SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB
                                  ANNUAL REPORT
                          UNDER SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                     FOR THE FISCAL YEAR ENDED JUNE 30, 2005
                          COMMISSION FILE NUMBER 0-9355


                               CUBIC ENERGY, INC.
                 (Name of Small Business Issuer in its Charter)

           TEXAS                                           87-0352095
(State of Incorporation)                    (I.R.S. Employer Identification No.)


                      9870 PLANO ROAD, DALLAS, TEXAS 75238
                    (Address of Principal Executive Offices)

                                  972-686-0369
                           (Issuer's Telephone Number)

      Securities Registered Pursuant To Section 12(g) of the Exchange Act:
                     COMMON STOCK, PAR VALUE $.05 PER SHARE

         Check whether the issuer (1) filed all reports  required to be filed by
Section 13 or 15(d) of the Exchange  Act during the past 12 months,  and (2) has
been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

         Check if there is no  disclosure  of  delinquent  filers in response to
Item 405 of  Regulation  S-B contained in this form,  and no disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

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

         The  issuer's  revenues  for the fiscal  year ended June 30,  2005 were
$469,442.

         As of June 30, 2005, the registrant had outstanding  35,161,976  shares
of common  stock,  $.05 par value,  which is  registrant's  only class of common
stock. The aggregate market value of the common stock held by  non-affiliates of
the  registrant,  computed  by  reference  to the  average bid and ask price and
shares  outstanding,  was  approximately  $19,577,473  as of September 19, 2005.
Shares of common stock held by each officer and director of the  registrant  and
by each person who may be deemed to be an  affiliate  have been  excluded.  This
determination of affiliate status is not necessarily a conclusive  determination
for other purposes.

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


<PAGE>

                               CUBIC ENERGY, INC.


                               TABLE OF CONTENTS                            Page
                                                                            ----

Item 1.       Description of Business and Properties...........................1
Item 2.       Description of Properties.......................................21
Item 3.       Legal Proceedings...............................................21
Item 4.       Submission of Matters to a Vote of Security Holders.............21
Item 5.       Market for Common Equity and Related Stockholder Matters........22
Item 6.       Management's Discussion and Analysis or Plan of Operations......23
Item 7.       Financial Statements............................................26
Item 8.       Changes In and Disagreements With Accountants on Accounting
              and Financial Disclosure........................................26
Item 8A.      Controls and Procedures.........................................26
Item 8B.      Other Information...............................................26
Item 9.       Directors, Executive Officers, Promoters and Control Persons;
              Compliance with Section 16(a) of the Exchange
              Act.............................................................27
Item 10.      Executive Compensation..........................................29
Item 11.      Security Ownership of Certain Beneficial Owners and Management
              and Related Stockholder Matters.................................30
Item 12.      Certain Relationships And Related Transactions..................32
Item 13.      Exhibits........................................................34
Item 14.      Principal Accountant Fees and Services..........................35
















                                       ii

<PAGE>

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This report contains "forward-looking  statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended.  Such forward-looking  statements are based on
current expectations that involve a number of risks and uncertainties that could
cause  actual  results to differ  materially  from the results  discussed in the
forward-looking statements. Generally,  forward-looking statements include words
or phrases  such as  "management  anticipates,"  "the  Company  believes,"  "the
Company   anticipates,"   and  words  and   phrases  of  similar   impact.   The
forward-looking  statements  are made pursuant to safe harbor  provisions of the
Private  Securities  Litigation Reform Act of 1995. The factors that could cause
actual results to differ materially from the forward-looking statements include,
but are not  limited  to: (i)  industry  conditions  and  competition,  (ii) the
cyclical  nature of the  industry,  (iii)  domestic and  worldwide  supplies and
demand for oil and gas, (iv) operational risks and insurance,  (v) environmental
liabilities  which may arise in the future which are not covered by insurance or
indemnity,   (vi)  the  impact  of  current  and  future  laws  and   government
regulations,  as well as repeal or modification  of same,  affecting the oil and
gas industry and our operations in particular, (vii) production levels and other
activities  of OPEC and other oil and gas  producers,  and the  impact  that the
above factors and other events have on the current and expected  future  pricing
of oil and natural gas, and (viii) the risks  described from time to time in our
reports filed with the Securities and Exchange Commission.























                                      iii
<PAGE>

                                     PART I

Item 1.  Description of Business and Properties.

GENERAL

         Cubic Energy,  Inc. is an  independent  energy  company  engaged in the
development and production of, and  exploration  for, crude oil and natural gas.
Our oil and gas assets are concentrated  principally in Texas and Louisiana.  At
June 30, 2005, our total proved reserves were 85,986 BOE.

         Our predecessor was incorporated in October 1978 in the State of Texas.
In March 1980,  this entity was merged  into a publicly  held Utah  corporation,
with the surviving entity being Roseland Oil and Gas, Inc., a Utah  corporation.
In August 1991,  Roseland Oil and Gas,  Inc., the Utah  corporation,  was merged
into an  Oklahoma  corporation  and we  relocated  our  corporate  offices  from
Houston,  Texas to Tulsa, Oklahoma. In October 1999, pursuant to approval of the
shareholders,  Roseland Oil and Gas, Inc. was merged into Cubic Energy,  Inc., a
Texas  corporation.  References  to Cubic,  Roseland or the Company  include the
Company  and  our  predecessors  unless  the  context  otherwise  requires.  Our
principal  executive office is located at 9870 Plano Road, Dallas,  Texas 75238,
and our telephone number is (972) 686-0369.

         In December  1997,  we entered  into a Stock  Purchase  Agreement  (the
"Agreement")  pursuant  to which the  Company  issued  12,500,000  shares of our
common  stock in exchange for the  conveyance  to the Company of certain oil and
gas properties by Calvin A. Wallen,  III and his affiliates.  In connection with
the  Stock  Purchase  Agreement,  three  of the  five  members  of the  Board of
Directors  resigned and new directors were appointed,  including Mr. Wallen, who
also became President and CEO of the Company.

DESCRIPTION OF BUSINESS

         Prior to the  Agreement,  we focused  primarily on the  acquisition  of
non-operated  working interests and overriding  royalty interests in oil and gas
properties.  Subsequent  to  the  Agreement  in  December  1997,  we  moved  our
headquarters  from  Tulsa,  Oklahoma  to  Garland,  Texas in order to utilize an
affiliate's assembled team of experienced management whose substantial expertise
lay in acquisition,  exploitation and development and the ability to manage both
operated and non-operated oil and gas properties.  Current  management  believes
that the ability to operate our own properties  will result in significant  cost
savings to the  Company.  In addition,  after  reviewing  our existing  property
portfolio and refining our new business strategy,  the management team initiated
a divestment  strategy to dispose of our non-strategic  assets in non-core areas
in order to concentrate on building core reserves. Pursuant to this strategy, we
are reviewing plans to acquire and develop properties in our core areas in Texas
and Louisiana,  as well as  establishing a drilling  program for the drilling of
exploratory,  development and infill wells, a strategy previously unavailable to
us due to the  technical  expertise  and  experience  required  and the  lack of
available  resources.  We have made  substantial  progress  in  redirecting  our
strategic business efforts and believe that attractive  opportunities remain for
acquisition and development of our remaining and future assets.

         On April 27, 2001, we completed an exchange  offer pursuant to which we
acquired (i) certain  direct  working  interests in producing oil and/or natural
gas wells (the "Working  Interests") and (ii) all of the outstanding  membership
units in four privately held limited liability companies and approximately 9.85%
of the membership  interest in another privately held limited liability company,
all of which are engaged in oil and/or natural gas  exploration  and production.
The  Working  Interests  consist of between  15% and 45%  working  interests  in
fourteen  (14) wells.  The Working  Interests  are part of projects  operated by
Tauren Exploration,  Inc. ("Tauren"),  an independent energy company, and Fossil
Operating, Inc. ("Fossil") acts as the operator for some of the properties.  Mr.
Wallen is the sole shareholder,  director and officer of Tauren and Fossil.  The



                                       1
<PAGE>

relationship  between the Company and each of Tauren and Fossil were approved by
our disinterested  directors. The exchange offer was made to and was accepted by
the various individual holders of the interests acquired.  The Working Interests
and the properties  held are located in Texas and Louisiana.  The  consideration
paid to the individuals who accepted the exchange offer was determined  based on
our valuation of the reserves  underlying the interests  acquired.  The value of
our common  stock for purpose of the  exchange  offer was deemed to be $0.50 per
share. In connection with the exchange offer, we issued approximately 11,141,256
shares of our common stock. In addition,  as consideration for services rendered
with respect to this exchange  offer,  C. K. Cooper & Company,  Inc.  and/or its
principals and employees, received 111,413 shares of our common stock.

         Effective  January 1, 2002,  we entered into an  agreement  with Tauren
whereby (i) Tauren exchanged and traded the accounts receivable of $856,712 owed
by the Company for 856,712 shares of restricted  Company common stock,  (ii) the
Company  attained  ground  floor  opportunities  from Tauren to  participate  in
Tauren's prospect and project inventory,  and (iii) certain warrants were issued
to Tauren from the Company to acquire restricted Company common stock. A copy of
this  agreement was filed with the  Company's  Form 10-QSB for the quarter ended
March 31, 2002.

         In April 2002, the Company made the strategic decision not to renew the
Red Rock, Louisiana leaseholds, which action has had a substantial impact on the
income  statement for the Company for the year ended June 30, 2002.  Despite the
impact, we believe the decision not to re-new the leases will be to the ultimate
benefit of the Company.

         On June 1, 2002,  Tauren assigned certain oil and gas properties to the
Company for de minimis consideration.  We already had an interest in some of the
properties assigned by Tauren.

         On or about October 1, 2004, we closed a Securities  Purchase Agreement
and issued  $2,635,000  in  principal  amount of 7% Senior  Secured  Convertible
Debentures   due  September  30,  2009  (the   "Debentures"),   to  a  group  of
institutional  and high net worth  investors.  The Debentures are secured by the
collateral  set forth in the Deed of Trust,  Security  Agreement,  Assignment of
Production and Fixture  Filing  attached to our Form 8-K filed October 12, 2004.
The  Debentures pay an annual  interest rate of 7% on a quarterly  basis and are
convertible  into  shares of our common  stock at a price of $.50 per share.  We
have the option to pay the  interest  on the  Debentures  in common  stock.  The
investors also received  warrants to purchase an additional  2,635,000 shares of
common stock with an exercise  price of $1.00 per share.  During the fiscal year
ended June 30, 2005,  $705,000 of debt had been converted into 1,410,000  shares
of common stock,  and 145,137 shares of common stock were issued in lieu of cash
to pay interest.

         We have  allocated the proceeds from the issuance of the  Debentures to
the warrants and the  Debentures  based on their  relative fair market values at
the date of  issuance.  The value  assigned to the warrants of $510,961 has been
recorded as an increase in additional paid in capital. The assignment of a value
to the warrants  results in a loan discount  being recorded for the same amount.
The  discount  is  being  amortized  over the  original  five  year  term of the
Debentures as additional interest expense.

         We incurred  loan costs of $264,300 on the  issuance of the  Debentures
and  warrants.  The amount  allocable  to the  Debentures  of $213,049  has been
capitalized and is being amortized over the term of the Debentures. Amortization
of loan costs was $28,258 for the year ended June 30, 2005.

         The  proceeds  of the  Debentures  have  primarily  been  used  for the
acquisition of interests in oil and gas properties.  Through  December 31, 2004,
we incurred  acquisition and development  costs of $1,418,996 on properties with
unproved reserves.  On or before March 31, 2005, we determined that the reserves



                                       2
<PAGE>

acquired in this  transaction  were proved,  and the associated  acquisition and
development  costs were transferred to proved  properties and depletion has been
computed in accordance with the full cost method.

         However,  upon audit and further  review,  it has been  determined that
approximately $1,053,000 in lease acquisition costs were improperly moved to the
proved  category  from  the  unproved   category,   and  this  amount  has  been
re-categorized to the unproved category.  The March 31, 2005 Form 10-QSB for the
Company  is being  amended  to  re-categorize  the  assets  between  proved  and
unproved, to restate the depletion and to restate the balance sheet accordingly.
The net  effect  of this  amendment  will not  result  in a change  in our total
assets, but reflects a material change in asset classification. In addition, the
balance of the prepaid drilling costs, net of allocable expenses, as of June 30,
2005, are $303,667.

         On or about  January 11,  2005,  we issued  1,531,661  shares of common
stock to Caravel  Resources  Energy Fund 2003-II,  L.P. (the  "Partnership")  in
exchange for a 0.1914575033  working  interest in the Kraemer 24-1 Well,  Desoto
Parish,  Township 14 N, Range 15 W,  Section 24 (the  "Well").  The Company also
issued  468,339  shares  of  common  stock  to  Mr.  Wallen  in  exchange  for a
0.0585424967 working interest in the Well. The common stock closed at a price of
$0.90 on January 10, 2005. The shares of common stock were issued by the Company
in reliance upon an exemption from registration set forth in Section 4(2) of the
Securities Act of 1933, as amended,  which exempts transactions by an issuer not
involving a public offering.

PRINCIPAL OIL AND GAS PROPERTIES

         The following table summarizes certain  information with respect to our
principal areas of operation at June 30, 2005.

                                                Percent        Present
                       Oil         Gas         of Proved        Value
         Areas        (Bbl)       (Mcf)        Reserves      (Disc @ 10%)
         -----        -----       -----        ---------     ------------

       Louisiana       360       297,796          65%          $690,800
         Texas         688       211,829          35%          $380,300
--------------------------------------------------------------------------------
         Total         1048      509,625         100%         $1,071,100

         Our Texas properties are situated in Palo Pinto,  Eastland and Callahan
Counties.  Our Louisiana  properties  are situated in Caddo Parish and in Desoto
Parish.  At June 30, 2005,  the Texas  properties  contained the majority of our
proved reserves;  however, it is anticipated that of our existing properties the
ones in Louisiana will eventually  contain the majority of our proved  reserves.
The Texas  properties  consist  primarily  of wells  acquired  by the Company in
several  transactions  between  1991  and 2002 and  through  overriding  royalty
interests  reserved  in  farm-out  agreements  in 1998 and 1999.  The  Louisiana
properties  were  acquired  on or about  October 1, 2004 and January 11, 2005 in
transactions described herein.

         In June 1998, we agreed to a farm-out  agreement with Cummings Company,
reserving a 6.25%  overriding  royalty  interest in any wells drilled under that
agreement.  As of June 30, 2000,  Cummings had completed its drilling program on
the farmed out interest and completed four wells, the Reagan 11-1,  Reagan 11-2,
Reagan 11-3 and the Reagan 11-4.

         In addition,  on December 10, 1998,  we entered into an agreement  with
Tauren that provides for Tauren to drill on our Section 11 in Palo Pinto County,
Texas.  The  agreement  grants  Tauren a farm-out  with Cubic  retaining  a 7.5%



                                       3
<PAGE>

overriding  royalty  interest.  The agreement  also provides for a  preferential
right in the event that Tauren, at some later date, decides to dispose of a part
or all of their interest in the drilled wells.

         Our net  production for the fiscal year ending June 30, 2005 for all of
the Company wells  averaged  approximately  185 Mcf of natural gas per day and 1
barrel of oil per day.

EXPLORATION ACTIVITIES

         Our strategy with respect to our domestic  exploration program seeks to
maintain a balanced  portfolio of drilling  opportunities  that range from lower
risk,  field extension wells to higher risk, high reserve  potential  prospects.
Our focus is  primarily  on  exploration  opportunities  that can  benefit  from
advanced  technologies,  including  3-D  seismic,  designed to reduce  risks and
increase  success  rates.  We develop  prospects  in-house at an  affiliate  and
through  strategic  alliances with exploration  companies that have expertise in
specific  target  areas.  In addition,  we evaluate  some  externally  generated
prospects and plan to participate in some of these  opportunities to enhance our
portfolio.

         We are  currently  focusing  our  domestic  exploration  activities  to
develop  our  undeveloped  leasehold   opportunities  in  Louisiana  and  Texas.
Currently  we have  exploration  opportunities  and seek to  acquire  additional
leasehold interests in Caddo and Desoto Parishes,  Louisiana, and in Palo Pinto,
Callahan  and  Eastland  Counties  in Texas.  These areas are a part of geologic
studies utilizing regional trend surface analysis, 2-D and 3-D seismic data, AVO
analysis  and/or vast  sub-surface  control.  Prospects have been developed from
4,000-10,500 feet in depth in the Cotton Valley, Hosston, Gloyd, Pettet, Paluxy,
Strawn sandstone, Bend conglomerate and Caddo limestone.

         We also have included an acquisition strategy to our business plan that
would allow us to capitalize on producing oil and gas acquisition targets.

MARKETING OF PRODUCTION

Crude Oil and Natural Gas

         Our production  consists  mainly of natural gas. We market our operated
production of natural gas to two  purchasers (i) in Texas,  Enbridge  Gathering,
LP, as successor to Devon Gas Services LP, and (ii) in Louisiana,  Crosstex Gulf
Coast Marketing, Ltd. We sell our crude oil and condensate production at or near
the well  site,  although  in some  cases it is  gathered  by us or  others  and
delivered to a central point of sale. Our crude oil and condensate production is
transported by truck or by pipeline and is typically  committed to  arrangements
having a term of one year or less.  We have not  engaged in crude oil hedging or
trading  activities.  We utilize  short-term  gas contracts with prices that are
related to market  conditions in varying degrees and have not engaged in natural
gas hedging or futures trading.

         We believe we would be able to locate alternate purchasers in the event
of the loss of any one of these  purchasers,  and that any such  loss  would not
have a  material  adverse  effect  on our  financial  condition  or  results  of
operations. Revenue from the sale of natural gas totaled $447,470 for the fiscal
year ended June 30, 2005 and  represented  95% of our total oil and gas revenues
for that fiscal year.

Price Considerations

         Crude oil  prices are  established  in a highly  liquid,  international
market, with average crude oil prices that we receive generally fluctuating with
changes  in  the  futures  price   established  on  the  NYMEX  for  West  Texas
Intermediate  Crude  Oil  ("NYMEX-WTI").  The  average  crude  oil price per Bbl
received by us in fiscal year 2005 was $43.42.



                                       4
<PAGE>
<TABLE>
<CAPTION>

         Natural  gas prices in the  geographical  areas in which we operate are
closely  tied to  established  price  indices  which are heavily  influenced  by
national and regional  supply and demand factors and the futures price per MMBTU
for natural  gas  delivered  at Henry Hub,  Louisiana  established  on the NYMEX
("NYMEX-Henry  Hub").  At  times,  these  indices  correlate  closely  with  the
NYMEX-Henry  Hub price,  but often there are significant  variances  between the
NYMEX-Henry  Hub price and the indices  used to price our natural  gas.  Average
natural  gas prices  received  by us in each of our  operating  areas  generally
fluctuate with changes in these  established  indices.  The average  natural gas
price per Mcf received by us in fiscal 2005 was $6.61.

OIL AND GAS RESERVES

         The   following   tables  set  forth  the  proved   developed,   proved
non-producing  and undeveloped  reserves at June 30, 2005, the estimated  future
net revenues from such proved  reserves and the Present  Value and  Standardized
Measure of Discounted Future Net Cash Flows attributable to our reserves at June
30, 2005, 2004 and 2003:

                                                                                        10%
Category                Oil (Bbls)     Gas (Mcf)     Total (Mcfe)       Income        Discount
                       ------------   ------------   ------------   -------------   ------------
<S>                    <C>            <C>            <C>            <C>             <C>
Proved Producing                989        250,889        262,757   $     616,200   $    478,300
Proved Non-Producing             59        258,736        259,444   $    1286,100   $    592,800
Proved Undeveloped             --             --             --              --             --
</TABLE>

                                                         AT JUNE 30,
                                            ------------------------------------
                                               2005         2004         2003
                                            ----------   ----------   ----------
Proved Reserves:
     Oil (Bbl)....................                1048            0            0
     Gas (Mcf)....................             509,625      311,098      330,409
BOE...............................              85,986       51,850       55,068
Estimated future net revenues.....          $1,902,300     $975,468   $1,098,147
     (before income tax) .........
       Standardized Measure (1)...          $1,071,100     $731,913     $798,381
Proved developed reserves: .......
     Oil (Bbl) ...................                1048            0            0
      Gas (Mcf) ..................             509,625      311,098      330,409
BOE ..............................              85,986       51,850       55,068
Estimated future net revenues ....          $1,092,300     $975,468   $1,098,147
     (before income tax)..........
Present Value ....................          $1,071,100     $731,913     $798,381
Standardized Measure (1) .........          $1,071,100     $731,913     $798,381
Weighted average sales prices:....
     Oil (Bbl) ...................              $42.43       $32.16       $26.20
     Gas (Mcf) ...................               $6.61        $5.55        $4.91

-----------------------------
(1)      The Standardized  Measure of Discounted  Future Net Cash Flows prepared
         by the Company  represents the present value (using an annual  discount
         rate of 10%) of estimated  future net revenues  from the  production of
         proved  reserves,   after  giving  effect  to  income  taxes.  See  the
         Supplemental Financial Information attached to the Financial Statements
         of the  Company  included  elsewhere  in  this  Report  for  additional
         information  regarding  the  disclosure  of  the  Standardized  Measure
         information in accordance with the provisions of Statement of Financial
         Accounting  Standards  ("SFAS") No. 69,  "Disclosures about Oil and Gas
         Producing Activities."



