Had the Company determined compensation cost based on the fair value atthe grant date for its stock options under FAS No. 123R, the Company’s netloss and loss per share would not have been different from the amounts reportedfor the fiscal year ended June 30, 2006.

 

**Exit ordisposal activities**

 

In July 2002, the FASB issued FAS No. 146, *Accounting for Cost Associated with Exit or Disposal Activities*.FAS No. 146 requires companies to recognize costs associated with exit ordisposal activities when they are incurred rather than at the date of acommitment to an exit or disposal plan. Examples of costs covered by thestandard include lease termination costs and certain employee severance coststhat are associated with a restructuring, discontinued operations, or otherexit or disposal activities. FAS No. 146 is effective prospectively forexit or disposal activities initiated after December 31, 2002, withearlier adoption encouraged. No exit or disposal activities have been enteredinto by management.

 

**Financialinstruments with characteristics of both liabilities and equity**

 

In May 2003, the FASB issued FAS No. 150 (“FAS No. 150”),*Accounting for Certain Financial Instruments withCharacteristics of Both Liabilities and Equity*. FAS No. 150established standards for how a company classifies and measures certainfinancial instruments with characteristics of both liabilities and equity. Thestatement requires that a company classify a financial instrument that iswithin its scope as a liability (or an asset in some circumstances) if certaincriteria are met. Freestanding financial instruments that obligate the issuerto redeem the holder’s shares, or are indexed to such an obligation, and aresettled in cash or settled with shares meeting certain conditions would betreated as liabilities. Many of those instruments were previously classified asequity.

 

F-14

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Tableof Contents

 

**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIALSTATEMENTS**

 

In June 2005, the FASB issued FSP FAS No. 150-5 (“FAS No. 150-5”),*Issuers Accounting under FASB Statement No. 150for Freestanding Warrants and Other Similar Instruments on Shares that areRedeemable*. FAS No. 150-5 clarifies that freestanding warrantsand similar instruments on shares that are redeemable should be accounted foras liabilities under FAS No. 150 regardless of the timing of theredemption feature or price, even though the underlying shares may beclassified as equity. FAS No. 150-5 is effective for the first reportingperiod beginning after June 30, 2006. Although the Company had outstandingwarrants as of June 30, 2008, the shares issued upon exercise of thewarrants are not redeemable; consequently, adoption of FAS No. 150-5 hasnot had an impact on the Company’s financial position, results of operations orcash flows.

 

**Guaranteeof debt**

 

In November 2002, the FASB issued Interpretation No. 45 (“FINNo. 45”), *Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers, an Interpretation of FASB Statements No. 5, 57, and 107 andRescission of FASB Interpretation No. 34*. FIN No. 45clarifies the requirements of FAS No. 5, relating to the guarantor’saccounting for, and disclosure of, the issuance of certain types of guarantees.This Interpretation clarifies that a guarantor is required to recognize, at theinception of certain types of guarantees, a liability for the fair value of theobligation undertaken in issuing the guarantee, and requires additionaldisclosures on existing guarantees even if the likelihood of future liabilityunder the guarantees is deemed remote. The Company has not issued anyguarantees and, therefore, the adoption of FIN No. 45 does not have asignificant impact on the Company’s financial statements.

 

**Variableinterest entities**

 

In January 2003, the FASB issued Interpretation No. 46 (“FIN No. 46”),*Consolidation of Variable Interest Entities, anInterpretation of ARB No. 51*. FIN No. 46 states that if abusiness enterprise has a controlling financial interest in a variable interestentity as the primary beneficiary, the assets, liabilities and results of theactivities of the variable interest entity should be included in theconsolidated financial statements of the business enterprise. ThisInterpretation explains how to identify variable interest entities and how anenterprise assesses its interests in a variable interest entity to decidewhether to consolidate that entity. The primary beneficiary of a variableinterest entity would be required to consolidate if the other equity investorsin the entity do not have the characteristics of a controlling financialinterest or do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties. FIN No. 46 applies immediately to variable interest entitiescreated after January 31, 2003, and to variable interest entities in whichan enterprise obtains an interest after that date. It applies in the firstfiscal year or interim period beginning after June 15, 2003, to variableinterest entities in which an enterprise holds a variable interest that itacquired before February 1, 2003. The Company has no current contractualrelationships or other business relationships with variable interest entities.

 

F-15

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Table of Contents

 

**CUBIC ENERGY, INC.**

 

**NOTESTO FINANCIAL STATEMENTS**

 

**Accounting changes and errorcorrections**

 

In May 2005, the FASB issued FAS No. 154 (“FAS No. 154”),*Accounting Changes and Error Corrections — AReplacement of APB Opinion No. 20 and FASB Statement No. 3*.FAS No. 154 replaces APB Opinion No. 20 (“APB No. 20”), *Accounting Changes*, and FAS No. 3 (“FAS No. 3”), *Reporting Accounting Changes in Interim Financial Statements*,and changes the requirements for the accounting for, and reporting of, a changein accounting principles. FAS No. 154 applies to all voluntary changes inaccounting principles and changes required by an accounting pronouncement inthe unusual instance that the pronouncement does not include specifictransition provisions. Under previous guidance, changes in accounting principlewere recognized as a cumulative effect in the net income of the period of thechange. FAS No. 154 requires retrospective application of changes inaccounting principle, limited to the direct effects of the change, to priorperiods’ financial statements, unless it is impracticable to determine eitherthe period-specific effects or the cumulative effect of the change inaccounting principle.

 

Additionally, FAS No. 154requires that a change in depreciation, amortization or depletion method forlong-lived, non-financial assets be accounted for as a change in accountingestimate affected by a change in accounting principle and that correction oferrors in previously issued financial statements should be termed a “restatement.”The provisions in FAS No. 154 became effective for accounting changes andcorrection of errors made in fiscal years beginning after December 15,2005. The adoption of FAS No. 154 did not have a material impact on theCompany’s financial position, results of operations or cash flows.

 

**Debt modifications**

 

In September 2005, theEITF reached a consensus on Issue No. 05-07 (“EITF No. 05-07”), *Accounting for Modifications to Conversion Options Embedded in DebtInstruments and Related Issues*. EITF No. 05-07 requires that achange in the fair value of a conversion option brought about by modifying thedebt agreement be included in analyzing in accordance with EITF consensus onIssue No. 96-19 (“EITF No. 96-19”), *Debtor’sAccounting for a Modification or Exchange of Debt Instruments*,whether a debt instrument is considered extinguished. Under EITF No. 96-19’srequirements, an issuer who modifies a debt instrument must compare the presentvalue of the original debt instrument’s cash flows to the present value of thecash flows of the modified debt. If the present value of those cash flowsvaries by more than 10 percent (10%), the modification is consideredsignificant and extinguishments accounting is applied to the original debt. Ifthe change in the present value of the cash flows is less than 10 percent(10%), the debt is considered to be modified and is subject to EITF No. 96-19’smodification accounting. EITF No. 05-07 requires that in applying the 10percent (10%) test the change in the fair value of the conversion option betreated in the same manner as a current period cash flow. EITF No. 05-07also requires that, if a modification does not result in an extinguishment, thechange in fair value of the conversion option be accounted for as an adjustmentto interest expense over the remaining term of the debt. The issuer should notrecognize a beneficial conversion feature or reassess an existing beneficialconversion feature upon modification of the conversion option of a debtinstrument that does not result in an extinguishment. EITF No. 05-07became effective for modifications of debt instruments beginning in the firstinterim or annual reporting period beginning after December 15, 2005. Theadoption of EITF No. 05-07 did not have a material impact on the Company’sfinancial position, results of operations or cash flows.

 

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Tableof Contents

 

**CUBIC ENERGY, INC.**

 

**NOTESTO FINANCIAL STATEMENTS**

 

**Certain hybrid financialinstruments**

 

In February 2006, theFASB issued FAS No. 155 (“FAS No. 155”), *Accountingfor Certain Hybrid Financial Instruments*, which amends FAS No. 133(“FAS No. 133”), *Accounting for DerivativeInstruments and Hedging Activities*and FAS No. 140 (“FAS No. 140”),*Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities*, and improves thefinancial reporting of certain hybrid financial instruments by requiring moreconsistent accounting that eliminates exemptions and provides a means tosimplify the accounting for these instruments. Specifically, FAS No. 155allows financial instruments that have embedded derivatives to be accounted foras a whole (eliminating the need to bifurcate the derivative from its host) ifthe holder elects to account for the whole instrument on a fair value basis.FAS No. 155 is effective for all financial instruments acquired or issuedafter the beginning of an entity’s first fiscal year that begins after September 15,2006. The adoption of FAS No. 155 did not have a material impact on theCompany’s financial position, results of operations or cash flows.

 

**Reporting taxes collected**

 

In March 2006, the EITFreached a tentative consensus on Issue No. 06-03 (“EITF No. 06-03”), *How Sales Taxes Collected from Customers and Remitted to GovernmentalAuthorities Should Be Presented in the Income Statement (That Is, Gross versusNet Presentation)*. EITF No. 06-03 addresses income statementclassification and disclosure requirements of externally-imposed taxes onrevenue-producing transactions. EITF No. 06-03 is effective for periodsbeginning after December 15, 2006. The adoption of EITF No. 06-03 didnot have a material impact on the Company’s financial position, results ofoperations or cash flows.

 

**Other recent accountingpronouncements**

 

In September 2006, the Securities and Exchange Commission issuedStaff Accounting Bulletin No. 108 (“SAB No. 108”), *Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements*. SAB No. 108was issued to address diversity in practice in quantifying financial statementmisstatements. Current practice allows for the evaluation of materiality on thebasis of either (1) the error quantified as the amount by which thecurrent year income statement was misstated (“rollover method”) or (2) thecumulative error quantified as the cumulative amount by which the current yearbalance sheet was misstated (“iron curtain method”). The guidance provided inSAB No. 108 requires both methods to be used in evaluatingmateriality (“dual approach”). SAB No. 108 permits companies toinitially apply its provisions either by (1) restating prior financialstatements as if the dual approach had always been used or (2) recordingthe cumulative effect of initially applying the “dual approach” as adjustmentsto the carrying values of assets and liabilities as of January 1, 2006with an offsetting adjustment recorded to the opening balance of retainedearnings. The adoption of SAB No. 108 did not have a material impact onthe Company’s financial position, results of operations or cash flows.

