SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

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

                     FOR THE FISCAL YEAR ENDED JUNE 30, 2006
                          COMMISSION FILE NUMBER 0-9355


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

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

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

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

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

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

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

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

         The  issuer's  revenues  for the fiscal  year ended June 30,  2006 were
$508,925.

         As of June 30, 2006, the registrant had outstanding  42,450,768  shares
of common  stock,  $.05 par value,  which is  registrant's  only class of common
stock. The aggregate market value of the common stock held by  non-affiliates of
the registrant, computed by reference to the last sale price of the common stock
as quoted on the Over-the-Counter  Bulletin Board, was approximately $12,922,000
as of  September  8,  2006.  Shares of common  stock  held by each  officer  and
director  of the  registrant  and by  each  person  who may be  deemed  to be an
affiliate  have been excluded.  This  determination  of affiliate  status is not
necessarily a conclusive determination for other purposes.

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

<PAGE>

                               CUBIC ENERGY, INC.


                                TABLE OF CONTENTS
                                -----------------

                                                                            Page
                                                                            ----

Item 1.      Description of Business and Properties............................1
Item 2.      Description of Properties........................................22
Item 3.      Legal Proceedings................................................22
Item 4.      Submission of Matters to a Vote of Security Holders..............22
Item 5.      Market for Common Equity and Related Stockholder Matters.........23
Item 6.      Management's Discussion and Analysis or Plan of Operations.......24
Item 7.      Financial Statements.............................................27
Item 8.      Changes In and Disagreements with Accountants on Accounting
             and Financial Disclosure.........................................27
Item 8A.     Controls and Procedures..........................................27
Item 8B.     Other Information................................................28
Item 9.      Directors, Executive Officers, Promoters and Control Persons;
             Compliance with Section 16(a) of the Exchange Act................29
Item 10.     Executive Compensation...........................................31
Item 11.     Security Ownership of Certain Beneficial Owners and Management
             and Related Stockholder Matters..................................32
Item 12.     Certain Relationships And Related Transactions...................34
Item 13.     Exhibits.........................................................36
Item 14.     Principal Accountant Fees and Services...........................38











                                       ii
<PAGE>

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

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


                                     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, 2006, our total proved reserves were approximately 2,850,078 MCFE.

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

         In December  1997,  we entered  into a Stock  Purchase  Agreement  (the
"Agreement")  pursuant  to which the  Company  issued  12,500,000  shares of our
common  stock in exchange for the  conveyance  to the Company of certain oil and
gas properties by Calvin A. Wallen,  III and his affiliates.  In connection with
the 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.


                                       1
<PAGE>

DESCRIPTION OF BUSINESS

         Prior to the  Agreement,  we focused  primarily on the  acquisition  of
non-operated  working interests and overriding  royalty interests in oil and gas
properties.  Subsequent  to  the  Agreement  in  December  1997,  we  moved  our
headquarters  from  Tulsa,  Oklahoma  to  Garland,  Texas in order to utilize an
affiliate's assembled team of experienced management whose substantial expertise
lay in acquisition,  exploitation and development and the ability to manage both
operated and non-operated oil and gas properties.  Current  management  believes
that the ability to operate our own  properties,  through this  affiliate,  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 have acquired  additional  properties in our core
areas,  primarily in Louisiana,  as well as establishing a drilling  program for
the drilling of exploratory, development and infill wells, a strategy previously
unavailable to us due to the technical expertise and experience required and the
lack of available  resources.  We have made substantial  progress in redirecting
our strategic business efforts and believe that attractive  opportunities remain
for acquisition and development of our remaining and future assets.

         On April 27, 2001, we completed an exchange  offer pursuant to which we
acquired (i) certain  direct  working  interests in producing oil and/or natural
gas wells (the "Working  Interests") and (ii) all of the outstanding  membership
units in four privately held limited liability companies and approximately 9.85%
of the membership  interest in another privately held limited liability company,
all of which are engaged in oil and/or natural gas  exploration  and production.
The  Working  Interests  consist of between  15% and 45%  working  interests  in
fourteen  (14) wells.  The Working  Interests  are part of projects  operated by
Tauren Exploration,  Inc. ("Tauren"),  an independent energy company, and Fossil
Operating, Inc. ("Fossil") acts as the operator for some of the properties.  Mr.
Wallen is the sole shareholder,  director and officer of Tauren and Fossil.  The
relationship  between the Company and each of Tauren and Fossil were approved by
our disinterested  directors. The exchange offer was made to and was accepted by
the various individual holders of the interests acquired.  The Working Interests
and the properties  held are located in Texas and Louisiana.  The  consideration
paid to the individuals who accepted the exchange offer was determined  based on
our valuation of the reserves  underlying the interests  acquired.  The value of
our common  stock for purpose of the  exchange  offer was deemed to be $0.50 per
share. In connection with the exchange offer, we issued approximately 11,141,256
shares of our common stock.

         Effective  January 1, 2002,  we entered into an  agreement  with Tauren
whereby (i) Tauren exchanged and traded the accounts receivable of $856,712 owed
by the Company for 856,712 shares of restricted  Company common stock,  (ii) the
Company  obtained  ground  floor  opportunities  from Tauren to  participate  in
Tauren's prospect and project inventory,  and (iii) certain warrants were issued
to Tauren from the Company to acquire restricted Company common stock.

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

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


                                       2
<PAGE>

were used  primarily for the  acquisition of interests in oil and gas properties
in Caddo and Desoto Parishes, Louisiana. The Debentures were retired on February
6, 2006, as set forth below.

         On or about  January 11,  2005,  we issued  1,531,661  shares of common
stock to Caravel  Resources  Energy Fund 2003-II,  L.P. (the  "Partnership")  in
exchange for a 0.1914575033  working  interest in the Kraemer 24-1 Well,  Desoto
Parish,  Township 14 N, Range 15 W,  Section 24 (the  "Well").  The Company also
issued  468,339  shares  of  common  stock  to  Mr.  Wallen  in  exchange  for a
0.0585424967 working interest in the Well. The common stock closed at a price of
$0.90 on January 10, 2005.

         On December 16, 2005,  the Company  entered into a Securities  Purchase
Agreement and issued  2,500,000 common shares at a price of $ 0.80 per share and
issued warrants, with five year expiration,  for the purchase of up to 1,000,000
shares of Company  common  stock at an  exercise  price of $1.00 per share.  The
proceeds of the offering were used for exploratory drilling and working capital.

         On February 6, 2006,  Cubic entered into a Credit  Agreement with Petro
Capital V, L.P.  (the  "Lender")  pursuant  to which the Lender  advanced to the
Company  $5,500,000.  The  indebtedness  bears  interest  at a rate of 12.5% per
annum,  matures on February 6, 2009 and is secured by  substantially  all of the
assets of the Company.  Approximately $1.8 million of the funded amount was used
to retire the Debentures  described  above. In connection with the funding under
the  Credit  Agreement,  the  Company  issued to the  Lender  and Petro  Capital
Securities, LLC, warrants, with five-year expirations, for the purchase of up to
1,833,334  and  250,000  shares,  respectively,  of Company  common  stock at an
exercise price of $1.00 per share.

         On July 28,  2006,  Cubic  entered  into and  consummated  transactions
pursuant to Subscription and Registration  Rights Agreements (the  "Subscription
Agreements")  with certain investors that are unaffiliated with the Company (the
"Investors").  Pursuant  to the  Subscription  Agreements,  the  Investors  paid
aggregate consideration of $2,100,000 to the Company for 3,000,000 shares of the
Company's common stock and warrants  exercisable into 1,500,000 shares of common
stock.  The warrants are exercisable  through July 31, 2011, at $0.70 per share.
In addition to  reimbursement  of certain  expenses  incurred in connection with
this offering, the Company agreed to pay 2% of the aggregate  consideration,  in
cash,  plus  150,000  shares of common  stock  valued at $0.70 per  share,  to a
placement agent.

         The shares of common stock and warrants described in the aforementioned
transactions  were  issued by the  Company in reliance  upon an  exemption  from
registration set forth in Regulation D and/or Section 4(2) of the Securities Act
of 1933,  as amended,  which exempts  transactions  by an issuer not involving a
public offering.


                  PRINCIPAL OIL AND GAS PROPERTIES

         The following table summarizes certain  information with respect to our
principal areas of operation at June 30, 2006.


                                       3
<PAGE>

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

    ------------------- ---------- ------------ ------------ ---------------
         Louisiana          8,672    2,707,408          97%      $6,306,962
           Texas              191       89,492           3%        $140,423
    ------------------- ---------- ------------ ------------ ---------------
           Total            8,863    2,796,900         100%      $6,447,385
    ------------------- ---------- ------------ ------------ ---------------

         Our Texas properties are situated in Palo Pinto,  Eastland and Callahan
Counties.  Our Louisiana  properties  are situated in Caddo Parish and in Desoto
Parish. At June 30, 2006, the Louisiana  properties  contained the vast majority
of our proved  reserves,  a situation  that is expected to  continue.  The Texas
properties  consist  primarily  of wells  acquired  by the  Company  in  several
transactions  between  1991 and 2002 and through  overriding  royalty  interests
reserved in farm-out agreements in 1998 and 1999. The Louisiana  properties were
acquired on or about October 1, 2004,  January 11, 2005 and February 6, 2006, in
transactions described herein.

         Our net  production for the fiscal year ending June 30, 2006 for all of
the Company wells  averaged  approximately  147 Mcf of natural gas per day and 3
barrels of oil per day.

EXPLORATION ACTIVITIES

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

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

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

MARKETING OF PRODUCTION

Crude Oil and Natural Gas

         Our production  consists  mainly of natural gas. We market our operated
production of natural gas to two  purchasers  (i) in Texas,  Enbridge G & P, LP,
and (ii) in Louisiana, Crosstex Gulf Coast Marketing, Ltd. We sell our crude oil
and condensate production at or near the well site; although in some cases it is
gathered by us or others and delivered to a central point of sale. Our crude oil
and  condensate  production  is  transported  by  truck  or by  pipeline  and is
typically  committed to arrangements  having a term of one year or less. We have
not engaged in crude oil hedging or trading  activities.  We utilize  short-term


                                       4
<PAGE>

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 $446,208 for the fiscal
year ended June 30, 2006 and  represented  88% 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 2006 was $59.90.

         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 2006 was $8.34.

OIL AND GAS RESERVES

         The   following   tables  set  forth  the  proved   producing,   proved
non-producing  and proved  undeveloped  reserves at June 30, 2006, the estimated
future net revenues from such proved  reserves and the  Standardized  Measure of
Discounted Future Net Cash Flows attributable to our proved reserves at June 30,
2006, 2005 and 2004:


                                       5
<PAGE>
<TABLE>
<CAPTION>

                                                                                       10%
Category                Oil (Bbls)      Gas (Mcf)    Total (Mcfe)      Income        Discount
------------           ------------   ------------   ------------   ------------   ------------
<S>                    <C>            <C>            <C>            <C>            <C>
Proved Producing              1,030        167,989        174,169   $    357,042   $    319,289
Proved Non-Producing          1,863        639,068        650,246   $  2,484,046   $  2,024,059
Proved Undeveloped            5,970      1,989,843      2,025,663   $  6,050,495   $  4,104,037

                                                                     AT JUNE 30,
                                    -----------------------------------------------------------
                                                         2006           2005           2004
Proved Reserves:
---------------
     Oil (Bbl)....................................
                                                            8,863          1,048              0
     Gas (Mcf)....................................
                                                        2,796,900        509,625        311,098
MCFE..............................................
                                                        2,850,078        515,913        311,098
Estimated future net revenues                        $  8,891,593   $  1,902,300   $    975,468
     (before income tax)..........................
       Standardized Measure (1)...................   $  6,447,385   $  1,071,100   $    731,913
Proved developed reserves:
-------------------------
     Oil (Bbl)....................................          2,893          1,048              0
      Gas (Mcf)...................................        807,057        509,625        311,098
MCFE..............................................        824,415        515,913        311,098
Estimated future net revenues                        $  2,841,088   $  1,902,300   $    975,468
     (before income tax)..........................
       Standardized Measure (1)...................   $  2,343,348   $  1,071,100   $    731,913
Unproved Reserves:
-----------------
     Oil (Bbl)....................................          5,970              0              0

     Gas (Mcf)....................................      1,989,843              0              0

MCFE..............................................      2,025,663              0              0

Estimated future net revenues
     (before income tax)..........................   $  6,050,495              0              0
       Standardized Measure (1)...................   $  4,104,037              0              0

Average price used to calculate reserves:
     Oil (Bbl)....................................   $      70.09   $      50.57            n/a
     Gas (Mcf)....................................   $       5.55   $       6.65   $       6.62
</TABLE>
---------------------
(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."

         The  information  set  forth  in this  Report  relating  to our  proved
reserves, estimated future net revenues and present values is taken from reports
prepared by the Dallas office of The Scotia Group, Inc. for 2006; by the Houston
office of  Netherland  Sewell &  Associates,  Inc.  for 2005;  and by Michael S.
Turner,  P.E.  for 2004;  all  independent,  petroleum  engineering  firms.  The
estimates  of these  engineering  firms  were based  upon  review of  production
histories  and  other  geological,  economic,  ownership  and  engineering  data
provided by the Company.  Information  with respect to  approximately  2% of the
total proved  reserves as of June 30, 2006,  were prepared  in-house and was not
reviewed by an  independent  engineering  firm.  No reports on our reserves have
been filed with any federal  agency.  In accordance  with guidelines of the SEC,


                                       6
<PAGE>
<TABLE>
<CAPTION>

our estimates of proved  reserves and the future net revenues from which present
values  are  derived  are made  using  year end oil and gas  sales  prices  held
constant  throughout the life of the properties (except to the extent a contract
specifically provides otherwise). Operating costs, development costs and certain
production-related  taxes were  deducted  in arriving  at  estimated  future net
revenues,   but  such  costs  do  not  include   debt  service  or  general  and
administrative expenses.

         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 years ended June 30, 2006, 2005 and 2004.

