UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

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

                     FOR THE FISCAL YEAR ENDED JUNE 30, 2007
                          COMMISSION FILE NUMBER 0-9355


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

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

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

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

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

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

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

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

     The  issuer's  revenues  for the  fiscal  year  ended  June 30,  2007  were
$583,416.

     As of August 31, 2007, the registrant had outstanding  56,130,896 shares of
common stock, $.05 par value,  which is registrant's only class of common stock.
The  aggregate  market value of the common stock held by  non-affiliates  of the
registrant,  computed by reference to the last sale price of the common stock as
quoted on the Over-the-Counter  Bulletin Board, was approximately $25,167,390 as
of August 31, 2007.  Shares of common stock held by each officer and director of
the registrant and by each person who may be deemed to be an affiliate have been
excluded. This determination of affiliate status is not necessarily a conclusive
determination for other purposes.

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


<PAGE>


                               CUBIC ENERGY, INC.


                             TABLE OF CONTENTS                              Page

PART I
Item 1.       Description of Business and Properties...........................4
Item 2.       Description of Properties.......................................25
Item 3.       Legal Proceedings...............................................25
Item 4.       Submission of Matters to a Vote of Security Holders.............25

PART II
Item 5.       Market for Common Equity and Related Stockholder Matters,
               and Small Business Issuer Purchases of Equity Securities.......26
Item 6.       Management's Discussion and Analysis or Plan of Operations......27
Item 7.       Financial Statements............................................30
Item 8.       Changes In and Disagreements with Accountants on Accounting
               and Financial Disclosure.......................................30
Item 8A.      Controls and Procedures.........................................30
Item 8B.      Other Information...............................................31

PART III
Item 9.       Directors, Executive Officers, Promoters, Control Persons
               and Corporate Governance; Compliance with Section 16(a) of the
               Exchange Act...................................................31
Item 10.      Executive Compensation..........................................33
Item 11.      Security Ownership of Certain Beneficial Owners and Management
               and Related Stockholder Matters................................39
Item 12.      Certain Relationships and Related Transactions,
               and Director Independence......................................41
Item 13.      Exhibits........................................................41
Item 14.      Principal Accountant Fees and Services..........................44








                                       ii

<PAGE>


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

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
























                                      iii




<PAGE>


                                     PART I

Item 1. Description of Business and Properties.

GENERAL

     Cubic  Energy,  Inc.  (referred  to as  "Cubic",  "we",  "our,  "us" or the
"Company") 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, 2007,
our total proved reserves were 4,319,031 MCFE.

     Our predecessor was incorporated in October 1978. Cubic was incorporated in
1999 in the State of Texas.  Our principal  executive  office is located at 9870
Plano Road, Dallas, Texas 75238, and our telephone number is (972) 686-0369.

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

DESCRIPTION OF BUSINESS

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

     On or about October 1, 2004, we closed a Securities  Purchase Agreement and
issued  $2,635,000  in  principal  amount  of  7%  Senior  Secured   Convertible
Debentures   due  September  30,  2009  (the   "Debentures"),   to  a  group  of
institutional  and high net worth investors.  The Debentures were secured by the
collateral  set forth in the Deed of Trust,  Security  Agreement,  Assignment of
Production and Fixture  Filing  attached to our Form 8-K filed October 12, 2004.
The Debentures  paid an annual interest rate of 7% on a quarterly basis and were
convertible  into shares of our common  stock at a price of $0.50 per share.  We
had the  option to pay the  interest  on the  Debentures  in common  stock.  The
investors also received  warrants to purchase an additional  2,635,000 shares of
common  stock  with an  exercise  price  of $1.00  per  share.  Pursuant  to the
anti-dilution  adjustment provisions  applicable to such warrants,  the exercise
price  applicable to the 1,000,000 of such warrants that have not been exercised



                                       4
<PAGE>

is currently $0.50 per share. The proceeds of the Debentures were used primarily
for the acquisition of interests in oil and gas properties.  The Debentures were
retired on February 6, 2006, as set forth below.

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

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

     On February  6, 2006,  Cubic  entered  into a Credit  Agreement  with Petro
Capital V, L.P.  ("Petro  Capital")  pursuant to which Petro Capital advanced to
the Company  $5,500,000.  The indebtedness  bore interest at a rate of 12.5% per
annum, was to mature on February 6, 2009 and was secured by substantially all of
the assets of the Company.  Approximately  $1,800,000  of the funded  amount was
used to retire the Debentures  described  above.  In connection with the funding
under the  Credit  Agreement,  the  Company  issued to Petro  Capital  and Petro
Capital Securities, LLC, warrants, with five-year expirations,  for the purchase
of up to 1,833,334 and 250,000 shares, respectively,  of Company common stock at
an exercise price of $1.00 per share.  Pursuant to the anti-dilution  adjustment
provisions  applicable to such warrants,  the exercise  price  applicable to all
such  warrants is  currently  $0.9842  per share.  The senior debt held by Petro
Capital  was  retired on March 5, 2007,  with  proceeds  from a new senior  debt
issue, as set forth below.

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

     On July 28, 2006, Cubic entered into and consummated  transactions pursuant
to  Subscription  and   Registration   Rights   Agreements  (the   "Subscription
Agreements")  with certain investors that are unaffiliated with the Company (the
"Investors").  Pursuant  to the  Subscription  Agreements,  the  Investors  paid
aggregate consideration of $2,100,000 to the Company for 3,000,000 shares of the
Company's  common stock and warrants,  exercisable  through July 31, 2011,  into
1,500,000  shares  of  common  stock  at  $0.70  per  share.   Pursuant  to  the
anti-dilution  adjustment provisions  applicable to such warrants,  the exercise
price  applicable  to all such  warrants  is  currently  $0.6885  per share.  In
addition to reimbursement  of certain expenses  incurred in connection with this



                                       5
<PAGE>
<TABLE>
<CAPTION>

offering, the Company agreed to pay 2% of the aggregate consideration,  in cash,
plus 150,000  shares of common  stock valued at $0.70 per share,  to a placement
agent.

     On  December  15,  2006,  the  Company   entered  into   Subscription   and
Registrations  Rights  Agreements (the  "Subscription  Agreements") with certain
investors  (the  "Investors").  One of the  Investors,  William  Bruggeman  (and
entities  affiliated  with  him),  was  the  beneficial  owner,  prior  to  this
transaction,  of approximately 23.0% of the common stock of the Company. Another
Investor,  Bob Clements,  is a director of the Company.  The remaining Investors
had no material  relationship  with the  Company.  Pursuant to the  Subscription
Agreements,  the Investors  paid  aggregate  consideration  of $3,940,000 to the
Company  for  7,880,000  shares  of the  Company's  common  stock  and  warrants
exercisable  into 3,940,000 shares of common stock. The warrants are exercisable
through November 30, 2011, at $0.70 per share.

     On March 5, 2007,  Cubic entered into a Credit  Agreement  with Wells Fargo
Energy Capital,  Inc. ("Wells Fargo")  providing for a revolving credit facility
of  $20,000,000  and  a  convertible   term  loan  of  $5,000,000  (the  "Credit
Facility").  The indebtedness  bears interest at a fluctuating rate equal to the
sum of the Wells Fargo Bank prime rate plus two percent (2%) per annum,  matures
on March 1,  2010,  and is  secured  by  substantially  all of the assets of the
Company.  The $5,000,000  convertible term loan was used,  together with cash on
hand, to retire the Company's  previously  outstanding senior debt that was held
by Petro Capital,  as described  above. The revolving credit facility is subject
to a borrowing  base,  initially set at  $4,000,000,  and is subject to periodic
review.  The convertible  term loan of $5,000,000 is convertible  into 5,000,000
shares  of Cubic  common  stock at a  conversion  price of $1.00 per  share.  In
connection with entering into the Credit  Facility,  the Company issued to Wells
Fargo warrants, with five-year expirations,  for the purchase of up to 2,500,000
shares of Company common stock at an exercise price of $1.00 per share.

     The terms of the Credit Facility,  among other things, prohibit the Company
from merging  with another  company or paying  dividends,  and limit  additional
indebtedness,  sales of certain  assets and  investments.  Upon the repayment in
full of the Credit Facility,  and with respect to certain  properties,  upon the
occurrence of the conditions set forth in Section 2.14 of the Credit  Agreement,
the Company  agreed to convey a net profits  interest to Wells Fargo equal up to
5% of Cubic's net interest in certain of its Louisiana properties.

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

PRINCIPAL OIL AND GAS PROPERTIES

     The following  table  summarizes  certain  information  with respect to our
principal areas of operation at June 30, 2007:



                        Proved Reserves
             --------------------------------------       Percent         Present Value
                   Oil                  Gas              of Proved         (Discounted
 Area             (Bbl)                (Mcf)             Reserves             @ 10%)
---------    -----------------    -----------------    --------------    -----------------
<S>          <C>                  <C>                  <C>               <C>
Louisiana        12,673              4,159,605             98.1%           $ 6,676,760
Texas               157                 82,446              1.9%               152,950
             -----------------    -----------------    --------------    -----------------
Total            12,830              4,242,051            100.0%           $ 6,829,710
             =================    =================    ==============    =================

</TABLE>



                                       6
<PAGE>

     Our Texas  properties  are  situated in Palo Pinto,  Eastland  and Callahan
Counties.  Our Louisiana  properties  are situated in Caddo Parish and in Desoto
Parish. At June 30, 2007, the Louisiana  properties  contained the vast majority
of our proved  reserves,  a situation  that is expected to  continue.  The Texas
properties  consist  primarily  of wells  acquired  by the  Company  in  several
transactions  between  1991 and 2002 and through  overriding  royalty  interests
reserved in farm-out agreements in 1998 and 1999. The Louisiana  properties were
acquired on or about October 1, 2004, January 11, 2005 and February 6, 2006.

     Our net  production  for the fiscal year ended June 30, 2007 for all of the
Company  wells  averaged  approximately  193  Mcf of  natural  gas per day and 3
barrels  of oil per day as  compared  to 147  Mcf of  natural  gas per day and 3
barrels of oil per day in the fiscal year ended June 30, 2006.

EXPLORATION ACTIVITIES

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

     We are currently  focusing our domestic  exploration  activities to develop
our undeveloped  leasehold  opportunities  in Louisiana and Texas.  Currently we
have  exploration   opportunities  and  seek  to  acquire  additional  leasehold
interests in Caddo and Desoto Parishes,  Louisiana,  and in Palo Pinto, Callahan
and  Eastland  Counties in Texas.  These  areas are a part of  geologic  studies
utilizing  regional  trend  surface  analysis,  2-D and 3-D  seismic  data,  AVO
analysis  and/or vast  sub-surface  control.  Prospects have been developed from
4,000-10,600 feet in depth in the Cotton Valley, Hosston, Gloyd, Pettet, Paluxy,
Strawn sandstone, Bend conglomerate and Caddo limestone.

RECENT DEVELOPMENTS

     Near the end of fiscal  2007,  utilizing  funds  provided  under the Credit
Facility  with  Wells  Fargo,  we  began  accelerating  our  drilling  pace.  To
illustrate,  while we drilled  three  wells in fiscal  2007 (as  compared to two
wells in fiscal  2006),  we have  drilled or begun the  drilling  of seven wells
since the end of fiscal 2007 (as of September 22, 2007).

MARKETING OF PRODUCTION

Crude Oil and Natural Gas

     Our  production  consists  mainly of natural  gas.  We market our  operated
production of natural gas to two  purchasers  (i) in Texas,  Enbridge G & P, LP,
and (ii) in Louisiana,  EROC Gathering Company, LP. In fiscal year 2007, we also
marketed our  production  of natural gas, in  Louisiana,  to Crosstex Gulf Coast
Marketing,  Ltd.,  but no longer  do so.  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



                                       7
<PAGE>

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  $523,774 for the fiscal year ended
June 30, 2007 and  represented  90% of our total oil and gas  revenues  for that
fiscal year.

Price Considerations

     Crude oil prices are established in a highly liquid,  international market,
with average crude oil prices that we receive generally fluctuating with changes
in the futures price established on the NYMEX for West Texas  Intermediate Crude
Oil ("NYMEX-WTI").  The average crude oil price per Bbl received by us in fiscal
year 2007 was $61.68 as compared to $59.90 in fiscal year 2006.

     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  2007 was $7.44 as compared to $8.34 in
fiscal 2006.

OIL AND GAS RESERVES

     The following tables set forth the proved developed,  proved  non-producing
and proved  undeveloped  reserves at June 30,  2007,  the  estimated  future net
revenues from such proved  reserves and the  Standardized  Measure of Discounted
Future Net Cash Flows  attributable  to our reserves at June 30, 2007,  2006 and
2005:




























                                       8
<PAGE>
<TABLE>
<CAPTION>


                                       Oil           Gas             Total                               10%
Category                             (Bbls)         (Mcf)           (Mcfe)            Income           Discount
----------------------------------  ----------   -------------  ----------------  ----------------  ---------------
<S>                                 <C>          <C>            <C>               <C>               <C>

Proved Producing                        2,244         686,362           699,826        $3,345,208       $2,698,067
Proved Non-Producing                      818         350,876           355,784         1,349,363        1,005,944
                                    -------------------------------------------------------------------------------
    Proved Developed Reserves           3,062       1,037,238         1,055,610       $ 4,694,571      $ 3,704,011
Proved Undeveloped                      9,768       3,204,813         3,263,421         6,926,991        3,125,699
                                    ----------   -------------  ----------------  ----------------  ---------------
    Total Proved Reserves              12,830       4,242,051         4,319,031      $ 11,621,562      $ 6,829,710
                                    ==========   =============  ================  ================  ===============

                                                                         AT JUNE 30,
                                                      ---------------------------------------------------
                                                           2007              2006              2005
                                                      ----------------  ----------------  ---------------

PROVED DEVELOPED RESERVES:
    Oil (Bbl)                                                 3,062             2,893             1,048
    Gas (Mcf)                                             1,037,238           807,057           509,625
MCFE                                                      1,055,610           824,415           515,913
Estimated future net revenues (before income tax)       $ 4,694,571       $ 2,841,088       $ 1,902,300
    Standardized Measure (1)                            $ 3,704,011       $ 2,343,348       $ 1,071,100

PROVED UNDEVELOPED RESERVES:
    Oil (Bbl)                                                 9,768             5,970              --
    Gas (Mcf)                                             3,204,813         1,989,843              --
MCFE                                                      3,263,421         2,025,663              --
Estimated future net revenues (before income tax)       $ 6,926,991       $ 6,050,495       $      --
    Standardized Measure (1)                            $ 3,125,699       $ 4,104,037       $      --

TOTAL PROVED RESERVES:
    Oil (Bbl)                                                12,830             8,863             1,048
    Gas (Mcf)                                             4,242,051         2,796,900           509,625
MCFE                                                      4,319,031         2,850,078           515,913
Estimated future net revenues (before income tax)       $11,621,562       $ 8,891,583       $ 1,902,300
    Standardized Measure (1)                            $ 6,829,710       $ 6,447,385       $ 1,071,100

Average price used to calculate reserves:
    Oil (Bbl)                                           $     64.46       $     70.09       $     50.57
    Gas (Mcf)                                           $      7.06       $      5.55       $      6.65



</TABLE>
--------------------------
     (1)  The Standardized  Measure of Discounted Future Net Cash Flows prepared
          by the Company  represents the present value (using an annual discount
          rate of 10%) of estimated  future net revenues from the  production of
          proved  reserves,  after giving effect to income taxes.  See "Note J -
          Oil and gas  reserves  information  (unaudited)"  in the  Notes 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 ("FAS") No. 69 ("FAS No.
          69"), "Disclosures about Oil and Gas Producing Activities."