 

In September 2006, theFASB issued FAS No. 157 (“FAS No. 157”), *Fair ValueMeasurements*. FAS No. 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles,and expands disclosures about fair value measurements. FAS No. 157 doesnot require any new fair value measurements in financial statements, butstandardizes its definition and guidance in GAAP. Thus, for some entities, theapplication of this statement may change current practice. FAS No. 157 waseffective for us beginning on January 1, 2008. The adoption of FAS No. 157did not have a material impact on the Company’s financial position, results ofoperations or cash flows.

 

F-17

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Tableof Contents

 

**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

InFebruary 2007, the FASB issued Statement of FAS No. 159 (“FAS No. 159”),*The Fair Value Option for Financial Assets andFinancial Liabilities*. FAS No. 159 allows entities to choose,at specified election dates, to measure eligible financial assets andliabilities at fair value that are not otherwise required to be measured atfair value. If a company elects the fair value option for an eligible item,changes in that item’s fair value in subsequent reporting periods must berecognized in current earnings. FAS No. 159 also establishes presentationand disclosure requirements designed to draw comparison between entities thatelect different measurement attributes for similar assets and liabilities. FAS No. 159is effective for fiscal years beginning after November 15, 2007. Earlyadoption is permitted subject to specific requirements outlined in theStatement. Management is currently evaluating the effect of this pronouncementon its financial statements.

 

**In December 2007, theFASB issued FAS No. 141 (revised 2007) (“FAS No. 141(R)”), *Business Combinations*. FAS No. 141(R) providescompanies with principles and requirements on how an acquirer recognizes andmeasures in its financial statements the identifiable assets acquired,liabilities assumed, and any non-controlling interest in the acquiree as wellas the recognition and measurement of goodwill acquired or a gain from abargain purchase in a business combination. FAS No. 141(R) alsorequires certain disclosures to enable users of the financial statements toevaluate the nature and financial effects of the business combination.Acquisition costs associated with the business combination will generally beexpensed as incurred. In addition, changes in an acquired entity’s valuationallowance for deferred tax assets and uncertain tax positions after themeasurement period will impact income tax expense. FAS No. 141(R) iseffective for business combinations occurring in fiscal years beginning after December 15,2008. Early adoption of FAS No. 141(R) is not permitted. We have notyet assessed the impact FAS No. 141(R) will have if we engage infuture business combinations.**

** **

**In December 2007, theFASB issued FAS No. 160 (“FAS No. 160), *Non-controllingInterests in Consolidated Financial Statements, an amendment of ARB No. 51*,which mandates that a non-controlling (minority) interest shall be reported inthe consolidated statement of financial position within equity, separately fromthe parent company’s equity. This statement amends ARB No. 51 andclarifies that a non-controlling interest in a subsidiary is an ownershipinterest in the consolidated entity. FAS No. 160 also requiresconsolidated net income to include amounts to both parent and non-controllinginterest and requires disclosure, on the face of the consolidated statement ofincome, of the amounts of consolidated net income attributable to the parentand to the non-controlling interest. FAS No. 160 is effective for fiscal yearsand interim periods beginning after December 15, 2008. We have not yetassessed the impact on our consolidated financial statements of adopting FAS No. 160effective January 1, 2009, but we do not expect it to be material as wecurrently do not have any minority interests that would be subject to FAS No. 160.**

 

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**CUBIC ENERGY, INC.**

 

**NOTESTO FINANCIAL STATEMENTS**

** **

**NoteC – Stockholders’ equity:**

** **

 The Company’s authorized capital is 100,000,000shares of $0.05 par value common stock and 10,000,000 shares of $0.01 par valuepreferred stock. No shares of preferred stock were issued or outstanding at June 30,2008 and 2007.

 

**Stockand warrants**

 

On or about October 1,2004, the Company closed a Securities Purchase Agreement and issued $2,635,000in principal amount of 7% Senior Secured Convertible Debentures due September 30,2009 (the “Debentures”), to a group of institutional and high net worthinvestors. The Company had the option to pay the interest on the Debentures incommon stock. The investors also received warrants to purchase an additional2,635,000 shares of common stock with an exercise price of $1.00 per share. Allof the above-referenced warrants had been exercised at June 30, 2008.

 

The Companyallocated the proceeds from the issuance of the Debentures to the warrants andthe Debentures based on their relative fair market values at the date ofissuance. The value assigned to the warrants of $510,961 was recorded as anincrease in additional paid-in capital for the year ended June 30, 2006.

 

On or about January 11,2005, the Company issued 1,531,661 shares of common stock to Caravel ResourcesEnergy Fund 2003-II, L.P. (the “Partnership”) in exchange for a 0.1914575033working interest in the Kraemer 24-1 Well, DeSoto Parish, Township 14 N, Range15 W, Section 24 (the “Well”). The Company also issued 468,339 shares ofcommon stock to Mr. Wallen in exchange for a 0.0585424967 working interestin the Well. The common stock closed at a price of $0.90 on January 10,2005.

 

On December 16,2005, the Company entered into a Securities Purchase Agreement and issued2,500,000 common shares at a price of $0.80 per share and issued warrants, withfive year expirations, for the purchase of up to 1,000,000 shares of Companycommon stock at an exercise price of $1.00 per share. The proceeds of theoffering were used for exploratory drilling and working capital. 640,000 of theabove-referenced warrants had been exercised and 360,000 remained outstandingat June 30, 2008.

 

On February 6,2006, Cubic entered into a Credit Agreement with Petro Capital V, L.P. (“PetroCapital”) pursuant to which Petro Capital advanced to the Company $5,500,000.In connection with the funding under the Credit Agreement, the Company issuedto Petro Capital and Petro Capital Securities, LLC, warrants, with five-yearexpirations, for the purchase of up to 1,833,334 and 250,000 shares,respectively, of Company common stock at an exercise price of $1.00 per share.Pursuant to the anti-dilution adjustment provisions applicable to suchwarrants, the exercise price applicable to all such warrants still outstanding iscurrently $0.9842 per share. 1,550,000 of the above-referenced warrants issued to Petro Capital hadbeen exercised and 283,334 remained outstanding at June 30, 2008. None ofthe 250,000 warrants issued to Petro Capital Securities, LLC had been exercisedand all remained outstanding at June 30, 2008. The Company allocated theproceeds from the issuance of the senior debt to the warrants and the seniordebt based on their relative fair market values at the date of issuance. Thevalue assigned to the warrants of $1,203,752 was recorded as an increase inadditional paid-in capital.

 

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Tableof Contents

 

**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

OnJuly 28, 2006, Cubic entered into and consummated transactions pursuant toSubscription and Registration Rights Agreements (the “July 2006Subscription Agreements”) with certain investors that are unaffiliated with theCompany (the “Investors”). Pursuant to the Subscription Agreements, theInvestors paid aggregate consideration of $2,100,000 to the Company for3,000,000 shares of the Company’s common stock and warrants exercisable,through July 31, 2011, into 1,500,000 shares of common stock at $0.70 pershare. Pursuantto the anti-dilution adjustment provisions applicable to such warrants, theexercise price applicable to all such warrants is currently $0.6885 pershare. Noneof the above-referenced warrants had been exercised and all remainedoutstanding at June 30, 2008.

 

OnNovember 10, 2006, in connection with the extension of a promissory note,the Company issued to Tauren warrants, with three-year expirations, for thepurchase of up to 50,000 shares of Company common stock at an exercise price of$0.70 per share.

 

OnDecember 15, 2006, the Company entered into Subscription and RegistrationRights Agreements (the “December 2006 Subscription Agreements”) withcertain investors. One of the investors, William Bruggeman (and entitiesaffiliated with him) was the beneficial owner, prior to this transaction, ofapproximately 23.0% of the common stock of the Company. In this transaction, Mr. Bruggeman(and entities affiliated with him) purchased an aggregate of 4,288,000 sharesof common stock at a purchase price of $0.50 per share, or an aggregate of$2,144,000. Mr. Bruggeman (and entities affiliated with him) receivedwarrants to purchase 2,144,000 shares of common stock with an exercise price of$0.70 per share. Another investor, Bob Clements, a director of the Company,purchased 100,000 shares of common stock at a purchase price of $0.50 pershare, or an aggregate of $50,000. Mr. Clements received warrants topurchase 50,000 shares of common stock with an exercise price of $0.70 pershare. Pursuant to the December 2006 Subscription Agreements, theinvestors paid aggregate consideration of $3,940,000 to the Company for7,880,000 shares of the Company’s common stock and warrants exercisable into3,940,000 shares of common stock. The warrants are exercisable through November 30,2011, at $0.70 per share. 140,000 of the above-referenced warrants had beenexercised and 3,800,000 remained outstanding at June 30, 2008.

 

On March 5, 2007,Cubic entered into a Credit Agreement with Wells Fargo Energy Capital (“WellsFargo”) providing for a revolving credit facility of $20,000,000 and aconvertible term loan of $5,000,000 (the “Credit Facility”). In connection withentering into the Credit Facility, the Company issued to Wells Fargo warrants,with five-year expirations, for the purchase of up to 2,500,000 shares ofCompany common stock at an exercise price of $1.00 per share. The term loan isalso convertible into 5,000,000 shares of Company common stock at a conversionprice of $1.00 per share. None of the above-referenced warrants had been exercisedand all remained outstanding at June 30, 2008. The Company allocated theproceeds from the issuance of the debt to the warrants, the debt and netprofits interest (see “Note E – Long-term debt”) based on their relative fairmarket values at the date of issuance. The value assigned to the warrants of$1,314,289 was recorded as an increase in additional paid-in capital and thevalue assigned to the net profits interest of $213,148 was recorded as a creditto the full cost pool for oil and gas properties.