-------------------------------------------------- ----------------- ----------------- -----------------
                                                      YEAR ENDED        YEAR ENDED         YEAR ENDED
                                                     JUNE 30, 2006     JUNE 30, 2005     JUNE 30, 2004
                                                     -------------     -------------     -------------
-------------------------------------------------- ----------------- ----------------- -----------------
<S>                                                <C>               <C>               <C>
PRODUCTION VOLUMES:
-------------------------------------------------- ----------------- ----------------- -----------------
    Oil (Bbl).....................................           1,047              506                562
-------------------------------------------------- ----------------- ----------------- -----------------
      Gas (Mcf)...................................          53,516            67,744            71,804
-------------------------------------------------- ----------------- ----------------- -----------------
WEIGHTED AVERAGE SALES PRICES:
-------------------------------------------------- ----------------- ----------------- -----------------
     Oil (per Bbl)................................          $59.90            $43.42            $32.16
-------------------------------------------------- ----------------- ----------------- -----------------
     Gas (per Mcf)................................          $ 8.34            $ 6.61             $5.55
-------------------------------------------------- ----------------- ----------------- -----------------
SELECTED EXPENSES PER MCFE:
-------------------------------------------------- ----------------- ----------------- -----------------
     Lease operating..............................          $ 5.66            $ 3.86             $2.48
-------------------------------------------------- ----------------- ----------------- -----------------
     Depreciation, Depletion & Amortization.......          $ 3.00            $ 5.15             $1.39
-------------------------------------------------- ----------------- ----------------- -----------------
     General and administrative...................          $23.42            $ 5.58             $3.19
-------------------------------------------------- ----------------- ----------------- -----------------
</TABLE>


                                       7
<PAGE>
<TABLE>
<CAPTION>

PRODUCTIVE WELLS AND ACREAGE

Productive Wells

         The following  table sets forth our domestic  productive  wells at June
30, 2006:

--------------- --------------- --------------- --------------- --------------- ---------------
<S>             <C>             <C>             <C>             <C>             <C>
              OIL                             GAS                            TOTAL
--------------- --------------- --------------- --------------- --------------- ---------------
     Gross            Net            Gross            Net            Gross            Net
--------------- --------------- --------------- --------------- --------------- ---------------
             0               0              17           13.07              17           13.07
--------------- --------------- --------------- --------------- --------------- ---------------

Acreage

         The following  table sets forth our undeveloped and developed gross and
net leasehold  acreage at June 30, 2006.  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
--------------- --------------- --------------- --------------- --------------- ---------------
        15,632           6,206           1,281             867          16,913           7,073
--------------- --------------- --------------- --------------- --------------- ---------------
</TABLE>

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

OPERATIONS

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

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

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


                                       8
<PAGE>

EMPLOYEES

         At June 30, 2006, the Company had 2 full and 4 part time employees.  We
regularly  use  independent  consultants  and  contractors  to  perform  various
professional services,  including well-site supervision,  design,  construction,
permitting  and  environmental  assessment.  We use  independent  contractors to
perform field and on-site production operation services.

FACILITIES

         The  Company's  principal  executive  and  administrative  offices  are
located at 9870 Plano Road,  Dallas,  Texas.  The offices are subleased  from an
affiliate  controlled by Mr. Wallen and the offices are owned by this affiliate.
The average monthly amount charged to the Company during the year ended June 30,
2006, was $2,229.  The Company  believes that there is other  appropriate  space
available  in the  event  the  Company  should  terminate  its  current  leasing
arrangement.


RISK FACTORS

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

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

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

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

         Drilling activities are subject to many risks,  including the risk that
no commercially productive oil or gas reservoirs will be encountered.  There can
be no assurance  that new wells drilled by us will be productive or that we will
recover  all or any  portion  of our  investment.  Drilling  for oil and gas may
involve unprofitable  efforts, not only from dry wells, but also from wells that
are  productive  but do not produce  sufficient  net revenues to return a profit
after drilling, operating and other costs. The cost of drilling,  completing and
operating wells is often  uncertain.  Our drilling  operations may be curtailed,
delayed  or  canceled  as a result of a variety  of  factors,  many of which are
beyond our control, including economic conditions, mechanical problems, pressure
or irregularities in formations, title problems, weather conditions,  compliance


                                       9
<PAGE>

with  governmental  requirements  and  shortages in or delays in the delivery of
equipment and services.  Such equipment  shortages and delays sometimes  involve
drilling  rigs where  inclement  weather  prohibits  the  movement  of land rigs
causing  a high  demand  for  rigs by a  large  number  of  companies  during  a
relatively  short  period of time.  Our future  drilling  activities  may not be
successful. Lack of drilling success could have a material adverse effect on our
financial condition and results of operations.

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

         We are in a  capital-intensive  business  and we will  need  additional
funds.

         Our   business  is  highly   capital-intensive   requiring   continuous
development  and  acquisition of oil and gas reserves.  In addition,  capital is
required  to  operate  and  expand  our oil and gas field  operations,  purchase
equipment and to fund our drilling program.

         At June 30, 2006, we had a working capital deficit of $(1,357,230).  On
July 28,  2006,  we raised  $2,100,000  through the private  placement of common
stock to in order to fund the  drilling  of a new well and for  general  working
capital purposes.

         We have experienced and will continue to experience significant capital
expenditures  and working capital  requirements,  principally as a result of our
drilling  program.  We expect  that we will  require  additional  financing,  in
addition to cash generated from operations,  to fund our expected growth.  There
can be no assurance,  however,  that  additional  financing will be available on
acceptable terms or at all. In the event that additional  capital  resources are
unavailable,  we may curtail  drilling,  development and other  activities or be
forced  to  sell  some  of our  assets  on an  untimely  or  unfavorable  basis.
Additionally,  failure  to drill on  certain of our  leasehold  interests  could
result in the forfeiture of our interest.

         Any  future  issuances  of equity  securities  would  likely  result in
dilution to our then  existing  shareholders  while the  incurring of additional
indebtedness  would  result  in  increased  interest  expense  and debt  service
changes. See "Management's Discussion and Analysis or Plan of Operations."

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

         We incurred  losses before income tax  provisions of  $(2,769,050)  and
$(784,526)  for the fiscal years ended June 30, 2006 and 2005.  Our  accumulated
deficit  as of June 30,  2006 was  $(13,521,918).  We do not have a bank line of
credit.  We have funded our operating  losses,  acquisitions  and drilling costs
primarily through a combination of private offerings of convertible debt, senior
secured  debt,  exempt  transactions,  and  equity  securities.  Our  success in
obtaining the necessary  capital  resources to fund future costs associated with
our operations and drilling plans is dependent upon our ability to: (i) increase
revenues  through  acquisitions  and recovery of our proved producing and proved
developed  non-producing  oil and gas  reserves;  (ii) maintain  effective  cost
controls at the corporate  administrative  office and in field  operations;  and
(iii)  obtain  additional  financing,  including  the  exercise  of  outstanding
warrants.  However, even if we achieve some success with our plans, there can be
no  assurance  that we will be able to generate  sufficient  revenues to achieve


                                       10
<PAGE>

significant  profitable operations or fund our drilling plans. See "Management's
Discussion and Analysis or Plan of Operations."

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

         The majority of our oil and gas Reserves are  undeveloped.  Recovery of
the  Company's  future  undeveloped  Reserves will require  significant  capital
expenditures.  Our management  estimates that aggregate capital  expenditures of
approximately $3,500,000 will be required to develop our current Reserves during
the next  eighteen  months.  No  assurance  can be given that our  estimates  of
capital  expenditures  will prove accurate,  that our financing  sources will be
sufficient to fully fund our planned development  activities or that development
activities  will be  either  successful  or in  accordance  with  our  schedule.
Additionally,  any significant decrease in oil and gas prices or any significant
increase in the cost of development  could result in a significant  reduction in
the number of wells drilled and/or reworked.  No assurance can be given that any
wells will produce oil or gas in commercially profitable quantities.

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

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

         Our revenues,  profitability  and the carrying value of our oil and gas
properties are  substantially  dependent upon  prevailing  prices of, and demand
for, oil and gas and the costs of acquiring,  finding,  developing and producing
reserves.   Our  ability  to  obtain   borrowing   capacity,   to  repay  future
indebtedness,  and to  obtain  additional  capital  on  favorable  terms is also
substantially dependent upon oil and gas prices.  Historically,  the markets for
oil and gas have been  volatile and are likely to continue to be volatile in the
future.  Prices for oil and gas are subject to wide fluctuations in response to:
(i) relatively minor changes in the supply of, and demand for, oil and gas; (ii)
market uncertainty;  and (iii) a variety of additional factors, all of which are
beyond our  control.  These  factors  include  domestic  and  foreign  political
conditions, the price and availability of domestic and imported oil and gas, the
level  of  consumer  and  industrial  demand,  weather,   domestic  and  foreign
government  relations,  the  price and  availability  of  alternative  fuels and
overall economic  conditions.  Furthermore,  the marketability of our production
depends in part upon the  availability,  proximity  and  capacity  of  gathering
systems,  pipelines and processing facilities.  Volatility in oil and gas prices
could  affect  our  ability  to market  our  production  through  such  systems,
pipelines or  facilities.  Substantially  all of our gas production is currently
sold to one gas marketing  firm on a  month-to-month  basis at  prevailing  spot
market  prices.  Oil prices  remained  subject to  unpredictable  political  and
economic forces during fiscal 2004, fiscal 2005 and fiscal 2006, and experienced
fluctuations  similar to those seen in natural  gas prices for those  years.  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.


                                       11
<PAGE>

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

         This report  contains  estimates  of our oil and gas  reserves  and the
future net cash flows from those  reserves,  which have been prepared by certain
independent petroleum consultants.  There are numerous uncertainties inherent in
estimating  quantities of reserves of oil and gas and in projecting future rates
of production and the timing of development expenditures, including many factors
beyond our control.  The reserve estimates  included herein 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 herein.
Additionally,  our reserves may be subject to downward or upward  revision based
upon  actual  production   performance,   results  of  future   development  and
exploration,  prevailing oil and gas prices and other factors, many of which are
beyond our control.

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

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

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

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


                                       12
<PAGE>

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

         Our business may suffer if we lose key personnel.

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

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

         Our executive  officers,  directors and their affiliates and certain 5%
shareholders hold  approximately 57% of our outstanding  shares of common stock.
As a result, officers, directors and their affiliates and such shareholders have
the ability to exert significant influence over our business affairs,  including
the ability to control the  election of  directors  and results of voting on all
matters requiring shareholder  approval.  This concentration of voting power may
delay or prevent a potential change in control.

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

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

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

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

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


                                       13
<PAGE>

often have been unrelated to the operating performance of these companies. These
broad  market  fluctuations  may  adversely  affect  the  market  price  of  our
securities.

         The trading price of our common stock is below $5.00 per share. As long
as the trading price of our common stock remains below $5.00 per share,  trading
in our common stock is subject to the  requirements  of certain  rules under the
Exchange Act which require additional disclosure by broker-dealers in connection
with any trades  generally  involving any non-NASDAQ  equity security that has a
market price of less than $5.00 per share,  subject to certain exceptions.  Such
rules  require  the  delivery,  prior  to  any  penny  stock  transaction,  of a
disclosure  schedule explaining the penny stock market and the associated risks,
and impose various sales practice  requirements on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors. For
these types of transactions,  the broker-dealer must make a special  suitability
determination  for the  purchaser  and have  received  the  purchaser's  written
consent to the  transaction  prior to sale. The additional  burdens imposed upon
broker-dealers by such requirements may discourage broker-dealers from effecting
transactions  in our  common  stock,  which  could  severely  limit  the  market
liquidity of our common stock.

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

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

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

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

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

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

         We may not have satisfactory title to our properties.

         Our contract land  professionals  have reviewed  title records or other
title  review  materials   relating  to  substantially   all  of  our  producing
properties.   The  title  investigation  performed  by  us  prior  to  acquiring
undeveloped  properties is thorough, but less rigorous than that conducted prior
to drilling, consistent with industry standards. A title opinion obtained on the


                                       14
<PAGE>

drill site prior to drilling does not necessarily ensure  satisfactory title. We
believe we have satisfactory title to all our producing properties in accordance
with standards  generally  accepted in the oil and gas industry.  Our properties
are  subject  to  customary  royalty  interests,  liens  incident  to  operating
agreements,  liens for current taxes and other burdens,  which we believe do not
materially interfere with the use of or affect the value of such properties.  At
June 30,  2006,  our  leaseholds  for some of our net acreage were being kept in
force by  virtue  of  production  on that  acreage  in  paying  quantities.  The
remaining  net acreage was held by lease  rentals  and  similar  provisions  and
requires  production  in paying  quantities  prior to expiration of various time
periods to avoid lease termination.

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

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

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

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

         Since  the  mid-1980's,  the  FERC  has  issued  a  series  of  orders,
culminating  in Order  Nos.  636,  636-A  and  636-B  ("Order  636"),  that have
significantly altered the marketing and transportation of natural gas. Order 636
mandated  a  fundamental   restructuring   of  interstate   pipeline  sales  and
transportation service,  including the unbundling by interstate pipelines of the
sale,  transportation,  storage  and other  components  of the  city-gate  sales
services such  pipelines  previously  performed.  One of the FERC's  purposes in
issuing the orders was to increase  competition within all phases of the natural
gas industry. Order 636 and subsequent FERC orders issued in individual pipeline
restructuring  proceedings have been the subject of appeals, and the courts have
largely upheld Order 636.  Because  further review of certain of these orders is


                                       15
<PAGE>

still  possible,  and other  appeals may be pending,  it is difficult to exactly
predict the  ultimate  impact of the orders on us and our natural gas  marketing
efforts.  Generally,  Order 636 has  eliminated  or  substantially  reduced  the
interstate  pipelines'  traditional  role as wholesalers of natural gas, and has
substantially increased competition and volatility in natural gas markets.

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

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

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

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

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

         Our  operations  and  properties  are subject to extensive and changing
federal,  state  and  local  laws  and  regulations  relating  to  environmental
protection,  including the generation,  storage,  handling and transportation of
oil and gas and the discharge of materials into the environment, and relating to
safety and health. The recent trend in environmental  legislation and regulation
generally is toward  stricter  standards,  and this trend will likely  continue.
These laws and  regulations  may  require the  acquisition  of a permit or other
authorization  before  construction or drilling  commences and for certain other
activities;  limit or prohibit  construction,  drilling and other  activities on
certain lands lying within  wilderness  and other  protected  areas;  and impose
substantial liabilities for pollution resulting from our operations. The permits


                                       16
<PAGE>

required for our various operations are subject to revocation,  modification and
renewal  by  issuing  authorities.  Governmental  authorities  have the power to
enforce compliance with their regulations,  and violations are subject to fines,
penalties or  injunctions.  In the opinion of management,  we are in substantial
compliance with current applicable  environmental  laws and regulations,  and we
have no material  commitments  for capital  expenditures to comply with existing
environmental requirements. Nevertheless, changes in existing environmental laws
and regulations or in interpretations thereof could have a significant impact on
us. The impact of such changes, however, would not likely be any more burdensome
to us than to any other similarly situated oil and gas company.

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

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

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

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


                                       17
<PAGE>

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

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

























                                       18
<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.

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

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

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

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

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

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

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

         "Gas" means natural gas.

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

         "MCF" means thousand cubic feet.

         "MCFE" means MCF of natural gas equivalent;  converting  volumes of oil
to natural gas equivalent  volumes using a ratio of one Bbl of oil to six MCF of
natural gas.

         "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.


                                       19
<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


                                       20
<PAGE>

to any acreage for which an  application  of fluid  injection or other  improved
recovery  technique is  contemplated,  unless such  techniques  have been proved
effective by actual tests in the area and in the same reservoir.

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

         "Reserves" means proved reserves.

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

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

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

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

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

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









                                       21
<PAGE>

Item 2.  Description of Properties.

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

Item 3.  Legal Proceedings.

         There are no legal  proceedings  to which the  Company is a party or to
which its properties are subject which are, in the opinion of management, likely
to have a material  adverse  effect on the  Company's  results of  operations or
financial condition.

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

         Not Applicable.

























                                       22
<PAGE>

                                     PART II

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

Common Stock and Market

         The Company is traded on the OTCBB, with the trading symbol "QBIK.OB."

         At June  30,  2006,  there  were  42,450,768  shares  of  common  stock
outstanding held by approximately 875 shareholders of record.

