SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                     FOR THE FISCAL YEAR ENDED JUNE 30, 2001

                          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.)


             1720 NORTHWEST HIGHWAY, SUITE 320, GARLAND, TEXAS 75041
                    (Address of Principal Executive Offices)


                            TELEPHONE: (972) 686-0369
                           (Issuer's Telephone Number)
           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                      COMMON STOCK-PAR VALUE $.05 PER SHARE


Check  whether  registrant  (1) has filed all  reports  required  to be filed by
Section 13 or 15(d) of the Securities  Exchange Act of 1934 during the preceding
12 months, and (2) has been subject to such filing  requirements for the past 90
days.

                                                  Yes [X]         No [ ]

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-B is not contained  herein,  and will not 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]

As of June 30, 2001, the registrant had outstanding  29,989,616 shares of common
stock,  $.05 par value ("Common  Stock"),  which is  registrant's  only class of
common  stock.  There  have been no trades  in the  Common  Stock or bid and ask
prices within the past sixty days.

The registrant's revenues for the fiscal year ended June 30, 2001 were $728,592.

Transitional Small Business Disclosure Format:  Yes     No X
                                                   ---    ---




                                       1
<PAGE>

                               CUBIC ENERGY, INC.
                          TABLE OF CONTENTSDESCRIPTION


Item                                                                        Page

                                     PART I


ITEM 1. Description of Business and Properties                                 4
GENERAL........................................................................4
DESCRIPTION OF BUSINESS........................................................4
RESTATEMENT OF FINANCIAL RESULTS...............................................5
PRINCIPAL OIL AND GAS PROPERTIES...............................................6
MARKETING OF PRODUCTION........................................................7
OIL AND GAS RESERVES...........................................................8
NET PRODUCTION, SALES PRICES AND COSTS.........................................9
PRODUCTIVE WELLS AND ACREAGE..................................................10
RISK FACTORS..................................................................12
ITEM 4. Submission of Matters to a Vote of Security Holders                   26
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters 27
ITEM 6. Management's Discussion And Analysis Or Plan Of Operations            27
GENERAL.......................................................................28
RESULTS OF OPERATIONS                                                         28
COMPARISON OF FISCAL 2001 TO FISCAL 2000 REVENUES.............................28
LIQUIDITY AND CAPITAL RESOURCES...............................................29
COMPARISON OF FISCAL 2001 TO FISCAL 2000 REVENUES.............................30
LIQUIDITY AND CAPITAL RESOURCES...............................................31
ITEM 7. FINANCIAL STATEMENTS
ITEM 8. Directors,  Executive  Officers, Promoters  and  Control  Persons of the
Registrant; Compliance with Section 16(a) of the Exchange Act.                33
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.............................34
ITEM 9. Executive Compensation                                                34
ITEM 10. Security Ownership of Certain Beneficial Owners and Management       34
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K      36
A. Financial Statements.......................................................36
B. Reports on Form 8-K........................................................37
SIGNATURES   37
INDEX TO FINANCIAL STATEMENTS                                                 40
Note B - Significant accounting policies (continued):.........................49
Concentration of credit risk..................................................49





                                       2
<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.


                                       3
<PAGE>

                               Cubic Energy, Inc.

                                     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,
2001, our total proved reserves were 836,193 BOE.

We were incorporated in October 1978 in the State of Texas and in March 1980, we
were 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 of 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
1720  Northwest  Highway,  Suite 320,  Garland,  Texas 75041,  and our telephone
number is (972) 686-0369.

In December  1997,  the Company  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  December  1997  Stock  Purchase  Agreement,  the  Company  focused
primarily on the  acquisition of non-operated  working  interests and overriding
royalty  interests in oil and gas  properties.  Subsequent to the Stock Purchase
Agreement  in December  1997,  the Company  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
the Company 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.




                                       4
<PAGE>

We also took decisive  steps in  addressing  various  accounting  issues and, in
accordance  with generally  accepted  financial and accounting  standards,  took
significant  write-downs  of our assets prior to our fiscal year end of June 30,
1999, which directly impacted our net income. The Company recorded a net loss in
fiscal 1999 of $515,933 due largely to depletion and lease operating expense. In
addition, our management requested our prior auditor to provide the Company with
restated audited  financial  statements for the fiscal year ending June 30, 1998
to accurately  reflect the condition of the Company as discussed below and these
restatements are included in this annual report.

In the year ending June 30, 1999, we took a prior year  adjustment that affected
the income  statement  for the year ending June 30,  1997.  The  adjustment  was
necessary to recapture excess depletion to income that should have been adjusted
in 1997.  Consequently,  the  retained  deficit for 1999 was adjusted to reflect
$196,491 of prior year excess depletion.

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
Exploration,   Inc.  ("Tauren"),  an  independent  energy  company,  and  Fossil
Operating,  Inc.  ("Fossil")  acts as the operator  for some of the  properties.
Calvin Wallen III, a material  shareholder,  director and officer of the Company
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 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,  and/or its  principals  and
employees, received 111,413 shares of the Company's common stock.

RESTATEMENT OF FINANCIAL RESULTS

Subsequent to the issuance of our financial statements for the fiscal year ended
June 30, 1999 and prior to the  issuance  of our  financial  statements  for the
fiscal year ended June 30, 1998, our new Board of Directors  determined that the
prior management of the Company (i.e., our management prior to the December 1997
Stock  Purchase  Agreement)  had  included  assets  consisting  of oil  and  gas
properties  on our financial  statements  after the oil and gas  properties  had
already been sold or transferred by the Company prior to the periods  covered by
the 1996 and 1997 financial statements. Upon examination, the Board of Directors
and new management of the Company determined that certain assets were improperly
included on our financial  statements for prior periods and were inappropriately
included in calculations of assets,  depletion  deductions and net income in our
balance  sheets and  statements of  operations.  As a result,  the  accompanying
financial  statements  as of June 30, 1998 and for the year  ended,  present the
restated accumulated deficit at June 30, 1999 of $2,430,936.  And a restated net
loss for the year ended June 30, 1999 of $515,933.


                                       5
<PAGE>

In response to the errors discussed  above, a number of conditions,  which could
represent a material weakness in our prior internal  accounting  controls,  were
identified. These conditions included a deterioration in our internal accounting
controls  under prior  management,  lack of adequate  communication  between our
prior  management  and prior  auditors,  a failure to stress the  importance  of
controls by prior  management,  and an apparent  lack of clarity and  consistent
understanding within the Company by prior management  concerning the application
of our accounting policies to transactions involving the sale of properties.  We
have implemented steps that have strengthened our internal accounting  controls.
These steps  included  provision  of in house  accounting  services  through our
affiliate,   updating  our  policies  regarding  accounting  and  reporting  for
transactions,  changing our corporate  accounting  and  reporting  structure and
hiring a new accounting firm.

PRINCIPAL OIL AND GAS PROPERTIES

The following table summarizes certain information with respect to our principal
areas of operation at June 30, 2001.

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

Texas                 0          1,629,977            39%              3,235,863
Louisiana       131,594          2,597,616            61%             $7,784,158
                ----------------------------------------------------------------

Total           131,594          4,227,593           100%            $11,020,021


Our Texas properties are situated in Palo Pinto,  Parker,  Eastland and Callahan
Counties.  At June 30,  2001,  the Texas  properties  contained 9% of our proved
reserves,  which  represented 29% of our Present Value of total proved reserves.
The Texas  properties  consist  primarily  of wells  acquired  by the Company in
several  transactions  between  1991  and 1995 and  through  overriding  royalty
interests reserved in farmout agreements in 1998 and 1999.

In June 1998, we agreed to a farmout agreement with Cummings Company,  reserving
an overriding royalty interest.  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.

Our net  production for the fiscal year ending June 30, 2001 for the Texas wells
averaged 60 Mcf of natural gas per day and less than 1 barrel of oil per day.

The  Louisiana  properties  consist of proved  undeveloped  leasehold in Webster
Parish that we have placed in our drilling  program.  The property is limited in
depth to the interval  from 9,900' below the surface to a depth of 12,500' below
the  surface  and  contains  approximately  84 net acres with a 75% net  revenue
interest.

Management  anticipates  the  development to be  approximately  80% natural gas.
Under our new  business  strategy,  the Company  intends to drill on the acreage
during the primary term of the leasehold.  The  properties  contained 61% of our
proved  reserves  and 71% of our  Present  Value of total  proved  reserves.  We
acquired  this property in December  1997 through the Stock  Purchase  Agreement
transaction.



                                       6
<PAGE>

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 strategy
focuses  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 farm-ins to enhance our portfolio.

We are  currently  focusing our domestic  exploration  activities to develop our
proved  undeveloped  leasehold  properties in Texas and  Louisiana.  We have the
opportunity  to develop and acquire  additional  leasehold  interests  in Allen,
Evangeline, Sabine, Red River Parishes, Louisiana, in Union County, Arkansas and
in Jones, Taylor, Howard, and Henderson Counties,  Texas. These areas are a part
of advanced  geologic  studies  utilizing 2-D and 3-D seismic data, AVO analysis
and/or vast sub-surface control. Prospects have been developed from 4,000-17,500
feet in depth in the Flippen, Frio, Wilcox, Smackover,  Bradley, Canyon, Rodessa
and James formations.  Also included in proved undeveloped  leasehold are offset
development wells targeted for the Red Rock Smackover and Haynesville Formations
in Webster Parish, Louisiana.

During fiscal year 2000, we farmed out our non-producing leasehold in Palo Pinto
County,  Texas to the Cummings Company and to Tauren Exploration Inc., reserving
overriding royalty interests.  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 one purchaser, Mitchell Gas Services LP. 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  $445,998 for the fiscal year ended
June 30, 2001 and  represented  98% 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
2001 was $26.49.


                                       7
<PAGE>

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 2001 was $5.71.

OIL AND GAS RESERVES

The following tables set forth the proved developed and undeveloped  reserves at
June 30, 2001, 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, 2001, 2000 and 1999:

                                                                          10%
Category           Oil (Bbls)  Gas (Mcf)  Total (Mcfe)      Income     Discount
                   ----------  ---------  ------------      ------     --------

Proved Producing           0   1,629,977   1,629,977      $4,970,583  $3,235,862
Proved Undeveloped   131,594   2,597,616   3,387,180     $11,746,697  $7,784,158


                                                          AT JUNE 30,
                                         ---------------------------------------
                                           2001           2000            1999

Proved reserves:
     Oil (Bbl).....................        131,594        132,048       131,789
     Gas (Mcf).....................      4,227,593      2,847,794     3,138,923
BOE................................        836,193        606,680       654,943
Estimated future net revenues
         (before income tax) ......     16,717,280    $14,959,135    $7,804,070
     Standardized Measure(1).......     11,020,021     $7,742,838    $3,863,014
Proved developed reserves:
     Oil (Bbl) ....................              0            863           604
     Gas (Mcf).....................      1,629,977        255,872       546,998
BOE................................        271,663         43,509        91,770
Estimated future net revenues
         (before income tax) ......      4,970,583       $972,881    $1,174,611
Present Value......................      3,235,862       $576,595      $729,470
Standardized Measure (1)...........      1,734,721       $396,286      $445,141
Weighted average sales prices:
     Oil (per Bbl).................          29.85         $20.91        $11.56
     Gas (per Mcf).................           5.52           3.07          1.93

(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."