                                       5
<PAGE>

         All  information  set  forth  in this  Report  relating  to our  proved
reserves, estimated future net revenues and present values is taken from reports
prepared by the Houston,  Texas office of Netherland  Sewell & Associates,  Inc.
("NSA"), our new independent,  petroleum engineering firm. The estimates of this
engineering  firm were  based  upon  review of  production  histories  and other
geological, economic, ownership and engineering data provided by the Company. No
reports on our reserves have been filed with any federal  agency.  In accordance
with  guidelines of the SEC, our estimates of proved reserves and the future net
revenues from which  Present  Values are derived are made using year end oil and
gas sales prices held constant  throughout the life of the properties (except to
the  extent  a  contract  specifically  provides  otherwise).  Operating  costs,
development costs and certain production-related taxes were deducted in arriving
at estimated future net revenues,  but such costs do not include debt service or
general and administrative expenses.

         The reserve  report from NSA showed a dramatic  downward  variance from
the  expectations  of  management  for the  Company in proved  reserves,  as NSA
re-classified  some thought to be proved  reserves as possible or probable.  The
Company and its  management  believe that the  significance  of this variance in
reserves is overridden in the investor  confidence  inspired by our  association
with NSA.

         There are numerous  uncertainties  inherent in  estimating  oil and gas
reserves  and their  values,  including  many factors  beyond our  control.  The
reserve  data set forth in this  Report  represents  estimates  only.  Reservoir
engineering  is a  subjective  process of  estimating  the sizes of  underground
accumulations  of oil and gas that cannot be measured  in an exact  manner.  The
accuracy of any reserve estimate is a function of the quality of available data,
engineering and geological interpretation,  and judgment. As a result, estimates
of  different  engineers,  including  those used by us, may vary.  In  addition,
estimates  of reserves  are subject to  revision  based upon actual  production,
results  of  future  development,   exploitation  and  exploration   activities,
prevailing  oil and  gas  prices,  operating  costs  and  other  factors,  which
revisions may be material.  Accordingly,  reserve  estimates are often different
from the quantities of oil and gas that are ultimately  recovered and are highly
dependent upon the accuracy of the assumptions upon which they are based.  There
can be no assurance that these estimates are accurate predictions of our oil and
gas reserves or their values. Estimates with respect to proved reserves that may
be  developed  and  produced  in the  future  are often  based  upon  volumetric
calculations  and upon analogy to similar  types of reserves  rather than actual
production history. Estimates based on these methods are generally less reliable
than those based on actual production history.

         Subsequent  evaluation  of the  same  reserves  based  upon  production
history will result in variations,  which may be  substantial,  in the estimated
reserves.

                  NET PRODUCTION, SALES PRICES AND COSTS

         The following table presents  certain  information  with respect to oil
and gas  production,  prices and costs  attributable to all oil and gas property
interests owned by us for the period ended June 30, 2004.

                                                     YEAR ENDED      YEAR ENDED
                                                   JUNE 30, 2005   JUNE 30, 2004
                                                   -------------   -------------

PRODUCTION VOLUMES:
    Oil (Bbl) ..................................             506             562
     Gas (Mcf) .................................          67,744          71,804

WEIGHTED AVERAGE SALES PRICES:
     Oil (per Bbl) .............................          $43.42          $32.16
     Gas (per Mcf) .............................           $6.61           $5.55




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<PAGE>

SELECTED EXPENSES PER BOE:
     Lease operating ...........................          $23.15          $14.88
      Depreciation, Depletion & Amortization....          $30.90          $ 8.36
     General and administrative ................          $33.47          $19.16

PRODUCTIVE WELLS AND ACREAGE

Productive Wells

         The following  table sets forth our domestic  productive  wells at June
30, 2005:

        OIL                           GAS                        TOTAL
-----------------            -----------------            -----------------
Gross         Net            Gross         Net            Gross         Net
-----         ---            -----         ---            -----         ---
  0            0              17          13.65             17         13.65

Acreage

         The following  table sets forth our undeveloped and developed gross and
net leasehold  acreage at June 30, 2005.  Undeveloped  acreage  includes  leased
acres on which wells have not been  drilled or  completed  to a point that would
permit the  production  of commercial  quantities of oil and gas,  regardless of
whether or not such acreage contains proved reserves.

   Undeveloped                   Developed                       TOTAL
-----------------            -----------------            -----------------
Gross         Net            Gross         Net            Gross         Net
-----         ---            -----         ---            -----         ---
 4928        1232             1122         939             6050         2171

         All the leases for the undeveloped  acreage summarized in the preceding
table will expire at the end of their  respective  primary terms unless prior to
that date the existing  leases are renewed or production  has been obtained from
the acreage subject to the lease, in which event the lease will remain in effect
until the cessation of production. As is customary in the industry, we generally
acquire oil and gas acreage  without any  warranty of title  except as to claims
made by,  through or under the  transferor.  Although we have title to developed
acreage  examined  prior to  acquisition  in those  cases in which the  economic
significance of the acreage  justifies the cost,  there can be no assurance that
losses will not result from title  defects or from defects in the  assignment of
leasehold  rights.  In many instances,  title opinions may not be obtained if in
our judgment it would be uneconomical or impractical to do so.

OPERATIONS

         We are not the operator of our wells,  but in most or all cases Fossil,
an entity related to Mr. Wallen, is the operator.

         We have contract relationships with petroleum engineers, geologists and
other  operations  and  production  specialists  who we believe  will be able to
improve  production rates,  increase reserves and/or lower the cost of operating
our oil and gas properties.

         Oil and gas  properties are  customarily  operated under the terms of a
joint operating  agreement,  which provides for  reimbursement of the operator's
direct expenses and monthly per well supervision fees. Per well supervision fees
vary widely depending on the geographic  location and producing formation of the
well, whether the well produces oil or gas and other factors.



                                       7
<PAGE>

EMPLOYEES

         At June 30, 2005,  the Company had no full time  employees.  In January
2002,  the Company  entered into a new contract with an affiliate  controlled by
Mr. Wallen to provide certain technical  administration and management  services
needed to conduct its business. The terms of the contract provided for personnel
to be contracted at the  affiliates  true cost;  which is more  favorable to the
Company than would be available from an unaffiliated third party.

FACILITIES

         The  Company's  principal  executive  and  administrative  offices  are
located at 9870 Plano Road,  Dallas,  Texas.  The offices are subleased  from an
affiliate  controlled by Mr. Wallen and the offices are owned by this affiliate.
The monthly  amount charged to the Company is based on actual costs of materials
and  man-hours  of the  affiliates  that are used  pursuant  to the terms of the
agreement.  The Company believes that there is other appropriate space available
in the event the Company should terminate its current leasing arrangement.


















                                       8
<PAGE>

RISK FACTORS

         You should carefully  consider the following risk factors,  in addition
to the other information set forth in this Report, before investing in shares of
our  common  stock.  Each of these  risk  factors  could  adversely  affect  our
business, operating results and financial condition, as well as adversely affect
the value of an investment in our common stock.  Some information in this Report
may contain "forward-looking" statements that discuss future expectations of our
financial  condition  and results of  operation.  The risk factors noted in this
section and other  factors could cause our actual  results to differ  materially
from those contained in any forward-looking statements.

         We face  significant  competition,  and  many of our  competitors  have
resources in excess of our available resources.

         The  oil  and  gas  industry  is  highly   competitive.   We  encounter
competition  from other oil and gas  companies  in all areas of our  operations,
including  the  acquisition  of producing  properties  and sale of crude oil and
natural gas. Our competitors  include major integrated oil and gas companies and
numerous independent oil and gas companies,  individuals and drilling and income
programs.  Many of our competitors are large,  well  established  companies with
substantially  larger  operating  staffs and greater capital  resources than us.
Such companies may be able to pay more for productive oil and gas properties and
exploratory  prospects and to define,  evaluate,  bid for and purchase a greater
number of properties and prospects than our financial or human resources permit.
Our ability to acquire  additional  properties  and to discover  reserves in the
future will depend upon our ability to evaluate and select  suitable  properties
and to consummate transactions in this highly competitive environment.

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

         Drilling activities are subject to many risks,  including the risk that
no commercially productive oil or gas reservoirs will be encountered.  There can
be no assurance  that new wells drilled by us will be productive or that we will
recover  all or any  portion  of our  investment.  Drilling  for oil and gas may
involve unprofitable  efforts, not only from dry wells, but also from wells that
are  productive  but do not produce  sufficient  net revenues to return a profit
after drilling, operating and other costs. The cost of drilling,  completing and
operating wells is often  uncertain.  Our drilling  operations may be curtailed,
delayed  or  canceled  as a result of a variety  of  factors,  many of which are
beyond its control, including economic conditions, mechanical problems, pressure
or irregularities in formations, title problems, weather conditions,  compliance
with  governmental  requirements  and  shortages in or delays in the delivery of
equipment and services.  Such equipment  shortages and delays sometimes  involve
drilling  rigs where  inclement  weather  prohibits  the  movement  of land rigs
causing  a high  demand  for  rigs by a  large  number  of  companies  during  a
relatively  short  period of time.  Our future  drilling  activities  may not be
successful. Lack of drilling success could have a material adverse effect on our
financial condition and results of operations.

         Our  operations  are also subject to all the hazards and risks normally
incident to the development, exploitation, production and transportation of, and
the  exploration  for, oil and gas,  including  unusual or  unexpected  geologic
formations,   pressures,   down  hole  fires,  mechanical  failures,   blowouts,
explosions,  uncontrollable  flows of oil, gas or well fluids and  pollution and
other  environmental  risks. These hazards could result in substantial losses to
us due to injury and loss of life,  severe damage to and destruction of property
and  equipment,  pollution  and other  environmental  damage and  suspension  of
operations.  We participate in insurance coverage  maintained by the operator of
its  wells,  although  there can be no  assurances  that such  coverage  will be
sufficient to prevent a material adverse effect to us in such events.



                                       9
<PAGE>

         We have a limited  operating history in a  capital-intensive  business,
and we will have a need for additional funds.

         From our inception  through December 1997, we were engaged  principally
in non-operating  activities.  While our new management has extensive experience
in oil and gas  exploration and operating  activities,  we have had very limited
experience  in  these  operations.  Our  business  is  highly  capital-intensive
requiring  continuous  development and  acquisition of oil and gas reserves.  In
addition,  capital  is  required  to  operate  and  expand our oil and gas field
operations and purchase  equipment.  At June 30, 2005, we had working capital of
$576,294. As a result of our determination to operate in the future, our working
capital  requirements  may be  expected  to  increase  significantly  over prior
periods.  We anticipate that we will be able to meet our cash  requirements  for
the next 12 months.  However, if such plans or assumptions change or prove to be
inaccurate,  we could be  required  to seek  additional  financing  sooner  than
currently anticipated.

         On October 6,  2004,  we closed a  Securities  Purchase  Agreement  and
issued  $2,635,000  in  principal  amount  of  7%  Senior  Secured   Convertible
Debentures due September 30, 2009 to a group of institutional and high net worth
investors.  Proceeds from the sale of the  Debentures  will be used to acquire a
25% interest in the Kraemer 24 #1 well located in the Bethany-Longstreet play of
Northern  Louisiana and the  development  of such play,  including  spudding two
additional  wells,  which is  anticipated  to occur by the end of the year.  The
Debentures  pay an  annual  interest  rate of 7% on a  quarterly  basis  and are
convertible  into shares of our common  stock at a price of $0.50 per share.  We
have the option to pay the interest on the  Debentures in our common stock.  The
investors also received  warrants to purchase an additional  2,635,000 shares of
common stock with an exercise  price of $1.00.  We have no commitments to obtain
any  additional  debt or equity  financing  and there can be no  assurance  that
additional funds will be available, when required, on terms favorable to us. Any
future  issuances of equity  securities  would likely  result in dilution to our
then existing shareholders while the incurring of additional  indebtedness would
result in increased interest expense and debt service changes. See "Management's
Discussion and Analysis or Plan of Operations."

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

         We incurred  losses  before income tax  provisions  of  $(784,526)  and
$(114,116)  for the fiscal years ended June 30, 2005 and 2004.  Our  accumulated
deficit  as of June 30,  2005 was  $(10,752,868).  We do not have a bank line of
credit.  We have funded our operating  losses,  acquisitions and expansion costs
primarily through a combination of private offerings of convertible debt, exempt
transactions,  equity securities and proceeds from the exercise of warrants. Our
success in  obtaining  the  necessary  capital  resources  to fund future  costs
associated with our operations and expansion plans is dependent upon our ability
to: (i)  increase  revenues  through  acquisitions  and  recovery  of our proved
producing and proved developed non-producing oil and gas reserves; (ii) maintain
effective  cost  controls at the  corporate  administrative  office and in field
operations; and (iii) obtain the exercise of outstanding warrants. However, even
if we achieve  some success  with our plans,  there can be no assurance  that we
will be able to generate sufficient  revenues to achieve significant  profitable
operations  or fund  our  expansion  plans.  See  "Management's  Discussion  and
Analysis or Plan of Operations."

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

         The vast majority of our oil and gas reserves are  classified as proved
reserves.  Recovery of the  Company's  future proved  undeveloped  reserves will
require  significant  capital   expenditures.   Our  management  estimates  that
aggregate capital  expenditures of approximately  $3,000,000 will be required to



                                       10
<PAGE>

fully develop some of these reserves in the next twelve months. No assurance can
be given that our estimates of capital  expenditures  will prove accurate,  that
our financing  sources will be sufficient to fully fund our planned  development
activities  or that  development  activities  will be  either  successful  or in
accordance with our schedule.  Additionally, any significant decrease in oil and
gas prices or any significant  increase in the cost of development  could result
in a significant  reduction in the number of wells drilled and/or  reworked.  No
assurance  can be given that any wells will  produce oil or gas in  commercially
profitable quantities.

         Development  of  our  properties   will  require   additional   capital
resources.  We have no  commitments  to  obtain  any  additional  debt or equity
financing  and there  can be no  assurance  that  additional  financing  will be
available,  when  required,  on favorable  terms to us. The  inability to obtain
additional  financing  could have a  material  adverse  effect on us,  including
requiring  us  to  curtail   significantly  our  oil  and  gas  acquisition  and
development  plans or farm-out  development  of our  properties.  Any additional
financing may involve substantial  dilution to the interests of our shareholders
at that time. See "Management's Discussion and Analysis or Plan of Operations."

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

         Our revenues,  profitability  and the carrying value of its oil and gas
properties are  substantially  dependent upon  prevailing  prices of, and demand
for, oil and gas and the costs of acquiring,  finding,  developing and producing
reserves.   Our  ability  to  obtain   borrowing   capacity,   to  repay  future
indebtedness,  and to  obtain  additional  capital  on  favorable  terms is also
substantially dependent upon oil and gas prices.  Historically,  the markets for
oil and gas have been  volatile and are likely to continue to be volatile in the
future.  Prices for oil and gas are subject to wide fluctuations in response to:
(i) relatively minor changes in the supply of, and demand for, oil and gas; (ii)
market uncertainty;  and (iii) a variety of additional factors, all of which are
beyond our  control.  These  factors  include  domestic  and  foreign  political
conditions, the price and availability of domestic and imported oil and gas, the
level  of  consumer  and  industrial  demand,  weather,   domestic  and  foreign
government  relations,  the  price and  availability  of  alternative  fuels and
overall economic  conditions.  Furthermore,  the marketability of our production
depends in part upon the  availability,  proximity  and  capacity  of  gathering
systems,  pipelines and processing facilities.  Volatility in oil and gas prices
could  affect  our  ability  to market  our  production  through  such  systems,
pipelines or  facilities.  Substantially  all of our gas production is currently
sold to one gas marketing  firm on a  month-to-month  basis at  prevailing  spot
market  prices.  Oil prices  remained  subject to  unpredictable  political  and
economic forces during fiscal 2003, fiscal 2004 and fiscal 2005, and experienced
fluctuations  similar  to those seen in  natural  gas  prices  for the year.  We
believe that oil prices will continue to fluctuate in response to changes in the
policies of the Organization of Petroleum Exporting Countries ("OPEC"),  changes
in demand from many Asian countries, current events in the Middle East, security
threats  to the  United  States,  and other  factors  associated  with the world
political  and  economic  environment.  As a result  of the  many  uncertainties
associated with levels of production  maintained by OPEC and other oil producing
countries,  the  availabilities  of worldwide  energy  supplies and  competitive
relationships and consumer  perceptions of various energy sources, we are unable
to predict what changes will occur in crude oil and natural gas prices.

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

         This prospectus  contains estimates of our oil and gas reserves and the
future net cash flows from those  reserves,  which have been prepared by certain
independent petroleum consultants.  There are numerous uncertainties inherent in
estimating  quantities of reserves of oil and gas and in projecting future rates
of production and the timing of development expenditures, including many factors
beyond our  control.  The  reserve  estimates  in this  prospectus  are based on
various  assumptions,  including,  for  example,  constant  oil and gas  prices,



                                       11
<PAGE>

operating  expenses,  capital  expenditures and the availability of funds,  and,
therefore, are inherently imprecise indications of future net cash flows. Actual
future  production,   cash  flows,  taxes,   operating   expenses,   development
expenditures  and  quantities  of  recoverable  oil and gas  reserves  may  vary
substantially from those assumed in the estimates.  Any significant  variance in
these assumptions  could materially  affect the estimated  quantity and value of
reserves set forth in this prospectus. Additionally, our reserves may be subject
to downward or upward revision based upon actual production performance, results
of future  development and exploration,  prevailing oil and gas prices and other
factors, many of which are beyond our control.

         The  present  value  of  future  net  reserves  discounted  at 10% (the
"PV-10")  of  proved  reserves  referred  to in this  prospectus  should  not be
construed as the current  market value of the estimated  proved  reserves of oil
and  gas   attributable  to  our  properties.   In  accordance  with  applicable
requirements  of the SEC, the  estimated  discounted  future net cash flows from
proved  reserves are  generally  based on prices and costs as of the date of the
estimate,  whereas  actual future  prices and costs may be materially  higher or
lower.  Actual future net cash flows also will be affected by: (i) the timing of
both production and related expenses;  (ii) changes in consumption  levels;  and
(iii) governmental  regulations or taxation. In addition, the calculation of the
present  value of the future net cash flows using a 10%  discount as required by
the SEC is not  necessarily  the  most  appropriate  discount  factor  based  on
interest  rates in  effect  from  time to time  and  risks  associated  with our
reserves or the oil and gas industry in general.  Furthermore,  our reserves may
be subject to downward or upward revision based upon actual production,  results
of future development, supply and demand for oil and gas, prevailing oil and gas
prices and other factors. See "Properties - Oil and Gas Reserves."

         We are subject to various operating and other casualty risks that could
result in liability exposure or the loss of production and revenues.

         Our oil  and gas  business  involves  a  variety  of  operating  risks,
including,   but  not   limited  to,   unexpected   formations   or   pressures,
uncontrollable  flows of oil,  gas,  brine or well fluids  into the  environment
(including groundwater  contamination),  blowouts, fires, explosions,  pollution
and other risks, any of which could result in personal  injuries,  loss of life,
damage to properties  and  substantial  losses.  Although we carry  insurance at
levels  that we believe are  reasonable,  we are not fully  insured  against all
risks. We do not carry business interruption  insurance.  Losses and liabilities
arising from  uninsured or  under-insured  events could have a material  adverse
effect on our financial condition and operations.