     The information  set forth in this Report relating to our proved  reserves,
estimated  future net revenues and Present Values is taken from reports prepared
by the Dallas  office of The  Scotia  Group,  Inc.,  an  independent,  petroleum
engineering  firm,  for fiscal years 2007 and 2006 and by the Houston  office of
Netherland  Sewell &  Associates,  Inc. for fiscal 2005.  The estimates of these
independent  petroleum  engineering  firms were based upon review of  production
histories  and  other  geological,  economic,  ownership  and  engineering  data
provided by the Company.  Information  with respect to  approximately  1% of the
total  proved  reserves as of June 30, 2007,  was prepared  in-house and was not



                                       9
<PAGE>
<TABLE>
<CAPTION>

reviewed by an  independent  engineering  firm.  No reports on our reserves have
been filed with any federal  agency.  In accordance  with guidelines of the SEC,
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 fiscal years ended June 30, 2007, 2006 and 2005:


                                                               Year Ended June 30,
                                                    -------------------------------------
                                                       2007         2006          2005
                                                    ---------     ---------     ---------
<S>                                                 <C>           <C>           <C>

PRODUCTION VOLUMES:
     Oil (Bbl)                                            967         1,047           506
     Gas (Mcf)                                         70,412        53,516        67,744
     Total Oil and Gas (MCFE)                          76,214        59,798        70,780

WEIGHTED AVERAGE SALES PRICES:
     Oil (per Bbl)                                  $   61.68     $   59.90     $   43.42
     Gas (per Mcf)                                  $    7.44     $    8.34     $    6.61

SELECTED EXPENSES PER MCFE:
     Lease operating expenses                       $    6.31     $    5.66     $    3.86
     Selling, general and administrative expenses   $   17.39     $   23.42     $    5.58
     Depreciation, depletion and amortization       $    4.76     $    3.00     $    5.15

</TABLE>



                                       10
<PAGE>

PRODUCTIVE WELLS AND ACREAGE

Productive Wells

     The following  table sets forth our domestic  productive  wells at June 30,
2007:


          Oil                      Gas                       TOTAL
----------------------   ----------------------    -----------------------
   Gross       Net          Gross        Net          Gross         Net
----------  ----------   ----------  ----------    ----------   ----------
     --        --             22        14.42          22          14.42


Acreage

     The following  table sets forth our undeveloped and developed gross and net
leasehold acreage at June 30, 2007. Undeveloped acreage includes leased acres on
which wells have not been  drilled or completed to a point that would permit the
production of commercial quantities of oil and gas, regardless of whether or not
such acreage contains proved reserves.


      Undeveloped               Developed                   TOTAL
----------------------   ----------------------    -----------------------
  Gross        Net          Gross        Net         Gross         Net
----------  ----------   ----------  ----------    ----------   ----------
  15,462      6,281         2,080       1,083        17,542        7,364


     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.

OPERATIONS

     We are not the operator of our wells,  but, in all cases,  as of August 31,
2007, Fossil Operating,  Inc. ("Fossil"),  an entity wholly owned by Mr. Wallen,
is the operator.

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

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

EMPLOYEES

     At August 31, 2007,  the Company had four (4) full- and seven (7) part-time
employees.  We regularly use independent  consultants and contractors to perform
various  professional  services,   including  well-site   supervision,   design,



                                       11
<PAGE>


construction,  permitting  and  environmental  assessment.  We  use  independent
contractors to perform field and on-site production operation services.

FACILITIES

     The Company's principal executive and administrative offices are located at
9870 Plano Road,  Dallas,  Texas.  The offices are  subleased  from an affiliate
controlled  by Mr.  Wallen  and the  offices  are owned by this  affiliate.  The
average  monthly  amount  charged to the Company  during the year ended June 30,
2007, was $2,229.  The Company  believes that there is other  appropriate  space
available  in the  event  the  Company  should  terminate  its  current  leasing
arrangement.

RISK FACTORS

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

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

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

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

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



                                       12
<PAGE>

causing  a high  demand  for  rigs by a  large  number  of  companies  during  a
relatively  short  period of time.  Our future  drilling  activities  may not be
successful. Lack of drilling success could have a material adverse effect on our
financial condition and results of operations.

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

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

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

     At June 30, 2007, we had working  capital of $2,606,796.  On March 5, 2007,
Cubic entered into a Credit Agreement with Wells Fargo providing for a revolving
credit  facility of $20,000,000  and a convertible  term loan of $5,000,000 (the
"Credit  Facility") in order to fund the drilling of new wells.  There can be no
assurance that funds under the Credit Facility and funds from operations will be
adequate to satisfy our capital requirements.

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

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

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

     We  incurred  losses  before  income tax  provisions  of  $(5,800,774)  and
$(2,769,050)  for the fiscal years ended June 30, 2007 and 2006. Our accumulated
deficit as of June 30, 2007 was $(19,322,692).  Historically, we have funded our
operating   losses,   acquisitions  and  drilling  costs  primarily   through  a
combination  of private  offerings of  convertible  debt,  senior  secured debt,
exempt  transactions,  and  equity  securities;  however,  on March  5,  2007 we
established a bank line of credit with Wells Fargo under the terms of the Credit
Facility  described  elsewhere  herein,  the primary purpose of which is to fund
drilling costs. Our success in obtaining the necessary capital resources to fund
future costs associated with our operations and drilling plans is dependent upon
our ability to: (i) increase  revenues through  acquisitions and recovery of our
proved producing and proved developed  non-producing oil and gas reserves;  (ii)
maintain effective cost controls at the corporate  administrative  office and in
field operations; and (iii) obtain additional financing,  including the exercise



                                       13
<PAGE>

of  outstanding  warrants.  However,  even if we achieve  some  success with our
plans,  there can be no  assurance  that we will be able to generate  sufficient
revenues to achieve  significant  profitable  operations or to fund our drilling
plans. See "Management's Discussion and Analysis or Plan of Operations."

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

     The majority of our oil and gas reserves are  undeveloped.  Recovery of the
Company's  future  undeveloped   reserves  will  require   significant   capital
expenditures.  As such, our management  intends to make capital  expenditures of
approximately  $22,500,000 to further  develop these reserves during fiscal year
2008. No assurance can be given that our estimates of capital  expenditures will
prove accurate,  that our financing sources will be sufficient to fully fund our
planned  development  activities or that  development  activities will be either
successful or in accordance  with our schedule.  Additionally,  any  significant
decrease  in oil and gas  prices  or any  significant  increase  in the  cost of
development  could  result in a  significant  reduction  in the  number of wells
drilled and/or  reworked.  No assurance can be given that any wells will produce
oil or gas in commercially profitable quantities.

     Development of our properties will require  additional  capital  resources.
Except for our  $20,000,000  revolving  credit  facility with Wells Fargo Energy
Capital,  we have  no  commitments  to  obtain  any  additional  debt or  equity
financing  and there  can be no  assurance  that  additional  financing  will be
available,  when  required,  on favorable  terms to us. The  inability to borrow
under the revolving credit facility or obtain additional  financing could have a
material adverse effect on us, including  requiring us to curtail  significantly
our oil and gas development plans or farm-out development of our properties. Any
additional  financing may involve  substantial  dilution to the interests of our
shareholders at that time. See "Management's  Discussion and Analysis or Plan of
Operations."

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

     Our  revenues,  profitability  and the  carrying  value  of our oil and gas
properties are  substantially  dependent upon  prevailing  prices of, and demand
for, oil and gas and the costs of acquiring,  finding,  developing and producing
reserves.   Our  ability  to  obtain   borrowing   capacity,   to  repay  future
indebtedness,  and to  obtain  additional  capital  on  favorable  terms is also
substantially dependent upon oil and gas prices.  Historically,  the markets for
oil and gas have been  volatile and are likely to continue to be volatile in the
future.  Prices for oil and gas are subject to wide fluctuations in response to:
(i) relatively minor changes in the supply of, and demand for, oil and gas; (ii)
market uncertainty;  and (iii) a variety of additional factors, all of which are
beyond our  control.  These  factors  include  domestic  and  foreign  political
conditions, the price and availability of domestic and imported oil and gas, the
level  of  consumer  and  industrial  demand,  weather,   domestic  and  foreign
government  relations,  the  price and  availability  of  alternative  fuels and
overall economic  conditions.  Furthermore,  the marketability of our production
depends in part upon the  availability,  proximity  and  capacity  of  gathering
systems,  pipelines and processing facilities.  Volatility in oil and gas prices
could  affect  our  ability  to market  our  production  through  such  systems,
pipelines or  facilities.  Substantially  all of our gas production is currently
sold to two gas marketing  firms on a  month-to-month  basis at prevailing  spot
market  prices.  Oil prices  remained  subject to  unpredictable  political  and
economic  forces  during  fiscal  years  2005,  2006 and 2007,  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



                                       14
<PAGE>

in demand from many Asian countries, current events in the Middle East, security
threats  to the  United  States,  and other  factors  associated  with the world
political  and  economic  environment.  As a result  of the  many  uncertainties
associated with levels of production  maintained by OPEC and other oil producing
countries,  the  availabilities  of worldwide  energy  supplies and  competitive
relationships and consumer  perceptions of various energy sources, we are unable
to predict what changes will occur in crude oil and natural gas prices.

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

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

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

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

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



                                       15
<PAGE>


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

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

     Our business may suffer if we lose key personnel.

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

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

     As of  August  31,  2007,  our  executive  officers,  directors  and  their
affiliates and certain 5% shareholders hold approximately 61% of our outstanding
shares of common stock. As a result,  officers,  directors and their  affiliates
and such shareholders  have the ability to exert significant  influence over our
business affairs, including the ability to control the election of directors and
results  of  voting  on  all  matters  requiring  shareholder   approval.   This
concentration  of  voting  power  may delay or  prevent  a  potential  change in
control.

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

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

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



                                       16
<PAGE>


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

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

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

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

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

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

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



                                       17
<PAGE>

procedural  requirements governing shareholder meetings.  These provisions could
have the effect of delaying or preventing a change in control of our Company.

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

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

     We may not have satisfactory title to our properties.

     Our contract land  professionals have reviewed title records or other title
review materials relating to substantially all of our producing properties.  The
title investigation performed by us prior to acquiring undeveloped properties is
thorough,  but less rigorous than that conducted  prior to drilling,  consistent
with industry  standards.  A title  opinion  obtained on the drill site prior to
drilling does not  necessarily  ensure  satisfactory  title.  We believe we have
satisfactory title to all our producing  properties in accordance with standards
generally  accepted in the oil and gas industry.  Our  properties are subject to
customary royalty interests,  liens incident to operating agreements,  liens for
current taxes and other burdens,  which we believe do not  materially  interfere
with the use of or affect the value of such  properties.  At June 30, 2007,  our
leaseholds  for some of our net  acreage  were  being kept in force by virtue of
production on that acreage in paying  quantities.  The remaining net acreage was
held by lease rentals and similar  provisions and requires  production in paying
quantities   prior  to  expiration  of  various  time  periods  to  avoid  lease
termination.  In the normal  course of our  business,  title  defects of varying
degrees will arise, and, if practicable, reasonable efforts will be made to cure
any such defects.

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

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

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



                                       18
<PAGE>

and  regulations,  because such laws and regulations  are frequently  amended or
reinterpreted,  we are unable to predict the future cost or impact of  complying
with such laws and regulations.

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

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

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

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

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



                                       19
<PAGE>


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

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

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

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

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



                                       20
<PAGE>


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

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

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

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



                                       21
<PAGE>



GLOSSARY OF OIL AND GAS TERMS

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

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

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

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

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

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

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

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

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

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

     "Gas" means natural gas.

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

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

     "MCF" means thousand cubic feet.

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

     "MMBTU" means ones million BTUs.



                                       22
<PAGE>


     "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.

     "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



                                       23
<PAGE>

          undrilled  prospects;  and (D) crude oil and  natural  gas that may be
          recovered from oil shales, coal, gilsonite and other such resources.

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

     "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.




                                       24
<PAGE>



Item 2. Description of Properties.

     See "Description of Business and Properties."

Item 3. Legal Proceedings.

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

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

     Not Applicable.





















                                       25
<PAGE>

                                     PART II

Item 5. Market for Common  Equity and  Related  Stockholder  Matters,  and Small
        Business Issuer Purchases of Equity Securities

Common Stock and Market

     The common  stock of the  Company is traded on the OTCBB,  with the trading
symbol "QBIK".

     At  August  31,  2007,  there  were  56,130,896   shares  of  common  stock
outstanding held by approximately 882 shareholders of record.

     Under its Articles of Incorporation,  as amended, the Company is authorized
to issue one  class of up to  100,000,000  common  shares,  par value  $0.05 per
share, and one class of up to 10,000,000  preferred shares,  par value $0.01 per
share.  As of August 31,  2007,  there were no  preferred  shares of the Company
outstanding.

Common Stock Price Range

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


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

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


Dividend Policy

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



                                       26
<PAGE>
<TABLE>
<CAPTION>

Securities Authorized for Issuance under Equity Compensation Plans

     The following table provides information as of August 31, 2007 with respect
to compensation plans (including  individual  compensation  arrangements)  under
which equity securities of the registrant are authorized for issuance:


                                             Number of               Weighted
                                          securities to be            average            Number of shares
                                            issued upon           exercise price          of common stock
                                            exercise of           of outstanding        remaining available
                                            outstanding              options,           for future issuance
                                         options, warrants         warrants and            under equity
                                             and rights               rights            compensation plans
                                        ---------------------    ------------------    ----------------------
<S>                                     <C>                      <C>                   <C>

2005 Stock Option Plan
     approved by shareholders                             --     $              --                 1,949,000
Equity compensation plans
     not approved by shareholders                         --     $              --                        --
                                        ---------------------                          ----------------------
Total                                                     --                                       1,949,000
                                        =====================                          ======================


</TABLE>



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, 2007. The Company's  Financial  Statements
and notes thereto included elsewhere in this Report contain detailed information
that should be referred to in conjunction with the following discussion.