         Under our  Articles  of  Incorporation,  as  amended,  the  Company  is
authorized  to issue one class of up to  100,000,000  common  shares,  par value
$0.05 per share, and one class of up to 10,000,000  preferred shares,  par value
$0.01 per share.  As of June 30,  2006,  there were no  preferred  shares of the
Company outstanding.

Common Stock Price Range

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


               ------------------------------------ --------- ---------
               Fiscal Year 2005                       High       Low
               ----------------                       ----       ---
               ------------------------------------ --------- ---------
               1st quarter                            $0.71     $0.30
               ------------------------------------ --------- ---------
               2nd quarter                            $0.72     $0.40
               ------------------------------------ --------- ---------
               3rd quarter                            $1.99     $0.85
               ------------------------------------ --------- ---------
               4th quarter                            $1.75     $1.02
               ------------------------------------ --------- ---------


               ------------------------------------ --------- ---------
               Fiscal Year 2006                       High       Low
               ----------------                       ----       ---
               ------------------------------------ --------- ---------
               1st quarter                            $1.10     $0.65
               ------------------------------------ --------- ---------
               2nd quarter                            $1.35     $0.68
               ------------------------------------ --------- ---------
               3rd quarter                            $0.87     $0.47
               ------------------------------------ --------- ---------
               4th quarter                            $0.90     $0.70
               ------------------------------------ --------- ---------


Dividend Policy

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


                                       23
<PAGE>

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,  2006.  The  Company's  Financial
Statements and notes thereto included  elsewhere in this Report contain detailed
information  that  should  be  referred  to in  conjunction  with the  following
discussion.

General

         The Company's future results of operations and growth are substantially
dependent  upon (i) its  ability  to acquire  or find and  successfully  develop
additional oil and gas reserves and (ii) the prevailing  prices for oil and gas.
We have an  inventory  of  exploration  drilling  locations  to pursue after the
fiscal year ending June 30, 2006.  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 2006 to Fiscal 2005 Revenues

         OIL AND GAS SALES  increased  8% to  $508,925  in the fiscal year ended
June 30, 2006  ("fiscal  2006") from  $469,441 in the fiscal year ended June 30,
2005 ("fiscal 2005"), due primarily to higher oil and gas prices.

Costs and Expenses

         PRODUCTION  AND OPERATING  EXPENSE  increased 24% to $338,329 in fiscal
2006 from  $273,074 in fiscal 2005 due primarily to greater  activity  resulting
from more wells being brought on line in Louisiana.


                                       24
<PAGE>

         DEPRECIATION,  DEPLETION AND AMORTIZATION  decreased 51% to $179,237 in
fiscal 2006 from  $364,496 in fiscal 2005.  The decrease was  primarily due to a
reduction in the DD&A rate per MCFE which  resulted  from an increase in oil and
gas reserves.

         GENERAL AND ADMINISTRATIVE EXPENSE ("G&A") increased 255% to $1,400,482
in  fiscal  2006  from  $394,827  in  fiscal  2005  primarily  as a result of an
aggregate  of $726,670  in charges  relating  to stock  grants to  officers  and
directors and due to an increase in salaries and  compensation as a result of an
increase in the number of employees.

         INTEREST EXPENSE  increased to $638,800 in fiscal 2006 from $193,313 in
fiscal  2005  due to the  increase  in  debt as a  result  of the  borrowing  of
$5,500,000 pursuant to a new senior debt issue on February 6, 2006.

         LOSS ON EXTINGUISHMENT OF DEBT was $660,330 in fiscal 2006. On February
6, 2006, the remaining  Debentures  were retired with proceeds from a new senior
debt issue. In connection with this  retirement,  the Company recorded a loss on
extinguishment  of debt in the amount of  $660,330.  Such  amount  includes  the
write-off of deferred loan costs ($99,204),  the write-off of the remaining loan
discount  ($237,931),  and  a  prepayment  penalty  and  associated  legal  fees
($323,195). There was no extinguishment of debt in fiscal 2005.

Liquidity and Capital Resources

Overview

         The Company's primary resource is its oil and gas reserves. The Company
has entered into a senior  credit  facility,  but such facility does not provide
for  future  funding  to the  Company.  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 additional  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.

         At June 30, 2006, we had a working capital deficit of $(1,357,230).  On
July 28,  2006,  we raised  $2,100,000  through the private  placement of common
stock to in order to fund the  drilling  of a new well and for  general  working
capital purposes.

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

Capital Expenditures

         The majority of our oil and gas reserves are  undeveloped.  Recovery of
the  Company's  future  undeveloped  proved  reserves  will require  significant
capital   expenditures.   Our  management   estimates  that  aggregate   capital
expenditures  of  approximately  $3,500,000  will be required  to develop  these
reserves  during  the  next  eighteen  months.   Moreover,   additional  capital
expenditures  will be  required  for  exploratory  drilling  on our  undeveloped
acreage.

         The Company  will  increase its planned  activities  for fiscal 2007 if
product prices remain strong and if we are able to obtain the additional capital
resources necessary to finance such activities.


                                       25
<PAGE>

Working Capital and Cash Flow

         During fiscal 2006, the Company used cash flow in operating  activities
of $(963,873). Cash flow from operations is dependent on our ability to increase
production  through our  development  and  exploratory  activities and the price
received for oil and natural gas.

         The Company's  working  capital  decreased to  $(1,357,230) at June 30,
2006 from  $576,294 at June 30, 2005,  primarily  due to an increase in accounts
payable and accrued expenses resulting from increased development activities. On
July 28,  2006,  we raised  $2,100,000  through the private  placement of common
stock. This funding significantly reduced the working capital deficit.

Capital Resources

         The Company plans to fund its development  and  exploratory  activities
through  cash  provided  from  operations  and the  issuance  of debt or  equity
securities.

         The Company  cannot be certain  that the funds which will be  available
from operating cash flow and the issuance,  if any, of debt or equity securities
will be adequate to fully fund the  projected  capital  expenditures  for fiscal
2006. Additionally, 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
development  and  exploration  program,  there  can  be no  assurance  that  the
Company's  capital  resources  will  be  sufficient  to  sustain  the  Company's
development and exploratory activities.

         Although the Company  believes it will be able to obtain funds pursuant
to one or more of the above-mentioned alternatives, management cannot be assured
that any such capital  resources  will be  available  to the Company.  If 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.

         The Company is also subject to a senior secured  credit  agreement that
requires quarterly  principal payments of $250,000 beginning March 31, 2007. The
Company  has the  option,  under  certain  conditions,  to defer  the  first two
quarterly payments.  If the Company is unable to refinance this senior debt, the
Company may be required to make the  quarterly  principal  payments  out of cash
provided by  operations  and curtail its  planned  development  and  exploratory
activities.

         On September 19, 2006, Petro Capital V, L.P.,  issued a letter claiming
defaults under various  sections of the Credit  Agreement.  The alleged defaults
relate  primarily  to  unresolved  imperfections  in title  concerning  the S.E.
Johnson 20 #1 and S.E. Johnson 29 #1 wells.

         In  Louisiana,  where  the  Company's  properties  are  located,  title
imperfections  are  encountered  in the ordinary  course of  business.  Prior to
drilling a well,  the operator  typically  obtains a drillsite  title opinion to
gain an  understanding  of, and limited  assurance  as to, the  ownership of the
subject well.  The drillsite  title  opinion is not  comprehensive  and does not
ensure  good  title.  Following  the  drilling  of a  well,  and if the  well is
successful  and  is  expected  to be  completed  for  production,  the  operator
typically  will obtain a division order title opinion that is more rigorous than
the drillsite  title  opinion.  The division  order title opinion is expected to
provide good,  but not absolute,  assurance as to the title of the subject well.
In any event,  title  issues  arise in the  ordinary  course of business and the
operator attempts to work with all impacted parties to resolve the issues.


                                       26
<PAGE>

         In the case of the  aforementioned  S.E.  Johnson wells,  after lengthy
investigation,  management believes that the Company does have good title to the
S.E.  Johnson  wells down to a depth of 6,464  feet;  however,  it  appears  the
Company may not have all rights below this depth.  Although  the division  order
title opinion for these wells has not yet been  received,  the Company  believes
that a third  party has deep  ownership  rights  with  respect  to a portion  of
certain  leases in Sections 20, 29 and 30 of Township 14N Range 15W. The Company
believes it is in the final stages of  negotiating a farmout  agreement for such
deep rights in the  aforementioned  S.E.  Johnson  wells.  Additionally,  Tauren
Exploration,  Inc. ("Tauren"),  the party that originally sold the rights in the
subject  properties to the Company,  executed a Letter Agreement as of September
20,  2006,  such that in the event  that  there is an  acreage  variance  in the
above-referenced  sections,  Tauren will  assign to the  Company  that number of
acres in Sections  4, 5, 6, 7 and/or 8 of  Township  14N Range 15W to offset any
such variance.

         Management  does not believe  that it was ever in default of any of the
requirements of the Credit Agreement specified by the Petro Capital letter dated
September  19,  2006.  Moreover,  even if a  default  has  occurred,  management
believes the  foregoing  curative  actions  will resolve any default  within the
applicable cure period.


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 2006.


Item 7.  Financial Statements.

         The Report of  Independent  Accountants,  Financial  Statements and any
supplementary  financial  data  required by this Item are set forth on pages F-1
through F-25 of this Report and are incorporated herein by reference.


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

         None.

Item 8A. Controls and Procedures.

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


                                       27
<PAGE>

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

Item 8B. Other Information.

         None.

























                                       28
<PAGE>

                                    PART III

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

Directors and Executive Officers

         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 Cubic         Director Since
          ----           ---         -------------------         --------------
----------------------- ----- ---------------------------------- --------------
Calvin A. Wallen, III     51  Chairman of the Board, President        1997
                              and Chief Executive Officer
----------------------- ----- ---------------------------------- --------------
James L. Busby            47  Chief Financial Officer                 n/a
----------------------- ----- ---------------------------------- --------------
Jon S. Ross               42  Secretary and Director                  1998
----------------------- ----- ---------------------------------- --------------
Gene C. Howard            78  Director                                1991
----------------------- ----- ---------------------------------- --------------
Herbert A. Bayer          56  Director                                2003
----------------------- ----- ---------------------------------- --------------
Bob L. Clements           64  Director                                2004
----------------------- ----- ---------------------------------- --------------

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

         JAMES L. BUSBY has served as the Chief Financial Officer of the Company
since October 2005. Mr. Busby joined the Company from Aviva Petroleum Inc. where
he served as the Chief  Financial  Officer from February 2000 to August 2005. He
also  served  as  Aviva's  Treasurer  from May 1994  through  August  2005,  and
Secretary from June 1996 through August 2005. Mr. Busby originally  joined Aviva
in November 1993 as its controller.  Prior to his employment at Aviva, Mr. Busby
served as a Senior Audit  Manager with the public  accounting  firm of KPMG LLP.
Mr. Busby  graduated  from the  University of Texas at Dallas with a Bachelor of
Science degree in accounting in May 1984.

         JON S. ROSS has served as a director  of the  Company  since April 1998
and as Secretary since November 1998. Since 1989, Mr. Ross has been a practicing
attorney in Dallas,  Texas  specializing  in the  representation  of over eighty
business  entities  within  the past  fifteen  years.  He has  served on several
community and  not-for-profit  committees and boards and has spoken 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


                                       29
<PAGE>

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 Corporation and Hinderliter
Corporation  from 1991 to August of 1992.  He is also  Chairman  of the Board of
Philadelphia Mortgage Trust.

         HERBERT  A. BAYER has served as a  director  of the  Company  since May
2003.  His major  course  of study at  Indiana  State  University  was  Business
Management.  In 1999, he was the top salesman for ITRON,  a technology  provider
for collecting,  analyzing,  and applying  electric,  gas, and water usage data.
From 2002 to 2003 he  served  as the  Regional  Director  of Sales  for  Utility
Automation Integrators. Mr. Bayer was the National Director of Sales for the gas
division of Hexagram, Inc. from 2003 to 2005. Before his most recent appointment
in 2006,  he served as the Director of Client  Services for  Communications  and
Information  Solutions for CH2M HILL, a $3.5 billion world-wide  engineering and
construction  company.  He currently  serves in the capacity of Director of WiFi
Markets for SmartSynch, Inc.

         BOB L.  CLEMENTS  joined the  Company's  board of directors in February
2004. Mr. Clements has a degree in the  Owner/President  Management Program from
the Harvard  Business  School.  Mr.  Clements has been in the wholesale food and
restaurant  business for over thirty years,  currently  controlling  the largest
independent  producer  of  stuffed  jalapenos  and  corn  dogs  as  well  as two
successful restaurants in the Rockwall,  Texas area. Mr. Clements has served and
currently serves on a variety of  not-for-profit  and charitable  committees and
boards.

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

Audit Committee; Financial Expert

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

Section 16(a) Beneficial Ownership Reporting Compliance

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

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

         Calvin A.  Wallen III filed two reports on Form 4 after the time period
for the  filing of such  reports on a timely  basis had  expired.  Such  reports
covered two stock purchase transactions.


                                       30
<PAGE>

         Bob Clements filed five reports on Form 4 after the time period for the
filing of such  reports  on a timely  basis had  expired.  Four of such  reports
covered four separate stock purchase transactions.  The remaining report covered
the conversion of an asset to stock.

Code of Ethics

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

Item 10. Executive Compensation.

         The total cash  compensation  for the three fiscal years ended June 30,
2006, for Calvin A. Wallen,  III, the Company's current Chief Executive Officer,
James L. Busby, the Company's current Chief Financial Officer,  and Jon S. Ross,
the  Company's  current  Secretary is set forth below in the  following  Summary
Compensation Table. Mr. Busby took over as the Company's Chief Financial Officer
effective  October 1, 2005. No other person received cash compensation in excess
of $100,000 during the fiscal year ended June 30, 2006.

                           Summary Compensation Table

                                                                    Restricted
                             Fiscal                   Other Annual    Stock
Name and Principal Position   Year    Salary   Bonus  Compensation    Awards
---------------------------  ------  --------  -----  ------------  ----------

Calvin A. Wallen, III, CEO    2006   $111,250    0          0       $  249,000
                              2005     78,000    0          0                0
                              2004          0    0          0                0

James L. Busby, CFO           2006   $ 75,330    0          0       $  124,500
                              2005          0    0          0                0
                              2004          0    0          0                0

Jon S. Ross, Secretary        2006   $ 62,500    0          0       $  166,000
                              2005     60,000    0          0                0
                              2004          0    0          0                0

Stock Grants

         On September 12, 2003, the Directors of Cubic tentatively approved of a
Director and Officer compensation plan as follows: (i) Directors of record as of
June 1, 2003 would receive 24,000  restricted Cubic common shares (16,000 shares
per  year,  multiplied  by 1.5  years)  for  years  of prior  service,  (ii) the
President/CEO  of Cubic would  receive  45,000  restricted  Cubic common  shares
(30,000  share per year,  multiplied  by 1.5 years) for years of prior  service,
(iii) the Secretary of Cubic would receive 22,500 restricted Cubic common shares
(15,000  shares per year,  multiplied  by 1.5 years) for prior years of service,
(iv) going  forward,  Directors  would receive  16,000  restricted  Cubic common
shares per year of service,  (v) going forward,  the President/CEO would receive
30,000  restricted Cubic common shares per year of service,  (vi) going forward,
the Secretary  would receive 15,000  restricted  Cubic common shares per year of
service,  (vii) Audit Committee  members would receive 10,000  restricted  Cubic
common shares per audit, and, (viii) any Compensation  Committee member,  should
one be formed,  would receive 3,000  restricted  Cubic common shares per year of
service. On October 25, 2004, Cubic issued 155,000 common shares of stock to its


                                       31
<PAGE>

Officers and  Directors  pursuant to this plan.  Based on a then market price of
$0.51 per share, Cubic recorded a compensation  expense of $79,050 for the year;
which  expense is recorded in the above  financial  statements  as a general and
administrative expense.

