SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB
                                  ANNUAL REPORT

                       PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                     FOR THE FISCAL YEAR ENDED JUNE 30, 2004
                          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)

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

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                      COMMON STOCK-PAR VALUE $.05 PER SHARE

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

                          Yes [X]               No [ ]

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-B is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB.

                                       [ ]

As of June 30, 2004, the registrant had outstanding  31,451,826 shares of common
stock,  $.05 par value ("Common  Stock"),  which is  registrant's  only class of
common  stock.   The  aggregate  market  value  of  the  Common  Stock  held  by
non-affiliates  of the registrant,  computed by reference to the average bid and
ask price and shares outstanding,  was approximately  $5,991,586 as of September
1,  2004.  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.


<PAGE>

The registrant's revenues for the fiscal year ended June 30, 2004 were $417,181.

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






























                                       2
<PAGE>

                               CUBIC ENERGY, INC.
                          TABLE OF CONTENTSDESCRIPTION


                                     PART I


Item                                                                        Page
----                                                                        ----

ITEM 1. Description of Business and Properties                                 5
GENERAL........................................................................5
DESCRIPTION OF BUSINESS........................................................5
RESTATEMENT OF FINANCIAL RESULTS...............................................7
PRINCIPAL OIL AND GAS PROPERTIES...............................................7
MARKETING OF PRODUCTION........................................................8
OIL AND GAS RESERVES...........................................................9
NET PRODUCTION, SALES PRICES AND COSTS........................................10
PRODUCTIVE WELLS AND ACREAGE..................................................11
ITEM 4. Submission of Matters to a Vote of Security Holders                   28
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters                                                                       28
ITEM 6. Management's Discussion and Analysis or Plan of Operations            29
RESULTS OF OPERATIONS                                                         30
COMPARISON OF FISCAL 2004 TO FISCAL 2003 REVENUES.............................30
LIQUIDITY AND CAPITAL RESOURCES...............................................30
ITEM 7. FINANCIAL STATEMENTS                                                  32
ITEM 9. Directors, Executive Officers, Promoters and Control Persons of
the Registrant; Compliance With Section 16(A) of the Exchange Act............ 33
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.  34
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.............................35
ITEM 10. Executive Compensation                                               35
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. 36
ITEM 11. Security Ownership of Certain Beneficial Owners and Management       36
item 13. Exhibits, Financial Statement Schedules and Reports On Form 8-K      39
the following documents are filed as part of this report commencing
on page F-1:..................................................................39








                                       3
<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.
















                                       4
<PAGE>

                               Cubic Energy, Inc.

                                     PART I

ITEM 1. Description of Business and Properties

GENERAL

Cubic Energy,  Inc. is an independent  energy company engaged in the development
and production of, and  exploration  for, crude oil and natural gas. Our oil and
gas assets are  concentrated  principally  in Texas and  Louisiana.  At June 30,
2004, our total proved reserves were 51,850 BOE.

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

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

DESCRIPTION OF BUSINESS

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




                                       5
<PAGE>

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

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

On April 27, 2001, the Company  completed an exchange offer pursuant to which it
acquired (i) certain  direct  working  interests in producing oil and/or natural
gas wells (the "Working  Interests") and (ii) all of the outstanding  membership
units in four privately held limited liability companies and approximately 9.85%
of the working interest in another privately held limited liability company, all
of which are engaged in oil and/or natural gas exploration  and production.  The
Working  Interests  consist of between 15% and 45% working interests in fourteen
(14)  wells.  The  Working  Interests  are part of  projects  operated by Tauren
Exploration,   Inc.  ("Tauren"),  an  independent  energy  company,  and  Fossil
Operating,  Inc.  ("Fossil")  acts as the operator  for some of the  properties.
Calvin A.  Wallen,  III, a material  shareholder,  director  and  officer of the
Company is the sole shareholder,  director and officer of Tauren and Fossil. The
relationship  between the Company and each of Tauren and Fossil were approved by
the disinterested  directors of the Company.  The exchange offer was made to and
was accepted by the various  individual holders of the interests  acquired.  The
Working  Interests and the  properties  held are located in Texas and Louisiana.
The  consideration  paid to the  individuals who accepted the exchange offer was
determined  based on the  Company's  valuation  of the reserves  underlying  the
interests  acquired.  The value of the Company's common stock for purpose of the
exchange offer was deemed to be $0.50 per share. In connection with the exchange
offer,  the Company  issued  approximately  11,141,256  shares of the  Company's
common stock. In addition,  as consideration  for services rendered with respect
to this  exchange  offer,  C. K.  Cooper & Company,  and/or its  principals  and
employees, received 111,413 shares of the Company's common stock.

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

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 re-new the leases will be to the ultimate  benefit
of the Company.

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



                                       6
<PAGE>

RESTATEMENT OF FINANCIAL RESULTS

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

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

PRINCIPAL OIL AND GAS PROPERTIES

The following table summarizes certain information with respect to our principal
areas of operation at June 30, 2004.

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

         Texas         0          311,098           100%          $731,913
         -----------------------------------------------------------------------
         Total          0         311,098           100%          $731,913


Our Texas properties are situated in Palo Pinto,  Parker,  Eastland and Callahan
Counties.  At June 30, 2004, the Texas  properties  contained 100% of our proved
reserves,  which represented 100% of our Present Value of total proved reserves.
The Texas  properties  consist  primarily  of wells  acquired  by the Company in
several  transactions  between  1991  and 2002 and  through  overriding  royalty
interests reserved in farm-out agreements in 1998 and 1999.

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



                                       7
<PAGE>

Our net  production for the fiscal year ending June 30, 2004 for the Texas wells
averaged  approximately  196 Mcf of natural  gas per day and 1 barrel of oil per
day.

EXPLORATION ACTIVITIES

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

We are  currently  focusing our domestic  exploration  activities to develop our
undeveloped  leasehold  opportunities  in  Louisiana,  Texas,  and  New  Mexico.
Currently  we have  development  opportunities  in and will  acquire  additional
leasehold interests in Allen, Caddo, Desoto, Evangeline,  Sabine,  Natchitoches,
Rapides  Parishes,  Louisiana,  in  Limestone,  Navarro,  Red  River,  Henderson
Counties,  Texas and in Chaves  County,  New  Mexico.  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.  Additionally  over 2,240
miles of aeor-magnetics  has been  acquisitioned  over several large Texas areas
and is under final analysis for basement structural mapping. Prospects have been
developed  from  4,000-17,500  feet  in  depth  in  the  Paluxy,  Frio,  Wilcox,
Smackover, Bradley, Canyon, Rodessa and James formations.

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

MARKETING OF PRODUCTION

Crude Oil and Natural Gas

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

We believe we would be able to locate  alternate  purchasers in the event of the
loss of any one of these  purchasers,  and that any such  loss  would not have a
material  adverse  effect on our financial  condition or results of  operations.
Revenue from the sale of natural gas totaled  $399,045 for the fiscal year ended
June 30, 2004 and  represented  96% of our total oil and gas  revenues  for that
fiscal year.



                                       8
<PAGE>

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
2004 was $32.16.

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 2004 was $5.55.

OIL AND GAS RESERVES

The following tables set forth the proved developed and undeveloped  reserves at
June 30, 2004, the estimated  future net revenues from such proved  reserves and
the Present Value and Standardized  Measure of Discounted  Future Net Cash Flows
attributable to our reserves at June 30, 2003, 2002 and 2001:

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

Proved Producing         0         311,098      311,098      $975,468   $731,913
Proved Undeveloped       0               0            0            $0         $0

                                                        AT JUNE 30,
                                          --------------------------------------
                                             2004          2003          2002

Proved reserves:
     Oil (Bbl) .......................             0             0             0
     Gas (Mcf) .......................       311,098       330,409       564,000
BOE ..................................        51,850        55,068        94,045
Estimated future net revenues
         (before income tax) .........    $  975,468    $1,098,147    $1,060,369
     Standardized Measure(1) .........    $  731,913    $  798,381    $ ,657,668
Proved developed reserves:
     Oil (Bbl) .......................             0             0             0
     Gas (Mcf) .......................       311,098       330,409       564,000
BOE ..................................        51,850        55,068        94,045
Estimated future net revenues
         (before income tax) .........    $  975,468    $1,098,147    $1,060,369
Present Value ........................    $  731,913    $  798,381    $  657,668
Standardized Measure (1) .............    $  731,913    $  798,381    $  657,668
Weighted average sales prices:
     Oil (per Bbl) ...................    $    32.16    $    26.20    $    24.18
     Gas (per Mcf) ...................    $     5.55    $     4.91    $     3.09

(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



                                       9
<PAGE>

         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."

All  information  set forth in this  Report  relating  to our  proved  reserves,
estimated  future net revenues and present values is taken from reports prepared
by Michael S. Turner, P.E., an independent petroleum engineer.  The estimates of
this  engineer  were  based  upon  review  of  production  histories  and  other
geological, economic, ownership and engineering data provided by the Company. No
reports on our reserves have been filed with any federal  agency.  In accordance
with  guidelines of the  Securities  and Exchange  Commission  (the "SEC"),  our
estimates  of proved  reserves and the future net  revenues  from which  Present
Values  are  derived  are made  using  year end oil and gas  sales  prices  held
constant  throughout the life of the properties (except to the extent a contract
specifically provides otherwise). 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 period ended June 30, 2004.