                                       8
<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 Coburn  Engineering  Corp., a firm of independent  petroleum  engineers.  The
estimates of these engineers 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  Securities  and Exchange  Commission  (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).  An increase in prices relative to fiscal year
end 2000 did cause a significant  increase in the Present Value  attributable to
our proved reserves at June 30, 2000. Since June 30, 2000,  prices had rebounded
to the  highest  since  1990.  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, general and administrative
expenses.

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, 2000.

                                                 YEAR ENDED      YEAR ENDED
                                                JUNE 30, 2001   JUNE 30, 2000
                                                -------------   -------------
PRODUCTION VOLUMES:
       Oil (Bbl)...............................           301               38

       Gas (Mcf)...............................        80,850           20,688

WEIGHTED AVERAGE SALES PRICES:
       Oil (per Bbl)...........................        $29.85           $20.91

       Gas (per Mcf)...........................          5.52            $3.07

SELECTED EXPENSES PER BOE:
       Lease operating.........................         12.31            $8.47

       Depreciation, depletion and
       Amortization............................          7.90            $3.24

       General and administrative..............         15.57           $95.09


                                       9
<PAGE>

PRODUCTIVE WELLS AND ACREAGE

Productive Wells

 The following table sets forth our domestic productive wells at June 30, 2001:


                Oil                    Gas                    Total
         ------------------       -------------         -----------------
         Gross          Net       Gross      Net        Gross         Net
         ------        ----       -----      ---        -----        ----
           0             0          19      12.3          18        12.3

Acreage

The  following  table sets forth our  undeveloped  and  developed  gross and net
leasehold acreage at June 30, 2000. 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
         -----        ---         -----      ---        -----          ---
         4,100        780          930       507        5,030        1,287

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.

On June 18,  1998,  the  Company  farmed-out  188 acres of the  Reagan  lease in
Section 11, Palo Pinto County,  Texas to the Cummings Company,  Inc. retaining a
6.25%  overriding  royalty  interest  in any wells  drilled  under the  Farm-out
Agreement.

In addition,  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  with Cubic  retaining  a 7.5%  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.  Tauren is an affiliate of Calvin Wallen, III, an
officer, director and majority shareholder of the Company.


                                       10
<PAGE>

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
Exploration,  Inc.  ("Tauren"),  and  independent  energy  company,  and  Fossil
Operating,  Inc.  ("Fossil")  acts as the operator  for some of the  properties.
Calvin Wallen III, a material  shareholder,  director and officer of the Company
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 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,  and/or its  principals  and
employees, received 111,413 shares of the Company's common stock.


OPERATIONS

Although in the past we have not been the  operator of our wells,  in the future
we generally intend to seek to be named operator for wells in which we acquire a
significant  interest or will appoint an operator on our behalf. As is common in
the industry,  this  typically  occurs only when we own the major portion of the
working  interest in a particular well or field. At June 30, 2001, third parties
operated our wells under specific agreements.

Through the specific agreements providing for third party operations of majority
owned  wells,  we are  able to  exercise  a great  deal of  influence  over  the
development and enhancement of a well and to supervise operation and maintenance
activities.  We have not conducted the actual drilling of wells on properties in
which we have acted as operator in the past, but in the future we plan to engage
independent  contractors  who are  supervised  by the Company.  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.


                                       11
<PAGE>

RISK FACTORS

Holders of our Common Stock and future  investors in the Company should be aware
of the following factors in evaluating their investment in the Company.

Competition

The  oil  and  gas  industry  is  highly  competitive.  The  Company  encounters
competition  from other oil and gas  companies  in all areas of its  operations,
including  the  acquisition  of producing  properties  and sale of crude oil and
natural gas. The  Company's  competitors  include major  integrated  oil and gas
companies  and  numerous  independent  oil and gas  companies,  individuals  and
drilling  and  income  programs.   Many  of  its  competitors  are  large,  well
established  companies with  substantially  larger  operating staffs and greater
capital  resources than the Company.  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
the Company's  financial or human  resources  permit.  The Company's  ability to
acquire additional properties and to discover reserves in the future will depend
upon its ability to evaluate and select  suitable  properties  and to consummate
transactions in this highly competitive environment.

Drilling and Operating Risks

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 the Company will be  productive or that
the Company will recover all or any portion of its 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.  The  Company's  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.  The  Company's  future
drilling activities may not be successful. Lack of drilling success could have a
material  adverse  effect on the  Company's  financial  condition and results of
operations.

The Company's  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, catering,
explosions,  uncontrollable  flows of oil, gas or well fluids and  pollution and
other  environmental  risks. These hazards could result in substantial losses to
the Company 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.  The Company participates 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 on the Company in such
events.




                                       12
<PAGE>

Limited Operating History; Capital Intensive Business; Need for Additional Funds

From its inception through December 1997, the Company was engaged principally in
non-operating  activities.  While the  Company's  new  management  has extensive
experience in oil and gas exploration and operating activities,  the Company has
had very limited  experience  in these  operations.  The  Company's  business is
highly capital-intensive requiring continuous development and acquisition of oil
and gas  reserves.  In  addition,  capital is required to operate and expand the
Company's oil and gas field operations and purchase equipment. At June 30, 2001,
the Company had a working capital deficit of approximately $676,583. As a result
of the Company's  determination to operate in the future,  the Company's working
capital  requirements  may be  expected  to  increase  significantly  over prior
periods.  The  Company  anticipates  that it will  be  able  to  meet  its  cash
requirements  for the next 12  months.  However,  if such  plans or  assumptions
change  or  prove to be  inaccurate,  the  Company  could  be  required  to seek
additional  financing  sooner  than  currently  anticipated.  The Company has 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 the Company. Any future issuances of equity securities would likely
result  in  dilution  to the  Company's  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."

History of Losses

The Company  incurred  losses  before  income tax  provisions  of  $216,938  and
$237,843   combined  for  the  fiscal  years  ended  June  30,  2001  and  2000,
respectively.  The  Company's  accumulated  deficit  as of  June  30,  2001  was
$3,866,972.The  Company  does not have a bank line of credit.  The  Company  has
funded its 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. The success of the
Company in  obtaining  the  necessary  capital  resources  to fund future  costs
associated  with  its  operations  and  expansion  plans is  dependent  upon the
Company's ability to: (i) increase revenues through acquisitions and recovery of
the Company's 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 the Company  achieves  some success with its plans,
there can be no assurance that it will be able to generate  sufficient  revenues
to achieve  significant  profitable  operations or fund its expansion plans. See
"Management's Discussion and Analysis or Plan of Operations".

Significant Capital Expenditures Necessary for Undeveloped Properties

The vast majority of the Company's oil and gas reserves are classified as Proved
Undeveloped Reserves,  meaning very little production currently exists. Recovery
of the Company's Proved Undeveloped  Reserves will require  significant  capital
expenditures.  Management  estimates  that  aggregate  capital  expenditures  of
approximately  $980,000 will be required to fully develop some of these reserves
in the  next  twelve  months.  No  assurance  can be given  that  the  Company's
estimates  of capital  expenditures  will  prove  accurate,  that its  financing
sources will be sufficient to fully fund its planned  development  activities or
that development  activities will be either successful or in accordance with the
Company's 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.



                                       13
<PAGE>

No Assurance of Additional Financing

Development  of  the  Company's   properties  will  require  additional  capital
resources.  The  Company has 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 the Company.  The inability to
obtain additional financing could have a material adverse effect on the Company,
including  requiring  the  Company  to  curtail  significantly  its  oil and gas
acquisition and development plans or farm-out development of its properties. Any
additional  financing may involve  substantial  dilution to the interests of the
Company's  shareholders at that time. See "Management's  Discussion and Analysis
or Plan of Operations."

Exploration and Development Risks

The  Company  intends to  increase  its  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.  The  Company's  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.

Volatility of Oil and Gas Prices

The Company's 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.  The Company's 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 the  Company's  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 the Company's
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 the Company's  ability to market its production  through
such systems,  pipelines or facilities.  Substantially  all of the Company's 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 1999,  fiscal 2000 and fiscal 2001,
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.


                                       14
<PAGE>

Uncertainty of Estimates of Reserves and Future Net Cash Flows

This Annual Report contains  estimates of the Company's 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 the Company's control.  The reserve estimates in this Annual
Report are based on various assumptions,  including,  for example,  constant oil
and gas prices, operating expenses, capital expenditures and the availability of
funds, and, therefore,  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 Annual Report.  Additionally,  the Company's 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 the Company's control.

The present  value of future net  reserves  discounted  at 10% (the  "PV-10") of
Proved Reserves referred to in this Annual Report should not be construed as the
current  market  value  of  the  estimated   Proved  Reserves  of  oil  and  gas
attributable  to  the  Company's  properties.   In  accordance  with  applicable
requirements of the Commission,  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 Commission is not necessarily the most appropriate  discount factor based on
interest  rates in  effect  from  time to time  and  risks  associated  with the
Company's  reserves or the oil and gas  industry in  general.  Furthermore,  the
Company's  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."

Operating Hazards and Uninsured Risks; Production Curtailments

The  Company's  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  the Company  carries
insurance at levels that it believes  are  reasonable,  it is not fully  insured
against all risks. The Company does not carry business  interruption  insurance.
Losses and liabilities arising from uninsured or under-insured events could have
a material  adverse  effect on the  financial  condition  and  operations of the
Company.

From time to time, due primarily to contract terms,  pipeline  interruptions  or
weather  conditions,  the producing  wells in which the Company owns 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
the  Company is  provided  only  limited  notice as to when  production  will be
curtailed  and the duration of such  curtailments.  The Company is not currently
experiencing any material curtailment of its production.


                                       15
<PAGE>

Dependence on 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 its executive  officer and has not obtained key personnel life insurance on
Mr. Wallen, its President and Chief Executive Officer.

