U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-KSB



(Mark one)



/ X / Annual report under section 13 or 15(d) of the Securities Exchange Act of 1934

For the Year Ended April 30, 2006



or



/ / Transition report under section 13 or 15(d) of the Securities Exchange Act of 1934



SONORAN ENERGY, INC.

(Name of Small Business Issuer in its Charter)





WASHINGTON                                                                                                                                  13-4093341

(State of incorporation)                                                                                                               (IRS Employer Identification No.)





3100 W. Ray Road, Ste 130, Chandler, AZ  85226

(Address of Principal Executive Offices) (Zip Code)







480-963-8800

(Issuer's Telephone Number)



Securities registered under Section 12(g) of the Act:



COMMON STOCK, NO PAR VALUE PER SHARE

(Title of Class)



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



State issuer's revenues for its most recent fiscal year: $1,938,234



The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and ask price of such common equity, as of July 31, 2006 was $26,017,782.



APPLICABLE ONLY TO CORPORATE REGISTRANTS



The number of shares outstanding of the issuer's Common Stock, no par value, as of July 31 2006, was 83,928,330.



Transitional Small Business Disclosure Format (check one):

YES / / NO /X/



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SONORAN ENERGY, INC.

2006 FORM 10-KSB ANNUAL REPORT



Table of Contents





Part
I



Item 1.  Description of Business

Item 2.  Description of Property

Item 3.  Legal Proceedings

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



Part
II



Item 5.  Market for Common Equity and Related Shareholder Matters

Item 6.  Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 7.  Financial Statements

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

Item 8A.  Controls and Procedures

Item 8B. Other Information



Part
III



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

Item 10.  Executive Compensation

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

Item 12.  Certain Relationships and Related Transactions

Item 13.  Exhibits and Reports on Form 8-K

Item 14.  Principal Accountant Fees and Services



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Cautionary Statement

This report on Form 10-K and the documents or information incorporated by reference herein contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements include, among others, the following:



·

our growth strategies;

·

anticipated trends in our business;

·

our ability to make or integrate acquisitions;

·

our liquidity and ability to finance our exploration, acquisition and development strategies;

·

market conditions in the oil and gas industry

·

the timing, cost and procedure for proposed acquisitions;

·

the impact of government regulation;

·

estimates regarding future net revenues from oil and natural gas reserves and the present value thereof;

·

planned capital expenditures (including the amount and nature thereof);

·

increases in oil and gas production;

·

the number of wells we anticipate drilling in the future;

·

estimates, plans and projections relating to acquired properties;

·

the number of potential drilling locations; and

·

our financial position, business strategy and other plans and objectives for future operations.



We identify forward-looking statements by use of terms such as may, will, expect, anticipate, estimate, hope, plan, believe, predict, envision, intend, will, continue, potential, should, confident, could and similar words and expressions, although some forward-looking statements may be expressed differently. You should be aware that our actual results could differ materially from those contained in the forward-looking statements. You should consider carefully the statements under the Risk Factors section of this report and other sections of this report which describe factors that could cause our actual results to differ from those set forth in the forward-looking statements, and the following factors:



·

the possibility that our acquisitions may involve unexpected costs;

·

the volatility in commodity prices for oil and gas;

·

the accuracy of internally estimated proved reserves;

·

the presence or recoverability of estimated oil and gas reserves;

·

the ability to replace oil and gas reserves;

·

the availability and costs of drilling rigs and other oilfield services;

·

environmental risks;

·

exploration and development risks;

·

competition;

·

the inability to realize expected value from acquisitions;

·

the ability of our management team to execute its plans to meet its goals;

·

other economic, competitive, governmental, legislative, regulatory, geopolitical and technological factors that may negatively impact our businesses, operations and pricing.



Forward-looking statements speak only as of the date of this report or the date of any document incorporated by reference in this report. Except to the extent required by applicable law or regulation, we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.





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PART I



ITEM 1 - DESCRIPTION OF BUSINESS



GENERAL BUSINESS DESCRIPTION



Overview



Sonoran Energy, Inc. (the "Company", "Sonoran" and sometimes "we," "us," "our" and derivatives of such words), formerly named Showstar Online.com Inc., was incorporated on July 14, 1995 in the State of Colorado as Cerotex Holdings, Inc. The stockholders of the Company approved a change in corporate domicile to Washington State, which became effective on September 15, 2000. Prior to June 2002 the company had developed software and an art site on the Internet. The project had to be discontinued due to lack of funding. On June 3, 2002 the Company changed its name to Sonoran Energy, Inc. and after a new Board and Management team took over the Company in 2004, began the transition into an International independent oil and gas exploration and production company, developing and producing crude oil and natural gas. Sonoran's portfolio during the reporting period was comprised of assets located in Louisiana and Texas. Our operational focus is on property enhancement through developmental and redevelopment drilling, operating cost reduction, low-to-moderate risk exploration, asset redeployment and acquisitions of properties in the right circumstances.

The principle assets of the company consists of proven and unproven oil and gas properties in Louisiana, East and West Texas, along with the related Oil and Gas production equipment necessary to produce the properties.



Business Strategy



We are an independent oil and gas company engaged in the acquisition, development, production and exploration of oil and gas properties located in North America. Our primary objective is to increase shareholder value. To accomplish this objective, our business strategy is focused on the following:



·

Pursuit of Strategic Acquisitions.We continually review opportunities to acquire producing properties, leasehold acreage and drilling prospects. We seek negotiated transactions to acquire operational control of properties that we believe have significant exploitation and exploration potential. Our strategy includes a significant focus on increasing our holdings in fields and basins in which we already own an interest.



·

Further Exploitation of Existing Properties.We seek to add proved reserves and increase production through the use of advanced technologies, including detailed reservoir engineering analysis, drilling development wells utilizing sophisticated techniques and selectively recompleting existing wells. We also focus on reducing the per unit operating costs associated with our properties. We believe that the properties we have acquired have significant potential and in certain cases have not been actively developed in the past.



·

Growth Through Exploration.We plan to commence an active technology-driven exploration program that is designed to complement our property acquisition and development drilling activities with low to moderate risk exploration projects that may have greater reserve potential.



·

Property Portfolio Management.We continually evaluate our property base to identify opportunities to divest non-core, higher cost or less productive properties with limited development potential. This strategy allows us to focus on a portfolio of core properties with significant potential to increase our proved reserves and production.



·

Maintenance of Financial Flexibility.We intend to maintain substantial borrowing capacity. We believe our internally generated cash flows, our borrowing capacity and access to the capital markets will provide us with the financial flexibility to pursue additional acquisitions of producing properties and leasehold acreage and to execute our drilling and development program. Another component of our financial management strategy includes the use of hedges to secure product prices for a substantial portion of our expected production.



·

Benefit from the Transactional Nature of Our Industry.The independent exploration and production industry has been consolidating for a number of years. Our business strategy embraces this trend. We intend to assemble a portfolio of quality proved reserves and drilling opportunities within a core group of operated properties that may potentially be desirable as a strategic acquisition target by larger industry participants.



·

Strategic alignment.  We have secured through the alignment with our strategic partnership a unique ability to analyze and operate both our existing properties and future potential acquisitions When our domestic production has reached a critical mass, we plan to accelerate our International strategy, which is based on the following areas  Middle East, North Africa, The Caspian and West Africa.



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DESCRIPTION OF BUSINESS - OIL AND GAS OPERATIONS



EXPLORATION AND DEVELOPMENT



The oil and gas industry is highly competitive and we compete with a substantial number of other companies that have greater resources. Many of these companies explore for, produce and market oil and gas, as well as, carry on refining operations and market the resultant products on a worldwide basis. The primary areas in which we encounter substantial competition are in locating and acquiring desirable leasehold acreage for our drilling and development operations, locating and acquiring attractive producing oil and gas properties, locating and obtaining sufficient rig and platform availability, and obtaining purchasers and transporters of the oil and gas we produce. There is also competition between oil and gas producers and other industries producing energy and fuel. Furthermore, competitive conditions may be substantially affected by various forms of energy legislation and/or regulation considered from time to time by the government of the United States; however, it is not possible to predict the nature of any such legislation or regulation which may ultimately be adopted or its effects upon our future operations. Such laws and regulations may, however, substantially increase the costs of exploring for, developing or producing oil and gas and may prevent or delay the commencement or continuation of a given operation. The exact effect of these risk factors cannot be accurately predicted.



OIL AND GAS DEVELOPEMENT PRODUCTION OPERATIONS

Louisiana Property

The Company has various working interests in (8) production wells, four (4) associated salt water disposal wells l located in various parishes in Louisiana.   .  Production from these wells is from the prolific Austin Chalk reservoir.  A Work program to bring 4 wells into production commenced in October 2005 with production from the first of these wells being established in November 2005.  This initial phase of operations that included cleaning up the vertical portion of the well-bores using Coil Tubing, installation of salt water disposal line and building/installing process facilities on one location was completed by middle of February 2006.  Pre-planning work on the technically more challenging and higher impact wells commenced in March 2006 with a snubbing unit moving onto one of the wells at the start of April 2006.   As of year end 2006, the obstruction initially in the well has been recovered and operations were in progress to clean out the remainder of the wellbore.

In May 2005 we released our interest in the two Crowell Wells which represented a small percentage of our total net reserves.



East Texas Property



The JRC/Lisa Layne fields in Wood County, Texas comprise eight producing wells and three water disposal wells.  Six of the producing wells flow from the Paluxy reservoir with the remaining two wells located in the Lisa Layne field producing from the Sub-Clarksville formation.    Improvements to the water disposal system were successfully implemented in May 2005. These improvements have significantly reduced the down time of the affected wells. We have also replaced the flow lines to the water disposal wells reducing the amount of down time associated with leaks in these lines.   However, we have experienced some problems with Electrical Submersible Pumps (ESPs) shorting out down-hole and to reduce capital costs necessary to replace these pumps, we have has decided to rent them when replacements have been necessary.   During the year we replaced pumps in two wells.  This years production has been somewhat reduced also as a result of  hurricanes Katrina & Rita;  while no direct damage was experienced at our location, there was an impact on the availability of equipment and material that has caused lengthy delays in getting wells back onto production.



The Ann McKnight Unit that is located in Smith County, Texas, produces from the Paluxy reservoir and the single well AMU101 producing from the Unit has performed without any problems during the year.  We successfully increased production and accessed additional reserves when we brought back onto production in September 2005, the AMU 201, which already had a pumping unit installed.



In March 2006 we proposed an additional work program to our partners to bring back onto production two wells using ESPs and to upgrade the water handling facilities.  It was also proposed that the current gas handling facilities be refurbished to allow production of the gas that was expected to be produced when all four wells were producing.



As of year end, April 2006, we had achieved the required pass mark as contained in the Unit Operating Agreement to allow us to move forward with the proposed work program and had completed the installation of the ESP in the AMU 801.  Work continues on the water handling system to allow the well to be produced



West Texas  Property



The KWB Unit is located NW of San Angelo, Texas and is comprised of approximately 3,922 acres. KWB was originally discovered by Morrow resources in 1981. Production in the field peaked in 1983 at 1,700 BOPD and 6,400 Mcfd.



KWB is located on the western side of the eastern shelf of the Permian Basin. A series of productive sands were deposited east to west giving a gross sand section of 120 feet across KWB in 5 major members. The three upper members are the oil bearing section while the lower two sections are usually water wet. The reservoir at KWB is bounded by a stratigraphic trapping mechanism with the sand sections thinning to the east.



Within the Unit there are 63 production wellbores and 25 plugged wellbores. Original reserve estimates in the Strawn reservoir of KWB yielded 27-32 MMbbls of oil in place. Reported cumulative oil production reports are currently in the neighborhood of 1.9 MMbbls of oil or only 6.5% of the original oil in-place estimate. Although the Strawn formation was the primary formation there has also been historic shallow production from Cisco and Canyon sands at KWB Field.



An engineering review of the KWB area is currently being undertaken by one of our strategic partners.  To allow better development of the assets, discussions are underway with the existing land owners to dissolve the unit and return operations to a lease by lease  basis.



Through the acquisition of
Baron Energy, we also acquired four wells in the Reeves County, Texas, which
holds approximately 880 acres.  These wells  which were initially completed as
gas wells but are currently suspended are under review to evaluate the potential
of bringing these wells back into production.

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MARKETING OF CRUDE OIL AND NATURAL GAS



Crude oil from the Louisiana properties is sold to Texon LP under the terms of an existing  contract between Sonoran Energy and Texon LP on a month to month basis.  For the year ending April 30, 2006 the average value realized for oil was $ 58.64 per barrel.



Crude oil from the East Texas properties is sold to Eastex Crude Company based on agreements effective at the time of the purchase of the working interests in November 2004 and Plains Marketing, LP under a contract dated October 1, 2005 to November 1, 2005, and month to month thereafter. For the year ending April 30, 2006 the average value realized for oil from the East Texas properties was $ 59.88 per barrel.



Natural gas sold from the Louisiana properties is sold under the terms of the Natural Gas Sales Contract between Sonoran Energy Inc. and Cokinos Natural Gas Company effective September 1, 2005 to March 31, 2006, and month to month thereafter.    For the year ending April 30, 2006 the average value realized for the gas was   $7.89 per Mcf.



We plan to continue to sell our current production under the terms of the above reference contracts. However, we will also continue to monitor and review these contracts to ensure that the best value for our production is being achieved.



RISKS, COMPETITION AND INDUSTRY CONDITIONS



Oil and natural gas prices are volatile, and low prices could have a material adverse impact on our business.



Our revenues, profitability and future growth and the carrying value of our properties depend substantially on prevailing oil and gas prices. Prices also affect the amount of cash flow available for capital expenditures and our ability to borrow and raise additional capital. Lower prices may also reduce the amount of oil and gas that we can economically produce and have an adverse effect on the value of our properties. Prices for oil and gas have increased significantly and been more volatile over the past twelve months. Historically, the markets for oil and gas have been volatile, and they are likely to continue to be volatile in the future. Among the factors that can cause volatility are:



·

the domestic and foreign supply of oil and gas;

·

the ability of members of the Organization of Petroleum Exporting Countries, or OPEC, and other producing countries to agree upon and maintain oil prices and production levels;

·

political instability, armed conflict or terrorist attacks, whether or not in oil or gas producing regions;

·

the level of consumer product demand;

·

the growth of consumer product demand in emerging markets, such as China;

·

weather conditions, including hurricanes;

·

the price and availability of alternative fuels;

·

labor unrest in oil and gas producing regions;

·

the price of foreign imports;

·

worldwide economic conditions; and

·

the availability of liquid natural gas imports.



These external factors and the volatile nature of the energy markets make it difficult to estimate future prices of oil and gas.



Assets we acquire may prove to be worth less than we paid because of uncertainties in evaluating recoverable reserves and potential liabilities.



Our recent growth is due significantly to acquisitions of properties and undeveloped leaseholds. We expect that acquisitions will also contribute to our future growth. Successful acquisitions require an assessment of a number of factors, including estimates of recoverable reserves, exploration potential, future oil and gas prices, operating and capital costs and potential environmental and other liabilities. Such assessments are inexact and their accuracy is inherently uncertain. In connection with our assessments, we perform a review of the acquired properties which we believe is generally consistent with industry practices. However, such a review will not reveal all existing or potential problems. In addition, our review may not permit us to become sufficiently familiar with the properties to fully assess their deficiencies and capabilities. We do not inspect every well. Even when we inspect a well, we do not always discover structural, subsurface and environmental problems that may exist or arise. We are generally not entitled to contractual indemnification for preclosing liabilities, including environmental liabilities. Normally, we acquire interests in properties on an as is basis with limited remedies for breaches of representations and warranties.



As a result of these factors, we may not be able to acquire oil and gas properties that contain economically recoverable reserves or be able to complete such acquisitions on acceptable terms.



Estimates of oil and gas reserves are uncertain and any material inaccuracies in these reserve estimates will materially affect the quantities and the value of our reserves.



This report on Form 10-KSB contains estimates of our proved oil and gas reserves. These estimates are based upon various assumptions, including assumptions required by the SEC relating to oil and gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. The process of estimating oil and gas reserves is complex. This process requires significant decisions and assumptions in the evaluation of available geological, geophysical, engineering and economic data for each reservoir.



Actual future production, oil and gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and gas reserves will vary from those estimated. Any significant variance could materially affect the estimated quantities and the value of our reserves. Our properties may also be susceptible to hydrocarbon drainage from production by other operators on adjacent properties. In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development, prevailing oil and gas prices and other factors, many of which are beyond our control.



Recovery of undeveloped reserves requires significant capital expenditures and successful drilling operations. The reserve data assumes that we will make significant capital expenditures to develop our reserves. Although we have prepared estimates of these oil and gas reserves and the costs associated with development of these reserves in accordance with SEC regulations, we cannot assure you that the estimated costs or estimated reserves are accurate, that development will occur as scheduled or that the actual results will be as estimated.