                                       10
<PAGE>

                                                   YEAR ENDED        YEAR ENDED
                                                 JUNE 30, 2004     JUNE 30, 2003
                                                 -------------     -------------
PRODUCTION VOLUMES:
       Oil (Bbl) .............................             562               298
       Gas (Mcf) .............................          71,804            71,054

WEIGHTED AVERAGE SALES PRICES:
       Oil (per Bbl) .........................   $       32.16     $       26.20
       Gas (per Mcf) .........................   $        5.55     $        4.91

SELECTED EXPENSES PER BOE:
       Lease operating .......................   $       14.88     $       13.78
       Depreciation, depletion and
       Amortization ..........................   $        8.36     $        9.82
       General and administrative ............   $       19.16     $       14.43

PRODUCTIVE WELLS AND ACREAGE

Productive Wells

The following table sets forth our domestic productive wells at June 30, 2004:

                 OIL                       GAS                      TOTAL
         --------------------      -------------------       -------------------

         Gross           Net       Gross           Net       Gross           Net
         -----           ---       -----           ---       -----           ---
             0             0       14              12.9         14          12.9

Acreage

The  following  table sets forth our  undeveloped  and  developed  gross and net
leasehold acreage at June 30, 2004. 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
         -----           ---       -----           ---       -----           ---
             0             0         930           891         930           891

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

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




                                       11
<PAGE>

In addition,  on December 10, 1998,  the Company  entered into an agreement with
Tauren  Exploration  Inc.  ("Tauren")  that  provides for Tauren to drill on the
Company's  Section 11 in Palo Pinto County,  Texas.  The agreement grants Tauren
Exploration  Inc. a farm-out  with Cubic  retaining  a 7.5%  overriding  royalty
interest. The agreement also provides for a preferential right in the event that
Tauren,  at some  later  date,  decides  to  dispose  of a part or all of  their
interest in the drilled wells.  Tauren is an affiliate of Calvin A. Wallen, III,
an officer, director and majority shareholder of the Company.

On April 27, 2001, the Company  completed an exchange offer pursuant to which it
acquired (i) certain  direct  working  interests in producing oil and/or natural
gas wells (the "Working  Interests") and (ii) all of the outstanding  membership
units in four privately held limited liability companies and approximately 9.85%
of the working interest in another privately held limited liability company, all
of which are engaged in oil and/or natural gas exploration  and production.  The
Working  Interests  consist of between 15% and 45% working interests in fourteen
(14)  wells.  The  Working  Interests  are part of  projects  operated by Tauren
Exploration,  Inc.  ("Tauren"),  and  independent  energy  company,  and  Fossil
Operating,  Inc.  ("Fossil")  acts as the operator  for some of the  properties.
Calvin A.  Wallen,  III, a material  shareholder,  director  and  officer of the
Company is the sole shareholder,  director and officer of Tauren and Fossil. The
relationship  between the Company and each of Tauren and Fossil were approved by
the disinterested  directors of the Company.  The exchange offer was made to and
was accepted by the various  individual holders of the interests  acquired.  The
Working   Interests  and  the  properties   held  are  located  in  Texas.   The
consideration  paid to the  individuals  who  accepted  the  exchange  offer was
determined  based on the  Company's  valuation  of the reserves  underlying  the
interests  acquired.  The value of the Company's common stock for purpose of the
exchange offer was deemed to be $0.50 per share. In connection with the exchange
offer,  the Company  issued  approximately  11,141,256  shares of the  Company's
common stock. In addition,  as consideration  for services rendered with respect
to this  exchange  offer,  C. K.  Cooper & Company,  and/or its  principals  and
employees, received 111,413 shares of the Company's common stock.

OPERATIONS

Although in the past we have not been the  operator of our wells,  in the future
we generally intend to seek to be named operator for wells in which we acquire a
significant  interest or will appoint an operator on our behalf. As is common in
the industry,  this  typically  occurs only when we own the major portion of the
working  interest in a particular well or field. At June 30, 2004, third parties
operated our wells under specific agreements.

Through the specific agreements providing for third party operations of majority
owned  wells,  we are  able to  exercise  a great  deal of  influence  over  the
development and enhancement of a well and to supervise operation and maintenance
activities.  We have not conducted the actual drilling of wells on properties in
which we have acted as operator in the past, but in the future we plan to engage
independent  contractors  who are  supervised  by the Company.  We have contract
relationships  with petroleum  engineers,  geologists  and other  operations and
production  specialists who we believe will be able to improve production rates,
increase reserves and/or lower the cost of operating our oil and gas properties.

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



                                       12
<PAGE>

RISK FACTORS

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

Competition

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

Drilling and Operating Risks

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

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



                                       13
<PAGE>

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

From its inception through December 1997, the Company was engaged principally in
non-operating  activities.  While the  Company's  new  management  has extensive
experience in oil and gas exploration and operating activities,  the Company has
had very limited  experience  in these  operations.  The  Company's  business is
highly capital-intensive requiring continuous development and acquisition of oil
and gas  reserves.  In  addition,  capital is required to operate and expand the
Company's oil and gas field operations and purchase equipment. At June 30, 2004,
the  Company  had  working  capital of  $143,032.  As a result of the  Company's
determination  to  operate  in  the  future,   the  Company's   working  capital
requirements may be expected to increase  significantly over prior periods.  The
Company  anticipates that it will be able to meet its cash  requirements for the
next 12  months.  However,  if such plans or  assumptions  change or prove to be
inaccurate,  the Company could be required to seek additional  financing  sooner
than  currently  anticipated.  The  Company  has no  commitments  to obtain  any
additional  debt  or  equity  financing  and  there  can  be no  assurance  that
additional  funds will be available,  when required,  on terms  favorable to the
Company.  Any future  issuances  of equity  securities  would  likely  result in
dilution to the  Company's  then  existing  shareholders  while the incurring of
additional  indebtedness  would  result in increased  interest  expense and debt
service  changes.   See  "Management's   Discussion  and  Analysis  or  Plan  of
Operations."

History of Losses

The Company  incurred  losses  before  income tax  provisions  of  $114,116  and
$217,121  for the fiscal years ended June 30, 2004 and 2003,  respectively.  The
Company's  accumulated  deficit as of June 30, 2004 was $9,968,342.  The Company
does not have a bank line of  credit.  The  Company  has  funded  its  operating
losses,  acquisitions  and expansion  costs  primarily  through a combination of
private offerings of convertible debt,  exempt  transactions,  equity securities
and  proceeds  from the  exercise  of  warrants.  The  success of the Company in
obtaining the necessary  capital  resources to fund future costs associated with
its operations and expansion  plans is dependent upon the Company's  ability to:
(i) increase revenues through  acquisitions and recovery of the Company's proved
producing and proved developed non-producing oil and gas reserves; (ii) maintain
effective  cost  controls at the  corporate  administrative  office and in field
operations; and (iii) obtain the exercise of outstanding warrants. However, even
if the Company  achieves some success with its plans,  there can be no assurance
that it will be able to  generate  sufficient  revenues  to achieve  significant
profitable operations or fund its expansion plans. See "Management's  Discussion
and Analysis or Plan of Operations".

Significant Capital Expenditures Necessary for Undeveloped Properties

The vast majority of the Company's oil and gas reserves are classified as Proved
Reserves.  Recovery of the  Company's  future Proved  Undeveloped  Reserves will
require significant capital  expenditures.  Management  estimates that aggregate
capital  expenditures  of  approximately  $1,000,000  will be  required to fully
develop some of these  reserves in the next twelve  months.  No assurance can be
given that the Company's estimates of capital  expenditures will prove accurate,


                                       14
<PAGE>

that  its  financing  sources  will be  sufficient  to fully  fund  its  planned
development  activities or that development activities will be either successful
or in accordance  with the Company's  schedule.  Additionally,  any  significant
decrease  in oil and gas  prices  or any  significant  increase  in the  cost of
development  could  result in a  significant  reduction  in the  number of wells
drilled and/or  reworked.  No assurance can be given that any wells will produce
oil or gas in commercially profitable quantities.

No Assurance of Additional Financing

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

Exploration and Development Risks

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

Volatility of Oil and Gas Prices

The Company's revenues,  profitability and the carrying value of its oil and gas
properties are  substantially  dependent upon  prevailing  prices of, and demand
for, oil and gas and the costs of acquiring,  finding,  developing and producing
reserves.  The Company's ability to obtain borrowing  capacity,  to repay future
indebtedness,  and to  obtain  additional  capital  on  favorable  terms is also
substantially dependent upon oil and gas prices.  Historically,  the markets for
oil and gas have been  volatile and are likely to continue to be volatile in the
future.  Prices for oil and gas are subject to wide fluctuations in response to:
(i) relatively minor changes in the supply of, and demand for, oil and gas; (ii)
market uncertainty;  and (iii) a variety of additional factors, all of which are
beyond the  Company's  control.  These  factors  include  domestic  and  foreign
political  conditions,  the price and  availability of domestic and imported oil
and gas,  the level of consumer and  industrial  demand,  weather,  domestic and
foreign  government  relations,  the price and availability of alternative fuels
and overall economic conditions. Furthermore, the marketability of the Company's
production  depends in part upon the  availability,  proximity  and  capacity of
gathering systems,  pipelines and processing  facilities.  Volatility in oil and
gas prices could affect the Company's  ability to market its production  through
such systems,  pipelines or facilities.  Substantially  all of the Company's gas
production is currently sold to one gas marketing firm on a month-to-month basis
at prevailing spot market prices.  Oil prices remained  subject to unpredictable
political and economic  forces during fiscal 2002,  fiscal 2003 and fiscal 2004,



                                       15
<PAGE>

and experienced fluctuations similar to those seen in natural gas prices for the
year.  We believe  that oil prices  will  continue to  fluctuate  in response to
changes in the policies of the  Organization  of Petroleum  Exporting  Countries
(OPEC),  changes in demand  from many  Asian  countries,  current  events in the
Middle East, security threats to the United States, and other factors associated
with the  world  political  and  economic  environment.  As a result of the many
uncertainties  associated with levels of production maintained by OPEC and other
oil producing  countries,  the  availabilities  of worldwide energy supplies and
competitive relationships and consumer perceptions of various energy sources, we
are unable to predict  what  changes  will  occur in crude oil and  natural  gas
prices.