 

During the fiscal year ended June 30, 2008, the Company receivedan aggregate total of $1,110,295 relating to the exercise of 2,730,000 warrantsrepresenting 2,314,665 shares of common stock.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**Stock-basedcompensation**

 

On December 29, 2005, the shareholders ofthe Company approved the 2005 Stock Option Plan (the “Plan”) and 3,750,000 shares of commonstock were reserved, of which 2,408,500 shares had been issued through June 30,2008, as set forth below.

 

On December 29, 2005, stock grants aggregating 597,000unregistered shares were approved for issuance to the officers and directors ofthe Company. As of such date, the aggregate market value of the common stockgranted was $483,570 based on the last sale price on the OTC Bulletin Board (“OTCBB”)of the Company’s common stock. Such amount was recorded as compensation expenseand included in general and administrative expenses for the fiscal year ended June 30,2006.

 

On January 5, 2006, the Company issued572,000 unregistered shares to the officers and directors of the Companypursuant to the Plan. As of such date, the aggregate market value of the commonstock granted was $486,200 based on the last sale price on the OTCBB of theCompany’s common stock. Such amount was amortized to compensation expense on aquarterly basis during calendar year 2006. Accordingly, $243,100 was recordedas compensation expense and included in general and administrative expenses foreach of the fiscal years ended June 30, 2007 and 2006.

 

On January 10 and January 18, 2007,the Company issued 489,500 and 52,500 unregistered shares, respectively, to theofficers, directors, and key employees of the Company pursuant to the Plan. Asof such dates, the aggregate market value of the common stock granted was$391,600 and $42,000, respectively, based on the last sale price on the OTCBBof the Company’s common stock. Such amounts were amortized to compensationexpense on a quarterly basis during calendar year 2007. An additional $30,000was recorded when our former Chief Financial Officer resigned during fiscal2007. Accordingly, $186,800 and $246,800 was recorded as compensation expenseand included in general and administrative expense for the fiscal years ended June 30,2008 and 2007, respectively. The Named Executive Officers received thefollowing grants: (i) 150,000 unregistered shares to Calvin A. Wallen, III,(ii) 75,000 unregistered shares to James L. Busby, and (iii) 47,500unregistered shares to Jon S. Ross.

 

On August 20, 2007, the Company issued90,000 unregistered shares to the current Chief Financial Officer of theCompany pursuant to the Plan, with such grant subject to vesting in quarterlyinstallments over the following four quarters. As of such date, the aggregatemarket value of the common stock granted was $103,500 based on the then marketprice on the OTCBB of the Company’s common stock. Such amount is beingamortized to compensation expense on a quarterly basis during fiscal years 2008and 2009. Accordingly, $90,563 was recorded as compensation expense andincluded in general and administrative expenses for fiscal 2008. The remaining$12,937 will be amortized to compensation expense in the first quarter offiscal 2009, which ends September 30, 2008.

 

On January 31 and February 4, 2008,the Company issued 555,000 and 52,500 unregistered shares, respectively, to theofficers and directors, and key employees of the Company pursuant to the Plan.As of such dates, the aggregate market value of the common stock granted was$893,550 and $84,525, respectively (a total of $978,075), based on thethen-market price on the OTCBB of the Company’s common stock. Recent SECguidance requires that immediately-vesting common stock grants with noforfeiture provisions be expensed at the time of grant rather than amortizedover four quarters. Accordingly, the full $978,075 was recorded as compensationexpense and included in general and administrative expenses for the fiscal yearended June 30, 2008.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

The following table providesinformation related to stock-based compensation for the years ended June 30,2008, 2007 and 2006:

** **
| ** **                                          | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                          | ** ** | **2008**                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Officer and employee restricted stock  grants:**  |       |                                               |       |   |   |   |   |
| Pretax compensation expense                         |       | $                                                  | 818,287    |   | $ | 368,625 |   | $ | 524,875 |   |
| Tax benefit                                         |       | $                                                  | —     |   | $ | — |   | $ | — |   |
| Restricted stock expense, net of tax                |       | $                                                  | 818,287    |   | $ | 368,625 |   | $ | 524,875 |   |
|                                                |       |                                               |       |   |   |   |   |
| **Director restricted stock grants:**               |       |                                               |       |   |   |   |   |
| Pretax compensation expense                         |       | $                                                  | 437,150    |   | $ | 121,275 |   | $ | 201,795 |   |
| Tax benefit                                         |       | $                                                  | —     |   | $ | — |   | $ | — |   |
| Director stock grants expense, net of tax           |       | $                                                  | 437,150    |   | $ | 121,275 |   | $ | 201,795 |   |
|                                                |       |                                               |       |   |   |   |   |
| **Stock options:**                                  |       |                                               |       |   |   |   |   |
| Pretax compensation expense                         |       | $                                                  | —     |   | $ | — |   | $ | — |   |
| Tax benefit                                         |       | $                                                  | —     |   | $ | — |   | $ | — |   |
| Stock option expense, net of tax                    |       | $                                                  | —     |   | $ | — |   | $ | — |   |
|                                                |       |                                               |       |   |   |   |   |
| **Total stock-based compensation:**                 |       |                                               |       |   |   |   |   |
| Pretax compensation expense                         |       | $                                                  | 1,255,437  |   | $ | 489,900 |   | $ | 726,670 |   |
| Tax benefit                                         |       | $                                                  | —     |   | $ | — |   | $ | — |   |
| Total share based compensation expense, net  of tax |       | $                                                  | 1,255,437  |   | $ | 489,900 |   | $ | 726,670 |   |

 

**Note D –Loss per common share:**

** **
| ** **                                         | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|----------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Net loss attributable to stockholders              |       | $          | (5,128,453 | )          | $          | (5,800,774 | )          | $ | (2,769,050 | ) |
| Weighted average number of shares of common  stock |       | 56,974,407 |       | 50,338,450 |       | 38,477,353 |       |
| Income (loss) per common share                     |       | $          | (0.09      | )          | $          | (0.12      | )          | $ | (0.07 | ) |

 

 Potential dilutive securities (e.g., stock warrants and convertibledebt) have not been considered because the Company reported a net loss and,accordingly, their effects would be anti-dilutive.

 

F-22

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Tableof Contents

 

**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**Note E –Long-term debt:**

 

**October 2004debt issue**

 

On or about October 1,2004, the Company closed a Securities Purchase Agreement and issued $2,635,000in principal amount of 7% Senior Secured Convertible Debentures due September 30,2009 (the “Debentures”), to a group of institutional and high net worthinvestors. The Debentures were secured by the collateral set forth in the Deedof Trust, Security Agreement, Assignment of Production and Fixture Filingattached to a Form 8-K filed October 12, 2004. The Debentures paid anannual interest rate of 7% on a quarterly basis and were convertible intoshares of our common stock at a price of $0.50 per share. The Company had theoption to pay the interest on the Debentures in common stock. The proceeds of theDebentures were used for the acquisition of interests in oil and gasproperties. The investors also received warrants to purchase an additional2,635,000 shares of common stock with an exercise price of $1.00 per share.During the fiscal year ended June 30, 2006, $705,000 of debt was convertedinto 1,410,000 shares of common stock, and 145,137 shares of common stock wereissued in lieu of cash to pay interest. During the fiscal year ended June 30,2006, $450,000 of debt was converted into 900,000 shares of common stock, and40,805 shares of common stock were issued in lieu of cash to pay interest.

 

The Company allocated theproceeds from the issuance of the Debentures to the warrants and the Debenturesbased on their relative fair market values at the date of issuance. The valueassigned to the warrants of $510,961 was recorded as an increase in additionalpaid-in capital. The assignment of a value to the warrants resulted in a loandiscount being recorded for the same amount. The discount was being amortizedover the original five year term of the Debentures as additional interestexpense. Amortization of the discount was $44,632 and $67,756, for the yearsended June 30, 2006 and 2005, respectively. The Company also incurred loancosts of $264,300 on the issuance of the Debentures and warrants. The amountallocable to the Debentures of $213,049 was capitalized and was being amortizedover the term of the Debentures. Amortization of loan costs was $18,612 and$28,258, for the years ended June 30, 2006 and 2005, respectively.

 

The debentures were retiredon February 6, 2006, with proceeds from a new senior debt issue, as setforth below. In connection with this retirement, the Company recorded a loss onextinguishment of debt in the amount of $660,330. Such amount includes thewrite-off of deferred loan costs ($99,204), the write-off of the remaining loandiscount ($237,931), and a prepayment penalty and associated legal fees($323,195).

 

**February 2006debt issue**

 

On February 6, 2006,Cubic entered into a Credit Agreement with Petro Capital V, L.P. (“PetroCapital”) pursuant to which Petro Capital advanced to the Company $5,500,000.The indebtedness bore interest at a rate of 12.5% per annum, was scheduled tomature on February 6, 2009, and was secured by substantially all of theassets of the Company. $1,800,000 of the funded amount was used to retire the7% Senior Secured Convertible Debentures that were due September 30, 2009,described above. In connection with the funding under the Credit Agreement, theCompany issued to Petro Capital and Petro Capital Securities, LLC, warrants,with five-year expirations, for the purchase of up to 1,833,334 and 250,000shares, respectively, of Company common stock at an exercise price of $1.00 pershare.

 

F-23

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Tableof Contents

 

**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

The Company allocated theproceeds from the issuance of the senior debt to the warrants and the seniordebt based on their relative fair market values at the date of issuance. Thevalue assigned to the warrants of $1,203,752 was recorded as an increase inadditional paid-in capital. The assignment of a value to the warrants resultedin a loan discount being recorded. The discount was being amortized over theoriginal three-year term of the senior debt as additional interest expense.Amortization for the year ended June 30, 2007 was $298,371 and for theyear ended June 30, 2006 was $174,451.