General

     The Company's  future  results of operations  and growth are  substantially
dependent  upon (i) its  ability  to acquire  or find and  successfully  develop
additional oil and gas reserves and (ii) the prevailing  prices for oil and gas.
We have an  inventory  of  exploration  drilling  locations  to pursue after the
fiscal year ending June 30, 2007.  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 THE COMPANY FILES FROM TIME TO TIME WITH THE  SECURITIES AND



                                       27
<PAGE>

EXCHANGE COMMISSION.  READERS SHOULD CAREFULLY REVIEW THE RISK FACTORS DESCRIBED
IN THIS ANNUAL REPORT AND THE DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH
THE SECURITIES AND EXCHANGE COMMISSION.

RESULTS OF OPERATIONS

Comparison of Fiscal 2007 to Fiscal 2006

Revenues

     OIL AND GAS SALES  increased  15% to $583,416 in the fiscal year ended June
30, 2007  ("fiscal  2007") from  $508,925 in the fiscal year ended June 30, 2006
("fiscal  2006"),  due  primarily to a 27%  increase in oil and gas  production,
which was  partially  offset by an 11%  decrease in the weighted  average  sales
prices for gas (per Mcf).

Costs and Expenses

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

     SELLING,  GENERAL  AND  ADMINISTRATIVE  EXPENSES  ("G&A")  decreased  5% to
$1,325,192 in fiscal 2007 from  $1,400,482 in fiscal 2006  primarily as a result
of a $266,700 decrease in non-cash  compensation expense related to stock grants
to officers and  directors.  Such  decrease was  partially  offset by a $128,736
increase in  compensation  expenses  resulting from an increase in the number of
employees.

     DEPRECIATION,   DEPLETION  AND  AMORTIZATION  ("DD&A")  increased  102%  to
$362,434 in fiscal 2007 from $179,237 in fiscal 2006. The increase was primarily
due to a $2,595,469,  or 143%,  increase in capital  expenditures in fiscal 2006
related to the acquisition and development of oil and gas properties.

     IMPAIRMENT OF OIL AND GAS PROPERTIES increased to $1,790,882 in fiscal 2007
from $0 in fiscal 2006. The impairment  resulted from a downward revision of our
reserve  estimates,   which  was  effected  by  the  following  events:  (i)  we
experienced  delays related to third party  providers in our Bethany  Longstreet
acreage in DeSoto  Parish,  Louisiana,  including not  receiving  contracted-for
compression  services,  which  temporarily  delayed our ability to produce  from
these wells; (ii) we did not effectuate final completion of certain wells due to
a short-term shift in our focus to the development of our Johnson Branch acreage
in Caddo Parish,  Louisiana;  and, (iii) the lack of production history in wells
recently  brought  online lead to a sharper  decline curve being utilized by The
Scotia Group, Inc. in formulating the reserve estimates.

     INTEREST EXPENSE  increased 100% to $1,278,721 in fiscal 2007 from $638,800
in fiscal  2006 due to the  increase  in debt as a result of the  $5,500,000  of
Petro Capital debt being in place for eight months in fiscal 2007 as compared to
four months in fiscal 2006;  and, the borrowing of $5,000,000  pursuant to a new
senior  convertible  term  loan on  March  5,  2007,  and  subsequent  draws  of
approximately  $4,000,000  on a related  revolving  line of  credit,  with Wells
Fargo.  The Credit  Facility  with Wells Fargo also  resulted in a loan discount
being  recorded.  The discount is being  amortized over the original  three-year



                                       28
<PAGE>

term of the debt as additional  interest expense with $164,961 being recorded in
fiscal 2007.

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

Liquidity and Capital Resources

Overview

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

     At June 30, 2007, the Company had working capital of $2,606,796. On July 28
and  December 15,  2006,  we raised  $2,100,000  and  $3,940,000,  respectively,
through the private  placement of common stock. On March 5, 2007,  Cubic entered
into a Credit  Agreement  with Wells Fargo  providing  for the Credit  Facility,
which consists of a convertible  term loan of $5,000,000 and a revolving  credit
facility of  $20,000,000  in order to fund the drilling of new wells (see "Notes
to Financial Statements - Note E - Long-term debt" elsewhere herein).

     The following discussion sets forth the Company's current plans for capital
expenditures  in fiscal  2008,  and the  expected  capital  resources  needed to
finance such plans.

Capital Expenditures

     The majority of our oil and gas reserves are  undeveloped.  Recovery of the
Company's future  undeveloped proved reserves will require  significant  capital
expenditures.  Our management  estimates that aggregate capital  expenditures of
approximately  $22,500,000 will be made to further develop these reserves during
fiscal  2008.  Moreover,  additional  capital  expenditures  may be required for
exploratory drilling on our undeveloped acreage.

     The Company will increase its planned activities for fiscal 2008 if product
prices  remain  strong  and if we are  able to  obtain  the  additional  capital
resources necessary to finance such activities.



                                       29
<PAGE>


Working Capital and Cash Flow

     During fiscal 2007, the Company incurred a cash flow deficit from operating
activities  of  $(1,802,068).  Cash flow from  operations  is  dependent  on our
ability  to  increase   production   through  our  development  and  exploratory
activities and the price received for oil and natural gas.

     The Company's working capital increased to $2,606,796 at June 30, 2007 from
a deficit of $(1,357,230) at June 30, 2006, primarily due to an increase in cash
and cash equivalents resulting from the borrowing of approximately $4,000,000 on
the aforementioned revolving line of credit with Wells Fargo.

Capital Resources

         The Company plans to fund its development and exploratory activities
     through cash provided from  operations  and the  utilization  of the Credit
Facility
(see "Notes to Financial Statements - Note E - Long-term debt" elsewhere
herein).

     The Company  cannot be certain that adequate  funds will be available  from
operating cash flow and the Credit Facility to fully fund the projected  capital
expenditures  for fiscal 2008.  Additionally,  because future cash flows and the
availability  of  borrowings  are  subject  to a number  of  variables,  such as
prevailing   prices  of  oil  and  gas,  actual  production  from  existing  and
newly-completed  wells,  the Company's  success in developing  and producing new
reserves,  and the  uncertainty  with  respect to the amount of funds  which may
ultimately  be required to finance the  Company's  development  and  exploration
program,  there can be no assurance that the Company's capital resources will be
sufficient to sustain the Company's development and exploratory activities.

     Although the Company  believes it will be able to obtain funds  pursuant to
the above-mentioned alternatives, management cannot be assured that such capital
resources  will be  available  to the  Company.  If we are unable to obtain such
capital  resources  on a timely  basis,  the  Company  may  curtail  its planned
development and exploratory activities.

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 2007.

Item 7. Financial Statements.

     The  Report  of  Independent  Accountants,  Financial  Statements  and  any
supplementary  financial  data  required by this Item are set forth on pages F-1
through F-30 of this Report and are incorporated herein by reference.

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

     None.

Item 8A. Controls and Procedures.

     Our  principal  executive and financial  officer have  concluded,  based on
their  evaluation as of the end of the period  covered by this report,  that our
disclosure  controls  and  procedures  under  Exchange  Act Rules 13a -15(e) and



                                       30
<PAGE>

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

     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.

                                    PART III

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

Directors and Executive Officers

     The following table provides  information  concerning each of our executive
officers and directors as of August 31, 2007:


                                                                        Director
       Name               Age    Position(s) Held with Cubic             Since
---------------------   ------   ----------------------------------   ----------
Calvin A. Wallen, III     52     Chairman of the Board, President        1997
                                 and Chief Executive Officer

Scott D. Guffey           43     Chief Financial Officer                  n/a

Jon S. Ross               43     Corporate Secretary and Director        1998

Gene C. Howard            78     Director                                1991

Herbert A. Bayer          56     Director                                2003

Bob L. Clements           64     Director                                2004



     CALVIN A.  WALLEN,  III has  served as the  President  and Chief  Executive
Officer of the  Company  since  December  1997,  and as Chairman of the Board of
Directors since June 1999. Mr. Wallen has over 20 years of experience in the oil
and gas industry working as a drilling and petroleum engineer.  Prior to joining
Cubic,  Mr.  Wallen was  employed by Superior  Oil and  various  other  drilling
contractors  including Resource,  Tom Brown and Rowan International.  Mr. Wallen
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



                                       31
<PAGE>

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
attended Texas A&M University at College Station, Texas.

     SCOTT D.  GUFFEY  joined  the  Company  in August  2007 as Chief  Financial
Officer and brings more than 19 years of corporate finance-related experience to
the Company.  Prior to joining  Cubic,  Mr. Guffey  served as Vice  President of
Corporate  Finance for BenefitMall Inc. from 2000 through 2006. Prior to joining
BenefitMall,  Mr.  Guffey  served  as  Vice  President  of  Finance,  Mergers  &
Acquisitions   ("M&A")  and  Investor   Relations  for   publicly-traded   Aegis
Communications  Group, Inc. from 1997 through 2000. Before joining Aegis, he was
Vice  President  of  Technology  Investment  Banking  with  Principal  Financial
Securities,  Inc. for three years,  and has seven years of Financial  Planning &
Analysis and M&A experience with Electronic Data Systems Corporation. Mr. Guffey
holds an M.B.A from Southern  Methodist  University and a B.A. in Economics from
the University of Virginia.

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

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

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

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



                                       32
<PAGE>

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

Audit Committee; Financial Expert

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

Compliance with Section 16(a) of the Exchange Act

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

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

     Bob  Clements  filed one report on Form 4 one day after the time period for
the filing of such reports on a timely basis had  expired.  Such report  covered
one stock purchase transaction.

Code of Ethics

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

Item 10. Executive Compensation.

Compensation Discussion and Analysis

     General.  Our Board of Directors has established a Compensation  Committee,
comprised entirely of independent non-employee directors,  with authority to set
all forms of compensation of our executive officers. Messrs. Bayer, Clements and
Howard  comprised  the  Compensation  Committee in fiscal 2007,  with Mr. Howard
serving as its Chairman.  The Compensation  Committee has overall responsibility
for our executive compensation policies as provided in a written charter adopted
by the Board of Directors. The Compensation Committee is empowered to review and
approve the annual compensation and compensation  procedures for our executives:
the President and Chief Executive Officer,  the Chief Financial Officer, and the
Secretary.  The Compensation Committee does not delegate any of its functions to
others in setting compensation.

     When establishing base salaries, cash bonuses and equity grants for each of
the executives,  the Compensation Committee considers the recommendations of the
President and Chief Executive  Officer and the Secretary,  the executive's  role
and contribution to the management team, responsibilities and performance during
the past year and future anticipated contributions,  corporate performance,  and



                                       33
<PAGE>

the amount of total  compensation paid to executives in similar  positions,  and
performing similar functions, at comparable companies as provided by third party
compensation studies.

     The Compensation  Committee relies upon its judgment in making compensation
decisions,  after  reviewing  the  Company's  performance  and  evaluating  each
executive's performance during the year. The Committee generally does not adhere
to rigid  formulas  or  necessarily  react to  short-term  changes  in  business
performance  in  determining  the amount and mix of  compensation  elements.  We
incorporate  flexibility  into our  compensation  programs and in the assessment
process to respond to and adjust for the evolving business environment.

     Compensation Philosophy. The Board of Director's compensation philosophy is
to  reward  executive  officers  for the  achievement  of  short  and  long-term
corporate  objectives  and for  individual  performance.  The  objective of this
philosophy  is to  provide  a balance  between  short-term  goals and  long-term
priorities  to achieve  immediate  objectives  while also focusing on increasing
shareholder  value over the long term. Also, to ensure that we are strategically
and competitively  positioned for the future, the Compensation Committee has the
discretion  to  attribute  significant  weight to other  factors in  determining
executive  compensation,  such as maintaining  competitiveness,  pursuing growth
opportunities and achieving other long-range business and operating  objectives.
The level of compensation should also allow us to attract,  motivate, and retain
talented  executive  officers  that  contribute to our  long-term  success.  The
compensation  of our President and Chief  Executive  Officer and other executive
officers is comprised of cash compensation and long-term incentive  compensation
in the form of base salary, discretionary bonuses and unregistered stock awards.

     Elements  of Our  Compensation  Program  and Why We Pay Each  Element.  For
fiscal 2007, our total  compensation  for executive  officers  consisted of base
salary,  bonuses and long-term incentives in the form of common stock awards. In
setting fiscal 2007  compensation,  the  Compensation  Committee  considered the
specific factors discussed below:

     Base  Salary.  In  setting  the  executive  officers'  base  salaries,  the
Compensation Committee considers the achievement of corporate objectives as well
as individual  performance.  Because the  Compensation  Committee  believes that
executive  compensation  should be viewed in terms of a balanced  combination of
cash  compensation  (i.e.,  base salaries and bonuses) and  long-term  incentive
(i.e.,  stock grants),  base salaries are targeted to approximate the low end of
the range of base  salaries  paid to  executives  of similar  companies for each
position. To ensure that each executive is paid appropriately,  the Compensation
Committee  considers the executive's level of responsibility,  prior experience,
overall knowledge,  contribution to business results,  executive pay for similar
positions in other companies, and executive pay within our company.

     Discretionary  Bonuses.  Executive  bonuses are intended to link  executive
compensation with the attainment of Company goals. The actual payment of bonuses
is primarily  dependent upon the extent to which these  Company-wide  objectives
are achieved. Determination of executive bonus amounts is not made in accordance
with a strict  formula,  but rather is based on  objective  data  combined  with
competitive  ranges and internal  policies and  practices,  including an overall
review of both  individual  and  corporate  performance.  For fiscal  year 2007,
bonuses  to  executives  were  based upon the  achievement  of certain  business
objectives  including progress in meeting our expected drilling schedule and the
obtainment of a new senior credit  facility.  The President and Chief  Executive
Officer  has the  discretion  to  recommend  to the  Compensation  Committee  to
increase or decrease  bonuses for all other  executive  officers,  but any bonus
amounts must be approved by the Compensation Committee.



                                       34
<PAGE>


     Long-Term Incentives. On December 29, 2005, the shareholders of the Company
approved  the 2005 Stock  Option Plan (the  "Plan")  under  which our  executive
officers may be, among other forms of compensation,  compensated  through grants
of unregistered  shares of our common stock and/or grants of options to purchase
shares of common stock.  The  Compensation  Committee  approves Plan grants that
provide additional incentives and align the executives' long-term interests with
those of the shareholders of the Company by tying executive  compensation to the
long-term performance of the Company's stock price. Annual equity grants for our
executives are typically reviewed in January.

     The Compensation  Committee recommends equity to be granted to an executive
with respect to shares of common stock based on the following principal elements
including, but not limited to:

          o    President  and  Chief   Executive   Officer's   and   Secretary's
               recommendations;

          o    Management role and contribution to the management team;

          o    Job responsibilities and past performance;

          o    Future anticipated contributions;

          o    Corporate performance; and

          o    Existing equity holdings.