Uncertainty of Estimates of Reserves and Future Net Cash Flows

This Annual Report contains  estimates of the Company's oil and gas reserves and
the  future net cash flows from  those  reserves,  which have been  prepared  by
certain  independent  petroleum  consultants.  There are numerous  uncertainties
inherent in  estimating  quantities of reserves of oil and gas and in projecting
future rates of production and the timing of development expenditures, including
many factors beyond the Company's control.  The reserve estimates in this Annual
Report are based on various assumptions,  including,  for example,  constant oil
and gas prices, operating expenses, capital expenditures and the availability of
funds, and, therefore,  are inherently imprecise  indications of future net cash
flows.  Actual  future  production,   cash  flows,  taxes,  operating  expenses,
development  expenditures and quantities of recoverable oil and gas reserves may
vary substantially from those assumed in the estimates. Any significant variance
in these assumptions could materially affect the estimated quantity and value of
reserves set forth in this Annual Report.  Additionally,  the Company's reserves
may be subject to  downward  or upward  revision  based upon  actual  production
performance,  results of future development and exploration,  prevailing oil and
gas prices and other factors, many of which are beyond the Company's control.

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

Operating Hazards and Uninsured Risks; Production Curtailments

The  Company's  oil and gas  business  involves  a variety of  operating  risks,
including,   but  not   limited  to,   unexpected   formations   or   pressures,
uncontrollable  flows of oil,  gas,  brine or well fluids  into the  environment



                                       16
<PAGE>

(including groundwater  contamination),  blowouts, fires, explosions,  pollution
and other risks, any of which could result in personal  injuries,  loss of life,
damage to  properties  and  substantial  losses.  Although  the Company  carries
insurance at levels that it believes  are  reasonable,  it is not fully  insured
against all risks. The Company does not carry business  interruption  insurance.
Losses and liabilities arising from uninsured or under-insured events could have
a material  adverse  effect on the  financial  condition  and  operations of the
Company.

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

Dependence on Key Personnel

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

Concentration of Voting Power

The Company's executive officers,  directors and their affiliates and certain 5%
shareholders  hold  approximately  68% of the  Company's  outstanding  shares of
Common Stock.  As a result,  officers,  directors and their  affiliates and such
shareholders have the ability to exert  significant  influence over the business
affairs  of the  Company,  including  the  ability to control  the  election  of
directors and results of voting on all matters requiring  shareholder  approval.
This  concentration  of voting power may delay or prevent a potential  change in
control.

Conflicts of Interests

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

Public Market and Possible Volatility

Our Common Stock is traded on "over-the-counter" market. There is presently only
a limited  public market for our Common Stock,  and there is no assurance that a
ready  public  market for our  securities  will  develop.  It is likely that any
market that  develops for our Common Stock will be highly  volatile and that the
trading  volume in such market will be limited.  The trading price of our Common



                                       17
<PAGE>

Stock could be subject to wide  fluctuations  in response to  quarter-to-quarter
variations in our operating  results,  announcements  of drilling results by the
Company and other events or factors. In addition, the U.S. stock market has from
time to time  experienced  extreme  price  and  volume  fluctuations  that  have
affected the market price for many companies and which often have been unrelated
to the operating performance of these companies. These broad market fluctuations
may adversely affect the market price of the Company's securities.

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

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

Possible  adverse  consequences  due  to the  indemnification  of  officers  and
directors

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

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

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



                                       18
<PAGE>

No Dividends

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

Title to Properties

The Company's  contract land  professionals have reviewed title records or other
title  review  materials   relating  to  substantially   all  of  its  producing
properties.  The title investigation performed by the Company prior to acquiring
undeveloped  properties is thorough, but less rigorous than that conducted prior
to drilling,  consistent with industry  standards.  The Company  believes it has
satisfactory title to all its producing  properties in accordance with standards
generally  accepted in the oil and gas industry.  The Company's  properties  are
subject to customary royalty interests,  liens incident to operating agreements,
liens for current  taxes and other  burdens,  which the Company  believes do not
materially interfere with the use of or affect the value of such properties.  At
June 30,  2004,  the  Company's  leaseholds  for  approximately  100% of its net
acreage  were being  kept in force by virtue of  production  on that  acreage in
paying  quantities.  The  remaining  net acreage  was held by lease  rentals and
similar  provisions  and  requires  production  in  paying  quantities  prior to
expiration of various time periods to avoid lease termination.

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



Governmental Regulation

The Company's  operations  are affected from time to time in varying  degrees by
political  developments and federal,  state and local laws and  regulations.  In
particular,  oil and gas  production  and  related  operations  are or have been
subject to price controls,  taxes and other laws and regulations relating to the
oil and gas  industry.  Failure  to comply  with such laws and  regulations  can
result  in  substantial  penalties.  The  regulatory  burden  on the oil and gas
industry  increases  the  Company's  cost of  doing  business  and  affects  its



                                       19
<PAGE>

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

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

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

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

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

The price the Company  receives  from the sale of oil is affected by the cost of
transporting  such  products  to market.  Effective  January  1, 1995,  the FERC
implemented regulations establishing an indexing system for transportation rates
for oil  pipelines,  which,  generally,  would  index such  rates to  inflation,



                                       20
<PAGE>

subject to certain conditions and limitations.  These regulations could increase
the cost of transporting oil by interstate  pipelines,  although the most recent
adjustment  generally  decreased  rates.  These  regulations have generally been
approved on judicial  review.  The Company is not able to predict with certainty
the  effect,  if any,  of these  regulations  on its  operations.  However,  the
regulations may increase transportation costs or reduce wellhead prices for oil.

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

Environmental Matters

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

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



                                       21
<PAGE>

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

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

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

Abandonment Costs

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

Employees

At June 30, 2004, the Company had no full time employees.  In January, 2002, the
Company  entered  into  a new  contract  with  an  affiliate  controlled  by our



                                       22
<PAGE>

President to provide certain technical  administration  and management  services
needed to conduct its business. The terms of the contract provided for personnel
to be contracted at the  affiliates  true cost;  which is more  favorable to the
company than would be available from an unaffiliated third party.

Facilities

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

Possible adverse consequences due to claims and legal proceedings


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

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

On July 15, 2003,  The Court  entered a Judgment in favor of Kees and as against
the Company for  approximately  $112,000.00.  The Company  believed the Judgment
should not stand and appealed the Judgment. On or about, September 17, 2004, the
Eastland Court Of Appeals  issued its ruling,  modifying the amounts owed by the
Company under the Judgment to $59,000.00. The Company is weighing the options as
to filing for re-Hearing or filing a Writ with the Texas Supreme  Court.  Should
the Judgment stand, it could have a material adverse effect on the cash position
of the Company.























                                       23
<PAGE>

Glossary of Oil and Gas Terms

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

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

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

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

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

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

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

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

     "FARM-IN" see "FARM-OUT" above.

     "GAS" means natural gas.

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

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

     "MCF" means thousand cubic feet.

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

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

     "NET  PRODUCTION"  means  production  that is  owned  by the  Company  less
royalties and production due others.

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



                                       24
<PAGE>

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

     "PRODUCTIVE  WELLS" or  "PRODUCING  WELLS"  consist of producing  wells and
wells capable of production, including wells waiting on pipeline connections.

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

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

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

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

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



                                       25
<PAGE>

     "PROVED  UNDEVELOPED  RESERVES"  means reserves that are recovered from new
wells on undrilled  acreage,  or from  existing  wells where a relatively  major
expenditure is required for completion.  Reserves on undrilled  acreage shall be
limited to those drilling units offsetting  productive units that are reasonably
certain of production  when drilled.  Proved  reserves for other undrilled units
can be claimed only where it can be  demonstrated  with  certainty that there is
continuity  of  production  from the  existing  productive  formation.  Under no
circumstances  should estimates for proved undeveloped  reserves be attributable
to any acreage for which an  application  of fluid  injection or other  improved
recovery  technique is  contemplated,  unless such  techniques  have been proved
effective by actual tests in the area and in the same reservoir.

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

  "RESERVES" means proved reserves.

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

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

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

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

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

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




                                       26
<PAGE>

ITEM 2. Description of Properties.

     See "ITEM 1. Description of Business And Properties."

ITEM 3. Legal Proceedings

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

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

On July 15, 2003,  The Court  entered a Judgment in favor of Kees and as against
the Company for  approximately  $112,000.00.  The Company  believed the Judgment
should not stand and appealed the Judgment. On or about, September 17, 2004, the
Eastland Court Of Appeals  issued its ruling,  modifying the amounts owed by the
Company under the Judgment to $59,000.00. The Company is weighing the options as
to filing for re-Hearing or filing a Writ with the Texas Supreme  Court.  Should
the Judgment stand, it could have a material adverse effect on the cash position
of the Company.


























                                       27
<PAGE>

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

During the fourth  quarter of the fiscal year ended June 30, 2003,  proxies were
mailed to shareholders of record as of April,  2003, for the Annual  Stockholder
meeting  that  was  held on June 2,  2003 in  Minneapolis,  Minnesota.  Security
holders were asked to ratify the  selection of the  Company's  accounting  firm,
Philip  Vogel & Co.,  PC,  and to vote on  directors  of the  Company  with  the
directors elected to serve one year or until their replacement was elected.

On June 2, 2003, a quorum was not obtained for the  Shareholder  meeting and the
shareholder  meeting was adjourned without  conducting  business.  The Directors
then conducted a Director's meeting immediately  following the adjournment.  The
Directors,  vested with the power to do so,  approved  the  selection  of Philip
Vogel & Co., PC, and added Herb Bayer to act as Director for the Company,  until
a successor is elected and sworn.  It was determined  that Gene Howard would act
as chairman of the Audit  Committee  and act as the  "financial  expert" for the
Audit Committee; and that Herb Bayer would serve on the Audit Committee.