         From  time  to  time,  due  primarily  to  contract   terms,   pipeline
interruptions  or weather  conditions,  the  producing  wells in which we own an
interest have been subject to production  curtailments.  The curtailments  range
from production being partially  restricted to wells being  completely  shut-in.
The duration of curtailments  varies from a few days to several months.  In most
cases,  we are  provided  only  limited  notice  as to when  production  will be
curtailed  and  the  duration  of  such  curtailments.   We  are  not  currently
experiencing any material curtailment of our production.

         We  intend  to  increase  our  development  and,  to a  lesser  extent,
exploration   activities.   Exploration   drilling  and,  to  a  lesser  extent,
development  drilling of oil and gas reserves involve a high degree of risk that
no  commercial  production  will be  obtained  and/or  that  production  will be
insufficient  to recover  drilling and completion  costs.  The cost of drilling,
completing and operating wells is often uncertain.  Our drilling  operations may
be  curtailed,  delayed or canceled as a result of numerous  factors,  including
title problems,  weather conditions,  compliance with governmental  requirements
and shortages or delays in the delivery of equipment. Furthermore, completion of
a well does not assure a profit on the  investment  or a recovery  of  drilling,
completion and operating costs.



                                       12
<PAGE>

         Our business may suffer if we lose key personnel.

         We depend to a large extent on the  services of Calvin A. Wallen,  III,
our President,  Chairman of the Board, and Chief Executive Officer.  The loss of
the  services  of  Mr.  Wallen  would  have a  material  adverse  effect  on our
operations. We have not entered into any employment contracts with our executive
officer and have not obtained key personnel life insurance on Mr. Wallen.

         Certain of our affiliates  control a majority of our outstanding common
stock, which may affect your vote as a shareholder.

         Our executive  officers,  directors and their affiliates and certain 5%
shareholders hold  approximately 60% of our outstanding  shares of common stock.
As a result, officers, directors and their affiliates and such shareholders have
the ability to exert significant influence over our business affairs,  including
the ability to control the  election of  directors  and results of voting on all
matters requiring shareholder  approval.  This concentration of voting power may
delay or prevent a potential change in control.

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

         Certain  officers,  directors and related parties,  including  entities
controlled  by Mr.  Wallen,  the  President and Chief  Executive  Officer,  have
engaged in business  transactions  with the Company which were not the result of
arm's length negotiations  between independent  parties. Our management believes
that the terms of these transactions were as favorable to us as those that could
have been obtained from unaffiliated  parties under similar  circumstances.  All
future  transactions  between  us and our  affiliates  will be on  terms no less
favorable  than could be obtained  from  unaffiliated  third parties and will be
approved by a majority of the disinterested members of our Board of Directors.

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

         Our common stock is traded on the Over-the-Counter Bulletin Board ("OTC
BB").  The  liquidity  of our  common  stock  may  be  adversely  affected,  and
purchasers of our common stock may have difficulty  selling our common stock, if
our common stock does not continue to trade in that or another  suitable trading
market.

         There is presently  only a limited  public market for our common stock,
and there is no assurance  that a ready public  market for our  securities  will
develop. It is likely that any market that develops for our common stock will be
highly volatile and that the trading volume in such market will be limited.  The
trading  price of our common  stock  could be subject  to wide  fluctuations  in
response   to   quarter-to-quarter   variations   in  our   operating   results,
announcements of our drilling results and other events or factors.  In addition,
the U.S. stock market has from time to time experienced extreme price and volume
fluctuations  that have  affected the market price for many  companies and which
often have been unrelated to the operating performance of these companies. These
broad  market  fluctuations  may  adversely  affect  the  market  price  of  our
securities.

         The trading price of our common stock is below $5.00 per share. As long
as the trading price of our common stock remains below $5.00 per share,  trading
in our common stock is subject to the  requirements  of certain  rules under the
Exchange Act which require additional disclosure by broker-dealers in connection
with any trades  generally  involving any non-NASDAQ  equity security that has a
market price of less than $5.00 per share,  subject to certain exceptions.  Such
rules  require  the  delivery,  prior  to  any  penny  stock  transaction,  of a



                                       13
<PAGE>

disclosure  schedule explaining the penny stock market and the associated risks,
and impose various sales practice  requirements on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors. For
these types of transactions,  the broker-dealer must make a special  suitability
determination  for the  purchaser  and have  received  the  purchaser's  written
consent to the  transaction  prior to sale. The additional  burdens imposed upon
broker-dealers by such requirements may discourage broker-dealers from effecting
transactions  in our  common  stock,  which  could  severely  limit  the  market
liquidity of our common stock.

         We  may   experience   adverse   consequences   because   of   required
indemnification of officers and directors.

         Provisions of our Articles of Incorporation  and Bylaws provide that we
will  indemnify  any director and officer as to those  liabilities  and on those
terms and  conditions  to the  fullest  extent  of Texas  law.  Further,  we may
purchase and maintain  insurance on behalf of any such persons whether or not we
would have the power to  indemnify  such person  against the  liability  insured
against.  The  foregoing  could  result in  substantial  expenditures  by us and
prevent any recovery  from our  officers,  directors,  agents and  employees for
losses incurred by us as a result of their actions.  Further,  the SEC takes the
position that  indemnification  against  liability  under the  Securities Act is
against the public policy as expressed in the Securities Act, and is, therefore,
unenforceable.

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

         Provisions  of Texas law and our Articles of  Incorporation  and Bylaws
may have the effect of delaying or preventing a change in control or acquisition
of our Company.  Our Articles of Incorporation and Bylaws include provisions for
a classified Board of Directors  (although we do not currently have a classified
board),  "blank check"  preferred  stock (the terms of which may be fixed by our
Board  of  Directors  without   shareholder   approval),   purported  limits  on
shareholder  action  by  written  consent  in lieu  of a  meeting,  and  certain
procedural  requirements governing shareholder meetings.  These provisions could
have the effect of delaying or preventing a change in control of our Company.

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

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

         We may not have satisfactory title to our properties.

         Our contract land  professionals  have reviewed  title records or other
title  review  materials   relating  to  substantially   all  of  our  producing
properties.   The  title  investigation  performed  by  us  prior  to  acquiring
undeveloped  properties is thorough, but less rigorous than that conducted prior
to drilling, consistent with industry standards. We believe we have satisfactory
title to all our producing  properties in accordance  with  standards  generally
accepted in the oil and gas industry.  Our  properties  are subject to customary
royalty  interests,  liens incident to operating  agreements,  liens for current
taxes and other burdens,  which we believe do not materially  interfere with the
use of or affect the value of such properties.  At June 30, 2005, our leaseholds
for some of our net acreage were being kept in force by virtue of  production on
that acreage in paying  quantities.  The remaining net acreage was held by lease
rentals and similar  provisions  and requires  production  in paying  quantities
prior to expiration of various time periods to avoid lease termination.



                                       14
<PAGE>

         We expect to make  acquisitions  of oil and gas properties from time to
time  subject to available  resources.  In making an  acquisition,  we generally
focus  most  of  our  title  and  valuation  efforts  on  the  more  significant
properties.  It is  generally  not  feasible  for us to  review  in-depth  every
property we purchase and all records with respect to such  properties.  However,
even an in-depth  review of properties  and records may not  necessarily  reveal
existing or potential problems,  nor will it permit us to become familiar enough
with the  properties  to  assess  fully  their  deficiencies  and  capabilities.
Evaluation of future  recoverable  reserves of oil and gas, which is an integral
part  of  the  property  selection  process,  is a  process  that  depends  upon
evaluation of existing geological,  engineering and production data, some or all
of which may prove to be unreliable or not indicative of future performance.  To
the extent the seller  does not  operate  the  properties,  obtaining  access to
properties and records may be more difficult. Even when problems are identified,
the seller may not be willing or financially able to give contractual protection
against  such  problems,  and we may  decide to assume  environmental  and other
liabilities in connection with acquired properties.

         We are subject to various  governmental  regulations which may cause us
to incur substantial costs.

         Our  operations  are affected  from time to time in varying  degrees by
political  developments and federal,  state and local laws and  regulations.  In
particular,  oil and gas  production  and  related  operations  are or have been
subject to price controls,  taxes and other laws and regulations relating to the
oil and gas  industry.  Failure  to comply  with such laws and  regulations  can
result  in  substantial  penalties.  The  regulatory  burden  on the oil and gas
industry  increases  our cost of doing  business and affects our  profitability.
Although we believe we are in substantial  compliance  with all applicable  laws
and  regulations,  because such laws and regulations  are frequently  amended or
reinterpreted,  we are unable to predict the future cost or impact of  complying
with such laws and regulations.

         Sales of natural gas by us are not regulated and are generally  made at
market  prices.  However,  the Federal  Energy  Regulatory  Commission  ("FERC")
regulates  interstate natural gas transportation  rates and service  conditions,
which  affect  the  marketing  of  natural  gas  produced  by us, as well as the
revenues  received by us for sales of such production.  Sales of our natural gas
currently are made at uncontrolled market prices, subject to applicable contract
provisions  and price  fluctuations  that  normally  attend  sales of  commodity
products.

         Since  the  mid-1980's,  the  FERC  has  issued  a  series  of  orders,
culminating  in Order  Nos.  636,  636-A  and  636-B  ("Order  636"),  that have
significantly altered the marketing and transportation of natural gas. Order 636
mandated  a  fundamental   restructuring   of  interstate   pipeline  sales  and
transportation service,  including the unbundling by interstate pipelines of the
sale,  transportation,  storage  and other  components  of the  city-gate  sales
services such  pipelines  previously  performed.  One of the FERC's  purposes in
issuing the orders was to increase  competition within all phases of the natural
gas industry. Order 636 and subsequent FERC orders issued in individual pipeline
restructuring  proceedings have been the subject of appeals, and the courts have
largely upheld Order 636.  Because  further review of certain of these orders is
still  possible,  and other  appeals may be pending,  it is difficult to exactly
predict the  ultimate  impact of the orders on us and our natural gas  marketing
efforts.  Generally,  Order 636 has  eliminated  or  substantially  reduced  the
interstate  pipelines'  traditional  role as wholesalers of natural gas, and has
substantially increased competition and volatility in natural gas markets.

         While  significant   regulatory  uncertainty  remains,  Order  636  may
ultimately enhance our ability to market and transport our natural gas, although
it may  also  subject  us to  greater  competition,  more  restrictive  pipeline
imbalance  tolerances  and greater  associated  penalties  for violation of such
tolerances.



                                       15
<PAGE>

         The FERC has announced several important  transportation-related policy
statements and proposed rule changes,  including the appropriate manner in which
interstate  pipelines  release capacity under Order 636 and, more recently,  the
price which shippers can charge for their  released  capacity.  In addition,  in
1995, the FERC issued a policy statement on how interstate natural gas pipelines
can recover the costs of new  pipeline  facilities.  In January  1997,  the FERC
issued a policy statement and a request for comments concerning  alternatives to
its traditional  cost-of-service rate making methodology.  A number of pipelines
have  obtained  FERC  authorization  to  charge  negotiated  rates  as one  such
alternative.  While any additional  FERC action on these matters would affect us
only indirectly,  these policy statements and proposed rule changes are intended
to further  enhance  competition in natural gas markets.  We cannot predict what
action  the FERC will take on these  matters,  nor can we  predict  whether  the
FERC's actions will achieve its stated goal of increasing competition in natural
gas  markets.  However,  we do not  believe  that we will be treated  materially
differently  than  other  natural  gas  producers  and  marketers  with which we
compete.

         The price we receive  from the sale of oil is  affected  by the cost of
transporting  such  products  to market.  Effective  January  1, 1995,  the FERC
implemented regulations establishing an indexing system for transportation rates
for oil  pipelines,  which,  generally,  would  index such  rates to  inflation,
subject to certain conditions and limitations.  These regulations could increase
the cost of transporting oil by interstate  pipelines,  although the most recent
adjustment  generally  decreased  rates.  These  regulations have generally been
approved on  judicial  review.  We are not able to predict  with  certainty  the
effect, if any, of these regulations on its operations. However, the regulations
may increase transportation costs or reduce wellhead prices for oil.

         The State of Texas and many other states  require  permits for drilling
operations,  drilling bonds and reports  concerning  operations and impose other
requirements relating to the exploration for and production of oil and gas. Such
states  also have  statutes  or  regulations  addressing  conservation  matters,
including  provisions for the  unitization or pooling of oil and gas properties,
the  establishment  of maximum rates of production from wells and the regulation
of spacing, plugging and abandonment of such wells. The statutes and regulations
of certain  states limit the rate at which oil and gas can be produced  from our
properties.   However,  we  do  not  believe  we  will  be  affected  materially
differently by these statutes and regulations than any other similarly  situated
oil and gas company.

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

         Our  operations  and  properties  are subject to extensive and changing
federal,  state  and  local  laws  and  regulations  relating  to  environmental
protection,  including the generation,  storage,  handling and transportation of
oil and gas and the discharge of materials into the environment, and relating to
safety and health. The recent trend in environmental  legislation and regulation
generally is toward  stricter  standards,  and this trend will likely  continue.
These laws and  regulations  may  require the  acquisition  of a permit or other
authorization  before  construction or drilling  commences and for certain other
activities;  limit or prohibit  construction,  drilling and other  activities on
certain lands lying within  wilderness  and other  protected  areas;  and impose
substantial liabilities for pollution resulting from our operations. The permits
required for our various operations are subject to revocation,  modification and
renewal  by  issuing  authorities.  Governmental  authorities  have the power to
enforce compliance with their regulations,  and violations are subject to fines,
penalties or  injunctions.  In the opinion of management,  we are in substantial
compliance with current applicable  environmental  laws and regulations,  and we
have no material  commitments  for capital  expenditures to comply with existing
environmental requirements. Nevertheless, changes in existing environmental laws
and regulations or in interpretations thereof could have a significant impact on
us. The impact of such changes, however, would not likely be any more burdensome
to us than to any other similarly situated oil and gas company.



                                       16
<PAGE>

         The Comprehensive Environmental Response,  Compensation,  and Liability
Act ("CERCLA"), also known as the "Superfund" law, and similar state laws impose
liability,  without regard to fault or the legality of the original conduct,  on
certain  classes of  persons  that are  considered  to have  contributed  to the
release of a "hazardous  substance" into the environment.  These persons include
the owner or operator of the disposal  site or sites where the release  occurred
and  companies  that  disposed or  arranged  for the  disposal of the  hazardous
substances  found at the site.  Persons who are or were responsible for releases
of  hazardous  substances  under  CERCLA  may be  subject  to joint and  several
liability for the costs of cleaning up the hazardous  substances  that have been
released into the environment and for damages to natural resources. Furthermore,
neighboring  landowners  and other third  parties  may file claims for  personal
injury and property damage allegedly caused by the hazardous substances released
into the environment.

         We  generate  typical  oil and gas field  wastes,  including  hazardous
wastes that are subject to the federal  Resources  Conservation and Recovery Act
and comparable state statutes. The United States Environmental Protection Agency
and various  state  agencies  have limited the approved  methods of disposal for
certain  hazardous  and  non-hazardous  wastes.   Furthermore,   certain  wastes
generated  by our  oil  and  gas  operations  that  are  currently  exempt  from
regulation as  "hazardous  wastes" may in the future be designated as "hazardous
wastes," and  therefore be subject to more  rigorous  and costly  operating  and
disposal requirements.

         The Oil  Pollution  Act ("OPA")  imposes a variety of  requirements  on
responsible  parties for onshore and offshore oil and gas facilities and vessels
related to the prevention of oil spills and liability for damages resulting from
such spills in waters of the United States. The "responsible party" includes the
owner or  operator of an onshore  facility or vessel or the lessee or  permittee
of, or the holder of a right of use and easement  for, the area where an onshore
facility is located.  OPA assigns  liability to each  responsible  party for oil
spill removal costs and a variety of public and private damages from oil spills.
Few  defenses  exist to the  liability  for oil spills  imposed by OPA. OPA also
imposes financial  responsibility  requirements.  Failure to comply with ongoing
requirements  or  inadequate   cooperation  in  a  spill  event  may  subject  a
responsible party to civil or criminal enforcement actions.

         We own or lease  properties  that for many years have  produced oil and
gas. We also own natural gas  gathering  systems.  It is not  uncommon  for such
properties to be contaminated with hydrocarbons.  Although we or previous owners
of these  interests  may have used  operating and disposal  practices  that were
standard in the industry at the time, hydrocarbons or other wastes may have been
disposed  of or  released  on or  under  the  properties  or on or  under  other
locations where such wastes have been taken for disposal.  These  properties may
be subject to federal or state  requirements that could require us to remove any
such wastes or to remediate the resulting  contamination.  All of our properties
are operated by third parties over whom we have limited control. Notwithstanding
our lack of control  over  properties  operated  by others,  the  failure of the
previous owners or operators to comply with applicable environmental regulations
may, in certain circumstances, adversely impact us.

         We  may  be  responsible  for  additional   costs  in  connection  with
abandonment of properties.

         We are responsible for payment of plugging and abandonment costs on its
oil  and  gas  properties  pro  rata  to  our  working  interest.  Based  on our
experience, we anticipate that the ultimate aggregate salvage value of lease and
well  equipment  located on our  properties  will exceed the costs of abandoning
such properties. There can be no assurance,  however, that we will be successful
in avoiding additional expenses in connection with the abandonment of any of our
properties.  In addition,  abandonment  costs and their timing may change due to
many factors,  including actual production results,  inflation rates and changes
in environmental laws and regulations.



                                       17
<PAGE>

GLOSSARY OF OIL AND GAS TERMS

         The following are  abbreviations and definitions of terms commonly used
in the oil and gas industry that are used in this Report.

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

         "BOE" means barrels of oil  equivalent;  converting  volumes of natural
gas to oil equivalent volumes using a ratio of six Mcf of natural gas to one Bbl
of oil.

         "BTU" means  British  Thermal  Units.  British  Thermal  Unit means the
quantity of heat required to raise the  temperature of one pound of water by one
degree Fahrenheit.

         "Completion"  means the  installation  of permanent  equipment  for the
production of oil or gas.

         "Development  Well" means a well  drilled  within the proved area of an
oil or gas  reservoir  to the  depth  of a  stratigraphic  horizon  known  to be
productive.

         "Dry  Hole"  or  "Dry  Well"  means a well  found  to be  incapable  of
producing hydrocarbons in sufficient quantities such that proceeds from the sale
of such production exceed production expenses and taxes.

         "Exploratory  Well" means a well drilled to find and produce oil or gas
reserves not classified as proved, to find a new production reservoir in a field
previously  found to be  productive  of oil or gas in  another  reservoir  or to
extend a known reservoir.

         "Farm-Out" means an agreement  pursuant to which the owner of a working
interest  in an oil and gas lease  assigns  the  working  interest  or a portion
thereof to another party who desires to drill on the leased acreage.  Generally,
the  assignee  is  required  to  drill  one or more  wells  in order to earn its
interest in the acreage.  The assignor usually retains a royalty or reversionary
interest in the lease.  The interest  received by an assignee is a "farm-in" and
the assignor issues a "farm-out."

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

         "Gas" means natural gas.

         "Gross" when used with  respect to acres or wells,  refers to the total
acres or wells in which we have a working interest.

         "Infill  Drilling"  means  drilling  of an  additional  well  or  wells
provided for by an existing spacing order to more adequately drain a reservoir.

         "MCF" means thousand cubic feet.

         "Net" when used with  respect to acres or wells,  refers to gross acres
or wells multiplied,  in each case, by the percentage  working interest owned by
the Company.

         "Net  Production"  means  production  that is owned by the Company less
royalties and production due others.



                                       18
<PAGE>

         "Operator"  means  the  individual  or  company   responsible  for  the
exploration, development and production of an oil or gas well or lease.

         "Present  Value" ("PV") when used with respect to oil and gas reserves,
means the estimated future gross revenues to be generated from the production of
proved reserves  calculated in accordance with the guidelines of the SEC, net of
estimated  production and future development costs, using prices and costs as of
the  date of  estimation  without  future  escalation  (except  to the  extent a
contract specifically provides otherwise), without giving effect to non-property
related  expenses  such as general and  administrative  expenses,  debt service,
future  income tax expense and  depreciation,  depletion and  amortization,  and
discounted using an annual discount rate of 10%.

         "Productive  Wells" or "Producing Wells" consist of producing wells and
wells capable of production, including wells waiting on pipeline connections.