We intend to fund our development, acquisition and exploration activities in part through additional debt financing. A higher level of debt could negatively impact our financial condition, results of operations and business prospects.



As of April 30, 2006, we had approximately $5.8 million of debt, including $1.5 million of convertible debt that is required to be repaid in the next 12 months. If we incur additional debt in order to fund our development, acquisition and exploration activities or for other purposes, our level of debt, and the covenants contained in the agreements governing our debt, could have important consequences, including the following:



·

a portion of our cash flow from operations is used to pay interest on borrowings;

·

a high level of debt may impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or other purposes;

·

a leveraged financial position would make us more vulnerable to economic downturns and could limit our ability to withstand competitive pressures; and

·

any debt that we incur may be at variable rates which make us vulnerable to increases in interest rates.



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Our exploration and development drilling efforts and the operation of our wells may not be profitable or achieve our targeted returns.



We require significant amounts of undeveloped leasehold acreage in order to further our development efforts. Exploration, development, drilling and production activities are subject to many risks, including the risk that commercially productive reservoirs will not be discovered. We invest in property, including undeveloped leasehold acreage, which we believe will result in projects that will add value over time. However, we cannot guarantee that all of our prospects will result in viable projects or that we will not abandon our initial investments. Additionally, we cannot guarantee that the leasehold acreage we acquire will be profitably developed, that new wells drilled by us will be productive or that we will recover all or any portion of our investment in such leasehold acreage or wells. 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 reserves to return a profit after deducting operating and other costs. In addition, wells that are profitable may not achieve our targeted rate of return. Our ability to achieve our target results are dependent upon the current and future market prices for oil and gas, costs associated with producing oil and gas and our ability to add reserves at an acceptable cost. We rely to a certain extent on 3-D seismic data and other advanced technologies in identifying leasehold acreage prospects and in conducting our exploitation and potential  exploration activities. The 3-D seismic data and other technologies we use do not allow us to know conclusively prior to acquisition of leasehold acreage or drilling a well whether oil or gas is present or may be produced economically. The use of 3-D seismic data and other technologies also requires greater pre-drilling expenditures than traditional drilling strategies.



In addition, we may not be successful in implementing our business strategy of controlling and reducing our drilling and production costs in order to improve our overall return. The cost of drilling, completing and operating a well is often uncertain and cost factors can adversely affect the economics of a project. We cannot predict the cost of drilling, and we may be forced to limit, delay or cancel drilling operations as a result of a variety of factors, including:



·

unexpected drilling conditions;

·

pressure or irregularities in formations;

·

equipment failures or accidents;

·

adverse weather conditions, including hurricanes;

·

compliance with governmental requirements; and

·

shortages or delays in the availability of drilling rigs and the delivery of equipment.



If we are unable to generate sufficient cash flow from operations to service our debt, we may have to obtain additional financing through the issuance of debt and/or equity. We cannot be sure that any additional financing will be available to us on acceptable terms. Issuing equity securities to satisfy our financing requirements could cause substantial dilution to our existing stockholders. The level of our debt financing could also materially affect our operations.



If our revenues were to decrease due to lower oil and gas prices, decreased production or other reasons, and if we could not obtain capital through our senior revolving credit facility or otherwise, our ability to execute our development and acquisition plans, replace our reserves or maintain production levels could be greatly limited.



We depend substantially on the continued presence of key personnel for critical management decisions and industry contacts.



Our future performance will be substantially dependent on retaining key members of our existing management. The loss of the services of any of our existing executive officers or key employees for any reason could have a material adverse effect on our business, operating results, financial condition and cash flows.



The unavailability or high cost of drilling rigs, equipment, supplies, personnel and oil field services could adversely affect our ability to execute our exploration and development plans on a timely basis and within our budget.



Our industry is cyclical and, from time to time, there is a shortage of drilling rigs, equipment, supplies or qualified personnel. During these periods, the costs and delivery times of rigs, equipment and supplies are substantially greater. In addition, the demand for, and wage rates of, qualified drilling rig crews rise as the number of active rigs in service increases. As a result of increasing levels of exploration and production in response to strong prices of oil and natural gas, the demand for oilfield services has risen, and the costs of these services are increasing, while the quality of these services may suffer. If the unavailability or high cost of drilling rigs, equipment, supplies or qualified personnel were particularly severe in Texas and Louisiana, we could be materially and adversely affected because our operations and properties are concentrated in those areas.



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The marketability of our oil and gas production depends on services and facilities that we typically do not own or control. The failure or inaccessibility of any such services or facilities could result in a curtailment of production and revenues.



The marketability of our production depends in part upon the availability, proximity and capacity of gathering systems, pipelines and processing facilities. Pursuant to interruptible or short term transportation agreements, we generally deliver gas through gathering systems and pipelines that we do not own. Under the interruptible transportation agreements, the transportation of our gas may be interrupted due to capacity constraints on the applicable system, for maintenance or repair of the system, or for other reasons as dictated by the particular agreements. If any of the pipelines or other facilities become unavailable, we would be required to find a suitable alternative to transport and process the gas, which could increase our costs and reduce the revenues we might obtain from the sale of the gas. Oil is currently trucked from our locations and is not dependent on the availability of pipelines .



We depend on the skill, ability and decisions of third party operators to a significant extent.



The success of the drilling, development and production of the oil and gas properties in which we have or expect to have a non-operating working interest is substantially dependent upon the decisions of such third-party operators and their diligence to comply with various laws, rules and regulations affecting such properties. The failure of any third-party operator to make decisions, perform their services, discharge their obligations, deal with regulatory agencies, and comply with laws, rules and regulations, including environmental laws and regulations in a proper manner with respect to properties in which we have an interest could result in material adverse consequences to our interest in such properties, including substantial penalties and compliance costs. Such adverse consequences could result in substantial liabilities to us or reduce the value of our properties, which could negatively affect our results of operations.



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Our business is highly competitive.



The oil and gas industry is highly competitive in many respects, including identification of attractive oil and gas properties for acquisition, drilling and development, securing financing for such activities and obtaining the necessary equipment and personnel to conduct such operations and activities. In seeking suitable opportunities, we compete with a number of other companies, including large oil and gas companies and other independent operators with greater financial resources, larger numbers of personnel and facilities, and, in some cases, with more expertise. There can be no assurance that we will be able to compete effectively with these entities.



Our oil and gas activities are subject to various risks which are beyond our control.



Our operations are subject to many risks and hazards incident to exploring and drilling for, producing, transporting, marketing and selling oil and gas. Although we may take precautionary measures, many of these risks and hazards are beyond our control and unavoidable under the circumstances. Many of these risks or hazards could materially and adversely affect our revenues and expenses, the ability of certain of our wells to produce oil and gas in commercial quantities, the rate of production and the economics of the development of, and our investment in the prospects in which we have or will acquire an interest. Any of these risks and hazards could materially and adversely affect our financial condition, results of operations and cash flows. Such risks and hazards include:



·

human error, accidents, labor force and other factors beyond our control that may cause personal injuries or death to persons and destruction or damage to equipment and facilities;

·

blowouts, fires, hurricanes, pollution and equipment failures that may result in damage to or destruction of wells, producing formations, production facilities and equipment;

·

unavailability of materials and equipment;

·

engineering and construction delays;

·

unanticipated transportation costs and delays;

·

unfavorable weather conditions;

·

hazards resulting from unusual or unexpected geological or environmental conditions;

·

environmental regulations and requirements;

·

accidental leakage of toxic or hazardous materials, such as petroleum liquids or drilling fluids, into the environment;

·

changes in laws and regulations, including laws and regulations applicable to oil and gas activities or markets for the oil and gas produced;

·

fluctuations in supply and demand for oil and gas causing variations of the prices we receive for our oil and gas production; and

·

the internal and political decisions of OPEC and oil and natural gas producing nations and their impact upon oil and gas prices.

As a result of these risks, expenditures, quantities and rates of production, revenues and cash operating costs may be materially adversely affected and may differ materially from those anticipated by us.



Because the requirements imposed by laws and regulations are frequently changed, we cannot assure you that laws and regulations enacted in the future, including changes to existing laws and regulations, will not adversely affect our business. In addition, because we acquire interests in properties that have been operated in the past by others, we may be liable for environmental damage caused by the former operators.



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We cannot be certain that the insurance coverage maintained by us will be adequate to cover all losses that may be sustained in connection with all oil and gas activities.



We maintain general and excess liability policies, which we consider to be reasonable and consistent with industry standards. These policies generally cover:



·

personal injury;

·

bodily injury;

·

third party property damage;

·

third party property damage;

·

legal defense costs;

·

pollution in some cases;

·

well blowouts in some cases; and

·

workers compensation.



There can be no assurance that this insurance coverage will be sufficient to cover every claim made against us in the future. A loss in connection with our oil and natural gas properties could have a materially adverse effect on our financial position and results of operation to the extent that the insurance coverage provided under our policies cover only a portion of any such loss.



REGULATIONS



In the United States, legislation affecting the oil and gas industry has been pervasive and is under constant review for amendment or expansion. Pursuant to such legislation, numerous federal, state and local departments and agencies have issued extensive rules and regulations binding on the oil and gas industry and its individual members, some of which carry substantial penalties for failure to comply. These laws and regulations have a significant impact on oil and gas drilling, gas processing plants and production activities, increase the cost of doing business and, consequently, affect profitability. Inasmuch as new legislation affecting the oil and gas industry is commonplace and existing laws and regulations are frequently amended or reinterpreted, Sonoran is unable to predict the future cost or impact of complying with these laws and regulations. Sonoran considers the cost of environmental protection a necessary and manageable part of its business. Sonoran has been able to plan for and comply with new environmental initiatives without materially altering its operating strategies.



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Exploration and Production. Sonoran's operations are subject to various types of regulation at the federal, state and local levels. These regulations include requiring permits for the drilling wells; maintaining prevention plans; submitting notification and receiving permits relation to the presence, sue and release of certain materials incidental to oil and gas operations; and regulating the location of wells, the method of drilling and casing wells, the use, transportation, storage and disposal of fluids and materials used in connection with drilling and production activities, surface plugging and abandoning of wells and the transporting of production. Sonoran's operations are also subject to various conservation matters, including the number of wells which may be drilled in a unit, and the unitization or pooling of oil and gas properties. In this regard, some states allow the forced pooling or integration of tracts to facilitate exploration while other states rely on voluntary pooling of lands and leases, which may make it more difficult to develop oil and gas properties. In addition state conservation laws establish maximum rates of production oil and gas wells, generally limit the venting or flaring of gas, and impose certain requirements regarding the ratable purchase of production. The effect of these regulations is to limit the amounts of oil and gas Sonoran can produce from its wells and to limit the number of wells or the locations at which Sonoran can drill.



Environmental. Our exploration, development, and production of oil and gas, including our operation of saltwater injection and disposal wells, are subject to various federal, state and local environmental laws and regulations. Such laws and regulations can increase the costs of planning, designing, installing and operating oil and gas wells. Our domestic activities are subject to a variety of environmental laws and regulations, including but not limited to, the Oil Pollution Act of 1990 ("OPA"), the Clean Water Act ("CWA"), the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), the Resource Conservation and Recovery Act ("RCRA"), the Clean Air Act ("CAA"), and the Safe Drinking Water Act ("SDWA"), as well as state regulations promulgated under comparable state statutes. We are also subject to regulations governing the handling, transportation, storage, and disposal of naturally occurring radioactive materials that are found in our oil and gas operations. Civil and criminal fines and penalties may be imposed for non-compliance with these environmental laws and regulations. Additionally, these laws and regulations require the acquisition of permits or other governmental authorizations before undertaking certain activities, limit or prohibit other activities because of protected areas or species, and impose substantial liabilities for cleanup of pollution.



Under the OPA, a release of oil into water or other areas designated by the statute could result in the company being held responsible for the costs of remediating such a release, certain OPA specified damages, and natural resource damages. The extent of that liability could be extensive, as set forth in the statute, depending on the nature of the release. A release of oil in harmful quantities or other materials into water or other specified areas could also result in the company being held responsible under the CWA for the costs of remediation, and civil and criminal fines and penalties.



CERCLA and comparable state statutes, also known as "Superfund" laws, can impose joint and several and retroactive liability, without regard to fault or the legality of the original conduct, on certain classes of persons for the release of a "hazardous substance" into the environment. In practice, cleanup costs are usually allocated among various responsible parties. Potentially liable parties include site owners or operators, past owners or operators under certain conditions, and entities that arrange for the disposal or treatment of, or transport hazardous substances found at the site. Although CERCLA, as amended, currently exempts petroleum, including but not limited to, crude oil, gas and natural gas liquids from the definition of hazardous substance, our operations may involve the use or handling of other materials that may be classified as hazardous substances under CERCLA. Furthermore, there can be no assurance that the exemption will be preserved in future amendments of the act, if any.



RCRA and comparable state and local requirements impose standards for the management, including treatment, storage, and disposal of both hazardous and non-hazardous solid wastes. We generate hazardous and non-hazardous solid waste in connection with its routine operations. From time to time, proposals have been made that would reclassify certain oil and gas wastes, including wastes generated during drilling, production and pipeline operations, as "hazardous wastes" under RCRA which would make such solid wastes subject to much more stringent handling, transportation, storage, disposal, and clean-up requirements. This development could have a significant impact on our operating costs. While state laws vary on this issue, state initiatives to further regulate oil and gas wastes could have a similar impact.



Because oil and gas exploration and production, and possibly other activities, have been conducted at some of our properties by previous owners and operators, materials from these operations remain on some of the properties and in some instances require remediation. In addition, in certain instances we have agreed to indemnify sellers of producing properties from which we have acquired reserves against certain liabilities for environmental claims associated with such properties. While we do not believe that costs to be incurred by us for compliance and remediating previously or currently owned or operated properties will be material, there can be no guarantee that such costs will not result in material expenditures.



Additionally, in the course of our routine oil and gas operations, surface spills and leaks, including casing leaks, of oil or other materials occur, and we incur costs for waste handling and environmental compliance. Moreover, we are able to control directly the operations of only those wells for which we act as the operator. Management believes that the company is in substantial compliance with applicable environmental laws and regulations.



We do not anticipate being required in the near future to expend amounts that are material in relation to our total capital expenditures program by reason of environmental laws and regulations, but inasmuch as such laws and regulations are frequently changed, we are unable to predict the ultimate cost of compliance. There can be no assurance that more stringent laws and regulations protecting the environment will not be adopted or that we will not otherwise incur material expenses in connection with environmental laws and regulations in the future.



Occupational Health and Safety. Sonoran is also subject to laws and regulations concerning occupational safety and health. Due to the continued changes in these laws and regulations, and the judicial construction of many of them, Sonoran is unable to predict with any reasonable degree of certainty its future costs of complying with these laws and regulations. Sonoran considers the cost of safety and health compliance a necessary and manageable part of its business. Sonoran has been able to plan for and comply with new initiatives without materially altering its operating strategies.



Sonoran is subject to certain laws and regulations relating to environmental remediation activities associated with past operations, such as the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") and similar state statutes. In response to liabilities associated with these activities, accruals have been established when reasonable estimates are possible. Such accruals primarily include estimated costs associated with remediation. Sonoran has used discounting to present value in determining its accrued liabilities for environmental remediation or well closure, but no material claims for possible recovery from third party insurers or other parties related to environmental costs have been recognized in Sonoran's financial statements. Sonoran adjusts the accruals when new remediation responsibilities are discovered and probable costs become estimable, or when current remediation estimates must be adjusted to reflect new information.



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TAXATION



The operations of the Company, as is the case in the petroleum industry generally, are significantly affected by federal tax laws. Federal, as well as state, tax laws have many provisions applicable to corporations which could affect the future tax liability of the Company.



ENVIRONMENTAL



The Company's activities are subject to existing federal and state laws and regulations governing environmental quality and pollution control. These laws may require the acquisition of permits relating to certain ongoing operations, for drilling, emissions, waste water disposal and other air and water quality controls. In view of the uncertainty and unpredictability of environmental statutes and regulations, the Company cannot ensure that such laws and regulations will not materially and adversely affect the business of the Company. The Company does not anticipate any material effect on its capital expenditures or earnings as the result of governmental regulations, enacted or proposed, concerning environmental protection or the discharge of material into the environment.



COMMITMENTS AND CONTINGENCIES



Sonoran is liable for future restoration and abandonment costs associated with its oil and gas properties. These costs include future site restoration, post closure and other environmental exit costs. The costs of future restoration and well abandonment have not been determined in detail. State regulations require operators to post bonds that assure that well sites will be properly plugged and abandoned. Each state in which Sonoran operates requires a security bond varying in value from state to state and depending on the number of wells that Sonoran operates. Management views this as a necessary requirement for operations within each state and does not believe that these costs will have a material adverse effect on its financial position as a result of this requirement.