 

Cubic incurred loan costs of$483,643 on the issuance of the senior debt and warrants. The amount allocableto the senior debt of $367,586 was capitalized and was being amortized over theterm of the senior debt. Amortization of loan costs for the senior debt was$83,101 for the year ended June 30, 2007 and was $48,587 for the yearended June 30, 2006.

 

The senior debt was retiredon March 5, 2007, with proceeds from a new senior debt issue, as set forthbelow. In connection with this retirement, the Company recorded a loss onextinguishment of debt in the amount of $(1,082,887). Such amount includes thewrite-off of deferred loan costs, ($235,898), and the write-off of theremaining loan discount, ($846,989).

 

**March 2007 debt issue**

 

On March 5, 2007, Cubicentered into a Credit Agreement with Wells Fargo Energy Capital, Inc. (“WellsFargo”) providing for a revolving credit facility of $20,000,000 and aconvertible term loan of $5,000,000 (the “Credit Facility”). The indebtednessbears interest at a fluctuating rate equal to the sum of the Wells Fargo Bankprime rate plus two percent (2%) per annum, matures on March 1, 2010, andis secured by substantially all of the assets of the Company. Approximately$5,000,000 of the funded amount was used, together with cash on hand, to retirethe Company’s aforementioned previously outstanding senior debt that was due February 6,2009.

 

Therevolving credit facility is subject to a borrowing base, initially set at$4,000,000, and is subject to periodic review. The convertible term loan of$5,000,000 is convertible into 5,000,000 shares of Cubic common stock at aconversion price of $1.00 per share.

 

Inconnection with entering into the Credit Facility, the Company issued to WellsFargo warrants, with five-year expirations, for the purchase of up to 2,500,000shares of Company common stock at an exercise price of $1.00 per share.

 

TheCompany allocated the proceeds from the issuance of the debt to the warrants,the debt and net profits interest (see below) based on their relative fairmarket values at the date of issuance. The value assigned to the warrants of$1,314,289 was recorded as an increase in additional paid-in capital and thevalue assigned to the net profits interest of $213,148 was recorded as a creditto the full cost pool for oil and gas properties. The assignment of a value tothe warrants and net profits interest resulted in a loan discount beingrecorded. The discount is being amortized over the original three-year term ofthe debt as additional interest expense. Amortization for the years ended June 30,2008 and 2007 was $516,030 and $164,961, respectively. Amortization for thefiscal years ending June 30, 2009 and 2010 is expected to be approximately$514,620 and $342,610, respectively.

 

F-24

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Tableof Contents

 

**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

Cubic incurred loan costsof $240,613 on the issuance of the debt and warrants. The amount allocable tothe debt of $166,590 has been capitalized and is being amortized over the termof the debt. Amortization for the years ended June 30, 2008 and 2007 was$55,886 and $17,865, respectively. Amortization for the fiscal years ending June 30,2009 and 2010 is expectedto be approximately $55,733 and $37,105, respectively. Cubic incurred commitment fees of $170,000related to subsequent increases in the Credit Facility’s borrowing base; suchamount was capitalized in fiscal 2008 and is being amortized over the remainingterm of the loan. Amortization for the year ended June 30, 2008 was$38,404. Amortization for the fiscal years ending June 30, 2009 and 2010 isexpected to be approximately $79,001 and $52,595, respectively.

 

**May 2008subordinated debt issue**

 

On May 6, 2008, theCompany issued a subordinated promissory note in the amount of $2,000,000 (the “SubordinatedNote”) to Diversified Dynamics Corporation (the “Lender”), an entity controlledby William Bruggeman, who beneficially owns more than 5% of the common stock ofthe Company. The Subordinated Note bears interest at a fluctuating rate equalto the sum of the prime rate plus two percent (2%) per annum, and matures on April 30,2010. As consideration for the loan made by Lender pursuant to the SubordinatedNote, the Company agreed to convey to Lender, upon the repayment in full of theindebtedness evidenced by the Subordinated Note and the repayment in full ofthe senior indebtedness evidenced by the Credit Facility with Wells Fargo, anundivided 0.375% (0.375 of one percent) net profits interest in the futureproduction of hydrocarbons from or attributable to Cubic’s net interest in itsLouisiana properties. The proceeds of the Subordinated Note are being used forgeneral corporate and working capital purposes.

 

Issuing the Subordinated Note required theconsent of the holder of the Company’s senior indebtedness, Wells Fargo, whichconsent it granted on May 5, 2008. Subsequently, on May 8, 2008, theCredit Facility with Wells Fargo was amended by the First Amendment to theCredit Agreement (the “First Amendment”). Material provisions of the FirstAmendment included the following: (i) the Company may not prepay all orany part of the principal balance outstanding on the Term Loan prior to itsmaturity on March 1, 2010; and (ii) the amount of the Borrowing Basewas increased to $20,000,000, which amount was fully drawn upon, subsequent tothe end of fiscal 2008, on August 20, 2008.

 

**Note F –Related party transactions:**

 

 Effective January 1, 2002, the Company entered into anagreement with Tauren that provides for the following:

 

1) As of January 1,2002, the Company owed Tauren $856,712, primarily comprised of non-interestbearing advances the Company had received over the course of several years. Inexchange for the amounts owed to it, Tauren accepted the transfer of 856,712newly issued and unregistered shares of common stock in the Company that had amarket price of $0.70 per share.

 

2) The Company received therights to participate in prospective oil and gas projects in which Tauren ownsa working interest.

 

3) The Company shall, asrequested, have the future privilege of using the general and administrativeservices of Tauren based on an agreed pro rata cost.

 

4) The Company issued threeseries of warrants to Tauren as described in Note C.

 

F-25

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Table of Contents

 

**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

On December 1, 1997, asrenewed and revised on January 1, 2002, the Company entered into acontract with Tauren to provide the necessary technical, administrative andmanagement expertise needed to conduct its business. Tauren also paid variousorganization costs and consulting fees on behalf of the Company. The monthlyamount charged to the Company was based on actual costs of materials and laborhours of Tauren that were used pursuant to the terms of the agreement. Theagreement was terminated effective January 1, 2006, except as to theoffice sharing provisions, which were extended to June 30, 2007 and sincecontinue on a month to month basis. The Company now has 10 employees and itsoffices are subleased from Tauren. During fiscal 2008, the Company’s onlyexpense under the office sharing arrangement was the rent sublease. Charges tothe Company under the contracts and subsequent arrangements were $26,748,$26,748 and $29,285 for the years ended June 30, 2008, 2007 and 2006,respectively.

 

An affiliated company,Tauren Exploration, Inc. (“Tauren”), which is owned 100% by the Company’sPresident and Chief Executive Officer, Calvin A. Wallen III, owns a workinginterest in the wells in which the Company owns a working interest. As of June 30,2008, the Company was owed $942 by Tauren for miscellaneous general andadministrative expenses paid by the Company on Tauren’s behalf; as of June 30,2007, the Company owed Tauren $3,715 for miscellaneous general andadministrative expenses paid by Tauren on the Company’s behalf; and, as of June 30,2006, the Company owed Tauren $100,000, for advances for payments of jointinterest leasehold and development costs, and was owed $12,865 by Tauren formiscellaneous general and administrative expenses paid by the Company onTauren’s behalf.

 

In addition, all but threewells in which the Company owns a working interest are operated by anaffiliated company, Fossil Operating, Inc. (“Fossil”), which is owned 100%by the Company’s President and Chief Executive Officer, Calvin A. Wallen III.As of June 30, 2008, 2007 and 2006, the Company owed Fossil $862,895,$1,659,786 and $1,196,203, respectively, for drilling costs and lease andoperating expenses, and was owed by Fossil $450,669, $28,446 and $88,477,respectively, for oil and gas sales.

 

On or about October 6,2004, the Company acquired from Tauren and its affiliates, a 25% working interestin eight sections in DeSoto Parish, Louisiana, in exchange for $1,080,000. Theeight sections include Sections 24 (excluding the Kraemer 24-1 well), 25 and 26of Township 14 N, Range 16 W and Sections 18, 19, 20, 29 and 30 of Township 14N, Range 15 W.

 

On or about January 11,2005, the Company issued 1,531,661 shares of common stock to Caravel ResourcesEnergy Fund 2003-II, L.P. (the “Partnership”) in exchange for a 0.1914575033working interest in the Kraemer 24-1 well, DeSoto Parish, Township 14 N, Range15 W, Section 24 (the “Well”). The Company also issued 468,339 shares ofcommon stock to Mr. Wallen in exchange for a 0.0585424967 working interestin the Well. The common stock closed at a price of $0.90 on January 10,2005.

 

On February 6, 2006, theCompany entered into a Purchase Agreement with Tauren with respect to thepurchase by the Company of certain Cotton Valley leasehold interests(approximately 11,000 gross acres; 5,000 net acres) held by Tauren. Pursuant tothe Purchase Agreement, the Company acquired from Tauren a 35% working interestin approximately 2,400 acres and a 49% working interest in approximately 8,500acres located in DeSoto and Caddo Parishes, Louisiana, along with an associatedArea of Mutual Interest (“AMI”) and the right to acquire at “cost” (as definedin the Purchase Agreement) a seventy percent (70%) working interest in alladditional mineral leases obtained by Tauren in the AMI, in exchange for (a) $3,500,000in cash, (b) 2,500,000 unregistered shares of Company common stock, (c) anunsecured 12.5% promissory note in the amount of $1,300,000, which note wasconvertible into Company common stock at a conversion price of $0.80 per share(the “Tauren Note”), and (d) a drilling credit of $2,100,000. Totalinterest paid to Tauren under terms of the Tauren Note was $0 in fiscal 2008,$96,610 in fiscal 2007 and $64,110 in fiscal 2006.