         "Proved  Developed  Reserves" means reserves that can be expected to be
recovered through existing wells with existing  equipment and operating methods.
Additional oil and gas expected to be obtained  through the application of fluid
injection or other improved  recovery  techniques for  supplementing the natural
forces and mechanisms of primary recovery will be included as "proved  developed
reserves"  only after  testing by a pilot  project or after the  operation of an
installed  program has confirmed  through  production  response  that  increased
recovery will be achieved.

         "Proved  Reserves"  means  the  estimated  quantities  of crude oil and
natural gas which upon analysis of geological and  engineering  data appear with
reasonable  certainty to be  recoverable  in future years from known  reservoirs
under existing economic and operating  conditions,  i.e., prices and costs as of
the date the  estimate  is made.  Prices  include  consideration  of  changes in
existing  prices  provided  only  by  contractual   arrangements,   but  not  on
escalations based upon future conditions.

         (i)      Reservoirs are considered  proved if either actual  production
                  or conclusive formation tests support economic  producibility.
                  The area of a reservoir  considered  proved  includes (A) that
                  portion  delineated by drilling and defined by gas-oil  and/or
                  oil-water contacts,  if any; and (B) the immediately adjoining
                  portions not yet drilled,  but which can be reasonably  judged
                  as   economically   productive   on  the  basis  of  available
                  geological and engineering data. In the absence of information
                  on fluid contacts,  the lowest known structural  occurrence of
                  hydrocarbons controls the lower proved limit of the reservoir.

         (ii)     Reserves   which   can  be   produced   economically   through
                  application  of improved  recovery  techniques  (such as fluid
                  injection)  are included in the "proved"  classification  when
                  successful testing by a pilot project,  or the operation of an
                  installed  program in the reservoir,  provides support for the
                  engineering  analysis  on which the  project  or  program  was
                  based.

         (iii)    Estimates of proved reserves do not include the following: (A)
                  oil that may become  available  from known  reservoirs  but is
                  classified Separately as "indicated additional reserves";  (B)
                  crude oil and natural gas, the recovery of which is subject to
                  reasonable   doubt  because  of  uncertainty  as  to  geology,
                  reservoir  characteristics or economic factors;  (C) crude oil
                  and natural gas that may occur in undrilled prospects; and (D)
                  crude  oil and  natural  gas  that may be  recovered  from oil
                  shales, coal, gilsonite and other such resources.

         "Proved  Undeveloped  Reserves"  means reserves that are recovered from
new wells on undrilled acreage,  or from existing wells where a relatively major
expenditure is required for completion.  Reserves on undrilled  acreage shall be
limited to those drilling units offsetting  productive units that are reasonably



                                       19
<PAGE>

certain of production  when drilled.  Proved  reserves for other undrilled units
can be claimed only where it can be  demonstrated  with  certainty that there is
continuity  of  production  from the  existing  productive  formation.  Under no
circumstances  should estimates for proved undeveloped  reserves be attributable
to any acreage for which an  application  of fluid  injection or other  improved
recovery  technique is  contemplated,  unless such  techniques  have been proved
effective by actual tests in the area and in the same reservoir.

         "Recompletion"  means the completion for production of an existing well
bore in  another  formation  from  that in which  the  well has been  previously
completed.

         "Reserves" means proved reserves.

         "Reservoir"  means  a  porous  and  permeable   underground   formation
containing a natural  accumulation of producible oil and/or gas that is confined
by impermeable  rock or water barriers and is individual and separate from other
reservoirs.

         "Royalty"  means an  interest  in an oil and gas lease  that  gives the
owner of the interest the right to receive a portion of the production  from the
leased acreage (or of the proceeds of the sale thereof),  but generally does not
require the owner to pay any portion of the costs of drilling or  operating  the
wells on the leased  acreage.  Royalties  may be either  landowner's  royalties,
which are  reserved by the owner of the leased  acreage at the time the lease is
granted, or overriding royalties,  which are usually reserved by an owner of the
leasehold in connection with a transfer to a subsequent owner.

         "2-D  Seismic"  means  an  advanced   technology   method  by  which  a
cross-section of the earth's subsurface is created through the interpretation of
reflecting seismic data collected along a single source profile.

         "3-D  Seismic"  means an  advanced  technology  method by which a three
dimensional   image  of  the   earth's   subsurface   is  created   through  the
interpretation  of reflection  seismic data  collected  over a surface grid. 3-D
seismic surveys allow for a more detailed  understanding  of the subsurface than
do  conventional  surveys  and  contribute  significantly  to  field  appraisal,
development and production.

         "Working Interest" means an interest in an oil and gas lease that gives
the owner of the  interest the right to drill for and produce oil and gas on the
leased  acreage and  requires  the owner to pay a share of the costs of drilling
and production  operations.  The share of production to which a working interest
owner is  entitled  will  always be  smaller  than the  share of costs  that the
working  interest owner is required to bear,  with the balance of the production
accruing to the owners of royalties.

         "Workover"  means operations on a producing well to restore or increase
production.








                                       20
<PAGE>

Item 2.  Description of Properties.

         See "Description of Business and Properties."

Item 3.  Legal Proceedings.

         The Company had filed suit in the 29th Judicial  District Court in Palo
Pinto County,  Texas, styled "Roseland Oil and Gas, Inc. v. William Vandever, et
al," bringing suit against Clifford Kees,  William Vandever and various persons,
seeking a judicial  determination that all grants of preferential  rights in the
Reagan Section 11 and 12 are void. This lawsuit was filed on April 26, 1999. All
section 11 preferential  rights were returned to the Company on or about January
2002.  However,  Clifford  Kees was to retain his 1% override  interest in these
Reagan Lease Sections.

         Clifford Kees then moved to trial against on the claim of attorney fees
owed to him  for the  prosecution  of this  lawsuit.  The  trial  was  heard  on
September 25, 2002,  with Kees  requesting in excess of  $200,000.00 in attorney
fees and costs.  In June of 2003,  The Court  re-opened the trial as to attorney
fees and costs, to allow Kees to put on additional evidence,  and such trial was
re-convened on June 19, 2003.

         On July 15, 2003,  the Court entered a Judgment in favor of Kees and as
against the Company for  approximately  $112,000.00.  The Company  believed  the
Judgment should not stand and appealed the Judgment. On or about,  September 17,
2004,  the Eastland  Court Of Appeals  issued its ruling,  modifying the amounts
owed by the Company under the Judgment to $59,000.00.

         The Company  was been denied a  Re-Hearing  as to  clarification  and a
further reduction of the Judgment.  The Company filed a Petition For Review with
the Texas Supreme Court that was Denied on or about January 21, 2005.

         The Company  had put into the  registry of the Court a cash bond in the
amount of $92,500.  On or about March 14,  2005,  the Trial Court issued a final
ruling which  ordered for Cubic to pay out to Kees  $83,725.78  of the monies in
the registry of the Court,  with  $8,774.22 of the monies in the registry of The
Court refunded to Cubic.

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

         Not Applicable.
















                                       21
<PAGE>

                                     PART II

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

Common Stock and Market

         The Company is traded on the OTC BB, with the trading symbol "QBIK".

         At June  30,  2005,  there  were  35,161,976  shares  of  common  stock
outstanding held by approximately 874 shareholders of record.

         In the fall of 1999,  Roseland Oil and Gas,  Inc. was merged into Cubic
Energy,  Inc., a Texas corporation and a wholly owned subsidiary of Roseland Oil
and Gas, Inc. Under its Articles of Incorporation,  Cubic is authorized to issue
one class of 50,000,000 common shares,  par value $0.05 per share, and one class
of 10,000,000  preferred  shares,  par value $0.01 per share. An exchange of one
common share of Roseland for one common  share of Cubic was  effectuated  in the
merger.  At the time of the  merger,  and as of June  30,  2005,  there  were no
preferred shares of the Company outstanding.

Common Stock Price Range

         The following table shows, for the periods indicated, the range of high
and low bid  information  for our common  stock as  reported  by the OTC BB. Any
market for our common stock should be considered  sporadic,  illiquid and highly
volatile. Prices reflect inter-dealer quotations,  without adjustment for retail
markup, markdowns or commissions, and may not represent actual transactions. Our
common stock's trading range during the periods indicated is as follows:

         ------------------------------------------------- ---------- ----------
         Fiscal Year 2003                                     High        Low
         ------------------------------------------------- ---------- ----------
         1st quarter                                          $0.52      $0.30
         ------------------------------------------------- ---------- ----------
         2nd quarter                                          $0.49      $0.18
         ------------------------------------------------- ---------- ----------
         3rd quarter                                          $0.75      $0.28
         ------------------------------------------------- ---------- ----------
         4th quarter                                          $0.45      $0.25
         ------------------------------------------------- ---------- ----------


         ------------------------------------------------- ---------- ----------
         Fiscal Year 2004                                     High        Low
         ------------------------------------------------- ---------- ----------
         1st quarter                                          $0.45      $0.20
         ------------------------------------------------- ---------- ----------
         2nd quarter                                          $0.30      $0.11
         ------------------------------------------------- ---------- ----------
         3rd quarter                                          $0.60      $0.25
         ------------------------------------------------- ---------- ----------
         4th quarter                                          $1.00      $0.35
         ------------------------------------------------- ---------- ----------


         ------------------------------------------------- ---------- ----------
         Fiscal Year 2005                                     High        Low
         ------------------------------------------------- ---------- ----------
         1st quarter                                          $0.71      $0.30
         ------------------------------------------------- ---------- ----------
         2nd quarter                                          $0.72      $0.40
         ------------------------------------------------- ---------- ----------
         3rd quarter                                          $1.99      $0.85
         ------------------------------------------------- ---------- ----------
         4th quarter                                          $1.75      $1.01
         ------------------------------------------------- ---------- ----------



                                       22
<PAGE>

Dividend Policy

         We have  neither  declared  nor paid any  dividends on our common stock
since our  inception.  Presently,  we intend to retain our earnings,  if any, to
provide  funds for expansion of our business.  Therefore,  we do not  anticipate
declaring  or paying  cash  dividends  on our  common  stock in the  foreseeable
future.  Any future  dividends will be subject to the discretion of our Board of
Directors  and will  depend  upon,  among other  things,  future  earnings,  our
operating and financial  condition,  our capital  requirements,  debt obligation
agreements, general business conditions and other pertinent facts.

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

         The following  discussion is intended to assist in an  understanding of
the Company's  historical  financial position and results of operations for each
year in the  two-year  period  ended  June 30,  2005.  The  Company's  Financial
Statements and notes thereto included  elsewhere in this Report contain detailed
information  that  should  be  referred  to in  conjunction  with the  following
discussion.

General

         The Company's future results of operations and growth are substantially
dependent  upon (i) its  ability  to acquire  or find and  successfully  develop
additional oil and gas reserves and (ii) the prevailing  prices for oil and gas.
We have an  inventory  of  exploration  drilling  locations  to pursue after the
fiscal year ending June 30, 2005.  If we are unable to  economically  acquire or
find  significant new reserves for development and  exploitation,  the Company's
oil and gas production, and thus its revenues, would likely decline gradually as
its reserves are produced.  In addition,  oil and gas prices are dependent  upon
numerous factors beyond the Company's control,  such as economic,  political and
regulatory  developments and competition  from other sources of energy.  The oil
and gas markets have  historically  been very volatile,  and any significant and
extended decline in the price of oil or gas would have a material adverse effect
on the Company's financial condition and results of operations, and could result
in a reduction  in the  carrying  value of the  Company's  proved  reserves  and
adversely affect its access to capital.

THIS  MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OR  PLAN  OF  OPERATION  CONTAINS
FORWARD-LOOKING  STATEMENTS  WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED.  ACTUAL RESULTS COULD DIFFER  MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING  STATEMENTS AS A RESULT OF CERTAIN FACTORS  DESCRIBED HEREIN AND
IN OTHER DOCUMENTS.  READERS SHOULD CAREFULLY REVIEW THE RISK FACTORS  DESCRIBED
IN THIS ANNUAL REPORT AND THE DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH
THE SECURITIES AND EXCHANGE COMMISSION.

         The reserve  report from NSA showed a dramatic  downward  variance from
the  expectations  of  management  for the  Company in proved  reserves,  as NSA
re-classified  some thought to be proved  reserves as possible or probable.  The
Company and its  management  believe that the  significance  of this variance in
reserves is overridden in the investor  confidence  inspired by our  association
with NSA.  Due to a  significant  price  increase  for both oil and  natural gas
subsequent  to fiscal year end,  this  decrease in reserves was not subject to a
ceiling test write-down.




                                       23
<PAGE>

RESULTS OF OPERATIONS

Comparison of Fiscal 2005 to Fiscal 2004 Revenues

HISTORICALLY PRESENTED:

         OIL AND GAS SALES  increased  13% to  $469,442 in the fiscal year ended
June 30, 2005  ("fiscal  2005") from  $414,741 in the fiscal year ended June 30,
2004 ("fiscal 2004"), due to higher oil and gas prices.

Costs and Expenses

HISTORICALLY PRESENTED:

         PRODUCTION AND OPERATING EXPENSE increased 46% to $273,074 in the year
ended June 30, 2005 ("fiscal 2005") from $186,465 in the year ended June 30,
2004 ("fiscal 2004") due to bringing additional wells on line.

HISTORICALLY PRESENTED:

         DEPRECIATION,  DEPLETION AND AMORTIZATION increased 348% to $364,496 in
fiscal 2005 from  $104,735 in fiscal 2004.  The increase was primarily due to an
increase in costs in the full-cost pool.

HISTORICALLY PRESENTED:

         SELLING,  GENERAL AND  ADMINISTRATIVE  EXPENSE ("G&A") increased 64% to
$394,827 in the year ended June 30, 2005  ("fiscal  2005") from  $240,022 in the
year ended June 30, 2004  ("fiscal  2004")  because  officer  stock  grants were
expensed at a higher average stock price.

HISTORICALLY PRESENTED:

         INTEREST EXPENSE  increased to $193,313 in the year ended June 30, 2005
("fiscal  2005") from $75 in the year ended June 30, 2004 ("fiscal 2004") due to
borrowing $2,635,000 on or about October 1, 2004.

HISTORICALLY PRESENTED:

         GAIN ON SALE OF ASSETS was $0 in the years ended June 30, 2005 ("fiscal
2005") and ended June 30, 2004  ("fiscal  2004")  because no assets were sold in
either year.

Net Income

HISTORICALLY PRESENTED:

         Net loss  increased to reflect a loss of $784,526 in fiscal 2005 from a
loss of  $114,116  in fiscal  2004 as a result of  increased  interest  expense,
increased depreciation, depletion and amortization, and increased expenses.



                                       24
<PAGE>

Liquidity and Capital Resources

Overview

         The Company's primary  financial  resource is its oil and gas reserves.
The Company does not have any credit  facilities  to supplement  its  internally
generated  cash  flow as a  source  of  financing  for its  capital  expenditure
programs.  Product  prices,  over which we have no control,  have a  significant
impact on revenues from production and the value of such reserves and thereby on
the Company's  borrowing  capacity in the event the Company determines to borrow
funds. Within the confines of product pricing,  the Company must be able to find
and develop or acquire oil and gas reserves in a cost effective  manner in order
to generate  sufficient  financial  resources through internal means to complete
the financing of its capital expenditure program.

         The Company had net working capital of $576,294 at June 30, 2005.

         The following  discussion  sets forth the  Company's  current plans for
capital  expenditures in fiscal 2006, and the expected capital  resources needed
to finance such plans.

Capital Expenditures

         At the present time, the Company anticipates an increase to spending on
exploration   and  development   activities   during  fiscal  2006  through  the
development  of  strategic  alliances  that will  position  the  Company to take
advantage of possible  acquisition  objectives  that will fit into the Company's
core activity areas of oil and gas production.

         The Company  will  increase its planned  activities  for fiscal 2006 if
product prices remain strong and if we are able to obtain the capital  resources
necessary to finance such activities. See "BUSINESS - DRILLING,  EXPLORATION AND
PRODUCTION ACTIVITIES."

Working Capital and Cash Flow

HISTORICALLY PRESENTED:

         During  fiscal 2005,  the Company  generated  cash flow from  operating
activities of $(185,085).

         The Company's  working  capital  increased to $576,294 at June 30, 2005
from $143,031 at June 30, 2004,  due to a balance  remaining from the $2,635,000
borrowed on or about October 1, 2004.

Capital Resources

         The Company  cannot be certain  that the funds which will be  available
from completed and pending sales of assets,  and as combined with operating cash
flow,  will be adequate to fund the projected  capital  expenditures  for fiscal
2006. However,  because future cash flows and the availability of borrowings are
subject  to a number of  variables,  such as  prevailing  prices of oil and gas,
actual production from existing and newly-completed wells, the Company's success
in developing and producing new reserves,  and the  uncertainty  with respect to
the amount of funds which may  ultimately  be required to finance the  Company's
exploration  program,  there  can be no  assurance  that the  Company's  capital
resources  will  be  sufficient  to  sustain  the  Company's   exploratory   and
development activities.



                                       25
<PAGE>

         If funds  available  from asset sales,  and as combined with  operating
cash  flow,  are not  sufficient  to fund  its  anticipated  levels  of  capital
expenditures,  the Company will be required to seek alternative forms of capital
resources, including the sale of other assets and the issuance of debt or equity
securities.  Although  the  Company  believes  it will be able to  obtain  funds
pursuant to one or more of these alternatives,  if needed,  management cannot be
assured that any such  capital  resources  will be available to the Company.  If
additional  capital  resources  are  needed,  but we are  unable to obtain  such
capital  resources on a timely basis,  the Company may not be able to maintain a
level of  liquidity  sufficient  to meet its  obligations  as they  mature or to
implement its capital expenditures or develop its assets.

Inflation

         Although the level of inflation  affects certain of the Company's costs
and  expenses,  inflation  did not have a  significant  effect on the  Company's
results of operations during fiscal 2004.

Information Systems For The Year 2000

         The  Company  completed  implementation  of a "Year  2000  Plan" in the
fiscal  year ended  June 30,  2000;  and  through  June 30,  2005,  the  Company
experienced  no  effects  of its  information  systems  from  "Y2K."  Though not
expected, it is still possible that "Y2K" issues could have a material effect on
the operations, productivity, and profitability of the Company.

Item 7.  Financial Statements.

         The Report of  Independent  Accountants,  Financial  Statements and any
supplementary  financial  data  required by this Item are set forth on pages F-1
through F-20 of this Report and are incorporated herein by reference.

Item  8.  Changes  In and  Disagreements  With  Accountants  on  Accounting  and
Financial Disclosure.

         None.

Item 8A.  Controls and Procedures.

         Our principal executive and financial officer have concluded,  based on
their  evaluation as of the end of the period  covered by this report,  that our
disclosure  controls and  procedures  under Rule 13a-15 of the Exchange Act, are
effective to ensure that  information we are required to disclose in the reports
we file or submit under the Exchange Act is recorded, processed,  summarized and
reported  within the time periods  specified  in the SEC's rules and forms,  and
include  controls  and  procedures  designed to ensure that  information  we are
required  to  disclose  in such  reports  is  accumulated  and  communicated  to
management,   including  our  principle  executive  and  financial  officer,  as
appropriate to allow timely decisions regarding required disclosure.  Subsequent
to our  evaluation,  there were no significant  changes in internal  controls or
other factors that could significantly affect these internal controls.

         We  maintain a system of internal  control  over  financial  reporting.
There has been no change in our internal  control over financial  reporting that
occurred  during our fourth fiscal quarter that has materially  affected,  or is
reasonably  likely to materially  affect,  our internal  control over  financial
reporting.

Item 8B.  Other Information.

         None.




                                       26
<PAGE>

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
        with Section 16(a) of the Exchange Act.

         The  following  table sets forth the name and age of each  director and
executive  officer and the period  during which each has served as a director of
the Company:

Directors and Executive Officers

         The  following  table  provides  information  concerning  each  of  our
executive officers and directors as of June 30, 2005:
                                                                        Director
            Name         Age            Position with Cubic              Since
            ----         ---            -------------------              -----

Calvin A. Wallen, III     50    Chairman of the  Board, President and     1997
                                Chief Executive Officer
Jon S. Ross               41    Director, Chief Financial Officer and     1998
                                Secretary
Gene C. Howard            77    Director                                  1991
Herbert A. Bayer          55    Director                                  2003
Bob L. Clements           63    Director                                  2004
Alexander Montano         34    Director                                  2004

         CALVIN A. WALLEN,  III has served as the President and Chief  Executive
Officer of the  Company  since  December  1997,  and as Chairman of the Board of
Directors since June 1999. Mr. Wallen has over 20 years of experience in the oil
and gas industry working as a drilling and petroleum  engineer.  He was employed
by Superior Oil and various other drilling contractors  including Resource,  Tom
Brown and Rowan  International.  He assisted in the design and  construction  of
several  land  rigs  with  advanced   drilling  systems  and  has  domestic  and
international  experience  in  drilling  engineering.  While  employed  by Rowan
International,  Mr. Wallen gained  experience in drilling high angle directional
wells at Prudhoe Bay on contract to Arco. In 1982,  Mr.  Wallen began  acquiring
and developing  oil and gas  properties,  forming a production  company that has
evolved into Tauren Exploration,  Inc. Mr. Wallen did his undergraduate  studies
at Texas A&M University in College Station, Texas.