Concentration of Voting Power

The Company's executive officers,  directors and their affiliates and certain 5%
shareholders  hold  approximately  70% of the  Company's  outstanding  shares of
Common Stock.  As a result,  officers,  directors and their  affiliates and such
shareholders have the ability to exert  significant  influence over the business
affairs  of the  Company,  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.

Conflicts of Interests

Certain officers,  directors and related parties,  including entities controlled
by Calvin A. Wallen III, 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.  Management believes that the
terms of these transactions were as favorable to the Company as those that could
have been obtained from unaffiliated  parties under similar  circumstances.  All
future  transactions  between the Company and its 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 the Board of Directors
of the Company.


Public Market and Possible Volatility

Our Common Stock is traded on "over-the-counter" 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 drilling results by the
Company 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 the Company's securities.

Additional  risks related to the Company's  common stock's status as a low price
or "penny" stock

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  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.


                                       16
<PAGE>

Possible limits on trading common stock

We  intend  to  qualify  our  Common  Stock on the OTC  inter-dealer  Electronic
Bulletin  Board.  There can be no assurance  that we will be  successful in this
attempt.  The  liquidity  of our Common  Stock may be  adversely  affected,  and
purchasers of our Common Stock may have difficulty  selling our Common Stock, if
we are  unsuccessful  in  qualifying  our Common Stock for trading in a suitable
trading market.

Possible  adverse  consequences  due  to the  indemnification  of  officers  and
directors

Provisions of our Certificate of Incorporation  and By-Laws 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.

Texas law and our charter  documents contain  anti-takeover  provisions that may
discourage a change in control

Provisions of Texas law and our  Certificate  of  Incorporation  and By-Laws may
have the effect of delaying or preventing a change in control or  acquisition of
our Company. Our Certificate of Incorporation and By-Laws 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   stockholder   approval),   purported  limits  on
stockholder  action  by  written  consent  in lieu  of a  meeting,  and  certain
procedural  requirements governing stockholder meetings.  These provisions could
have the effect of delaying or preventing a change in control of our Company.

No Dividends

The Company's board of directors presently intends to retain all of its earnings
for the expansion of its business. The Company therefore does not anticipate the
distribution of cash dividends in the foreseeable future. Any future decision of
the Company's board of directors to pay cash dividends will depend,  among other
factors, upon the Company's earnings, financial position and cash requirements.

Title To Properties

The Company's  contract land  professionals have reviewed title records or other
title  review  materials   relating  to  substantially   all  of  its  producing
properties.  The title investigation performed by the Company prior to acquiring
undeveloped  properties is thorough, but less rigorous than that conducted prior
to drilling,  consistent with industry  standards.  The Company  believes it has
satisfactory title to all its producing  properties in accordance with standards
generally  accepted in the oil and gas industry.  The Company's  properties  are
subject to customary royalty interests,  liens incident to operating agreements,
liens for current  taxes and other  burdens,  which the Company  believes do not
materially interfere with the use of or affect the value of such properties.  At
June 30, 2001, the Company's leaseholds for approximately 60% of its 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.


                                       17
<PAGE>

The Company expects to make  acquisitions of oil and gas properties from time to
time  subject to  available  resources.  In making an  acquisition,  the Company
generally  focuses  most  of  its  title  and  valuation  efforts  on  the  more
significant  properties.  It is generally not feasible for the Company to review
in-depth  every  property  it  purchases  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  the
Company 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 the Company may
decide to assume environmental and other liabilities in connection with acquired
properties.

Governmental Regulation

The Company's  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  the  Company's  cost of  doing  business  and  affects  its
profitability.  Although the Company  believes it is in  substantial  compliance
with all applicable laws and regulations,  because such laws and regulations are
frequently amended or reinterpreted, the Company is unable to predict the future
cost or impact of complying with such laws and regulations.

Sales of natural gas by the Company 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 the Company,  as well as
the revenues received by the Company for sales of such production.  Sales of the
Company's 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 the  Company and its 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.


                                       18
<PAGE>

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

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 the
Company only indirectly,  these policy  statements and proposed rule changes are
intended to further  enhance  competition  in natural gas  markets.  The Company
cannot  predict  what  action  the FERC will take on these  matters,  nor can it
predict  whether the FERC's  actions will achieve its stated goal of  increasing
competition in natural gas markets.  However,  the Company does not believe that
it will be treated  materially  differently than other natural gas producers and
marketers with which it competes.

The price the Company  receives  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.  The Company is 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 the
Company's properties.  However, the Company does not believe it will be affected
materially  differently  by  these  statutes  and  regulations  than  any  other
similarly situated oil and gas company.



                                       19
<PAGE>

Environmental Matters

The Company's  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 the Company's  operations.
The  permits  required  for the  Company's  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,  the Company is in substantial  compliance  with current  applicable
environmental laws and regulations,  and the Company has 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 the Company.  The
impact of such changes,  however, would not likely be any more burdensome to the
Company than to any other similarly situated oil and gas company.

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.

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. 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 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.

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.


                                       21
<PAGE>

The Company owns or leases  properties that for many years have produced oil and
gas. The Company also owns natural gas gathering systems. It is not uncommon for
such properties to be contaminated  with  hydrocarbons.  Although the Company 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
the  Company  to  remove  any  such  wastes  or  to  remediate   the   resulting
contamination.  All of the  Company's  properties  are operated by third parties
over whom the Company has limited control. Notwithstanding the Company's 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 the Company.

Abandonment Costs

The Company is responsible for payment of plugging and abandonment  costs on its
oil  and  gas  properties  pro  rata  to  its  working  interest.  Based  on its
experience, the Company anticipates that the ultimate aggregate salvage value of
lease and well  equipment  located on its  properties  will  exceed the costs of
abandoning such properties. There can be no assurance, however, that the Company
will be  successful  in  avoiding  additional  expenses in  connection  with the
abandonment of any of its 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.

Employees

At June 30, 2001, the Company had no full time employees.  In December 1997, the
Company  entered into a contract  with an affiliate  controlled by our President
and Chief Executive  Officer 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.  The Company  believes that the terms of the
contract  are at least as  favorable  to the  Company as are  available  from an
unaffiliated third party.

Facilities

The Company's principal executive and administrative offices are located at 1720
Northwest Highway, Suite 320, Garland,  Texas. The offices are subleased from an
affiliate  controlled  by our  President  and Chief  Executive  Officer  and the
offices are subleased  through  October 31, 2001.  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.

Possible adverse consequences due to claims and legal proceedings

In the spring of 1999,  the Company  became aware of the claim of Clifton  Kees,
Jr.  ("Kees"),  a  geologist,  to a 1%  overriding  royalty  interest  in Reagan
Sections 11 and 12, Palo Pinto County,  Texas.  Kees filed an assignment in Palo
Pinto County,  Texas,  after December 1, 1997,  upon which Kees bases his claim.
The Company, after its initial investigation, disputes Kees' legal rights to the
overriding royalty and has filed suit to challenge this royalty.


                                       22
<PAGE>

William Vandever,  during the period of time in which he served as the President
and  Chief  Executive   Officer  of  the  Company,   purportedly   granted  some
preferential rights with respect to 75% of the Reagan leases in Section 11, Palo
Pinto County,  Texas,  to  participants in the re-work of the Reagan #2-11 well.
Claims related to preferential rights with regard to the Reagan lease in Section
11 could materially and adversely affect the financial condition and the outlook
of the Company.  Based upon information obtained by the Company, the Company has
filed suit in the 29th  Judicial  District  Court in Palo Pinto  County,  Texas,
styled "Roseland Oil and Gas, Inc. v. William Vandever,  et al.",  against Kees,
Vandever and various persons,  seeking a judicial  determination that all grants
of  preferential  rights in the Reagan Section 11 are void. This suit also seeks
monetary damages against the named  defendants.  This lawsuit was filed on April
26, 1999.  The Company is pursuing this action  vigorously.  Some parties to the
lawsuit have settled with the Company






                                       23
<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.

         "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.

         "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.

         "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.

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


                                       24
<PAGE>

         "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
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.


                                       25
<PAGE>

         "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.




                                       26
<PAGE>

ITEM 2. Description of Properties.

         See "ITEM 1. Description of Business."


ITEM 3. Legal Proceedings

First  National  Bank of Oklahoma  (the  "Bank")  filed a lawsuit in Kay County,
Oklahoma  against a former Company  Director,  William  Vandever,  and a current
Company Director, Gene Howard, alleging that these individuals,  while acting in
the  capacity  of  Directors  for  the  Companies,   breached  their   fiduciary
responsibility allegedly owed to the Bank with respect to a former subsidiary of
the Company,  Hiland Properties,  Inc.  ("Hiland").  In a prior Texas bankruptcy
proceeding  involving  Hiland,  the Bank failed to assert its claims as a Hiland
creditor.  Following the bankruptcy court approval of the Hiland  settlement and
distribution of properties,  the Bank filed suit in the bankruptcy  court to set
aside the  settlement.  After the bankruptcy  court dismissed the Bank's claims,
the Bank filed the  lawsuit in Kay County  styled  "The First  National  Bank of
Oklahoma vs. Nora Gordon,  et al". Mr. Vandever and Mr. Howard moved to transfer
the  suit to the  Texas  Bankruptcy  Court.  In the  fall  of  1999,  the  Texas
Bankruptcy  Court  denied the Motion To Transfer  filed by Mr.  Vandever and Mr.
Howard.  The Bank has taken no action in the  prosecution of this lawsuit in the
past three years.  Mr. Vandever and Mr. Howard may seek  reimbursement  from the
Company for defense costs and the amounts of any judgment attained against them.
The Bank is seeking $65,000,  plus interest and legal fees. The Company believes
that the lawsuit  filed by the Bank is without  merit and Mr.  Vandever  and Mr.
Howard  intend to  vigorously  defend  against  the  claims if they are  pursued
further.  The legal  fees  expended  by Mr.  Vandever  and Mr.  Howard for their
defense is believed to be approximately $4,000. Howard, Widdows, and Bufogle, PC
is counsel of record for Gene Howard and William Vandever.

In the spring of 1999,  the Company  became aware of the claim of Clifton  Kees,
Jr.  ("Kees"),  a  geologist,  to a 1%  overriding  royalty  interest  in Reagan
Sections 11 and 12, Palo Pinto County,  Texas.  Kees filed an assignment in Palo
Pinto County,  Texas,  after December 1, 1997,  upon which Kees bases his claim.
The Company, after its initial investigation, disputes Kees' legal rights to the
overriding  royalty and has filed suit to  challenge  this  royalty as described
below.