OTHER



The Company had 9 employees as of 30 April, 2006 based in Phoenix and Jordan. In addition, Sonoran currently contracts for operational and other support (contract operator) with recognized operating companies within the area of operation. The contract operator may also enter into additional contracts for field level personnel (i.e., pumpers, rig crews, roustabouts and equipment operators) that perform basic daily activities associated with producing oil and gas. Daily operations include inspections of surface facilities and equipment, gauging, reporting and shipping oil, and routine maintenance and repair activities on wells, production facilities and equipment. In the event operations are controlled by a Joint Venture agreement, the operator nominated within the Joint Venture agreement will contract necessary field personnel.

All of the Company's revenues during 2006 were derived from domestic sources.



The Company does not have any patents or trademarks, and it does not believe that its business or operations are dependent upon owning any patents or trademarks.



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ITEM 2 - DESCRIPTION OF PROPERTY



(a) DESCRIPTION OF PROPERTY



The principal assets of the Company consist of proven and unproven oil and gas properties along with oil and gas production related equipment acquired as part of the leases.

The properties are described above in the Oil and gas development and production operations section in this report.



b) RESERVES, ACREAGE AND SALES PRICE



The Company began acquiring properties during May of 2002, whereas prior to that, the Company was not involved in the Oil and Gas Industry. As such, all years prior to 2003 are shown as zero. The producing wells on the East Texas and Louisiana properties have proven net reserves as detailed below.



The following table sets forth our estimated net proved oil and natural gas reserves and the PV-10 Value of such reserves as of May 1, 2006. The reserve data and the present value as of May 1, 2006 were prepared by Haas Petroleum Engineering Services, Inc., Independent Petroleum Engineers. The PV-10 Value was prepared using constant prices as of the calculation date, discounted at 10% per annum on a pretax basis. For further information concerning the present value of future net revenue from these proved reserves, see Note 12 of Notes to Consolidated Financial Statements.



The Company cautions that there are many inherent uncertainties in estimating proved reserve quantities and in projecting future production rates and the timing of development expenditures. Accordingly, these estimates are likely to change as future information becomes available, and these changes could be material.



|                            |                   |                    |                    
|--------------------------- | ----------------- | ------------------ | -------------------
|                            | Crude Oil (MBBLS) | Natural Gas (MMCF) | NPV-10
Pre tax
($M)
|Proved Producing (PDP)      | 279.85            | 110.61             | $    6,315         
|Proved Non-Producing (PDNP) | 197.99            | 468.63             | 8,623              
|Proved Undeveloped (PUD)    | 491.48            | 1,601.51           | 20,945             
|Total Proven                | 969.32            | 2,180.75           | $35,883            



The Company's estimated future net recoverable oil and gas reserves, noted above, have not been filed with any other Federal authority or agency.



Sonoran's net share of the oil and gas wells and acreage after royalty and other working interests for the past five years ending April 30, were as follows:



|                 |        |        |        |        |        |     |       |     |   |  | 
|---------------- | ------ | ------ | ------ | ------ | ------ | --- | ----- | --- | - |  | 
|                 | 2006   | 2005   | 2004   | 2003   | 2002  
|                 | Gross  | Net    | Gross  | Net    | Gross  | Net | Gross | Net |  
|Productive Wells |        |        |        |        |        |     |       |     |  
|Oil              | 14     | 13     | 17     | 16     | 10     | 10  | 23    | 11  | 0
|Gas              | 0      | 0      | 0      | 0      | 0      | 0   | 27    | 4   | 0
|                 |        |        |        |        |        |     |       |     |  
|Acreage          |        |        |        |        |        |     |       |     |  
|Oil - Developed  | 12,714 | 12,082 | 12,714 | 12,082 | 15,000 | 0   | 162   | 83  | 0
|- Undeveloped    | 3,922  | 3,922  | 0      | 0      | 0      | 0   | 111   | 58  | 0
|                 | 16,004 | 16,004 | 12,714 | 12,082 | 15,000 | 0   | 273   | 141 | 0
|                 |        |        |        |        |        |     |       |     |  
|Gas - Developed  | 0      | 0      | 0      | 0      | 0      | 0   | 2,186 | 169 | 0
|- Undeveloped    | 880    | 880    | 0      | 0      | 0      | 0   | 1,433 | 131 | 0
|                 | 880    | 880    | 0      | 0      | 0      | 0   | 3,619 | 300 | 0
|                 |        |        |        |        |        |     |       |     |  

Sonoran did not participate in the drilling of any new wells on any property that they had a working interest in during fiscal 2006.



Sonoran's average sales prices per barrel or per MCF of crude oil and natural gas, respectively, and production costs per equivalent barrel (gas production is converted to equivalent barrels at the rate of 6 MCF per barrel, representing the estimated relative energy content of gas to oil) for the past five years ending April 30, were as follows:





|                 |           |              |          |          |      
|---------------- | --------- | ------------ | -------- | -------- | -----
|                 | 2006      | 2005         | 2004     | 2003     | 2002 
|Sales price:     |           |              |          |          |      
|Crude oil        | $  59.11  | $   47.65    | $ 24.93  | $ 24.87  | $ n/a
|                 |           |              |          |          |      
|Natural gas      | $   7.89  | $        n/a | $   5.16 | $   4.99 | $ n/a
|                 |           |              |          |          |      
|Production costs | $   49.81 | $ 46.48      | $  26.75 | $  10.80 | $ n/a
|                 |           |              |          |          |      

Statistics for 2003 and 2004 are associated with properties that were sold January 31, 2004.  The Louisiana property was purchased January 31, 2004 and operated at levels to maintain ownership of working interest.



The statistics for 2005 are for the East Texas property only as the Louisiana properties were being operated at levels to maintain ownership of working interest. The high production costs reflect work undertaken at acquisition to correct mechanical problems which was limiting production.



The statistics for 2006 are for the East Texas property and the Louisiana properties as there was no production on the KWB property . The high level of operating costs are not indicative of  expected values as we move forward with our operations and have been inflated as a result of both increased commodity costs, electricity for our submersible pumps in East Texas and  the start up nature of our assets in Louisiana.

A large proportion of our operating costs relate to operations in Louisiana where we started work in bringing these high pressure wells into production in late November 2005. Considerable work and unscheduled intervention on a number of these wells, that had not been in production for a number of years,  has unfortunately inflated the operating costs.  As we move forward and complete our work program, then the need for the high level of intervention and supervision on these wells will dramatically reduce bringing our operating costs into line with expected values for the area.





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ITEM 3 - LEGAL PROCEEDINGS

Longbow, LLC v. Sonoran Energy, Inc. - Superior Court of California, County of Kern, Metropolitan Division Case No. S-1500-CV-25398-SPC

On or about March 8, 2004, a complaint was filed by Longbow, LLC against the Company alleging that Sonoran breached the agreement to purchase Longbow's interest in the Emjayco Glide #33 Property, the Keystone-Deer Creek Property and the Deer Creek-Merzonian Property. The action essentially alleges that, according the agreements entered into between Longbow and Sonoran, Longbow had the right of first refusal on the properties in the event that Sonoran offered those properties for sale.  In addition, Longbow claims that they are entitled to a percentage of the profits if the property is sold to a third party.  Subsequent to the execution of those agreements, Sonoran entered into an agreement to sell those properties to a third party, Harvest Worldwide, LLC. Sonoran filed a cross-complaint against Harvest and Longbow seeking the rescission of the Harvest purchase agreements. This case was consolidated with Harvest Worldwide, LLC v. Longbow, LLC(Case no. S-1500-CV-253284-SPC).  Trial is set currently set for September 25, 2006.



Sonoran Energy, Inc v. Mark Roy Anderson et al

Mark Anderson was sued, individually and in the form of his corporate alter egos, by Sonoran (Los Angeles County Superior Court Case No. BC327099), seeking rescission of all shares issued to these entities, with additional compensation due for various timing failures and legal exposures resulting from Anderson's various shortcomings. Anderson cross-complained against Sonoran, alleging certain commissions earned for projects Sonoran has undertaken that occurred during the pendency of his (Camden Holdings) consulting agreement . On June 5, 2006 the Company entered in a tentative settlement of their court case wherein Mr. Anderson has agreed to transfer control of the shares in controversy to settle debts that were to be originally assumed by Anderson, and retire obligations associated with project developments underway at the time of the original dealings.  The settlement is also dependent on the outcome of the case to be heard on September 25, 2006 concerning disposition of three properties tentatively sold by the Company to affiliates of Anderson in January 2004. The settlement includes the cancellation of a commission payable of $250 K and a loan payable of $48 K.  The ultimate disposition of the properties will dictate the accounting treatment of the $484 K gain on disposal presently showing in other liabilities. Sonoran has agreed to pay down a note on the three properties, subject to the case decision and has prepaid part of the note with stock and included the payment in prepaids on the balance sheet.  Sonoran hopes to have this matter completely settled by the end of its third quarter.



John Punzo



J. Punzo, previous CEO initiated an action to obtain funds he is owed for past services in the amount of $147,000.  The company is presently negotiating the amount and payment terms and believes this action will be settled without the necessity for trial.





ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



There were no matters submitted to a vote of the shareholders.



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PART II



ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS



(a) PRICE RANGE OF COMMON SHARES



The common stock of Sonoran is traded on the OTC Bulletin Board under the symbol "SNRN". The following are high and low bid prices for each quarter of 2006 and 2005, and reflect inter-dealer prices without retail markup, markdown or commission.





|                 |          |        
|---------------- | -------- | -------
|QUARTER ENDING   | HIGH BID | LOW BID
|July 31,  2004   | $1.86    | $0.50  
|October 31, 2004 | $1.35    | $0.53  
|January 31, 2005 | $0.71    | $0.38  
|April 30, 2005   | $0.72    | $0.25  
|July 31, 2005    | $0.70    | $0.69  
|October 31, 2005 | $1.15    | $0.52  
|January 31, 2006 | $0.90    | $0.54  
|April 30, 2006   | $0.59    | $0.35  
|July 31, 2006    | $0.51    | $0.30  







The Company has paid one dividend on its common shares in the past five years. In July 2003, the Company announced an 8% Unit dividend and warrant (one warrant for every 10 shares held) payable August 22, 2003 to shareholders of record on July 25, 2003. The warrants expired on July 25, 2005 and the exercise period was not extended.



We have never paid cash dividends on our common stock. We intend to retain earnings for use in the operation and expansion of our business and therefore do not anticipate declaring cash dividends on our common stock in the foreseeable future. The Company cannot declare and issue a dividend without the permission of the holders of our 5.0% convertible debenture. Any future determination to pay dividends on common stock will be at the discretion of the board of directors and will be dependent upon then existing conditions, including our prospects, debt structure, and such other factors, as the board of directors deems relevant.



Approximately 1,030 shareholders of record as of April 30, 2006 held our common stock. In many instances, a registered shareholder is a broker or other entity holding shares in street name for one or more customers who beneficially own the shares.



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ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



GENERAL



The Company continued to look for and enter into agreements to grow Sonoran into a major independent oil and gas company operating in the global marketplace.



Operations on the Louisiana assets commenced in October 2005 with the objective of bringing 4 of the wells into production through the cleanout of the existing wellbores and the establishment of production and water disposal infrastructure.  The 1stof these 4 wells was brought into production in November and this phase of operations was completed by February 2006.  Planning on the more technically challenging and potentially higher impact wells commenced in March 2006.

Operations on the East Texas assets was undertaken during the year to improve the water handling and disposal facilities reducing the downtime previously experienced. The limited availability of materials and equipment as a direct result of hurricanes Katrina and Rita  delayed the work program.

Sonoran's Middle East office seeks oil field opportunities in that region. Sonoran has signed a Profit Sharing Agreement with the Government of Jordan for the AZRAQ Block. This block is the only producing block in Jordan and Sonoran's technical team believes that additional oil production potential is possible. However, a final Production Sharing Agreement is subject to ratification by the Jordanian Parliament and the outcome of this vote is uncertain. No other tangible, material deal flow has emerged from this office.  Consequently, management is considering its strategic options at this time.



Nevertheless, management is confident that 2007 will see a substantial increase in domestic production and will focus its immediate attention in this regard.  International opportunities will continue to be considered but primarily as a medium to longer-term strategic goal.





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CRITICAL ACCOUNTING POLICIES



Use of Estimates

Under generally accepted accounting principles management is required to make use of estimates and assumptions that could affect the reported amounts on the financial statements and in disclosures in the notes to the financial statements at the date of financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.



Oil & Gas Producing Activities

The Company follows the full cost method of accounting for its oil and gas activities. Accordingly, all costs associated with the acquisition, exploration and development of oil and gas properties are capitalized within the appropriate cost center.  Any internal costs that are capitalized are limited to those costs that can be directly identified with acquisition, exploration, and development activities undertaken by the Company for its own account, and do not include any costs related to production, general corporate overhead, or similar activities.



Revenue Recognition

The Company utilizes the accrual method of accounting for crude oil revenues whereby revenues are recognized as the Company's entitlement share of the oil that is produced and delivered to a purchaser based upon its working interest in the properties.  The Company records a receivable (payable) to the extent that it receives less (more) than its proportionate share of the gas revenues.



Impairments on Long-Lived Assets

The Company evaluates the carrying value of its long-lived assets under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets".  SFAS No. 144 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted future cash flows estimated to be generated by those assets are less than the assets' carrying amount.   If such assets are impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.  Assets to be disposed of are reported at the lower of the carrying value or fair value, less costs to sell.



Income Taxes

Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the recorded book basis and tax basis of assets and liabilities for financial and income tax reporting.  The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.  Deferred taxes are also recognized for operating losses that are available to offset future taxable income and tax credits that are available to offset future income taxes.



LIQUIDITY AND CAPITAL RESOURCES



The Company had cash and cash equivalents of $4.8 million at April 30, 2006 for an increase of $4.8 million when compared to April 30, 2005. Net capital spending of $895,558 used cash in 2006. This was offset by proceeds from private placements of approximately $9.6 million. The components of the changes in cash for 2006 are more fully described in the Statements of Cash Flows included in Item 7 of this Form 10-KSB. Adequate funds were available to carry out all cash calls the Company chose to participate in.





The Company believes that it will be able to source sufficient funds to develop its existing current assets and planned acquisitions so that these operations will be sufficient to fund the anticipated liquidity and capital resource needs of the Company for the fiscal year ending April 30, 2007.  At the present time, Management feels that there are opportunities to enhance existing wells and discussions have been held regarding efforts to tap into possible reserves on the oil properties.



The Company is not a party to off-balance sheet arrangements and does not engage in trading activities involving non-exchange traded contracts. In addition, the Company has no financial guarantees, debt or lease agreements or other arrangements that could trigger a requirement for an early payment or that could change the value of the Company's assets. Management continues to examine various alternatives for increasing capital resources including, among other things, participation with industry and/or private partners and specific rework of existing properties to enhance production and expansion of its sales of crude oil and natural gas.



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ANALYSIS OF SIGNIFICANT CHANGES IN RESULTS OF OPERATIONS



Results of Operations for the Fiscal Year Ended April 30, 2006 compared to the Fiscal Year Ended April 30, 2005



REVENUES



Revenue increased to $1,938,234 for the year ended April 30, 2006 from the $518,711 for the year ended April 30, 2005. The increase in revenue reflects the first full year of the East Texas property accounting for an increase of 12.6 Mbls valued at $720,000 plus increased production from the Louisiana operations of 3 Mbls of oil valued at $235,000 and increased gas production of 11.1 Mmcf valued at $90,200.   The addition of Scottsdale Oil Field Services added $390,000 worth of consulting revenue to this years total revenue.



OIL AND GAS PRODUCTION COSTS



Production costs increased to $ 1,224,608 for the year ended April 30, 2006 as compared to the $702,028 production costs for the year ended April 30, 2005.  The increase in the operating expense reflects the increased operations of the East Texas plus a large proportion of our operating costs relate to operations in Louisiana where we started work in bringing these high pressure wells into production in late November 2005. Considerable work and unscheduled intervention on a number of these wells, that had not been in production for a number of years, has inflated the operating costs.



PROVISION FOR DEPLETION, DEPRECIATION AND AMORTIZATION



The provision for depletion, depreciation and amortization was $245,444 for the year ended April 30, 2006 compared to $62,907 for April 30, 2005.   The full year operation of the East Texas properties and the inclusion of productive wells in the Louisiana properties account for the increase in cost.



STOCK BASED COMPENSATION



The Company used restricted stock to pay for various activities as discussed in Notes 4, in Item 7 of this 10KSB.  This included incentive payments to officers, directors and employees and consulting services associated with property acquisitions for the years ended April 30, 2006, 2005 and 2004.



GENERAL AND ADMINISTRATIVE EXPENSES



General and administrative expenses increased $1.76 million for the year ended April 30, 2006, when compared to the same period for 2005. General and Administrative expense major cost increases were incurred in investor relations up $200,000, legal and audit up $250,000, loan commitment fees up 272,000, consultants fees up $334,000, salaries and wages up $321,000, officer compensation up $132,000. Salaries and wages increased due to additional staff acquired in the Scottsdale acquisition, new staff in Phoenix and Jordan.  Consultants were hired to assist the Company in searching for and getting introductions to potential acquisition projects as well as due diligence and geological reviews.