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

         On December  29, 2005,  the  shareholders  of the Company  approved the
above-described   Director  and  Officer  Compensation  Plan  (the  "Plan")  and
3,750,000  shares of common stock were reserved,  of which 1,169,000 shares have
been  issued  through  June 30,  2006,  as set  forth  below.  Accordingly,  the
previously authorized conditional stock grants aggregating 597,000 un-registered
shares were  approved for issuance to the officers and directors of the Company.
As of such date,  the  aggregate  market value of the common  stock  granted was
$483,570 based on the last sale price on the OTC Bulletin Board of the Company's
common  stock.  Such  amount has been  recorded as  compensation  expense and is
included in general and  administrative  expense for the quarter ended  December
31, 2005.

         On January 5, 2006, the Company issued 572,000  un-registered shares to
the officers and directors of the Company pursuant to the Plan. As of such date,
the aggregate market value of the common stock granted was $486,200 based on the
last sale price on the OTC Bulletin  Board of the Company's  common stock.  Such
amount is being  amortized to  compensation  expense on a quarterly basis during
calendar  year 2006.  Accordingly,  $121,550 has been  recorded as  compensation
expense and is included  in general and  administrative  expense for each of the
quarters ended March 31 and June 30, 2006.


Pro forma Information Related to Stock Options

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

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

         The  following  table sets forth the number of shares of the  Company's
common stock beneficially owned, as of June 30, 2006 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


                                       32
<PAGE>

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, 2006
are outstanding.


-------------------------------------- -------------------- --------------------
                                                                 Approximate
           Name and Address              Number of Shares     Percent of Class
           ----------------              ----------------     ----------------
-------------------------------------- -------------------- --------------------
Calvin A. Wallen, III                      11,852,212(1)            27.9%
9870 Plano Road
Dallas, TX  75238

-------------------------------------- -------------------- --------------------
William Bruggeman                          10,307,303(2)            24.3%
20 Anemone Circle
North Oaks, MN  55127

-------------------------------------- -------------------- --------------------
Gene Howard                                 514,425(3)               1.2%
2402 East 29th St.
Tulsa, OK  74114

-------------------------------------- -------------------- --------------------
Bob Clements                                530,527(4)               1.2%
9870 Plano Road
Dallas, TX  75238
-------------------------------------- -------------------- --------------------
Herbert Bayer                               288,287(5)                *
9870 Plano Road
Dallas, TX  75238
-------------------------------------- -------------------- --------------------
Jon S. Ross                                 347,500(6)                *
9870 Plano Road
Dallas, TX  75238

-------------------------------------- -------------------- --------------------
James L. Busby                               150,000                  *
9870 Plano Road
Dallas, TX  75238

-------------------------------------- -------------------- --------------------
All officers and directors                  13,682,951              32.2%
as a group (6 persons)
-------------------------------------- -------------------- --------------------

------------------------------
* - Less Than One Percent
(1)      Includes 4,141,216 shares held by Tauren  Exploration,  Inc., an entity
         controlled by Mr. Wallen,  includes 500,000 shares held by spouse,  and
         includes 300,000 shares held by minor children.
(2)      Includes  834,000 shares held by Diversified  Dynamics Corp., a company
         controlled  by William  Bruggeman;  includes  120,000  shares  owned by
         Consumer  Products Corp. in which Mr.  Bruggeman's  spouse,  Ruth, is a
         joint  owner;  and  includes  8,913,303  shares held jointly by William
         Bruggeman  &  Ruth   Bruggeman   as  joint   tenants   with  rights  of
         survivorship.
(3)      Includes  322,245 shares are held by Mr.  Howard's  spouse,  Belva,  of
         which Mr. Howard disclaims beneficial ownership.
(4)      Includes  109,527  shares held with spouse as joint tenants with rights
         of survivorship.
(5)      Includes  132,287  shares held with spouse as joint tenants with rights
         of survivorship.
(6)      Includes 3,000 shares held by minor children.


                                       33
<PAGE>

Item 12. Certain Relationships And Related Transactions.

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

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

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

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


                                       34
<PAGE>

$0.50 per share.  In  connection  with the exchange  offer,  the Company  issued
approximately 11,141,256 shares of the Company's common stock.

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

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

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

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

         On or about January 11, 2005,  the Company issued  1,531,661  shares of
its  common  stock  to  Caravel   Resources  Energy  Fund  2003-II,   L.P.  (the
"Partnership")  in exchange for a 0.1914575033  working  interest in the Kraemer
24-1 Well,  Desoto  Parish,  Township 14 N, Range 16 W, Section 24 (the "Well").
The Company also issued  468,339  shares of its common stock to Calvin A. Wallen
III, the Company's Chairman of the Board, President and Chief Executive Officer,
in exchange for a 0.0585424967 working interest in the Well.

         On February 6, 2006, the Company entered into a Purchase Agreement with
Tauren  Exploration,  Inc.,  an entity  wholly  owned by Calvin  Wallen III, the
Company's Chairman of the Board and Chief Executive Officer, with respect to the
purchase  by  the  Company  of  certain   Cotton  Valley   leasehold   interests
(approximately 11,000 gross acres; 5,000 net acres) held by Tauren.  Pursuant to
the Purchase Agreement,  the Company acquired from Tauren a 35% working interest
in approximately  2,400 acres and a 49% working interest in approximately  8,500
acres located in DeSoto and Caddo Parishes,  Louisiana, along with an associated
Area of Mutual  Interest  ("AMI") and the right to acquire at "cost" (as defined
in the Purchase  Agreement) a working interest in all additional  mineral leases
obtained by Tauren in the AMI,  in  exchange  for (a)  $3,500,000  in cash,  (b)
2,500,000  unregistered  shares  of  Company  common  stock,  (c)  a  short-term
promissory  note in the amount of  $1,300,000,  which note is  convertible  into
Company common stock at a conversion  price of  $0.80/share,  and (d) a drilling
credit of $2,100,000.  The  consideration  described above was determined  based
upon  negotiations  between  Tauren  and a Special  Committee  of the  Company's
directors,  excluding Mr. Wallen. The Special Committee obtained an opinion from
its independent financial advisor with respect to the fairness, from a financial
point of view, to the public stockholders of the Company, of such transactions.





                                       35
<PAGE>

Item 13. Exhibits.

  ------------    --------------------------------------------------------------
    Exhibit
      No.         Description

  ------------    --------------------------------------------------------------
      3.1         Articles  of  Incorporation   (incorporated  by  reference  to
                  Exhibit  3.1 to the  Registrant's  Form  10-QSB for the period
                  ended September 30, 1999).

  ------------    --------------------------------------------------------------
      3.2         Articles of Amendment to the Articles of  Incorporation of the
                  Company dated December 30, 2005  (incorporated by reference to
                  Exhibit 3.1 of the Company's  Form 10-QSB for the period ended
                  December 31, 2005).

  ------------    --------------------------------------------------------------
      3.3         Bylaws  (incorporated  by  reference  to  Exhibit  3.2  of the
                  Company's Form 10-KSB for the period ended June 30, 2000).

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

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

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

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

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

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

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

  ------------    --------------------------------------------------------------
     10.8         Securities Purchase Agreement,  dated as of December 12, 2005,
                  among Cubic Energy, Inc. and each purchaser  identified on the
                  signature pages thereto  (incorporated by reference to Exhibit
                  10.1 of the Company's  Current  Report on Form 8-K, filed with
                  the SEC on December 16, 2005).

  ------------    --------------------------------------------------------------
     10.9         Registration Rights Agreement,  dated as of December 12, 2005,
                  among Cubic Energy, Inc. and the purchasers  signatory thereto
                  (incorporated  by reference  to Exhibit 10.2 of the  Company's
                  Current Report on Form 8-K, filed with the SEC on December 16,
                  2005).

  ------------    --------------------------------------------------------------
     10.10        Form  of  Common  Stock  Purchase  Warrant   (incorporated  by
                  reference to Exhibit 10.3 of the Company's  Current  Report on
                  Form 8-K, filed with the SEC on December 16, 2005).

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


                                       36
<PAGE>

  ------------    --------------------------------------------------------------
     10.11        Credit  Agreement,  dated February 6, 2006, by and among Cubic
                  Energy,  Inc. and Petro Capital V, L.P. (filed as exhibit 10.1
                  to  the  Company's  Form  8-K  dated  February  8,  2006,  and
                  incorporated herein by reference).

  ------------    --------------------------------------------------------------
     10.12        Promissory  Note,  dated  as of  February  6,  2006,  by Cubic
                  Energy,  Inc., payable to Petro Capital V, L.P. in the maximum
                  principal  amount of $7,000,000  (filed as exhibit 10.2 to the
                  Company's Form 8-K dated  February 8, 2006,  and  incorporated
                  herein by reference).

  ------------    --------------------------------------------------------------
     10.13        Common Stock Purchase Warrant,  dated February 6, 2006, issued
                  to Petro Capital Securities, LLC (filed as exhibit 10.3 to the
                  Company's Form 8-K dated  February 8, 2006,  and  incorporated
                  herein by reference).

  ------------    --------------------------------------------------------------
     10.14        Common Stock Purchase Warrant,  dated February 6, 2006, issued
                  to  Petro  Capital  V,  L.P.  (filed  as  exhibit  10.4 to the
                  Company's Form 8-K dated  February 8, 2006,  and  incorporated
                  herein by reference).

  ------------    --------------------------------------------------------------
     10.15        Registration  Rights Agreement,  dated as of February 6, 2006,
                  by and between Cubic Energy,  Inc.,  Petro Capital V, L.P. and
                  Petro  Capital  Securities,  LLC (filed as exhibit 10.5 to the
                  Company's Form 8-K dated  February 8, 2006,  and  incorporated
                  herein by reference).

  ------------    --------------------------------------------------------------
     10.16        Purchase Agreement, dated as of February 6, 2006, by and among
                  Cubic Energy, Inc., Calvin Wallen III, and Tauren Exploration,
                  Inc.  (filed as exhibit 10.6 to the  Company's  Form 8-K dated
                  February 8, 2006, and incorporated herein by reference).

  ------------    --------------------------------------------------------------
     10.17        Promissory  Note,  dated  as of  February  6,  2006,  by Cubic
                  Energy,  Inc.,  payable  to Tauren  Exploration,  Inc.  in the
                  principal  amount of $1,300,000  (filed as exhibit 10.7 to the
                  Company's Form 8-K dated  February 8, 2006,  and  incorporated
                  herein by reference).

  ------------    --------------------------------------------------------------
     10.18        Amendment to  Promissory  Note,  dated March 30, 2006,  by and
                  between,  Cubic  Energy,  Inc.  and Tauren  Exploration,  Inc.
                  (incorporated  by reference  to Exhibit 10.8 of the  Company's
                  Form 10-QSB for the quarter ended March 31, 2006).

  ------------    --------------------------------------------------------------
     10.19        Amendment to Purchase  Agreement,  dated April 3, 2006, by and
                  among  Cubic  Energy,  Inc.,  Calvin  Wallen  III  and  Tauren
                  Exploration,  Inc.  (incorporated by reference to Exhibit 10.9
                  of the  Company's  Form 10-QSB for the quarter ended March 31,
                  2006).

  ------------    --------------------------------------------------------------
     10.20        Amendment  to Purchase  Agreement,  dated May 5, 2006,  by and
                  among  Cubic  Energy,  Inc.,  Calvin  Wallen  III  and  Tauren
                  Exploration,  Inc. (incorporated by reference to Exhibit 10.10
                  of the  Company's  Form 10-QSB for the quarter ended March 31,
                  2006).

  ------------    --------------------------------------------------------------
     10.21        Subscription  and  Registration  Rights  Agreement with George
                  Karfunkel,  dated July 26, 2006 (filed as Exhibit  10.1 to the
                  Company's Form 8-K dated July 28, 2006).

  ------------    --------------------------------------------------------------
     10.22        Subscription  and  Registration  Rights  Agreement with Yehuda
                  Neuberger and Anne Neuberger JTWROS dated July 26, 2006 (filed
                  as  Exhibit  10.2 to the  Company's  Form 8-K  dated  July 28,
                  2006).

  ------------    --------------------------------------------------------------
     10.23        Warrant issued to George  Karfunkel  (filed as Exhibit 10.3 to
                  the Company's Form 8-K dated July 28, 2006).

  ------------    --------------------------------------------------------------
     10.24        Warrant issued to Yehuda  Neuberger and Anne Neuberger  JTWROS
                  (filed as Exhibit  10.4 to the  Company's  Form 8-K dated July
                  28, 2006).

  ------------    --------------------------------------------------------------
    10.25*        Second  Amendment to Promissory  Note, dated June 27, 2006, by
                  and between, Cubic Energy, Inc. and Tauren Exploration, Inc.

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


                                       37
<PAGE>

  ------------    --------------------------------------------------------------
     23.1*        Consent of Philip Vogel & Co., PC

  ------------    --------------------------------------------------------------
     27.1*        Financial Data Schedule.

  ------------    --------------------------------------------------------------
     31.1*        Rule  13a-14(a)/15d-14(a)  Certification  of Calvin A. Wallen,
                  III

  ------------    --------------------------------------------------------------
     31.2*        Rule 13a-14(a)/15d-14(a) Certification of James L. Busby

  ------------    --------------------------------------------------------------
     32.1*        Section 1350 Certification of Calvin A. Wallen, III

  ------------    --------------------------------------------------------------
     32.2*        Section 1350 Certification of James L. Busby

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

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

Item 14.  Principal Accountant Fees and Services.

 ------------------- ---------------------------- ----------------------------
                      July 1, 2004-June 30, 2005   July 1, 2005-June 30, 2006
                      --------------------------   --------------------------

 ------------------- ---------------------------- ----------------------------
 Audit Fees                     $16,000                      $18,750
 ------------------- ---------------------------- ----------------------------
 Audit Related Fees              11,350                        7,875
 ------------------- ---------------------------- ----------------------------
 Tax Fees                         3,550                        4,015
 ------------------- ---------------------------- ----------------------------
 All Other Fees                   2,400                        3,425
                                 ------                    ---------
 ------------------- ---------------------------- ----------------------------
           Total                $33,300                      $34,065
                                =======                      =======
 ------------------- ---------------------------- ----------------------------

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












                                       38
<PAGE>

                                   SIGNATURES

         In  accordance  with the Section 13 or 15(d) of the  exchange  act, the
registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized, on the 28th day of September, 2006.