     Determination  of equity  grant  amounts is not made in  accordance  with a
strict formula,  but rather is based on objective data combined with competitive
ranges and internal policies and practices,  including an overall review of both
individual  and  corporate  performance.  Equity  grants may also be made to new
executives upon  commencement  of employment and, on occasion,  to executives in
connection with a significant  change in job  responsibility.  The  Compensation
Committee  believes  annual  equity  grants  more  closely  align the  long-term
interests of executives with those of  shareholders  and assist in the retention
of key  executives.  As such,  these  grants  comprise the  Company's  principal
long-term incentive to executives.

Other Compensation Policies Affecting the Executive Officers

     Compliance with Section 162(m) of the Internal Revenue Code. Section 162(m)
disallows a federal  income tax deduction to publicly held companies for certain
compensation   paid  to  our  Named  Executive   Officers  to  the  extent  that
compensation  exceeds $1 million per executive officer covered by Section 162(m)
in any fiscal year.  The  limitation  applies only to  compensation  that is not
considered  "performance  based" as  defined in the  Section  162(m)  rules.  In
designing our compensation  programs,  the Compensation  Committee considers the
effect of Section  162(m)  together with other factors  relevant to our business
needs. We have  historically  taken, and intend to continue taking,  appropriate
actions,  to the extent we believe  desirable,  to preserve the deductibility of
annual incentive and long-term  performance  awards.  However,  the Compensation
Committee  has  not  adopted  a  policy  that  all  compensation  paid  must  be
tax-deductible  and qualified under Section  162(m).  We believe that the fiscal
2007 base salary, annual bonus and stock grants paid to the individual executive
officers  covered by Section 162(m) will not exceed the Section 162(m) limit and
will be fully deductible under Section 162(m).

     Stock Ownership Requirements.  The Compensation Committee does not maintain
a  policy  relating  to  stock  ownership  guidelines  or  requirements  for our
executive  officers because the Compensation  Committee does not feel that it is



                                       35
<PAGE>
<TABLE>
<CAPTION>

necessary to impose such a policy on our executive  officers.  If  circumstances
change,  the  Compensation  Committee  will  review  whether  such a  policy  is
appropriate for executive officers.

     Employment  Agreements.  In  general,  our  executive  officers do not have
employment,  severance or change-of-control  agreements.  Our executive officers
serve at the will of the Board,  which enables us to terminate their  employment
with discretion as to the terms of any severance arrangement. This is consistent
with our compensation philosophy.

Chief Executive Officer Compensation

     Mr. Wallen's annual base salary for fiscal 2007 was $150,000. He received a
common stock award of 150,000  unregistered  shares granted on January 10, 2007,
which vested  immediately.  Rule 144 promulgated under the Securities Act, which
permits certain  re-sales of unregistered  securities,  currently  requires that
such  securities  be paid for and held for a minimum of one year before they may
be resold.

Chief Financial Officer Compensation

     The Company's  former Chief  Financial  Officer,  Mr.  Busby's  annual base
salary for fiscal 2007 was $100,000,  of which he received  $82,701 prior to his
resignation  effective  May 18, 2007. He received a common stock award of 75,000
unregistered shares granted on January 10, 2007, which vested immediately.

Summary Compensation Table

     The following table shows  information  regarding the  compensation  earned
during the fiscal year ended June 30, 2007 by our Chief Executive  Officer,  our
current Chief  Financial  Officer,  our former Chief  Financial  Officer and our
other most highly  compensated  executive  officer who was  employed by us as of
June 30, 2007 and whose total compensation  exceeded $100,000 during that fiscal
year (the "Named Executive Officers").

                                                                                          All
                                                                                         Other
Name and                       Fiscal                                     Stock         Compen-
Principal Position              Year       Salary          Bonus        Awards (1)      sation         Total
--------------------------     ------   ------------    -----------    ------------   -----------   ------------
<S>                            <C>      <C>             <C>            <C>            <C>           <C>

Calvin A. Wallen, III           2007      $ 150,000            $ -       $ 120,000      $     --      $ 270,000
Chairman of the Board,
President and Chief
Executive Officer

James L. Busby             (2)  2007       $ 82,701            $ -        $ 60,000      $     --      $ 142,701
Former Chief Financial
Officer

Scott D. Guffey            (3)  2007       $     --       $     --        $     --      $     --      $      --
Chief Financial Officer

Jon S. Ross                     2007       $ 60,000       $ 23,000        $ 38,000      $     --      $ 121,000
Secretary

</TABLE>


                                       36
<PAGE>

----------------------------
(1)  On January  10,  2007 we granted  our named  executive  officers a total of
     272,500 unregistered shares of common stock as follows: Mr. Wallen, 150,000
     shares; Mr. Busby, 75,000 shares; and Mr. Ross, 47,500 shares. These shares
     vested immediately on the grant date.
(2)  Mr. Busby  resigned as Cubic's Chief  Financial  Officer  effective May 18,
     2007.
(3)  Mr. Guffey was  appointed  Cubic's  Chief  Financial  Officer on August 20,
     2007.

Fiscal 2007 Grants of Plan-Based Awards

     The following table provides details regarding equity grants in fiscal 2007
to the Named  Executive  Officers.  No stock  options  were granted to executive
officers last year and thus any reference to options in the table below has been
omitted.


                                              All Other Stock
                                                  Awards:          Grant Date
                                                 Number of       Fair Value of
Name                       Grant Date             Shares          Stock Award
----------------------   ------------------   ----------------  ----------------
Calvin A. Wallen, III     January 10, 2007        150,000          $ 120,000

James L. Busby            January 10, 2007         75,000           $ 60,000

Scott D. Guffey                          -              -                  -

Jon S. Ross               January 10, 2007         47,500           $ 38,000



Stock Grants

     On October 25,  2004,  Cubic issued  155,000  shares of common stock to its
officers  and  directors  pursuant  to  a  then  current  Director  and  Officer
compensation  plan.  Based on a then  market  price of $0.51  per  share,  Cubic
recorded a  compensation  expense of $79,050,  which was included in general and
administrative expenses for the fiscal year ended June 30, 2005.

     On December 29, 2005,  the  shareholders  of the Company  approved the 2005
Stock  Option  Plan (the  "Plan")  and  3,750,000  shares of common  stock  were
reserved,  of which 1,711,000  shares had been issued through June 30, 2007, and
1,801,000 shares have been issued through August 31, 2007, as set forth below.

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

     On January 5, 2006, the Company issued 572,000  unregistered  shares to the
officers and directors of the Company pursuant to the Plan. As of such date, the
aggregate  market  value of the common stock  granted was $486,200  based on the
last sale price on the OTC Bulletin  Board of the Company's  common stock.  Such
amount was  amortized  to  compensation  expense  on a  quarterly  basis  during
calendar year 2006.  Accordingly,  $243,100 was recorded as compensation expense
and included in general and administrative expenses for each of the fiscal years
ended June 30, 2007 and 2006.



                                       37
<PAGE>


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

     Subsequent  to the end of fiscal  2007,  on August 20,  2007,  the  Company
issued 90,000  unregistered  shares to an officer of the Company pursuant to the
Plan. Such grant is subject to a vesting schedule over the next 12 months. As of
such date,  the aggregate  market value of the common stock granted was $103,500
based on the then-market price on the OTC Bulletin Board of the Company's common
stock.  These  shares vest over four  quarterly  periods,  the first of which is
November 20, 2007.

Outstanding Equity Awards at Fiscal Year-End

     The Company had no  outstanding  stock options and no unvested stock awards
at June 30, 2007;  therefore,  the table setting forth outstanding  equity-based
awards has been omitted.

Options Exercises and Stock Vesting

     The  following  table sets forth dollar  amounts  realized  pursuant to the
vesting or exercise of  equity-based  award during the latest  fiscal  year.  No
stock  options  were  granted  to  executive  officers  last  year  and thus any
reference to options in the table below has been omitted.


                                  Number of
                                   Shares
                                 Acquired on      Value Realized
Name                               Vesting          on Vesting
---------------------------    ----------------   ----------------
Calvin A. Wallen, III             150,000          $ 120,000

James L. Busby                     75,000          $  60,000

Scott D. Guffey                        --                 --

Jon S. Ross                        47,500          $  38,000



Pension Benefits and Non-Qualified Defined Contribution Plans

     None  of our  named  executive  officers  participate  in or  have  account
balances in qualified or  non-qualified  defined benefit plans or  non-qualified
defined contribution plans sponsored by us. The Compensation Committee, which is
comprised  solely of  "outside  directors"  as defined  for  purposes of Section
162(m)  of the Code,  may  elect to adopt  qualified  or  non-qualified  defined
benefit  or  non-qualified  contribution  plans  if the  Compensation  Committee
determines that doing so is in our best interests.



                                       38
<PAGE>


Proforma 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.

Non-Employee Director Compensation for Fiscal 2007


                                                         All
                     Fees Earned                        Other
                      or Paid in       Stock            Compen-
Name                   Cash (1)        Awards (2)       sation         Total
-----------------    -----------     ------------    ----------     ----------
Gene C. Howard         $ 2,000        $ 42,400        $    --        $ 44,400

Herbert A. Bayer       $ 2,000        $ 37,600                       $ 39,600

Bob L. Clements        $ 2,000        $ 37,600        $    --        $ 39,600

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

(1)  Represents the amount of cash compensation  earned in fiscal 2007 for Board
     and Committee service.  Each non-employee director was paid $1,000 for each
     Board of Directors meeting attended. During fiscal 2007, Board of Directors
     meetings were held on October 31, 2006 and May 11, 2007.
(2)  Each  non-employee  director  received:  25,000  shares of common stock for
     service  on the Board of  Directors;  14,000  shares  of  common  stock for
     service  on the Audit  Committee;  and,  6,000  shares of common  stock for
     service on the  Compensation  Committee.  Mr. Howard received an additional
     6,000  shares of common  stock for  serving  as the  financial  expert  and
     Chairman of the Audit Committee.

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

     The following table sets forth the number of shares of the Company's common
stock beneficially  owned, as of August 31, 2007 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,  we consider all shares of common stock that can be
issued under convertible  securities or warrants  currently or within 60 days of
August 31, 2007 to be  outstanding  for the purpose of computing the  percentage
ownership of the person  holding  those  securities,  but do not consider  those
securities to be outstanding for computing the percentage ownership of any other
person.  Each owner's  percentage is calculated by dividing the number of shares
beneficially  held by that  owner by the sum of  56,130,896  and the  number  of
shares that owner has the right to acquire within 60 days.



                                       39
<PAGE>
<TABLE>
<CAPTION>


                                                                               Approximate
                                                          Number                Percent of
Name and Address                                         of Shares              Class (1)
------------------------------------------------      ----------------        ---------------
<S>                                                   <C>                     <C>

5% Stockholders
William Bruggeman                                      16,739,303  (2)             28.7%
20 Anemone Circle, North Oaks, MN  55127

Wells Fargo Energy Capital, Inc.                        7,500,000  (3)             11.8%
1000 Louisiana 9th Floor, Houston, TX  77002

Steven S. Bruggeman                                     4,189,955  (4)              7.3%
5609 St. Albans Circle, Shoreview, MN 55126

George Karfunkel                                        3,375,000  (5)              5.9%
9870 Plano Road, Dallas, TX  75238

Named Executive Officers and Directors
Calvin A. Wallen, III                                  12,027,212  (6)             21.4%
9870 Plano Road, Dallas, TX  75238

Bob Clements                                              727,527  (7)              1.3%
9870 Plano Road, Dallas, TX  75238

Gene Howard                                               577,425  (8)              1.0%
2402 East 29th St., Tulsa, OK  74114

Jon S. Ross                                               398,000  (9)                 *
9870 Plano Road, Dallas, TX  75238

Herbert Bayer                                             335,287  (10)                *
9870 Plano Road, Dallas, TX  75238

James L. Busby                                            251,500  (11)                *
2018 Portsmouth Dr., Richardson, TX 75082

Scott D. Guffey                                            90,000  (12)                *
9870 Plano Road, Dallas, TX  75238

All officers and directors
as a group (6 persons)                                 14,406,951                  25.6%

</TABLE>

--------------------------------------
* Denotes less than one percent

(1)  Based  on  a  total  of  56,130,896  shares  of  Common  Stock  issued  and
     outstanding on August 31, 2007.
(2)  Includes  2,034,000  shares and warrants to purchase 600,000 shares held by
     Diversified  Dynamics  Corp.,  a company  controlled by William  Bruggeman;
     120,000 shares owned by Consumer  Products Corp., in which Mr.  Bruggeman's
     spouse,  Ruth,  is a joint owner;  and,  12,401,303  shares and warrants to
     purchase  1,544,000  held jointly by William  Bruggeman & Ruth Bruggeman as
     joint tenants with rights of survivorship.
(3)  Includes  warrants  to  purchase  2,500,000  shares and a  promissory  note
     convertible into 5,000,000 shares.
(4)  Includes  901,955 shares held jointly by Steven S. Bruggeman and Jacqueline
     Bruggeman as joint tenants with rights of  survivorship;  48,000 shares and
     warrants to purchase 24,000 shares held by Jacqueline  Bruggeman,  of which
     Steven S.  Bruggeman  disclaims  beneficial  ownership;  96,000  shares and
     warrants to purchase 48,000 shares held by minor children; and, warrants to
     purchase 1,024,000 shares held by Steven S. Bruggeman.
(5)  Includes warrants to purchase 1,125,000 shares.





                                       40
<PAGE>


(6)  Includes  1,714,000  shares and warrants to purchase  50,000 shares held by
     Tauren  Exploration,  Inc.,  an entity  controlled by Mr.  Wallen;  500,000
     shares held by spouse; and, 340,000 shares held by minor children.
(7)  Includes  109,527  shares held with spouse as joint  tenants with rights of
     survivorship; and, warrants to purchase 50,000 shares.
(8)  Includes  322,245 shares are held by Mr. Howard's  spouse,  Belva, of which
     Mr. Howard disclaims beneficial ownership.
(9)  Includes 6,000 shares held by minor children.
(10) Includes  335, 287 shares held with spouse as joint  tenants with rights of
     survivorship.
(11) Mr.  Busby is the  Company's  former  Chief  Financial  Officer.  Mr. Busby
     resigned from the Company effective May 18, 2007.
(12) Mr. Guffey was appointed Chief  Financial  Officer of the Company on August
     20, 2007.

Item 12.  Certain   Relationships   and  Related   Transactions,   and  Director
          Independence.

Certain Relationships and Related Transactions

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

     On  December  15,  2006,  the  Company   entered  into   Subscription   and
Registration  Rights  Agreements with certain  investors.  One of the investors,
William  Bruggeman (and entities  affiliated with him) was the beneficial owner,
prior to this  transaction,  of  approximately  23.0% of the common stock of the
Company.  In this transaction,  Mr. Bruggeman (and entities affiliated with him)
purchased an aggregate of 4,288,000  shares of common stock at a purchase  price
of $0.50 per share, or an aggregate of $2,144,000.  Mr.  Bruggeman (and entities
affiliated with him) received  warrants to purchase  2,144,000  shares of common
stock with an exercise price of $0.70 per share. Another investor, Bob Clements,
a  director  of the  Company,  purchased  100,000  shares of  common  stock at a
purchase  price of $0.50 per share,  or an  aggregate of $50,000.  Mr.  Clements
received  warrants to purchase  50,000  shares of common  stock with an exercise
price of $0.70 per share. The consideration described above was determined based
upon negotiations between the Company and various potential investors.