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OTHER INCOME (EXPENSE)



The charge for Impairment of oil and gas property of $71,078 reflects managements estimate of the impact of losing the rights to two of the Louisiana wells as discussed in Note 3 contained in Notes to the Financial Statements in Item 7 of this 10-KSB.



Workover expense and ad valorem taxes reflect full year and increased operations at East Texas and Louisiana operations.



Accretion expense reflects the current year allocation of estimated plugging and abandonment costs estimated for the three properties.



Loss on debt repaid with stock results from the application of market prices at the time the payment by stock was agreed to versus the share price used to establish the number of shares to be issued in payment of the debt.



Results of Operations for the Fiscal Year Ended April 30, 2005 compared to the Fiscal Year Ended April 30, 2004:



REVENUES



Revenue increased to $518,711 for the year ended April 30, 2005 from the $291,297 revenue for the year ended April 30, 2004. The increase in revenue reflects the acquisition s of the East Texas interests during November 2004 compared to the revenue from the assets disposed of in January 2004 . The fields operated in 2005 constitute a completely different asset base than those operated in 2004 except for the Louisiana properties, which the Company acquired in January 2004.



OIL AND GAS PRODUCTION COSTS



Production costs increased to $ 702,028 for the year ended April 30, 2005 as compared to the $293,363 production costs for the year ended April 30, 2004.  The increase in the operating expense reflects the operations of the Louisiana property plus the work undertaken for the East Texas properties from November 1, 2004. T he re was considerable remedial work undertaken on the East Texas properties to bring the m up to normal operational standards. The fields operated in 2005 are completely different from those operated during 200 4, except for Louisiana which the Company acquired in January 2004.



PROVISION FOR DEPLETION, DEPRECIATION AND AMORTIZATION



The provision for depletion, depreciation and amortization was $62,907 for the year ended April 30, 2005 compared to $67,777 for April 30, 2004.   The acquisition of the East Texas properties and the disposal of certain assets during January 2004 resulted in Sonoran having a completely different asset base operated during 2005 than those held and operated during 2004. The notable exception is the Louisiana properties, which the Company acquired in January 2004.



STOCK BASED COMPENSATION



The Company used restricted stock to pay for various activities as discussed in Notes 4, in Item 7 of this 10KSB . This included incentive payments to officers, payment for debt and consulting services associated with property acquisitions.



GENERAL AND ADMINISTRATIVE EXPENSES



General and administrative expenses increased substantially for the year ended April 30, 2005, when compared to the same period f or 2004. The Company incurred increased legal expense as a result of the work needed on the acquisitions and sales of properties. General and Administrative expense includes the costs for Management services, personnel, Investor Relations, Audit , travel and office expenses. Given the move to a global operation with experienced oil and gas industry personnel at higher salaries plus greatly increased travel expense was a contributor to the increased costs . Consultants were hired to assist the Company in searching for and getting introductions to potential acquisition projects as well as due diligence and geological reviews.



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OTHER INCOME (EXPENSE)



The charge for Impairment of oil and gas property of $71,078 reflects managements estimate of the impact of losing the rights to two of the Louisiana wells as d discussed in Note 6 contained in Notes to the Financial Statements in Item 7 of this 10-KSB.



Workover expense and ad valorem taxes are applicable to the two existing properties,  There was no expense accrued in 2004 for the Louisiana property as we acquired the property in the last quarter of the fiscal year.



The loss on disposal of Assets expense in 2004 is discussed in Note 6 contained in Notes to the Financial Statements in Item 7 of this 10-KSB report and represent the estimated cost of the equipment held by a merger candidate.



RECENT ACCOUNTING PRONOUNCEMENTS



In December 2004 the FASB issued a revised Statement 123 (SFAS 123R), "Accounting for Stock-Based Compensation" requiring public entities to measure the cost of employee services received in exchange for an award of equity instruments based on grant date fair value. The cost will be recognized over the period during which an employee is required to provide service in exchange for the award  usually the vesting period. This is effective for the Companys fiscal year beginning May 1, 2006.





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ITEM 7 - FINANCIAL STATEMENTS





SONORAN ENERGY, INC. AND SUBSIDIARIES

Index to Consolidated Financial Statements





|                                                                                                      |     
|----------------------------------------------------------------------------------------------------- | ----
|                                                                                                      | Page
|Independent Auditors' Reports 2006                                                                    | F-2 
|                                                                                                      |     
|Consolidated Balance Sheets at April 30, 2006 and 2005                                                | F-3 
|                                                                                                      |     
|Consolidated Statements of Operations for the years ended April 30, 2006 and 2005                     | F-4 
|                                                                                                      |     
|Consolidated Statement of Changes in Shareholders' Equity for the years ended April 30, 2006 and 2005 | F-5 
|                                                                                                      |     
|Consolidated Statements of Cash Flows for the years ended April 30, 2006 and 2005                     | F-6 
|                                                                                                      |     
|Notes to Consolidated Financial Statements                                                            | F-7 
|                                                                                                      |     

F-1

---



INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Shareholders

Sonoran Energy, Inc.



We have audited the accompanying consolidated balance sheets of Sonoran Energy, Inc. and its subsidiaries as of April 30, 2006 and 2005 and the related consolidated statements of operations, changes in shareholders' equity/deficit, and cash flows for the years then ended.  These consolidated financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these consolidated 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 misstatements.  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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sonoran Energy, Inc. and its subsidiaries as of April 30, 2006 and 2005 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.







Epstein Weber & Conover, PLC

Scottsdale, AZ

July 28, 2006 except for Note 16 as to which

the date is September 13, 2006





F-2

---



SONORAN ENERGY, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

April 30,







|                                                                                                                        |                     |  |                        
|----------------------------------------------------------------------------------------------------------------------- | ------------------- |  | -----------------------
|Assets                                                                                                                  | 2006                |  | 2005                   
|                                                                                                                        |                     |  |                        
|Current assets:                                                                                                         |                     |  |                        
|Cash and cash equivalents                                                                                               | $         4,832,327 |  | $                62,533
|Accounts receivable                                                                                                     | 433,233             |  | 148,213                
|Prepaid and other current assets                                                                                        | 479,309             |  | 43,128                 
|Total current assets                                                                                                    | 5,744,869           |  | 253,874                
|                                                                                                                        |                     |  |                        
|Oil and gas properties - full cost method (Note 3)                                                                      |                     |  |                        
|Proved, less accumulated depletion of $260,503 and $56,375,
	respectively                                               | 3,494,614           |  | 1,973,915              
|Unproved, less impairment charge of $71,078 both years                                                                  | 19,053,245          |  | 2,195,718              
|Equipment, less accumulated depreciation of $73,787 and $32,471,
	respectively (Note 3)                                 | 98,194              |  | 39,913                 
|Total capital assets                                                                                                    | 22,646,053          |  | 4,209,546              
|                                                                                                                        |                     |  |                        
|Other assets ( Note 7):                                                                                                 |                     |  |                        
|Certificate of deposits                                                                                                 | 350,000             |  | 50,000                 
|Deferred finance charge, net of accumulated amortization  of
	$386,674 and $181,923, respectively                       | 307,126             |  | 511,877                
|Goodwill                                                                                                                | 394,585             |  | -                      
|Intangible assets                                                                                                       | 210,000             |  | -                      
|Total other assets                                                                                                      | 1,261,711           |  | 561,877                
|                                                                                                                        | $     29,652,633    |  | $         5,025,297    
|                                                                                                                        |                     |  |                        
|Liabilities and Shareholders' Equity                                                                                    |                     |  |                        
|                                                                                                                        |                     |  |                        
|Current liabilities:                                                                                                    |                     |  |                        
|Accounts payable                                                                                                        | $        3,396,601  |  | $         1,266,892    
|Accounts payable - ad valorem tax                                                                                       | 219,973             |  | 110,457                
|Indebtedness to related parties (Note 6)                                                                                | 75,339              |  | 353,036                
|Accrued expenses                                                                                                        | 464,776             |  | 1,493,136              
|Convertible debentures (Note 9), net of discount of $202,100 in 2006                                                    | 1,549,072           |  | 2,045,936              
|Loans payable (Note 8)                                                                                                  | 119,214             |  | 302,945                
|Total current liabilities                                                                                               | 5,824,975           |  | 5,572,402              
|                                                                                                                        |                     |  |                        
|Long-term liabilities:                                                                                                  |                     |  |                        
|Deferred rent                                                                                                           | 30,730              |  | 31,744                 
|Deferred gains on oil and gas property sales                                                                            | 484,046             |  | 484,046                
|Deferred commission payable                                                                                             | 250,000             |  | 250,000                
|Asset retirement obligation (Note 10)                                                                                   | 795,589             |  | 354,679                
|                                                                                                                        | 1,560,365           |  | 1,120,469              
|                                                                                                                        |                     |  |                        
|Contingencies (Note 11)                                                                                                 | -                   |  | -                      
|                                                                                                                        |                     |  |                        
|Shareholders' equity/(deficit) (Note 4):                                                                                |                     |  |                        
|Series "A" convertible preferred stock, no par value;                                                                   |                     |  |                        
|25,000,000 shares authorized, 0 shares issued and outstanding in
	2006, 1,000,000 shares issued and outstanding in 2005 | -                   |  | 1,950,000              

|Common stock, no par value; 250,000,000 shares authorized                             |                  |  |                    
|------------------------------------------------------------------------------------- | ---------------- |  | -------------------
|83,345,663 and 31,372,389 shares issued and outstanding in 2006 and 2005 respectively | 59,692,602       |  | 24,014,930         
|Paid-in capital for stock options                                                     | 1,767,720        |  | 1,430,887          
|Accumulated deficit                                                                   | (39,193,029)     |  | (29,063,391)       
|Total shareholders' equity/(deficit)                                                  | 22,267,293       |  | (1,667,574)        
|                                                                                      | $     29,652,633 |  | $         5,025,297
|                                                                                      |                  |  |                    

See accompanying notes to consolidated financial statements.



F-3

---



SONORAN ENERGY, INC. AND SUBSIDIARIES

Consolidated Statements of Operations





|                                                    | For the Years Ended April 30,
|--------------------------------------------------- | -----------------------------
|                                                    | 2006                         
|Revenue:                                            |                              
|Oil and gas sales                                   | $       1,541,344            
|Other                                               | 396,890                      
|Total revenue                                       | 1,938,234                    
|                                                    |                              
|Operating expenses:                                 |                              
|Oil and gas production costs                        | 1,224,608                    
|Workover expense                                    | 41,110                       
|Ad valorem and other taxes                          | 209,791                      
|Accretion expense                                   | 72,326                       
|Depletion, depreciation and amortization (Note 1)   | 245,444                      
|Stock-based compensation (Notes 2 and 4):           |                              
|Officer compensation                                | 2,423,581                    
|Employees                                           | 348,000                      
|Legal                                               | -                            
|Stock options                                       | -                            
|Donation                                            | 6,400                        
|Consulting                                          | 713,285                      
|Directors                                           | 877,999                      
|General and administrative                          | 5,037,573                    
|Impairment of oil and gas property (Note 3)         | -                            
|Total expenses                                      | 11,200,117                   
|Other income and expense:                           |                              
|Loss on debt repaid with stock (Note 4)             | (388,316)                    
|Interest income                                     | 79,182                       
|Interest expense                                    | (558,621)                    
|                                                    |                              
|Loss from continuing operations before income taxes | (10,129,638)                 
|                                                    |                              
|Income tax provision (Note 5)                       | -                            

|                                            |                    |  |                   
|------------------------------------------- | ------------------ |  | ------------------
|                                            |                    |  |                   
|Net loss                                    | $  (10,129,638)    |  | $  (7,429,471)    
|                                            |                    |  |                   
|Net loss per common share:                  |                    |  |                   
|Basic and diluted                           | $           (0.17) |  | $           (0.28)
|Weighted average common shares outstanding: |                    |  |                   
|Basic and diluted                           | 61,208,887         |  | 26,981,319        
|                                            |                    |  |                   





See accompanying notes to consolidated financial statements.



F-4

---



SONORAN ENERGY, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders' Equity/(Deficit)





|                                                                       | Series "A" Convertible Preferred Stock |  | Common Stock |  | Paid in Capital
for Stock
Options |  | Accumulated Deficit |  | Total      
|---------------------------------------------------------------------- | -------------------------------------- |  | ------------ |  | --------------------------------- |  | ------------------- |  | -----------
|                                                                       | Shares                                 |  | Amount       |  | Shares                            |  | Amount              |  |            
|Balance at April 30, 2004                                              | 1,000,000                              |  | $1,950,000   |  | 24,531,620                        |  | $20,377,389         |  | $    23,425
|Common stock sales                                                     | -                                      |  | -            |  | 2,771,971                         |  | 1,328,208           |  | -          
|Exercised common stock warrants                                        | -                                      |  | -            |  | 150,512                           |  | 38,012              |  | -          
|Common stock issued to an officer for compensation                     | -                                      |  | -            |  | 2,400,000                         |  | 1,392,000           |  | -          
|Common stock issued to directors for services                          | -                                      |  | -            |  | 350,000                           |  | 203,000             |  | -          
|Common stock issued in exchange for consulting services                | -                                      |  | -            |  | 587,280                           |  | 354,000             |  | 1,407,462  
|Common stock issued to employees for compensation                      | -                                      |  | -            |  | 100,000                           |  | 58,000              |  | -          
|Common stock issued in exchange for legal services                     | -                                      |  | -            |  | 50,000                            |  | 25,500              |  | -          
|Common stock issued in exchange for oil and gas properties             | -                                      |  | -            |  | 300,000                           |  | 210,000             |  | -          
|Common stock issued for payment of debt                                | -                                      |  | -            |  | 131,006                           |  | 28,821              |  | -          
|Comprehensive loss:                                                    |                                        |  |              |  |                                   |  |                     |  |            
|Net loss, year ended April 30, 2005                                    | -                                      |  | -            |  | -                                 |  | -                   |  | -          
|                                                                       |                                        |  |              |  |                                   |  |                     |  |            
|Balance at April 30, 2005                                              | 1,000,000                              |  | $1,950,000   |  | 31,372,389                        |  | $24,014,930         |  | $1,430,887 
|                                                                       |                                        |  |              |  |                                   |  |                     |  |            
|Common stock sales (Note 4)                                            | -                                      |  | -            |  | 15,296,179                        |  | 9,603,991           |  | -          
|Exercised common stock warrants (Note 4)                               | -                                      |  | -            |  | 50                                |  | 50                  |  | -          
|Common stock issued for conversion of preferred shares                 | (1,000,000)                            |  | (1,950,000)  |  | 2,000,000                         |  | 1,950,000           |  | -          
|Common stock issued to officers for compensation (Note 4)              | -                                      |  | -            |  | 4,752,120                         |  | 2,423,581           |  | -          
|Common stock issued to directors for services (Note 4)                 | -                                      |  | -            |  | 1,549,998                         |  | 877,999             |  | -          
|Common stock issued in exchange for rent of office space (Note 4)      | -                                      |  | -            |  | 320,000                           |  | 128,000             |  | -          
|Common stock issued in exchange for consulting services (Note 4)       | -                                      |  | -            |  | 1,382,691                         |  | 725,000             |  | -          
|Common stock issued to Arab Womans Association as a donation (Note 4) | -                                      |  | -            |  | 10,000                            |  | 6,400               |  | -          
|Common stock issued to employees for compensation (Note 4)             | -                                      |  | -            |  | 675,000                           |  | 348,000             |  | -          

|                                                                    |   |  |                  |  |            |  |             |  |            |  |               |  |              | 
|------------------------------------------------------------------- | - |  | ---------------- |  | ---------- |  | ----------- |  | ---------- |  | ------------- |  | ------------ | 
|Common stock issued in exchange for asset purchases (Note 4)        | - |  | -                |  | 20,026,514 |  | 16,061,476  |  | -          |  | -             |  | 16,061,476  
|Common stock issued in payment of debt (Note 4)                     | - |  | -                |  | 5,647,389  |  | 3,305,642   |  | -          |  | -             |  | 3,305,642   
|Common stock issued in payment of prepaid legal settlement (Note 4) | - |  | -                |  | 313,333    |  | 247,533     |  | -          |  | -             |  | 247,533     
|Beneficial conversion feature on conv. note (Note 4)                | - |  | -                |  | -          |  | -           |  | 336,833    |  | -             |  | 336,833     
|Net loss, year ended April 30, 2006                                 | - |  | -                |  | -          |  | -           |  | -          |  | (10,129,638)  |  | (10,129,638)
|                                                                    |   |  |                  |  |            |  |             |  |            |  |               |  |             
|Balance at April 30, 2006                                           | - |  | $              - |  | 83,345,663 |  | $59,692,602 |  | $1,767,720 |  | $(39,193,029) |  | $22,267,293 
|                                                                    |   |  |                  |  |            |  |             |  |            |  |               |  |             

See accompanying notes to consolidated financial statements.