                                                   CUBIC ENERGY, INC.


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



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

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

/s/ Calvin A. Wallen, III        President, Chief Executive   September 28, 2006
-----------------------------
Calvin A. Wallen, III            Officer and Director
                                 (principal executive
                                 officer)

/s/ James L. Busby               Chief Financial Officer      September 28, 2006
-----------------------------
James L. Busby                   (principal financial and
                                 accounting officer)

/s/ Jon Stuart Ross              Secretary and Director       September 28, 2006
-----------------------------
Jon Stuart Ross

/s/ Gene Howard                  Director                     September 28, 2006
-----------------------------
Gene Howard

/s/ Herbert A. Bayer             Director                     September 28, 2006
-----------------------------
Herbert A. Bayer

/s/ Bob Clements                 Director                     September 28, 2006
-----------------------------
Bob Clements




<PAGE>

                               CUBIC ENERGY, INC.

                              FINANCIAL STATEMENTS
                                       and
                          INDEPENDENT AUDITORS' REPORT

                                  JUNE 30, 2006







                                 C O N T E N T S

                                                                         Page

Independent Auditors' Report..........................................   F-1

Financial Statements:

  Balance Sheets......................................................   F-2

  Statements of Operations............................................   F-3

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

  Statements of Cash Flows............................................   F-5

  Notes to Financial Statements.......................................F-6 - F-25














<PAGE>

                          INDEPENDENT AUDITORS' REPORT



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



We have audited the balance sheets of Cubic Energy,  Inc., a Texas  corporation,
as of June 30,  2006 and 2005,  and the related  statements  of  operations,  of
changes in stockholders' equity and of cash flows for each of the three years in
the  period  ended  June  30,  2006.   These   financial   statements   are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Cubic Energy,  Inc. as of June
30, 2006 and 2005, and the results of its operations and its cash flows for each
of the three  years in the  period  ended  June 30,  2006,  in  conformity  with
accounting principles generally accepted in the United States of America.



                                                    PHILIP VOGEL & CO. PC




                                                    Certified Public Accountants

Dallas, Texas

September 8, 2006




                                      F-1
<PAGE>

                               CUBIC ENERGY, INC.

                                 BALANCE SHEETS
                             JUNE 30, 2006 AND 2005

                                                       2006            2005
                                                   ------------    ------------
         Assets

Current assets:
   Cash and cash equivalents                       $    259,157    $    257,253
   Accounts receivable - trade                           41,680          34,354
   Prepaid drilling costs                               264,223         303,666
   Prepaid expenses                                     243,100            --
                                                   ------------    ------------
       Total current assets                        $    808,160    $    595,273


Property and equipment (at cost):
   Oil and gas properties, full cost method:
       Proved properties (including wells and
         related equipment and facilities)         $  6,679,730    $  4,098,571
       Unproven properties                            6,780,530       1,053,000
   Office and other equipment                             7,876           4,873
                                                   ------------    ------------
                                                   $ 13,468,136    $  5,156,444
   Less accumulated depreciation, depletion
       and amortization                               1,648,581       1,469,345
                                                   ------------    ------------
                                                     11,819,555       3,687,099
Other assets:
   Deferred loan costs - net                            318,999         132,639
   Restricted Cash                                      401,723            --
   Other                                                 25,000            --
                                                   ------------    ------------
                                                   $    745,722    $    132,639
                                                   ------------    ------------
                                                   $ 13,373,437    $  4,415,011
                                                   ============    ============


                                                       2006            2005
                                                   ------------    ------------

         Liabilities and stockholders' equity

Current liabilities:
   Current portion of long term debt               $    500,000
   Accounts payable and accrued expenses                165,628    $     11,261
   Due to affiliates                                  1,499,762           7,717
                                                   ------------    ------------
       Total current liabilities                   $  2,165,390    $     18,978

Long-term liabilities
   Long-term debt, net of discounts                $  3,854,641    $  1,611,886
   Note payable to affiliate                          1,300,000            --
                                                   ------------    ------------
                                                      5,154,641       1,611,886
Commitments and contingencies (Note H)

Stockholders' equity:
   Preferred stock - $.01 par value,
     authorized 10,000,000 shares,
     issued none                                   $       --      $       --

   Common stock - $.05 par value, authorized
     100,000,000 shares, issued 42,450,768
     shares in 2006 and 35,161,963 in 2005            2,122,540       1,758,100
   Additional paid-in capital                        17,452,784      11,778,915
   Accumulated deficit                              (13,521,918)    (10,752,868)
                                                   ------------    ------------

       Stockholders' equity                           6,053,406       2,784,147
                                                   ------------    ------------

                                                   $ 13,373,437    $  4,415,011
                                                   ============    ============


The accompanying notes are an integral part of these statements.


                                      F-2
<PAGE>
<TABLE>
<CAPTION>

                               CUBIC ENERGY, INC.

                            STATEMENTS OF OPERATIONS
                FOR THE YEARS ENDED JUNE 30, 2006, 2005 AND 2004


                                                      2006           2005           2004
                                                  -----------    -----------    -----------
<S>                                               <C>            <C>            <C>
Revenues:
   Oil and gas sales                              $   508,925    $   469,441    $   414,741
                                                  -----------    -----------    -----------

       Total revenues                             $   508,925    $   469,441    $   414,741
                                                  -----------    -----------    -----------

Costs and expenses:
   Oil and gas production, operating and
     development costs                            $   338,329    $   273,074    $   186,465
   Selling, general and administrative expenses     1,400,482        394,827        240,022
   Depreciation, depletion and amortization           179,237        364,496        104,735
                                                  -----------    -----------    -----------

       Total costs and expenses                   $ 1,918,048    $ 1,032,397    $   531,222
                                                  -----------    -----------    -----------

       Operating income (loss)                    $(1,409,123)   $  (562,956)   $  (116,481)
                                                  -----------    -----------    -----------

Non-operating income (expense):
   Other income                                   $     6,402    $      --      $     2,440
   Interest expense                                  (638,800)      (193,313)           (75)
   Amortization of loan costs                         (67,199)       (28,257)          --
                                                  -----------    -----------    -----------

       Total non-operating income (expense)       $  (699,597)   $  (221,570)   $     2,365
                                                  -----------    -----------    -----------

Loss on debt extinguishment                       $  (660,330)   $      --      $      --
                                                  -----------    -----------    -----------

Loss from operations before income taxes          $(2,769,050)   $  (784,526)   $  (114,116)

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

       Net loss                                   $(2,769,050)   $  (784,526)   $  (114,116)
                                                  ===========    ===========    ===========

Net loss per common share - basic and diluted     $     (0.07)   $     (0.02)   $     (0.00)
                                                  ===========    ===========    ===========
</TABLE>


The accompanying notes are an integral part of these statements.


                                      F-3
<PAGE>
<TABLE>
<CAPTION>

                               CUBIC ENERGY, INC.

                  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                FOR THE YEARS ENDED JUNE 30, 2006, 2005 AND 2004

                                                                     Common Stock
                                                Cumulative    -------------------------       Additional
                                                preferred         Shares           Par          paid-in
                                                  stock        outstanding        value         capital
                                              -------------   -------------   -------------   -------------
 <S>                                           <C>            <C>             <C>             <C>
Balance, June 30, 2003                                 --        31,180,326   $   1,559,017   $   8,892,992
   Stock issued under compensation plan                --           271,500          13,575          79,475
   Net loss, year ended June 30, 2004                  --              --              --              --
                                              -------------   -------------   -------------   -------------
Balance, June 30, 2004                                 --        31,451,826   $   1,572,592   $   8,972,467
   Debt proceeds allocated to warrants                 --              --              --           510,961
   Stock issued under compensation plan                --           155,000           7,750          71,300
   Stock issued under convertible
      debenture agreements                             --         1,410,000          70,500         406,006
   Stock issued in payment of interest
      obligations                                      --           145,137           7,258         118,181
   Stock issued for acquisition of property
      interests                                        --         2,000,000         100,000       1,700,000
   Net loss, year ended June 30, 2005                  --              --              --              --
                                              -------------   -------------   -------------   -------------

Balance, June 30, 2005                                 --        35,161,963   $   1,758,100   $  11,778,915
   Stock issued for acquisition of
      property interests                               --         2,500,000         125,000       1,175,000
   Stock issued under compensation plan                --         1,169,000          58,450         911,320
   Stock issued for working capital                    --         2,679,000         133,950       1,786,836
   Stock issued under convertible
      debenture agreements                             --           900,000          45,000         354,626
   Warrants issued for debt costs                      --              --              --           208,333
   Debt proceeds allocated to warrants                 --              --              --         1,203,752
   Stock issued in payment of interest
      obligations                                      --            40,805           2,040          34,002

   Net loss, year ended June 30, 2006                  --              --              --              --
                                              -------------   -------------   -------------   -------------
Balance, June 30, 2006                                 --        42,450,768   $   2,122,540   $  17,452,784
                                              =============   =============   =============   =============

                                                                  Total
                                               Accumulated    stockholders'
                                                 deficit         equity
                                              -------------   -------------

Balance, June 30, 2003                        $  (9,854,225)  $     597,784
   Stock issued under compensation plan                --            93,050
   Net loss, year ended June 30, 2004              (114,117)       (114,117)
                                              -------------   -------------
Balance, June 30, 2004                        $  (9,968,342)  $     576,717
   Debt proceeds allocated to warrants                 --           510,961
   Stock issued under compensation plan                --            79,050
   Stock issued under convertible
      debenture agreements                             --           476,506
   Stock issued in payment of interest
      obligations                                      --           125,439
   Stock issued for acquisition of property
      interests                                        --         1,800,000

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

Balance, June 30, 2005                        $ (10,752,868)  $   2,784,147
   Stock issued for acquisition of
      property interests                               --         1,300,000
   Stock issued under compensation plan                --           969,770
   Stock issued for working capital                    --         1,920,786
   Stock issued under convertible
      debenture agreements                             --           399,626
   Warrants issued for debt costs                      --           208,333
   Debt proceeds allocated to warrants                 --         1,203,752
   Stock issued in payment of interest
      obligations                                      --            36,042
                                              -------------   -------------
   Net loss, year ended June 30, 2006            (2,769,050)     (2,769,050)

Balance, June 30, 2006                        $ (13,521,918)  $   6,053,406
                                              =============   =============
</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-4
<PAGE>
<TABLE>
<CAPTION>

                               CUBIC ENERGY, INC.

                            STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED JUNE 30, 2006, 2005 AND 2004

                                                              2006           2005           2004
                                                          -----------    -----------    -----------
<S>                                                       <C>            <C>            <C>
Cash flows from operating activities:
   Net (loss)                                             $(2,769,050)   $  (784,526)   $  (114,116)
   Adjustments to reconcile net (loss) to cash
       provided (used) by operating activities:
     Depreciation, depletion and amortization                 465,519        460,509        104,735
     Stock issued for interest                                 36,042        125,440           --
     Stock issued for compensation                            726,670         79,050         93,051
     Write off deferred loan costs                             99,203           --             --
     Write off note payable discount                          237,931           --             --
     Change in assets and liabilities:
       (Increase) decrease in accounts receivable              (7,326)        45,826        (22,050)
       Increase (decrease) in loan from affiliates             92,771          4,119          3,418
       Increase (decrease) in accounts payable
         and accrued liabilities                              154,367       (115,503)        10,725
                                                          -----------    -----------    -----------

       Net cash provided (used) by operating activities   $  (963,873)   $  (185,085)   $    75,763
                                                          -----------    -----------    -----------

Cash flows from investing activities:
   Acquisition and development of oil
     and gas properties                                   $(4,409,415)   $ 1,813,946)   $      --
   Purchase of office equipment                                (3,003)        (3,963)          --
   Advances on development costs                               39,443       (303,666)          --
   Cash restricted by debt                                   (401,723)          --             --
   Increase in other assets                                   (25,000)          --             --
                                                          -----------    -----------    -----------

       Net cash provided (used) by investing activities   $(4,799,698)   $(2,121,575)   $      --
                                                          -----------    -----------    -----------

Cash flows from financing activities:
   Issuance of debentures and warrants                    $ 5,500,000    $ 2,635,000    $      --
   Issuance of common stock, net                            2,020,786           --             --
   Repayment of debentures                                 (1,480,000)          --             --
   Loan costs incurred and other                             (275,311)      (264,300)          --
                                                          -----------    -----------    -----------

       Net cash provided (used) by financing activities   $ 5,765,475    $ 2,370,700    $      --
                                                          -----------    -----------    -----------

Net increase (decrease) in cash and cash equivalents      $     1,904    $    64,040    $    75,763

Cash and cash equivalents:
   Beginning of year                                          257,253        193,213        117,450
                                                          -----------    -----------    -----------

   End of year                                            $   259,157    $   257,253    $   193,213
                                                          ===========    ===========    ===========
Other information:
   Interest paid                                          $   355,607    $   125,557    $      --
   Noncash investing and financing activities:
     Acquisition of property with stock issue             $ 1,300,000    $      --      $      --
    Acquisition of property with debt issue               $ 2,599,274    $      --      $      --
</TABLE>


The accompanying notes are an integral part of these statements.


                                      F-5
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS

Note A - Background and general:

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

Note B - Significant accounting policies:

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

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

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

        Office and other  equipment  are stated at cost and  depreciated  by the
    straight-line  method over estimated useful lives ranging from five to seven
    years.  Depreciation and amortization of office and other equipment amounted
    to $1,173,  $330,  and $- for the years ended June 30, 2006,  2005 and 2004,
    respectively.

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

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

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

        In addition,  the capitalized  costs are subject to a "full cost ceiling
    test," which generally  limits such costs to the aggregate of the "estimated
    present  value,"  discounted  at a 10  percent  interest  rate of future net
    revenues  from proved  reserves,  based on current  economic  and  operating
    conditions,  plus  the  lower  of cost  or fair  market  value  of  unproved
    properties.  The Company's analysis of its proved properties  indicated that
    no impairment was considered necessary at June 30, 2006.

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

        Depletion  of  producing  oil and gas  properties  amounted to $178,064,
    $364,166  and  $104,735  for the years ended June 30,  2006,  2005 and 2004,
    respectively.

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

        The Company  has  adopted  the  provisions  of  Statement  of  Financial
    Accounting  Standards  (SFAS) No.  144,  Accounting  for the  Impairment  or
    Disposal of Long-Lived  Assets effective for periods beginning July 1, 2002,
    and  thereafter.  SFAS 144  replaces  SFAS 121,  and,  among other  matters,
    addresses financial  accounting and reporting for the impairment or disposal



                                      F-6
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS

    of long-lived assets. SFAS 144 retains the basic provisions of SFAS 121, but
    broadens its scope and  establishes a single model for long-lived  assets to
    be  disposed  of by  sale.  Management  does  not  believe  adoption  of the
    Statement  had any effect on the  financial  statements  of the Company.  In
    addition, the Company is subject to the rules of the Securities and Exchange
    Commission  with respect to impairment of oil and gas  properties  accounted
    for under the full cost method of  accounting,  as  described  earlier.  The
    Company's analysis of its unproved  properties  indicated that no impairment
    was considered necessary at June 30, 2006.

    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.