Director Independence

     Messrs.  Howard,  Clements and Bayer meet the  independence  standards  for
independent  directors  under the  rules of the SEC and the rules of the  Nasdaq
Stock Market published in the Nasdaq Marketplace Rules.



                                       41
<PAGE>


Item 13.  Exhibits.

No.      Description

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

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

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

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

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

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

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

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

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

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

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

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



                                       42
<PAGE>


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

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

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

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

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

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

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

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

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

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

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

10.21     Third  Amendment to Promissory  Note,  dated November 10, 2006, by and
          between,  Cubic Energy,  Inc. and Tauren  Exploration,  Inc. (filed as
          Exhibit  10.1 to the  Company's  Form  10-QSB  for the  quarter  ended
          September 30, 2006).

10.22     Warrant  issued to Tauren  Exploration,  Inc.  dated November 10, 2006
          (filed as Exhibit  10.2 to the  Company's  Form 10-QSB for the quarter
          ended September 30, 2006).

10.23     Form of  Subscription  and  Registration  Rights  Agreement  (filed as
          Exhibit 10.1 to the Company's Form 8-K filed December 21, 2006).



                                       43
<PAGE>


10.24     Form of Warrant (filed as Exhibit 10.2 to the Company's Form 8-K filed
          December 21, 2006).

10.25     Credit Agreement dated March 5, 2007 by and between Cubic Energy, Inc.
          and Wells Fargo Capital,  Inc. (filed as Exhibit 10.1 to the Company's
          Form 8-K filed March 9, 2007).

10.26     Convertible Promissory Note dated as of March 5, 2007 by Cubic Energy,
          Inc.  payable to Wells Fargo  Energy  Capital,  Inc. in the  principal
          amount of $5,000,000  (filed as Exhibit 10.2 to the Company's Form 8-K
          filed March 9, 2007).

10.27     Promissory  Note dated as of March 5, 2007 by Cubic Energy  payable to
          Wells Fargo Energy Capital,  Inc. in the maximum  principal  amount of
          $20,000,000  (filed as Exhibit 10.3 to the Company's Form 8-K on March
          9, 2007).

10.28     Warrant to Purchase Shares of Common Stock of Cubic Energy, Inc. dated
          March 5, 2007,  issued to Wells Fargo Energy  Capital,  Inc. (filed as
          Exhibit 10.4 to the Company's Form 8-K on March 9, 2007).

10.29     Registration Rights Agreement dated as of March 5, 2007 by and between
          Cubic  Energy,  Inc. and Wells Fargo Energy  Capital,  Inc.  (filed as
          Exhibit 10.5 to the Company's Form 8-K on March 9, 2007).

10.30     Form of Assignment of Net Profits  Interest  (filed as Exhibit 10.6 to
          the Company's Form 8-K on March 9, 2007).

23.1*     Consent of Philip Vogel & Co., PC

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

31.2*     Rule 13a-14(a)/15d-14(a) Certification of Scott D. Guffey

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

32.2*     Section 1350 Certification of Scott D. Guffey

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

Item 14. Principal Accountant Fees and Services.


                                     July 1, 2006 -      July 1, 2005 -
                                     June 30, 2007       June 30, 2006
                                    --------------      --------------
Audit fees                            $ 21,000            $ 18,750
Audit-related fees                       8,500               8,675
Tax fees                                 4,585               3,500
All other fees                           8,500               3,140
                                   --------------       --------------
     Total                            $ 42,585            $ 34,065
                                   ==============       ==============



                                       44
<PAGE>


Audit Fees

     Aggregate audit fees billed for  professional  services  rendered by Philip
Vogel & Co.,  PC were  $21,000  for the year ended June 30, 2007 and $18,750 for
the year ended June 30, 2006. Such fees were primarily for professional services
rendered for the audits of our consolidated  financial  statements as of and for
the years ended June 30, 2007 and 2006.

Audit-Related Fees

     Aggregate  audit-related fees billed for professional  services rendered by
Philip  Vogel & Co.,  PC were $8,500 for the year ended June 30, 2007 and $8,675
for the year  ended June 30,  2006.  Such fees were for  limited  reviews of our
unaudited condensed consolidated interim financial statements.

Tax Fees

     Aggregate  income tax  compliance  and  related  services  fees  billed for
professional  services  rendered  by Philip  Vogel & Co., PC were $4,585 for the
year ended June 30, 2007 and $3,500 for the year ended June 30, 2006.

All Other Fees

     In  addition  to the fees  described  above,  aggregate  fees of $8,500 and
$3,140  were  billed by Philip  Vogel & Co.,  PC during the years ended June 30,
2007 and 2006, respectively,  primarily for review of our Form SB-2 registration
statements and related amendments,  and for research regarding our use of shares
of common stock as compensation.

Audit Committee Pre-Approval Policies and Procedures

     In  accordance  with  Company  policy,  any  additional  audit or non-audit
services must be approved in advance. All of the foregoing professional services
provided by Philip Vogel & Co., PC during the years ended June 30, 2007 and June
30, 2006 were  pre-approved in accordance with policies of our Audit  Committee.
The Audit  Committee  has approved the  engagement  of Philip Vogel & Co., PC to
perform auditing services for the current fiscal year ending June 30, 2008.








                                       45
<PAGE>





                                   SIGNATURES

     In  accordance  with  the  Section  13 or 15(d) of the  exchange  act,  the
registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized, on the 28th day of September, 2007.


                                                   CUBIC ENERGY, INC.


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


                                                   By:  /s/ Scott D. Guffey
                                                        ------------------------
                                                        Scott D. Guffey
                                                        Chief Financial Officer

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

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

/s/ Calvin A. Wallen, III     President, Chief Executive      September 28, 2007
--------------------------
Calvin A. Wallen, III         Officer and Director

/s/ Scott D. Guffey           Chief Financial Officer         September 28, 2007
--------------------------
Scott D. Guffey               (principal accounting
                              officer)
/s/ Jon Stuart Ross           Secretary and Director          September 28, 2007
--------------------------
Jon Stuart Ross

/s/ Gene Howard               Director                        September 28, 2007
--------------------------
Gene Howard

/s/ Herbert A. Bayer          Director                        September 28, 2007
--------------------------
Herbert A. Bayer

/s/ Bob Clements              Director                        September 28, 2007
--------------------------
Bob Clements




<PAGE>


                               CUBIC ENERGY, INC.

                              FINANCIAL STATEMENTS
                                       and
                          INDEPENDENT AUDITORS' REPORT

                                  JUNE 30, 2007




                                 C O N T E N T S

                                                                         Page

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

Financial Statements:

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

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

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

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

Notes to Financial Statements.............................................F6-30
  Note A- Background and general..........................................F6
  Note B - Significant accounting policies................................F6-16
  Note C - Stockholders' equity...........................................F17-19
  Note D - Loss per common share..........................................F20
  Note E - Long-term debt.................................................F20-22
  Note F - Related party transactions.....................................F22-23
  Note G - Income taxes...................................................F24-25
  Note H - Commitments and contingencies..................................F25-26
  Note I - Cost of oil and gas properties.................................F26-27
  Note J - Oil and gas reserves information (unaudited)...................F28-29
  Note K - Subsequent events..............................................F30




<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,  2007 and 2006,  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,  2007.   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, 2007 and 2006, and the results of its operations and its cash flows for each
of the three  years in the  period  ended  June 30,  2007,  in  conformity  with
accounting principles generally accepted in the United States of America.



                                                    PHILIP VOGEL & CO. PC




                                                    Certified Public Accountants

Dallas, Texas

September 26, 2007









                                      F-1
<PAGE>
<TABLE>
<CAPTION>


                               CUBIC ENERGY, INC.

                                 BALANCE SHEETS
                             JUNE 30, 2007 AND 2006


                                                                       2007            2006
                                                                  ------------    ------------
<S>                                                               <C>             <C>

Assets
Current assets:
     Cash and cash equivalents                                    $  3,122,273    $    259,157
     Accounts receivable - trade                                       218,874          41,680
     Prepaid drilling costs                                            721,136         264,223
     Prepaid expenses                                                  231,232         243,100
                                                                  ------------    ------------
            Total current assets                                     4,293,515         808,160
Property and equipment (at cost):
     Oil and gas properties, full cost method:
         Proved properties (including wells and related
            equipment and facilities)                                8,836,790       6,679,730
         Unproven properties                                         6,827,341       6,780,530
     Office and other equipment                                         12,886           7,876
                                                                  ------------    ------------
                                                                    15,677,017      13,468,136
Less accumulated depreciation, depletion and amortization            2,011,015       1,648,581
                                                                  ------------    ------------
            Property and equipment, net                             13,666,002      11,819,555
Other assets:
     Deferred loan costs - net                                         148,724         318,999
     Restricted cash                                                      --           401,723
     Other                                                                --            25,000
                                                                  ------------    ------------
            Total other assets                                         148,724         745,722
                                                                  ------------    ------------
                                                                  $ 18,108,241    $ 13,373,437
                                                                  ============    ============
Liabilities and stockholders' equity
Current liabilities:
     Current portion of long term debt                            $       --      $    500,000
     Accounts payable and accrued expenses                              51,664         165,628
     Due to affiliates                                               1,635,055       1,499,762
                                                                  ------------    ------------
                                                                  ------------    ------------
            Total current liabilities                                1,686,719       2,165,390
Long-term liabilities:
     Long-term debt, net of discounts                                7,626,739       3,854,641
     Note payable to affiliate                                            --         1,300,000
                                                                  ------------    ------------
            Total long-term liabilities                              7,626,739       5,154,641
Commitments and contingencies (Note H)                                    --              --
Stockholders' equity:
Preferred stock - $.01 par value, authorized 10,000,000 shares,
     issued none                                                          --              --
Common stock - $.05 par value, authorized 100,000,000 shares,
     issued 55,840,896 in 2007 and 42,450,768 shares in 2006         2,792,046       2,122,540
Additional paid-in capital                                          25,325,429      17,452,784
Accumulated deficit                                                (19,322,692)    (13,521,918)
                                                                  ------------    ------------
            Stockholders' equity                                     8,794,783       6,053,406
                                                                  ------------    ------------
                                                                  $ 18,108,241    $ 13,373,437
                                                                  ============    ============
</TABLE>


        The accompanying notes are an integral part of these statements.


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


                               CUBIC ENERGY, INC.

                             STATEMENT OF OPERATIONS
                FOR THE YEARS ENDED JUNE 30, 2007, 2006, AND 2005



                                                         2007            2006            2005
                                                    ------------    ------------    ------------
<S>                                                 <C>             <C>             <C>

Revenues:
     Oil and gas sales                              $    583,416    $    508,925    $    469,441
                                                    ------------    ------------    ------------
         Total revenues                             $    583,416    $    508,925    $    469,441
Costs and expenses:
     Oil and gas production, operating and
         development costs                               481,145         338,329         273,074
     Selling, general and administrative expenses      1,325,192       1,400,482         394,827
     Depreciation, depletion and amortization            362,434         179,237         364,496
     Impairment loss on oil and gas properties         1,790,882            --              --
                                                    ------------    ------------    ------------
         Total costs and expenses                      3,959,653       1,918,048       1,032,397
                                                    ------------    ------------    ------------
            Operating income (loss)                   (3,376,237)     (1,409,123)       (562,956)
                                                    ------------    ------------    ------------
Non-operating income (expense):
     Other income                                         38,037           6,402            --
     Interest expense                                 (1,278,721)       (638,800)       (193,313)
     Amortization of loan costs                         (100,966)        (67,199)        (28,257)
                                                    ------------    ------------    ------------
         Total non-operating income (expense)         (1,341,650)       (699,597)       (221,570)
Loss on debt extinguishment                           (1,082,887)       (660,330)           --
                                                    ------------    ------------    ------------
Loss from operations before income taxes              (5,800,774)     (2,769,050)       (784,526)
Provision for income taxes                                  --              --              --
                                                    ------------    ------------    ------------
Net loss                                            $ (5,800,774)   $ (2,769,050)   $   (784,526)
                                                    ============    ============    ============
Net loss per common share - basic and diluted       $      (0.12)   $      (0.07)   $      (0.02)
                                                    ============    ============    ============
Weighted average common shares outstanding            50,338,450      38,477,353      33,112,644


</TABLE>







        The accompanying notes are an integral part of these statements.



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


                               CUBIC ENERGY, INC.

                  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                FOR THE YEARS ENDED JUNE 30, 2007, 2006, AND 2005


                                                 Common Stock
                                                 ------------           Additional        Accum-          Total
                                            Shares          Par          paid-in          ulated       stockholders'
                                          outstanding      value         capital         deficit          equity
                                         ------------   ------------   ------------    ------------    ------------
<S>                                      <C>            <C>            <C>             <C>             <C>

Balance, June 30, 2004                     31,451,826   $  1,572,592   $  8,972,467    $ (9,968,342    $    576,717
    Debt proceeds allocated to
      warrants                                   --             --          510,961            --           510,961
    Stock issued under compensation
      plan                                    155,000          7,750         71,300            --            79,050
    Stock issued under convertible
      debenture agreements                  1,410,000         70,500        406,006            --           476,506
    Stock issued in payment of
      interest obligations                    145,137          7,258        118,181            --           125,439
    Stock issued for acquisition of
      property interests                    2,000,000        100,000      1,700,000            --         1,800,000
    Net loss, year ended June 30, 2005           --             --             --          (784,526)       (784,526)
                                         ------------   ------------   ------------    ------------    ------------
Balance, June 30, 2005                     35,161,963   $  1,758,100   $ 11,778,915    $(10,752,868    $  2,784,147
    Stock issued for acquisition of
      property interests                    2,500,000        125,000      1,175,000            --         1,300,000
    Stock issued under compensation
      plan                                  1,169,000         58,450        911,320            --           969,770
    Stock issued for working capital        2,679,000        133,950      1,786,836            --         1,920,786
    Stock issued under convertible
      debenture agreements                    900,000         45,000        354,626            --           399,626
    Warrants issued for debt costs               --             --          208,333            --           208,333
    Debt proceeds allocated to
      warrants                                   --             --        1,203,752            --         1,203,752
    Stock issued in payment of
      interest obligations                     40,805          2,040         34,002            --            36,042
    Net loss, year ended June 30, 2006           --             --             --        (2,769,050)     (2,769,050)
                                         ------------   ------------   ------------    ------------    ------------
Balance, June 30, 2006                     42,450,768   $  2,122,540   $ 17,452,784    $(13,521,918    $  6,053,406
    Stock issued under compensation
      plan                                    542,000         27,100        406,500            --           433,600
    Stock issued for working capital       10,880,000        544,000      5,496,000            --         6,040,000
    Stock issued for placement fee            150,000          7,500         (7,500)           --              --
    Stock issued for warrant exercise       1,818,128         90,906        726,594            --           817,500
    Debt proceeds allocated to
      warrants                                   --             --        1,251,051            --         1,251,051
    Net loss, year ended June 30, 2007           --             --             --        (5,800,774)     (5,800,774)
                                         ------------   ------------   ------------    ------------    ------------
Balance, June 30, 2007                     55,840,896   $  2,792,046   $ 25,325,429    $(19,322,692    $  8,794,783
                                         ============   ============   ============    ============    ============

</TABLE>

        The accompanying notes are an integral part of these statements.