F-5

---



SONORAN ENERGY, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows



|                                                                            | For the Years Ended April 30,
|--------------------------------------------------------------------------- | -----------------------------
|                                                                            | 2006                         
|Cash flows from operating activities:                                       |                              
|Net loss                                                                    | $  (10,129,638)              
|Adjustments to reconcile net loss to net cash used in operating activities: |                              
|Amortization of deferred finance charge                                     | 204,751                      
|Amortization of beneficial conversion feature                               | 134,833                      
|Accretion expense                                                           | 72,326                       
|Depletion, depreciation and amortization                                    | 245,444                      
|Financing fees for debt                                                     | 331,336                      
|Stock issued for payment of expenses                                        | 725,000                      
|Stock compensation expense                                                  | 3,649,180                    
|Stock issued for donation expense                                           | 6,400                        
|Common stock options granted                                                | -                            
|Loss on debt repaid with stock                                              | 388,316                      
|Impairment of oil and gas properties                                        | -                            
|Changes in operating assets and liabilities:                                |                              
|Receivables, prepaids and deferred other                                    | (34,296)                     
|Accounts payable, accrued expenses and other liabilities                    | 2,820,716                    
|                                                                            |                              
|Net cash used in operating activities                                       | (1,585,632)                  
|                                                                            |                              
|Cash flows from investing activities:                                       |                              
|Acquisition of property and equipment                                       | (99,597)                     
|Acquisition of oil and gas properties                                       | (2,802,294)                  
|Payment for certificate of deposit                                          | (249,780)                    
|Cash acquired in business combination                                       | 29,345                       
|Payments for oil and gas working interests                                  | -                            
|                                                                            |                              
|Net cash used in investing activities                                       | (3,122,326)                  
|                                                                            |                              

|                                                                                 |                       |  |                      
|-------------------------------------------------------------------------------- | --------------------- |  | ---------------------
|Cash flows from financing activities:                                            |                       |  |                      
|Proceeds from exercised options and warrants                                     | 50                    |  | 38,012               
|Proceeds/(Repayment) from related party advances                                 | -                     |  | 100,000              
|Proceeds from notes payable                                                      | -                     |  | 165,000              
|Proceeds from issuance of convertible debenture                                  | -                     |  | 1,512,000            
|Repayment of loans, advances and other                                           | (126,069)             |  | (15,176)             
|Proceeds from the sale of common stock                                           | 9,603,991             |  | 1,328,208            
|                                                                                 |                       |  |                      
|Net cash provided by financing activities                                        | 9,477,972             |  | 3,128,044            
|                                                                                 |                       |  |                      
|Net change in cash                                                               | 4,770,014             |  | 19,004               
|                                                                                 |                       |  |                      
|Cash, beginning of year                                                          | 62,313                |  | 43,309               
|                                                                                 |                       |  |                      
|Cash, end of year                                                                | $    4,832,327        |  | $        62,313      
|                                                                                 |                       |  |                      
|Supplemental disclosure of cash flow information:                                |                       |  |                      
|Cash paid for income taxes                                                       | $                   - |  | $                  - 
|Cash paid for interest                                                           | $         12,768      |  | $                  - 
|                                                                                 |                       |  |                      
|Non-cash investing and financing activities:                                     |                       |  |                      
|Common stock issued for payment of debt and current liabilities                  | $   3,305,642         |  | $           8,121    
|Common stock issued for business acquisitions                                    | $ 16,061,746          |  | $                   -
|Oil and gas property acquired in exchange for a promissory note and common stock | $                  -  |  | $       210,000      
|                                                                                 |                       |  |                      

See accompanying notes to consolidated financial statements.



F-6

---





SONORAN ENERGY, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements



Note 1:    Nature of Organization and Summary of Significant Accounting Policies



Nature of Organization



Sonoran Energy, Inc. (the "Company") was incorporated under the laws of Colorado as Cerotex Holdings, Inc. on July 14, 1995.  The Company's shareholders approved a change of corporate domicile to Washington State, which became effective on September 15, 2000.  Prior to June 2002, the Company developed software and an art site on the Internet.  The Internet project was terminated in April 2002.  On June 3, 2002, the Company changed its name to Sonoran Energy, Inc. and entered the oil and gas industry.  The Company's primary objective is to identify, acquire and develop oil and gas projects.



The Company has acquired interests in producing properties through leases on which it drills and/or operates oil or gas wells in efforts to discover and/or to produce oil and gas.  The Company's interests in the properties vary depending on the availability of the interests and their locations.  At April 30, 2006, the Company owned working interests in oil and gas properties located within the states of Louisiana and Texas.



As part of the acquisition of Scottsdale Oil Field Services Ltd. the Company is employing one engineer in a consulting capacity to third parties as reflected in the segmented information in note 14.



Basis of Consolidation



The consolidated financial statements include the accounts of Sonoran Energy, Inc. Scottsdale Oil Field Services Ltd. and Baron Oil AS.  All significant intercompany balances and transactions have been eliminated in consolidation.

F-7

---





Use of Estimates



The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.



Cash Equivalents



For the purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.



Property, Equipment and Depreciation



Property and equipment is recorded at cost, less accumulated depreciation.  Major items and betterments are capitalized; minor items and repairs are expensed as incurred.  Depreciation is computed under the straight-line method over the estimated useful lives of the assets. Depreciation on equipment totaled $41,316 and $6,806 for the years ended April 30, 2006 and 2005, respectively.



Goodwill



Goodwill represents the excess of the aggregate price paid by us over the value of the net equity acquired in the acquisition of Scottsdale Oil Field Services in 2006. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we are no longer required to amortize goodwill, but are required to review goodwill for impairment at least annually or whenever events indicate that the carrying amount of the asset may not be recoverable in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.  As of April 30, 2006 no events had occurred that would indicate goodwill had been impaired.



Intangible Assets



Our intangible assets include proprietary computer programs. We will amortize this intangible assets on a straight-line basis over five years.



Oil and Gas Producing Activity



The Company follows the full cost method of accounting for its oil and gas activities. Accordingly, all costs associated with the acquisition, exploration and development of oil and gas properties are capitalized within the appropriate cost center.  Any internal costs that are capitalized are limited to those costs that can be directly identified with acquisition, exploration, and development activities undertaken by the Company for its own account, and do not include any costs related to production, general corporate overhead, or similar activities.



All capitalized costs within a cost center are depleted on the units-of-production method based on estimated proved reserves attributable to the oil and gas properties owned by the Company.



For each cost center, capitalized costs less accumulated depletion and related deferred income taxes, may not exceed the cost center ceiling.  The cost center ceiling is equal to the sum of (a) the present value of estimated future net revenues from proved oil and gas reserves, less estimated future expenditures to be incurred in developing the proved reserves computed using a 10 percent discount factor; (b) the cost of properties not being amortized; (c) the lower of cost or fair market



F-8

---



value of unproven properties included in the costs being amortized; and (d) income tax effects related to the differences between the book and tax basis of the properties.  Any excess is charged to expense during the period in which the excess occurs.



Sales of oil and gas properties, whether or not being amortized currently, 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 attributable to a cost center.  Abandonments of oil and gas properties are accounted for as adjustments of capitalized costs, and are amortized and subject to the cost center ceiling limitation.



The Company recorded depletion expense of $204,128 and $56,101 for the years ended April 30, 2006 and 2005, respectively.



Revenue Recognition



The Company utilizes the accrual method of accounting for crude oil revenues whereby revenues are recognized as the Company's entitlement share of the oil that is produced and delivered to a purchaser based upon its working interest in the properties.  The Company records a receivable (payable) to the extent that it receives less (more) than its proportionate share of the gas revenues.  The Company utilizes the accrual method of accounting for its consulting services recognizing income when it is earned and records a receivable for unpaid fees.



Impairments on Long-Lived Assets



The Company evaluates the carrying value of its long-lived assets under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets".  SFAS No. 144 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted future cash flows estimated to be generated by those assets are less than the assets' carrying amount.   If such assets are impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.  Assets to be disposed of are reported at the lower of the carrying value or fair value, less costs to sell.



Net loss per share



Net loss per basic share excludes dilution and is determined by dividing loss available to common shareholders by the weighted average number of common shares outstanding during the period.  Net loss per diluted share reflects the potential dilution that could occur if securities and other contracts to issue common stock were exercised or converted into common stock.  Due to the Company's losses, any inclusion of other securities to issue common stock would have an anti-dilutive effect on loss per diluted share. The diluted net loss per shares excludes the effect of common stock options and warrants exercisable into 20,734,294 shares of common stock and debt convertible into approximately 3,243,000 shares of common stock because inclusion of such would be anti-dilutive for the year ended April 30, 2006.  The diluted net loss per shares excludes the effect of common stock options and warrants exercisable into 17,856,780 shares of common stock and debt convertible into approximately 3,508,000 shares of common stock because inclusion of such would be anti-dilutive for the year ended April 30, 2005.



F-9

---





Accounts Receivable

The Company's accounts receivable at April 30, 2006 reflect amounts that are due from working interest owners in oil wells that the Company operates and the sale of crude oil to several primary customers.



The Company determines any required allowance by considering a number of factors including length of time trade accounts receivable are past due and the Company's previous loss history.  Receivables are considered past due when they are unpaid greater than thirty days.  The Company records a reserve account for accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.  There was no allowance for doubtful accounts at April 30, 2006 and 2005.  There was no bad debt expense for the year ended April 30, 2006 and 2005.



Income Taxes



Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the recorded book basis and tax basis of assets and liabilities for financial and income tax reporting.  The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.  Deferred taxes are also recognized for operating losses that are available to offset future taxable income and tax credits that are available to offset future income taxes.



Stock-Based Compensation



The Company accounts for stock-based employee compensation arrangements in accordance with Accounting Principles Board ("APB") Opinion 25 and complies with the disclosure provisions of SFAS No. 123, as amended by SFAS 148.  Under APB No. 25, compensation expense is based on the difference, if any, on the date of grant, between the fair value of the Company's stock and the exercise price.  The Company accounts for stock issued to non-employees in accordance with the provisions of SFAS No. 123.  SFAS 123 requires the fair value based method of accounting for stock issued to non-employees in exchange for services.



Companies that elect to use the method provided in APB 25 are required to disclose pro forma net income and pro forma earnings per share information that would have resulted from the use of the fair value based method.  The Company has elected to continue to determine the value of stock-based compensation arrangements under the provisions of APB 25 until it will be required to implement the provisions of SFAS
No. 123R.



The Company did not grant any options during the year ended April 30, 2006.



The fair value for the options granted during the year ended April 30, 2005 was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:



F-10

---





|                                                                                                        |        
|------------------------------------------------------------------------------------------------------- | -------
|Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     | 4.24%  
|Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  | 0.00%  
|Volatility factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 138.60%
|Weighted average expected life . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                | 2 years



The Black-Scholes options valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable.  In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility.  Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. However, the Company has presented the pro forma net loss and pro forma basic and diluted loss per common share using the assumptions noted above.



|                                      |                               |  |                 
|------------------------------------- | ----------------------------- |  | ----------------
|                                      | For the Years Ended April 30,
|                                      | 2006                          |  | 2005            
|                                      |                               |  |                 
|Net loss, as reported                 | $    (10,129,638)             |  | $    (7,429,471)
|                                      |                               |  |                 
|Add stock based compensation reported | 3,614,265                     |  | 3,414,462       

|Deduct stock based compensation determined using the fair value method | (3,614,265)         |  | (3,955,488)         
|---------------------------------------------------------------------- | ------------------- |  | --------------------
|Pro forma net loss                                                     | $    (10,129,638)   |  | $    (7,970,497)    
|                                                                       |                     |  |                     
|Basic and diluted net loss per common share, as reported               | $             (.17) |  | $             (0.28)
|                                                                       |                     |  |                     
|Pro Forma basic and diluted net loss per common share                  | $             (.17) |  | $             (0.30)
|                                                                       |                     |  |                     



Fair Value of Financial Instruments



The Company's financial instruments, including cash, accounts receivables, current liabilities, and short-term debt, are carried at cost, which approximates their fair value because of the short-term maturity of these instruments. Convertible debentures are carried at cost which approximates fair value because of fair value interest rates and discounts associated with the beneficial conversion feature.



Foreign Currency Translation



Assets and liabilities of non-U.S. subsidiaries are translated to U.S. dollars at end-of-period exchange rates.  The effects of this translation for non-U.S. subsidiaries are reported in other comprehensive income (loss).  Remeasurement of assets and liabilities of non-U.S. subsidiaries that use a currency other than the U.S. dollar as their functional currency are included in income as transaction gains and losses.  Income statement elements of all non-U.S. subsidiaries are translated to U.S. dollars at average-period exchange rates and are recognized as part of revenues, costs and expenses.  The functional currency of the Company's foreign subsidiary is the local currency, the Canadian dollar.





F-11

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Reclassifications



Certain prior year amounts may have been reclassified to conform to the current year presentation. Such reclassifications had no effect on the prior year net income.



Present Accounting Pronouncements



In December 2004 the FASB issued a revised Statement 123 (SFAS 123R), "Accounting for Stock-Based Compensation" requiring public entities to measure the cost of employee services received in exchange for an award of equity instruments based on grant date fair value. The cost will be recognized over the period during which an employee is required to provide service in exchange for the award  usually the vesting period. This is effective for the Companys fiscal year beginning May 1, 2006.



Note 2:    Related Party Transactions



The Company had amounts outstanding to a former CEO of $75,339 and $353,036 as of April 30, 2006 and 2005, respectively.



During the year ended April 30, 2005, a party related to one of the officers of the Company lent Sonoran $100,000 repayable August 5, 2005 with an interest rate of 12%. The loan was repaid as of April 30, 2006.





F-13

---







Note 3:    Capital Assets



Oil and Gas Operations

Acquisitions

Scottsdale Oil Field Services Acquisition



The Company acquired 100% of the common stock of Scottsdale Oil Field Services Ltd. on June 1, 2005 for 1,000,000 shares of restricted common stock valued at the market price on that day of $0.65 per share.  Scottsdale Oil Field Services brought an experienced infrastructure to Sonoran Energy to manage operations.

The purchase price was allocated as follows:

|                       |              
|---------------------- | -------------
|                       |              
|Cash                   | $       2,844
|Accounts receivable    | 311,038      
|Prepaid expense        | 334          
|Property and equipment | 2,226        
|Bank line of credit    | (52,300)     
|Accounts payable       | (186,341)    
|Accrued expense        | (28,474)     
|Customer deposit       | (3,912)      
|`Intangible assets     | 210,000      
|Goodwill               | 394,585      
|Purchase price         | $    650,000 



KWB - The Company completed the acquisition of 100% of the common stock of Baron Oil AS on November 1, 2005 through the issue of 19,026,514 restricted common shares of Sonoran valued at market prices on the date that Sonoran had an agreement with over 80% of the Baron shareholders to complete the share exchange resulting in a valuation of $15,411,476.  In addition, the Company added an asset retirement cost of $368,584 associated with the wellbores on the property.  Baron Oil AS provided Sonoran Energy with the KWB asset for US Operations and an introduction and access to the Middle East and other properties.



The purchase price was allocated as follows:

|                           |                
|-------------------------- | ---------------
|                           |                
|Cash                       | $  26,501      
|CD deposit                 | 50,000         
|Abandonment cost           | 368,584        
|Unproven property          | 15,690,563     
|Accounts payable           | (304,888)      
|Loan payable               | (43,200)       
|Inter company loan payable | (7,500)        
|P & A liability            | (368,584)      
|Purchase price             | $    15,411,476



Other  The Company undertook major projects in the Louisiana and East Texas properties resulting in capital additions of $2,545,090 for both proved and unproved properties. The Company identified certain wells in Louisiana as being productive during the year and moved $549,104 and the asset retirement obligation for Louisiana from unproved properties to proved properties.



Dispositions



The Company did not dispose of any oil and gas properties during the year ended April 30, 2006.



F-15

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Impairment



Two Crowell wells in Louisiana were  relinquished in April 2005. Sonoran still has the liability to abandon and restore the two well locations but anticipates that the resale value of the equipment which will be recovered from the wells will more than adequately offset the cost of abandonment.

The Company recorded an impairment charge of $71,078 in the year ended April 30, 2005.

Equipment

The Companys equipment asset is made up of the following:

|                         |                  
|------------------------ | -----------------
|Computers                | $         58,620 
|Furniture and fixtures   | 85,800           
|Leasehold improvements   | 27,560           
|                         | 171,980          
|Accumulated depreciation | 73,786           
|Equipment total          | $          98,194



Note 4:    Shareholders' Equity



Preferred Stock



The Company is authorized to issue 25 million shares of no par value preferred stock, which may be issued in series with such designations, preferences, stated values, rights, qualifications or limitations as determined by the Board of Directors.  As of April 30, 2006, the Company had no preferred stock issued and outstanding.