William Vandever,  during the period of time in which he served as the President
and  Chief  Executive   Officer  of  the  Company,   purportedly   granted  some
preferential rights with respect to 75% of the Reagan leases in Section 11, Palo
Pinto County,  Texas,  to  participants in the re-work of the Reagan #2-11 well.
Claims related to preferential rights with regard to the Reagan lease in Section
11 could materially and adversely affect the financial condition and the outlook
of the Company.  Based upon information obtained by the Company, the Company has
filed suit in the 29th  Judicial  District  Court in Palo Pinto  County,  Texas,
styled "Roseland Oil and Gas, Inc. v. William Vandever,  et al.",  against Kees,
Vandever and various persons,  seeking a judicial  determination that all grants
of  preferential  rights in the Reagan Section 11 are void. This suit also seeks
monetary damages against the named  defendants.  This lawsuit was filed on April
26, 2000.  The Company plans to vigorously  pursue this action.  Some parties to
the lawsuit have settled with the Company.

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

During the first  quarter of the fiscal year ended June 30,  2001,  proxies were
mailed  to  shareholders  of  record  as of  August  11,  2000  for  the  Annual
Stockholder  meeting  that was held on  September  13,  2000 in  Dallas,  Texas.
Security holders were asked to ratify the selection of the Company's  accounting
firm,  Philip  Vogel & Co., PC, and to vote on directors of the Company with the
directors elected to serve one year or until their replacement was elected.


                                       27
<PAGE>

The  shareholders  approved the  Company's  selection of accounting  firms,  and
elected the directors with the following vote:


APPROVAL OF ACCOUNTANTS           YES VOTES          NO VOTES        ABSTENTIONS

Philip Vogel & Co., PC           14,738,763             0                2200


ELECTION OF DIRECTORS

Calvin Wallen III                14,740,923             0                  40
Gene Howard                      14,740,919             4                  40
Jon Ross                         14,740,923             0                  40



                                     PART II


ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters

The Common Stock had been thinly traded on the  "over-the-counter"  market under
the  symbol  "RGAS"  from  1980  through  the  fall of  1999;  with  Brookstreet
Securities  Corporation,  2361 Campus Dr. #210,  Irvine,  CA 92715 acting as the
market maker.  In 1999,  the NASD  approved the Company's  request to change its
trading  symbol to "QBIC" and then to "QBIK" in  connection  with the  Company's
intention to change its corporate name to Cubic Energy, Inc.

At June 30, 2001, there were 29,989,616  shares of Common Stock outstanding held
by approximately 800 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 Texas Articles Of Incorporation, Cubic is authorized to issue one
class of  50,000,000  common  shares,  par  value  $0.05/share  and one class of
10,000,000  preferred shares, par value  $0.01/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,  2001,  there were no  preferred
shares of the Company outstanding.

The Company  does not have a written  cash  dividend  policy,  has not paid cash
dividends  on its  common  stock in the past  and  does not  expect  to pay cash
dividends in the foreseeable  future.  It is the present intention of management
to utilize all available funds for the development of the Company's business.

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, 2001. 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.


                                       28
<PAGE>

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  development  drilling  locations  to pursue after the
fiscal year ending June 30, 2001.  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.


RESULTS OF OPERATIONS

COMPARISON OF FISCAL 2001 TO FISCAL 2000 REVENUES

HISTORICALLY PRESENTED:
OIL AND GAS SALES  increased  552% to $455,654 in the fiscal year ended June 30,
2001  ("fiscal  2001")  from  $69,850  in the fiscal  year  ended June 30,  2000
("fiscal 2000"),  primarily because of the April 27, 2001 transaction  described
herein.

OTHER  REVENUES  decreased  to $0 in fiscal  2001 from $0 in fiscal  2000.  This
category of Other Revenue was totally  comprised of income from property  rental
in fiscal 1999. This property was disposed of in fiscal 1999.

COSTS AND EXPENSES

HISTORICALLY PRESENTED:
PRODUCTION  AND OPERATING  EXPENSE  increased 475% to $169,507 in the year ended
June 30,  2001  ("fiscal  2001")  from  $29,500 in the year ended June 30,  2000
("fiscal 2000") primarily  because of the April 27, 2001  transaction  described
herein.

HISTORICALLY PRESENTED:
DEPRECIATION,  DEPLETION AND  AMORTIZATION  increased 703% to $108,805 in fiscal
2000 from $13,544 in fiscal 1999.  The increase was  primarily  due to the April
27, 2001 transaction described herein.




                                       29
<PAGE>

HISTORICALLY PRESENTED:
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE ("G&A") decreased 35% to $214,387 in
the year ended June 30, 2001  ("fiscal  2001")  from  $331,463 in the year ended
June 30, 2000 ("fiscal  2000")  primarily  because  legal,  accounting and audit
costs  resulting  from  the  implementation  of a new  software  system  and the
utilization of corporate personnel versus contract personnel.

HISTORICALLY PRESENTED:
INTEREST EXPENSE decreased to $0 in the year ended June 30, 2001 ("fiscal 2001")
from $6,503 in the year ended June 30, 2000 ("fiscal 2000") primarily because of
converting some company debt into equity in the Year 2000.

HISTORICALLY PRESENTED:
LOSS ON SALE OF ASSETS  decreased to $0 in the year ended June 30, 2001 ("fiscal
2001") from $75,562 in the year ended June 30, 2000  ("fiscal  2000")  primarily
because all of the Comanche Energy, Inc. stock owned was sold in the Year 2000.

NET INCOME

HISTORICALLY PRESENTED:
Net loss  decreased 42% to reflect a loss of $216,938 in fiscal 2001 from a loss
of $372,895 in fiscal 2000 as a result of higher  market prices for oil and gas,
lower cost of  operations  from  improved  efficiency  of field  operations  and
operator  reducing  costs,  reduction  of  G&A in  accounting  and  audit  fees,
Depreciation,  Depletion and  Amortization  reduced to reflect  current  reserve
report  projections and interest expense reduced by converting some company debt
into equity.


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 a net working capital deficit of $676,583 at June 30, 2001.

The  following  discussion  sets forth the  Company's  current plans for capital
expenditures  in fiscal  2002,  and the  expected  capital  resources  needed to
finance such plans.

CAPITAL EXPENDITURES

HISTORICALLY PRESENTED:
At the present time, the Company anticipates to increase spending on exploration
and  development  activities  during  fiscal  2002  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.


                                       30
<PAGE>

The Company  will  increase  its planned  activities  for fiscal 2002 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 2001, the Company generated cash flow from operating activities of
$586,073.

The Company's  deficit in working capital  decreased to a deficit of $676,583 at
June 30, 2001 from a deficit of $721,910 at June 30, 2000.

COMPARISON OF FISCAL 2001 TO FISCAL 2000 REVENUES

RESTATED PRESENTED COMBINED:
OIL AND GAS SALES  increased  30% to  $455,654 in the fiscal year ended June 30,
2001  ("fiscal  2001")  from  $351,414  in the fiscal  year ended June 30,  2000
("fiscal 2000").

RESTATED PRESENTED COMBINED:
OTHER  REVENUES  decreased  to $0 in fiscal  2001 from $0 in fiscal  2000.  This
category of Other Revenue was totally  comprised of income from property  rental
in fiscal 1999. This property was disposed of in fiscal 1999.

COSTS AND EXPENSES

RESTATED PRESENTED COMBINED:
PRODUCTION  AND  OPERATING  EXPENSE  increased 74% to $169,507 in the year ended
June 30,  2001  ("fiscal  2001")  from  $97,552 in the year ended June 30,  2000
("fiscal 2000").

RESTATED PRESENTED COMBINED:
DEPRECIATION,  DEPLETION  AND  AMORTIZATION  decreased 39% to $108,805 in fiscal
2001 from $177,916 in fiscal 2000. The decrease was primarily  attributable to a
non-recurring  accounting adjustment due to the Company's revised annual reserve
analysis.

RESTATED PRESENTED COMBINED:
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE ("G&A") decreased 36% to $214,387 in
the year ended June 30, 2001  ("fiscal  2001")  from  $332,548 in the year ended
June 30, 2000 ("fiscal  2000")  primarily  because  legal,  accounting and audit
costs  resulting  from  the  implementation  of a new  software  system  and the
utilization of corporate personnel versus contract personnel.

RESTATED PRESENTED COMBINED:
INTEREST EXPENSE decreased to $0 in the year ended June 30, 2001 ("fiscal 2001")
from $6,651 in the year ended June 30, 2000 ("fiscal 2000") primarily because of
converting some company debt into equity in the Year 2000.

RESTATED PRESENTED COMBINED:
LOSS ON SALE OF ASSETS  decreased to $0 in the year ended June 30, 2001 ("fiscal
2001") from $75,562 in the year ended June 30, 2000  ("fiscal  2000")  primarily
because all of the Comanche Energy, Inc. stock owned was sold in the Year 2000.




                                       31
<PAGE>

NET INCOME

RESTATED PRESENTED COMBINED:
Net loss  decreased  9% to reflect a loss of $216,938 in fiscal 2001 from a loss
of $237,843 in fiscal 2000 as a result of higher  market prices for oil and gas,
lower cost of  operations  from  improved  efficiency  of field  operations  and
operator  reducing  costs,  reduction  of  G&A in  accounting  and  audit  fees,
Depreciation,  Depletion and  Amortization  reduced to reflect  current  reserve
report  projections and interest expense reduced by converting some company debt
into equity.

LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
RESTATED PRESENTED COMBINED:
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 a net working capital deficit of $676,583 at June 30, 2001.

The  following  discussion  sets forth the  Company's  current plans for capital
expenditures  in fiscal  2002,  and the  expected  capital  resources  needed to
finance such plans.


CAPITAL EXPENDITURES

RESTATED PRESENTED COMBINED:
At the present time, the Company anticipates to increase spending on exploration
and  development  activities  during  fiscal  2002  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 2002 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

RESTATED PRESENTED COMBINED:
During  fiscal 2001,  the Company  generated a cash flow deficit from  operating
activities of $586,073.

The Company's  deficit in working capital  decreased to a deficit of $676,583 at
June 30, 2001 from a deficit of $721,910 at June 30, 2000.



                                       32
<PAGE>

CAPITAL RESOURCES

The Company  cannot be certain that the funds which will be  available  from the
completed and pending sales of assets,  combined with operating cash flow,  will
be adequate to fund the projected capital expenditures for fiscal 2002. 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.

If funds available from asset sales,  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 2001.


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, 2001,  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 F1
through F23 of this Report and are incorporated herein by reference.