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

                               CUBIC ENERGY, INC.

                            STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED JUNE 30, 2007, 2006, AND 2005




                                                              2007           2006           2005
                                                          -----------    -----------    -----------
<S>                                                       <C>            <C>            <C>

Cash flows from operating activities:
Net (loss)                                                $(5,800,774)   $(2,769,050)   $  (784,526)
Adjustments to reconcile net (loss) to cash provided
     (used) by operating activities:
         Depreciation, depletion and amortization             545,261        465,519        460,509
         Impairment loss                                    1,790,882           --             --
         Stock issued for interest                               --           36,042        125,440
         Stock issued for compensation                        489,900        726,670         79,050
         Write off deferred loan costs                        318,999         99,203           --
         Write off note payable discount                    1,145,359        237,931           --
         Change in assets and liabilities:
            (Increase) decrease in accounts receivable       (177,194)        (7,326)        45,826
            (Increase) decrease in prepaid expenses           (44,432)          --             --
            Increase (decrease) in loan from affiliates        43,895         92,771          4,119
            Increase (decrease) in accounts payable
                and accrued liabilities                      (113,964)       154,367       (115,503)
                                                          -----------    -----------    -----------
     Net cash provided (used) by operating activities      (1,802,068)      (963,873)      (185,085)
                                                          -----------    -----------    -----------
Cash flows from investing activities:
Acquisition and development of oil and gas properties      (4,016,503)    (4,409,415)    (1,813,946)
Purchase of office equipment                                   (5,010)        (3,003)        (3,963)
Advances on development costs                                (456,913)        39,443       (303,666)
Cash restricted by debt                                       401,723       (401,723)          --
Increase in other assets                                       25,000        (25,000)          --
                                                          -----------    -----------    -----------
     Net cash provided (used) by investing activities      (4,051,703)    (4,799,698)    (2,121,575)
                                                          -----------    -----------    -----------
Cash flows from financing activities:
Issuance of debentures and warrants                         9,000,000      5,500,000      2,635,000
Issuance of common stock, net                               6,857,500      2,020,786           --
Repayment of debentures                                    (5,500,000)    (1,480,000)          --
Payment of note payable to affiliate                       (1,300,000)          --             --
Loan costs incurred and other                                (240,613)      (275,311)      (264,300)
Repayment of advances                                        (100,000)          --             --
                                                          -----------    -----------    -----------
     Net cash provided (used) by financing activities       8,716,887      5,765,475      2,370,700
                                                          -----------    -----------    -----------
Net increase (decrease) in cash and cash equivalents      $ 2,863,116    $     1,904    $    64,040
Cash and cash equivalents:
     Beginning of year                                        259,157        257,253        193,213
                                                          -----------    -----------    -----------
     End of year                                          $ 3,122,273    $   259,157    $   257,253
                                                          ===========    ===========    ===========
Other information:
     Interest paid                                        $ 1,342,831    $   355,607    $   125,557
     Non-cash investing and financing activities:
         Acquisition of property with stock issue         $      --      $ 1,300,000    $      --
         Acquisition of property with debt issue          $      --      $ 2,599,274    $      --

</TABLE>


        The accompanying notes are an integral part of these statements.


                                      F-5
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS

Note A - Background and general:

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

Note B - Significant accounting policies:

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

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

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

Office  and  other   equipment  are  stated  at  cost  and  depreciated  by  the
straight-line  method over  estimated  useful  lives  ranging from five to seven
years.  Depreciation and amortization of office and other equipment  amounted to
$1,524,  $1,173  and $330 for the  years  ended  June 30,  2007,  2006 and 2005,
respectively.

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

The Company has adopted the  provisions  of the Financial  Accounting  Standards
Board's (the "FASB") Statement of Financial Accounting Standards ("FAS") No. 144
("FAS No. 144"),  Accounting for the Impairment or Disposal of Long-Lived Assets
effective  for  periods  beginning  July 1, 2002,  and  thereafter.  FAS No. 144
replaces FAS No. 121, and, among other matters,  addresses financial  accounting
and reporting for the impairment or disposal of long-lived  assets.  FAS No. 144
retains  the  basic  provisions  of FAS No.  121,  but  broadens  its  scope and
establishes a single model for  long-lived  assets to be disposed of by sale. 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 below.

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.



                                      F-6
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS

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  (10%)  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.  Accordingly,  an
impairment of oil and gas  properties  charge of $1,790,882 was recorded for the
year ended June 30, 2007;  however,  an excess of the capitalized costs over the
full cost ceiling test  limitation  at June 30,  2006,  was not charged  against
earnings  for the year ended June 30, 2006 because of an increase in oil and gas
prices subsequent to year end.

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

Depletion of producing oil and gas properties amounted to $360,910, $178,064 and
$364,166 for the years ended June 30, 2007, 2006 and 2005, respectively.

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

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

In September 2005, the Emerging  Issues Task Force ("EITF")  reached a consensus
on Issue No. 05-08,  Income Tax Consequences of Issuing  Convertible Debt with a
Beneficial Conversion Feature ("EITF 05-08").  Under EITF 05-08, the issuance of
convertible  debt with a beneficial  conversion  feature  results in a temporary
difference  for purposes of applying FAS No. 109,  Accounting  for Income Taxes.
The deferred taxes recognized for the temporary difference should be recorded as
an  adjustment  to paid-in  capital.  EITF  98-05,  Accounting  for  Convertible
Securities  with  Beneficial  Conversion  Features  or  Contingently  Adjustable
Conversion  Ratios,  and EITF 00-27,  Application  of Issue No. 98-05 to Certain
Convertible Instruments, require that the non-detachable conversion feature of a
convertible  debt  security be accounted  for  separately  if it is a beneficial
conversion  feature. A beneficial  conversion feature is recognized and measured
by allocating to additional  paid-in  capital a portion of the proceeds equal to
the conversion  feature's intrinsic value. A discount on the convertible debt is
recognized for the amount that is allocated to additional  paid-in capital.  The
debt  discount  is accreted  from the date of issuance to the stated  redemption
date of the  convertible  instrument or through the earliest  conversion date if
the instrument does not have a stated  redemption  date. The U.S. Federal Income
Tax Code includes the entire amount of proceeds  received at issuance as the tax
basis of the  convertible  debt security.  The adoption of EITF 05-08 has had no
impact on the  Company's  financial  statements  because none of the  conversion
features embedded in the Company's notes payable is considered beneficial.



                                      F-7
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS

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

Oil and gas revenues
--------------------

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, 2007, 2006 and 2005 were not significant.

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

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

As discussed in Note E, there were no dilutive securities outstanding during the
years ended June 30, 2007, 2006 and 2005. The weighted  average number of common
and  common  equivalent  shares  outstanding  was  50,338,450,  38,477,353,  and
33,112,644 for the years ended June 30, 2007, 2006 and 2005, respectively.

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

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

The Company had cash balances of  approximately  $3,259,000 at June 30, 2007, in
one banking  institution  in excess of the federally  insured amount of $100,000
for each institution. This balance is before considering outstanding items.




                                      F-8
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS

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

The Company has adopted the provisions of FAS No. 130,  Reporting  Comprehensive
Income, and FAS No. 131,  Disclosure about Segments of an Enterprise and Related
Information. FAS No. 130 requires that an enterprise report, by major components
and as a single  total,  the  change in its net assets  during  the period  from
non-owner  sources.  FAS  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 FAS
No.  131 has had no impact  on the  Company's  financial  position,  results  of
operations,  cash flows, or related  disclosures since the Company's  operations
are considered to be a single segment.

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

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

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

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

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

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




                                      F-9
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS

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

The  Company has adopted the  provisions  of FAS No. 143,  Accounting  for Asset
Retirement Obligations,  effective July 1, 2002. FAS No. 143 amended FAS No. 19,
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. FAS No. 143 requires that the fair value of a
liability  for an asset  retirement  obligation  be  recognized in the period in
which it is incurred,  with the associated  asset retirement cost capitalized as
part of the related asset and allocated to expense over the asset's useful life.

This is a change from the approach taken under FAS 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 FAS No.
143 has had no significant  effect on the Company's  financial  statements since
abandonment costs for which it is responsible are not material.

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

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,  FAS 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. FAS 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 FAS
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 FAS No. 123.




                                      F-10
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS

In addition,  the Company has adopted the  provisions  of  Financial  Accounting
Standards Board  Interpretation  (FIN) 44,  Accounting for Certain  Transactions
Involving Stock  Compensation,  which became  effective July 1, 2000. FIN No. 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.

In  December  2002,  the FASB  issued FAS No. 148,  Accounting  for  Stock-Based
Compensation - Transition and Disclosure,  which amends FAS No. 123. FAS No. 148
provides  alternative  methods of transition for a voluntary  change to the fair
value based method of accounting for stock-based compensation.  In addition, FAS
No. 148  amends  the  disclosure  requirements  of FAS 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  became  effective  for  financial  reports
containing financial statements for interim periods beginning after December 15,
2002. The other  requirements  of this standard have been adopted by the Company
for periods beginning January 1, 2003.

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

Additionally,  in August 2005, the FASB issued FASB Staff  Position  ("FSP") No.
123R-1  ("FSP1"),  Classification  and  Measurement  of  Freestanding  Financial
Instruments  Originally  Issued in Exchange  for  Employee  Services  under FASB
Statement No. 123(R). In FSP1, the FASB decided to defer the requirements in FAS
No. 123 that make a freestanding financial instrument subject to the recognition
and  measurement  requirements  of other  GAAP when the rights  conveyed  by the
instrument are no longer  dependent on the holder being an employee.  In October
2005, the FASB issued FSP No. 123R-2  ("FSP2"),  Practical  Accommodation to the
Application of Grant Date as Defined in FASB Statement No. 123(R).  In FSP2, the
FASB is providing  companies with a "practical  accommodation"  when determining
the grant date of an award that is subject to the  accounting  provisions in FAS
No. 123R. In November 2005, the FASB issued FSP No. 123R-3 ("FSP3"),  Transition
Election  Related  to  Accounting  for the Tax  Effects of  Share-Based  Payment
Awards.  FSP3  provides  an  elective  alternative  method  that  establishes  a
computational  component to arrive at the beginning  balance of the  accumulated
paid-in capital pool related to employee compensation and a simplified method to
determine  the  subsequent  impact on the  accumulated  paid-in  capital pool of
employee awards that are fully vested and  outstanding  upon the adoption of FAS
No. 123R.



                                      F-11
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS

In February 2006,  the FASB issued FSP No. 123R-4  ("FSP4"),  Classification  of
Options and Similar  Instruments Issued as Employee  Compensation That Allow for
Cash Settlement upon the Occurrence of a Contingent Event,  which concludes that
a cash  settlement  feature that can be exercised  only upon the occurrence of a
contingent  event  that is  outside  the  employee's  control  does not become a
liability  until it becomes  probable  that the event will  occur.  An option or
similar  instrument  that is classified as equity,  but  subsequently  becomes a
liability because the contingent cash settlement event is probable of occurring,
shall be  accounted  for  similar to  modification  from an equity to  liability
award. To the extent that the liability exceeds the amount previously recognized
in equity,  the excess is recognized as compensation  cost. The total recognized
compensation  cost for an award with a contingent cash settlement  feature shall
at least equal the fair value of the award at the grant date. FSP4 is applicable
only for options or similar instruments issued as part of employee  compensation
arrangements.  The  guidance  in FSP1,  FSP2,  FSP3  and  FSP4 has been  applied
concurrent with our adoption of FAS No. 123R.

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

The per share weighted-average fair value of stock warrants granted to employees
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 to employees
during the fiscal years ended June 30, 2007, 2006 and 2005.

                                         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 FAS No. 123, the  Company's  net loss and loss per
share would have been reduced to the proforma amounts indicated below:



                                      F-12
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS


                                                   Year ended June 30,
                                      ------------------------------------------
                                          2007            2006            2005
                                      ------------    ------------    ----------
Net loss:
     As reported                      $ (5,800,774)   $ (2,769,050)   $(784,526)
                                      ============    ============    =========
     Proforma                         $ (5,800,774)   $ (2,769,050)   $(802,026)
                                      ============    ============    =========

Stock-based employee compensation:
     As reported                      $    489,900    $    726,670    $    --
                                      ============    ============    =========
     Proforma                         $    489,900    $    726,670    $  17,500
                                      ============    ============    =========

Basic loss per common share:
     As reported                      $      (0.12)   $      (0.07)   $   (0.02)
                                      ============    ============    =========
     Proforma                         $      (0.12)   $      (0.07)   $   (0.02)
                                      ============    ============    =========


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

In July 2002, the FASB issued FAS No. 146,  Accounting for Cost  Associated with
Exit or Disposal  Activities.  FAS No. 146 requires companies to recognize costs
associated  with exit 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.  FAS No.  146 is  effective
prospectively for exit or disposal activities initiated after December 31, 2002,
with  earlier  adoption  encouraged.  No exit or disposal  activities  have been
entered into by management.

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

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

In June 2005,  the FASB  issued FSP FAS No.  150-5  ("FAS No.  150-5"),  Issuers
Accounting  under FASB  Statement  No. 150 for  Freestanding  Warrants and Other
Similar Instruments on Shares that are Redeemable.  FAS No. 150-5 clarifies that
freestanding  warrants  and similar  instruments  on shares that are  redeemable
should be  accounted  for as  liabilities  under FAS No. 150  regardless  of the
timing of the redemption feature or price, even though the underlying shares may
be  classified  as equity.  FAS No. 150-5 is effective  for the first  reporting
period  beginning  after June 30,  2005.  Although  the Company had  outstanding
warrants as of June 30, 2007,  the shares  issued upon  exercise of the warrants
are not  redeemable;  consequently,  adoption  of FAS No.  150-5  has not had an
impact on the Company's financial position, results of operations or cash flows.