Series A preferred stock, was issued in 2004 for the purchase of oil and gas interests, and was convertible to 1,000,000 restricted shares of the Company's common stock 180 days after the date of closing (August 9, 2004), plus additional shares based on the market price at the time of conversion, at the option of the preferred stockholder.  The holder of the shares exercised their option on May 25, 2005 resulting in the issue of 2,000,000 common shares.



Common Stock



During the year ended April 30, 2006, the Company issued

a)   5,647,389 shares of its common stock as payment for debts totaling $3,305,642 with a resulting loss on debt repayment of $388,316.

b)   320,000 shares of its common stock as the payment for the 5 year lease of office space in Jordan totaling $128,000 .

c)   2,000,000 shares of its common stock in exchange for 1,000,000 preferred shares valued at $1,950,000.

d)   313,333 shares of its common stock for payment of a prepaid legal settlement totaling $247,533.

e)   20,026,514 shares of its common stock for asset purchases totaling $16,061,476

f)    15,296,179 shares of its common stock for private placements totaling $9,603,991 and 50 shares for warrants exercised totaling $50.

g)   8,369,609 shares of its common stock for stock based compensation totaling $4,380,980 as detailed below under stock based compensation.



During the year ended April 30, 2005, the Company issued

a)     131,006 shares of its common stock as payment for debts totaling $28,821.

b)     300,000 shares of its common stock as part of the payment for the acquisition of East Texas totaling $210,000.

c)      2,771,971 shares of its common stock for private placements totaling 1,328,208 and 150,512 shares for warrants exercised totaling 38,012.

d)      3,487,280 shares of its common stock for stock based compensation totaling $2,032,500 as detailed below under stock based compensation.





F-16

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Stock-Based Compensation



During the year ended April 30, 2006, the Company issued 1,382,691 shares of its common stock to outside service providers, in exchange for financial consulting, investor relations and other consulting services. The value of the stock issued was recorded at the value of the services and totaled $725,000.  The services are included in the accompanying financial statements as "stock-based compensation".



During the year ended April 30, 2006, the Company issued 10,000 shares of its common stock as a donation. The value of the stock issued was recorded at the value of the donation and totaled $6,400.  The donation is included in the accompanying financial statements as "stock-based compensation".





During the year ended April 30, 2006, the Company issued 6,977,118 shares of its common stock to officers, employees and directors in recognition of their services. The value of the stock issued was recorded at the quoted market price on the date of the grant and totaled $3,649,580.  The services are included in the accompanying financial statements as "stock-based compensation".



During the year ended April 30, 2005, the Company issued 587,280 shares of its common stock to outside service providers, in exchange for financial consulting, investor relations and other consulting services. The value of the stock issued was recorded at the value of the services and totaled $354,000.  The services are included in the accompanying financial statements as "stock-based compensation".



During the year ended April 30, 2005, the Company issued 50,000 shares of its common stock as payment for legal expense.  The transaction totaled $25,500 and was valued based on the traded market value of the common stock.



During the year ended April 30, 2005, the Company issued 2,850,000 shares of its common stock to officers, employees and directors in recognition of their services. The value of the stock issued was recorded at the quoted market price on the date of issuance and totaled $1,653,000.  The services are included in the accompanying financial statements as "stock-based compensation".



F-17

---





Common Stock Options



A summary of the status of the Company's stock option awards as of April 30, 2006, and the changes during the period from May 1, 2004 through April 30, 2006 are presented below:



|                            |                             |                                 |                                 |                             |             |                                              
|--------------------------- | --------------------------- | ------------------------------- | ------------------------------- | --------------------------- | ----------- | ---------------------------------------------
|                            |                             | Options Issued to Non-Employees | Weighted Average Exercise Price | Weighted Average Fair Value | Exercisable | Weighted Average Exercise Price - Exercisable
|                            | Options Issued to Employees
|Outstanding, April 30, 2004 | 1,350,000                   | 175,000                         | $     0.57                      | $   0.11                    | 1,525,000   | $     0.57                                   
|                            |                             |                                 |                                 |                             |             |                                              
|Options granted             | 8,750,000                   | 4,000,000                       | 0.58                            | 0.13                        | 12,750,000  | 0.52                                         
|Options exercised           | -                           | -                               | -                               | -                           | -           | -                                            
|Options cancelled           | -                           | -                               | -                               | -                           | -           | -                                            
|Outstanding, April 30, 2005 | 10,100,000                  | 4,175,000                       | 0.53                            | 0.29                        | 14,275,000  | 0.53                                         
|                            |                             |                                 |                                 |                             |             |                                              
|Options granted             | -                           | -                               | -                               | -                           | -           | -                                            
|Options exercised           | -                           | -                               | -                               | -                           | -           | -                                            
|Options cancelled           | (150,000)                   | -                               | -                               | -                           | (150,000)   | -                                            
|Outstanding, April 30, 2006 | 9,950,000                   | 4,175,000                       | $     0.53                      | $   0.29                    | 14,125,000  | $   0.53                                     
|                            |                             |                                 |                                 |                             |             |                                              



Common Stock Dividend and Warrants



The Company declared an eight percent dividend payable to shareholders of record at the close of business on July 22, 2003.  The unit stock dividend, paid on August 22, 2003, consisted of one common share plus a warrant allowing shareholders to purchase one share for each ten shares of the Company's stock held on the record date at a $1.00 strike price.  The number of shares issued on August 22, 2003 totaled 753,542 and 941,642 related warrants were granted.  Shares issued prior to July 22, 2003 have been retroactively restated to reflect the impact at May 1, 2002.The unexercised warrants granted with the stock dividend expired on July 23, 2005.  Of the 941,642 warrants originally granted, only 6,950 were exercised.



The Company did not declare a dividend during 2006.



F-18

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As part of a private placement done during the year ended April 30, 2006, investors were granted warrants to purchase additional shares. The exercise price on 4,763,438 warrants was set at $0.95 per share, the price on 184,214 warrants was set at $1.25 per share and the price on 1,661,642 warrants was set at $1.50 per share.



Note 5:    Income Taxes



A reconciliation of the U.S. statutory federal income tax rate to the effective tax rate is as follows:



A reconciliation of the U.S. statutory federal income tax rate to the effective tax rate is as follows:



|                                                                   |          |                       |  |         |  | 
|------------------------------------------------------------------ | -------- | --------------------- |  | ------- |  | 
|                                                                   |          | Years Ended April 30,
|                                                                   |          | 2006                  |  | 2005   
|U.S. Federal statutory graduated rate                              | (34.00)% | $      (3,444,200)    |  | 34.00% 
|State income tax rate, net of federal benefit                      | (6.00)%  | (607,800)             |  | 5.83%  
|Other                                                              | -        | 7,000                 |  |        
|Net operating loss for which no tax benefit is currently available | 40.00%   | 4,045,000             |  | -39.83%
|                                                                   | 0.00%    | $                 -0- |  | 0.00%  
|                                                                   |          |                       |  |        



The valuation allowance offsets the net deferred tax asset for which there is no assurance of recovery.  The change in the valuation allowance for the years ended April 30, 2006 and 2005 totaled $4,045,000 and $1,406,000 and, respectively.  A current tax benefit $2,468,000 and $1,406,000 was recorded for the years ended April 30, 2006 and 2005, respectively.  These amounts were offset by and equal deferred income expense due primarily to the increase in the valuation allowance.  At April 30, 2006, the Company had net operating loss carryforwards of approximately $17,082,000.  The net operating loss carryforward expires through the year 2026.



At April 30, 2005, the Company had a deferred income tax asset of $9,995,000.  Of that amount, $6,833,000 related primarily to net operating loss carryforwards and $3,162,000 relates to book and tax differences in the recognition of stock based compensation and accrued compensation to officers.  The deferred income tax asset is offset by a valuation allowance and deferred tax liability of $16,000 related to book and tax differences for the amortization of goodwill and intangible assets.



The valuation allowance will be evaluated at the end of each year, considering positive and negative evidence about whether the deferred tax asset will be realized.  At that time, the allowance will either be increased or reduced; reduction could result in the complete elimination of the allowance if positive evidence indicates that the value of the deferred tax assets is no longer impaired and the allowance is no longer required.



Should the Company undergo an ownership change as defined in Section 382 of the Internal Revenue Code, the Company's tax net operating loss carryforwards generated prior to the ownership change will be subject to an annual limitation, which could reduce or defer the utilization of these losses.



F-19

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Note 6:  Indebtness to Related Parties



The amount of $75,339 relates to fees owed to a past CEO and is being repaid at $18 K monthly.



Note 7:   Other Assets



Certificate of Deposit



The Company was required to post $350,000 in Bonds with governments for the operations in the U.S. The funds are held by financial institutions in investment certificates, which bear interest at a variable rate, and are included in certificates of deposit.



Deferred finance charges



The Company incurred commitment fees and finder fees for the Cornell Capital convertible debentures totaling $689,000. The term of the debenture is three years and the Company has chosen to amortize the commitment and finder  fees over the life of the debenture resulting in a charge to interest expense of $204,571 and  $181,923for 2006 and 2005, respectively..





Goodwill, Intangible Assets



The Company acquired Scottsdale Oil Field Services Ltd. during the year for 1 million restricted common stock shares valued at $0.65 per share for $650,000.  Based on a third party valuation of the acquisition the Company has recorded goodwill of $394,585 and intangible assets, being proprietary computer programs, for an amount of $210,000.

The Company will amortize the Intangible Asset at $42,000 per year for 2007 through 2011 inclusive.



Note 8:    Loan Payable



During July 2004 the Company issued a promissory note for $165,000 to Glencoe Capital Inc for the purposes of placing the advance payment on the Texas property. The note bears an interest rate of 12% per annum commencing on August 16th, 2004. Of this $15,000 was held by the lender to cover its fees for services. The term of the note was initially August 16, 2004, but the term was extended by verbal agreement between both parties. In addition, Zenith Financial, as guarantor,  pledged 330,000 shares of the Company's stock it held as collateral for the loan.  In November 2004, Glencoe Capital, Inc. chose to foreclose on the collateral and sell the pledged shares and by April 15, 2005 had sold all of the pledged shares.  The Company recorded a liability to Zenith of $218,121 for the replacement of the sold collateral.  The obligation to Zenith at April 30, 2005 includes 80,000 additional shares of the Company's common stock as a fee payable to Zenith.



On August 11, 2005 the Company issued 410,000 restricted shares at $0.53 per share in payment of this debt.



F-20

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The balance of $119,214 consists of loans covering furniture and equipment purchases plus two advances that may be paid in stock. See table in Note 9 for these notes.



Note 9:    Convertible Debentures.



On October 18, 2004, the Company entered into a Standby Equity Distribution Agreement with Cornell Capital Partners, L.P. wherein we may, at our discretion, periodically sell to Cornell Capital Partners shares of our common stock for a total purchase price of up to $15,000,000. For each share of common stock purchased under the Standby Equity Distribution Agreement, Cornell Capital Partners will pay 100% of the lowest volume weighted average price of the common stock as quoted on Bloomberg LP during the five consecutive trading days immediately following the notice date.



On August 17, 2005 the Company signed an agreement with Cornell Capital Partners, LP that replaces the existing agreement. Under the new agreement the lender chose to convert the $425,000 commitment fee note into 1,000,000 shares of restricted common stock.  The balance of $1,680,000 plus accrued interest,  plus a delay fee of approximately $272,000 resulted in a total debt of  $2,021,172 bearing interest at 5% annually, repayable at $150,000 per month plus interest over 13 months starting November 1, 2005 with a final payment of $71,461 in the 14th month. Subsequently, the lender has converted $270,000 of the loan to shares at $0.54.



The lender has the right to convert all or a portion of the outstanding amount to common stock at a price of $0.54 per share subject to the actual shares received cannot exceed 4.99% of the then outstanding shares. The Company has charged $65,960 to interest expense this quarter reflecting the expense from August 17, 2005 to April 30, 2006.  Additionally, the Company recorded a debt discount for the beneficial conversion feature in the note agreement of $336,833 resulting in an allocation to interest expense of $134,733 for the year ended April 30, 2006.



F-21

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Convertible Debentures and Loans Payable at April 30 are comprised of the following:





|                                                                                                                                |                  |  |                  
|------------------------------------------------------------------------------------------------------------------------------- | ---------------- |  | -----------------
|                                                                                                                                | 2006             |  | 2005             
|                                                                                                                                |                  |  |                  
|Convertible debentures bearing interest at 5% repayable December 1, 2006                                                        | $    1,751,172   |  | $       1,680,000
|                                                                                                                                |                  |  |                  
|Convertible debenture for commitment fee, non-interest bearing, discounted at an imputed rate of 5%, repayable December 1, 2006 | -                |  | 365,936          
|                                                                                                                                |                  |  |                  
|Total convertible debentures                                                                                                    | 1,751,172        |  | 2,045,936        
|                                                                                                                                |                  |  |                  
|Loan payable to Camden Holdings, on demand and non-interest bearing                                                             | 48,476           |  | 84,824           
|                                                                                                                                |                  |  |                  
|Credit line bearing interest of 14.99%, repayable at a minimum of 2 1⁄2 % of the outstanding balance                              | 13,467           |  | -                
|                                                                                                                                |                  |  |                  
|Loan payable bearing interest of 10.81%, repayable in monthly installments of $609 for 36 months                                | 14,071           |  | -                
|                                                                                                                                |                  |  |                  
|Loan payable for cancelled stock purchase                                                                                       | 43,200           |  | -                
|                                                                                                                                |                  |  |                  
|Loan payable to Zenith Financial, on demand and non-interest bearing                                                            | -                |  | 218,121          
|                                                                                                                                | 119,214          |  | 302,945          
|                                                                                                                                |                  |  |                  
|Loan from related party, due August 5, 2005 bearing interest at 12% (see Note 2)                                                | -                |  | 100,000          
|                                                                                                                                |                  |  |                  
|Totals                                                                                                                          | $      1,870,386 |  | $       2,448,881
|                                                                                                                                |                  |  |                  

Principal payments due in years ended April 30:



2007                                        $    1,856,161

2008                                                    12,758

2009                                                    1,467



Total                                    $     1,870,386



Note 10:  Asset Retirement Obligation



In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations.  SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset.  Subsequently, the asset retirement cost is allocated to expense using a systematic and rational method.  The provisions of SFAS No. 143 were effective for fiscal years beginning after June 15, 2002.



The following table is a reconciliation of the Company's liability for asset retirement obligations:



|                                   |   |        
|---------------------------------- | - | -------
|Balance April 30, 2005             | $ | 354,679
|Impact of adoption of SFAS No. 143 |   | -      
|Addition to Liability              |   | 368,584
|Liability Settled                  |   | -      
|Accretion Expense                  |   | 72,326 
|Balance April 30, 2006             | $ | 795,589



---



| |  | 
| |  | 



The addition during 2006 relates to the estimated cost associated with the KWB wellbores acquired as part of the Baron Oil acquisition. Accretion expense reflects the cost allocated to this year and shown as accretion expense on the income statement.



Note 11:    Concentrations and Contingencies



Concentrations



The Company places its cash and cash equivalents with high quality institutions. At times such cash may be in excess of the FDIC insurance limit.



During the year ended April 30, 2006, the Company sold all of its crude oil from Louisiana to Texon LP, gas from Louisiana to Cokinos Energy Corp and all of its crude oil from East Texas to Eastex Crude Company and Plains Marketing, LP.



While the Company has utilized only a few customers over the past two years, it is management's belief that the oil and gas the Company produces could be sold to other crude oil purchasers, refineries or pipeline companies.  The Company sells its oil pursuant to short-term contracts at market prices.  Market demand for the Company's production is subject to various influences that can never be assured.  The base values for the Company's crude oil sales is set by major oil companies in response to area and market strengths and international influences.



F-22

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Contingencies



Longbow

The Company has been named as defendant in a lawsuit filed by Longbow, LLC for approximately $185,000 representing their estimate of their share of the profit on the sale of the Company's working interests in the Keystone, Glide and Merzonian leases. This lawsuit was filed in the California Superior Court, Kern County (Case Number S-1500-CV-252398, SPC).  Longbow is using a liberal interpretation of the purchase agreements in order to claim a percentage of the proceeds of Sonoran's sale of its working interests to Harvest Worldwide.  Sonoran has filed a cross-complaint seeking monetary damages and a judicial interpretation of the "sale-for-profits" clause. Contemporaneously, Harvest Worldwide, the entity to which Sonoran sold these interests, has filed suit against Longbow for withholding distributions and to remove them as the "operator" of the leases.  In response, Longbow filed a cross-complaint in that action against Sonoran.  Sonoran intends to vigorously defend itself against these claims and to pursue its claims against Longbow.  It is management's view that Longbow will not prevail in their action and Sonoran will prevail on its cross-complaint.