 

F-26

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Tableof Contents

 

**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

The consideration describedabove was determined based upon negotiations between Tauren and a SpecialCommittee of the Company’s directors, excluding Mr. Wallen. The SpecialCommittee obtained an opinion from its independent financial advisor withrespect to the fairness, from a financial point of view, to the publicstockholders of the Company, of such transactions.

 

On November 10, 2006,the maturity of the Tauren Note was extended to October 5, 2007. Inconnection with the extension of the Tauren Note, the Company issued to Taurenwarrants, with three-year expirations, for the purchase of up to 50,000 sharesof Company common stock at an exercise price of $0.70 per share.

 

On February 2, 2007,the Tauren Note was retired pursuant to a provision in the note that requiredpayment from the proceeds of an equity offering. The equity offering thatoccurred in December 2006 (see “Note C – Stockholders’ Equity”) wassufficient to facilitate such repayment.

 

**On May 6, 2008, theCompany issued a subordinated promissory note in the amount of $2,000,000 toDiversified Dynamics Corporation, an entity controlled by William Bruggemanwho, at the time of such transaction, was the beneficial owner of approximately28.9% of the common stock of the Company. See “May 2008 subordinated debtissue” in “Note E – Long-term debt” elsewhere herein.**

** **

**NoteG – Income taxes:**

** **

Deferred tax assets andliabilities are computed by applying the effective U.S. federal income tax rateto the gross amounts of temporary differences and other tax attributes.Deferred tax assets and liabilities relating to state income taxes are notmaterial. In assessing the realizability of deferred tax assets, managementconsiders whether it is more likely than not that some portion or all of thedeferred tax assets will not be realized. The ultimate realization of deferredtax assets is dependent upon the generation of future taxable income during theperiods in which those temporary differences become deductible. Managementconsiders the scheduled reversal of deferred tax liabilities, projected futuretaxable income, and tax planning strategies in making this assessment. As of June 30,2008, 2007 and 2006, the Company believed it was more likely than not thatfuture tax benefits from net operating loss carryforwards and other deferredtax assets would not be realizable through generation of future taxable income;therefore, they were fully reserved.

 

Thecomponents of the net deferred federal income tax assets (liabilities) at June 30were as follows:

 
| ** **                                                        | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Deferred tax assets:                                              |       |       |       |       |       |       |       |
| Net operating loss carryforwards                                  |       | $          | 7,914,000  |       | $          | 4,013,000  |       | $ | 2,441,800 |   |
| Depletion basis of assets and related  accounts                   |       | 311,000    |       | 93,300     |       | —     |       |
|                                                              |       | $          | 8,225,000  |       | $          | 4,106,300  |       | $ | 2,441,800 |   |
| Deferred tax liabilities:                                         |       |       |       |       |       |       |       |
| Depletion basis of assets and related  accounts                   |       | $          | —     |       | $          | (1,500     | )          | $ | (493,800 | ) |
|                                                              |       | $          | —     |       | $          | (1,500     | )          | $ | (493,800 | ) |
| Net deferred tax (liabilities) assets  before valuation allowance |       | $          | 8,225,000  |       | $          | 4,104,800  |       | $ | 1,948,000 |   |
| Valuation allowance                                               |       | (8,225,000 | )          | (4,104,800 | )          | (1,948,000 | )          |
| Net deferred tax (liabilities) assets                             |       | $          | —     |       | $          | —     |       | $ | — |   |

 

F-27

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Tableof Contents

 

**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

Thefollowing table summarizes the difference between the actual tax provision andthe amounts obtained by applying the statutory tax rates to the income or lossbefore income taxes for the years ended June 30, 2008, 2007 and 2006:

 
| ** **                                      | ** ** | **2008**  | ** ** | **2007**  | ** ** | **2006**   | ** ** |
|-------------------------------------------------|------------|-----------|------------|-----------|------------|------------|------------|
| Tax (benefit) calculated at statutory rate      |       | $         | (1,282,000 | )         | $          | (1,450,000 | )          | $ | (692,000 | ) |
| Losses not providing tax benefits               |       | 1,282,000 |       | 1,450,000 |       | 692,000    |       |
| Current federal income tax provision  (benefit) |       | $         | —     |      | $          | —     |       | $ | — |   |
| Change in valuation allowance                   |       | $         | (4,120,200 | )         | $          | (2,156,800 | )          | $ | 1,346,200 |   |

 

Asof June 30, 2008, the Company had net operating loss carryforwards ofapproximately $31,656,435, which are available to reduce future taxable income.These carryforwards expire as follows:

 
| ** ** | ** ** | **Net operating** | ** ** |
|------------|------------|------------------------|------------|
| **Year**   | ** ** | **losses**             | ** ** |
| 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       |       | 37,000                 |       |
| 2025       |       | 1,321,800              |       |
| 2026       |       | 5,095,600              |       |
| 2027       |       | 6,413,700              |       |
| 2028       |       | 15,604,535             |       |
|       |       | $                      | 31,656,435 |   |

 

F-28

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Tableof Contents

 

**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**Note H – Commitments and contingencies:**

 

**Keypersonnel**

 

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 ExecutiveOfficer. The loss of the services of Mr. Wallen would have a materialadverse effect on the Company’s operations.

 

On February 29, 2008,the Company entered into employment agreements with its President and ChiefExecutive Officer, Calvin A. Wallen, III, and Secretary, Jon S. Ross. Theagreement with Mr. Wallen provides for a base salary of $200,000 per year,while the agreement with Mr. Ross provides for a base salary of $150,000per year. The other terms and conditions of the agreements are substantiallyconsistent.

 

Both agreements provide fora term of employment of 36 months from the effective date of February 1,2008, which term shall be automatically extended by one additional month uponthe expiration of each month during the term; provided, that the Company mayterminate subsequent one-month extensions at any time. Each agreement issubject to early termination by the Company in the event that the employeedies, becomes totally disabled or commits an act constituting “Just Cause”under the agreement. The agreements provide that Just Cause includes, amongother things, the conviction of certain crimes, habitual neglect of his dutiesto the Company or other material breaches by the employee of the agreement.Each agreement also provides that the employee shall be permitted to terminatehis employment upon the occurrence of “Good Reason,” as defined in theagreement. The agreements provide that Good Reason includes, among otherthings, a material diminution in the employee’s authority, duties,responsibilities or salary, or the relocation of the Company’s principaloffices by more than 50 miles. If the employee’s employment is terminated by (a) theCompany other than due to the employee’s death, disability or Just Cause, or (b) theemployee for Good Reason, then the Company is required to pay all remainingsalary through the end of the then-current term. The foregoing severancepayment is subject to reduction under certain conditions.

 

**Environmentalmatters**

 

The Company’s operations and properties are subject to extensive andchanging federal, state, provincial and local laws and regulations relating toenvironmental protection, including the generation, storage, handling andtransportation of oil and gas and the discharge of materials into the environment.The Company generates typical oil and gas field wastes, including hazardouswastes that are subject to the federal Resources Conservation and Recovery Actand comparable state statutes. Furthermore, certain wastes generated by theCompany’s oil and gas operations that are currently exempt from regulation as“hazardous wastes” may in the future be designated as “hazardous wastes” andtherefore be subject to more rigorous and costly operating and disposalrequirements. All of the Company’s properties are operated by third partiesover whom the Company has limited control. In addition to the Company’s lack ofcontrol over properties operated by others, the failure of previous owners oroperators to comply with applicable environmental regulations may, in certaincircumstances, adversely impact the Company.

 

F-29

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Tableof Contents

 

**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**NoteI - Cost of oil and gas properties:**

** **

**Costsincurred**

 

Costs (capitalized andexpensed) incurred in oil and gas property acquisition, exploration, anddevelopment activities for the years ended June 30, 2008, 2007 and 2006were as follows:

 
| ** **            | ** ** | **2008**   | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|-----------------------|------------|------------|------------|-----------|------------|-----------|------------|
| Property acquisitions |       | $          | 394,675    |      | $          | 481,229   |       | $ | 6,176,766 |   |
| Exploration           |       | 14,030,615 |       | 2,759,794 |       | 808,678   |       |
| Development           |       | 916,613    |       | 966,879   |       | 1,323,243 |       |
|                  |       | $          | 15,341,903 |      | $          | 4,207,902 |       | $ | 8,308,687 |   |

 

**Capitalizedcosts**

 

Theaggregate amounts of capitalized costs relating to oil and gas producingactivities and the aggregate amounts of the related accumulated depreciation,depletion, and amortization at June 30, 2008, 2007 and 2006 were asfollows:

 
| ** **                                                                            | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Proved properties                                                                     |       | $          | 29,542,015 |       | $          | 10,627,672 |       | $ | 6,679,730 |   |
| Unproved properties                                                                   |       | 3,254,901  |       | 6,827,341  |       | 6,780,529  |       |
|                                                                                  |       | 32,796,916 |       | 17,455,013 |       | 13,460,259 |       |
| Less: accumulated depreciation, depletion and  amortization of oil and gas properties |       | 4,156,650  |       | 2,007,080  |       | 1,646,170  |       |
| Total properties                                                                      |       | 28,640,266 |       | 15,447,933 |       | 11,814,089 |       |
| Less: accumulated impairment of oil and gas  properties due to full cost ceiling test |       | 1,790,882  |       | 1,790,882  |       | —     |       |
| Net properties                                                                        |       | $          | 26,849,384 |       | $          | 13,657,051 |       | $ | 11,814,089 |   |

 

F-30

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Tableof Contents

 

**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**Resultsof operations**

 

Theresults of operations from oil and gas producing activities for the years endedJune 30, 2008, 2007 and 2006 were as follows:

 
| ** **                                                                 | ** ** | **2008**   | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Revenues:                                                                  |       |       |       |     |       |     |       |
| Revenues                                                                   |       | $          | 2,302,310  |     | $          | 583,416  |       | $ | 508,925 |   |
| Preferred return                                                           |       | —     |       | —   |       | —   |       |
|                                                                       |       | 2,302,310  |       | 583,416  |       | 508,925  |       |
| Expenses (excluding G&A and interest  expense):                        |       |       |       |     |       |     |       |
| Production, operating and development costs                                |       | 1,162,489  |       | 481,145  |       | 338,329  |       |
| Depreciation, depletion and amortization                                   |       | 2,149,570  |       | 360,910  |       | 178,064  |       |
|                                                                       |       | 3,312,059  |       | 842,055  |       | 516,393  |       |
| Results before income taxes                                                |       | (1,009,749 | )          | (258,639 | )          | (7,468   | )          |
| Provision for income taxes                                                 |       | —     |       | —   |       | —   |       |
| Results of operations (excluding corporate overhead  and interest expense) |       | $          | (1,009,749 | )        | $          | (258,639 | )          | $ | (7,468 | ) |

 

**Note J - Oil and gas reserves information (unaudited):**

 

Theestimates of proved oil and gas reserves utilized in the preparation of thefinancial statements are estimated in accordance with guidelines established bythe Securities and Exchange Commission and the FASB, which require that reserveestimates be prepared under existing economic and operating conditions with noprovision for price and cost escalations over prices and costs existing atyear-end except by contractual arrangements.