                                       33
<PAGE>
<TABLE>
<CAPTION>



                                   PART III

ITEM 8.  Directors,  Executive  Officers,  Promoters and Control  Persons of the
Registrant; 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:

NAME                           AGE     POSITION WITH ROSELAND                DIRECTOR SINCE
------                         ---     ---------------------                 --------------
<S>                            <C>     <C>                                   <C>

Calvin Wallen III              46      Chairman of the Board, President         1997
                                       & Chief Executive Officer

Jon S. Ross                    37      Director, Secretary                      1998

Gene Howard                    74      Director                                 1991

</TABLE>

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 fifty
corporate  entities  within  the past  eight  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").

Directors do not receive any compensation for their services as directors except
that the Company reimburses all travel expenses.



                                       34
<PAGE>


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.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

To the  Company's  knowledge,  based  solely  on a review  of the  copies of the
reports  required  pursuant to Section 16(a) of the  Securities  Exchange Act of
1934,  as  amended,  that  have  been  furnished  to  the  Company  and  written
representations that no other reports were required,  during the year ended June
30, 2001 all Section  16(a) filing  requirements  applicable  to its  directors,
executive officers and greater than 10% beneficial owners have been met.


ITEM 9. Executive Compensation

The total  compensation  for the three  fiscal  years ended June 30,  2000,  for
Calvin 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. No other person received cash compensation in excess
of $100,000 during the fiscal year ended June 30, 2000.

SUMMARY COMPENSATION TABLE
                                           Fiscal     Annual   Other Annual
Name and Principal Position                 Year      Salary   Compensation
---------------------------                ------     ------   ------------
Calvin Wallen III, President and CEO       2001          0           0
                                           2000          0           0
                                           1999          0           0
Jon S. Ross, Secretary                     2001          0           0
                                           2000          0           0
                                           1999          0           0

There were no options granted or exercised by any of the Company's  directors or
officers.

ITEM 10. Security Ownership of Certain Beneficial Owners and Management

The  following  table sets forth the  number of shares of the  Company's  Common
Stock  beneficially  owned,  as of June 30, 2001 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, 2001
are outstanding.

                                           NUMBER               APPROXIMATE
NAME AND ADDRESS                          OF SHARES          PERCENT OF CLASS
------------------                        ---------          ----------------

Calvin Wallen III                          9,912,804 /1/              33.1%
1720 Northwest Highway, Ste. 320
Garland, TX  75041



                                       35
<PAGE>

William Bruggeman                         10,872,996 /2/              36.3%
20 Anemone Circle
North Oaks, MN  55127

Gene Howard                                  322,245 /3/               1.1%
2402 East 29th St.
Tulsa, OK   74114

Jon S. Ross                                   50,000                   0.2%
1720 Northwest Highway, Ste. 320
Garland, TX  75041

All officers and directors
as a group (3 persons):                   10,285,049                  34.3%

*Less than one percent.

/1/ Includes  3,500,000  shares held by  Earthstock  Resources,  Inc., a company
controlled by Mr. Wallen, and 736,504 shares held by Tauren  Exploration,  Inc.,
an entity controlled by Mr. Wallen.

/2/  Includes  500,000  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 wife Ruth is a joint owner, and includes
2,500,000 shares held jointly by William Bruggeman & Ruth Bruggeman JTWROS

/3/ All 322,245 shares are held by Mr. Howard's wife, Belva, of which Mr. Howard
claims no beneficial ownership


ITEM 11. Certain Relationships and Related Transactions

In December  1997,  the Company  entered into a Stock  Purchase  Agreement  (the
"Agreement") with Calvin 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  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  Registrant.  In exchange for the issuance of the
Shares,  the Buyers  conveyed to the Registrant 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 our  President  and Chief  Executive  Officer to provide  certain
technical,   administrative  and  management  services  needed  to  conduct  its
business.



                                       36
<PAGE>



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 our President and Chief
Executive  Officer and the offices are subleased  through  October 31, 2001. 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 June 30, 2001, the Company had accumulated $790,098 in accounts
payable due affiliates  that includes the amounts owed for personnel and leasing
of office space.

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 their  interests  in the drilled  wells.
Tauren is an affiliate of Calvin Wallen, III, an officer,  director and majority
shareholder of the Company.

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
Exploration,   Inc.  ("Tauren"),  an  independent  energy  company,  and  Fossil
Operating,  Inc.  ("Fossil")  acts as the operator  for some of the  properties.
Calvin Wallen III, a material  shareholder,  director and officer of the Company
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 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,  and/or its  principals  and
employees, received 111,413 shares of the Company's common stock.


In October 1996,  William Bruggeman,  who subsequently  became a 5% shareholder,
loaned  $60,400  to  the  Company.  See  "Management  Discussion  and  Analysis;
Liquidity and Capital Resources".


Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K

A. Financial Statements

     The following documents are filed as part of this Report commencing on page
F-1:

         1. Report of Independent Auditors

      Statements of Income and Retained Earnings


                                       37
<PAGE>

         Balance Sheets

         Statements of Cash Flows

         Notes to Financial Statements


2.  Schedules  are  omitted  because  they are not  applicable  or the  required
information is shown in the financial statements or notes thereto listed above.


3. Exhibits

         10.1 -- Stock Purchase  Agreement,  dated  December 7. 1997,  among the
         Company,  Calvin  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 -- Consulting Agreement, dated as of December 1, 1997, between the
         Company and Tauren  Exploration,  Inc.  (incorporated  by  reference to
         Exhibit  10.2 of the  Company's  10K,  filed  with the SEC for the year
         ended June 30, 1998).

         23.1* -- Consent of Philip Vogel & Co., PC
         27.1* -- Financial Data Schedule.

         * Filed herewith.

B. Reports on Form 8-K.
The  Company  filed an 8-K on May 11,  2001  with the  Securities  and  Exchange
Commission describing the April 27, 2001 transaction.


SIGNATURES

PURSUANT TO THE  REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES  EXCHANGE
ACT OF 1934,  THE  REGISTRANT  HAS DULY  CAUSED  THIS REPORT TO BE SIGNED ON ITS
BEHALF  BY THE  UNDERSIGNED,  THEREUNTO  DULY  AUTHORIZED,  ON THE  28TH  DAY OF
SEPTEMBER, 2001.


                                                   Cubic Energy, Inc.

                                                   By: /s/  Calvin Wallen III
                                                   --------------------------
                                                   CALVIN WALLEN III
                                                   PRESIDENT AND CHIEF
                                                   EXECUTIVE OFFICER



                                       37
<PAGE>

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, 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 Wallen III     President, Chief Executive          September 28, 2001
-----------------------   Officer and Director
Calvin Wallen III         (Principal Executive Financial,
                          Accounting Officer)

/s/ Jon Stuart Ross
                          Director, Secretary                 September 28, 2001
-----------------------
Jon Stuart Ross


/s/ Gene Howard           Director                            September 28, 2001
-----------------------
Gene Howard


                                       38
<PAGE>


                               CUBIC ENERGY, INC.

                              FINANCIAL STATEMENTS
                                       and
                          INDEPENDENT AUDITORS' REPORT

                             JUNE 30, 2001 AND 2000


<PAGE>

                               CUBIC ENERGY, INC.

                              FINANCIAL STATEMENTS
                                       and
                          INDEPENDENT AUDITORS' REPORT

                             JUNE 30, 2001 AND 2000




                          INDEX TO FINANCIAL STATEMENTS


                                                                         PAGE
                                                                         ----

Report of Independent Auditors                                           F1-2

Balance Sheets                                                           F3-4

Statements of Operations                                                   F5

Statements of Changes in Stockholders' Equity                            F6-7

Statements of Cash Flows                                                   F8

Notes to Financial Statements                                           F9-23


<PAGE>

                                                                             F-1

                               CUBIC ENERGY, INC.


                          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, 2001,  and 2000,  and the related  statements of  operations,  of
changes  in  stockholders'  equity  and of cash  flows for the three  years then
ended.  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 auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit 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, 2001 and 2000,  and the results of its operations and its cash flows for the
three years then ended,  in  conformity  with  accounting  principles  generally
accepted in the United States of America.



                                                  /s/ PHILIP VOGEL & CO. PC




                                                  Certified Public Accountants

Dallas, Texas
September 24, 2001


<PAGE>
                                                                             F-2

                               CUBIC ENERGY, INC.


                         CONSENT OF INDEPENDENT AUDITORS



Cubic Energy, Inc.



We hereby  consent  to the use in the Form  10-KSB  filing of our  report  dated
September 24, 2001  relating to the balance  sheet of Cubic  Energy,  Inc. as of
June 30,  2001 and 2000 and the related  statements  of  operations,  changes in
shareholders' equity and cash flows for the year then ended, which are contained
in that filing.




                                                  /s/  Philip Vogel & Co., PC


                                                       PHILIP VOGEL & CO., PC

Dallas, Texas
September 27, 2001



<PAGE>
<TABLE>
<CAPTION>

                                                                             F-3

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


                                CUBIC ENERGY, INC
                                  BALANCE SHEET
                         June 30, 2001 and June 30, 2000


                                     ASSETS

                                                                                    (Restated)
                                                     June 30, 2001                June 30, 2000
<S>                                             <C>                          <C>
Current Assets:
   Cash and cash equivalents                    $              85,208        $                 931
   Accounts receivable                                         38,816                      119,574
                                                -------------------------    -------------------------

          Current asserts                                     124,024                      120,505


Property and equipment, at cost
   Oil and gas properties                                   7,210,335                    7,196,377
   Office and other equipment                                     910                          910
                                                -------------------------    -------------------------

           Total property and equipment                     7,211,245                    7,197,287

    Less accumulated depreciation,
     depletion and amortization                               562,964                      454,159
                                                -------------------------    -------------------------

            Net property and equipment                      6,648,281                    6,743,128


             TOTAL ASSETS                       $           6,772,305        $           6,863,633
                                                =========================    =========================

</TABLE>



<PAGE>
<TABLE>
<CAPTION>

                                                                             F-4

                                CUBIC ENERGY, INC
                                  BALANCE SHEET
                         June 30, 2001 and June 30, 2000


                        LIABILITIES & STOCKHOLDERS EQUITY


                                                                                            (Restated)
                                                            June 30, 2001                 June 30, 2000
<S>                                                      <C>                             <C>
Current Liabilities:
    Accounts payable and accrued expenses                $              10,509           $           49,963
    Due to affiliates                                                  790,098                      664,701
                                                     ----------------------------    -------------------------

          Total current liabilities                                    800,607                      714,664

Noncurrent    Liabilities:
    Deferred income taxes                                              471,800                            0

Commitments and contingencies (Note I)

Stockholders' equity:
    Preferred stock - $.01 par value,
    Authorized 10,000,000 shares, issued none            $                   0           $                0
    Common stock, -$.05 par value, authorized
    50,000,000 shares, issued 29,989,616 of
    as of June 30, 2001
    30,058,202 shares in as of June 30, 2000                         1,499,481                    1,502,911
    Additional paid in capital                                       7,867,389                    7,965,823
    Accumulated deficit                                             (3,866,972)                  (3,319,765)
                                                     ----------------------------    -------------------------

