**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**








**FORM
      10-KSB**







x
            ANNUAL
                REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
                1934
                FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
                2005




o
            TRANSITION
                REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
                1934




For
      the
      transition period from _____________ to ____________





Commission
      File Number 000-25170





**CADENCE
      RESOURCES CORPORATION**


(Name
      of
      Small Business Issuer in Its Charter)




Utah
            87-0306609(State
                or Other Jurisdiction of Incorporation or Organization)
            (I.R.S.
                Employer
              Identification
                No.)





4110
                Copper Ridge Drive, Suite 100, Traverse City, Michigan
            49684(Address
                of Principal Executive Offices)
            (Zip
                code)





(231)
                941-0073(Issuer’s
                Telephone Number, Including Area
                Code.)





Securities
      registered under Section 12(b) of the Exchange Act:


Title
                of Each Class
            
            Name
                of Each Exchange
              on
                Which RegisteredNone
            
            N/A





Securities
      registered under Section 12(g) of the Exchange Act:  Common
      Stock, par value, $0.01


(Title
      of class)




Check
      whether the issuer: (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Securities Exchange Act of 1934 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 past 90 days.
      Yes x No
o




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B is not contained in this form, and no disclosure will be
      contained, to the best of registrant’s knowledge, in definitive proxy or
      information statements incorporated by reference in Part III of this Form 10-KSB
      or any amendment to this Form 10-KSB.




State
      issuer’s revenues for its most recent fiscal year: $ 2,513,046.




The
      aggregate market value of the voting and non-voting stock held by non-affiliates
      of the registrant as of December 15, 2005, was approximately $188,159,725.
      For
      purposes of this computation, all executive officers, directors and 10%
      stockholders were deemed affiliates. Such a determination should not be
      construed as an admission that such 10% stockholders are affiliates.




As
      of
      December 15, 2005 there were 59,041,685 shares of the common stock,
      par
      value $0.01 per share, of the registrant issued and outstanding.




Documents
      Incorporated by Reference: None




Transitional
      Small Business Disclosure Format: Yes o   No x









**TABLE
      OF CONTENTS**


Item
              
              PagePART
                  IItem
                  1.
              Description
                  of Business
              1Item
                  2.
              Description
                  of Properties
              44Item
                  3.
              Legal
                  Proceedings
              45Item
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              45PART
                  IIItem
                  5.
              Market
                  for Common Equity and Related Stockholder
                  Matters
              45Item
                  6.
              Management’s
                  Discussion and Analysis or Plan of
                  Operations
              49Item
                  7.
              Financial
                  Statements
              56Item
                  8.
              Changes
                  in and Disagreements with
                  Accountants
              56Item
                  8A.
              Controls
                  and Procedures
              56PART
                  IIIItem
                    9.
              Directors,
                  Executive Officers, Promoters and Control
                  Persons
              57Item
                  10.
              Executive
                  Compensation
              61Item
                  11.
              Security
                  Ownership of Certain Beneficial Owners and
                  Management
              64Item
                  12.
              Certain
                  Relationships and Related
                  Transactions
              66Item
                  13.
              Exhibits
                  and Reports on Form 8-K
              67Item
                  14.
              Principal
                  Accountant Fees And Services
              68Financial
                  StatementsIndependent
                  Auditor’s Report
              F-1Balance
                  Sheets as of September 30, 2005, 2004 and
                  2003
              F-2Statements
                  of Operations and Comprehensive Loss for the years
                  ended September 30, 2005, 2004 and 2003
              F-4Statement
                  of Stockholder’s Equity
              F-5Statements
                  of Cash Flows for the years ended September 30,
                  2005, 2004 and 2003
              F-7Notes
                  to the Financial Statements
              F-9





-i-





**PART
      I**





This
      report contains forward-looking statements within the meaning of Section 27A
      of
      the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of
      the Securities Exchange Act of 1934, as amended (the “Exchange Act”). You can
      find many of these statements by looking for words such as "believes,"
      "expects," "anticipates," "estimates" or similar expressions used in this
      report.




These
      forward-looking statements are subject to numerous assumptions, risks and
      uncertainties. Factors which may cause our actual results, performance or
      achievements to be materially different from any future results, performance
      or
      achievements expressed or implied by us in those statements include, among
      others, the following:




·
            the
                quality of our properties with regard to, among other things, the
                existence of reserves in economic quantities;




·
            our
                ability to increase our production and oil and gas income through
                exploration and development;




·
            the
                number of locations to be drilled and the time frame within which
                they
                will be drilled;




·
            future
                prices of natural gas and crude oil;




·
            anticipated
                domestic demand for oil and natural gas; and




·
            the
                adequacy of our capital resources and liquidity.




Because
      such statements are subject to risks and uncertainties, actual results may
      differ materially from those expressed or implied by the forward-looking
      statements. You are cautioned not to place undue reliance on such statements,
      which speak only as of the date of this report.




**Item
      1. Description of Business**




**The
      Company**




Cadence
      Resources Corporation is a Utah corporation incorporated on April 7, 1969 to
      explore and mine natural resources under the name Royal Resources, Inc. In
      January 1983, we changed our name to Royal Minerals, Inc. In March 1994, we
      changed our name to Consolidated Royal Mines, Inc. In September 1995, we changed
      our name to Royal Silver Mines, Inc. On May 2, 2001 we changed our name to
      Cadence Resources Corporation in connection with a corporate reorganization
      to
      focus our operations on oil and gas exploration.