On a going  forward  basis,  the  Company  plans to hold its Annual  Shareholder
Meetings in November or December of each year.

                                     PART II


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

The Company is traded OTC BB, trading  symbol "QBIK",  with CK Cooper & Company,
18300 Von Karman, Suite 440, Irvine, California 92612, acting as the lead market
maker.

At June 30, 2004, there were 31,451,835  shares of Common Stock outstanding held
by approximately 870 shareholders of record.

In the fall of 1999,  Roseland Oil and Gas,  Inc. was merged into Cubic  Energy,
Inc., a Texas corporation and a wholly owned subsidiary of Roseland Oil and Gas,
Inc. Under its Texas Articles of Incorporation, Cubic is authorized to issue one
class of  50,000,000  common  shares,  par  value  $0.05/share  and one class of
10,000,000  preferred shares, par value  $0.01/share.  An exchange of one common
share of Roseland for one common share of Cubic was  effectuated  in the merger.
At the time of the  merger,  and as of June 30,  2004,  there were no  preferred
shares of the Company outstanding.

The following table shows, for the periods indicated,  the range of high and low
bid  information  for our  common  stock  as  reported  by the  Over-the-Counter
Bulletin Board.  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:





                                       28
<PAGE>

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


          ---------------------------- -------------- -----------------
          Fiscal Year 2004                 High             Low

          ---------------------------- -------------- -----------------
          1st quarter                          $0.45             $0.20
          ---------------------------- -------------- -----------------
          2nd quarter                          $0.30             $0.11
          ---------------------------- -------------- -----------------
          3rd quarter                          $1.00             $0.25
          ---------------------------- -------------- -----------------
          4th quarter                          $0.70             $0.60
          ---------------------------- -------------- -----------------

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

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

The  following  discussion  is  intended  to assist in an  understanding  of the
Company's  historical financial position and results of operations for each year
in the two-year period ended June 30, 2004. 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  development  drilling  locations  to pursue after the
fiscal year ending June 30, 2004.  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.



                                       29
<PAGE>

RESULTS OF OPERATIONS

COMPARISON OF FISCAL 2004 TO FISCAL 2003 REVENUES

HISTORICALLY PRESENTED:
OIL AND GAS SALES  increased  16% to  $414,741 in the fiscal year ended June 30,
2004  ("fiscal  2004")  from  $356,635  in the fiscal  year ended June 30,  2003
("fiscal 2003"), due to higher oil and gas prices.



COSTS AND EXPENSES

HISTORICALLY PRESENTED:
PRODUCTION  AND  OPERATING  EXPENSE  increased 11% to $186,465 in the year ended
June 30,  2004  ("fiscal  2004")  from  $167,303 in the year ended June 30, 2003
("fiscal 2003").

HISTORICALLY PRESENTED:
DEPRECIATION,  DEPLETION  AND  AMORTIZATION  decreased 12% to $104,735 in fiscal
2004 from $119,249 in fiscal 2003. The decrease was primarily due to an increase
in estimated reserves.

HISTORICALLY PRESENTED:
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE ("G&A") increased 37% to $240,022 in
the year ended June 30, 2004  ("fiscal  2004")  from  $175,201 in the year ended
June 30, 2003 ("fiscal 2003") because officer stock grants were expensed.

HISTORICALLY PRESENTED:
INTEREST  EXPENSE  increased  to $75 in the year  ended June 30,  2004  ("fiscal
2004") from $4 in the year ended June 30, 2003 ("fiscal 2003").

HISTORICALLY PRESENTED:
GAIN ON SALE OF ASSETS was $0 in the years ended June 30, 2004  ("fiscal  2004")
and ended June 30, 2003  ("fiscal  2003")  because no assets were sold in either
year.

NET INCOME

HISTORICALLY PRESENTED:
Net loss  decreased  to reflect a loss of $114,116 in fiscal 2004 from a loss of
$217,121 in fiscal 2003 as a result of higher oil and gas prices.

LIQUIDITY AND CAPITAL RESOURCES

OVERVIEW

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



                                       30
<PAGE>

The Company had net working capital of $143,031 at June 30, 2004.

The  following  discussion  sets forth the  Company's  current plans for capital
expenditures  in fiscal  2005,  and the  expected  capital  resources  needed to
finance such plans.

CAPITAL EXPENDITURES

HISTORICALLY PRESENTED:
At the  present  time,  the  Company  anticipates  an  increase  to  spending on
exploration   and  development   activities   during  fiscal  2005  through  the
development  of  strategic  alliances  that will  position  the  Company to take
advantage of possible  acquisition  objectives  that will fit into the Company's
core activity areas of oil and gas production.

The Company  will  increase  its planned  activities  for fiscal 2005 if product
prices  remain  strong  and if we are  able  to  obtain  the  capital  resources
necessary to finance such activities. See "BUSINESS - DRILLING,  EXPLORATION AND
PRODUCTION ACTIVITIES."

WORKING CAPITAL AND CASH FLOW

HISTORICALLY PRESENTED:
During fiscal 2004, the Company generated cash flow from operating activities of
$75,763.

The  Company's  working  capital  increased  to  $143,031  at June 30, 2004 from
$59,362  at June  30,  2003,  due to  increased  oil and gas  sales  which  were
primarily achieved by higher oil and gas prices.

CAPITAL RESOURCES

The Company  cannot be certain that the funds which will be  available  from the
completed and pending sales of assets,  combined with operating cash flow,  will
be adequate to fund the projected capital expenditures for fiscal 2005. However,
because  future cash flows and the  availability  of borrowings are subject to a
number of variables, such as prevailing prices of oil and gas, actual production
from existing and newly-completed wells, the Company's success in developing and
producing new reserves,  and the uncertainty with respect to the amount of funds
which may ultimately be required to finance the Company's  exploration  program,
there  can  be no  assurance  that  the  Company's  capital  resources  will  be
sufficient to sustain the Company's exploratory and development activities.

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



                                       31
<PAGE>

INFLATION

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

INFORMATION SYSTEMS FOR THE YEAR 2000

The Company  completed  implementation  of a "Year 2000 Plan" in the fiscal year
ended June 30,  2000;  and through  June 30, 2004,  the Company  experienced  no
effects of its information systems from "Y2K". Though not expected,  it is still
possible  that "Y2K"  issues  could have a  material  effect on the  operations,
productivity, and profitability of the Company.



ITEM 7. FINANCIAL STATEMENTS

The  Report  of   Independent   Accountants,   Financial   Statements   and  any
supplementary  financial  data  required  by this Item are set forth on pages F1
through F23 of this Report and are incorporated herein by reference.


                                    PART III


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 has  concluded,  based on his
evaluation  as of the  end of the  period  covered  by  this  report,  that  our
disclosure  controls and procedures under Rule 13a-14 of the Securities Exchange
Act of 1934,  as  amended,  are  effective  to ensure  that  information  we are
required to disclose in the reports we file or submit  under the Exchange Act is
recorded,  processed,  summarized and reported within the time periods specified
in the SEC's rules and forms,  and include  controls and procedures  designed to
ensure  that  information  we are  required  to  disclose  in  such  reports  is
accumulated and  communicated to management,  including our principle  executive
and  financial  officer,  as  appropriate  to allow timely  decisions  regarding
required  disclosure.  Subsequent to our  evaluation,  there were no significant
changes in internal  controls or other factors that could  significantly  affect
these internal controls.

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

Item 8B.  Other Information.

None.




                                       32
<PAGE>

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

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


Directors and Executive Officers

         The  following  table  provides  information  concerning  each  of  our
executive officers and directors as of June 30, 2004:

  ----------------------  --------  --------------------------  ----------------
              Name          Age        Position with Cubic       Director Since
  ----------------------  --------  --------------------------  ----------------
  Calvin A. Wallen, III     49      Chairman of the Board,
                                    President, &                      1997
                                    Chief Executive Officer
  ----------------------  --------  --------------------------  ----------------
  Jon S. Ross               40      Director, Secretary               1998
  ----------------------  --------  --------------------------  ----------------
  Gene Howard               77      Director                          1991
  ----------------------  --------  --------------------------  ----------------
  Herbert Bayer             55      Director                          2003
  ----------------------  --------  --------------------------  ----------------
  Bob Clements              62      Director                          2004
  ----------------------  --------  --------------------------  ----------------

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

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

         GENE  C.  HOWARD  is the  Senior  Partner  of the law  firm of  Howard,
Widdows, and Bufogle,  P.C. of Tulsa, Oklahoma and has been engaged primarily in
the private practice of law over the past  thirty-five  years. Mr. Howard served
in the Oklahoma  State Senate from 1964 through 1982 and was  President  Pro Tem
from 1975 through 1981.  In addition,  he served as the Chairman of the Board of



                                       33
<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 and Hinderliter corporations
from 1991 to August of 1992.  He is also  Chairman of the Board of  Philadelphia
Mortgage Trust ("PMT").

         HERBERT A. BAYER has served as a director of Cubic  Energy since May of
2003.  Mr. Bayer is currently  the Regional  Director of Sales for Itron,  which
provides  intelligent  electronic maps of utility  transmission and distribution
systems. He was a Business Management major at Indiana State University.

         ROBERT L. CLEMENTS joined the Cubic Energy,  Inc. Board Of Directors in
February 0f 2004. Mr. Clements was born and raised in Texas.  The culmination of
Mr.  Clements'  education  was degree in the OPM  Program  at  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 area.  Bob has served and currently  serves on a variety for profit and
charitable committees and Boards.