         Total stockholders' equity                                  5,499,898                    6,148,969


              TOTAL LIABILITIES AND
              STOCKHOLDERS' EQUITY                       $           6,772,305           $        6,863,633
                                                     ============================    =========================

</TABLE>



<PAGE>
<TABLE>
<CAPTION>

                                                                             F-5

                                CUBIC ENERGY, INC
                             STATEMENT OF OPERATIONS
                For the Years Ended June 30, 2001, 2000 and 1999

                                                                                  (Restated)             (Restated)
                                                        June 30, 2001            June 30, 2000         June 30, 1999
<S>                                                    <C>                    <C>                    <C>
Revenue:
   Oil and gas sales                                   $        455,654         $       351,414        $       87,348
   Rental income from operating leases                                0                       0                 5,513
   Preferred return                                             272,938                  78,448                     0
                                                    -----------------------  ---------------------- ---------------------

          Total revenue                                         728,592                 429,862                92,861

Costs and expenses:
   Oil and gas production, operating
    and development costs                                       169,507                  97,552                67,851
   Selling, general and administrative expense                  214,387                 332,548               461,335
   Depreciation, depletion and amortization                     108,805                 177,916                83,676
                                                    -----------------------  ---------------------- ---------------------

            Total costs and expenses                            492,699                 608,016               612,862


Operating income (loss)                                         235,893                (178,154)             (520,001)

Non-operating income (expenses):
   Gain (loss) on sale of assets                                      0                 (75,562)                    0
    Other income (loss)                                          18,969                  22,524               (12,193)
   Interest expense                                                   0                  (6,651)              (12,043)
                                                    -----------------------  ---------------------- ---------------------

             Total non-operating income (expenses)               18,969                 (59,689)              (24,236)


Income (loss) before income tax                                 254,862                (237,843)             (544,237)
                                                    -----------------------  ---------------------- ---------------------

Provision for income taxes                                      471,800                       0                     0

             Net loss                                  $       (216,938)        $      (237,843)       $     (544,237)

Other comprehensive income (loss), net of tax:
   Unrealized gain (loss) on securities                               0                       0                 4,836
   Reclassification adjustment                                        0                  33,914                     0
                                                    -----------------------  ---------------------- ---------------------

Comprehensive loss                                             (216,938)               (203,929)             (539,401)
                                                    =======================  ====================== =====================

Net loss per common share - basic and diluted          $          (0.01)        $        (0.01)        $        (0.02)

</TABLE>


<PAGE>
<TABLE>
<CAPTION>


                                                                             F-6

                               CUBIC ENERGY, INC.
                      (FORMERLY ROSELAND OIL AND GAS, INC.)

                  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999


                                                          Cumulative                  Common Stock                Additional
                                                           preferred             Shares            Par             paid-in
                                                             stock            Outstanding         Value            Capital
<S>                                                       <C>                 <C>           <C>                <C>
Balance, June 30, 1998 - restated                                0             17,730,847   $       886,543    $     2,385,400

   Net loss, year ended June 30, 1998                            0                      0                 0                  0
   Stock Issued - previously subscribed                          0                200,000            10,000            100,000
   Stock Issued - services rendered                              0                178,500             8,925             80,325
   Stock Issued - to settle lawsuit
      (Regal Petroleum)                                          0                129,000             6,450                  0
   Stock issued to effect business combination                                  6,807,209           340,360          2,792,825
   Unrealized gain on securities                                                        0                 0                  0
   Warrants Exercised                                                                   0                 0                  0
   Distributions from unincorporated entities
     acquired in business combination                            0                      0                 0            (25,415)
   Capitalization of earnings of unincorporated
     entities acquired in business combination                                          0                 0            (28,303)

Balance, June 30, 1999 - restated                                0             25,045,556   $     1,252,278    $     5,556,245

   Net loss, year ended June 30,2000                                                    0                 0                  0
   Stock issued - conversion of notes payable                    0                439,600            21,980            124,554
   Stock issued - previously subscribed                          0                240,000            12,000            108,000
   Stock issued to effect business combination lawsuit           0              4,334,046           216,703          1,902,244
   Stock purchase                                                0                 (1,000)              (50)              (450)
   Contributions (net) to unincorporated
     entities acquired in business combination                   0                      0                 0            140,178
   Capitalization of earnings of unincorporated
     entities acquired in business combination                   0                      0                 0            135,052
   combination
   Reclassification adjustment on sale of
     Securities                                                  0                      0                 0                  0

Balance, June 30, 2000 - restated                                0             30,058,202   $     1,502,911    $     7,965,823

   Net loss, year ended June 30, 2001                            0                      0                 0                  0
   Retirement of stock                                           0              (180,000)           (9,000)              9,000
   Distributions (net) from unincorporated                       0
     entities acquired in business combination                                          0                 0          (487,838)
   Capitalization of earnings of unincorporated                  0
     entities acquired in business combination                   0                      0                 0            330,269
   Stock issued to service provider                                               111,412             5,570             50,135

Balance, June 30, 2001                                           0             29,989,614   $     1,499,481    $     7,867,389

</TABLE>


<PAGE>

                                                                             F-7

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS



                                           Accumulated
        Stock                                Other               Total
    subscriptions       Accumulated       comprehensive      stockholders'
        Paid              deficit             Loss              Equity
   ---------------    ---------------    ---------------    ---------------

   $       110,000    $    (2,430,936)   $       (38,750)   $     1,163,670

                 0           (544,237)                 0           (544,237)
          (110,000)                 0                  0                  0
                 0                  0                  0             89,250

                 0                  0              6,450
                 0                  0          3,133,185
                 0                  0              4,836              4,836
           120,000                  0            120,000

                 0                  0                  0            (25,415)

                 0             28,303                  0                  0
   ---------------    ---------------    ---------------    ---------------

   $       120,000    $    (2,946,870)   $       (33,914)   $     3,947,739

                 0           (237,843)                 0           (237,843)
                 0                  0                  0            146,534
          (120,000)                 0                  0                  0
                 0                  0                  0          2,118,947
                 0                  0                  0               (500)

                 0                  0                  0            140,178

                 0           (135,052)                 0                  0

                 0             33,914             33,914
   ---------------    ---------------    ---------------    ---------------

   $             0    $    (3,319,765)   $             0    $     6,148,969


                 0           (216,938)                 0           (216,938)

                 0                  0                  0           (487,838)

                 0           (330,260)                 0                  0
                 0                  0                  0             55,705
   ---------------    ---------------    ---------------    ---------------

   $             0    $    (3,866,972)   $             0    $     5,499,898
   ===============    ===============    ===============    ===============



<PAGE>
<TABLE>
<CAPTION>

                                                                             F-8
                               CUBIC ENERGY, INC.

                            STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999

                                                                         (Restated)     (Restated)
                                                             2001           2000           1999
<S>                                                      <C>            <C>            <C>
Cash flows from operating activities:
 Net loss                                                $  (216,938)   $  (237,843)   $  (544,237)
 Adjustments to reconcile net loss to cash
       provided (used) by operating activities:
    Depreciation, depletion and amortization                 108,805        177,913         83,676
    (Gain) loss on sale of assets                                  0         75,562              0
    Deferred tax provision                                   471,800              0              0
    Non-cash interest expense                                      0          6,039              0
    Stock issued for services                                 55,705              0              0
    Change in assets and liabilities:
     (Increase) decrease in accounts receivable               80,758        (95,374)         6,180
     (Increase) decrease in other assets                           0              0         (4,252)
     Increase in loan from affiliates                        125,397        209,353        259,723
     Increase (decrease) in accounts payable
       and accrued liabilities                               (39,454)       (51,002)        43,442
                                                         -----------    -----------    -----------

      Net cash provided (used) by operating activities   $   586,073    $    84,648    $  (155,468)
                                                         -----------    -----------    -----------

Cash flows from investing activities:
 Proceeds from sale of securities                        $         0    $    60,063    $         0
 Proceeds from disposal of property and equipment                  0              0         38,000
 Purchase of property and equipment                          (13,958)    (2,618,990)    (2,716,022)
                                                         -----------    -----------    -----------

      Net cash provided (used) by investing activities   $   (13,958)   $(2,558,927)   $(2,678,022)
                                                         -----------    -----------    -----------

Cash flows from financial activities:
 Proceeds from stock subscriptions                       $         0    $         0    $   120,000
 Capital contributions in acquired entities                        0      2,282,233      2,881,478
 Purchase of outstanding stock                                     0           (500)             0
 Capital distributions from acquired entities               (487,838)             0              0
                                                         -----------    -----------    -----------

      Net cash provided (used) by financing activities   $  (487,838)   $ 2,281,733    $ 3,001,478
                                                         -----------    -----------    -----------

Net increase (decrease) in cash and cash equivalents     $    84,277    $  (192,546)   $   167,988

Cash and cash equivalents:
 Beginning of year                                               931        193,477         25,489
                                                         -----------    -----------    -----------

 End of year                                             $    85,208    $       931    $   193,477
                                                         ===========    ===========    ===========

Supplemental cash flows information:
Cash paid during the year for:
    Interest                                                       0              0              0
    Income taxes                                                   0              0              0

</TABLE>

<PAGE>

                                                                             F-9

                               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, Oklahoma and Louisiana.

         On April 27,  2001,  the  Company  completed a  nontaxable  transaction
whereby it  exchanged  shares of stock for the  ownership  interests  of various
entities  engaged in the  production of oil and gas. As more fully  described in
Note L, this  transaction  was accounted for under the provisions of APB Opinion
No. 16, as a pooling of interests.  Accordingly,  the financial statements as of
June 30,  2000,  and for the two years then ended have been  restated to reflect
the combined operations of the separate companies. The results of operations for
the year ended June 30, 2001,  reflect the combined  statements  of the separate
companies  through the date of  combination,  and the  operations  of the merged
companies after that date.

         All significant  intercompany  transactions have been eliminated in the
combinations.   Adjustments  to  previously   issued   statements  also  include
capitalization of undistributed  earnings of the acquired entities as additional
paid-in  capital.  The  acquired  entities  were not  tax-paying  companies  and
therefore no provision  for  deferred  taxes had been accrued in prior  periods.
Accordingly,  a deferred  tax  liability  (expense)  has been  reflected  in the
current  period  to  record  the  difference  in the book  and tax  bases of the
acquired entities pursuant to the business combination.

Note B - Significant accounting policies:

         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
$0, $20 and $173 for the years ended June 30, 2001, 2000 and 1999, 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.