During January 2004, the Company sold itsGlide, Keystone and Merzonian leases on the Deer Creek Oil Company property; the Malton-Black Butte, Denverton Creek, Maine Prairie and the Lambie Ranch Gas Fields; as well as the North West Lost Hills property to Harvest Worldwide, LLC ("Harvest") subject to the debt related to the properties, which totaled $1.2 million.This contract has also devolved into litigation among the various parties, currently proceeding in Kern County (Bakersfield, California), with a trial date estimated to occur in late December, 2005. This case has been consolidated with  (Case Number S-1500-CV-252398, SPC) above and will be heard in September 2006.



Anderson et al

During November 2003, the Company entered into a Stock Purchase Agreement with Camden Holdings, whereby Camden agreed to purchase $3 million in common stock at a price equal to a 20 percent discount from the average 10-day "bid" price starting on or before November 26, 2003 (determined as a price of $.80 per share).  In January 2004, under the terms of the Stock Purchase Agreement, Camden agreed to assume $840,043 of the Company's liabilities in exchange for 1,050,053 shares of common stock. A dispute has arisen as to the payments of the various debts assumed, between Camden and the company, which has resulted in litigation in the Los Angeles Superior Court.



On June 5, 2006 the Company entered in a tentative settlement of their court case wherein Mr. Anderson has agreed to transfer control of the shares in controversy to settle debts that were to be originally assumed by Anderson, and retire obligations associated with project developments underway at the time of the original dealings.



However, there are other parties involved as claimants and defendants and settlements have not reached with all parties.  The dispute involves whether the Company has title to certain assets and liabilities related to oil properties in California.  The Company believes that it sold these properties and transferred the associated debt in that transaction.  One claimant believes that the Company is the debtor on approximately $1,200,000 in debt related to the California oil properties.  The accompanying balance sheet contains approximately $780,000 in liabilities accrued related to this matter.  The Company believes that any potential settlement with the parties would not have an adverse material effect on the Companys financial condition in that any such settlement would likely involve the Company reacquiring the rights to the California properties and the return on approximately 8,000,000 shares of the Companys common stock.



F-23

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Note 12:    Oil and Gas Reserves and Related Financial Information



Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development Activities





Costs incurred in oil and gas property acquisition, exploration and development activities are summarized as follows:



|                  |                                
|----------------- | -------------------------------
|                  | Year Ended
April 30, 2006      
|                  |                                
|Acquisitions:     |                                
|Proved            | $                             -
|Unproved          | 16,059,146                     
|Development costs | 2,545,091                      
|Exploration costs | -                              
|                  |                                
|Total             | $         18,604,237           
|                  |                                



Proved Oil and Gas Reserve Quantities (Unaudited)



At April 30, 2006 the estimated oil and gas reserves presented herein were derived from reports prepared by Haas Petroleum Engineering Services, Inc., an independent engineering firm.  The Company cautions that there are many inherent uncertainties in estimating proved reserve quantities and in projecting future production rates and the timing of development expenditures. Accordingly, these estimates are likely to change as future information becomes available, and these changes could be material.



Estimated quantities of proved reserves, all located within the United States, as well as the changes in proved reserves during the year ended April 30, 2006, are presented in the following tables:



|                                            | Crude Oil (Bls) |  | Natural Gas (Mcf)
|------------------------------------------- | --------------- |  | -----------------
|Proved developed reserves at April 30, 2005 | 321,667         |  | -                
|Sale of reserves                            | -               |  | -                
|Purchase of reserves                        | -               |  | -                
|Change in previous estimate                 | 57,202          |  | 92,480           
|Transfer from unproved properties           | 614,837         |  | 2,101,009        
|Production                                  | (24,376)        |  | (12,739)         
|Proved developed reserves at April 30, 2006 | 969,330         |  | 2,180,750        
|                                            |                 |  |                  

Proved reserves are estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data indicate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions.



F-24

---





Proved reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods.



Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserve Quantities



The table below sets forth a standardized measure of the estimated discounted future net cash flows attributable to the Company's proved oil and gas reserves. Estimated future cash inflows were computed by applying year-end prices of oil and gas (with consideration of price changes only to the extent provided by contractual arrangements) to the estimated future production of proved oil and gas reserves at April 30, 2006 discounted at 10 percent. The future production and development costs represent the estimated future expenditures to be incurred in developing and producing the proved reserves, assuming continuation of existing economic conditions.



|                                                                  |                          
|----------------------------------------------------------------- | -------------------------
|                                                                  | Year Ended
April 30, 2006
|                                                                  |                          
|Future cash inflows                                               | $  79,565,910            
|Future cash outflows:                                             |                          
|Production costs                                                  | (20,348,480)             
|Development costs                                                 | (5,396,120)              
|Future net cash flows before income taxes                         | 53,821,310               
|                                                                  |                          
|Future income taxes                                               | (13,853,986)853)         
|Future net cash flows                                             | 39,967,324               
|Adjustment to discount future annual net cash flows at 10 percent | (13,749,435)             
|                                                                  |                          
|Standardized measure of discounted future net cash flows          | $   26,217,889           
|                                                                  |                          



The following table summarizes the principal factors comprising the changes in the standardized measure of estimated discounted net cash flows:



|                                              |                               
|--------------------------------------------- | ------------------------------
|                                              | Year Ended
April 30, 2006     
|                                              |                               
|Standardized measure, beginning of period     | $                    4,696,398
|Sales of oil and gas, net of production costs | (316,736)                     
|Purchase of reserves                          | -                             
|Change in valuation:                          |                               
|Estimated effect of price increase            | 2,839,783                     
|Estimated effect of volume increase           | 400,628                       
|Estimated effect of cost increases            | (984,577)                     
|Transfer from unproved properties             | 19,582,393                    
|Sale of reserves                              | -                             
|                                              |                               
|Standardized measure, end of period           | $      26,217,889             
|                                              |                               



F-25

---





Note 13:    Lease Commitments



The Company has leased office premises in Chandler, Arizona and  Amman, Jordan. In addition the Company is leasing a house and vehicle in Phoenix for the CEO. Future minimum payments required are:



Year 2007                                                $189,514

Year 2008                                                  168,514

Year 2009                                                  160,453

Year 2010                                                  149,998



$668,480



Rent expense was $200,836 and $114,964 for 2006 and 2005, respectively.





Note 14:   Segmented Information

The Company is presently operating in two segments:

Oil and Gas :

|        |                    |              
|------- | ------------------ | -------------
|        | 2006               | 2005         
|Revenue | $        1,556,588 | $     518,711
|Income  | (10,131,166)       | (7,429,471)  
|Assets  | 29,674,515         | 5,025,297    
|        |                    |              

Consulting Services:

|        |                  |             
|------- | ---------------- | ------------
|        | 2006             | 2005        
|Revenue | $        381,646 | $          0
|Income  | 1,528            | 0           
|Assets  | 0                | 0           
|        |                  |             



Oil field services work consists of engineers performing services based outside the Corporate offices with no Company assets being allocated to this function.

Note 15:   General and Administrative Expense



The major components of General and Administrative expense for the years ending April 30, 2006 and 2005



|                         |                |           
|------------------------ | -------------- | ----------
|                         | 2006           | 2005      
|Consulting               | $    1,004,515 | $  676,605
|Investor relations       | 368,099        | 167,813   
|Loan payment delays      | 272,272        | -         
|Officer compensation     | 1,648,146      | 1,515,799 
|Other                    | 463,316        | 284,832   
|Professional fees-legal  | 442,427        | 246,962   
|Rent/Utilities           | 200,836        | 114,964   
|Salary and wages         | 388,275        | 67,338    
|Travel and entertainment | 249,687        | 215,319   
|                         | $   5,037,573  | 3,289,632 
|                         |                |           



Note 16:    Subsequent Events



On September 11, 2006 the Company received a commitment from a financial institution for a 12 million senior secured credit facility that is expected to close on or before October 2, 2006. Funds will be used to repay debt, develop reserves and for working capital purposes.





F-26

---





ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE



None



ITEM 8A - CONTROLS AND PROCEDURES





(a) Disclosure Controls and Procedures. Disclosure controls and procedures are controls and other procedures that are designed to ensure that the information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that a company files or submits under the Exchange Act is accumulated and communicated to the Company's management, including its Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.



We maintain disclosure controls and procedures designed to ensure that material information related to our company is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.



Under the supervision of our Chief Executive Officer and our Chief Financial Officer, we re-evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of April 30, 2006, the design and operation of such disclosure controls and procedures were effective.



ITEM 8B - OTHER INFORMATION



None.



---





PART III



ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT



Section 16(a) of the Exchange Act ("Section 16(a)") requires the Company's Officers and Directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership on Form 3 and changes in ownership on Form 4 or Form 5 with the Securities and Exchange Commission (the "SEC"). Such Officers, Directors and ten percent shareholders are also required by SEC rules to furnish the Company with copies of all such forms that they file. The Company's initial registration statement on Form 10-SB became effective on or about April 5, 2000. Management is confident that all filings required are current as of the statement date.



|                 |     |                         |                    
|---------------- | --- | ----------------------- | -------------------
|Name             | Age | Current Position/Office | Position Held Since
|Peter Rosenthal  | 44  | Director/President/CEO  | 2004               
|Khaldoun Awamleh | 47  | Director                | 2005               
|Robert M. King   | 45  | Director                | 2006               
|Brad Farrow      | 49  | Director                | 2006               
|Mehdi Varzi      | 60  | Director                | 2003               
|Charles Waterman | 67  | Director                | 2003               



At the Annual meeting held April 14, 2005 Mr. Rosenthal was elected for a three year term and Mr. Varzi and Mr. Waterman were elected for two year terms.  At an Annual meeting held December 14, 2005 Mr. Awamleh was elected to serve a one year term. Mr Farrow and Mr. King were appointed in 2006 to serve until the next annual meeting.



PETER ROSENTHAL, CHAIRMAN, CEO, PRESIDENT, DIRECTOR



Prior to joining Sonoran Energy, Inc Peter held the position of General Manager - Aberdeen Operations with Amerada Hess Corporation Prior to joining Amerada Hess Ostenfeld-Rosenthal worked for Elf Petroleum Norge, as a Specialist Engineer, Project Manager and Implementation Superintendent from 1993 to 1997. He has worked both onshore and offshore during his time with Elf.



Previous to that he was a consulting engineer assisting with the development of new concepts for floating Oil & Gas facilities, developing technical and commercial proposals for clients such as Chevron, Mobil and Shell, and project management of various projects, mainly within structural reliability and risk analysis (both technical and financial).



KHALDOUN AWAMLEH, DIRECTOR

From 1992 to 2001, Mr. Awamleh was owner and General Manager of Arab Infotech Center, a computer hardware and software company. From 2001 to 2002, Mr. Awamleh served as Chairman of Jordan Aviation, a charter airplane company. Mr. Awamleh currently serves on the board of directors of five companies, including Sonoran Energy, Inc. Mr. Awamleh began serving as a director and partner of Axiolog, an e-logisitic company, in 1999. In 2004, Mr. Awamleh began serving as a director of Allied Soft, a software company, and Cyber City, a qualified industrial zone. Mr. Awamleh also serves as Chief Executive Officer of Cyber City. Also in 2004, Mr. Awamleh began serving as a director for Dibah Construction Company. Mr. Awamleh also owns Al Jawarah Hotal Suites in the United Arab Emirates and is a Partner in the Arab American University in Jenin - West Bank.



BRAD FARROW, DIRECTOR



Since 1985, Brad Farrow has led implementations for RLG International clients throughout North America and Western Europe. He introduced RLG's TMP® process (Theoretical Maximum Performance) to the drilling industry in 1996 and has helped to establish RLG as the consultant of choice for offshore performance coaching. Brad spent six years leading RLG's European Operations from Scotland. His current role as a Managing Director includes overseeing the European Operations and directing RLG's international and offshore oil and gas portfolio. Additionally, he is a director of Technical Limit Services Ltd., a performance coaching organization specializing in offshore drilling operations.



Mr. Farrow holds a Bachelor of Science degree from Concordia University in Montreal and an MBA from the University of Western Ontario. He joined the Board of Sonoran Energy, Inc on June 27, 2006.



ROBERT M. KING, DIRECTOR



Robert M. King is a strategic financial executive who has spent most of his career involved with the oil and gas industry, first as a banker, managing lending and corporate finance relationships with diversified energy companies, then as a senior financial officer of two different independent oil and gas companies, and finally as Co-Founder and Managing Director of a private equity group focused on natural gas development opportunities.
Mr. King was the Senior VP and Chief Financial Officer of Nuevo Energy Company from 1996 through 2001. From 2002 to September 2004, he was co-founder and Managing Director of Red Oak Capital Management, LLC, a private firm which raises capital for development drilling projects and provides other similar advisory services for small oil and gas companies.

Mr. King lives in Houston, Texas, where he has been involved in the management of a major nonprofit human services organization since 2004.  He joined the Board on July 18, 2006.



MEHDI VARZI, DIRECTOR



Mr. Varzi established Varzi Energy as an independent oil and gas consultancy in June 2001 after a 33-year career spanning oil, diplomacy and international finance. From 1982 - 2001, Mr. Varzi worked in the City of London, first as an oil consultant, specializing in OPEC and international oil market developments from 1982-1986 with stockbrokers Grieveson Grant; then as a Director of Energy Research with Kleinwort Benson (1986-1995), and then in the same position with Dresdner Kleinwort Wasserstein (1995-2001), retiring as Managing Director of Energy Research in 2001. From 1972-1981, Mr. Varzi served in the Iranian Ministry of Foreign Affairs, and was posted to the Iranian Embassy in Ankara from 1977-1981. From 1968-1972, Mr. Varzi served as a Senior Analyst in the International Affairs Section of the National Iranian Oil Company. Mr. Varzi regularly conducts briefings on world oil issues for private and state oil and gas companies and is currently involved in a number of oil and gas projects in the Middle East.



---





CHARLES WATERMAN, DIRECTOR



Mr. Waterman is the Chief Executive Officer and founding member of Jefferson Waterman International, a Washington, DC-based consultancy that advises clients on political, economic and military trends worldwide. Waterman has held several leading positions within the U.S. Central Intelligence Agency and as National Intelligence Officer in the Middle East (1963 to 1985), Mr. Waterman coordinated the intelligence input to policy deliberations in the Near East and South Asia. As a member of the Foreign Service, he spent many years living and working overseas in Kuwait, Cairo, Beirut, Amman and Jiddah. A recognized expert in the Middle East and the former Soviet Union, Mr. Waterman has extensive knowledge of the defense and petroleum industries, and has published extensively in foreign affairs journals.



Section 16(a) Beneficial Ownership Reporting Compliance



Section 16(a) of the Securities Exchange Act of 1934 requires the Company's executive officers, directors and persons beneficially owning more than 10% of the Company's common stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission. The Company has undertaken an extensive review of the Section 16(a) reports filed on behalf of each person subject to Section 16(a) prior to April 30, 2005, to determine whether all of their reportable transactions in the Company's common stock were timely reported and to ensure proper reporting of all of their beneficial holdings. The review revealed that there were a number of holdings and transactions that were not timely reported and the Company has undertaken to assist the subject persons to file the necessary forms. The Company has also developed new procedures to ensure improved compliance with Section 16(a) on an on-going basis.



Based solely on copies of such forms furnished as provided above, to the Company's knowledge all reports required under Section 16(a) during the most recent fiscal year or prior years, except that none of the newly appointed/elected members of the Board of Directors has filed a Form 3.  These reports are intended to be filed as soon as possible.



Audit Committee Financial Expert



The entire Board of Directors of Sonoran Energy, Inc. serves as the Company's Audit Committee.  As of April 30, 2006, our Board of Directors has designated one audit committee financial expert  as that term is defined in Item 401(e)(2) of Regulation S-B.  Rasheed Rafidi served as the audit committee financial expert for the Company until December 31, 2005.    Mr. Rafidi was not an independent director. Sonoran has found an independent financial expert to join the Board and, effective September 1, 2006, to chair the audit committee.





Code of Ethics



We have
adopted a "Code of Ethics for Directors, Officers and Employees", a code of
ethics that applies to all employees, including our executive officers.



---

In the event that we make any amendments to, or grant any waivers of, a provision of the Code of Ethics for Directors, Officers and Employees that applies to the principal executive officer, principal financial officer, or principal accounting officer that requires disclosure under applicable SEC rules, we intend to disclose such amendment or waiver and the reasons therefore on a Form 8-K or on our next periodic report.