Audit Committee Financial Expert

The Board of Directors, after reviewing all of the relevant facts, circumstances
and  attributes,  has  determined  that Mr.  Howard,  the  Chairman of the Audit
Committee, is the sole "audit committee financial expert" on the Audit Committee
and that Mr. Howard is "independent" (as defined by SEC rules).


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 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.

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



                                       34
<PAGE>

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.

Directors are reimbursed by the Company for all travel expenses.

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

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
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 for (1) Herbert Bayer's
inadvertent  late filing of his initial  Form 3 due in June 2003 and a Form 4 to
report one  transaction  in November 2003,  (2) Gene Howard's  inadvertent  late
filing of a Form 4 to report one transaction in November 2003, (3) Calvin Wallen
III's  inadvertent  late  filing  of one Forms 4 to report  one  transaction  in
November 2003 and one Form 4 to report three  transactions in March 2004 and (4)
Jon Stuart Ross'  inadvertent  late filing of a Form 4 to report one transaction
in November 2003.

ITEM 10. Executive Compensation

The total cash  compensation for the three fiscal years ended June 30, 2004, for
Calvin A. Wallen,  III, the Company's current Chief Executive Officer and Jon S.
Ross,  the  Company's  current  Secretary  is set forth  below in the  following
Summary Compensation Table. No other person received cash compensation in excess
of $100,000 during the fiscal year ended June 30, 2004.

SUMMARY COMPENSATION TABLE
                                           Fiscal      Annual       Other Annual
Name and Principal Position                 Year       Salary       Compensation
---------------------------                 ----       ------       ------------
Calvin A. Wallen, III, President and CEO    2004         0               0
                                            2003         0               0
                                            2002         0               0
Jon S. Ross, Secretary                      2004         0               0
                                            2003         0               0
                                            2002         0               0

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

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,



                                       35
<PAGE>

(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 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.

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

The  following  table sets forth the  number of shares of the  Company's  Common
Stock  beneficially  owned,  as of June 30, 2004 by (i) each person known to the
Company to beneficially own more than 5% of the Common Stock of the Company (the
only  class of  voting  securities  now  outstanding),  (ii) each  director  and
executive  officer,  and (iii) all directors and executive  officers as a group.
Unless otherwise indicated,  the number of shares and percentage of ownership of
Common Stock for each of the stockholders set forth below assumes that shares of
Common Stock that the stockholder may acquire within sixty days of June 30, 2004
are outstanding.

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

Calvin A. Wallen, III            9,818,515 /1/                       31.2%
9870 Plano Rd.
Dallas, TX  75238

William Bruggeman               10,707,303 /2/                       34.0%
20 Anemone Circle
North Oaks, MN  55127

Gene Howard                        382,245 /3/                        1.2%
2402 East 29th St.
Tulsa, OK   74114

Jon S. Ross                        113,500                            0.4%
9870 Plano Rd.
Dallas, TX  75238




                                       36
<PAGE>

Herbert Bayer                      168,287 /4/                        0.5%
9870 Plano Rd.
Dallas, TX 75238

Robert L. Clements                 276,000                            0.9%
9870 Plano Rd.
Dallas, TX 75238

All officers and directors
as a group (5 persons):         10,758,547                           34.2%


/1/ Includes  100,000  shares held in equal amounts by each of Mr.  Wallen's two
children of minority,  Calvin Wallen, IV and Lauren Wallen; and 1,641,216 shares
held by Tauren Exploration, Inc., an entity controlled by Mr. Wallen.

/2/  Includes  500,000  shares held by  Diversified  Dynamics  Corp.,  a company
controlled  by William  Bruggeman,  includes  120,000  shares  owned by Consumer
Products Corp. in which Mr. Bruggeman's wife Ruth is a joint owner, and includes
9,713,303 shares held jointly by William Bruggeman & Ruth Bruggeman JTWROS

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

/4/  Includes 132,287 held JTWROS with his spouse

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  Registrant.  In exchange for the issuance of the
Shares,  the Buyers  conveyed to the Registrant the interests in certain oil and
gas properties  owned by the Buyers,  as well as the Buyers' entire  interest in
any contracts,  leases,  records and insurance policies affecting such interests
(the  "Consideration").  The  amount of the  Consideration  was the result of an
agreed negotiation between the Buyers and the Company.  Prior to the negotiation
and execution of the Agreement, there were no material relationships between the
Company or any  affiliates,  officers or directors  of the  Company,  on the one
hand, and any of the Buyers, or any affiliates,  officers or directors of any of
the Buyers, on the other hand.

On  December 1, 1997,  the Company  entered  into a contract  with an  affiliate
controlled  by our  President  and Chief  Executive  Officer to provide  certain
technical,   administrative  and  management  services  needed  to  conduct  its
business.



                                       37
<PAGE>

The terms of the contract  provided for  personnel to be  contracted  at current
market rates in effect at the time the agreement was executed. In addition,  the
offices are  subleased  from an affiliate  controlled by our President and Chief
Executive Officer.  The monthly amount charged to the Company is based on actual
costs of materials and man-hours of the affiliates that are used pursuant to the
terms of the  agreement.  As of June  30,  2001,  the  Company  had  accumulated
$790,098 in accounts  payable due affiliates  that includes the amounts owed for
personnel and leasing of office space.

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

On April 27, 2001, the Company  completed an exchange offer pursuant to which it
acquired (i) certain  direct  working  interests in producing oil and/or natural
gas wells (the "Working  Interests") and (ii) all of the outstanding  membership
units in four privately held limited liability companies and approximately 9.85%
of the working interest in another privately held limited liability company, all
of which are engaged in oil and/or natural gas exploration  and production.  The
Working  Interests  consist of between 15% and 45% working interests in fourteen
(14)  wells.  The  Working  Interests  are part of  projects  operated by Tauren
Exploration,   Inc.  ("Tauren"),  an  independent  energy  company,  and  Fossil
Operating,  Inc.  ("Fossil")  acts as the operator  for some of the  properties.
Calvin A.  Wallen,  III, a material  shareholder,  director  and  officer of the
Company is the sole shareholder,  director and officer of Tauren and Fossil. The
relationship  between the Company and each of Tauren and Fossil were approved by
the disinterested  directors of the Company.  The exchange offer was made to and
was accepted by the various  individual holders of the interests  acquired.  The
Working  Interests and the  properties  held are located in Texas and Louisiana.
The  consideration  paid to the  individuals who accepted the exchange offer was
determined  based on the  Company's  valuation  of the reserves  underlying  the
interests  acquired.  The value of the Company's common stock for purpose of the
exchange offer was deemed to be $0.50 per share. In connection with the exchange
offer,  the Company  issued  approximately  11,141,256  shares of the  Company's
common stock. In addition,  as consideration  for services rendered with respect
to this  exchange  offer,  C. K.  Cooper & Company,  and/or its  principals  and
employees, received 111,413 shares of the Company's common stock.

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

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.



                                       38
<PAGE>

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

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

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

     1.   Report of Independent Auditors

          Statements of Income and Retained Earnings

          Balance Sheets

          Statements of Cash Flows

          Notes to Financial Statements

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

     3. Exhibits

          10.1 -- Stock Purchase  Agreement,  dated December 7. 1997,  among the
          Company, Calvin 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
          of the Company's  10Q,  filed with the SEC for the quarter ended March
          31, 2002).

          31.1* -- Rule 13a-14(a)/15d-14(a) Certifications
          32.1* -- Section 1350 Certifications

         * Filed herewith.

Item 14.  Principal Accountant Fees and Services

                         July 1, 2002-June 30, 2003     Jul 1, 2003-Jun 30, 2004
                         --------------------------     ------------------------
Audit Fees                        19,700                        16,000
Audit-Related Fees                 7,750                         6,100
Tax Fees                           7,600                         2,800
Other Fees                            00                         1,750
----------                            --                         -----
Total                             35,050                        26,650

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




                                       39
<PAGE>

SIGNATURES

PURSUANT TO THE  REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES  EXCHANGE
ACT OF 1934,  THE  REGISTRANT  HAS DULY  CAUSED  THIS REPORT TO BE SIGNED ON ITS
BEHALF  BY THE  UNDERSIGNED,  THEREUNTO  DULY  AUTHORIZED,  ON THE  27TH  DAY OF
SEPTEMBER, 2004.


                                                   Cubic Energy, Inc.



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

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BELOW BY THE FOLLOWING  PERSONS ON BEHALF OF THE  REGISTRANT AND
IN THE CAPACITIES AND ON THE DATES INDICATED.


SIGNATURE                             TITLE                         DATE


/s/ Calvin A. Wallen, III     President, Chief Executive      September 27, 2004
-------------------------     Officer and Director
Calvin A. Wallen, III         (Principal Executive Financial,
                              Accounting Officer)


/s/ Jon Stuart Ross           Director, Secretary             September 27, 2004
-------------------------
Jon Stuart Ross



/s/ Gene Howard               Director                        September 27, 2004
-------------------------
Gene Howard



/s/ Herbert A. Bayer         Director                         September 27, 2004
-------------------------
Herbert A. Bayer



/s/ Robert Clements          Director                         September 27, 2004
-------------------------
Robert Clements




                                       40
<PAGE>

                               CUBIC ENERGY, INC.

                              FINANCIAL STATEMENTS
                                       and
                          INDEPENDENT AUDITORS' REPORT

                                  JUNE 30, 2004






<PAGE>

                               CUBIC ENERGY, INC.

                              FINANCIAL STATEMENTS
                                       and
                          INDEPENDENT AUDITORS' REPORT

                                  JUNE 30, 2004







                                 C O N T E N T S

                                                                            Page

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

Financial Statements:

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

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

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

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

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



<PAGE>

                          INDEPENDENT AUDITORS' REPORT



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



We have audited the balance sheets of Cubic Energy,  Inc., a Texas  corporation,
as of June 30,  2004 and 2003,  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,  2004.   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, 2004 and 2003, and the results of its operations and its cash flows for each
of the three  years in the  period  ended  June 30,  2004,  in  conformity  with
accounting principles generally accepted in the United States of America.