<PAGE>

                                                                            F-10

                              CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS


         In addition,  the  capitalized  costs are subject to a "ceiling  test,"
which  basically  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.

         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.

         Note B - Significant accounting policies (continued):

         Depletion of  producing  oil and gas  properties  amounted to $108,805,
$177,916  and  $73,839  for the  years  ended  June 30,  2001,  2000  and  1999,
respectively (as restated).

         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.

         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 F, there were no dilutive  securities  during the
years ended June 30, 2001, 2000 and 1999. The weighted  average number of common
and  common  equivalent  shares  outstanding  was  29,951,349,  29,949,052,  and
25,045,556  for the years ended June 30, 2001,  2000 and 1999,  respectively  as
restated for the business combination.


<PAGE>

                                                                            F-11

                              CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS


Note B - Significant accounting policies (continued):

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

         The Company has adopted the provisions of SFAS No. 121,  Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
This  statement  requires  that  long-lived  assets  and  certain   identifiable
intangibles   be  reviewed  for  impairment   whenever   events  or  changes  in
circumstances  indicate  that  the  carrying  amount  of an  asset  may  not  be
recoverable.  Recoverability  of  assets  to be held and used is  measured  by a
comparison of the carrying  amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired,  the
impairment  to be  recognized  is measured  by the amount by which the  carrying
amount of the assets exceed the fair value of the assets.  Assets to be disposed
of are reported at the lower of the carrying  amount or fair value less costs to
sell.  During  the years  ended  June 30,  2001,  2000 and 1999,  the  Company's
analyses indicated that there was not an impairment of its long-lived assets.

         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.

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

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

         Comprehensive income
         --------------------

         Comprehensive  income  is the  total of (1) net loss plus (2) all other
changes in net assets arising from non-owner  sources,  which are referred to as
other  comprehensive   income.  In  accordance  with  SFAS  No.  130  "Reporting
Comprehensive  Income", the Company has presented a statement of operations that
includes  other  comprehensive  income.  An analysis of changes in components of
accumulated other comprehensive  income is presented in the statement of changes
in stockholders' equity.

         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.



<PAGE>

                                                                            F-12

                              CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS


         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.

         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, 2001, 2000 and 1999 were not significant.

         Preferred return
         ----------------

         Certain of the entities acquired in the business combination  described
in  Note L had  agreements  with  the  promoter/operator  of  the  oil  and  gas
properties that provided for a minimum annual production  volume.  The companies
had no  obligation  to refund  such  payments  and,  accordingly,  the  payments
received by those entities have been recorded as income in the periods they were
received.  Effective  on the  date of  combination,  all  such  agreements  were
cancelled.

         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.

Note C - Marketable securities:

         On January 1, 1998 the  Company  sold all rights in certain oil and gas
properties  and gas gathering  systems in exchange for 155,000  shares of common
stock of  Comanche  Energy,  Inc.  (Comanche).  The  president  of Comanche is a
stockholder  and former  director  of the  Company.  Management  classified  the
securities as available

<PAGE>

                                                                            F-13

                              CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS


for sale and they were reported at fair market value. During the year ended June
30, 2000, the Company sold all of its stock in Comanche and recognized a loss on
the sale of securities of $75,562.

Note D - Long-term debt:

         At  June  30,  2001  and  2000,  the  Company  had  no  long-term  debt
outstanding or commitments related thereto.

         The  Minneapolis  Group  consisted  of  nine  individuals  all  holding
promissory  notes dated  October 1, 1996 with an interest  rate of 10% per annum
and various  installment  payments,  each with a maturity date of April 1, 2002.
The notes  collateralized  by  various  oil and gas  properties.  Holders of the
promissory  notes  representing  the  Minneapolis  Group were  entitled,  at the
holder's option,  at any time on or before the date on which the note is paid in
full, to convert the principal  amount of the note and any accrued interest into
fully paid and  non-assessable  shares of common stock at a conversion  price of
three shares of common stock for each $1.00 of  outstanding  balance.  Effective
October 1, 1999, the holders of these notes converted $146,534, representing all
principal and accrued interest, into 439,600 shares of common stock.


Note E - 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, 2001 and 2000.

         Stock purchase agreement
         ------------------------

         In December  1997,  the Board of Directors  voted to enter into a stock
purchase  agreement  ("the  agreement") in which the Company  issued  12,500,000
restricted  shares of common stock in exchange for the conveyance to the Company
of certain non-producing  leasehold properties valued at $967,215,  less $86,951
of costs  associated  with the  transaction.  The  valuation of the property was
based on its fair market value as of the exchange date.  The  12,500,000  shares
issued  represent  approximately  70% of the  issued and  outstanding  shares of
common stock of the Company.  In connection  with the agreement,  as of December
10, 1997,  three of the five members of the Board of Directors  resigned,  three
new directors were appointed and new management of the Company was elected.

         Warrants
         --------

         Under a Limited Offering Memorandum in 1996, the Company issued 470,000
warrants  to  purchase  one share of common  stock for each  warrant at $.50 per
share of common  stock.  These  warrants were  scheduled to expire  December 28,
1998, and contained a provision for extending the  expiration  date. The Company
did not extend the  exercise  period of the  warrants.  As of December 30, 1998,
warrant holders had exercised 240,000 warrants for a total of $120,000 which was
used primarily to fund the settlement of the Regal Petroleum  lawsuit  described
in Note I and to pay other debt incurred by former management.  The Company also
issued 43,000 new warrants in

<PAGE>
<TABLE>
<CAPTION>

                                                                            F-14

                              CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS



connection with the Regal Settlement  Agreement,  exercisable at $1.00 per share
of common stock and expiring  December 31, 2000.  These warrants expired without
being exercised.

Note F - Loss per common share:

    Net loss per common share is computed as follows:

                                                                        2001                2000                1999
                                                             --------------------------------------------------------------
<S>                                                          <C>                  <C>                 <C>
                 Net loss available to stockholders
                                                             $         (216,938)  $        (237,843)  $        (544,237)

                 Weighted average number of shares of                29,951,349          29,949,052          25,045,556
                 common stock

                 Loss per common share                       $            (0.01)  $           (0.01)  $           (0.02)

</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 G - 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,  a director and a majority  stockholder of both
the Company and Tauren.

         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.  The Company has no full-time employees.  The Company's
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 an  agreement.  Tauren also paid  various  organization
costs and  consulting  fees on behalf of the  Company.  As of June 30,  2001 and
2000, the Company owed Tauren $$790,098 and $664,701,  as a result of charges to
the Company of $125,328 and $230,034 for the years then ended, 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, 2001 and 2000,  the Company owed Fossil $69 and $16,276,  in
lease operating expenses.



<PAGE>
<TABLE>
<CAPTION>

                                                                            F-15

                              CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS


Note H - 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, 2000, 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.  Pursuant to the
business combination described in Note L, the tax benefits of net operating loss
carryforwards  at June 30,  2001,  have been  utilized to  partially  offset the
liability  for deferred  taxes  arising  from that  transaction.  Therefore,  no
valuation allowance was considered necessary at June 30, 2001.

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

                                                                  2001                2000
                                                          -----------------   -----------------
<S>                                                       <C>                 <C>
       Deferred tax assets:
          Net operating loss carryforwards                $       393,198     $       868,012
          Capital loss carryforwards                               11,334              25,691
                                                          -----------------   -----------------
                                                          $       404,532     $       893,703
       Deferred tax liabilities:
          Depletion basis of assets and related           $      (876,332)    $      (300,181)
       accounts
                                                          -----------------   -----------------

       Net deferred tax (liabilities) assets
       before valuation allowance                         $      (471,800)    $       593,522

       Valuation allowance                                              0            (593,522)
                                                          -----------------   -----------------

       Net deferred tax (liabilities) assets              $       (471,800)   $             0
                                                          =================   =================

</TABLE>


<PAGE>
<TABLE>
<CAPTION>

                                                                            F-16

                              CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS



Note H - Income taxes (continued):

         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, 2001,  2000 and
1999:

                                                                          (Restated)   (Restated)
                                                               2001         2000         1999
<S>                                                          <C>          <C>          <C>

           Tax provision (benefit) calculated at statutory   $  82,646    $ (76,009)   $(294,688)
           rate

           Increase (reductions) in taxes due to:
             Acquired entities nontaxable                     (105,097)     (25,019)       9,623
             Excess of book basis over tax
               basis of acquired entities
               previously unrecorded                           471,800            0            0
             Losses not providing tax benefits                  22,451      101,028      285,065

           Current federal income tax provision              $ 471,800    $       0    $       0

           Change in valuation allowance                     $(593,522)   $  85,770    $ 284,509

</TABLE>

As discussed  above,  the Company has recorded a deferred  tax  liability  which
primarily represents the effects of the business  combination  described in Note
L. Since the acquired  entities were nontaxable,  they did not record a deferred
tax  liability  for the excess of the book  basis of assets  over the tax basis,
which  generally  resulted  from  expensing  intangible  drilling  costs for tax
purposes. The Company is required,  under the provisions of APB 16 and SFAS 109,
to record the effects of the combination in the period the  combination  occurs,
rather than as part of the restatement of the financial statements

         As of June 30, 2001, the Company had net operating loss  carry-forwards
of approximately $2,622,000, which are available to reduce future taxable income
and the related income tax liability. These carry-forwards expire as follows:

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

                                        2007        $          134,200
                                        2011                   431,100
                                        2012                   205,100
                                        2013                   639,800
                                        2018                   838,400
                                        2019                   351,400
                                        2020                    22,000
                                                    ---------------------
                                                    $        2,622,000
                                                    =====================


<PAGE>

                                                                            F-17

                              CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS



Note I - 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,  but has obtained key
personnel life insurance on Mr. Wallen.

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

         First National Bank of Oklahoma has filed a lawsuit  against two of the
Company's  directors alleging that the directors breached their fiduciary duties
to the  Bank  as a  creditor  of a  previously  wholly-owned  subsidiary  of the
Company.  The Company may be required to  indemnify  the  directors  for defense
costs, and for any judgment against the directors. The amount sought by the Bank
is $65,000 plus  interest and legal costs.  The Company  believes the claims are
without  merit,  and no  provision  for  loss  has  been  made in the  financial
statements.