         JON S. ROSS has served as a director  of the  Company  since April 1998
and as Secretary since November 1998. Since 1989, Mr. Ross has been a practicing
attorney in Dallas,  Texas  specializing  in the  representation  of over eighty
corporate  entities  within  the past  fifteen  years.  He has served on several
community and  not-for-profit  committees and Boards and has been asked to speak
to corporate and civic  leaders on a variety of corporate  law topics.  Mr. Ross
graduated from St. Mark's School of Texas with honors in 1982 and graduated from
the University of Texas at Austin in 1986 with a B.B.A.  in Accounting.  He then
graduated  from the  University of Texas School of Law in 1989 attaining a Juris
Doctorate degree.

         GENE  C.  HOWARD  is the  Senior  Partner  of the law  firm of  Howard,
Widdows, and Bufogle,  P.C. of Tulsa, Oklahoma and has been engaged primarily in
the private practice of law over the past  thirty-five  years. Mr. Howard served
in the Oklahoma  State Senate from 1964 through 1982 and was  President  Pro Tem
from 1975 through 1981.  In addition,  he served as the Chairman of the Board of
Farmers and  Exchange  Bank from 1972 through 1991 and on the Board of Directors
of Local  Federal  Bank of  Oklahoma.  Mr.  Howard is a Director of the Oklahoma
State  Education and  Employment  Group  Insurance  Board and presently  acts as
Chairman. Mr. Howard served as Director of EntreCap and Hinderliter corporations
from 1991 to August of 1992.  He is also  Chairman of the Board of  Philadelphia
Mortgage Trust ("PMT").



                                       27
<PAGE>

         HERBERT A. BAYER has served as a director of Cubic Energy,  Inc.  since
May, 2003. Mr. Bayer is uniquely positioned to help in the growth of the company
and increase  shareholder  value. His career over the last 20 years has lead him
to be the top salesman for ITRON.  He has worked with Investor Owned  utilities,
Government Run Municipalities and Electric  Cooperatives.  He has served as Vice
President  of two  companies  and on Board of  Directors  of a third.  His major
course of study at Indiana  State  University  was Business  Management  and has
broadened his  knowledge  base with  additional  study in courses such as Miller
Heiman Strategic Selling, IBM Management, Dale Carnegie, Professional Management
Techniques,  Contract  Negotiations and Human Relations.  Mr. Bayer is currently
the Director of Client Services for Communications and Information Solutions for
CH2M  HILL,  a  $3.5  billion  world-wide  company.  He  is  working  in  Global
Information  Systems mainly in the Homeland Security market. His work experience
includes  work in  Electronic  Meter  Reading,  Automatic  Meter  Reading,  Load
Research, Internet Applications and Customer Information.

         BOB L.  CLEMENTS  joined the  Company's  board of directors in February
2004. Mr.  Clements was born and raised in Texas.  Mr.  Clements has a degree in
the OPM Program from the Harvard Business  School.  Mr. Clements has been in the
wholesale  food  and  restaurant  business  for  over  thirty  years,  currently
controlling the largest independent  producer of stuffed jalapenos and corn dogs
as well as two successful restaurants in the Rockwall,  Texas area. Mr. Clements
has served and currently serves on a variety of profit and charitable committees
and boards.

         ALEXANDER  MONTANO is  President  of C. K. Cooper & Company,  Inc.,  an
investment  banking boutique.  Mr. Montano has managed the energy practice at C.
K. Cooper & Company,  Inc.  since 1997 and has completed over $500 million worth
of investment banking  transactions during this time. Prior to this, Mr. Montano
was an oil and gas industry analyst,  where he was recognized by several leading
publications,  including Zacks, as a five star analyst,  The Wall Street Journal
in their "Best on The Street" special edition in 2003 and by Starmine  Research.
Prior to 1996, Mr.  Montano was director of Research at  Brookstreet  Securities
where he  specialized in following  early stage energy  issues.  Mr. Montano has
been a recognized speaker at various conferences on energy-related topics and is
a member of the IPAA. Mr. Montano attended the University of Southern California
and Chapman  University.  Mr.  Montano  also serves on the board of directors of
CardioVascular BioThereputics, Inc.

         There  are no  family  relationships  among  any of  the  directors  or
executive  officers  of the  Company.  See  "Certain  Relationships  and Related
Transactions"  for a  description  of  transactions  between the Company and its
directors, executive officers or their affiliates.

Audit Committee; Financial Expert

         The Audit Committee is comprised of Messrs. Howard (Chairman), Clements
and Bayer. All of the members of the Audit Committee are "independent" under the
rules of the SEC. The Board of  Directors,  after  reviewing all of the relevant
facts,  circumstances and attributes, has determined that Mr. Howard is the sole
"audit committee financial expert" on the Audit Committee.

Compliance with Section 16(a) of the Exchange Act

         Section  16(a) of the Exchange Act  requires the  Company's  directors,
executive  officers,  and  holders of more than 10% of the common  stock to file
with the SEC reports of  ownership  changes in ownership  of common  stock.  SEC
regulations require those directors,  executive  officers,  and greater than 10%
shareholders  to furnish the Company with copies of all Section 16(a) forms they
file.



                                       28
<PAGE>

         Based on the Company's review of reports, the Company believes that the
directors,  executive officers,  and greater than 10% shareholders complied with
all applicable Section 16(a) filing requirements.

Code of Ethics

         The Company has adopted a Code of Ethics that applies to its directors,
officers and  employees.  The Company will provide a copy of its Code of Ethics,
without  charge,  to any  stockholder  who makes such  request in writing to the
Company, attention: Secretary.

Item 10.  Executive Compensation.

         The total cash  compensation  for the three fiscal years ended June 30,
2005, for Calvin A. Wallen,  III, the Company's  current Chief Executive Officer
and Jon S. Ross,  the  Company's  current  Secretary  is set forth  below in the
following Summary Compensation Table. The Company has retained a Chief Financial
Officer,  to be  phased  in to  those  duties  by  October  1,  2005.  The  cash
compensation  for the Officers  below did not commence until January 1, 2005. No
other person received cash  compensation in excess of $100,000 during the fiscal
year ended June 30, 2005.

                           Summary Compensation Table

                                           Fiscal       Annual      Other Annual
Name and Principal Position                 Year        Salary      Compensation
---------------------------                 ----        ------      ------------

Calvin A. Wallen, III, President and CEO    2005        $78,000           0
                                            2004           0              0
                                            2003           0              0
Jon S. Ross, Secretary                      2005        $60,000           0
                                            2004           0              0
                                            2003           0              0

         Warrants  were  granted  to an  affiliate  of  Calvin  A.  Wallen,  III
effective January 1, 2002, as described in that agreement attached as an exhibit
to the March 31, 2002, Form 10-QSB, which have all expired.

Stock Grants

         On September 12, 2003, the Directors of Cubic tentatively approved of a
Director and Officer compensation plan as follows: (i) Directors of record as of
June 1, 2003 would receive 24,000  restricted Cubic common shares (16,000 shares
per  year,  multiplied  by 1.5  years)  for  years  of prior  service,  (ii) the
President/CEO  of Cubic would  receive  45,000  restricted  Cubic common  shares
(30,000  share per year,  multiplied  by 1.5 years) for years of prior  service,
(iii) the Secretary of Cubic would receive 22,500 restricted Cubic common shares
(15,000  shares per year,  multiplied  by 1.5 years) for prior years of service,
(iv) going  forward,  Directors  would receive  16,000  restricted  Cubic common
shares per year of service,  (v) going forward,  the President/CEO would receive
30,000  restricted Cubic common shares per year of service,  (vi) going forward,
the Secretary  would receive 15,000  restricted  Cubic common shares per year of
service,  (vii) Audit Committee  members would receive 10,000  restricted  Cubic
common shares per audit, and, (viii) any Compensation  Committee member,  should



                                       29
<PAGE>

one be formed,  would receive 3,000  restricted  Cubic common shares per year of
service. On October 25, 2004, Cubic issued 155,000 common shares of stock to its
Officers and  Directors  pursuant to this plan.  Based on a then market price of
$0.51 per share, Cubic recorded a compensation  expense of $79,050 for the year;
which  expense  is  recorded  in the above  financial  statements  as a selling,
general and administrative expense.

         The  following  compensation  plan was adopted on March 30, 2005,  with
conditional Grants authorized on March 30, 2005 subject to Shareholder approval.
On March 30, 2005, the  Compensation  Committee for Cubic voted and  authorized,
and  then  the  Board  Of  Directors  conditionally  approved,  all  subject  to
shareholder  approval,  these grants, in addition to all other grants previously
issued:  (i) 150,000  un-registered  shares to Calvin  Wallen III,  (ii) 100,000
un-registered  shares to Jon Stuart Ross, (iii) 70,000  un-registered  shares to
Rick Sepulvado,  and (iv) 30,000  un-registered shares to Lindsey Tate Renteria.
Further, the Compensation Committee for Cubic voted and authorized, and then the
Board Of Directors  conditionally approved, all subject to shareholder approval,
Director and Committee  compensation as follows, in addition to all other grants
previously  issued:  (a) $1,000 cash  compensation  per Director for each actual
meeting held,  (b)  reimbursement  for reasonable  and necessary  expenses,  (c)
grants of 25,000 un-registered shares for yearly Director service, (d) grants of
8,000 un-registered  shares for service on the Compensation  Committee,  and (e)
grants of 14,000  un-registered shares for service for upcoming audit committee,
with the chairman to receive grants of 20,000 un-registered shares.

         The Company has not recorded any compensation  cost with respect to the
contingent  issuance of stock  under the  above-referenced  plan  because of the
uncertainty involved in obtaining shareholder  approval.  Compensation cost will
be  recognized  once the plan has been  formally  approved  and the  shares  are
issued.

Pro forma Information Related to Stock Options

         The Company accounts for its stock-based  employee  compensation  plans
under  the  recognition  and  measurement  principles  of APB  Opinion  No.  25,
Accounting for Stock Issued to Employees, and related interpretations.  No stock
based  employee  compensation  cost is reflected  in net income,  as all options
granted under those plans had an exercise  price at least equal to the market of
the underlying common stock on the date of the grant.

Item 11.  Security  Ownership of Certain  Beneficial  Owners and  Management and
          Related Stockholder Matters.

         The  following  table sets forth the number of shares of the  Company's
common stock beneficially owned, as of June 30, 2005 by (i) each person known to
the Company to beneficially  own more than 5% of the common stock of the Company
(the only class of voting  securities now  outstanding),  (ii) each director and
executive  officer,  and (iii) all directors and executive  officers as a group.
Unless otherwise indicated,  the number of shares and percentage of ownership of
common stock for each of the stockholders set forth below assumes that shares of
common stock that the stockholder may acquire within sixty days of June 30, 2005
are outstanding.

                                                                   Approximate
 Name and Address                     Number of Shares          Percent of Class
 ----------------                     ----------------          ----------------

Calvin A. Wallen, III                   9,685,712(1)                 27.6%
9870 Plano Road
Dallas, TX  75238

William Bruggeman                       10,307,303(2)                29.3%
20 Anemone Circle
North Oaks, MN  55127




                                       30
<PAGE>

Gene Howard                              408,245(3)                   1.2%
2402 East 29th St.
Tulsa, OK  74114

                                           302,000                     *
Bob Clements
9870 Plano Road
Dallas, TX  75238
                                         194,287(4)                    *
Herbert Bayer
9870 Plano Road
Dallas, TX  75238
Alexander Montano                         66,000(5)                    *
18300 Von Karman Avenue
Suite 700
Irving, CA  92612

Jon S. Ross                              147,500(6)                    *
9870 Plano Road
Dallas, TX  75238

All officers and directors               10,803,744                  30.8%
as a group (6 persons)

--------------------------------------
* - Less Than One Percent
(1)      Includes 1,641,216 shares held by Tauren  Exploration,  Inc., an entity
         controlled by Mr. Wallen,  includes 500,000 shares held by spouse,  and
         includes 240,000 shares held by minor children.
(2)      Includes  834,000 shares held by Diversified  Dynamics Corp., a company
         controlled  by William  Bruggeman;  includes  120,000  shares  owned by
         Consumer  Products Corp. in which Mr.  Bruggeman's  spouse,  Ruth, is a
         joint  owner;  and  includes  8,913,303  shares held jointly by William
         Bruggeman  &  Ruth   Bruggeman   as  joint   tenants   with  rights  of
         survivorship.
(3)      Includes  322,245 shares are held by Mr.  Howard's  spouse,  Belva,  of
         which Mr. Howard disclaims beneficial ownership.
(4)      Includes  132, 287 shares held with spouse as joint tenants with rights
         of survivorship.
(5)      Includes  55,000  shares held by C. K. Cooper & Company,  Inc. and 1000
         shares held by minor children.
(6)      Includes 3000 shares held by minor children.












                                       31
<PAGE>

Item 12.  Certain Relationships And Related Transactions.

         In December 1997, the Company  entered into a Stock Purchase  Agreement
(the "Agreement") with Calvin A. Wallen, III or his designees, William Bruggeman
and Ruth Bruggeman,  and Diversified  Dynamics,  Inc. (together,  the "Buyers").
Pursuant to the Agreement, the Company issued (i) 7,000,000 shares of its common
stock to  Calvin A.  Wallen,  III;  (ii)  2,500,000  shares  of common  stock to
Earthstock Resources,  Inc., all of the shares of which are owned by Mr. Wallen;
(iii) 2,500,000  shares of common stock to William  Bruggeman and Ruth Bruggeman
as joint tenants with rights of survivorship;  and (iv) 500,000 shares of common
stock  to  Diversified   Dynamics,   which  is  controlled  by  the  Bruggemans,
representing an aggregate of  approximately  71.3% of the issued and outstanding
shares of common stock of the Company,  with the shares issued to Mr. Wallen and
his affiliates  representing  approximately  54.2% of the issued and outstanding
shares of common  stock of the  Company.  In  exchange  for the  issuance of the
Shares,  the Buyers conveyed to the Company the interests in certain oil and gas
properties  owned by the Buyers,  as well as the Buyers' entire  interest in any
contracts,  leases, records and insurance policies affecting such interests (the
"Consideration").  The amount of the  Consideration  was the result of an agreed
negotiation  between the Buyers and the Company.  Prior to the  negotiation  and
execution of the  Agreement,  there were no material  relationships  between the
Company or any  affiliates,  officers or directors  of the  Company,  on the one
hand, and any of the Buyers, or any affiliates,  officers or directors of any of
the Buyers, on the other hand.

         On  December  1, 1997,  the  Company  entered  into a contract  with an
affiliate  controlled by Calvin A. Wallen III, our Chairman of the Board,  Chief
Executive Officer and President,  to provide certain  technical,  administrative
and  management  services  needed  to  conduct  its  business.  The terms of the
contract  provided for  personnel to be  contracted  at current  market rates in
effect at the time the  agreement  was  executed.  In addition,  the offices are
subleased from an affiliate controlled by Mr. Wallen. The monthly amount charged
to the  Company  is based on actual  costs of  materials  and  man-hours  of the
affiliates  that are used pursuant to the terms of the agreement.  As of January
1, 2002, the Company  entered into a favorable  arrangement  with Mr. Wallen for
the  continued  provision of staff and  services on a prorated  and/or as needed
basis.

         On December 10, 1998, the Company entered into an agreement with Tauren
that  provides  for  Tauren to drill on the  Company's  Section 11 in Palo Pinto
County,  Texas.  The  agreement  grants  Tauren  a  farm-out  retaining  a  7.5%
overriding royalty interest.  The agreement also grants the Company preferential
rights in the event that Tauren,  at some later date,  decides to divest part or
all of their  interests  in the drilled  wells.  Tauren is an  affiliate  of Mr.
Wallen.

         On April 27, 2001, the Company  completed an exchange offer pursuant to
which it acquired (i) certain direct  working  interests in producing oil and/or
natural  gas wells (the  "Working  Interests")  and (ii) all of the  outstanding
membership  units  in  four  privately  held  limited  liability  companies  and
approximately  9.85% of the working  interest in another  privately held limited
liability  company,  all  of  which  are  engaged  in  oil  and/or  natural  gas
exploration and production. The Working Interests consist of between 15% and 45%
working  interests in fourteen  (14) wells.  The Working  Interests  are part of
projects operated by Tauren, an independent  energy company,  and Fossil acts as
the operator for some of the  properties.  Mr.  Wallen is the sole  shareholder,
director and officer of Tauren and Fossil. The relationship  between the Company
and each of Tauren and Fossil were  approved by the  disinterested  directors of
the  Company.  The  exchange  offer was made to and was  accepted by the various
individual  holders of the  interests  acquired.  The Working  Interests and the
properties held are located in Texas and Louisiana.  The  consideration  paid to
the  individuals  who accepted the exchange  offer was  determined  based on the
Company's valuation of the reserves underlying the interests acquired. The value



                                       32
<PAGE>

of the Company's common stock for purpose of the exchange offer was deemed to be
$0.50 per share.  In  connection  with the exchange  offer,  the Company  issued
approximately  11,141,256 shares of the Company's common stock. In addition,  as
consideration  for services  rendered with respect to this exchange offer, C. K.
Cooper & Company,  Inc.,  and/or its principals and employees,  received 111,413
shares of the Company's common stock.

         Effective  January 1, 2002, the Company  entered into an Agreement with
Tauren  whereby (i).  Tauren  exchanged  and traded the accounts  receivable  of
$856,712  owed by the Company for 856,712  shares of restricted  Company  common
stock,  (ii) the Company  attained  ground  floor  opportunities  from Tauren to
participate  in Tauren's  prospect  and  project  inventory,  and (iii)  certain
warrants  were issued to Tauren from the Company to acquire  restricted  Company
common stock.  A copy of this Agreement was filed with the Company's Form 10-QSB
for the period ended March 31, 2002.

         In April,  2002,  the Company made the strategic  decision not to renew
the Red Rock Louisiana leaseholds,  which action has had a substantial impact on
the June 30, 2002 income  statement  for the  Company.  Despite the impact,  the
Company  believes  the  decision not to renew the leases will be to the ultimate
benefit of the Company.

         On June 1, 2002,  Tauren assigned certain oil and gas properties to the
Company for de minimis  consideration.  The  Company  already had an interest in
some of the properties assigned for Tauren.

         On or  about  October  1,  2004,  Alexander  Montano,  prior to being a
Director of the Company,  received a commission in connection with the Company's
$2,635,000 debt financing transaction.

         On or about January 11, 2005,  the Company issued  1,531,661  shares of
its  common  stock  to  Caravel   Resources  Energy  Fund  2003-II,   L.P.  (the
"Partnership")  in exchange for a 0.1914575033  working  interest in the Kraemer
24-1 Well,  Desoto  Parish,  Township 14 N, Range 15 W, Section 24 (the "Well").
The Company also issued  468,339  shares of its common stock to Calvin A. Wallen
III, the Company's Chairman of the Board, President and Chief Executive Officer,
in exchange for a 0.0585424967 working interest in the Well.

















                                       33
<PAGE>

Item 13.  Exhibits.

      Exhibit
        No.     Description
      -------   -----------
        3.1     Articles of Incorporation  (incorporated by reference to Exhibit
                3.1 to  the  Registrant's  Form  10-QSB  for  the  period  ended
                September 30, 1999, filed with the SEC on November 23, 1999).

        3.2     Bylaws   (incorporated  by  reference  to  Exhibit  3.2  to  the
                Registrant's  Form  10-KSB for the period  ended June 30,  2000,
                filed with the SEC on September 27, 2000).

        10.1    Stock  Purchase  Agreement,  dated  December 7. 1997,  among the
                Company,  Calvin A. Wallen,  III or his  designees,  Diversified
                Dynamics,  William and Ruth Bruggeman (incorporated by reference
                to  Exhibit  2.1 to the  Company's  Current  Report on Form 8-K,
                filed with the SEC on December 24, 1997).