 

TheCompany emphasizes that reserve estimates are inherently imprecise.Accordingly, the estimates are expected to change as more current informationbecomes available. The Company’s policy is to amortize capitalized oil and gascosts on the unit of production method, based upon these reserve estimates. Itis reasonably possible that, because of changes in market conditions or theinherent imprecision of these reserve estimates, that the estimates of futurecash inflows, future gross revenues, the amount of oil and gas reserves, theremaining estimated lives of the oil and gas properties, or any combination ofthe above may be increased or reduced in the near term.

 

Ifreduced, the carrying amount of capitalized oil and gas properties may bereduced materially in the near term.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

Thefollowing unaudited table sets forth proved oil and gas reserves, all withinthe United States, at June 30, 2008, 2007 and 2006 together with thechanges therein:

 
| ** **                                 | ** ** | **Natural Gas (Mcf)** | ** ** |
|--------------------------------------------|------------|---------------------------------|------------|
| ** **                                 | ** ** | **2008**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Proved developed and undeveloped reserves: |       |                            |       |   |   |   |   |
| Beginning of year                          |       | 4,242,051                       |       | 2,796,900 |   | 509,625 |   |
| Revisions of previous estimates            |       | (1,969,397                      | )          | (1,188,985 | ) | 226,730 |   |
| Purchases of reserves in place             |       | —                          |       | — |   | — |   |
| Extensions and discoveries                 |       | 4,045,294                       |       | 2,704,548 |   | 2,114,061 |   |
| Less: Production                           |       | (228,219                        | )          | (70,412 | ) | (53,516 | ) |
| Disposals of reserves in place             |       | —                          |       | — |   | — |   |
| End of year                                |       | 6,089,729                       |       | 4,242,051 |   | 2,796,900 |   |

 
| ** **                                 | ** ** | **Oil, condensate and natural gas liquids (Bbls)** | ** ** |
|--------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **2008**                                                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| Proved developed and undeveloped reserves: |       |                                                                             |       |   |   |   |   |
| Beginning of year                          |       | 12,830                                                                           |       | 8,863 |   | 1,048 |   |
| Revisions of previous estimates            |       | (1,002                                                                           | )          | (2,437 | ) | 1,029 |   |
| Purchases of reserves in place             |       | —                                                                           |       | — |   | — |   |
| Extensions and discoveries                 |       | 79,861                                                                           |       | 7,371 |   | 7,833 |   |
| Less: Production                           |       | (2,741                                                                           | )          | (967 | ) | (1,047 | ) |
| Disposals of reserves in place             |       | —                                                                           |       | — |   | — |   |
| End of year                                |       | 88,948                                                                           |       | 12,830 |   | 8,863 |   |

 

All of the Company’s Louisiana acreage lies atop thecenter of what is known in our industry as the “Haynesville Shale Play” (whichwe refer to as the “Bossier/Haynesville shales” elsewhere herein), which isbelieved in our industry to be one of the most prolific field discoveries inthe United States. The discovery of the existence of the Bossier/Haynesvilleshale formations in the Company’s acreage mandated that we redirect capital infiscal 2008 to protect our rights to this formation, which took spending awayfrom the maximization of development of the Cotton Valley formation in ourBethany Longstreet and Johnson Branch fields.

 

Our first round of drillingwas undertaken to maximize retention of our lease rights to develop our JohnsonBranch and Bethany Longstreet acreage. Infrastructure costs have requiredgreater capital outlay than anticipated. This variance, coupled with increasesin overall drilling and completion costs, had an effect on the completiontechniques that we utilized in fiscal 2008. While it is in the Company’s futuredevelopment plans to re-complete this first round of producing wells at a laterdate, the Company’s focus has changed from maximizing production and reservesin the first round of drilling to holding acreage and preserving capital forpotentially much greater production and reserves from the emerging HaynesvilleShale Play.

 

The majority of theCompany’s unproven acreage lies in our Johnson Branch field. Reservoir analysisproduced by a third-party engineer for the Johnson Branch acreage indicates aprolific and economic Bossier/Haynesville shale formation and a productive andeconomic Cotton Valley formation. Wells drilled by the Company subsequent tothe end of fiscal 2008 into the Bossier/Haynesville shale formation in ourBethany Longstreet field seem to indicate the same productive formationcharacteristics as compared to the wells drilled into the Bossier/Haynesvilleshales in our Johnson Branch acreage. Moreover, horizontal Cotton Valleyformation wells drilled by our competitors in the Bethany Longstreet field havedemonstrated productive characteristics.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

Accordingly, while workundertaken by the Company subsequent to the end of fiscal 2008 has allowed usto improve our completion techniques for vertical Cotton Valley wells in ourBethany Longstreet and Johnson Branch fields, going forward, the Companycontemplates horizontal drilling of all its Cotton Valley andBossier/Haynesville wells.

 

The redirection of theCompany’s focus outlined above impacted the Company’s proved reserves amountsfor the fiscal year ended June 30, 2008 as follows: (i) onlyhorizontal wells for the Cotton Valley sandstone and Bossier/Haynesville shaleformations are now contemplated, which resulted in the loss of ProvedUndeveloped (“PUD”) reserves for certain Cotton Valley wells that hadpreviously been allowed with a vertical drilling program; and (ii) thelack of production history information as of June 30, 2008 for horizontalCotton Valley and horizontal Bossier/Haynesville shale wells adversely impactedassumptions regarding both initial production rates and production declinecurves used in calculating the Company’s reserve estimates. The Companybelieves that proceeding at a more measured drilling pace for fiscal 2009 willallow the Company to take advantage of improved completion techniques, and,pursuant to the data filed subsequent to the end of fiscal 2008 by ourcompetitors with respect to productive wells in the Haynesville Shale Play,that the two wells drilled and the four wells completed subsequent to the endof fiscal 2008 (see Item 1. Business – “RECENT DEVELOPMENTS” elsewhere herein)will result in a significant increase in reserves for fiscal 2009.

 

The “Revisions of previousestimates” amount of (1,969,397) Mcf in fiscal 2008 was primarily a result ofmore performance information being available for the fiscal 2008 reserve report.Three wells in our Bethany Longstreet acreage that were re-completed in theHosston formation in late fiscal 2007 and early fiscal 2008 experiencedproduction rates lower than initially anticipated  (i.e., at the time of the fiscal 2007 reservereport). Based on these updated performance rates, downward revisions of anaggregate of 220,840 were made to the Proved Developed reserves of the Kraemer24-1, Moseley 25-1 and Moseley 26-1 wells and downward revisions of anaggregate of 851,569 Mcf were made to these wells’ PUD offset locations. Inaddition, four Bethany Longstreet wells that were completed in the CottonValley and Hosston formations in late fiscal 2007 and early fiscal 2008experienced production rates lower than initially anticipated. As a result,downward revisions of an aggregate of 431,913 Mcf were made to the ProvedDeveloped reserves of the Rushing 18-1, S.E. Johnson 19-1, S.E. Johnson 20-1,and S.E. Johnson 29-1wells and downward revisions of an aggregate of 512,452Mcf were made to these wells’ PUD offset locations. Also, part of the downwardrevisions amount was due to a temporary delay in our exploratory drillingschedule. To wit, the Estes 7-1 well, which is an offset location to the Estes8-1 well, was spudded during fiscal 2008 but was not completed until July 15,2008, subsequent to the end of fiscal 2008 (see “Recent Developments” elsewhereherein). Because the well was not drilled to total depth as of the end of thefiscal year (June 30, 2008), the entire amount of 441,846 Mcf included inPUD reserves in fiscal 2007 for the Estes 7-1 well was written down to zero infiscal 2008. Had it been completed during fiscal 2008, the amount would nothave been written down. These downward revisions were partially offset by anupward PUD offset location revision of 289,966 Mcf to the Estes 8-1 wellresulting from its proximity to a competitor’s productive horizontally-drilledCotton Valley well.

 

The “Extensions anddiscoveries” amount of 4,045,294 Mcf in fiscal 2008 was a result of exploratoryand developmental, or “step out”, drilling in our Johnson Branch acreage infiscal 2008. This drilling, coupled with the proving up of the Rye 34-1, Barlow11-1 and McDonnell 8-1 wells (which were non-proved as of June 30, 2007)lead to additional PUD offset locations. The reserve estimates attributable tothese new PUD locations are listed under “Extensions and discoveries.”