ITEM 10 - EXECUTIVE COMPENSATION



SUMMARY COMPENSATION TABLE



The following table sets forth the aggregate annual remuneration of Sonoran's Chief Executive Officer and the other executive officers whose annual salary and bonus exceeded $100,000 in the fiscal year ended April 30, 2006 (collectively, the "named executive officers"), and for the fiscal years ended April 30, 2005 and April 30, 2004, the Company's most recent and meaningful fiscal years. All amounts are in U.S. dollars unless otherwise noted.



|                            |             |                     |                        |          |                  |           |                       
|--------------------------- | ----------- | ------------------- | ---------------------- | -------- | ---------------- | --------- | ----------------------
|                            |             | Annual Compensation | Long Term Compensation
|Name and Principal Position | Fiscal Year | Salary              | Bonus                  | Other    | Restricted Stock | Options   | All Other Compensation
|                            |             |                     |                        |          |                  |           |                       
|Peter Rosenthal             | 2006        | $350,000(4)         | 0                      | $165,596 | 1,200,000        | 0         | 0                     
|Director/CEO/President      | 2005        | $350,000(3)         | 0                      | $180,000 | 1,050,000        | 1,500,000 | 0                     
|                            | 2004        | n/a                 | n/a                    | n/a      | n/a              | n/a       | n/a                   
|                            |             |                     |                        |          |                  |           |                       
|Paul Bristol                | 2006        | n/a                 | n/a                    | n/a      | n/a              | n/a       | n/a                   
|Former CEO                  | 2005        | n/a                 | n/a                    | n/a      | n/a              | n/a       | n/a                   
|                            | 2004        | $46,849(1)          | $600,000               | 0        | 0                | 0         | 0                     
|                            |             |                     |                        |          |                  |           |                       
|Rasheed M. Rafidi           | 2006        | $166,667(4)         | 0                      | 112,000  | 1,149,999        | 0         | 0                     
|CFO                         | 2005        | $208,334(3)         | 0                      | 45,000   | 400,000          | 1,500,000 | 0                     
|                            | 2004        | n/a                 | n/a                    | n/a      | n/a              | n/a       | n/a                   
|                            |             |                     |                        |          |                  |           |                       
|Ala Amine Nuseibeh          | 2006        | $218,750(4)         | 0                      | 47,250   | 1,200,000        | 0         | 0                     
|Vice-President              | 2005        | $208,334(3)         | 0                      | 45,000   | 400,000          | 1,500,000 | 0                     
|                            | 2003        | n/a                 | n/a                    | n/a      | n/a              | n/a       | n/a                   
|                            |             |                     |                        |          |                  |           |                       
|David Mackertich            | 2006        | $158,363(4)         | 0                      | 0        | 752,120          | 0         | 0                     
|Vice-President              | 2005        | $188,501(3)         | 0                      | 0        | 350,000          | 1,000,000 | 0                     



---





|               |      |             |     |        |           |           |    
|-------------- | ---- | ----------- | --- | ------ | --------- | --------- | ---
|               | 2004 | n/a         | n/a | n/a    | n/a       | n/a       | n/a
|               |      |             |     |        |           |           |    
|Bill McFie     | 2006 | $250,000(4) | 0   | 18,000 | 1,000,000 | 0         | 0  
|Vice-President | 2005 | $250,000(3) | 0   | 0      | 350,000   | 1,000,000 | 0  
|               | 2004 | n/a         | n/a | n/a    | n/a       | n/a       | n/a
|               |      |             |     |        |           |           |    
|Jack Hodgson   | 2006 | $85,100     | 0   | 0      | 0         | 0         | 0  
|Interim CFO    | 2005 | n/a         | n/a | n/a    | n/a       | n/a       | n/a
|               | 2004 | n/a         | n/a | n/a    | n/a       | n/a       | n/a
|               |      |             |     |        |           |           |    



---





|           |      |             |   |               |       |           |  
|---------- | ---- | ----------- | - | ------------- | ----- | --------- | -
|John Punzo | 2006 | 0           | 0 | n/a           | 0     | 0         | 0
|Former CEO | 2005 | 0           | 0 | n/a           | 0     | 0         | 0
|           | 2004 | $120,000(1) | 0 | 180,000(1)(2) | 2,500 | 1,500,000 | 0



(1) Payment was part debt and part cash.

(2) Severance pay of 18 months

(3) Salaries for 2005 were all accrued as debt

(4) Salaries up to and including July 2006 were paid thru converting 70 % of the balances owing from April 30, 2004 and to July 31, 2005 to stock at a price of $.55 per share. Salaries for August through December were paid by half cash and half converted to stock.  For January to April 2006, salaries plus 1/12 of the balance owing from July 2005 was paid in cash except for the CEO who took less cash and left his balance owing.

Mr. Rafidi, Mr. Nuseibeh and Mr. Hodgson have resigned their positions with the Company.



OPTION GRANTS IN FISCAL YEAR 2006



|     |                                                 |  |                                                                   |  |                          |  |                
|---- | ----------------------------------------------- |  | ----------------------------------------------------------------- |  | ------------------------ |  | ---------------
|     | Individual Grants                              
|Name | Number of Securities Underlying Options Granted |  | Percent of Total Options Granted to Employees in Fiscal Year 2006 |  | Exercise Price Per Share |  | Expiration Date
|     |                                                 |  |                                                                   |  |                          |  |                
|nil  | nil                                             |  | nil                                                               |  | nil                      |  | nil            
|     |                                                 |  |                                                                   |  |                          |  |                
|     |                                                 |  |                                                                   |  |                          |  |                





---







The following table provides the specified information concerning unexercised options held as of April 30, 2006, by the persons named in the Summary Compensation Table:





|                   |                             |  |                |  |                                                    |  |                                                      |  |             |  |              
|------------------ | --------------------------- |  | -------------- |  | -------------------------------------------------- |  | ---------------------------------------------------- |  | ----------- |  | -------------
|                   |                             |  |                |  | Number of Securities Underlying Options at 4/30/06 |  | Value of Unexercised in the Money Options at 4/30/06
|Name               | Shares Acquired on Exercise |  | Value Realized |  | Exercisable                                        |  | Unexercisable                                        |  | Exercisable |  | Unexercisable
|Peter Rosenthal    | n/a                         |  |                |  |                                                    |  |                                                      |  |             |  |              
|Rasheed Rafidi     | n/a                         |  |                |  |                                                    |  |                                                      |  |             |  |              
|Charles Waterman   | n/a                         |  |                |  |                                                    |  |                                                      |  |             |  |              
|Christopher Pitman | n/a                         |  |                |  |                                                    |  |                                                      |  |             |  |              
|Mehdi Varzi        | n/a                         |  |                |  |                                                    |  |                                                      |  |             |  |              
|Ala Nuseibeh       | n/a                         |  |                |  |                                                    |  |                                                      |  |             |  |              



ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



The following table sets forth the beneficial ownership of Common Stock of the Company as of the Record Date for the following: (i) each person or entity who is known to the Company to beneficially own more than 5% of the outstanding shares of the Company's Common Stock; (ii) each of the Company's Directors (and nominees for election as Directors); (iii) the Company's Chief Executive Officer and each of the officers ("Named Officers") named in the Summary Compensation Table herein; and (iv) all Directors and executive officers of the Company as a group.



The number and percentage of shares beneficially owned is determined under rules of the Securities and Exchange Commission ("SEC"), and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or dispositive power and also any shares that the individual has the right to acquire within sixty days of the Record Date through the exercise of any stock option or other right. Unless otherwise indicated in the footnotes, each person has sole voting and dispositive power (or shares such power) with respect to the shares shown as beneficially owned.



---





|               |                                           |                                           |                 
|-------------- | ----------------------------------------- | ----------------------------------------- | ----------------
|TITLE OF CLASS | NAME AND ADDRESS OF BENEFICIAL OWNER      | AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP | PERCENT OF CLASS
|Common Stock   | Rasheed Rafidi  ex dir                   | 2,972,733                                 | 3.58%           
|Common Stock   | Ala Amine Nuseibeh  ex dir               | 3,620,955                                 | 4.36%           
|Common Stock   | David Mackertich  ex officer             | 1,204,107                                 | 1.45%           
|Common Stock   | Bill McFie                                | 3,142,371                                 | 3.78%           
|Common Stock   | Khaldoun Awamleh                          | 999,999                                   | 1.20%           
|Common Stock   | Christopher Pitman  ex dir               | 250,000                                   | 0.30%           
|Common Stock   | Mehdi Varzi                               | 250,000                                   | 0.30%           
|Common Stock   | Charles Waterman                          | 250,000                                   | 0.30%           
|Common Stock   | Peter Rosenthal                           | 2,793,666                                 | 3.36%           
|Common Stock   | Current Directors and Officers as a Group | 15,483,831                                | 18.63%          
|Common Stock   | AGR Holding                               | 4,615,338                                 | 5.55%           
|               | Total                                     | 20,099,169                                | 24.19%          



ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



There were no transactions during the year ended April 30, 2006.



During the year ended April 30, 2005, a party related to one of the officers of the Company lent Sonoran $100,000 repayable August 5, 2005 with an interest rate of 12%. The loan and interest were repaid as of April 30, 2006.







---









PART IV



ITEM 13 - EXHIBITS



(a) 1. FINANCIAL STATEMENTS



These documents are listed and included in Part II, Item 7 of this report:



Report of Independent Public Accountants

Balance Sheets at April 30, 2006

Statements of Operations for the periods ended April 30, 2006 and 2005.

Statements of Shareholders' Equity for the periods ended April 30, 2006 and 2005.



Statements of Cash Flows for the periods ended April 30, 2005 and 2004.

Notes to Financial Statements.





(a) 3. EXHIBITS



3.1 - Articles of Incorporation - Cerotex Holdings, Inc.*

3.2 - Articles of Incorporation - Name change from Cerotex Holding, Inc. to Showstar Entertainment Corporation*

3.3 - Amendment to the Articles of Incorporation - Name change from Showstar Entertainment Corporation to Showstar Online.com, Inc.*

3.4 - Bylaws of Showstar - Name change from Certoex Holdings, Inc. to Showstar Entertainment Corporation to Showstar Online.com, Inc.*

3.5 - Amended Articles of Incorporation (filed with Definitive Proxy Statement on August 17, 2000)

3.6 - Amended Bylaws (filed with the Definitive Proxy Statement on August 17, 2000)

4.1 - Convertible Note

4.2 - Convertible Note

10.1 - Content Licensing Agreement with National Register Publishing, a division of Reed Elsevier, Inc.*

10.2 - Supplier Agreement - Leiberman's Gallery, LLP*

10.3 - Agreement dated October 29, 2000 regarding Proposed China Joint Venture*

10.4 - John Punzo Employment Contract dated May 27, 1999*

10.5 - Oil and Gas Purchase Agreement between Sonoran Energy, Inc. and Longbow, LLC for Emjayco Glide #33 Lease (dated October 5, 2002)(1)

10.6 - Oil and Gas Purchase Agreement between Sonoran Energy, Inc. and Longbow, LLC for Keystone/Deer Creek Property (dated October 5, 2002)(21)

10.7 - Deer Creek Property Purchase Agreement (dated February 7, 2003)*

10.8 - Denverton Creek/Malton Black Butte/Maine Prairie/Lambie Ranch Field Property Purchase Agreement (dated March 1, 2003)(1)

10.9 - Services Agreement between Sonoran and Paradigm (Punzo)(1)

14.1 - Code of Ethics

31.1 - Rule 13a-14a/15d-14(a) Certification by Chief Executive Officer

31.2 - Rule 13a-14a/15d-14(a) Certification by Chief Financial Officer

32.1 - Section 1350 Certification by Chief Executive Officer

32.2 - Section 1350 Certification by Chief Financial Officer



* Incorporated by reference (filed with Company's Form 10-SB on January 14, 2000).

(1) Incorporated by reference (filed with Form 10KSB for the year ended April 30, 2003)



(b) Other Information



The Company filed Form 8-K reports during the 4th quarter:





ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES



The following table sets forth the aggregate fees billed from May 1, 2005 to April 30, 2006 by



Epstein Webber & Canover PLC



|                   |   |          
|------------------ | - | ---------
|                   |   |          
|Audit Fees         | $ | 57,384.00
|Audit Related Fees |   | 0        
|Tax Fees           |   | 0        
|All Other Fees     |   | 0        
|Total              | $ | 57,384.00









---







SIGNATURES



In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





SONORAN ENERGY, INC.

(Registrant)



September 12, 2006



By: /s/ Peter Rosenthal

Peter Rosenthal

Director/President/CEO



KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby severally constitutes and appoints Peter Rosenthal and Frank T. Smith, and each of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Commission, granting unto said attorney-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each said attorneys-in-fact and agents or any of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.



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



|                                      |                        |                   
|------------------------------------- | ---------------------- | ------------------
|Signature                             | Title                  | Date              
|/s/ Peter Rosenthal
Peter Rosenthal   | President/CEO/Director | September 12, 2006
|/s/ Brad Farrow
Brad Farrow           | Director               | September 12, 2006
|/s/ Mehdi Varzi
Mehdi Varzi           | Director               | September 12, 2006
|/s/ Charles Waterman
Charles Waterman | Director               | September 12, 2006
|/s/ Khaldoun Awamleh
Khaldoun Awamleh | Director               | September 12, 2006
|/s/Robert King
Robert King            | Director               | September 12, 2006







---



Exhibit 31.1



Pursuant to the requirements of Rule 13a-14 of the Securities Exchange Act of 1934, as amended, provides the following certification.



I, Peter Rosenthal, President of Sonoran Energy, Inc. ("Company"), certify that:



1. I have reviewed this annual report on Form 10-KSB of Sonoran Energy, Inc.;



2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to  make the statements made, in light of the circumstances under which such  statements were made, not misleading with respect to the period covered by this annual report;



3. Based on my knowledge, the financial statements, and other financial  information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the
small business issuer as of, and for, the periods presented in this annual report;



4.
The other certifying directors and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e))  and internal control over financial  reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the small business
issuer and have:



a.  Designed such disclosure controls and procedures, or caused such  disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to
the small business issuer,  including its consolidated subsidiaries, is made known to us by other within those entities, particularly during the period in which this report  is being prepared;



b. Designed such internal control over financial reporting, or caused  such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of  financial reporting and the preparation of financial statement for external purposes in accordance with generally accepted accounting  principles.



c.  Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about   the effectiveness of the disclosure controls and procedures, as of the end  of the period covered by this report on such evaluation; and



d.  Disclosed in this report any change in
the small business issuer's internal control over financial reporting that occurred during
small business issuer's fourth fiscal quarter that has materially affected, or is reasonably likely to  materially affect,
the small business issuer's internal control over financial reporting; and



5. The other certifying directors and I have disclosed, based on our most  recent evaluation of internal control over financial reporting, to the
small business issuer's auditors and the audit committee of our board of directors (or  persons performing the equivalent functions):



a. All significant deficiencies and material weaknesses  in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the
small business issuer's ability to record, process, summarize and report financial data; and



b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
small business issuer's internal control over financial reporting; and



Date: September 12, 2006



/s/ Peter Rosenthal

Peter Rosenthal, President

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Exhibit 31.2



Pursuant to the requirements of Rule 13a-14 of the Securities Exchange Act of 1934, as amended, provides the following certification.



I, Frank T. Smith, Chief Financial Officer of Sonoran Energy, Inc. ("Company"), certify that:



1.  I have reviewed this annual report on Form 10-KSB of Sonoran Energy, Inc.;



2. Based on my knowledge, this annual report does not contain any untrue  statement of a material fact or omit to state a material fact necessary to  make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;



3.
 Based on my knowledge, the financial statements, and other financial
 information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
the small business issuer as of, and for, the periods presented in this annual report;



4. The other certifying directors and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))  and internal control over financial  reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for
the small business isser and have:



a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to
the small business issuer, including its consolidated subsidiaries, is made known to us by other within those entities, particularly during the period in which this report is being prepared;



b. Designed such internal control over financial reporting, or caused  such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of  financial reporting and the preparation of financial statement for external purposes in accordance with generally accepted accounting  principles.



c.  Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end  of the period covered by this report on such evaluation; and





d.  Disclosed in this report any change in
the small business issuer's internal  control over financial reporting that occurred during
the small business issuer's fourth fiscal quarter that has materially affected, or is reasonably likely to  materially affect,
the small business issuer's internal control over financial reporting; and



5. The other certifying directors and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the  Company's auditors and the audit committee of our board of directors (or persons performing the equivalent functions):



a. All significant deficiencies and material weaknesses  in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the
small business issuer's ability to record,  process, summarize and report financial data; and



b. Any fraud, whether or not material, that involves management or  other employees who have a significant role in the
small business issuer's internal control over financial reporting; and



Date:  September 12, 2006



/s/ Frank T. Smith

Frank T. Smith, CFO



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Exhibit 32.1



CERTIFICATION PURSUANT TO 18 U.S.C. Section 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002



In connection with the Annual Report of Sonoran Energy, Inc. on Form 10-KSB for the year ending April 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Peter Rosenthal, President of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.



/s/ Peter Rosenthal

Peter Rosenthal

President

September 12, 2006

---





Exhibit 32.2



CERTIFICATION PURSUANT TO 18 U.S.C. Section 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002



In connection with the Annual Report of Sonoran Energy, Inc. on Form 10-KSB for the year ending April 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Frank T. Smith, CFO of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.



/s/ Frank T. Smith

Frank T. Smith

Chief Financial Officer

September 12, 2006