        10.2    Agreement,  dated as of January 1, 2002, between the Company and
                Tauren Exploration,  Inc.  (incorporated by reference to Exhibit
                10.1 of the Company's 10-QSB, filed with the SEC for the quarter
                ended March 31, 2002, filed with the SEC on May 15, 2002).

        10.3    Securities  Purchase  Agreement,  effective as of September  30,
                2004, among Cubic Energy, Inc. and each purchaser  identified on
                the  signature  pages  thereto  (incorporated  by  reference  to
                Exhibit 10.1 of the Company's  Current Report on Form 8-K, filed
                with the SEC on October 12, 2004).

        10.4    Form of 7% Senior  Secured  Convertible  Debenture Due September
                30,  2009  (incorporated  by  reference  to Exhibit  10.2 of the
                Company's  Current  Report  on Form 8-K,  filed  with the SEC on
                October 12, 2004).

        10.5    Form of Common Stock Purchase Warrant (incorporated by reference
                to Exhibit  10.3 of the  Company's  Current  Report on Form 8-K,
                filed with the SEC on October 12, 2004).

        10.6    Registration  Rights  Agreement,  effective as of September  30,
                2004,  among Cubic  Energy,  Inc. and the  purchasers  signatory
                thereto  (incorporated  by  reference  to  Exhibit  10.1  of the
                Company's  Current  Report  on Form 8-K,  filed  with the SEC on
                October 12, 2004).

        10.7    Deed of Trust, Security Agreement,  Assignment of Production and
                Fixture  Filing,  effective as of September 30, 2004, from Cubic
                Energy, Inc. to Alex Montano, as Trustee,  for the benefit of C.
                K.  Cooper &  Company,  as Lender on behalf of  Investors  of 7%
                Senior Secured Convertible Debentures (incorporated by reference
                to Exhibit  10.5 of the  Company's  Current  Report on Form 8-K,
                filed with the SEC on October 12, 2004).

        10.8    Agreement  between the Company on one hand and Calvin  A.Wallen,
                III  on  the  other  hand  (incorporated  by  reference  to  the
                Company's 8-K filed on January 14, 2005).

        23.1*   Consent of Philip Vogel & Co., PC

        31.1*   Rule 13a-14(a)/15d-14(a) Certifications

        32.1*   Section 1350 Certifications

      -----------------------------------
         * Filed herewith.




                                       34
<PAGE>

Item 14.  Principal Accountant Fees and Services.

                        July 1, 2003-June 30, 2004    July 1, 2004-June 30, 2005
                       ---------------------------    --------------------------

Audit Fees                       $16,000                       $16,000
Audit-Quarterly Fees               6,100                       $11,350
Tax Fees                           2,800                       $ 3,550
Registration Fees                  1,750                       $ 2,400
                                 -------                       -------
          Total                  $26,650                       $33,300
                                 =======                       =======

        All of the  foregoing  services  were  rendered to the Company by Philip
Vogel & Co., PC, and were pre-approved by the Audit Committee.
























                                       35
<PAGE>

                                   SIGNATURES

        In  accordance  with the Section 13 or 15(d) of the  exchange  act,  the
registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized, on the 4th day of October, 2005.


                                                   CUBIC ENERGY, INC.


                                                   By: /s/ Calvin A. Wallen, III
                                                      --------------------------
                                                      Calvin A. Wallen, Iii
                                                      President And Chief
                                                      Executive Officer


                                                   By: /s/Jon Stuart Ross
                                                      --------------------------
                                                      Jon Stuart Ross
                                                      Chief Financial Officer

        In  accordance  with the Exchange Act, this report has been signed below
by the following  persons on behalf of the  registrant and in the capacities and
on the dates indicated.

        Signature                       Title                          Date
        ---------                       -----                          ----

/s/ Calvin A. Wallen, III      President, Chief Executive        October 4, 2005
-------------------------
Calvin A. Wallen, III          Officer and Director

/s/ Jon Stuart Ross            Chief Financial Officer,          October 4, 2005
-------------------------
Jon Stuart Ross                Director, Secretary

/s/ Gene Howard                Director                          October 4, 2005
-------------------------
Gene Howard

/s/ Herbert A. Bayer           Director                          October 4, 2005
-------------------------
Herbert A. Bayer

/s/ Bob Clements               Director                          October 4, 2005
-------------------------
Bob Clements

/s/ Alex Montano               Director                          October 4, 2005
-------------------------
Alex Montano









                                       36
<PAGE>


                               CUBIC ENERGY, INC.

                              FINANCIAL STATEMENTS
                                       and
                          INDEPENDENT AUDITORS' REPORT

                                  JUNE 30, 2005
















<PAGE>

                               CUBIC ENERGY, INC.

                              FINANCIAL STATEMENTS
                                       and
                          INDEPENDENT AUDITORS' REPORT

                                  JUNE 30, 2005







                                 C O N T E N T S

                                                                            Page

Independent Auditors' Report................................................  1

Financial Statements:

  Balance Sheets............................................................  2

  Statements of Operations..................................................  3

  Statements of Changes in Stockholders' Equity.............................  4

  Statements of Cash Flows..................................................  5

  Notes to Financial Statements.............................................6-20




















<PAGE>

                          INDEPENDENT AUDITORS' REPORT



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



We have audited the balance sheets of Cubic Energy,  Inc., a Texas  corporation,
as of June 30,  2005 and 2004,  and the related  statements  of  operations,  of
changes in stockholders' equity and of cash flows for each of the three years in
the  period  ended  June  30,  2005.   These   financial   statements   are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audits to  obtain  reasonable  assurance  about  whether  the
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial  statements.  An audit also  includes  assessing  the  accounting
principles  used  and  significant  estimates  made  by  management,  as well as
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Cubic Energy,  Inc. as of June
30, 2005 and 2004, and the results of its operations and its cash flows for each
of the three  years in the  period  ended  June 30,  2005,  in  conformity  with
accounting principles generally accepted in the United States of America.



                                                    PHILIP VOGEL & CO. PC




                                                    Certified Public Accountants

Dallas, Texas

September 23, 2005
















                                       1
<PAGE>

                               CUBIC ENERGY, INC.

                                 BALANCE SHEETS
                             JUNE 30, 2005 AND 2004


                                                       2005            2004
                                                   ------------    ------------
Assets

Current assets:
Cash and cash equivalents                          $    257,253    $    193,213
Accounts receivable - trade                              34,354          80,180
Prepaid drilling costs                                  303,666            --
                                                   ------------    ------------

Total current assets                               $    595,273    $    273,393



Property and equipment (at cost):
Oil and gas properties, full cost method:
Proved properties (including wells and
related equipment and facilities)                  $  4,098,571    $  1,537,625
Unproven properties                                   1,053,000            --
Office and other equipment                                4,873             910
                                                   ------------    ------------

                                                   $  5,156,444    $  1,538,535
Less accumulated depreciation, depletion
and amortization                                      1,469,345       1,104,849
                                                   ------------    ------------
                                                      3,687,099         433,686
Other assets:
Deferred loan costs - net                               132,639            --
                                                   ------------    ------------

                                                   $  4,415,011    $    707,079
                                                   ============    ============


                                                       2005            2004
                                                   ------------    ------------

Liabilities and stockholders' equity

Current liabilities:
Accounts payable and accrued expenses              $     11,261    $    126,764
Due to affiliates                                         7,717           3,598
                                                   ------------    ------------

Total current liabilities                          $     18,978    $    130,362

Long-term liabilities
Debentures payable - net of discounts              $  1,611,886    $       --
                                                   ------------    ------------
                                                      1,611,886            --
Commitments and contingencies (Note G)

Stockholders' equity:
Preferred stock - $.01 par value,
authorized 10,000,000 shares,
issued none                                        $       --      $       --
Common stock - $.05 par value, authorized
50,000,000 shares, issued 35,161,963
shares in 2005 and 31,451,826 in 2004                 1,758,100       1,572,592
Additional paid-in capital                           11,778,915       8,972,467
Accumulated deficit                                 (10,752,868)     (9,968,342)
                                                   ------------    ------------

Stockholders' equity                                  2,784,147         576,717
                                                   ------------    ------------

                                                   $  4,415,011    $    707,079
                                                   ============    ============


The accompanying notes are an integral part of these statements.

                                       2
<PAGE>
<TABLE>
<CAPTION>

                               CUBIC ENERGY, INC.

                            STATEMENTS OF OPERATIONS
                FOR THE YEARS ENDED JUNE 30, 2005, 2004 AND 2003


                                                         2005           2004           2003
                                                     -----------    -----------    -----------
<S>                                                  <C>            <C>            <C>
Revenues:
Oil and gas sales                                    $   469,441    $   414,741    $   356,636
                                                     -----------    -----------    -----------

Total revenues                                       $   469,441    $   414,741    $   356,636
                                                     -----------    -----------    -----------

Costs and expenses:
Oil and gas production, operating and
development costs                                    $   273,074    $   186,465    $   167,303
Selling, general and administrative expenses             394,827        240,022        175,201
Depreciation, depletion and amortization                 364,496        104,735        119,249
                                                     -----------    -----------    -----------

Total costs and expenses                             $ 1,032,397    $   531,222    $   461,753
                                                     -----------    -----------    -----------

Operating income (loss)                              $  (562,956)   $  (116,481)   $  (105,117)
                                                     -----------    -----------    -----------

Non-operating income (expense):
Legal judgment                                       $      --      $      --      $  (112,000)
Other income                                                --            2,440           --
Interest expense                                        (193,313)           (75)            (4)
Amortization of loan costs                               (28,257)          --             --
                                                     -----------    -----------    -----------

Total non-operating income (expense):                $  (221,570)   $     2,365    $  (112,004)
                                                     -----------    -----------    -----------

Income (loss) from operations before income taxes:   $  (784,526)   $  (114,116)   $  (217,121)

Provision for income taxes                                  --             --             --
                                                     -----------    -----------    -----------

Net loss                                             $  (784,526)   $  (114,116)   $  (217,121)
                                                     ===========    ===========    ===========

Net loss per common share - basic and diluted        $     (0.02)   $     (0.00)   $     (0.01)
                                                     ===========    ===========    ===========
</TABLE>






The accompanying notes are an integral part of these statements.

                                       3
<PAGE>
<TABLE>
<CAPTION>

                               CUBIC ENERGY, INC.

                  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                FOR THE YEARS ENDED JUNE 30, 2005, 2004 AND 2003




                                                                          Common Stock
                                                    Cumulative    ---------------------------
                                                     preferred       Shares          Par
                                                       stock      outstanding       value
                                                   ------------   ------------   ------------
<S>                                                <C>            <C>            <C>
Balance, June 30, 2002                                     --       31,180,326   $  1,559,017

Net loss, year ended June 30, 2003                         --             --             --
                                                   ------------   ------------   ------------

Balance, June 30, 2003                                     --       31,180,326   $  1,559,017

Stock issued under compensation plan                       --          271,500         13,575

Net loss, year ended June 30, 2004                         --             --             --
                                                   ------------   ------------   ------------

Balance, June 30, 2004                                     --       31,451,826   $  1,572,592

Debt proceeds allocated to warrants                        --             --             --
Stock issued under compensation plan                       --          155,000          7,750
Stock issued under convertible debenture                   --        1,410,000         70,500
agreements
Stock issued in payment of interest obligations            --          145,137          7,258
Stock issued for acquisition of property interests         --        2,000,000        100,000

Net loss, year ended June 30, 2005                         --             --             --
                                                   ------------   ------------   ------------

Balance, June 30, 2005                                     --       35,161,963   $  1,758,100
                                                   ============   ============   ============

                                                     Additional                      Total
                                                      paid-in     Accumulated    stockholders'
                                                      capital        deficit        equity
                                                   ------------   ------------   ------------

Balance, June 30, 2002                             $  8,892,992   $ (9,637,105)  $    814,904

Net loss, year ended June 30, 2003                         --         (217,121)      (217,121)
                                                   ------------   ------------   ------------

Balance, June 30, 2003                             $  8,892,992   $ (9,854,226)  $    597,783

Stock issued under compensation plan                     79,475           --           93,050

Net loss, year ended June 30, 2004                         --         (114,116)      (114,116)
                                                   ------------   ------------   ------------

Balance, June 30, 2004                             $  8,972,467   $ (9,968,342)  $    576,717

Debt proceeds allocated to warrants                     510,961           --          510,961
Stock issued under compensation plan                     71,300           --           79,050
Stock issued under convertible debenture                406,006           --          476,506
agreements
Stock issued in payment of interest obligations         118,181           --          125,439
Stock issued for acquisition of property interests    1,700,000           --        1,800,000

Net loss, year ended June 30, 2005                         --         (784,526)      (784,526)
                                                   ------------   ------------   ------------

Balance, June 30, 2005                             $ 11,778,915   $(10,752,868)  $  2,784,147
                                                   ============   ============   ============
</TABLE>


The accompanying notes are an integral part of these statements.


                                       4
<PAGE>
<TABLE>
<CAPTION>

                               CUBIC ENERGY, INC.

                            STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED JUNE 30, 2005, 2004 AND 2003


                                                           2005           2004           2003
                                                       -----------    -----------    -----------
<S>                                                    <C>            <C>            <C>
Cash flows from operating activities:
Net (loss)                                             $  (784,526)   $  (114,116)   $  (217,121)
Adjustments to reconcile net (loss) to cash
provided (used) by operating activities:
Depreciation, depletion and amortization                   460,509        104,735        119,249
Stock issued for interest                                  125,440
Stock issued for services                                   79,050         93,051           --
Change in assets and liabilities:
(Increase) decrease in accounts receivable                  45,826        (22,050)       (18,002)
Increase (decrease) in loan from affiliates                  4,119          3,418         (8,931)
Increase (decrease) in accounts payable
and accrued liabilities                                   (115,503)        10,725         72,921
                                                       -----------    -----------    -----------

Net cash provided (used) by operating activities       $  (185,085)   $    75,763    $   (51,884)
                                                       -----------    -----------    -----------

Cash flows from investing activities:
Acquisition and development of oil
and gas properties                                     $(1,813,946)   $      --      $      --
Purchase of office equipment                                (3,963)          --             --
Advances on developments costs                            (303,666)          --             --
                                                       -----------    -----------    -----------

Net cash provided (used) by investing activities       $(2,121,575)   $      --      $      --
                                                       -----------    -----------    -----------

Cash flows from financing activities:
Issuance of convertible debentures and warrants        $ 2,635,000    $      --      $      --
Loan costs incurred on issuance of debentures             (264,300)          --             --
                                                       -----------    -----------    -----------

Net cash provided (used) by financing activities       $ 2,370,700    $      --      $      --
                                                       -----------    -----------    -----------

Net increase (decrease) in cash and cash equivalents   $    64,040    $    75,763    $   (51,884)

Cash and cash equivalents:
Beginning of year                                          193,213        117,450        169,334
                                                       -----------    -----------    -----------

End of year                                            $   257,253    $   193,213    $   117,450
                                                       ===========    ===========    ===========
</TABLE>







The accompanying notes are an integral part of these statements.

                                       5
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS


Note A - Background and general:

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


Note B - Significant accounting policies:

    Cash equivalents
    ----------------

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

    Office and other equipment
    --------------------------

        Office and other  equipment  are stated at cost and  depreciated  by the
    straight-line  method over estimated useful lives ranging from five to seven
    years.  Depreciation and amortization of office and other equipment amounted
    to $330,  $-,  and $-for  the  years  ended  June 30,  2005,  2004 and 2003,
    respectively.

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

        The Company has adopted the full cost method of  accounting  for oil and
    gas properties.  Management  believes  adoption of the full cost method more
    accurately  reflects  management's  exploration  objectives  and  results by
    including all costs incurred as integral for the acquisition,  discovery and
    development  of whatever  reserves  ultimately  result from its efforts as a
    whole.  Under the full cost method of accounting,  all costs associated with
    acquisition,  exploration and development of oil and gas reserves, including
    directly related overhead costs, are capitalized.

        All capitalized costs of oil and gas properties, including the estimated
    future   costs  to  develop   proved   reserves,   are   amortized   on  the
    unit-of-production method using estimates of proved reserves. Investments in
    unproved  properties and major development  projects are not amortized until
    proved  reserves  associated  with the projects can be  determined  or until
    impairment  occurs.  If the  results  of an  assessment  indicate  that  the
    properties  are  impaired,  the  amount  of the  impairment  is added to the
    capitalized costs to be amortized.

        In addition,  the capitalized  costs are subject to a "full cost ceiling
    test," which generally  limits such costs to the aggregate of the "estimated
    present  value,"  discounted  at a 10  percent  interest  rate of future net
    revenues  from proved  reserves,  based on current  economic  and  operating
    conditions,  plus  the  lower  of cost  or fair  market  value  of  unproved
    properties.  An excess of the capitalized  costs over the full costs ceiling
    test limitation at June 30, 2005, was not charged against  earnings  because
    of an increase in oil and gas prices subsequent to year end.

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

        Depletion  of  producing  oil and gas  properties  amounted to $364,166,
    $104,735  and  $119,249  for the years ended June 30,  2005,  2004 and 2003,
    respectively.

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

        The Company  has  adopted  the  provisions  of  Statement  of  Financial
    Accounting  Standards  (SFAS) No.  144,  Accounting  for the  Impairment  or
    Disposal of Long-Lived  Assets effective for periods beginning July 1, 2002,



                                       6
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS



    and  thereafter.  SFAS 144  replaces  SFAS 121,  and,  among other  matters,
    addresses financial  accounting and reporting for the impairment or disposal
    of long-lived assets. SFAS 144 retains the basic provisions of SFAS 121, but
    broadens its scope and  establishes a single model for long-lived  assets to
    be  disposed  of by  sale.  Management  does  not  believe  adoption  of the
    Statement  had any effect on the  financial  statements  of the Company.  In
    addition, the Company is subject to the rules of the Securities and Exchange
    Commission  with respect to impairment of oil and gas  properties  accounted
    for under the full cost method of accounting, as described earlier.

    Income taxes
    ------------

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

    Oil and gas revenue
    -------------------

        The Company  recognizes  oil and gas revenues by the sales method as oil
    and gas production is sold. Differences between sales and production volumes
    during the years ended June 30, 2005, 2004 and 2003 were not significant.

    Earnings (loss) per common share
    --------------------------------

        The Company  has  adopted  the  provisions  of  Statement  of  Financial
    Accounting  Standards  (SFAS) No.  128,  Earnings  per  Share.  SFAS No. 128
    requires  the  presentation  of basic  earnings  (loss) per share  (EPS) and
    diluted  EPS.  Basic  EPS is  calculated  by  dividing  net  income  or loss
    (available to common  stockholders) by the weighted average number of common
    shares  outstanding  for the period.  Diluted  EPS  reflects  the  potential
    dilution that could occur if  securities or other  contracts to issue common
    stock,  such as stock options,  warrants,  convertible  preferred  stock and
    convertible debentures, were exercised or converted into common stock.

        As  discussed in Note E, there were no dilutive  securities  outstanding
    during the years ended June 30, 2005,  2004 and 2003.  The weighted  average
    number of common and common  equivalent  shares  outstanding was 33,112,644,
    31,316,222 and 31,180,326 for the years ended June 30, 2005,  2004 and 2003,
    respectively.

    Concentration of credit risk
    ----------------------------

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

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

        The  Company  has adopted  the  provisions  of SFAS No.  130,  Reporting
    Comprehensive  Income and SFAS No.  131,  Disclosure  about  Segments  of an
    Enterprise and Related Information. SFAS No. 130 requires that an enterprise
    report,  by major  components  and as a single total,  the change in its net
    assets during the period from  nonowner  sources.  SFAS No. 131  establishes
    annual  and  interim  reporting  standards  for  an  enterprise's  operating
    segments and related  disclosures about its products,  services,  geographic
    areas and major customers. Adoption of SFAS No. 131 has had no impact on the
    Company's financial position, results of operations,  cash flows, or related
    disclosures  since the Company's  operations  are  considered to be a single
    segment.




                                       7
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS


    Use of estimates
    ----------------

        The  preparation  of financial  statements in conformity  with generally
    accepted  accounting  principles  requires  management to make estimates and
    assumptions that affect the amounts reported in the financial statements and
    accompanying notes. Actual results could differ from those estimates.