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

The “Revisions of previousestimates” amount of (1,188,985) Mcf in fiscal 2007 was due to more performanceinformation being available for the fiscal 2007 reserve report and a change inour estimation procedure. In fiscal 2007, reserves were based on analogy to theTaylor Alt-2 well, a comparable well located in Section 22 in T14N-R16W,which is adjacent to the Company’s Bethany Longstreet acreage. The initial ratewas based on the ratio of hydrocarbon pore volume calculated from the well logsof Cubic wells awaiting completion and the Taylor Alt-2 well. This ratio wasthen multiplied by the initial rate of the Taylor Alt-2 well. The CalculatedInitial Rate for each Cubic well was capped at the initial rate of the TaylorAlt-2 well. For the fiscal 2007 report, more information was available. Severalof the wells or zones that were previously categorized as “behind pipe” werenow producing and had initial potential tests giving a better indication ofinitial production rates. These better defined, and lower, initial productionrates were combined with typical declines for each formation (the Cotton Valleyand the Hosston) in the field and overall reserves were cut off usingvolumetric analysis. These initial production rates were lower than initiallyexpected (i.e., at the time of the fiscal 2006 reserve report). Based on theseupdated performance rates, downward revisions of an aggregate of 369,087 Mcfwere made to the Proved Developed reserves of the Moseley 25-1 and Moseley 26-1wells and downward revisions of an aggregate of 1,079,274 Mcf were made tothese wells’ PUD offset locations. These downward revisions were partiallyoffset by upward revisions of an aggregate of 196,010 Mcf to the Kraemer 24-1,S.E. Johnson 20-1 and S.E. Johnson 29-1 wells resulting from completions in theHosston zone.

 

The “Extensions anddiscoveries” amount of 2,704,548 Mcf in fiscal 2007 was a result ofdevelopmental, or “step out”, drilling in fiscal 2007. This drilling, coupledwith the proving up of the Hosston formation as a result of the drilling andcompletion of the Company’s S.E. Johnson 20-1 and S.E. Johnson 29-1 wells(which were non-proved as of June 30, 2006) and recompletion of theKraemer 24-1 well, lead to additional PUD offset locations. The reserveestimates attributable to these new PUD locations are listed under “Extensionsand discoveries.”

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**Standardizedmeasure of discounted future net cash flows relating to proved reserves:**

 

Thestandardized measure of discounted future net cash flows was calculated by applyingcurrent year-end prices, considering fixed and determinable price changes onlyto the extent provided by contractual arrangements or law, to estimated futureproduction, less future expenditures (based on fiscal year-end costs) to beincurred in developing proved undeveloped and proved producing oil and gasreserves, and future income taxes. The resulting future net cash flows werediscounted using a rate of 10% per annum (Table 1). The standardized measure ofdiscounted net cash flow amounts contained in the following tabulation does notpurport to represent the fair market value of the Company’s oil and gas provedby drilling or production history. There are significant uncertainties inherentin estimating timing and amount of future costs. In addition, the method ofvaluation utilized, is based on current prices and costs and the use of a 10%discount rate, and is not necessarily appropriate for determining fair value(Table 2).

 

Thefollowing is the estimated standardized measure relating to proved oil and gasreserves at June 30, 2008, 2007 and 2006:

 
| **Table 1**                                                    | ** ** | **2008**    | ** ** | **2007**    | ** ** | **2006**   | ** ** |
|---------------------------------------------------------------------|------------|-------------|------------|-------------|------------|------------|------------|
| Future cash flows                                         |       | $           | 95,132,248 |        | $          | 30,768,518 |       | $ | 16,139,781 |   |
| Future production costs                                             |       | (11,759,214 | )          | (5,601,924  | )          | (2,975,063 | )          |
| Future development costs                                            |       | (34,598,145 | )          | (11,832,100 | )          | (3,453,350 | )          |
| Future severance tax expense                                        |       | (1,708,116  | )          | (1,713,562  | )          | (819,785   | )          |
| Future income taxes                                                 |       | —      |       | —      |       | —     |       |
| Future net cash flows                                               |       | $           | 47,066,773 |        | $          | 11,620,932 |       | $ | 8,891,583 |   |
| Ten percent annual discount for estimated timing  of net cash flows |       | (13,956,117 | )          | (4,791,222  | )          | (2,444,198 | )          |
| Standardized measure of discounted future  net cash flows           |       | $           | 33,110,656 |        | $          | 6,829,710  |       | $ | 6,447,385 |   |

 

Thefollowing is an analysis of changes in the estimated standardized measure ofproved reserves during the years ended June 30, 2008, 2007 and 2006:

 
| **Table 2**                                                  | ** ** | **2008**    | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-------------------------------------------------------------------|------------|-------------|------------|------------|------------|------------|------------|
| Changes from:                                                     | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sale of oil and gas produced                                      |       | $           | (1,139,821 | )          | $          | (102,271   | )          | $ | (170,596 | ) |
| Net changes in prices and production costs                        |       | 13,650,638  |       | 1,474,742  |       | 18,591     |       |
| Extensions and discoveries                                        |       | 23,748,732  |       | 4,073,195  |       | 4,288,891  |       |
| Revision of previous quantity estimates                           |       | (13,379,733 | )          | (4,559,850 | )          | 508,762    |       |
| Accretion of discounts                                            |       | 682,971     |       | 644,739    |       | 107,110    |       |
| Net change in income taxes                                        |       | —      |       | —     |       | —     |       |
| Purchases of reserves in place                                    |       | —      |       | —     |       | —     |       |
| Disposals of reserves in place                                    |       | —      |       | —     |       | —     |       |
| Development costs incurred that reduced future  development costs |       | (302,200    | )          | (339,500   | )          | (11,300    | )          |
| Changes in future development costs                               |       | (1,786,129  | )          | 324,717    |       | 69,210     |       |
| Changes in timing of production and other                         |       | 4,806,488   |       | (1,133,447 | )          | 565,617    |       |
| Change in standardized measure                                    |       | $           | 26,280,946 |       | $          | 382,325    |       | $ | 5,376,285 |   |

 

F-35

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**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**Note K – Selected quarterlyfinancial data (unaudited):**

 

Summarizedunaudited quarterly financial data for fiscal 2008 and 2007 are as follows:

 
| ** **                                         | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|------------|------------|
| ** **                                         | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Total**  | ** ** |
| **Fiscal 2008**                               | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** |
| Revenues                                           |       | $           | 447,988    |        | $          | 375,825     |       | $           | 778,360    |       | $          | 700,137 |   | $ | 2,302,310 |   |
| Loss before income taxes                           |       | $           | (841,044   | )           | $          | (946,974    | )          | $           | (1,084,333 | )          | $          | (2,256,102 | ) | $ | (5,128,453 | ) |
| Net loss                                           |       | $           | (841,044   | )           | $          | (946,974    | )          | $           | (1,084,333 | )          | $          | (2,256,102 | ) | $ | (5,128,453 | ) |
| Net loss per common share - basic and  diluted (1) |       | $           | (0.02      | )           | $          | (0.02       | )          | $           | (0.02      | )          | $          | (0.04 | ) | $ | (0.09 | ) |
| Weighted average common shares outstanding         |       | 55,957,472  |       | 56,362,581  |       | 57,095,686  |       | 58,449,786  |       | 56,974,407 |       |
|                                               |       |        |       |        |       |        |       |        |       |       |       |
| **Fiscal 2007**                                    | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** |
| Revenues                                           |       | $           | 132,106    |        | $          | 86,263      |       | $           | 77,601     |       | $          | 287,446 |   | $ | 583,416 |   |
| Loss before income taxes                           |       | $           | (631,228   | )           | $          | (744,585    | )          | $           | (1,869,218 | )          | $          | (2,555,743 | ) | $ | (5,800,774 | ) |
| Net loss                                           |       | $           | (631,228   | )           | $          | (744,585    | )          | $           | (1,869,218 | )          | $          | (2,555,743 | ) | $ | (5,800,774 | ) |
| Net loss per common share - basic and  diluted (1) |       | $           | (0.01      | )           | $          | (0.02       | )          | $           | (0.03      | )          | $          | (0.05 | ) | $ | (0.12 | ) |
| Weighted average common shares outstanding         |       | 44,660,007  |       | 46,967,725  |       | 54,474,168  |       | 55,396,790  |       | 50,338,450 |       |

 

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(1) The sum of the per share amounts per quarter does not equalthe total year amount due to changes in the weighted average number of commonshares outstanding in each quarter.

 

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**CUBIC ENERGY, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**Note L – Subsequent events:**

 

On July 3, 2008, twowarrant holders of the Company exercised warrants for an aggregate of 1,127,500shares of Company common stock, through the payment of $777,002 to the Company.

 

On July 7, 2008, onewarrant holder of the Company exercised warrants for 250,000 shares of Companycommon stock, through the payment of $243,950 to the Company.

 

On July 8, 2008, onewarrant holder of the Company exercised warrants for 100,000 shares of Companycommon stock, through the payment of $70,000 to the Company.

 

On July 17, 2008, onewarrant holder of the Company exercised warrants for 5,000 shares of Companycommon stock, through the payment of $5,000 to the Company.

 

OnAugust 20, 2008, Cubic drew upon an additional $3,172,200 from Wells Fargounder the revolving line of credit component of the Credit Facility in order tofund the completion of four wells drilled in our Johnson Branch acreage infiscal 2008 and the drilling of two additional wells located in the Company’sBethany Longstreet acreage in Caddo and DeSoto parishes. As of the date of thisfiling, September 29, 2008, the Company has borrowed a total of$20,000,000 under the Credit Facility’s Revolving Note (and an aggregate of$25,000,000 under the Credit Facility).

 

OnAugust 20, 2008, the remaining 33,750 shares of Mr. Guffey’s August 20,2007 restricted stock grant vested (see “Item 10. Executive Compensation —Compensation Discussion & Analysis — Options Exercises and StockVesting”).