                                                    PHILIP VOGEL & CO. PC




                                                    Certified Public Accountants

Dallas, Texas

September 3, 2004


<PAGE>

                               CUBIC ENERGY, INC.

                                 BALANCE SHEETS
                             JUNE 30, 2004 AND 2003



                                                         2004           2003
                                                     -----------    -----------
         Assets

 Current assets:
   Cash and cash equivalents                         $   193,213    $   117,450
   Accounts receivable - trade                            80,180         58,130
                                                     -----------    -----------

         Total current assets                        $   273,393    $   175,580




Property and equipment (at cost):
   Oil and gas properties, full cost method:
     Proved properties (including wells and
     related equipment and facilities)               $ 1,537,625    $ 1,537,625
   Office and other equipment                                910            910
                                                     -----------    -----------

                                                     $ 1,538,535    $ 1,538,535
   Less accumulated depreciation, depletion
     and amortization                                  1,104,849
                                                                      1,000,114
                                                     -----------    -----------
                                                         433,686        538,421
                                                     -----------    -----------

                                                     $   707,079    $   714,001
                                                     ===========    ===========












The accompanying notes are an integral part of these statements.

<PAGE>

                                                         2004           2003
                                                     -----------    -----------

         Liabilities and stockholders' equity

Current liabilities:
  Accounts payable and accrued expenses              $   126,764    $   116,039
  Due to affiliates                                        3,598            179
                                                     -----------    -----------

       Total current liabilities                     $   130,362    $   116,218

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
     50,000,000 shares, issued 31,451,826
     shares in 2004 and 31,180,326 in 2003             1,572,592      1,559,017
   Additional paid-in capital                          8,972,467      8,892,992
   Accumulated deficit                                (9,968,342)    (9,854,226)
                                                     -----------    -----------
         Stockholders' equity                            576,717        597,783
                                                     -----------    -----------
                                                     $   707,079    $   714,001
                                                     ===========    ===========













The accompanying notes are an integral part of these statements.

<PAGE>
<TABLE>
<CAPTION>

                               CUBIC ENERGY, INC.

                            STATEMENTS OF OPERATIONS
                FOR THE YEARS ENDED JUNE 30, 2004, 2003 AND 2002


                                                          2004           2003           2002
                                                      -----------    -----------    -----------
<S>                                                   <C>            <C>            <C>
Revenues:
   Oil and gas sales                                  $   414,741    $   356,636    $   250,716
                                                      -----------    -----------    -----------

       Total revenues                                 $   414,741    $   356,636    $   250,716
                                                      -----------    -----------    -----------

Costs and expenses:
   Oil and gas production, operating and
     development costs                                $   186,465    $   167,303    $   216,505
   Selling, general and administrative expenses           240,022        175,201        234,804
   Depreciation, depletion and amortization               104,735        119,249        317,901
   Impairment loss on oil and gas properties                 --             --        5,750,838
                                                      -----------    -----------    -----------

       Total costs and expenses                       $   531,222    $   461,753    $ 6,520,048
                                                      -----------    -----------    -----------


        Operating income (loss)                       $  (116,481)   $  (105,117)   $(6,269,332)
                                                      -----------    -----------    -----------


Non-operating income (expense):
   Legal judgment                                     $      --      $  (112,000)   $      --
   Gain on sales of securities                               --             --           26,550
   Other income                                             2,440           --              339
   Interest expense                                           (75)            (4)           (38)
   Interest income                                           --             --              548
                                                      -----------    -----------    -----------
       Total non-operating income (expense):          $     2,365    $  (112,004)   $    27,399
                                                      -----------    -----------    -----------

Income (loss) from operations  before income taxes:   $  (114,116)   $  (217,121)   $(6,241,933)

Provision for (benefit of) income taxes                      --             --         (471,800)
                                                      -----------    -----------    -----------

       Net loss                                       $  (114,116)   $  (217,121)   $(5,770,133)
                                                      ===========    ===========    ===========

Net loss per common share - basic and diluted         $     (0.00)   $     (0.01)   $     (0.19)
                                                      ===========    ===========    ===========
</TABLE>











The accompanying notes are an integral part of these statements.

<PAGE>
<TABLE>
<CAPTION>

                               CUBIC ENERGY, INC.

                  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                FOR THE YEARS ENDED JUNE 30, 2004, 2003 AND 2002



                                                               Common Stock
                                             Cumulative   -------------------------   Additional                      Total
                                             preferred       Shares         Par         paid-in     Accumulated   stockholders'
                                               stock      outstanding      value        capital       deficit        equity
                                            -----------   -----------   -----------   -----------   -----------    -----------
<S>                                         <C>           <C>           <C>           <C>           <C>            <C>

Balance, June 30, 2001                             --      29,989,614   $ 1,499,481   $ 7,867,389   $(3,866,972)   $ 5,499,898

   Net loss, year ended June 30, 2002              --            --            --            --      (5,770,133)    (5,770,133)
   Stock issued for cash                           --         334,000        16,700       133,600          --          150,300
   Contribution of oil and gas properties          --            --            --          78,127          --           78,127
   Stock issued in exchange for debt               --         856,712        42,836       813,876          --          856,712
                                            -----------   -----------   -----------   -----------   -----------    -----------

Balance, June 30, 2002                             --      31,180,326   $ 1,559,017   $ 8,892,992   $(9,637,105)   $   814,904

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

Balance, June 30, 2003                             --      31,180,326   $ 1,559,017   $ 8,892,992   $(9,854,226)   $   597,783

   Net loss, year ended June 30, 2004              --            --            --            --        (114,116)      (114,116)
   Stock issued under compensation plan            --         271,500        13,575        79,475          --           93,050
                                            -----------   -----------   -----------   -----------   -----------    -----------

Balance, June 30, 2004                             --      31,451,826   $ 1,572,592   $ 8,972,467   $(9,968,342)   $   576,717
                                            ===========   ===========   ===========   ===========   ===========    ===========
</TABLE>

















The accompanying notes are an integral part of these statements.

<PAGE>
<TABLE>
<CAPTION>

                               CUBIC ENERGY, INC.

                            STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED JUNE 30, 2004, 2003 AND 2002


                                                                2004           2003           2002
                                                            -----------    -----------    -----------
<S>                                                         <C>            <C>            <C>
Cash flows from operating activities:
     Net loss                                               $  (114,116)   $  (217,121)   $(5,770,133)
     Adjustments to reconcile net loss to cash
       provided (used) by operating activities:
     Depreciation, depletion and amortization                   104,735        119,249        317,901
     Gain on sale of securities                                    --             --          (26,550)
     Impairment loss                                               --             --        5,750,838
     Deferred taxprovision                                         --             --         (471,800)
     Stock issued for services                                   93,051           --             --
     Change in assets and liabilities:
       (Increase) decrease in accounts receivable               (22,050)       (18,002)        (1,312)
       Increase (decrease) in loan from affiliates                3,418         (8,931)        75,724
       Increase (decrease) in accounts payable
         and accrued liabilities                                 10,725         72,921         32,608
                                                            -----------    -----------    -----------

         Net cash provided (used) by operating activities   $    75,763    $   (51,884)   $   (92,724)
                                                            -----------    -----------    -----------

Cash flows from investing activities:
     Proceeds from sale of securities                       $      --      $      --      $    26,550
     Purchase of property and equipment                            --             --             --
                                                            -----------    -----------    -----------

         Net cash provided (used) by investing activities   $      --      $      --      $    26,550
                                                            -----------    -----------    -----------
Cash flows from financing activities:
     Proceeds from issuance of stock                        $      --      $      --      $   150,300
     Capital distributions from acquired entities                  --             --             --
                                                            -----------    -----------    -----------

         Net cash provided (used) by financing activities   $      --      $      --      $   150,300
                                                            -----------    -----------    -----------

Net increase (decrease) in cash and cash equivalents        $    75,763    $   (51,884)   $    84,126

Cash and cash equivalents:
     Beginning of year                                          117,450        169,334         85,208
                                                            -----------    -----------    -----------
      End of year                                           $   193,213    $   117,450    $   169,334
                                                            ===========    ===========    ===========
</TABLE>







The accompanying notes are an integral part of these statements.

<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, Oklahoma and Louisiana.

     On April 27, 2001, the Company completed a nontaxable  transaction  whereby
it exchanged  shares of stock for the  ownership  interests of various  entities
engaged in the  production  of oil and gas. As more fully  described  in Note K,
this transaction was accounted for under the provisions of APB Opinion No. 16 as
a pooling of interests.


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
$0 for each of the years ended June 30, 2004, 2003 and 2002.

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.

     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  $104,735,
$119,249  and  $317,901  for the  years  ended  June 30,  2004,  2003 and  2002,
respectively.

<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS



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

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

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

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

     The Company  recognizes oil and gas revenues by the sales method as oil and
gas production is sold.  Differences between sales and production volumes during
the years ended June 30, 2004, 2003 and 2002 were not significant.

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

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

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

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

     As discussed in Note E, there were no dilutive  securities during the years
ended June 30, 2004,  2002 and 2001.  The weighted  average number of common and
common equivalent shares  outstanding was 31,316,222,  31,180,329 and 30,621,257
for the years ended June 30, 2004, 2003 and 2002, 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.


<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS


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.