         On February  4, 1998,  in the 236th  District  Court,  Tarrant  County,
Texas, Regal Petroleum Services,  Inc. ("Regal") filed suit against the Company.
Regal's  lawsuit  against the Company  alleged that the Company was in breach of
several  contracts,  for which Regal sought money for work performed as operator
of wells in which the Company  maintained  an  interest.  On December  30, 1998,
Regal and the Company executed a final, limited Settlement Agreement,  resolving
Regal's claims in this lawsuit. The Company recognized its liability to Regal at
June 30, 1998, in the amount of $120,209 which is included in accounts  payable.
In  settlement,  the Company  transferred to Regal $60,000 cash, its interest in
various oil and gas  properties of nominal  value,  129,000 shares of restricted
common stock and 43,000  warrants with an expiration  date of December 31, 2000,
at an exercise price of $1.00 per share.

<PAGE>
<TABLE>
<CAPTION>

                                                                            F-18

                              CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS


         In the  spring  of 1999,  the  Company  became  aware of the claim of a
geologist filed in December 1997, to a 1% overriding royalty interest in various
properties.  The  geologist  filed an  assignment  after  December 1, 1997.  The
Company disputes the geologist's  legal right to the overriding  royalty and has
filed suit to challenge this claim.

         William Vandever, as the prior President and Chief Executive Officer of
the Company,  purportedly  granted some  preferential  right with respect to the
Reagan leases in Section 11, Palo Pinto County,  Texas,  to  participants in the
re-work  of the  Reagan  #2-11  well.  The  Company  has filed  suit in the 29th
Judicial Court, Palo Pinto County,  Texas, styled "Roseland Oil and Gas, Inc. v.
William  Vandever,  et  al.,"  against  various  persons,   seeking  a  judicial
determination  that all grants of  preferential  rights in the Reagan Section 11
are void, and seeking  monetary  damages.  In connection  with the lawsuit,  the
defendant  has filed a  counterclaim  seeking  a  declaration  that its  alleged
working  interest  and right of first  refusal are valid and  existing;  and has
asserted a breach of contract claim for allegedly failing to honor its purported
right of  first  refusal.  This  litigation  is in the  discovery  phase  and no
judgment  can yet be formed  about the  probable  outcome or whether it would be
unfavorable  to the Company.  Accordingly,  no  provision  has been made for any
possible loss.

Note J - 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, 2001, 2000 and 1999 were as follows:

                                           2001              2000              1999
                                     --------------------------------------------------
<S>                                  <C>             <C>               <C>
           Property acquisition      $      13,959   $     2,618,589   $     2,971,073
           Exploration                           0                 0                 0
           Development                           0                 0                 0
                                     --------------------------------------------------

                                     $      13,959   $     2,618,589   $     2,971,073
                                     ==================================================
</TABLE>

         In  addition to the costs  reflected  above for the year ended June 30,
1999,  capitalized  costs were increased by $330,492  representing the amount of
loss on sale of oil and gas  properties  which was  accounted for under the full
cost method as described in Note B.

         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,  2001 and 2000 were as
follows:


<PAGE>
<TABLE>
<CAPTION>

                                                                            F-19

                              CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS



                                                                 (Restated)
                                                       2001         2000
                                                    ----------   ----------

               Proved properties                    $7,210,335   $7,196,377
               Unproved properties                           0            0
                                                    ----------   ----------

                                                    $7,210,335   $7,196,377

               Accumulated depreciation,
                  depletion and amortization           562,054      453,249
                                                    ----------   ----------

               Net properties                       $6,648,281   $6,743,128
                                                    ==========   ==========


    Results of operation

         The results of operations from oil and gas producing activities for the
years ended June 30, 2001, 2000 and 1999 were as follows:

                                                                                    (Restated)          (Restated)
                                                                  2001                2000               1999
<S>                                                              <C>                 <C>                 <C>
           Revenues:
              Revenues from unaffiliated customers               $455,654            $351,414            $87,348
              Preferred return                                    272,938              78,448                  0

                                                                 $728,592            $429,862            $87,348
           Expenses:
             Production costs                                    $169,507             $97,552            $67,851
             Exploration expenses                                       0                   0                  0
             Abandonments                                               0                   0                  0
             Depreciation, depletion and amortization             108,805             177,916             83,676

                                                                 $278,312            $275,468           $151,527

           Results before income taxes                           $450,280            $154,394           $(64,179)
           Provision for income taxes                                   0                   0                  0

           Results of operations (excluding corporate
              overhead and interest expense)                     $450,280            $154,394           $(64,179)

</TABLE>


Note K - 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.

<PAGE>
<TABLE>
<CAPTION>

                                                                            F-20

                              CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS


Note K - Oil and gas reserves information (unaudited) (continued):

         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. The following  unaudited table sets
forth proved oil and gas  reserves,  all within the United  States,  at June 30,
2001, 2000 and 1999 together with the changes therein (prior years have not been
restated).

                                                                                    Natural Gas (Mcf)
                                                                        2001            2000             1999
<S>                                                                   <C>             <C>             <C>
                   Proved developed and undeveloped reserves:
                      Beginning of year                               2,847,794       3,138,923        5,185,942
                      Revisions of previous estimates                   170,507        (270,441)      (2,363,513)
                      Purchases of reserves in place                  1,291,403               0                0
                      Extensions and discoveries                              0               0          546,998
                      Production                                        (82,111)        (20,688)         (21,129)
                      Sales of reserves in place                                              0         (209,375)

                   End of year                                        4,227,593       2,847,794        3,138,923



                                                                                  Oil and condensate (Bbls)
                                                                        2001            2000             1999

                   Proved developed and undeveloped reserves:
                      Beginning of year                                 132,048         131,789          141,292
                      Revisions of previous estimates                      (454)              0           (4,899)
                      Purchases of reserves in place                          0               0                0
                      Extensions and discoveries                              0             297              604
                      Production                                              0             (38)            (667)
                      Sales of reserves in place                              0               0           (4,541)

                   End of year                                          131,594         132,048          131,789

</TABLE>

<PAGE>
<TABLE>
<CAPTION>

                                                                            F-21

                              CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS


Note K - Oil and gas reserves information (unaudited) (continued):

         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).


         The following is the estimated  standardized measure relating to proved
oil and gas reserves at June 30, 2001,  2000 and 1999 (prior years have not been
restated):

          Table 1                                              2001                 2000                1999
          -------
<S>                                                        <C>                  <C>                 <C>
          Future cash flows                                $19,657,207          $17,516,546         $ 9,522,716
          Future production costs                             (641,742)            (456,000)           (456,000)
          Future development costs                            (680,000)            (655,000)           (480,000)
          Future severance tax expense                      (1,618,185)          (1,446,411)           (782,646)
          Future income taxes                               (2,507,592)          (3,308,762)         (1,951,018)

          Future net cash flows                            $14,209,688          $11,650,373         $ 5,853,052

          Ten percent annual discount for estimated
             timing of net cash flows                       (3,189,667)          (3,907,535)         (1,990,038)

          Standardized measure of
            discounted future net cash flows               $11,020,021          $ 7,742,838         $ 3,863,014

</TABLE>

         Following  is an  analysis  of  changes in the  estimated  standardized
measure of proved  reserves  during the years ended June 30, 2001, 2000 and 1999
(prior years have not been restated):


<PAGE>
<TABLE>
<CAPTION>


                                                                            F-22

                              CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS



        Table 2                                          2001           2000           1999
        -------
<S>                                                  <C>            <C>            <C>
        Changes from:
           Sale of oil and gas produced              $   341,403    $   (40,350)   $    48,502

        Net changes in prices and production costs    (1,464,961)     4,992,169        (48,994)
        Extensions and discoveries                             0              0        729,470
        Revision of previous quantity estimates          294,065       (733,510)      (436,670)
        Accretion of discounts                         1,671,728        515,062        137,434
        Net change in income taxes                        20,744       (855,997)             0
        Purchases of reserves in place                 2,227,221              0              0
        Sales of reserves in place                             0              0       (191,315)
        Other                                            186,982          2,450              0

        Standard measure, end of year                $ 3,277,182    $ 3,879,824    $   238,427


</TABLE>

        Note L - Pooling of interests business combination:

         On April 27,  2001,  the  Company  completed a  nontaxable  transaction
whereby it  exchanged  shares of stock for the  ownership  interests  of various
entities  engaged  in the  production  of oil  and  gas.  This  transaction  was
accounted  for as a pooling of  interests  under the  provisions  of  Accounting
Principles  Board  Opinion  No.  16,  Business  Combinations.  The  accompanying
financial  statements  for the  year  ended  June  30,  2001,  are  based on the
assumption  that the companies  were  combined for the full year,  and financial
statements of prior years have been restated to give effect to the  combination.
The interests of the following entities were acquired :

         Caravel Resources Energy Fund 1997 LLC (Caravel 97)
         Caravel Resources Energy Fund 1998-I LLC (Caravel 98-I)
         Caravel Resources Energy Fund 1998-II LLC (Caravel 98-II)
         Caravel Resources Energy Fund 1999-I LLC (Caravel 99-I)
         Caravel Resources Energy Fund 1999-II LLC (Caravel 99-II)

         Pursuant to this  transaction,  the Company issued 11,141,255 shares of
its common stock in exchange for the ownership interests of these entities.  The
Company issued an additional 111,412 shares of its common stock for professional
fees  associated  with the  transaction,  which was charged to operations at the
date of  combination.  The  estimated  value of the stock issued in exchange for
these entities was approximately $5,570,000, or $.50 per share.

         Summarized  results of  operations  of the separate  companies  for the
period from July 1, 2000, through April 1, 2001, are as follows:


<PAGE>
<TABLE>
<CAPTION>


                                                                            F-23

                              CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS


                                                 Net                 Net
                                               Revenues            Income

            Cubic Energy, Inc.                  $62,584          $(106,701)

            Acquired companies:
              Caravel 97                         93,513              67,413
              Caravel 98-I                      159,746             119,657
              Caravel 98-II                      26,478              19,802
              Caravel 99-I                       95,700              77,940
              Caravel 99-II                      51,134              45,457

              Totals                           $489,155            $223,568


         There  were  no  intercompany  transactions  recorded  or  eliminations
necessary. There were no extraordinary items for the period.

Note L - Pooling of interests business combination (continued):

Following is a reconciliation of the amounts of net sales and net income
previously reported with restated amounts:



                                          June 30, 2000            June 30, 1999
                                         Net        Net           Net        Net
                                      Revenues     Income      Revenues     Income
<S>                                  <C>         <C>          <C>         <C>
            As previously reported   $  69,850   $(372,895)   $  58,452   $(515,933)

            Acquired companies:
              Caravel 97               133,734     (11,762)      34,409     (28,304)
              Caravel 98-I             138,546      71,018            0           0
              Caravel 98-II             15,124      14,502            0           0
              Caravel 99-I              48,759      41,741            0           0
              Caravel 99-II             23,849      19,553            0           0

              As restated            $ 429,862   $(237,843)   $  92,861   $(544,237)


</TABLE>