        In September  2005,  the EITF  reached a consensus  on Issue No.  05-08,
    Income  Tax  Consequences  of  Issuing  Convertible  Debt with a  Beneficial
    Conversion  Feature  ("EITF  05-08").  Under EITF  05-08,  the  issuance  of
    convertible debt with a beneficial conversion feature results in a temporary
    difference  for  purposes of applying  FAS No.  109,  Accounting  for Income
    Taxes. The deferred taxes recognized for the temporary  difference should be
    recorded as an adjustment to paid-in  capital.  EITF 98-05,  Accounting  for
    Convertible  Securities with Beneficial  Conversion Features or Contingently
    Adjustable Conversion Ratios, and EITF 00-27, Application of Issue No. 98-05
    to  Certain   Convertible   Instruments,   require  that  the  nondetachable
    conversion   feature  of  a  convertible  debt  security  be  accounted  for
    separately if it is a beneficial conversion feature. A beneficial conversion
    feature is  recognized  and measured by  allocating  to  additional  paid-in
    capital  a  portion  of  the  proceeds  equal  to the  conversion  feature's
    intrinsic  value. A discount on the  convertible  debt is recognized for the
    amount that is allocated to additional paid-in capital. The debt discount is
    accreted  from the date of  issuance  to the stated  redemption  date of the
    convertible  instrument  or  through  the  earliest  conversion  date if the
    instrument does not have a stated  redemption  date. The U.S. Federal Income
    Tax Code includes the entire amount of proceeds  received at issuance as the
    tax basis of the  convertible  debt  security.  EITF 05-08 should be applied
    retrospectively  to all  instruments  with a beneficial  conversion  feature
    accounted  for under EITF 98-05 and EITF 00-27 for periods  beginning  after
    December 15, 2005.  Management  is  evaluating  the effect  adoption of EITF
    05-08 will have on the Company's financial  position,  results of operations
    and cash flows.

        In July 2006,  the FASB issued  Interpretation  No. 48,  Accounting  for
    Uncertainty  in Income  Taxes--an  interpretation  of FASB Statement No. 109
    ("FIN 48"), which clarifies the accounting for uncertainty in tax positions.
    FIN 48 requires that the Company  recognize in the financial  statements the
    impact of a tax  position if that  position is more likely than not of being
    sustained upon audit, based on the technical merits of the position.  FIN 48
    is effective for fiscal years beginning after December 15, 2006.  Management
    is  evaluating  the impact of  adopting  FIN 48 on the  Company's  financial
    position, results of operations and cash flows.

    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, 2006, 2005 and 2004 were not significant.

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

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




                                      F-7
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS


        There were no  dilutive  securities  outstanding  during the years ended
    June 30,  2006,  2005 and 2004.  The weighted  average  number of common and
    common  equivalent  shares   outstanding  was  38,477,353,   33,112,644  and
    31,316,222 for the years ended June 30, 2006, 2005 and 2004, respectively.

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

        Financial  instruments  which  potentially  subject  the  Company  to  a
    concentration of credit risk consists primarily of trade accounts receivable
    with a variety of local,  national,  and  international  oil and natural gas
    companies.  Such credit risks are considered by management to be limited due
    to the financial resources of the oil and natural gas companies. The Company
    also  maintains  accounts with  financial  institutions  which  periodically
    exceed federally  insured amounts.  The excess balance at June 30, 2006, was
    approximately $160,000.

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

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

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

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

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

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

    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.



                                       F-8
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS


        In September  2006, the FASB issued FAS No. 157, Fair Value  Measurement
    ("FAS  157").  FAS 157 defines  fair  value,  establishes  a  framework  for
    measuring fair value and expands  disclosures about fair value measurements.
    FAS 157 is  effective  for  financial  statements  issued for  fiscal  years
    beginning  after  November 15, 2007 and interim  periods within those fiscal
    years.  Management  is  evaluating  the  impact of  adopting  FAS 157 on the
    Company's financial position, results of operations and cash flows.

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

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

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

        In March 2005, the FASB issued FASB  Interpretation  No. 47,  Accounting
    for Conditional  Asset Retirement  Obligations  ("FIN 47"). FIN 47 clarifies
    that a conditional asset retirement  obligation,  as used in FAS 143, refers
    to a legal obligation to perform an asset  retirement  activity in which the
    timing or method of the  settlement  are  conditional on a future event that
    may or may not be within the control of the entity.  Accordingly,  an entity
    is required to  recognize  a liability  for the fair value of a  conditional
    asset retirement  obligation if the fair value can be reasonably  estimated.
    FIN 47 is effective  no later than fiscal  years  ending after  December 15,
    2005. Management does not expect the adoption of FIN 47 will have a material
    impact on the Company's  financial  position,  results of operations or cash
    flows.

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

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

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

        In December 2002, the Financial  Accounting  Standards Board issued SFAS
    No.  148,   Accounting  for   Stock-Based   Compensation  -  Transition  and
    Disclosure,  which amends SFAS No. 123.  SFAS No. 148  provides  alternative
    methods of transition for a voluntary  change to the fair value based method
    of accounting for stock-based compensation. In addition, SFAS No. 148 amends




                                      F-9
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS


    the  disclosure  requirements  of SFAS No. 123 to require more prominent and
    more  frequent  disclosures  in  financial  statements  about the effects of
    stock-based  compensation.  The  transition  guidance and annual  disclosure
    provisions  are  effective  for years  ending after  December 15, 2002.  The
    interim  disclosure  provisions are effective  financial reports  containing
    financial  statements for interim periods beginning after December 15, 2002.
    The transition  rules of this standard are not applicable  since the Company
    continues to account for stock-based  compensation under the guidance of APB
    Opinion 25. The other requirements of this standard have been adopted by the
    Company for periods beginning January 1, 2003.

        In December 2004, the Financial  Accounting  Standards Board issued SFAS
    No.  123(R),  Share-Based  Payment,  which is a  revision  of SFAS No.  123,
    Accounting  for  Stock-Based  Compensation,   and  supersedes  APB  No.  25,
    Accounting  for Stock Issued to Employees.  This  Statement will require the
    Company to  recognize  compensation  costs  related to  stock-based  payment
    transactions (i.e.  granting of stock options and warrants) in the financial
    statements. With limited exceptions, the amount of compensation cost will be
    measured  based on the  grant-date  fair  value of the  equity or  liability
    instruments  issued.  In addition,  liability awards will be remeasured each
    reporting period.  Compensation cost will be recognized over the period that
    an employee  provides  services in exchange for the award. This new standard
    will be effective  for awards that are granted,  modified or settled in cash
    in interim and annual financial periods beginning after June 30, 2006.

        Additionally,  in August  2005,  the FASB  issued  FASB  Staff  Position
    ("FSP") FSP FAS  123R-1,  Classification  and  Measurement  of  Freestanding
    Financial  Instruments  Originally  Issued in Exchange for Employee Services
    under FASB Statement No. 123(R) ("FSP1"). In FSP1, the FASB decided to defer
    the  requirements in FAS 123 that make a freestanding  financial  instrument
    subject to the recognition  and measurement  requirements of other GAAP when
    the rights conveyed by the instrument are no longer  dependent on the holder
    being an  employee.  In  October  2005,  the  FASB  issued  FSP FAS  123R-2,
    Practical  Accommodation to the Application of Grant Date as Defined in FASB
    Statement No. 123(R) ("FSP2"). In FSP2, the FASB is providing companies with
    a "practical accommodation" when determining the grant date of an award that
    is subject to the  accounting  provisions in FAS 123R. In November 2005, the
    FASB issued FSP FAS 123R-3,  Transition  Election  Related to Accounting for
    the Tax Effects of  Share-Based  Payment Awards  ("FSP3").  FSP3 provides an
    elective  alternative  method that establishes a computational  component to
    arrive at the  beginning  balance of the  accumulated  paid-in  capital pool
    related to employee  compensation  and a simplified  method to determine the
    subsequent impact on the accumulated paid-in capital pool of employee awards
    that are fully  vested and  outstanding  upon the  adoption of FAS 123R.  In
    February 2006, the FASB issued FSP FAS 123R-4, Classification of Options and
    Similar  Instruments  Issued as  Employee  Compensation  That Allow for Cash
    Settlement  upon  the  Occurrence  of a  Contingent  Event  ("FSP4"),  which
    concludes that a cash settlement feature that can be exercised only upon the
    occurrence of a contingent event that is outside the employee's control does
    not become a liability until it becomes  probable that the event will occur.
    An  option  or  similar   instrument  that  is  classified  as  equity,  but
    subsequently  becomes a liability  because the  contingent  cash  settlement
    event  is  probable  of  occurring,   shall  be  accounted  for  similar  to
    modification  from an equity to  liability  award.  To the  extent  that the
    liability exceeds the amount previously  recognized in equity, the excess is
    recognized as compensation cost. The total recognized  compensation cost for
    an award with a contingent cash settlement  feature shall at least equal the
    fair  value of the  award at the grant  date.  FSP4 is  applicable  only for
    options  or  similar  instruments  issued as part of  employee  compensation
    arrangements. The guidance in FSP1, FSP2, FSP3 and FSP4 will be applied upon
    our adoption of FAS 123R.  Management is  evaluating  the impact of adopting
    the  guidance  in  FSP1,  FSP2,  FSP3 and  FSP4 on the  Company's  financial
    position, results of operations and cash flows.

        In March 2005, the SEC published Staff Accounting Bulletin No. 107 ("SAB
    107"). The  interpretations  in this staff  accounting  bulletin express the
    views of the staff  regarding the  interaction  between FAS 123R and certain
    SEC rules and  regulations  and  provide  the staff's  views  regarding  the
    valuation of  share-based  payment  arrangements  for public  companies.  In
    particular,  SAB  107  provides  guidance  related  to  share-based  payment
    transactions  with  non-employees,  the transition  from nonpublic to public
    entity status,  valuation  methods  (including  assumptions such as expected
    volatility  and  expected  term),  the  accounting  for  certain  redeemable
    financial  instruments issued under share-based  payment  arrangements,  the
    classification  of  compensation   expense,   non-GAAP  financial  measures,
    first-time  adoption  of FAS 123R in an interim  period,  capitalization  of
    compensation  cost  related  to  share-based   payment   arrangements,   the
    accounting for income tax effects of share-based  payment  arrangements upon
    adoption of FAS 123R,  the  modification  of employee share options prior to
    adoption of FAS 123R and disclosures in Management's Discussion and Analysis




                                      F-10
<PAGE>
<TABLE>
<CAPTION>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS


    subsequent  to  adoption  of FAS 123R.  We will comply with SAB 107 upon our
    adoption of FAS 123R.  Management is  evaluating  the impact of adopting SAB
    107 on the Company's  financial  position,  results of  operations  and cash
    flows.

        The per share  weighted-average  fair  value of stock  warrants  granted
    during the year ended June 30, 2002, was $0.29, on the date of grant,  using
    the Black-Scholes pricing model. There were no stock warrants granted during
    the years ended June 30, 2006, 2005 and 2004.

                                                     2002
                                                --------------

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

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

                                                     2006           2005           2004
                                                 -----------    -----------    -----------
            <S>                                  <C>            <C>            <C>
            Net loss:
            As reported                          $(2,769,050)   $  (784,526)   $  (114,116)
                                                 ===========    ===========    ===========
            Proforma                             $(2,769,050)   $  (802,026)   $  (149,580)
                                                 ===========    ===========    ===========
            Stock-based employee compensation:
            As reported                          $   726,670    $      --      $      --
                                                 ===========    ===========    ===========
            Proforma                             $   726,670    $    17,500    $    35,464
                                                 ===========    ===========    ===========
            Basic loss per common share:
            As reported                          $     (0.07)   $     (0.02)   $     (0.00)
                                                 ===========    ===========    ===========
            Proforma                             $     (0.07)   $     (0.02)   $     (0.00)
                                                 ===========    ===========    ===========
    </TABLE>

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

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



                                      F-11
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS


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

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

        In June 2005, the FASB issued FSP FAS 150-5,  Issuers  Accounting  under
    FASB  Statement  No.  150  for  Freestanding   Warrants  and  Other  Similar
    Instruments on Shares that are Redeemable ("FAS 150-5"). FAS 150-5 clarifies
    that  freestanding  warrants  and  similar  instruments  on shares  that are
    redeemable  should be accounted for as liabilities  under FAS 150 regardless
    of the timing of the redemption feature or price, even though the underlying
    shares may be  classified  as equity.  FAS 150-5 is effective  for the first
    reporting  period  beginning  after June 30, 2005.  Although the Company had
    outstanding  warrants as of July 1, 2005, the shares issued upon exercise of
    the warrants are not  redeemable;  consequently,  management does not expect
    the  adoption  of FAS 150-5  will have a  material  impact on the  Company's
    financial position, results of operations or cash flows.

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

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

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

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

    Exchanges of nonmonetary assets
    -------------------------------

        In December 2004, the FASB issued FAS No. 153,  Exchanges of Nonmonetary
    Assets,  an  amendment  of APB Opinion No. 29,  Accounting  for  Nonmonetary
    Transactions  ("FAS 153"). FAS 153 addresses the measurement of exchanges of
    nonmonetary  assets and redefines the scope of  transactions  that should be
    measured based on the fair value of the assets exchanged.  The provisions in
    FAS 153 are effective for nonmonetary  asset  exchanges  occurring in fiscal
    periods  beginning  after June 15, 2005.  Adoption of FAS 153 did not have a
    material impact on the Company's financial  position,  results of operations
    or cash flows.



                                      F-12
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS



        Accounting changes and error corrections
        ----------------------------------------

        In May 2005, the FASB issued FAS No. 154,  Accounting  Changes and Error
    Corrections--A  replacement  of APB Opinion No. 20 and FASB  Statement No. 3
    ("FAS 154"). FAS 154 replaces APB Opinion No. 20,  Accounting  Changes ("APB
    20"),  and FAS No. 3,  Reporting  Accounting  Changes in  Interim  Financial
    Statements  ("FAS 3") and changes the  requirements  for the accounting for,
    and reporting of, a change in accounting principles.  FAS 154 applies to all
    voluntary  changes in  accounting  principles  and  changes  required  by an
    accounting pronouncement in the unusual instance that the pronouncement does
    not include specific transition provisions. Under previous guidance, changes
    in accounting  principle were  recognized as a cumulative  effect in the net
    income  of  the  period  of  the  change.  FAS  154  requires  retrospective
    application  of  changes  in  accounting  principle,  limited  to the direct
    effects of the change, to prior periods' financial statements,  unless it is
    impracticable  to  determine  either  the  period-specific  effects  or  the
    cumulative effect of the change in accounting principle.  Additionally,  FAS
    154 requires that a change in depreciation, amortization or depletion method
    for  long-lived,  nonfinancial  assets  be  accounted  for  as a  change  in
    accounting  estimate  affected by a change in accounting  principle and that
    correction of errors in previously  issued  financial  statements  should be
    termed  a  "restatement."  The  provisions  in FAS  154  are  effective  for
    accounting  changes and correction of errors made in fiscal years  beginning
    after December 15, 2005.  Management does not expect the adoption of FAS 154
    will have a material impact on the Company's financial position,  results of
    operations or cash flows.