     Comprehensive  income  is the  total of (1) net  income  plus (2) all other
changes in net assets  arising from nonowner  sources,  which are referred to as
other  comprehensive  income.  In  accordance  with SFAS No.  130,  the  Company
presents a statement of operations that includes other comprehensive income when
applicable.   An  analysis  of  changes  in  components  of  accumulated   other
comprehensive  income is presented in the statement of changes in  stockholders'
equity. There were no transactions related to other comprehensive income for the
three years ended June 30, 2004.

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

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

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

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

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

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

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

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


<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS



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

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

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

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

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

Other new accounting pronouncements
-----------------------------------

     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.  As the
provisions  of SFAS No. 146 are required to be applied  prospectively  after the
adoption  date,  and no exit or  disposal  activities  have been  entered  into,
management  does not  expect  SFAS No. 146 to have a  significant  impact on its
future results of operations of cash flows.

     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


<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS

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.  This statement is effective
for  financial  instruments  entered into or modified  after May 31,  2003,  and
otherwise is effective for the first fiscal period  beginning after December 15,
2003. The adoption of SFAS No. 150 is not expected to have a significant  impact
on the Company's financial statements.

     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
initial recognition and initial measurement provisions of the Interpretation are
applicable  on a  prospective  basis to  guarantees  issued  or  modified  after
December  31, 2002.  The  disclosure  requirements  in this  Interpretation  are
effective for financial  statements of interim periods ending after December 15,
2002. The Company has not issued any guarantees and, therefore,  the adoption of
FIN 45 is not expected to have a significant  impact on the Company's  financial
statements.

     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  and,  therefore,  the  adoption  of FIN 46 is not  expected  to have a
significant impact on the Company's financial statements.


Note C - Marketable securities - gains and losses:

     On July 29, 1999,  Cubic received  155,000 shares of stock in Energytec.com
pursuant to a spin-off  from the  investment  Cubic held in the common  stock of
Comanche  Energy,  Inc.  ("Comanche").  At the time, Cubic received one share of
Energytec.com for each share that it owned in Comanche.  Prior to November 2001,
Energytec.com was a privately held company;  therefore, there was no established
market price for its stock. Prior to Energytec.com  becoming a public company in
November  2001,  Cubic  believed that the stock had little,  if any,  verifiable
value; therefore, Cubic had not recorded any amounts for its investment.  During
the  year  ended  June  30,  2002,  the  Company  sold  all of its  holdings  in
Energytec.com and recognized a gain on the sale of securities of $26,550.


Note D - Stockholders' equity:

     The Company's  authorized  capital is 50,000,000  shares of $0.05 par value
common stock and 10,000,000 shares of $0.01 par value preferred stock. No shares
of preferred stock are issued or outstanding at June 30, 2004 and 2003.

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

     In  December  1997,  the  Board of  Directors  voted to enter  into a stock
purchase  agreement  ("the  agreement") in which the Company  issued  12,500,000
restricted  shares of common stock in exchange for the conveyance to the Company

<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS


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

Warrants
--------

     On January 1, 2002,  the Company  issued three series of warrants to Tauren
Exploration,  Inc.,  an  entity  owned by the CEO and major  stockholder  of the
Company  (see Note F).  These  warrants  allow  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,  expiring on April 30,
2005.

     The weighted-average exercise price of all exercisable warrants at June 30,
2004 and 2003 was $2.00 and $1.50,  respectively.  The weighted-average exercise
price of all outstanding warrants at June 30, 2004 and 2003 was $2.00 and $1.79,
respectively.  The remaining weighted-average contractual life of these warrants
at June 30, 2004, was ten months.  The remaining  weighted  average  contractual
life of exercisable warrants at June 30, 2004, was zero months.

Capital contributions
---------------------

     As  more  fully  described  in Note F,  on  June  1,  2002,  a  stockholder
transferred  its interest in ten  producing oil and gas wells to the Company for
no current or future  consideration.  The Company  recorded these interests as a
contribution to capital at an aggregate  amount of $78,127,  which was the lower
of each  property's  basis or its fair value using the  present  value of future
reserves.

     As more fully  described in Note F, on January 1, 2002, the Company entered
into an  agreement  that  provided  for the exchange of stock for debt owed to a
major  stockholder.  This resulted in a reduction of existing debt  amounting to
$856,712, with a corresponding issuance of 856,712 shares of stock.

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.

     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.



<PAGE>
<TABLE>
<CAPTION>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS

Note E -- Loss per common share:

     Net loss per common share is computed as follows:


                                                 2004            2003            2002
                                             ------------    ------------    ------------
     <S>                                     <C>             <C>             <C>
     Net loss attributable to stockholders   $   (114,116)   $   (217,121)   $ (5,770,133)

     Weighted average number of shares of
       common stock                            31,316,222      31,180,329      30,621,257

     Income (loss) per common share          $      (0.00)   $      (0.01)   $      (0.19)
     </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 F -- Related party transactions:

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

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

     1)   As of January 1, 2002,  the Company  owed Tauren  $856,712,  primarily
          comprised of  non-interest  bearing  advances the Company had received
          over the course of several years.  In exchange for the amounts owed to
          it,  Tauren   accepted  the  transfer  of  856,712  newly  issued  and
          unregistered  shares of common  stock in the Company that had a market
          price of $.70 per share.  The Company has  recognized  the gain on the
          extinguishment  of this debt as a capital  contribution  for financial
          reporting purposes due to the related party aspect of the transaction.
          The gain was  fully  recognized  as a  taxable  gain  for  income  tax
          reporting purposes for the year ended June 30, 2002.
     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 D.

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

     On June 1, 2002,  Tauren  transferred its interest in ten producing oil and
gas wells to the  Company  for no current or future  consideration.  The Company
recorded these  interests at the lower of Tauren's basis or the present value of
future  reserves on a per well basis.  At June 1, 2002,  the aggregate  basis of
these  wells was  $78,127.  The  transaction  was treated as a  contribution  of
capital.



<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS


     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,  2004  and  2003,  the  Company  owed  Fossil  $0 and $0,
respectively,  in lease  operating  expenses and was owed by Fossil  $78,887 and
$57,960,  respectively,  for oil and gas sales. The amounts owed the Company are
included in accounts receivable - trade.

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, 2004 and 2003, the Company  believed it
was more  likely  than not that  future tax  benefits  from net  operating  loss
carryforwards  and other  deferred  tax assets would not be  realizable  through
generation  of future  taxable  income;  therefore,  they were  fully  reserved.
Pursuant to the  business  combination  described in Note K, the tax benefits of
net operating loss  carryforwards  at June 30, 2002,  were utilized to partially
offset the liability for deferred taxes arising from that transaction.


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


                                                            2004         2003
                                                         ---------    ---------
     Deferred tax as sets:
        Net operating loss carryforwards                 $ 500,200    $ 490,400
        Capital loss carryforwards                           7,400       11,300
        Accrued lawsuit settlement                          16,800       16,800
                                                         ---------    ---------
                                                         $ 524,400    $ 518,500
                                                         ---------    ---------
     Deferred tax liabilities :
        Depletion basis of assets and related accounts   $ (60,400)   $ (65,200)

                                                         ---------    ---------
                                                         $ (60,400)   $ (65,200)

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

     Net deferred tax (liabilities) assets before
        valuation allowance                              $ 464,000    $ 453,300

     Valuation allowance                                  (464,000)    (453,300)
                                                         ---------    ---------

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



<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, 2004,  2003 and
2002:


                                                              2004         2003         2002
                                                           ---------    ---------    ---------
     <S>                                                   <C>          <C>          <C>
     Taxprovision (benefit) calculated at statutory rate   $ (38,800)   $ (73,800)   $(936,300)

     Increase (reduction) in taxes due to:
        Forgiveness-of-debt income                              --           --         38,600
        Acquired entities - nontaxable                          --           --           --
        Excess of book basis over tax basis of
          acquired entities previously unrecorded               --           --           --
     Losses not providing tax benefits                        38,800       73,800      425,900
                                                           ---------    ---------    ---------

     Current federal income tax provision                  $    --      $    --      $(471,800)
                                                           =========    =========    =========


     Change in valuation allowance
                                                           $  10,700    $  29,400    $ 423,900
                                                           =========    =========    =========
     </TABLE>



     As discussed  above, at June 30, 2001, the Company  recorded a deferred tax
liability  which  primarily  represents the effects of the business  combination
described in Note K. Since the acquired  entities were nontaxable,  they did not
record a deferred tax  liability for the excess of the book basis of assets over
the tax basis, which generally resulted from expensing intangible drilling costs
for tax purposes.  The Company is required,  under the  provisions of APB 16 and
SFAS 109, to record the effects of the combination in the period the combination
occurs, rather than as part of the restatement of the financial statements.

     As of June 30, 2004,  the Company had net operating loss  carryforwards  of
approximately  $3,334,900,  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
                                                   --------------
                                                   $    3,334,900
                                                   ==============



<PAGE>

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,  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
------------------

     During  the  spring of 1999,  the  Company  became  aware of the claim of a
geologist filed in December 1997, to a 1% overriding royalty interest in various
properties.  The  geologist  filed an  assignment  after  December 1, 1997.  The
Company disputed the geologist's  legal right to the overriding  royalty and had
filed suit to challenge  this claim.  Through a court  ruling,  the Company must
honor the  override and owed to the  geologist  $30,381 in back  overrides  plus
amounts of attorney fees expended in the geologist's  defense of this challenge.
Accordingly,  the  Company  accrued  $30,381  as a charge to income for the year
ended June 30, 2002. During July 2003, a final judgment was entered by the court
against Cubic for approximately $112,000 representing attorney fees. The Company
has begun the process of appealing the latest  judgment and is confident,  based
on the facts,  that the court will vacate or substantially  reduce the amount it
has been  ordered to pay.  However,  since a  judgment  has been  rendered,  and
neither it nor its  attorneys  are able to conclude  that it is probable it will
succeed in its appeals,  the full amount of the judgment has been accrued in the
accompanying financial statements for the year ended June 30, 2003.