    Certain significant estimates
    -----------------------------

        Management estimates included in these financial statements for which it
    is reasonably  possible that a future event in the near term could cause the
    estimate to change and the change could have a severe impact are as follows:
    Management's  estimates  of oil  and  gas  reserves  are  based  on  various
    assumptions,   including   constant  oil  and  gas  prices.   Actual  future
    production, cash flows, taxes, operating expenses,  development expenditures
    and  quantities of recoverable  oil and gas reserves may vary  substantially
    from those assumed in the estimate.  The accuracy of any reserve estimate is
    a function of the quality of  available  data,  engineering  and  geological
    interpretation,  and  judgment.  Subsequent  evaluation of the same reserves
    based  upon  production  history  will  result in  variations,  which may be
    substantial,  in the  estimated  reserves.  While it is at least  reasonably
    possible that the estimates  above will change  materially in the near term,
    no estimate can be made of the range of possible losses that might occur.

    Fair value of financial instruments
    -----------------------------------

        The  Company  defines the fair value of a  financial  instrument  as the
    amount at which the instrument  could be exchanged in a current  transaction
    between willing  parties.  Financial  instruments  included in the Company's
    financial   statements   include  cash  and  cash  equivalents,   short-term
    investments,  accounts receivable, other receivables, other assets, accounts
    payable, notes payable and due to affiliates.  Unless otherwise disclosed in
    the notes to the  financial  statements,  the  carrying  value of  financial
    instruments  is  considered  to  approximate  fair  value  due to the  short
    maturity and  characteristics  of those  instruments.  The carrying value of
    debt approximates fair value as terms approximate those currently  available
    for similar debt instruments.

    Obligations associated with the retirement of assets
    ----------------------------------------------------

        The Company has adopted the  provisions of SFAS No. 143,  Accounting for
    Asset Retirement  Obligations,  effective July 1, 2002. SFAS No. 143 amended
    SFAS No. 19,  Financial  Accounting  and  Reporting by Oil and Gas Producing
    Companies,  and, among other  matters,  addresses  financial  accounting and
    reporting for legal  obligations  associated with the retirement of tangible
    long-lived  assets and the associated asset retirement  costs.  SFAS No. 143
    requires  that  the  fair  value  of a  liability  for an  asset  retirement
    obligation  be  recognized  in the period in which it is incurred,  with the
    associated  asset  retirement cost  capitalized as part of the related asset
    and allocated to expense over the asset's useful life.

        This is a change from the approach  taken under SFAS No. 19,  whereby an
    amount  for  an  asset   retirement   obligation  was  recognized   using  a
    cost-accumulation  measurement approach. Under that approach, the obligation
    was  reported  as  a  contra-asset  recognized  as  part  of  depletion  and
    depreciation over the life of the asset without discounting.  Management has
    determined  that adopting SFAS No. 143 has had no significant  effect on the
    company's  financial  statements  since  abandonment  costs  for which it is
    responsible are not material.

    Stock based compensation
    ------------------------

        Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
    Issued to Employees,  and related  interpretations require that compensation
    expense be recorded on the date of the grant of stock  options and  warrants
    only if the  current  market  price of the  underlying  stock  exceeded  the
    exercise price.  Alternatively,  Statement of Financial Accounting Standards
    (SFAS) No. 123, Accounting for Stock-Based Compensation, permits entities to
    recognize,  as  expense  over the  vesting  period,  the  fair  value of all
    stock-based  awards on the date of grant.  SFAS No. 123 allows  entities  to
    continue to apply the provisions of APB Opinion No. 25 and provide  proforma
    net income and proforma  earnings per share  disclosures  for employee stock
    option  grants  made in 1996 and  future  years as if the  fair-valued-based
    method defined in SFAS No. 123 had been applied.  The Company has elected to
    apply  the  provisions  of APB  Opinion  No.  25 and  provide  the  proforma
    disclosure provisions of SFAS No. 123.


                                       8
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS


        In  addition,  the  Company  has adopted  the  provisions  of  Financial
    Accounting  Standards Board  Interpretation (FIN) 44, Accounting for Certain
    Transactions  Involving Stock  Compensation,  which became effective July 1,
    2000. FIN 44 clarifies the application of APB 25 for certain  issues.  Among
    other issues,  this  interpretation  clarifies the definition of an employee
    for purposes of applying APB 25, the criteria for qualification of a plan as
    compensatory,  the consequences of modifications to the terms of a plan, and
    the treatment of stock compensation  issued to service providers who are not
    employees.  The issuance of this  interpretation does not change the current
    accounting  policies  of  the  Company,   and  has  had  no  effect  on  the
    accompanying financial statements.

        In December 2002, the Financial  Accounting  Standards Board issued SFAS
    No.  148,   Accounting  for   Stock-Based   Compensation  -  Transition  and
    Disclosure,  which amends SFAS No. 123.  SFAS No. 148  provides  alternative
    methods of transition for a voluntary  change to the fair value based method
    of accounting for stock-based compensation. In addition, SFAS No. 148 amends
    the  disclosure  requirements  of SFAS No. 123 to require more prominent and
    more  frequent  disclosures  in  financial  statements  about the effects of
    stock-based  compensation.  The  transition  guidance and annual  disclosure
    provisions  are  effective  for years  ending after  December 15, 2002.  The
    interim  disclosure  provisions are effective  financial reports  containing
    financial  statements for interim periods beginning after December 15, 2002.
    The transition  rules of this standard are not applicable  since the Company
    continues to account for stock-based  compensation under the guidance of APB
    Opinion 25. The other requirements of this standard have been adopted by the
    Company for periods beginning January 1, 2003.  Disclosures required by this
    statement are in Note J.

        In December 2004, the Financial  Accounting  Standards Board issued SFAS
    No.  123r,  "Share-Based  Payment,"  which is a  revision  of SFAS No.  123,
    "Accounting  for  Stock-Based  Compensation,"  and  supersedes  APB No.  25,
    "Accounting for Stock Issued to Employees."  This Statement will require the
    Company to  recognize  compensation  costs  related to  stock-based  payment
    transactions (i.e.  granting of stock options and warrants) in the financial
    statements. With limited exceptions, the amount of compensation cost will be
    measured  based on the  grant-date  fair  value of the  equity or  liability
    instruments  issued.  In addition,  liability awards will be remeasured each
    reporting period.  Compensation cost will be recognized over the period that
    an employee  provides  services in exchange for the award. This new standard
    will be effective  for awards that are granted,  modified or settled in cash
    in interim  and annual  financial  periods  beginning  after June 30,  2006.
    Management  has not yet  determined  what impact this statement will have on
    the Company's financial position or results of operations.

    Exit or disposal activities
    ---------------------------

        In July 2002, the Financial  Accounting  Standards Board issued SFAS No.
    146, Accounting for Cost Associated with Exit or Disposal  Activities.  SFAS
    No. 146  requires  companies  to  recognize  costs  associated  with exit or
    disposal  activities  when they are  incurred  rather  than at the date of a
    commitment  to an exit or disposal  plan.  Examples of costs  covered by the
    standard  include lease  termination  costs and certain  employee  severance
    costs that are associated with a restructuring,  discontinued operations, or
    other exit or disposal activities.  SFAS No. 146 is effective  prospectively
    for exit or disposal  activities  initiated  after  December 31, 2002,  with
    earlier  adoption  encouraged.  No exit or  disposal  activities  have  been
    entered into by management.

    Financial instruments with characteristics of both liabilities and equity
    -------------------------------------------------------------------------

        In May 2003, the Financial  Accounting  Standards  Board issued SFAS No.
    150,  Accounting for Certain Financial  Instruments with  Characteristics of
    both  Liabilities and Equity.  SFAS No. 150 established  standards for how a
    company   classifies  and  measures  certain   financial   instruments  with
    characteristics  of both liabilities and equity. The statement requires that
    a company  classify  a  financial  instrument  that is within its scope as a
    liability (or an asset in some  circumstances)  if certain criteria are met.
    Freestanding  financial  instruments  that obligate the issuer to redeem the
    holder's  shares,  or are indexed to such an obligation,  and are settled in
    cash or settled with shares meeting certain  conditions  would be treated as
    liabilities. Many of those instruments were previously classified as equity.



                                       9
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS


    Guarantee of debt
    -----------------

        In November  2002,  the  Financial  Accounting  Standards  Board  issued
    Interpretation  No. 45 ("FIN 45"),  Guarantor's  Accounting  and  Disclosure
    Requirements for Guarantees,  Including Indirect  Guarantees of Indebtedness
    of  Others,  an  Interpretation  of FASB  Statements  No. 5, 57, and 107 and
    Rescission of FASB  Interpretation No. 34. FIN 45 clarifies the requirements
    of SFAS No. 5, relating to the  guarantor's  accounting  for, and disclosure
    of,  the  issuance  of  certain  types of  guarantees.  This  Interpretation
    clarifies  that a guarantor is required to  recognize,  at the  inception of
    certain  types  of  guarantees,  a  liability  for  the  fair  value  of the
    obligation  undertaken  in issuing the  guarantee,  and requires  additional
    disclosures  on  existing  guarantees  even  if  the  likelihood  of  future
    liability under the guarantees is deemed remote.  The Company has not issued
    any  guarantees  and,  therefore,  the  adoption  of FIN 45 does  not have a
    significant impact on the Company's financial statements.

    Variable interest entities
    --------------------------

        In  January  2003,  the  Financial  Accounting  Standards  Board  issued
    Interpretation  No.  46  ("FIN  46"),  Consolidation  of  Variable  Interest
    Entities,  an Interpretation of ARB No. 51. FIN 46 states that if a business
    enterprise  has a  controlling  financial  interest  in a variable  interest
    entity as the primary  beneficiary,  the assets,  liabilities and results of
    the  activities  of the variable  interest  entity should be included in the
    consolidated   financial  statements  of  the  business   enterprise.   This
    Interpretation  explains how to identify  variable interest entities and how
    an enterprise assesses its interests in a variable interest entity to decide
    whether to consolidate  that entity.  The primary  beneficiary of a variable
    interest  entity  would be  required  to  consolidate  if the  other  equity
    investors  in the entity do not have the  characteristics  of a  controlling
    financial  interest or do not have sufficient  equity at risk for the entity
    to finance its activities without additional  subordinated financial support
    from other parties. FIN 46 applies immediately to variable interest entities
    created after January 31, 2003, and to variable  interest  entities in which
    an enterprise  obtains an interest  after that date. It applies in the first
    fiscal year or interim  period  beginning  after June 15, 2003,  to variable
    interest  entities in which an enterprise holds a variable  interest that it
    acquired  before  February 1, 2003.  The Company has no current  contractual
    relationships  or  other  business   relationships  with  variable  interest
    entities.


Note C - Stockholders' equity:

    The Company's  authorized  capital is  50,000,000  shares of $0.05 par value
common stock and 10,000,000 shares of $0.01 par value preferred stock. No shares
of preferred stock are issued or outstanding at June 30, 2005 and 2004.

    Warrants
    --------

        On January 1, 2002,  the  Company  issued  three  series of  warrants to
    Tauren  Exploration,  Inc., an entity owned by the CEO and major stockholder
    of the  Company  (see Note E).  These  warrants  allowed  Tauren to purchase
    unregistered  common shares in the Company as follows:  1) exercisable after
    May 1, 2002, to purchase 125,000  unregistered  common shares at an exercise
    price of $1.00, which expired on April 30, 2003; 2) exercisable after May 1,
    2003, to purchase 150,000  unregistered  common shares at the exercise price
    of $1.50,  which expired on April 30, 2004; and 3) exercisable  after May 1,
    2004, to purchase 200,000 unregistered common shares at an exercise price of
    $2.00,  which expired on April 30, 2005. All warrants  expired  unexercised.
    The weighted-average  exercise price of all exercisable warrants at June 30,
    2005 and 2004 was $0 and $2.00, respectively.  The weighted-average exercise
    price  of all  outstanding  warrants  at June  30,  2005 and 2004 was $0 and
    $2.00, respectively.

        On or about October 1, 2004,  the Company  closed a Securities  Purchase
    Agreement  and issued  $2,635,000 in principal  amount of 7% Senior  Secured
    Convertible Debentures due September 30, 2009 (the "Debentures"), to a group
    of institutional and high net worth investors. The Debentures are secured by
    the  collateral  set  forth  in  the  Deed  of  Trust,  Security  Agreement,
    Assignment of  Production  and Fixture  Filing  attached to a Form 8-K filed
    October 12, 2004.  The  Debentures  pay an annual  interest  rate of 7% on a
    quarterly  basis and are  convertible  into shares of our common  stock at a
    price of $.50 per share.  The Company has the option to pay the  interest on
    the  Debentures in common stock.  The  investors  also received  warrants to



                                       10
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS



    purchase an  additional  2,635,000  shares of common  stock with an exercise
    price of $1.00 per  share.  During the  fiscal  year  ended  June 30,  2005,
    $705,000 of debt had been converted  into 1,410,000  shares of common stock,
    and  145,137  shares  of  common  stock  were  issued in lieu of cash to pay
    interest.   None  of  the  warrants  have  been  exercised  and  all  remain
    outstanding at June 30, 2005.

        The  Company  has  allocated  the  proceeds  from  the  issuance  of the
    Debentures to the warrants and the  Debentures  based on their relative fair
    market values at the date of issuance. The value assigned to the warrants of
    $510,961 has been recorded as an increase in additional paid in capital. The
    assignment  of a value to the  warrants  results  in a loan  discount  being
    recorded  for the same  amount.  The  discount is being  amortized  over the
    original five year term of the Debentures as additional interest expense.

        The  Company  incurred  loan costs of  $264,300  on the  issuance of the
    Debentures and warrants.  The amount allocable to the Debentures of $213,049
    has been capitalized and is being amortized over the term of the Debentures.
    Amortization of loan costs was $28,258 for the year ended June 30, 2005.

        The  proceeds  of the  Debentures  have  primarily  been  used  for  the
    acquisition  of interests in oil and gas  properties.  Through  December 31,
    2004,  Cubic incurred  acquisition  and  development  costs of $1,418,996 on
    properties with unproved reserves.  On or before March 31, 2005,  management
    determined that the reserves  acquired in this transaction were proved,  and
    the associated  acquisition and development costs were transferred to proved
    properties and depletion has been computed in accordance  with the full cost
    method.

        However,  upon further review, it has been determined that approximately
    $1,053,000 in lease  acquisition  costs were improperly  moved to the proved
    category from the unproved category, and this amount has been re-categorized
    to the unproved category. The March 31, 2005, Form 10-QSB for the Company is
    being amended to  re-categorize  the assets between proved and unproved,  to
    restate the depletion and to restate the balance sheet accordingly.  The net
    effect of this  amendment  will not result in a change in our total  assets,
    but reflects a material  change in asset  classification.  In addition,  the
    balance of the prepaid drilling costs, net of allocable expenses, as of June
    30, 2005, is $303,667.

        On or about January 11, 2005,  the Company  issued  1,531,661  shares of
    common  stock  to  Caravel   Resources   Energy  Fund  2003-II,   L.P.  (the
    "Partnership")  in  exchange  for a  0.1914575033  working  interest  in the
    Kraemer 24-1 Well, Desoto Parish, Township 14 N, Range 15 W, Section 24 (the
    "Well").  The Company  also  issued  468,339  shares of common  stock to Mr.
    Wallen in exchange  for a  0.0585424967  working  interest in the Well.  The
    common stock  closed at a price of $0.90 on January 10, 2005.  The shares of
    common stock were issued by the Company in reliance  upon an exemption  from
    registration  set forth in Section 4(2) of the  Securities  Act of 1933,  as
    amended,  which  exempts  transactions  by an issuer not  involving a public
    offering.

    Stock-based compensation
    ------------------------

        On September 12, 2003, the Directors of the Company  approved a Director
    and Officer  compensation  plan as follows:  (i.)  Directors of record as of
    June 1, 2003 would receive  24,000  restricted  Cubic common shares  (16,000
    shares per year, multiplied by 1.5 years) for years of prior service,  (ii.)
    the  President/CEO  of Cubic would receive  45,000  restricted  Cubic common
    shares  (30,000 share per year,  multiplied by 1.5 years) for years of prior
    service, (iii.) the Secretary of Cubic would receive 22,500 restricted Cubic
    common shares  (15,000  shares per year,  multiplied by 1.5 years) for prior
    years of service,  (iv.)  going  forward,  Directors  would  receive  16,000
    restricted Cubic common shares per year of service,  (v.) going forward, the
    President/CEO  would receive 30,000  restricted Cubic common shares per year
    of  service,  (vi.)  going  forward,  the  Secretary  would  receive  15,000
    restricted  Cubic common shares per year of service,  (vii.) Audit Committee
    members would receive 10,000  restricted Cubic common shares per audit, and,
    (viii.)  any  Compensation  Committee  member,  should one be formed,  would
    receive 3,000 restricted Cubic common shares per year of service.

        On November 5, 2003 Cubic issued  116,500  common shares of stock to its
    Officers and Directors  pursuant to this plan.  Based on a then market price
    of $0.20 per share, Cubic recorded a compensation expense of $23,300;  which
    expense is recorded in the above financial statements as a selling,  general
    and administrative expense for the year ended June 30, 2004.



                                       11
<PAGE>
<TABLE>
<CAPTION>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS


        On February 9, 2004,  Cubic issued 155,000 common shares of stock to its
    Officers and Directors pursuant to this plan, for service during the current
    fiscal year. Based on a then market price of $0.45 per share, Cubic recorded
    a  compensation  expense of $69,750;  which expense is recorded in the above
    financial  statements as a selling,  general and administrative  expense for
    the year ended June 30, 2004.

        On October 25, 2004,  Cubic issued 155,000 Common shares of stock to its
    Officers and Directors  pursuant to this plan.  Based on a then market price
    of $.51 per share, Cubic recorded a compensation  expense of $79,050;  which
    expense is recorded in the above financial statements as a selling,  general
    and administrative expense for the year ended June 30, 2005.

        The  following  compensation  plan was adopted on March 30,  2005,  with
    conditional  Grants  authorized  on March 30,  2005  subject to  Shareholder
    approval. On March 30, 2005, the Compensation  Committee for Cubic voted and
    authorized,  and then the Board Of  Directors  conditionally  approved,  all
    subject to  shareholder  approval,  these  grants,  in addition to all other
    grants previously issued: (i) 150,000  un-registered shares to Calvin Wallen
    III,  (ii) 100,000  un-registered  shares to Jon Stuart  Ross,  (iii) 70,000
    un-registered shares to Rick Sepulvado, and (iv) 30,000 un-registered shares
    to Lindsey Tate  Renteria.  Further,  the  Compensation  Committee for Cubic
    voted  and  authorized,  and  then  the  Board  Of  Directors  conditionally
    approved,  all  subject to  shareholder  approval,  Director  and  Committee
    compensation as follows,  in addition to all other grants previously issued:
    (a) $1,000 cash  compensation per Director for each actual meeting held, (b)
    reimbursement  for reasonable and necessary  expenses,  (c) grants of 25,000
    un-registered  shares  for  yearly  Director  service,  (d)  grants of 8,000
    un-registered  shares for  service on the  Compensation  Committee,  and (e)
    grants of  14,000  un-registered  shares  for  service  for  upcoming  audit
    committee,  with the  chairman  to  receive  grants of 20,000  un-registered
    shares.  The Company has not recorded any compensation  cost with respect to
    the contingent issuance of stock under the above-referenced  plan because of
    the uncertainty  involved in obtaining  shareholder  approval.  Compensation
    cost will be  recognized  once the plan has been  formally  approved and the
    shares are issued.


Note D - Loss per common share:


    Net loss per common share is computed as follows:


                                               2005           2004           2003
                                            -----------    -----------    -----------
    <S>                                     <C>            <C>            <C>
    Net loss attributable to stockholders   $  (784,526)   $  (114,116)   $  (217,121)

    Weighted average number of shares of
    common stock                             33,112,644     31,316,222     31,180,326

    Income (loss) per common share          $     (0.02)   $     (0.00)   $     (0.01)
</TABLE>


    Potential  dilutive  securities (stock warrants,  convertible debt) have not
been considered  since the Company reported a net loss and,  accordingly,  their
effects would be antidilutive.