                                      F-13
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS

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

In  November  2002,  the FASB  issued  Interpretation  No.  45 ("FIN  No.  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
No. 45 clarifies  the  requirements  of FAS No. 5,  relating to the  guarantor's
accounting  for, and disclosure of, the issuance of certain types of guarantees.
This Interpretation  clarifies that a guarantor is required to recognize, at the
inception of certain types of guarantees,  a liability for the fair value of the
obligation  undertaken  in  issuing  the  guarantee,   and  requires  additional
disclosures on existing  guarantees  even if the likelihood of future  liability
under the guarantees is deemed remote. The Company has not issued any guarantees
and, therefore, the adoption of FIN No. 45 does not have a significant impact on
the Company's financial statements.

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

In  January  2003,  the  FASB  issued  Interpretation  No.  46 ("FIN  No.  46"),
Consolidation of Variable  Interest  Entities,  an Interpretation of ARB No. 51.
FIN No. 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 No. 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.

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

In May 2005, the FASB issued FAS No. 154 ("FAS No. 154"), Accounting Changes and
Error  Corrections -- A Replacement of APB Opinion No. 20 and FASB Statement No.
3. FAS No. 154 replaces APB Opinion No. 20 ("APB No. 20"),  Accounting  Changes,
and FAS No. 3 ("FAS No. 3"),  Reporting  Accounting Changes in Interim Financial
Statements,  and changes the  requirements for the accounting for, and reporting
of, a change in  accounting  principles.  FAS No. 154  applies to all  voluntary
changes  in  accounting   principles  and  changes  required  by  an  accounting
pronouncement  in the unusual instance that the  pronouncement  does not include
specific transition provisions.  Under previous guidance,  changes in accounting
principle were recognized as a cumulative effect in the net income of the period
of the change.  FAS No. 154  requires  retrospective  application  of changes in
accounting  principle,  limited to the direct  effects of the  change,  to prior
periods'  financial  statements,  unless it is impracticable to determine either
the period-specific effects or the cumulative effect of the change in accounting
principle.



                                      F-14
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS

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

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

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

Certain hybrid financial instruments
------------------------------------

In February  2006,  the FASB issued FAS No. 155 ("FAS No. 155"),  Accounting for
Certain Hybrid Financial Instruments,  which amends FAS No. 133 ("FAS No. 133"),
Accounting for  Derivative  Instruments  and Hedging  Activities and FAS No. 140
("FAS No. 140"),  Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities,  and improves the financial reporting of certain
hybrid  financial  instruments  by requiring  more  consistent  accounting  that
eliminates  exemptions and provides a means to simplify the accounting for these
instruments.  Specifically,  FAS No. 155 allows financial  instruments that have
embedded  derivatives  to be accounted for as a whole  (eliminating  the need to
bifurcate the derivative  from its host) if the holder elects to account for the
whole  instrument  on a fair  value  basis.  FAS No.  155 is  effective  for all
financial  instruments  acquired or issued  after the  beginning  of an entity's
first fiscal year that begins after  September  15,  2006.  Management  does not
expect the adoption of FAS No. 155 will have a material  impact on the Company's
financial position, results of operations or cash flows.




                                      F-15
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS

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

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

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

In  September  2006,  the  Securities  and  Exchange   Commission  issued  Staff
Accounting  Bulletin No. 108 ("SAB No. 108"),  Considering  the Effects of Prior
Year  Misstatements  when  Quantifying  Misstatements  in Current Year Financial
Statements.  SAB No.  108  was  issued  to  address  diversity  in  practice  in
quantifying financial statement  misstatements.  Current practice allows for the
evaluation of materiality on the basis of either (1) the error quantified as the
amount by which the  current  year income  statement  was  misstated  ("rollover
method") or (2) the  cumulative  error  quantified as the  cumulative  amount by
which the current year balance sheet was misstated ("iron curtain method").  The
guidance  provided in SAB No. 108 requires both methods to be used in evaluating
materiality ("dual approach").  SAB No. 108 permits companies to initially apply
its provisions either by (1) restating prior financial statements as if the dual
approach  had  always  been  used or (2)  recording  the  cumulative  effect  of
initially  applying the "dual approach" as adjustments to the carrying values of
assets  and  liabilities  as of January  1, 2006 with an  offsetting  adjustment
recorded to the opening  balance of retained  earnings.  The adoption of SAB No.
108 did not have a material impact on the Company's financial position,  results
of operations or cash flows.

In  September  2006,  the FASB  issued FAS No. 157 ("FAS No.  157"),  Fair Value
Measurements.  FAS No. 157 defines  fair  value,  establishes  a  framework  for
measuring fair value in generally accepted  accounting  principles,  and expands
disclosures about fair value measurements.  FAS No. 157 does not require any new
fair value measurements in financial statements, but standardizes its definition
and guidance in GAAP. Thus, for some entities, the application of this statement
may change current  practice.  FAS No. 157 will be effective for us beginning on
January 1, 2008. Management is currently evaluating the impact that the adoption
of this  statement may have on its financial  position,  results of  operations,
earnings per share, and cash flows.

In February 2007, the FASB issued  Statement of FAS No. 159 ("FAS No. 159"), The
Fair Value Option for Financial  Assets and Financial  Liabilities.  FAS No. 159
allows entities to choose,  at specified  election  dates,  to measure  eligible
financial  assets and liabilities at fair value that are not otherwise  required
to be measured at fair value.  If a company  elects the fair value option for an
eligible item, changes in that item's fair value in subsequent reporting periods
must  be  recognized  in  current   earnings.   FAS  No.  159  also  establishes
presentation  and disclosure  requirements  designed to draw comparison  between
entities that elect  different  measurement  attributes  for similar  assets and
liabilities.  FAS No. 159 is effective for fiscal years beginning after November
15, 2007. Early adoption is permitted subject to specific  requirements outlined
in the  Statement.  Management  is  currently  evaluating  the  effect  of  this
pronouncement on its financial statements.





                                      F-16
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS

Note C - Stockholders' equity:

The Company's authorized capital is 100,000,000 shares of $0.05 par value common
stock and 10,000,000  shares of $0.01 par value  preferred  stock.  No shares of
preferred stock were issued or outstanding at June 30, 2007 and 2006.

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

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

On or about October 1, 2004, the Company closed a Securities  Purchase Agreement
and issued  $2,635,000  in  principal  amount of 7% Senior  Secured  Convertible
Debentures   due  September  30,  2009  (the   "Debentures"),   to  a  group  of
institutional  and high net worth  investors.  The Company had the option to pay
the interest on the  Debentures  in common stock.  The  investors  also received
warrants to  purchase an  additional  2,635,000  shares of common  stock with an
exercise  price of $1.00 per share.  Pursuant  to the  anti-dilution  adjustment
provisions  applicable to such warrants,  the exercise  price  applicable to the
1,000,000 of such warrants that have not been  exercised is currently  $0.50 per
share.  1,635,000  of the  above-referenced  warrants  had  been  exercised  and
1,000,000 remained outstanding at June 30, 2007.

The Company  allocated the proceeds  from the issuance of the  Debentures to the
warrants and the  Debentures  based on their  relative fair market values at the
date of issuance. The value assigned to the warrants of $510,961 was recorded as
an increase in additional paid in capital for the year ended June 30, 2006.

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

On December 16, 2005, the Company entered into a Securities  Purchase  Agreement
and  issued  2,500,000  common  shares at a price of $0.80 per share and  issued
warrants, with five year expirations, for the purchase of up to 1,000,000 shares
of Company common stock at an exercise price of $1.00 per share. The proceeds of
the offering were used for exploratory drilling and working capital. None of the
above-referenced  warrants had been  exercised and all remained  outstanding  at
June 30, 2007.

On February 6, 2006, Cubic entered into a Credit Agreement with Petro Capital V,
L.P. ("Petro  Capital")  pursuant to which Petro Capital advanced to the Company
$5,500,000.  In  connection  with the funding  under the Credit  Agreement,  the
Company  issued to Petro Capital and Petro Capital  Securities,  LLC,  warrants,
with  five-year  expirations,  for the purchase of up to  1,833,334  and 250,000
shares, respectively,



                                      F-17
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS

of Company common stock at an exercise price of $1.00 per share. Pursuant to the
anti-dilution  adjustment provisions  applicable to such warrants,  the exercise
price applicable to all such warrants is currently  $0.9842 per share. On May 8,
2007,  300,000  warrants were exercised  utilizing a cashless  exercise price of
$1.35 per share and 81,289  shares were issued;  and, on May 15,  2007,  300,000
warrants were exercised  utilizing a cashless  exercise price of $1.49 per share
and 101,839  shares were  issued.  1,233,334  of the  above-referenced  warrants
issued to Petro  Capital  remained  outstanding  at June 30,  2007.  None of the
250,000 warrants issued to Petro Capital Securities, LLC have been exercised and
all remained  outstanding at June 30, 2007.  The Company  allocated the proceeds
from the  issuance of the senior debt to the  warrants and the senior debt based
on their relative fair market values at the date of issuance. The value assigned
to the warrants of $1,203,752 was recorded as an increase in additional  paid in
capital.

On July 28, 2006,  Cubic entered into and consummated  transactions  pursuant to
Subscription and Registration Rights Agreements (the "Subscription  Agreements")
with certain investors that are unaffiliated with the Company (the "Investors").
Pursuant  to  the   Subscription   Agreements,   the  Investors  paid  aggregate
consideration of $2,100,000 to the Company for 3,000,000 shares of the Company's
common stock and warrants  exercisable,  through July 31, 2011,  into  1,500,000
shares  of  common  stock at $0.70  per  share.  Pursuant  to the  anti-dilution
adjustment provisions applicable to such warrants, the exercise price applicable
to  all  such   warrants  is   currently   $0.6885   per  share.   None  of  the
above-referenced  warrants had been  exercised and all remained  outstanding  at
June 30, 2007.

On December 15, 2006, the Company  entered into  Subscription  and  Registration
Rights  Agreements  with  certain  investors.  One  of  the  investors,  William
Bruggeman (and entities  affiliated with him) was the beneficial owner, prior to
this transaction,  of approximately 23.0% of the common stock of the Company. In
this transaction,  Mr. Bruggeman (and entities affiliated with him) purchased an
aggregate of 4,288,000  shares of common stock at a purchase  price of $0.50 per
share,  or an aggregate of $2,144,000.  Mr.  Bruggeman (and entities  affiliated
with him) received warrants to purchase 2,144,000 shares of common stock with an
exercise price of $0.70 per share. Another investor, Bob Clements, a director of
the Company,  purchased  100,000  shares of common stock at a purchase  price of
$0.50 per share, or an aggregate of $50,000.  Mr. Clements  received warrants to
purchase  50,000  shares of common  stock  with an  exercise  price of $0.70 per
share. None of the above-referenced warrants had been exercised and all remained
outstanding at June 30, 2007.

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




                                      F-18
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS

During  the fiscal  year ended June 30,  2007,  the  Company  received  $817,500
relating to the exercise of 2,235,000 warrants representing  1,818,128 shares of
common stock.

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

On October 25, 2004, Cubic issued 155,000 shares of common stock to its officers
and directors pursuant to a then current Director and Officer compensation plan.
Based on a then market price of $0.51 per share,  Cubic  recorded a compensation
expense of $79,050,  which was included in general and  administrative  expenses
for the fiscal year ended June 30, 2005.

On December 29, 2005, the  shareholders  of the Company  approved the 2005 Stock
Option Plan (the "Plan") and 3,750,000 shares of common stock were reserved,  of
which  1,711,000  shares have been issued  through June 30,  2007,  as set forth
below.

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

On  January 5, 2006,  the  Company  issued  572,000  unregistered  shares to the
officers and directors of the Company pursuant to the Plan. As of such date, the
aggregate  market  value of the common stock  granted was $486,200  based on the
last sale price on the OTC Bulletin  Board of the Company's  common stock.  Such
amount was  amortized  to  compensation  expense  on a  quarterly  basis  during
calendar year 2006.  Accordingly,  $243,100 was recorded as compensation expense
and included in general and administrative expenses for each of the fiscal years
ended June 30, 2007 and 2006.

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




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

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS

Note D - Loss per common share:
                                            2007                 2006                 2005
                                        -------------       -------------       -------------
<S>                                     <C>                 <C>                 <C>

Net loss attributable to stockholders   $ (5,800,774)       $ (2,769,050)       $   (784,526)
Weighted average number of shares of
     common stock                         50,338,450          38,477,353          33,112,644
Income (loss) per common share          $      (0.12)       $      (0.07)       $      (0.02)

</TABLE>

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

Note E - Long-term debt:

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

On or about October 1, 2004, the Company closed a Securities  Purchase Agreement
and issued  $2,635,000  in  principal  amount of 7% Senior  Secured  Convertible
Debentures   due  September  30,  2009  (the   "Debentures"),   to  a  group  of
institutional  and high net worth investors.  The Debentures were secured by the
collateral  set forth in the Deed of Trust,  Security  Agreement,  Assignment of
Production and Fixture Filing attached to a Form 8-K filed October 12, 2004. The
Debentures  paid an annual  interest  rate of 7% on a  quarterly  basis and were
convertible  into shares of our common stock at a price of $0.50 per share.  The
Company had the option to pay the interest on the  Debentures  in common  stock.
The proceeds of the Debentures were used for the acquisition of interests in oil
and gas  properties.  The  investors  also  received  warrants  to  purchase  an
additional  2,635,000 shares of common stock with an exercise price of $1.00 per
share.  During  the  fiscal  year  ended  June 30,  2005,  $705,000  of debt was
converted  into 1,410,000  shares of common stock,  and 145,137 shares of common
stock were issued in lieu of cash to pay interest.  During the fiscal year ended
June 30, 2006,  $450,000 of debt was  converted  into  900,000  shares of common
stock,  and 40,805  shares of common  stock  were  issued in lieu of cash to pay
interest.

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

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




                                      F-20
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS

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

On February 6, 2006, Cubic entered into a Credit Agreement with Petro Capital V,
L.P.  (Petro  Capital)  pursuant to which Petro Capital  advanced to the Company
$5,500,000.  The  indebtedness  bore interest at a rate of 12.5% per annum,  was
scheduled to mature on February 6, 2009, and was secured by substantially all of
the assets of the Company.  $1,800,000  of the funded  amount was used to retire
the 7% Senior Secured  Convertible  Debentures that were due September 30, 2009,
described above. In connection with the funding under the Credit Agreement,  the
Company  issued to Petro Capital and Petro Capital  Securities,  LLC,  warrants,
with  five-year  expirations,  for the purchase of up to  1,833,334  and 250,000
shares, respectively,  of Company common stock at an exercise price of $1.00 per
share.

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

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

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

March 2007 debt issue
---------------------

On March 5, 2007,  Cubic entered into a Credit Agreement with Wells Fargo Energy
Capital,  Inc.  ("Wells  Fargo")  providing for a revolving  credit  facility of
$20,000,000 and a convertible  term loan of $5,000,000 (the "Credit  Facility").
The  indebtedness  bears interest at a fluctuating  rate equal to the sum of the
Wells Fargo Bank prime rate plus two percent (2%) per annum, matures on March 1,
2010,  and  is  secured  by  substantially  all of the  assets  of the  Company.
Approximately  $5,000,000 of the funded  amount was used,  together with cash on
hand, to retire the Company's  previously  outstanding  senior debt that was due
February 6, 2009, described above.