     The Company  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 other persons seeking
a judicial  determination  that all grants of preferential  rights in the Reagan
Sections  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% overriding royalty interest in
these Reagan Lease Sections.

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

     On July 15, 2003 the Court  entered a judgment in favor of Kees and 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 is weighing its options as to
filing for re-hearing or filing a writ with the Texas Supreme Court.  Should the
judgment stand, it could have a material  adverse effect on the cash position of
the Company. Because of the uncertainty as to what the ultimate liability to the
Company would be resulting  from its response to the Appeals  Court  ruling,  no
adjustment has been made to the $112,000 accrued as of June 30, 2004.


<PAGE>
<TABLE>
<CAPTION>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS



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, 2004, 2003 and 2002 were as follows:

                                             2004          2003          2002
                                         -----------   -----------   -----------

          Property acquisitions          $      --     $      --     $    78,128
                                         ===========   ===========   ===========

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, 2004, 2003 and 2002 were
as follows:

                                                     2004         2003         2002
                                                  ----------   ----------   ----------
     <S>                                          <C>          <C>          <C>

     Proved properties                            $1,537,625   $1,537,625   $7,288,463
     Unproved properties                                --           --           --
                                                  ----------   ----------   ----------

                                                  $1,537,625   $1,537,625   $7,288,463

     Accumulated depreciation, depletion
        and amortization                           1,103,939      999,205      879,955
                                                  ----------   ----------   ----------

     Total properties                             $  433,686   $  538,420   $6,408,508

     Less: impairment of oil and gas properties
        due to full cost ceiling test                   --           --      5,750,838
                                                  ----------   ----------   ----------

     Net properties                               $  433,686   $  538,420   $  657,670
                                                  ==========   ==========   ==========
     </TABLE>


     During the year ended June 30, 2002,  capitalized  costs were reduced based
on the results of the full cost ceiling test.  This  impairment  was recorded by
reducing the full cost pool by a grossed-up amount and reducing net deferred tax
liability  for the  related  tax effect.  The net amount of the  impairment  was
charged to expense during the year ended June 30, 2002 (see Note M).



<PAGE>
<TABLE>
<CAPTION>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS


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

     The results of  operations  from oil and gas producing  activities  for the
years ended June 30, 2004, 2003 and 2002 were as follows:


                                                     2004        2003        2002
                                                   ---------   ---------   ---------
     <S>                                           <C>         <C>         <C>
     Revenues:
        Revenues                                   $ 414,741   $ 356,636   $ 250,716
        Preferred return                                --          --          --
                                                   ---------   ---------   ---------

                                                   $ 414,741   $ 356,636   $ 250,716
                                                   ---------   ---------   ---------
     Expenses:
        Production and development costs           $ 186,465   $ 167,303   $ 216,505
        Depreciation, depletion and amortization     104,735     119,249     317,901
                                                   ---------   ---------   ---------

                                                   $ 291,200   $ 286,552   $ 534,406
                                                   ---------   ---------   ---------

     Results before income taxes                   $ 123,541   $  70,084   $(283,690)
     Provision for income taxes                         --          --          --
                                                   ---------   ---------   ---------
     Results of operations (excluding corporate
        overhead and interest expense)             $ 123,541   $  70,084   $(283,690)
                                                   =========   =========   =========
     </TABLE>

     As  disclosed  in Note H, the Company  accrued  $30,381 as its  estimate of
amounts it will be  required to pay to settle a lawsuit  with  respect to unpaid
overriding  royalties.  This amount has been included in oil and gas  production
and development costs for the year ended June 30, 2002.


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.


<PAGE>
<TABLE>
<CAPTION>

                               CUBIC ENERGY, INC.
                          NOTES TO FINANCIAL STATEMENTS



     The following  unaudited table sets forth proved oil and gas reserves,  all
within the United  States,  at June 30, 2004,  2003 and 2002  together  with the
changes therein:


                                                            Natural Gas (Mcf)
                                                  --------------------------------------
                                                     2004          2003          2002
                                                  ----------    ----------    ----------
     <S>                                          <C>           <C>         <C>
     Proved developed and undeveloped reserves:
       Beginning of year                             330,000       564,272     4,227,593
       Revisions of previous estimates                52,902      (161,184)     (985,156)
       Purchases of reserves in place                   --            --            --
       Extensions and discoveries                       --            --            --
       Production                                    (71,804)      (73,088)      (80,549)
       Disposals of reserves in place                   --            --      (2,597,616)
                                                  ----------    ----------    ----------
     End of year                                     311,098       330,000       564,272
                                                  ==========    ==========    ==========



                                                        Oil and condensate (Bbls)
                                                  --------------------------------------
                                                     2004          2003          2002
                                                  ----------    ----------    ----------
     Proved developed and undeveloped reserves:
       Beginning of year                                --            --         131,594
       Revisions of previous estimates                  --            --            --
       Purchases of reserves in place                   --            --            --
       Extensions and discoveries                       --            --            --
       Production Disposals of reserves in place        --            --        (131,594)
                                                  ----------    ----------    ----------
     End of year                                        --            --            --
                                                  ==========    ==========    ==========
</TABLE>


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

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


<PAGE>
<TABLE>
<CAPTION>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS



    The following is the estimated standardized measure relating to proved oil
and gas reserves at June 30, 2004, 2003 and 2002:



     Table 1                                         2004            2003            2002
     -------                                     ------------    ------------    ------------
     <S>                                         <C>             <C>             <C>
     Future cash flows                           $  2,059,245    $  1,893,067    $  1,836,492
     Future production costs                         (833,306)       (564,669)       (552,741)
     Future development costs                            --              --              --
     Future severance tax expense                    (250,473)       (230,251)       (223,382)
     Future income taxes                                 --              --              --
                                                 ------------    ------------    ------------

     Future net cash flows                       $    975,466    $  1,098,147    $  1,060,369

     Ten percent annual discount for estimated
       timing of net cash flows                      (243,553)       (299,766)       (402,699)
                                                 ------------    ------------    ------------
     Standardized measure of
       discounted future net cash flows          $    731,913    $    798,381    $    657,670
                                                 ============    ============    ============



     Following is an analysis of changes in the estimated  standardized  measure
of proved reserves during the years ended June 30, 2004, 2003 and 2002:


     Table 2                                         2004            2003            2002
     -------                                     ------------    ------------    ------------

     Changes from:
       Sale of oil and gas produced              $   (123,541)   $   (114,795)   $     51,290
     Net changes in prices and production costs       (43,462)        296,479        (179,036)
     Extensions and discoveries                          --              --              --
     Revision of previous quantity estimates          122,601        (260,268)     (2,007,574)
     Accretion of discounts                           103,681         107,926         888,882
     Net change in income taxes                       (33,565)         23,487      (1,295,234)
     Purchases of reserves in place                      --              --              --
     Disposals of reserves in place                      --              --        (7,784,158)
     Other                                            (92,182)         87,882         (36,521)
                                                 ------------    ------------    ------------

     Change in standardized measure              $    (66,468)   $    140,711    $(10,362,351)
                                                 ============    ============    ============
</TABLE>


Note K - Pooling of interests business combination:

     On April 27, 2001, the Company completed a nontaxable  transaction  whereby
it exchanged  shares of stock for the  ownership  interests of various  entities
engaged in the production of oil and gas. This  transaction was accounted for as
a pooling of interests  under the  provisions  of  Accounting  Principles  Board
Opinion No. 16, Business Combinations.

     Pursuant to this  transaction,  the Company issued 11,141,255 shares of its
common stock in exchange for the  ownership  interests  of these  entities.  The
Company issued an additional 111,412 shares of its common stock for professional
fees  associated  with the  transaction,  which was charged to operations at the


<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS



date of  combination.  The  estimated  value of the stock issued in exchange for
these  entities  was  approximately  $5,570,000,  or $.50  per  share.  Note L -
Proforma information related to stock warrants:

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


                                                      2002
                                                  ------------
          Expected dividend yield                    0.00%
          Risk-free interest rate                    1.80%
          Expected life                            1.7 years
          Expected volatility                       133.00%


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


                                           2004          2003           2002
                                       -----------    ----------    -----------

     Net loss:
        As reported                    $  (114,116)   $ (217,121)   $(5,770,133)
                                       ===========    ==========    ===========

        Pro forma                      $  (149,580)   $ (272,434)   $(5,826,571)
                                       ===========    ==========    ===========

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

        Pro forma                      $    35,464    $   55,313    $    56,438
                                       ===========    ==========    ===========
     Basic loss per common share:
        As reported                    $     (0.00)   $    (0.01)   $     (0.19)
                                       ===========    ==========    ===========

        Pro forma                      $     (0.00)   $    (0.01)   $     (0.19)
                                       ===========    ==========    ===========




Note M - Impairment loss on oil and gas properties:

     The Company has had lease rights to certain properties located in Louisiana
that  comprised a significant  portion of its oil and gas  reserves.  On May 25,
2002, the Company  elected not to renew its interest in those  properties and to
abandon its plans for future  development in that area. As a result, the Company
recognized  an  impairment  loss  on  its  oil  and  gas  properties  due to the
application  of the full  cost  ceiling  test  described  in Note B.  This  test
generally  limits the  capitalized  costs of oil and gas  producing  properties,
recognized under the full cost method of accounting, to the aggregate "estimated
present value,"  discounted at a 10 percent interest rate of future net revenues
from proved reserves, based on current economic and operating conditions;  which
is a measure of overall  fair value of its  properties.  For the year ended June
30, 2002, the impairment loss on oil and gas properties  recognized  amounted to
$5,750,838,  less the related deferred tax benefit of $1,611,228.  There were no
impairment losses during the years ended June 30, 2004 and 2003.