    Debt modifications
    ------------------

        In September  2005, the Emerging  Issues Task Force  ("EITF")  reached a
    consensus on Issue No. 05-07,  Accounting  for  Modifications  to Conversion
    Options Embedded in Debt Instruments and Related Issues ("EITF 05-07"). EITF
    05-07  requires  that a change  in the fair  value  of a  conversion  option
    brought  about by modifying  the debt  agreement be included in analyzing in
    accordance with EITF consensus on Issue No. 96-19, Debtor's Accounting for a
    Modification or Exchange of Debt Instruments ("EITF 96-19"),  whether a debt
    instrument is considered extinguished.  Under EITF 96-19's requirements,  an
    issuer who modifies a debt  instrument must compare the present value of the
    original debt instrument's cash flows to the present value of the cash flows
    of the  modified  debt.  If the present  value of those cash flows varies by
    more  than 10  percent,  the  modification  is  considered  significant  and
    extinguishments accounting is applied to the original debt. If the change in
    the  present  value of the cash flows is less than 10  percent,  the debt is
    considered  to be  modified  and is  subject  to EITF  96-19's  modification
    accounting.  EITF 05-07  requires  that in applying  the 10 percent test the
    change in the fair  value of the  conversion  option be  treated in the same
    manner as a current  period cash flow.  EITF 05-07 also requires  that, if a
    modification does not result in an extinguishment,  the change in fair value
    of the  conversion  option be  accounted  for as an  adjustment  to interest
    expense over the remaining term of the debt. The issuer should not recognize
    a  beneficial   conversion  feature  or  reassess  an  existing   beneficial
    conversion  feature upon  modification  of the  conversion  option of a debt
    instrument  that  does  not  result  in an  extinguishment.  EITF  05-07  is
    effective  for  modifications  of debt  instruments  beginning  in the first
    interim or annual  reporting  period  beginning  after  December  15,  2005.
    Management  does not expect  the  adoption  of EITF  05-07 to have  material
    impact on the Company's  financial  position,  results of operations or cash
    flows.

    Reporting taxes collected
    -------------------------

        In March  2006,  the EITF  reached a  tentative  consensus  on Issue No.
    06-03, How Sales Taxes Collected from Customers and Remitted to Governmental
    Authorities  Should Be  Presented  in the Income  Statement  (That Is, Gross
    Versus  Net  Presentation)  ("EITF  06-03").  EITF  06-03  addresses  income
    statement  classification and disclosure  requirements of externally-imposed
    taxes on revenue-producing transactions. EITF 06-03 is effective for periods
    beginning  after December 15, 2006.  Management is currently  evaluating the
    effect  implementation  of EITF 06-03 will have on the  Company's  financial
    position, results of operations and cash flows.

    Other recent pronouncements
    ---------------------------

        In February  2006,  the FASB issued FAS No. 155,  Accounting for Certain
    Hybrid  Financial  Instruments  ("FAS  155"),  which  amends  FAS  No.  133,
    Accounting for Derivative Instruments and Hedging Activities ("FAS 133") and
    FAS No. 140,  Accounting for Transfers and Servicing of Financial Assets and




                                      F-13
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS



    Extinguishments  of  Liabilities,  and improves the  financial  reporting of
    certain hybrid financial instruments by requiring more consistent accounting
    that  eliminates  exemptions and provides a means to simplify the accounting
    for these instruments.  Specifically,  FAS 155 allows financial  instruments
    that have embedded  derivatives to be accounted for as a whole  (eliminating
    the need to bifurcate the derivative  from its host) if the holder elects to
    account for the whole instrument on a fair value basis. FAS 155 is effective
    for all financial  instruments  acquired or issued after the beginning of an
    entity's first fiscal year that begins after September 15, 2006.  Management
    does not expect the  adoption of FAS 155 will have a material  impact on the
    Company's financial position, results of operations or cash flows.

Note C - Stockholders' equity:

    The Company's  authorized  capital is 100,000,000  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, 2006 and 2005.

    Stock and warrants
    ------------------

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

        On or about October 1, 2004,  the Company  closed a Securities  Purchase
    Agreement  and issued  $2,635,000 in principal  amount of 7% Senior  Secured
    Convertible Debentures due September 30, 2009 (the "Debentures"), to a group
    of institutional and high net worth investors. The Company had the option to
    the interest on the Debentures in common stock.  The investors also received
    warrants to purchase an additional  2,635,000 shares of common stock with an
    exercise  price of $1.00 per  share.  On August 7, 2006,  1,000,000  of such
    warrants  were  repriced  at $.70 per  share.  None of the  above-referenced
    warrants have been exercised and all remain outstanding at June 30, 2006.

        The Company  allocated the proceeds from the issuance of the  Debentures
    to the  warrants  and the  Debentures  based on their  relative  fair market
    values  at the date of  issuance.  The value  assigned  to the  warrants  of
    $510,961 was recorded as an increase in  additional  paid in capital for the
    year ended June 30, 2005.

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

        On December 16,  2005,  the Company  entered into a Securities  Purchase
    Agreement  and issued  2,500,000  common shares at a price of $.80 per share
    and issued warrants,  with five year  expiration,  for the purchase of up to
    1,000,000  shares of Company  common stock at an exercise price of $1.00 per
    share.  The proceeds of the offering were used for exploratory  drilling and
    working capital.  None of the above-referenced  warrants have been exercised
    and all remain outstanding at June 30, 2006.

        On February 6, 2006,  Cubic entered into a Credit  Agreement  with Petro
    Capital V, L.P. (the "Lender")  pursuant to which the Lender advanced to the
    Company  $5,500,000.  In  connection  with  the  funding  under  the  Credit



                                      F-14
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS



    Agreement,  the Company  issued to the Lender and Petro Capital  Securities,
    LLC,  warrants,  with  five-year  expirations,  for  the  purchase  of up to
    1,833,334 and 250,000  shares,  respectively,  of Company common stock at an
    exercise  price of $1.00 per share.  None of the  above-referenced  warrants
    have been exercised and all remain outstanding at June 30, 2006.

        The Company  allocated the proceeds from the issuance of the senior debt
    to the  warrants  and the senior  debt based on their  relative  fair market
    values  at the date of  issuance.  The value  assigned  to the  warrants  of
    $1,203,752 was recorded as an increase in additional paid in capital.

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

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

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

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

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

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

        On December  29,  2005,  the  shareholders  of the Company  approved the
    above-described   Director  and  Officer  Compensation  Plan  (the  "Plan").
    Accordingly,  the previously authorized conditional stock grants aggregating
    597,000  un-registered shares were approved for issuance to the officers and
    directors of the Company. As of such date, the aggregate market value of the
    common stock  granted was  $483,570  based on the last sale price on the OTC
    Bulletin Board of the Company's common stock.  Such amount has been recorded
    as  compensation  expense  and is  included  in general  and  administrative
    expense for the year ended June 30, 2006.



                                      F-15
<PAGE>
<TABLE>
<CAPTION>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS



        On January 5, 2006, the Company issued 572,000  un-registered  shares to
    the officers and  directors of the Company  pursuant to the Plan. As of such
    date,  the  aggregate  market value of the common stock granted was $486,200
    based on the last  sale  price on the OTC  Bulletin  Board of the  Company's
    common stock.  Such amount is being amortized to  compensation  expense on a
    quarterly  basis during the calendar  year 2006.  Accordingly,  $243,100 has
    been  recorded  as  compensation  expense  and is  included  in general  and
    administrative expense for the year ended June 30, 2006.

Note D - Loss per common share:

    Net loss per common share is computed as follows:

                                                    2006           2005           2004
                                                -----------    -----------    -----------
        <S>                                     <C>            <C>            <C>
        Net loss attributable to stockholders   $(2,769,050)   $  (784,526)   $  (114,116)

        Weighted average number of shares of
           common stock                          38,477,353     33,112,644     31,316,222

        Income (loss) per common share          $     (0.07)   $     (0.02)   $     (0.00)
        </TABLE>

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

Note E - Long-term debt:

    October 2004 debt issue
    -----------------------

        On or about October 1, 2004,  the Company  closed a Securities  Purchase
    Agreement  and issued  $2,635,000 in principal  amount of 7% Senior  Secured
    Convertible Debentures due September 30, 2009 (the "Debentures"), to a group
    of institutional  and high net worth investors.  The Debentures were secured
    by the  collateral  set  forth in the  Deed of  Trust,  Security  Agreement,
    Assignment of  Production  and Fixture  Filing  attached to a Form 8-K filed
    October 12, 2004.  The  Debentures  paid an annual  interest rate of 7% on a
    quarterly  basis and were  convertible  into shares of our common stock at a
    price of $.50 per share.  The Company had the option to pay the  interest on
    the Debentures in common stock. The proceeds of the Debentures were used for
    the acquisition of interests in oil and gas  properties.  The investors also
    received warrants to purchase an additional 2,635,000 shares of common stock
    with an exercise price of $1.00 per share. During the fiscal year ended June
    30,  2005,  $705,000 of debt had been  converted  into  1,410,000  shares of
    common stock, and 145,137 shares of common stock were issued in lieu of cash
    to pay  interest.  During the fiscal year ended June 30,  2006,  $450,000 of
    debt had been  converted  into 900,000  shares of common  stock,  and 40,805
    shares of common stock were issued in lieu of cash to pay interest.

        The Company  allocated the proceeds from the issuance of the  Debentures
    to the  warrants  and the  Debentures  based on their  relative  fair market
    values  at the date of  issuance.  The value  assigned  to the  warrants  of
    $510,961  was  recorded as an increase in  additional  paid in capital.  The
    assignment  of a value to the  warrants  resulted in a loan  discount  being
    recorded for the same amount.  The  discount  was being  amortized  over the
    original five year term of the  Debentures as additional  interest  expense.
    Amortization  of the discount  was $44,632 and $67,756,  for the years ended
    June 30, 2006 and 2005,  respectively.  The Company also incurred loan costs
    of  $264,300 on the  issuance of the  Debentures  and  warrants.  The amount
    allocable  to the  Debentures  of  $213,049  was  capitalized  and was being
    amortized over the term of the  Debentures.  Amortization  of loan costs was
    $18,612  and  $28,258,   for  the  years  ended  June  30,  2006  and  2005,
    respectively.

        The  debentures  were retired on February 6, 2006,  with proceeds from a
    new  senior  debt  issue,  as set  forth  below.  In  connection  with  this



                                      F-16
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS


    retirement,  the Company  recorded a loss on  extinguishment  of debt in the
    amount of  $660,330.  Such amount  includes the  write-off of deferred  loan
    costs  ($99,204),  the write-off of the remaining loan discount  ($237,931),
    and a prepayment penalty and associated legal fees ($323,195).

    February 2006 debt issue
    ------------------------

        On February 6, 2006,  Cubic entered into a Credit  Agreement  with Petro
    Capital V, L.P. (the "Lender")  pursuant to which the Lender advanced to the
    Company  $5,500,000.  The indebtedness bears interest at a rate of 12.5% per
    annum,  matures on February 6, 2009, and is secured by substantially  all of
    the assets of the Company.  Approximately  $1.8 million of the funded amount
    was used to retire the 7% Senior Secured  Convertible  Debentures  that were
    due  September 30, 2009,  described  above.  In connection  with the funding
    under the  Credit  Agreement,  the  Company  issued to the  Lender and Petro
    Capital  Securities,  LLC,  warrants,  with five-year  expirations,  for the
    purchase of up to 1,833,334  and 250,000  shares,  respectively,  of Company
    common stock at an exercise price of $1.00 per share.

        The Company  allocated the proceeds from the issuance of the senior debt
    to the  warrants  and the senior  debt based on their  relative  fair market
    values  at the date of  issuance.  The value  assigned  to the  warrants  of
    $1,203,752  was recorded as an increase in additional  paid in capital.  The
    assignment  of a value to the  warrants  results  in a loan  discount  being
    recorded.  The discount is being amortized over the original three-year term
    of the senior debt as additional interest expense. Amortization for the year
    ended June 30, 2006 was $174,451.  Amortization for the years ended June 30,
    2007,  2008 and 2009 is expected to be  $439,135,  $440,338,  and  $265,887,
    respectively.

        Cubic incurred loan costs of $483,643 on the issuance of the senior debt
    and warrants.  The amount  allocable to the senior debt of $367,586 has been
    capitalized  and is  being  amortized  over  the  term of the  senior  debt.
    Amortization  of loan costs for the new senior debt was $48,587 for the year
    ended June 30, 2006.  Amortization  for the years ended June 30, 2007,  2008
    and 2009 is expected to be $122,305, $122,640, and $74,053, respectively.

        The terms of the Credit  Agreement  among  other  things,  prohibit  the
    Company  from  merging  with  another  company  or paying  dividends,  limit
    additional  indebtedness,  sales of assets and  investments  and require the
    maintenance of a Fixed Charge  Coverage Ratio, as measured at the end of any
    four consecutive fiscal quarters, and being first measured on June 30, 2007,
    to be less than 1.30 to 1.00.  The  agreement  also  requires the Company to
    maintain a Minimum Tangible Net Worth of $3,000,000 and requires the Company
    to maintain a debt service account of $400,000 until the ratio of EBITDA (as
    defined)  to  interest  expense  equals  2.00 to 1.00 for three  consecutive
    months.  Such debt service  account is classified  as restricted  cash under
    other assets in the accompanying balance sheet as of June 30, 2006.

        Quarterly  principal  payments of $250,000 are due  beginning  March 31,
    2007,  and continue  through  December 31, 2008,  with the  remainder of the
    outstanding  loan balance due February 6, 2009.  The Company has the option,
    under certain conditions,  to defer the first two quarterly payments through
    the issuance of warrants to purchase  300,000 shares of the Company's common
    stock.

        The aggregate  maturities of long-term debt at June 30, 2006,  are: year
    ending June 30, 2007 - $500,000; year ending June 30, 2008 - $1,000,000; and
    year ending June 30, 2009 - $4,000,000.

        On September 19, 2006,  Petro Capital V, L.P.,  issued a letter claiming
    defaults  under  various  sections  of the  Credit  Agreement.  The  alleged
    defaults relate  primarily to unresolved  imperfections  in title concerning
    the S.E. Johnson 20 #1 and S.E. Johnson 29 #1 wells.

        In  Louisiana,   where  the  Company's  properties  are  located,  title
    imperfections  are encountered in the ordinary course of business.  Prior to
    drilling a well, the operator typically obtains a drillsite title opinion to
    gain an understanding  of, and limited assurance as to, the ownership of the
    subject well. The drillsite title opinion is not  comprehensive and does not
    ensure  good title.  Following  the  drilling of a well,  and if the well is
    successful  and is expected to be  completed  for  production,  the operator
    typically  will obtain a division  order title opinion that is more rigorous
    than the  drillsite  title  opinion.  The  division  order title  opinion is
    expected to provide good, but not absolute, assurance as to the title of the
    subject  well.  In any event,  title issues arise in the ordinary  course of
    business  and the  operator  attempts to work with all  impacted  parties to
    resolve the issues.