Note E - Related party transactions:

    On December 10,  1998,  the Company  entered  into an agreement  with Tauren
Exploration  Inc.  ("Tauren") that provides for Tauren to drill on the Company's
Section 11 in Palo Pinto County,  Texas. The agreement grants Tauren Exploration
Inc. a farm-out retaining a 7.5% overriding royalty interest. The agreement also
grants the Company  preferential  rights in the event that Tauren, at some later
date,  decides to divest  part or all of its  interests  in the  drilled  wells.
Calvin  Wallen III is an officer,  director  and major  stockholder  of both the
Company and Tauren.



                                       12
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS



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

        1)  As of January 1, 2002, the Company owed Tauren  $856,712,  primarily
            comprised of non-interest  bearing advances the Company had received
            over the course of several  years.  In exchange for the amounts owed
            to it,  Tauren  accepted  the  transfer of 856,712  newly issued and
            unregistered shares of common stock in the Company that had a market
            price of $.70 per share.
        2)  The Company  received the rights to participate  in prospective  oil
            and gas projects in which Tauren owns a working interest.
        3)  The Company shall, as requested,  have the future privilege of using
            the general and administrative services of Tauren based on an agreed
            pro rata cost.
        4)  The Company  issued  three series of warrants to Tauren as described
            in Note C.

    On December  1, 1997,  the Company  entered  into a contract  with Tauren to
provide the necessary technical,  administrative and management expertise needed
to conduct its  business.  This  agreement was renewed and revised on January 1,
2002. The Company has no full-time employees, and its offices are subleased from
Tauren.  The monthly  amount  charged to the Company is based on actual costs of
materials  and labor hours of Tauren that are used  pursuant to the terms of the
agreement.  Tauren also pays various  organization  costs and consulting fees on
behalf of the  Company.  As of June 30, 2005 and 2004,  the Company  owed Tauren
$3,598 and $178,  respectively,  which are  included  in  accounts  payable  and
accrued  expenses  in the  accompanying  financial  statements.  Charges  to the
Company  under the  contracts  were  $35,322,  $45,938 and $83,628 for the years
ended June 30, 2005, 2004 and 2003, respectively.

    In  addition,  the wells in which the Company  owns a working  interest  are
operated by an affiliated company,  Fossil Operating Inc.  ("Fossil"),  which is
owned 100% by the Company's President and Chief Executive Officer, Calvin Wallen
III.  As of June 30,  2005 and  2004,  the  Company  owed  Fossil  $0,  in lease
operating expenses and was owed by Fossil $34,354 and $78,887, respectively, for
oil and gas sales.  The amounts owed by Fossil include  revenue in the amount of
$30,104  earned on the Mosley well #25-1  which has been held in suspense  until
filings are  finalized.  The amounts  owed the Company are  included in accounts
receivable - trade.

    On or about January 11, 2005, the Company issued  1,531,661 shares of common
stock to Caravel  Resources  Energy Fund 2003-II,  L.P. (the  "Partnership")  in
exchange for a 0.1914575033  working  interest in the Kraemer 24-1 Well,  Desoto
Parish,  Township 14 N, Range 15 W,  Section 24 (the  "Well").  The Company also
issued  468,339  shares  of  common  stock  to  Mr.  Wallen  in  exchange  for a
0.0585424967 working interest in the Well. The common stock closed at a price of
$0.90 on January 10, 2005. The shares of common stock were issued by the Company
in reliance upon an exemption from registration set forth in Section 4(2) of the
Securities Act of 1933, as amended,  which exempts transactions by an issuer not
involving a public offering.


Note F - Income taxes:

    Deferred tax assets and  liabilities  are computed by applying the effective
U.S.  federal income tax rate to the gross amounts of temporary  differences and
other tax  attributes.  Deferred  tax assets and  liabilities  relating to state
income taxes are not material.  In assessing the  realizability  of deferred tax
assets,  management  considers  whether  it is more  likely  than not that  some
portion or all of the  deferred  tax assets will not be  realized.  The ultimate
realization  of deferred tax assets is dependent  upon the  generation of future
taxable income during the periods in which those  temporary  differences  become
deductible.   Management  considers  the  scheduled  reversal  of  deferred  tax
liabilities,  projected  future taxable income,  and tax planning  strategies in
making this  assessment.  As of June 30, 2005 and 2004, the Company  believed it
was more  likely  than not that  future tax  benefits  from net  operating  loss
carryforwards  and other  deferred  tax assets would not be  realizable  through
generation of future taxable income; therefore, they were fully reserved.






                                       13
<PAGE>
<TABLE>
<CAPTION>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS


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

                                                            2005         2004
                                                         ---------    ---------
    Deferred tax assets:
    Net operating loss carryforwards                     $ 698,000    $ 500,200
    Capital loss carryforwards                               7,400        7,400
    Accrued lawsuit settlement                                --         16,800
                                                         ---------    ---------
                                                         $ 705,400    $ 524,400
                                                         ---------    ---------
    Deferred tax liabilities:
    Depletion basis of assets and related accounts       $(103,600)   $ (60,400)
                                                         ---------    ---------
                                                         $(103,600)   $ (60,400)
                                                         ---------    ---------

    Net deferred tax (liabilities) assets before
    valuation allowance                                  $ 601,800    $ 464,000

    Valuation allowance                                   (601,800)    (464,000)
                                                         ---------    ---------

    Net deferred tax (liabilities) assets                $    --      $    --
                                                         =========    =========


    The  following  table  summarizes  the  difference  between  the  actual tax
provision  and the amounts  obtained by applying the  statutory tax rates to the
income or loss before  income taxes for the years ended June 30, 2005,  2004 and
2003:


                                                              2005         2004         2003
                                                           ---------    ---------    ---------
    <S>                                                    <C>          <C>          <C>
    Tax provision (benefit) calculated at statutory rate   $(197,800)   $ (38,800)   $ (73,800)

    Losses not providing tax benefits                        197,800       38,800       73,800
                                                           ---------    ---------    ---------

    Current federal income tax provision                   $    --      $    --      $    --
                                                           =========    =========    =========


    Change in valuation allowance                          $ 137,800    $  10,700    $  29,400
                                                           =========    =========    =========
</TABLE>






                                       14
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS


    As of June 30, 2005,  the Company had net operating  loss  carryforwards  of
approximately  $4,653,200,  which are available to reduce future taxable income.
These carryforwards expire as follows:

                                                       Net operating
                  Year                                    losses
                 ------                                -------------

                  2007                                 $     128,500
                  2009                                         5,700
                  2011                                       431,100
                  2012                                       205,100
                  2013                                       639,800
                  2019                                       845,600
                  2020                                       297,100
                  2021                                       172,100
                  2022                                        15,400
                  2023                                       571,900
                  2024                                        22,600
                  2025                                     1,318,300
                                                       -------------

                                                       $   4,653,200
                                                       =============

Note G - Commitments and contingencies:

    Key personnel
    -------------

        The  Company  depends  to a large  extent on the  services  of Calvin A.
    Wallen  III,  the  Company's  President,  Chairman  of the Board,  and Chief
    Executive  Officer.  The loss of the  services  of Mr.  Wallen  would have a
    material  adverse  effect on the Company's  operations.  The Company has not
    entered into any employment contracts with any of its executive officers.

    Environmental matters
    ---------------------

        The Company's  operations  and  properties  are subject to extensive and
    changing federal,  state, provincial and local laws and regulations relating
    to environmental protection, including the generation, storage, handling and
    transportation  of oil and  gas and the  discharge  of  materials  into  the
    environment.  The  Company  generates  typical  oil  and gas  field  wastes,
    including  hazardous  wastes  that  are  subject  to the  federal  Resources
    Conservation  and Recovery Act and comparable  state statutes.  Furthermore,
    certain wastes  generated by the Company's oil and gas  operations  that are
    currently exempt from regulation as "hazardous  wastes" may in the future be
    designated as  "hazardous  wastes" and therefore be subject to more rigorous
    and  costly  operating  and  disposal  requirements.  All of  the  Company's
    properties  are operated by third  parties over whom the Company has limited
    control.  In  addition  to the  Company's  lack of control  over  properties
    operated by others,  the failure of previous  owners or  operators to comply
    with applicable  environmental  regulations  may, in certain  circumstances,
    adversely impact the Company.

    Litigation matters
    ------------------

        The Company had filed suit in the 29th Judicial  District  Court in Palo
    Pinto County, Texas, styled "Roseland Oil and Gas, Inc. v. William Vandever,
    et al," bringing suit against  Clifford Kees,  William  Vandever and various
    persons,  seeking a judicial  determination  that all grants of preferential
    rights in the Reagan  Section 11 and 12 are void.  This lawsuit was filed on
    April 26,  1999.  All section 11  preferential  rights were  returned to the
    Company on or about January 2002.  However,  Clifford Kees was to retain his
    1% override  interest in these Reagan  Lease  Sections.  Clifford  Kees then
    moved to trial  against  on the claim of  attorney  fees owed to him for the
    prosecution of this lawsuit. The trial was heard on September 25, 2002, with
    Kees requesting in excess of $200,000 in attorney fees and costs. In June of
    2003, The Court  re-opened the trial as to attorney fees and costs, to allow



                                       15
<PAGE>
<TABLE>
<CAPTION>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS

    Kees to put on additional  evidence,  and such trial was re-convened on June
    19, 2003.  On July 15, 2003,  the Court  entered a Judgment in favor of Kees
    and as against the Company for approximately  $112,000. The Company believed
    the  Judgment  should  not stand and  appealed  the  Judgment.  On or about,
    September  17,  2004,  the  Eastland  Court Of Appeals  issued  its  ruling,
    modifying the amounts owed by the Company under the Judgment to $59,000. The
    Company  was been  denied a  Re-Hearing  as to  clarification  and a further
    reduction of the Judgment.  The Company filed a Petition For Review with the
    Texas Supreme Court that was Denied on or about January 21, 2005.

        The  Company  had put into the  registry of the Court a cash bond in the
    amount of $92,500.  On or about  March 14,  2005,  the Trial Court  issued a
    final  ruling  which  ordered  for Cubic to pay out to Kees  $83,726  of the
    monies in the  registry of the Court,  with  $8,774.22  of the monies in the
    registry of The Court refunded to Cubic.

        The Company  was been  denied a  Re-Hearing  as to  clarification  and a
    further  reduction of the Judgment.  The Company filed a Petition For Review
    with the Texas Supreme Court that was Denied on or about January 21, 2005.

        The  Company  had put into the  registry of the Court a cash bond in the
    amount of $92,500.  On or about  March 14,  2005,  the Trial Court  issued a
    final  ruling  which  ordered  for Cubic to pay out to Kees  $83,726  of the
    monies in the  registry  of the  Court,  with  $8,774  of the  monies in the
    registry of The Court refunded to Cubic.


Note H - Cost of oil and gas properties:

    Costs incurred
    --------------

        Costs  (capitalized  and  expensed)  incurred  in oil and  gas  property
    acquisition,  exploration,  and  development  activities for the years ended
    June 30, 2005, 2004 and 2003 were as follows:

                                               2005         2004         2003
                                            ----------   ----------   ----------
    Property acquisitions                   $2,880,000   $     --     $     --
    Exploration                                733,946         --           --
    Development                                   --           --           --
                                            ----------   ----------   ----------

                                            $3,613,946   $     --     $     --
                                            ==========   ==========   ==========

Capitalized costs

        The  aggregate  amounts of  capitalized  costs  relating  to oil and gas
    producing  activities and the aggregate  amounts of the related  accumulated
    depreciation,  depletion,  and  amortization at June 30, 2005, 2004 and 2003
    were as follows:

                                                    2005         2004         2003
                                                 ----------   ----------   ----------
    <S>                                          <C>          <C>          <C>
    Proved properties                            $4,098,571   $1,537,625   $1,537,625
    Unproved properties                           1,053,000         --           --
                                                 ----------   ----------   ----------

                                                 $5,151,571   $1,537,625   $1,537,625

    Accumulated depreciation, depletion
    and amortization                              1,468,106    1,103,939      999,205
                                                 ----------   ----------   ----------

    Total properties                             $3,683,465   $  433,686   $  538,420

    Less: impairment of oil and gas properties
    due to full cost ceiling test                      --           --           --
                                                 ----------   ----------   ----------

    Net properties                               $3,683,465   $  433,686   $  538,420
                                                 ==========   ==========   ==========
</TABLE>





                                       16
<PAGE>
<TABLE>
<CAPTION>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS




        Results of operations
        ---------------------

        The results of operations from oil and gas producing  activities for the
    years ended June 30, 2005, 2004 and 2003 were as follows:

                                                    2005         2004        2003
                                                 ---------    ---------   ---------
    <S>                                          <C>          <C>         <C>
    Revenues:
    Revenues                                     $ 469,441    $ 414,741   $ 356,636
    Preferred return                                  --           --          --
                                                 ---------    ---------   ---------

                                                 $ 469,441    $ 414,741   $ 356,636
                                                 ---------    ---------   ---------
    Expenses:
    Production and development costs             $ 273,074    $ 186,465   $ 167,303
    Depreciation, depletion and amortization       364,496      104,735     119,249
                                                 ---------    ---------   ---------

                                                 $ 637,570    $ 291,200   $ 286,552
                                                 ---------    ---------   ---------

    Results before income taxes                  $(168,129)   $ 123,541   $  70,084
    Provision for income taxes                        --           --          --
                                                 ---------    ---------   ---------

    Results of operations (excluding corporate
    overhead and interest expense)               $(168,129)   $ 123,541   $  70,084
                                                 =========    =========   =========
</TABLE>



Note I - Oil and gas reserves information (unaudited):

    The estimates of proved oil and gas reserves  utilized in the preparation of
the financial statements are estimated in accordance with guidelines established
by the Securities and Exchange Commission and the Financial Accounting Standards
Board,  which require that reserve estimates be prepared under existing economic
and operating  conditions with no provision for price and cost  escalations over
prices and costs existing at year-end except by contractual arrangements.

    The Company  emphasizes  that reserve  estimates are  inherently  imprecise.
Accordingly,  the estimates  are expected to change as more current  information
becomes available.  The Company's policy is to amortize  capitalized oil and gas
costs on the unit of production method,  based upon these reserve estimates.  It
is  reasonably  possible  that,  because of changes in market  conditions or the
inherent  imprecision of these reserve  estimates,  that the estimates of future
cash inflows,  future gross  revenues,  the amount of oil and gas reserves,  the
remaining  estimated lives of the oil and gas properties,  or any combination of
the above may be increased or reduced in the near term.

    If reduced, the carrying amount of capitalized oil and gas properties may be
reduced materially in the near term.


                                       17
<PAGE>
<TABLE>
<CAPTION>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS



    The following  unaudited  table sets forth proved oil and gas reserves,  all
within the United  States,  at June 30, 2005,  2004 and 2003  together  with the
changes therein:


                                                         Natural Gas (Mcf)
                                                 --------------------------------
                                                   2005        2004        2003
                                                 --------    --------    --------
    <S>                                          <C>         <C>         <C>
    Proved developed and undeveloped reserves:
    Beginning of year                             311,098     330,000     564,272
    Revisions of previous estimates                  --        52,902    (161,184)
    Purchases of reserves in place                269,308        --          --
    Extensions and discoveries                       --          --          --
    Production                                    (70,781)    (71,804)    (73,088)
    Disposals of reserves in place                   --          --          --
                                                 --------    --------    --------

    End of year                                   509,625     311,098     330,000
                                                 ========    ========    ========


                                                   Oil and condensate (Bbls)
                                                 --------------------------------
                                                   2005        2004        2003
                                                 --------    --------    --------
    Proved developed and undeveloped reserves:
    Beginning of year                                --          --          --
    Revisions of previous estimates                 1,194        --          --
    Purchases of reserves in place                     14        --          --
    Extensions and discoveries                        346        --          --
    Production                                       (506)       --          --
    Disposals of reserves in place                   --          --          --
                                                 --------    --------    --------

    End of year                                     1,048        --          --
                                                 ========    ========    ========
</TABLE>




Standardized  measure of  discounted  future net cash flows  relating  to proved
reserves
--------------------------------------------------------------------------------

    The standardized  measure of discounted future net cash flows was calculated
by applying current year-end prices,  considering  fixed and determinable  price
changes  only to the extent  provided  by  contractual  arrangements  or law, to
estimated future production,  less future  expenditures (based on current costs)
to be incurred in developing proved undeveloped and proved producing oil and gas
reserves,  and future  income taxes.  The  resulting  future net cash flows were
discounted  using a rate of 10 percent  per annum  (Table  1). The  standardized
measure  of  discounted  net  cash  flow  amounts  contained  in  the  following
tabulation  does not purport to represent the fair market value of the Company's
oil and gas proved by  drilling or  production  history.  There are  significant
uncertainties  inherent  in  estimating  timing and amount of future  costs.  In
addition, the method of valuation utilized, is based on current prices and costs
and the use of 10 percent discount rate, and is not necessarily  appropriate for
determining fair value (Table 2).



                                       18
<PAGE>
<TABLE>
<CAPTION>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS



Standardized  measure of  discounted  future net cash flows  relating  to proved
reserves (continued):
--------------------------------------------------------------------------------


    The following is the estimated standardized measure relating to proved oil
and gas reserves at June 30, 2005, 2004 and 2003:


    Table 1                                          2005           2004           2003
    -------                                      -----------    -----------    -----------
    <S>                                          <C>            <C>            <C>
    Future cash flows                            $ 3,443,400    $ 2,059,245    $ 1,893,067
    Future production costs                       (1,303,300)      (833,306)      (564,669)
    Future development costs                         (23,900)          --             --
    Future severance tax expense                    (213,900)      (250,473)      (230,251)
    Future income taxes                                 --
                                                 -----------    -----------    -----------

    Future net cash flows                        $ 1,902,300    $   975,466    $ 1,098,147

    Ten percent annual discount for estimated
    timing of net cash flows                        (831,200)      (243,553)      (299,766)
                                                 -----------    -----------    -----------

    Standardized measure of
    discounted future net cash flows             $ 1,071,100    $   731,913    $   798,381
                                                 ===========    ===========    ===========


    Following is an analysis of changes in the estimated standardized measure of
proved reserves during the years ended June 30, 2005, 2004 and 2003:


                  Table 2                            2005           2004           2003
                                                 -----------    -----------    -----------

    Changes from:
    Sale of oil and gas produced                 $  (196,368)   $  (123,541)   $  (114,795)

    Net changes in prices and production costs      (165,199)       (43,462)       296,479
    Extensions and discoveries                       493,500           --             --
    Revision of previous quantity estimates          (42,290)       122,601       (260,268)
    Accretion of discounts                            73,191        103,681        107,926
    Net change in income taxes                          --          (33,565)        23,487
    Purchases of reserves in place                   197,300           --             --
    Disposals of reserves in place                      --             --             --
    Other                                            (20,947)       (92,182)        87,882
                                                 -----------    -----------    -----------

    Change in standardized measure               $   339,187    $   (66,468)   $   140,711
                                                 ===========    ===========    ===========
</TABLE>





                                       19
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS




Note J - Proforma information related to stock warrants:

    The per share  weighted-average  fair value of stock warrants granted during
the year  ended  June 30,  2002,  was  $0.29,  on the date of  grant,  using the
Black-Scholes  pricing model.  There were no stock  warrants  granted during the
years ended June 30, 2005, 2004 and 2003.


                                                   2002
                                                ---------

    Expected dividend yield                       0.00%
    Risk-free interest rate                       1.80%
    Expected life                               1.7 years
    Expected volatility                          133.00%



    The Company  applies APB Opinion No. 25 in accounting for its stock warrants
issued  to  employees  and  directors,  and,  accordingly,   has  recognized  no
compensation  expense for stock warrants and options  granted at exercise prices
at least  equal to the  market  value of the  Company's  common  stock.  Had the
Company  determined  compensation cost based on the fair value at the grant date
for its stock  options under SFAS No. 123, the Company's net income and earnings
per share would have been reduced to the proforma amounts indicated below:


                                             2005          2004         2003
                                          ----------    ----------    ---------

    Net loss:
    As reported                           $ (784,526)   $ (114,116)   $(217,121)
                                          ==========    ==========    =========

    Proforma                              $ (802,026)   $ (149,580)   $(272,434)
                                          ==========    ==========    =========

    Stock-based employee compensation:
    As reported                           $     --      $     --      $    --
                                          ==========    ==========    =========

    Proforma                              $   17,500    $   35,464    $  55,313
                                          ==========    ==========    =========

    Basic loss per common share:
    As reported                           $    (0.02)   $    (0.00)   $   (0.01)
                                          ==========    ==========    =========

    Proforma                              $    (0.02)   $    (0.00)   $   (0.01)
                                          ==========    ==========    =========








                                       20