 

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**EXHIBIT INDEX**

 
| **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).                                                                                                                                                           |
|    |       |                                                                                                                                                                                                                                                                                                                          |
| 3.2     |       | Articles  of Amendment to the Articles of Incorporation of the Company dated  December 30, 2005 (incorporated by reference to Exhibit 3.1 of the  Company’s Form 10-QSB for the period ended December 31, 2005).                                                                                     |
|    |       |                                                                                                                                                                                                                                                                                                                          |
| 3.3     |       | Bylaws  (incorporated by reference to Exhibit 3.2 of the Company’s  Form 10-K for the period ended June 30, 2000).                                                                                                                                                                                        |
|    |       |                                                                                                                                                                                                                                                                                                                          |
| 10.1    |       | 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).                                                                                                                            |
|    |       |                                                                                                                                                                                                                                                                                                                          |
| 10.2    |       | 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).                           |
|    |       |                                                                                                                                                                                                                                                                                                                          |
| 10.3    |       | Securities  Purchase Agreement, dated as of December 12, 2005, 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  December 16, 2005). |
|    |       |                                                                                                                                                                                                                                                                                                                          |
| 10.4    |       | Registration  Rights Agreement, dated as of December 12, 2005, among Cubic  Energy, Inc. and the purchasers signatory thereto (incorporated by  reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K,  filed with the SEC on December 16, 2005).                               |
|    |       |                                                                                                                                                                                                                                                                                                                          |
| 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  December 16, 2005).                                                                                                                           |
|    |       |                                                                                                                                                                                                                                                                                                                          |
| 10.6    |       | Credit  Agreement, dated February 6, 2006, by and among Cubic Energy, Inc.  and Petro Capital V, L.P. (filed as exhibit 10.1 to the Company’s  Form 8-K dated February 8, 2006, and incorporated herein by  reference).                                                                              |
|    |       |                                                                                                                                                                                                                                                                                                                          |
| 10.7    |       | Promissory  Note, dated as of February 6, 2006, by Cubic Energy, Inc., payable  to Petro Capital V, L.P. in the maximum principal amount of $7,000,000 (filed  as exhibit 10.2 to the Company’s Form 8-K dated February 8, 2006,  and incorporated herein by reference).                             |
|    |       |                                                                                                                                                                                                                                                                                                                          |
| 10.8    |       | Common  Stock Purchase Warrant, dated February 6, 2006, issued to Petro Capital  Securities, LLC (filed as exhibit 10.3 to the Company’s Form 8-K dated  February 8, 2006, and incorporated herein by reference).                                                                                         |
|    |       |                                                                                                                                                                                                                                                                                                                          |
| 10.9    |       | Common  Stock Purchase Warrant, dated February 6, 2006, issued to Petro Capital  V, L.P. (filed as exhibit 10.4 to the Company’s Form 8-K dated  February 8, 2006, and incorporated herein by reference).                                                                                                 |
|    |       |                                                                                                                                                                                                                                                                                                                          |
| 10.10   |       | Registration  Rights Agreement, dated as of February 6, 2006, by and between Cubic  Energy, Inc., Petro Capital V, L.P. and Petro Capital Securities, LLC  (filed as exhibit 10.5 to the Company’s Form 8-K dated February 8,  2006, and incorporated herein by reference).                          |

 

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Table of Contents

 
| 10.11  |   | Purchase  Agreement, dated as of February 6, 2006, by and among Cubic  Energy, Inc., Calvin A. Wallen III, and Tauren Exploration, Inc.  (filed as exhibit 10.6 to the Company’s Form 8-K dated February 8,  2006, and incorporated herein by reference).           |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                              |
| 10.12  |   | Promissory  Note, dated as of February 6, 2006, by Cubic Energy, Inc., payable  to Tauren Exploration, Inc. in the principal amount of $1,300,000 (filed  as exhibit 10.7 to the Company’s Form 8-K dated February 8, 2006,  and incorporated herein by reference). |
|   |   |                                                                                                                                                                                                                                                                                              |
| 10.13  |   | Amendment  to Promissory Note, dated March 30, 2006, by and between, Cubic  Energy, Inc. and Tauren Exploration, Inc. (incorporated by  reference to Exhibit 10.8 of the Company’s Form 10-QSB for the  quarter ended March 31, 2006).                         |
|   |   |                                                                                                                                                                                                                                                                                              |
| 10.14  |   | Amendment  to Purchase Agreement, dated April 3, 2006, by and among Cubic  Energy, Inc., Calvin A. Wallen III and Tauren Exploration, Inc.  (incorporated by reference to Exhibit 10.9 of the Company’s  Form 10-QSB for the quarter ended March 31, 2006).    |
|   |   |                                                                                                                                                                                                                                                                                              |
| 10.15  |   | Amendment  to Purchase Agreement, dated May 5, 2006, by and among Cubic  Energy, Inc., Calvin A. Wallen III and Tauren Exploration, Inc.  (incorporated by reference to Exhibit 10.10 of the Company’s  Form 10-QSB for the quarter ended March 31, 2006).     |
|   |   |                                                                                                                                                                                                                                                                                              |
| 10.16  |   | Subscription  and Registration Rights Agreement with George Karfunkel, dated July 26,  2006 (filed as Exhibit 10.1 to the Company’s Form 8-K dated  July 28, 2006).                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                              |
| 10.17  |   | Subscription  and Registration Rights Agreement with Yehuda Neuberger and Anne Neuberger  JTWROS dated July 26, 2006 (filed as Exhibit 10.2 to the Company’s  Form 8-K dated July 28, 2006).                                                                             |
|   |   |                                                                                                                                                                                                                                                                                              |
| 10.18  |   | Warrant  issued to George Karfunkel (filed as Exhibit 10.3 to the Company’s  Form 8-K dated July 28, 2006).                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                              |
| 10.19  |   | Warrant  issued to Yehuda Neuberger and Anne Neuberger JTWROS (filed as  Exhibit 10.4 to the Company’s Form 8-K dated July 28, 2006).                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                              |
| 10.20  |   | Third  Amendment to Promissory Note, dated November 10, 2006, by and between,  Cubic Energy, Inc. and Tauren Exploration, Inc. (filed as Exhibit 10.1  to the Company’s Form 10-QSB for the quarter ended September 30,  2006).                                |
|   |   |                                                                                                                                                                                                                                                                                              |
| 10.21  |   | Warrant  issued to Tauren Exploration, Inc. dated November 10, 2006 (filed  as Exhibit 10.2 to the Company’s Form 10-QSB for the quarter ended  September 30, 2006).                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                              |
| 10.22  |   | Form of  Subscription and Registration Rights Agreement (filed as Exhibit 10.1 to  the Company’s Form 8-K filed December 21, 2006).                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                              |
| 10.23  |   | Form of  Warrant (filed as Exhibit 10.2 to the Company’s Form 8-K filed  December 21, 2006).                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                              |
| 10.24  |   | Credit  Agreement dated March 5, 2007 by and between Cubic Energy, Inc. and  Wells Fargo Capital, Inc. (filed as Exhibit 10.1 to the Company’s  Form 8-K filed March 9, 2007).                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                              |
| 10.25  |   | Convertible  Promissory Note dated as of March 5, 2007 by Cubic Energy, Inc.  payable to Wells Fargo Energy Capital, Inc. in the principal amount of  $5,000,000 (filed as Exhibit 10.2 to the Company’s Form 8-K filed  March 9, 2007).                       |

 

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Table of Contents

 
| 10.26  |   | Promissory  Note dated as of March 5, 2007 by Cubic Energy payable to Wells Fargo  Energy Capital, Inc. in the maximum principal amount of $20,000,000  (filed as Exhibit 10.3 to the Company’s Form 8-K on March 9,  2007). |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                       |
| 10.27  |   | Warrant  to Purchase Shares of Common Stock of Cubic Energy, Inc. dated  March 5, 2007, issued to Wells Fargo Energy Capital, Inc. (filed as  Exhibit 10.4 to the Company’s Form 8-K on March 9, 2007).                 |
|   |   |                                                                                                                                                                                                                                                       |
| 10.28  |   | Registration  Rights Agreement dated as of March 5, 2007 by and between Cubic  Energy, Inc. and Wells Fargo Energy Capital, Inc. (filed as  Exhibit 10.5 to the Company’s Form 8-K on March 9, 2007).                   |
|   |   |                                                                                                                                                                                                                                                       |
| 10.29  |   | Form of  Assignment of Net Profits Interest (filed as Exhibit 10.6 to the  Company’s Form 8-K on March 9, 2007).                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                       |
| 10.30  |   | Employment Agreement with  Calvin A. Wallen, III, dated February 29, 2008 (filed as  Exhibit 10.1 to the Company’s Form 8-K on March 5, 2008).                                                                               |
|   |   |                                                                                                                                                                                                                                                       |
| 10.31  |   | Employment Agreement with  Jon S. Ross dated February 29, 2008 (filed as Exhibit 10.1 to the Company’s  Form 8-K on March 5, 2008).                                                                                               |
|   |   |                                                                                                                                                                                                                                                       |
| 10.32  |   | Subordinated Promissory  Note dated May 6, 2008 (filed as Exhibit 10.1 to the Company’s  Form 10-QSB for the quarter ended March 31, 2008).                                                                                       |
|   |   |                                                                                                                                                                                                                                                       |
| 10.33  |   | First Amendment to Credit  Agreement with Wells Fargo Energy Capital dated May 8, 2008 (filed as  Exhibit 10.2 to the Company’s Form 10-QSB for the quarter ended  March 31, 2008).                                               |
|   |   |                                                                                                                                                                                                                                                       |
| 23.1*  |   | Consent  of Philip Vogel & Co., PC                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                       |
| 31.1*  |   | Rule 13a-14(a)/15d-14(a) Certification  of Calvin A. Wallen, III                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                       |
| 31.2*  |   | Rule 13a-14(a)/15d-14(a) Certification  of Scott D. Guffey                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                       |
| 32.1*  |   | Section 1350  Certification of Calvin A. Wallen, III                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                       |
| 32.2*  |   | Section 1350  Certification of Scott D. Guffey                                                                                                                                                                                                        |

 

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* Filed herewith.

 

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