                                      F-17
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS



        In the case of the  aforementioned  S.E.  Johnson  wells,  after lengthy
    investigation,  management believes that the Company does have good title to
    the S.E.  Johnson wells down to a depth of 6,464 feet;  however,  it appears
    the Company may not have all rights below this depth.  Although the division
    order title opinion for these wells has not yet been  received,  the Company
    believes  that a third party has deep  ownership  rights  with  respect to a
    portion of certain  leases in Sections  20, 29 and 30 of Township  14N Range
    15W. The Company  believes  that it is in the final stages of  negotiating a
    farmout  agreement for such deep rights in the  aforementioned  S.E. Johnson
    wells.  Additionally,  Tauren Exploration,  Inc. ("Tauren"),  the party that
    originally  sold  the  rights  in the  subject  properties  to the  Company,
    executed a Letter Agreement as of September 20, 2006, such that in the event
    that there is an acreage variance in the above-referenced  sections,  Tauren
    will  assign to the  Company  that  number of acres in  Sections  4, 5, 6, 7
    and/or 8 of Township 14N Range 15W to offset any such variance.

        Management  does not  believe  that it was ever in default of any of the
    requirements of the Credit  Agreement  specified by the Petro Capital letter
    dated  September  19,  2006.  Moreover,  even  if a  default  has  occurred,
    management  believes the foregoing curative actions will resolve any default
    within the applicable cure period.

Note F - Related party transactions:

    Effective January 1, 2002, the Company entered into an agreement with Tauren
Exploration Inc. ("Tauren") that provides for the following:

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

    On December 1, 1997, as renewed and revised on January 1, 2002,  the Company
entered  into a  contract  with  Tauren  to  provide  the  necessary  technical,
administrative  and  management  expertise  needed to conduct its business.  The
agreement  was  terminated  effective  January 1, 2006,  except as to the office
sharing  provisions  which were extended to June 30 2006.  The Company now has 6
employees, and its offices are subleased from Tauren. The monthly amount charged
to the Company was based on actual costs of materials  and labor hours of Tauren
that were used pursuant to the terms of the agreement.  Tauren also pays various
organization costs and consulting fees on behalf of the Company.  Charges to the
Company  under the  contracts  were  $29,285,  $35,322 and $45,938 for the years
ended June 30, 2006, 2005 and 2004, 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, 2006 and 2005,  the Company owed Fossil  $1,196,203  and $0,
respectively,  for drilling costs and lease  operating  expenses and was owed by
Fossil $88,477 and $16,540, respectively, for oil and gas sales.

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

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




                                      F-18
<PAGE>
<TABLE>
<CAPTION>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS


    On February 6, 2006,  the Company  entered  into a Purchase  Agreement  with
Tauren  Exploration,  Inc.,  an entity  wholly  owned by Calvin  Wallen III, the
Company's Chairman of the Board and Chief Executive Officer, with respect to the
purchase  by  the  Company  of  certain   Cotton  Valley   leasehold   interests
(approximately 11,000 gross acres; 5,000 net acres) held by Tauren.  Pursuant to
the Purchase Agreement,  the Company acquired from Tauren a 35% working interest
in approximately  2,400 acres and a 49% working interest in approximately  8,500
acres located in DeSoto and Caddo Parishes,  Louisiana, along with an associated
Area of Mutual  Interest  ("AMI") and the right to acquire at "cost" (as defined
in the  Purchase  Agreement) a seventy  percent  (70%)  working  interest in all
additional  mineral  leases  obtained by Tauren in the AMI, in exchange  for (a)
$3,500,000 in cash, (b) 2,500,000  unregistered  shares of Company common stock,
(c) an unsecured 12.5%  promissory note in the amount of $1,300,000,  which note
is convertible  into Company common stock at a conversion  price of $0.80/share,
and (d) a drilling credit of $2,100,000.  The consideration  described above was
determined based upon negotiations between Tauren and a Special Committee of the
Company's  directors,  excluding Mr. Wallen.  The Special Committee  obtained an
opinion from its  independent  financial  advisor with respect to the  fairness,
from a financial point of view, to the public  stockholders  of the Company,  of
such transactions.

    The maturity of the  above-referenced  promissory  note has been extended to
July 15, 2007.

Note G - 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, 2006 and 2005, 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.

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

                                                              2006           2005
                                                          -----------    -----------
      <S>                                                 <C>            <C>
      Deferred tax assets:
         Net operating loss carryforwards                 $ 2,441,800    $   698,000
         Capital loss carryforwards                              --            7,400
                                                          -----------    -----------
                                                          $ 2,441,800    $   705,400
                                                          -----------    -----------
      Deferred tax liabilities:
         Depletion basis of assets and related accounts   $  (493,800)   $  (103,600)
                                                          -----------    -----------
                                                          $  (493,800)   $  (103,600)
                                                          -----------    -----------
      Net deferred tax (liabilities) assets before
         valuation allowance                              $ 1,948,000    $   601,800

      Valuation allowance                                  (1,948,000)      (601,800)
                                                          -----------    -----------

      Net deferred tax (liabilities) assets               $      --      $      --
                                                          ===========    ===========
     </TABLE>



                                      F-19
<PAGE>
<TABLE>
<CAPTION>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS



    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, 2006,  2005 and
2004:

                                                                   2006           2005           2004
                                                               -----------    -----------    -----------
        <S>                                                    <C>            <C>            <C>
        Tax provision (benefit) calculated at statutory rate   $  (692,000)   $  (197,000)   $   (38,800)

        Losses not providing tax benefits                          692,000        197,000         38,800
                                                               -----------    -----------    -----------

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

       Change in valuation allowance                           $ 1,346,200    $   137,800    $    10,700
                                                               ===========    ===========    ===========
</TABLE>

    As of June 30, 2006,  the Company had net operating  loss  carryforwards  of
approximately  $4,653,200,  which are available to reduce future taxable income.
These carryforwards expire as follows:
                                               Net
                                            operating
                           Year               losses
                           ----            -----------

                           2007            $   128,500
                           2009                  5,700
                           2011                431,100
                           2012                205,100
                           2013                639,800
                           2019                845,600
                           2020                297,100
                           2021                172,100
                           2022                 15,400
                           2023                571,900
                           2024                 22,600
                           2025              1,318,300
                           2026              5,096,200
                                           -----------
                                           $ 9,749,400
                                           ===========

Note H - Commitments and contingencies:

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

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

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

        The Company's  operations  and  properties  are subject to extensive and
    changing federal,  state, provincial and local laws and regulations relating
    to environmental protection, including the generation, storage, handling and
    transportation  of oil and  gas and the  discharge  of  materials  into  the
    environment.  The  Company  generates  typical  oil  and gas  field  wastes,




                                      F-20
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS



    including  hazardous  wastes  that  are  subject  to the  federal  Resources
    Conservation  and Recovery Act and comparable  state statutes.  Furthermore,
    certain wastes  generated by the Company's oil and gas  operations  that are
    currently exempt from regulation as "hazardous  wastes" may in the future be
    designated as  "hazardous  wastes" and therefore be subject to more rigorous
    and  costly  operating  and  disposal  requirements.  All of  the  Company's
    properties  are operated by third  parties over whom the Company has limited
    control.  In  addition  to the  Company's  lack of control  over  properties
    operated by others,  the failure of previous  owners or  operators to comply
    with applicable  environmental  regulations  may, in certain  circumstances,
    adversely impact the Company.

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

        The Company had filed suit in the 29th Judicial  District  Court in Palo
    Pinto County, Texas, styled "Roseland Oil and Gas, Inc. v. William Vandever,
    et al," bringing suit against  Clifford Kees,  William  Vandever and various
    persons,  seeking a judicial  determination  that all grants of preferential
    rights in the Reagan  Section 11 and 12 are void.  This lawsuit was filed on
    April 26,  1999.  All section 11  preferential  rights were  returned to the
    Company on or about January 2002.  However,  Clifford Kees was to retain his
    1% override  interest in these Reagan  Lease  Sections.  Clifford  Kees then
    moved to trial  against  on the claim of  attorney  fees owed to him for the
    prosecution of this lawsuit. The trial was heard on September 25, 2002, with
    Kees requesting in excess of $200,000 in attorney fees and costs. In June of
    2003, The Court  re-opened the trial as to attorney fees and costs, to allow
    Kees to put on additional  evidence,  and such trial was re-convened on June
    19, 2003.  On July 15, 2003,  the Court  entered a Judgment in favor of Kees
    and as against the Company for approximately  $112,000. The Company believed
    the  Judgment  should  not stand and  appealed  the  Judgment.  On or about,
    September  17,  2004,  the  Eastland  Court Of Appeals  issued  its  ruling,
    modifying the amounts owed by the Company under the Judgment to $59,000. The
    Company  was been  denied a  Re-Hearing  as to  clarification  and a further
    reduction of the Judgment.  The Company filed a Petition For Review with the
    Texas Supreme Court that was Denied on or about January 21, 2005.

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

Note I - 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, 2006, 2005 and 2004 were as follows:

                                     2006         2005         2004
                                  ----------   ----------   ----------

          Property acquisitions   $6,176,766   $2,880,000   $     --
          Exploration                808,678      733,946         --
          Development              1,323,243         --           --
                                  ----------   ----------   ----------

                                  $8,308,687   $3,613,946   $     --
                                  ==========   ==========   ==========







                                      F-21
<PAGE>
<TABLE>
<CAPTION>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS


    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, 2006, 2005 and 2004
    were as follows:

                                                       2006           2005           2004
                                                   -----------    -----------    -----------
      <S>                                          <C>            <C>            <C>
      Proved properties                            $ 6,679,730    $ 4,098,571    $ 1,537,625
      Unproved properties                            6,780,529      1,053,000           --
                                                   -----------    -----------    -----------

                                                   $13,460,259    $ 5,151,571    $ 1,537,625

      Accumulated depreciation, depletion
         and amortization                            1,646,170      1,468,106      1,103,939
                                                   -----------    -----------    -----------

      Total properties                             $11,814,089    $ 3,683,465    $   433,686

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

      Net properties                               $11,814,089    $ 3,683,465    $   433,686
                                                   ===========    ===========    ===========

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

        The results of operations from oil and gas producing  activities for the
    years ended June 30, 2006, 2005 and 2004 were as follows:

                                                       2006           2005           2004
                                                   -----------    -----------    -----------
      Revenues:
      Revenues                                     $   508,925    $   469,441    $   414,741
      Preferred return                                    --             --             --
                                                   -----------    -----------    -----------
                                                   $   508,925    $   469,441    $   414,741
                                                   -----------    -----------    -----------
      Expenses:
      Production and development costs             $   338,329    $   272,957    $   186,465
      Depreciation, depletion and amortization         178,064        364,496        104,735
                                                   -----------    -----------    -----------
                                                   $   516,393    $   637,453    $   291,200
                                                   -----------    -----------    -----------
      Results before income taxes                  $    (7,468)   $  (168,012)   $   123,541
      Provision for income taxes                          --             --             --
                                                   -----------    -----------    -----------
      Results of operations (excluding corporate
      overhead and interest expense)               $    (7,468)   $  (168,012)   $   123,541
                                                   ===========    ===========    ===========
</TABLE>



                                      F-22
<PAGE>
<TABLE>
<CAPTION>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS



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

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

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

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

    The following  unaudited  table sets forth proved oil and gas reserves,  all
within the United  States,  at June 30, 2006,  2005 and 2004  together  with the
changes therein:

                                                        Natural Gas (Mcf)
                                             --------------------------------------
                                                2006          2005          2004
                                             ----------    ----------    ----------
<S>                                          <C>           <C>           <C>
Proved developed and undeveloped reserves:
Beginning of year                               509,625       311,098       330,000
Revisions of previous estimates                 226,730          --          52,902
Purchases of reserves in place                     --         269,308          --
Extensions and discoveries                    2,114,061          --            --
Production                                      (53,516)      (70,781)      (71,804)
Disposals of reserves in place                     --            --            --
                                             ----------    ----------    ----------
End of year                                   2,796,900       509,625       311,098
                                             ==========    ==========    ==========

                                                     Oil and condensate (Bbls)
                                             --------------------------------------
                                                2006          2005          2004
                                             ----------    ----------    ----------

Proved developed and undeveloped reserves:
Beginning of year                                 1,048      --                --
Revisions of previous estimates                   1,029     1,194              --
Purchases of reserves in place                     --          14              --
Extensions and discoveries                        7,833       346              --
Production                                       (1,047)     (506)             --
Disposals of reserves in place                     --            --            --
                                             ----------    ----------    ----------
End of year                                       8,863         1,048          --
                                             ==========    ==========    ==========
</TABLE>




                                      F-23
<PAGE>
<TABLE>
<CAPTION>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS


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, 2006, 2005 and 2004:

Table 1                                         2006            2005            2004
-------                                     ------------    ------------    ------------
<S>                                         <C>             <C>             <C>
Future cash flows                           $ 16,139,781    $  3,443,400    $  2,059,245
Future production costs                       (2,975,063)     (1,303,300)       (833,306)
Future development costs                      (3,453,350)        (23,900)           --
Future severance tax expense                    (819,785)       (213,900)       (250,473)
Future income taxes                                 --              --              --
                                            ------------    ------------    ------------

Future net cash flows                       $  8,891,583    $  1,902,300    $    975,466

Ten percent annual discount for estimated
   timing of net cash flows                   (2,444,198)       (831,200)       (243,553)
                                            ------------    ------------    ------------
Standardized measure of
   discounted future net cash flows         $  6,447,385    $  1,071,100    $    731,913
                                            ============    ============    ============
</TABLE>









                                      F-24
<PAGE>
<TABLE>
<CAPTION>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS



    Following is an analysis of changes in the estimated standardized measure of
proved reserves during the years ended June 30, 2006, 2005 and 2004:

Table 2                                          2006           2005           2004
-------                                      -----------    -----------    -----------
<S>                                          <C>            <C>            <C>
Changes from:
   Sale of oil and gas produced              $  (170,596)   $  (196,368)   $  (123,541)

Net changes in prices and production costs        18,591       (165,199)       (43,462)
Extensions and discoveries                     4,288,891        493,500           --
Revision of previous quantity estimates          508,762        (42,290)       122,601
Accretion of discounts                           107,110         73,191        103,681
Net change in income taxes                          --             --          (33,565)
Purchases of reserves in place                      --          197,300           --
Disposals of reserves in place                      --             --             --
Development costs incurred that reduced
   future development costs                      (11,300)          --             --
Changes in future development costs               69,210           --             --
Other                                            565,617        (20,947)       (92,182)
                                             -----------    -----------    -----------

Change in standardized measure               $ 5,376,285    $   339,187    $   (66,468)
                                             ===========    ===========    ===========
</TABLE>

Note K - Subsequent events:

    On July 28, 2006, Cubic entered into and consummated  transactions  pursuant
to  Subscription  and   Registration   Rights   Agreements  (the   "Subscription
Agreements")  with certain investors that are unaffiliated with the Company (the
"Investors").  Pursuant  to the  Subscription  Agreements,  the  Investors  paid
aggregate consideration of $2,100,000 to the Company for 3,000,000 shares of the
Company's common stock and warrants  exercisable into 1,500,000 shares of common
stock. The warrants are exercisable  through July 31 2011, at $.70 per share. In
addition to reimbursement  of certain expenses  incurred in connection with this
offering, the Company agreed to pay 2% of the aggregate consideration,  in cash,
plus 150,000  shares of common  stock  valued at $.70 per share,  to a placement
agent.









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