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

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




                                      F-21
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS

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

Cubic  incurred loan costs of $240,613 on the issuance of the debt and warrants.
The amount  allocable to the debt of $166,590 has been  capitalized and is being
amortized  over the term of the debt.  Amortization  for the year ended June 30,
2007 was  $17,865.  Amortization  for the years ending June 30, 2008 and 2009 is
expected to be $55,886, and $55,733, respectively.

Note F - Related party transactions:

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

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

On  December 1, 1997,  as renewed  and  revised on January 1, 2002,  the Company
entered  into a  contract  with  Tauren  to  provide  the  necessary  technical,
administrative and management  expertise needed to conduct its business.  Tauren
also  paid  various  organization  costs  and  consulting  fees on behalf of the
Company.  The monthly amount charged to the Company was based on actual costs of
materials  and labor hours of Tauren that were used pursuant to the terms of the
agreement.  The agreement was terminated effective January 1, 2006, except as to
the office  sharing  provisions,  which were extended to June 30, 2006 and since
continue on a month to month  basis.  The Company now has 11  employees  and its
offices are  subleased  from Tauren.  During  fiscal 2007,  the  Company's  only
expense under the office sharing  arrangement was the rent sublease.  Charges to
the Company  under the  contracts  and  subsequent  arrangements  were  $26,748,
$29,285  and  $35,322  for the  years  ended  June 30,  2007,  2006,  and  2005,
respectively.

An affiliated company, Tauren, owns a working interest in the wells in which the
Company owns a working  interest.  As of June 30, 2007,  the Company owed Tauren
$3,715 for miscellaneous  general and administrative  expenses paid by Tauren on
the  Company's  behalf;  and,  as of June 30,  2006,  the  Company  owed  Tauren
$100,000,  for advances for payments of joint interest leasehold and development
costs.  As of June 30,  2007 and  2006,  The  Company  was owed by Tauren $0 and
$12,685,  respectively,  for miscellaneous  general and administrative  expenses
paid by the Company on Tauren's behalf.



                                      F-22
<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, 2007 and 2006,  the  Company  owed Fossil  $1,659,786  and  $1,196,203,
respectively,  for drilling costs and lease and operating expenses, and was owed
by Fossil $28,446 and $88,477, respectively, for oil and gas sales.

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

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

On February 6, 2006, the Company  entered into a Purchase  Agreement with Tauren
Exploration,  Inc.,  an entity  wholly owned by Calvin Wallen III, the Company's
Chairman of the Board and Chief Executive Officer,  with respect to the purchase
by the  Company of certain  Cotton  Valley  leasehold  interests  (approximately
11,000  gross acres;  5,000 net acres) held by Tauren.  Pursuant to the Purchase
Agreement,   the  Company  acquired  from  Tauren  a  35%  working  interest  in
approximately  2,400 acres and a 49% working  interest  in  approximately  8,500
acres located in DeSoto and Caddo Parishes,  Louisiana, along with an associated
Area of Mutual  Interest  ("AMI") and the right to acquire at "cost" (as defined
in the  Purchase  Agreement) a seventy  percent  (70%)  working  interest in all
additional  mineral  leases  obtained by Tauren in the AMI, in exchange  for (a)
$3,500,000 in cash, (b) 2,500,000  unregistered  shares of Company common stock,
(c) an unsecured 12.5%  promissory note in the amount of $1,300,000,  which note
was  convertible  into Company  common stock at a conversion  price of $0.80 per
share (the  "Tauren  Note"),  and (d) a  drilling  credit of  $2,100,000.  Total
interest  paid to Tauren  under  terms of the Tauren  Note was $96,610 in fiscal
2007  and  $64,110  in  fiscal  2006.  The  consideration  described  above  was
determined based upon negotiations between Tauren and a Special Committee of the
Company's  directors,  excluding Mr. Wallen.  The Special Committee  obtained an
opinion from its  independent  financial  advisor with respect to the  fairness,
from a financial point of view, to the public  stockholders  of the Company,  of
such transactions.

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

On February 2, 2007, the Tauren Note was retired  pursuant to a provision in the
note that required payment from the proceeds of an equity  offering.  The equity
offering that occurred in December  2006 (see "Note C -  Stockholders'  Equity")
was sufficient to facilitate such repayment.




                                      F-23
<PAGE>
<TABLE>
<CAPTION>
                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS

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,  2007 and 2006,  the  Company  believed  it was more
likely than not that future tax benefits from net operating  loss  carryforwards
and other  deferred tax assets would not be  realizable  through  generation  of
future taxable income; therefore, they were fully reserved.

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

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


The following table  summarizes the difference  between the actual tax provision
and the amounts  obtained by applying the  statutory  tax rates to the income or
loss before income taxes for the years ended June 30, 2007, 2006 and 2005:


                                                     2007           2006           2005
                                                 -----------    -----------    -----------
<S>                                              <C>            <C>            <C>
Tax (benefit) calculated at statutory rate       $(1,450,000)   $  (692,000)   $  (197,000)
Losses not providing tax benefits                  1,450,000        692,000        197,000
                                                 -----------    -----------    -----------
Current federal income tax provision (benefit)   $      --      $      --      $      --
                                                 ===========    ===========    ===========
Change in valuation allowance                    $(2,156,800)   $ 1,346,200    $   137,800
                                                 ===========    ===========    ===========
</TABLE>



                                      F-24
<PAGE>


                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS

As of June 30,  2007,  the  Company  had net  operating  loss  carryforwards  of
approximately $16,034,600,  which are available to reduce future taxable income.
These carryforwards expire as follows:

                                         Net operating
                           Year              losses
                         ------          ------------
                          2009               $ 5,700
                          2011               431,100
                          2012               205,100
                          2013               639,800
                          2019               845,600
                          2020               297,100
                          2021               172,100
                          2022                15,400
                          2023               571,900
                          2024                37,000
                          2025             1,321,800
                          2026             5,095,600
                          2027             6,413,700
                                         ------------
                                        $ 16,051,900
                                         ============


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.




                                      F-25
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS

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

The Company  had filed suit in the 29th  Judicial  District  Court in Palo Pinto
County,  Texas, styled "Roseland Oil and Gas, Inc. v. William Vandever,  et al,"
bringing  suit against  Clifford  Kees,  William  Vandever and various  persons,
seeking a judicial  determination that all grants of preferential  rights in the
Reagan Section 11 and 12 are void. This lawsuit was filed on April 26, 1999. All
section 11 preferential  rights were returned to the Company on or about January
2002.  However,  Clifford  Kees was to retain his 1% override  interest in these
Reagan  Lease  Sections.  Clifford  Kees  then  moved to  trial on the  claim of
attorney fees owed to him for the  prosecution  of this  lawsuit.  The trial was
heard on  September  25,  2002,  with Kees  requesting  in excess of $200,000 in
attorney  fees and costs.  In June  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 against  the Company for  approximately  $112,000.
The Company appealed the judgment. On or about, September 17, 2004, the Eastland
Court of Appeals  issued its ruling,  modifying  the amounts owed by the Company
under the judgment to $59,000.  The Company was been denied a  re-hearing  as to
clarification  and a further  reduction  of the  judgment.  The Company  filed a
petition  for review  with the Texas  Supreme  Court that was denied on or about
January 21, 2005.

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

Note 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, 2007, 2006
and 2005 were as follows:

                            2007        2006          2005
                        ----------   ----------   ----------
Property acquisitions   $  481,229   $6,176,766   $2,880,000
Exploration              2,759,794      808,678      733,946
Development                966,879    1,323,243         --
                        ----------   ----------   ----------
                        $4,207,902   $8,308,687   $3,613,946
                        ==========   ==========   ==========






                                      F-26
<PAGE>
<TABLE>
<CAPTION>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS

Capitalized costs
-----------------

The aggregate  amounts of  capitalized  costs  relating to oil and gas producing
activities and the aggregate  amounts of the related  accumulated  depreciation,
depletion, and amortization at June 30, 2007, 2006 and 2005 were as follows:

                                                 2007          2006          2005
                                             -----------   -----------   -----------
<S>                                          <C>           <C>            <C>

Proved properties                            $10,627,672   $ 6,679,730   $ 4,098,571
Unproved properties                            6,827,341     6,780,529     1,053,000
                                             -----------   -----------   -----------
                                              17,455,013    13,460,259     5,151,571
Less: Accumulated depreciation, depletion
     and amortization                          2,007,080     1,646,170     1,468,106
                                             -----------   -----------   -----------
         Total properties                     15,447,933    11,814,089     3,683,465
Less: impairment of oil and gas properties
     due to full cost ceiling test             1,790,882          --            --
                                             -----------   -----------   -----------
         Net properties                      $13,657,051   $11,814,089   $ 3,683,465
                                             ===========   ===========   ===========
</TABLE>
<TABLE>
<CAPTION>


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

The results of operations  from oil and gas producing  activities  for the years
ended June 30, 2007, 2006 and 2005 were as follows:


                                                    2007         2006         2005
                                                 ---------    ---------    ---------
<S>                                              <C>          <C>          <C>

Revenues:
     Revenues                                    $ 583,416    $ 508,925    $ 469,441
     Preferred return                                 --           --           --
                                                 ---------    ---------    ---------
                                                   583,416      508,925      469,441
Expenses (excluding G&A and interest expense):
     Production and development costs              481,145      338,329      273,074
     Depreciation, depletion and amortization      360,910      178,064      364,496
                                                 ---------    ---------    ---------
                                                   842,055      516,393      637,570
                                                 ---------    ---------    ---------
Results before income taxes                       (258,639)      (7,468)    (168,129)
Provision for income taxes                            --           --           --
                                                 ---------    ---------    ---------
Results of operations (excluding corporate
     overhead and interest expense)              $(258,639)   $  (7,468)   $(168,129)
                                                 =========    =========    =========

</TABLE>



                                      F-27
<PAGE>
<TABLE>
<CAPTION>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS

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

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

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

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

The following unaudited table sets forth proved oil and gas reserves, all within
the United  States,  at June 30, 2007,  2006 and 2005  together with the changes
therein:

                                                        Natural Gas (Mcf)
                                             --------------------------------------
                                                2007          2006          2005
                                             ----------    ----------    ----------
<S>                                          <C>           <C>           <C>

Proved developed and undeveloped reserves:
     Beginning of year                        2,796,900       509,625       311,098
     Revisions of previous estimates         (1,188,985)      226,730          --
     Purchases of reserves in place                --            --         269,308
     Extensions and discoveries               2,704,548     2,114,061          --
     Less: Production                           (70,412)      (53,516)      (70,781)
     Disposals of reserves in place                --            --            --
                                             ----------    ----------    ----------
End of year                                   4,242,051     2,796,900       509,625
                                             ==========    ==========    ==========


                                                   Oil and condensate (Bbls)
                                             --------------------------------------
                                                2007          2006          2005
Proved developed and undeveloped reserves:   ----------    ----------    ----------
     Beginning of year                            8,863         1,048          --
     Revisions of previous estimates             (2,437)        1,029         1,194
     Purchases of reserves in place                --            --              14
     Extensions and discoveries                   7,371         7,833           346
     Less: Production                              (967)       (1,047)         (506)
     Disposals of reserves in place                --            --            --
                                             ----------    ----------    ----------
End of year                                      12,830         8,863         1,048
                                             ==========    ==========    ==========

</TABLE>




                                      F-28
<PAGE>
<TABLE>
<CAPTION>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS

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

The standardized  measure of discounted  future net cash flows was calculated by
applying  current  year-end prices,  considering  fixed and  determinable  price
changes  only to the extent  provided  by  contractual  arrangements  or law, to
estimated future production,  less future  expenditures (based on current costs)
to be incurred in developing proved undeveloped and proved producing oil and gas
reserves,  and future  income taxes.  The  resulting  future net cash flows were
discounted using a rate of 10% 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 a 10%
discount rate, and is not necessarily  appropriate  for  determining  fair value
(Table 2).

The following is the estimated  standardized  measure relating to proved oil and
gas reserves at June 30, 2007, 2006 and 2005:

Table 1                                          2007            2006           2005
-------                                     ------------    ------------    ------------
<S>                                         <C>             <C>             <C>

Future cash flows                           $ 30,768,518    $ 16,139,781    $  3,443,400
Future production costs                       (5,601,924)     (2,975,063)     (1,303,300)
Future development costs                     (11,832,100)     (3,453,350)        (23,900)
Future severance tax expense                  (1,713,562)       (819,785)       (213,900)
Future income taxes                                 --              --              --
                                            ------------    ------------    ------------
Future net cash flows                       $ 11,620,932    $  8,891,583    $  1,902,300
Ten percent annual discount for estimated
     timing of net cash flows                 (4,791,222)     (2,444,198)       (831,200)
                                            ------------    ------------    ------------
Standardized measure of
     discounted future net cash flows       $  6,829,710    $  6,447,385    $  1,071,100
                                            ============    ============    ============



The following is an analysis of changes in the estimated standardized measure of
proved reserves during the years ended June 30, 2007, 2006 and 2005:

 Table 2                                          2007           2006           2005
-------                                       -----------    -----------    -----------

Changes from sale of oil and gas produced    $  (102,271)   $  (170,596)   $  (196,368)
Net changes in prices and production costs     1,474,742         18,591       (165,199)
Extensions and discoveries                     4,073,195      4,288,891        493,500
Revision of previous quantity estimates       (4,559,850)       508,762        (42,290)
Accretion of discounts                           644,739        107,110         73,191
Net change in income taxes                          --             --             --
Purchases of reserves in place                      --             --          197,300
Disposals of reserves in place                      --             --             --
Development costs incurred that reduced
     future development costs                   (339,500)       (11,300)          --
Changes in future development costs              324,717         69,210           --
Other                                         (1,133,447)       565,617        (20,947)
                                             -----------    -----------    -----------
Change in standardized measure               $   382,325    $ 5,376,285    $   339,187
                                             ===========    ===========    ===========

</TABLE>



                                      F-29
<PAGE>

                               CUBIC ENERGY, INC.

                          NOTES TO FINANCIAL STATEMENTS

Note K - Subsequent events:

On August 27, 2007, two warrant holders of the Company exercised warrants for an
aggregate  of 200,000  shares of Company  common  stock,  through the payment of
$100,000 to the  Company.  On  September  17,  2007,  one warrant  holder of the
Company  exercised  warrants for 25,000 shares of Company common stock,  through
the payment of $17,500 to the Company.

On September 7, 2007,  Wells Fargo  increased  the Company`s  borrowing  base to
$8,600,000  under the revolving line of credit  component of the Credit Facility
in order to fund the drilling of new wells.