We
      acquired Aurora Energy, Ltd. ("Aurora") on October 31, 2005 through the merger
      of our wholly-owned subsidiary with and into Aurora. As a result of that merger,
      Aurora became our wholly-owned subsidiary. The acquisition of Aurora will be
      accounted for as a reverse merger, with Aurora being the acquiring party for
      accounting purposes. The acquisition of Aurora was pursuant to the Agreement
      and
      Plan of Merger dated as of January 31, 2005 (the "Merger Agreement"). In
      connection with the acquisition of Aurora, we issued an aggregate of 37,512,366
      shares of our common stock to the former shareholders of Aurora, and have
      reserved an additional 10,497,328 shares of our common stock for issuance upon
      exercise of option or warrants that had been issued by Aurora prior to the
      acquisition and that were previously exercisable for shares of the common stock
      of Aurora. Pursuant to the terms of the Merger Agreement our board of directors
      is composed of seven individuals, three of whom were directors of Aurora prior
      to the acquisition and two of whom were directors of Cadence prior to the
      acquisition. Our Board of Directors consists of William W. Deneau, the former
      Chairman and President of Aurora, Howard M. Crosby, Kevin D. Stulp, Ronald
      E.
      Huff, Richard Deneau, Gary J. Myles and Earl V. Young. Messrs. Crosby and Stulp,
      were directors of the Company immediately prior to the acquisition of Aurora
      and
      Messrs. Deneau, Myles and Young were directors of Aurora immediately prior
      to
      the acquisition of Aurora.




Although
      the acquisition of Aurora occurred after the period to which this report on
      Form
      10-KSB relates, the description of our business contained herein includes
      descriptions of the material aspects of the business of Aurora. Because the
      business of Aurora is now included as our Aurora division, we believe that
      a
      full understanding of our business as it will be conducted in the future
      requires an understanding of the business operations of both Cadence and Aurora.
      In addition, as a result of the acquisition, we will revise certain of our
      accounting principles applicable to our oil and gas properties, and have changed
      our accounting fiscal year to end on December 31, commencing December 31, 2005.
      See "Management's Discussion and Analysis of Financial Condition and Results
      of
      Operation."




-1-




We
      are
      engaged in acquiring, exploring, developing, and producing oil and gas
      properties. We have operations in Wilbarger County, Texas, DeSoto Parish,
      Louisiana, Eddy County, New Mexico and Alpena County, Michigan. We also have
      leased interests in western Kansas and southern Texas. Through our subsidiary
      Aurora, we have an interest in the following productive properties: the Beyer,
      Black Bean, Blue Spruce, Devil River, Dover, Gehrke, Hudson, Mackinaw, Nicholson
      Hill, Paxton Quarry, Sequin, Timm and Treasure Island Antrim Shale gas projects
      in Michigan; and the Bergsasi oil well and Church Lake oil field in Michigan.
      We
      also own a number of non-producing properties described below that are in
      various stages of development.




One
      of
      our primary goals is to produce gas from lower risk unconventional gas
      reservoirs such as black shales, coal seams and tight sands, targeting projects
      where large acreage blocks can be easily evaluated with a series of low cost
      test wells prior to development investments. To achieve this goal, we have
      a
      particular, but not exclusive, focus on the black shales of Michigan and
      Indiana.




Historically,
      we have acquired and then resold (for cash) mineral leases, often with a
      retained interest. Those mineral leasehold interests in which we or our
      affiliates currently have an interest are described below. In 2004, we sold
      80%
      of a substantial block of our Michigan Antrim leaseholds and working interests
      to Samson Resources Company. This transaction with Samson Resources Company
      is
      described below in more detail under the caption "Samson Transaction" (the
      "Samson Transaction"). In 2003, 2004 and 2005, we sold substantial blocks of
      our
      Indiana New Albany Shale assets as described below. These sales, and others,
      were undertaken to generate cash that we could use to continue work on our
      development plan. Greater detail about the terms of these sales is provided
      below. A subsidiary of our Aurora division also has a $50 million credit
      facility with Trust Company of the West. In addition, during December 2004
      and
      January 2005, we raised an aggregate of $22,312,500 million through the sale
      of
      equity and warrants in two private placements, one through our Cadence division
      and the second through our Aurora division.




Our
      longer term goal is to generate revenues from the sale of oil and gas production
      sufficient to support ongoing development. Once wells are drilled and in
      production, the underlying gas reserves will be characterized as proved
      developed producing reserves, which have greater value than unproven probable
      reserves. As a general rule, once the underlying reserves are characterized
      as
      proved developed producing reserves, the underlying assets can be pledged to
      support debt financing. We currently have one such financing facility in place.
      Proved developed producing reserves are also generally more attractive to
      prospective asset purchasers such as larger oil and gas companies.




During
      the year ended September 30, 2005, substantially all of our revenues were
      derived from our Cadence division's interests in nine producing oil wells in
      Wilbarger County, Texas and eleven producing natural gas wells in DeSoto Parish,
      Louisiana. We received small revenues from our Cadence division's interest
      in
      nine producing gas wells in Alpena County, Michigan and a minority interest
      in a
      producing well in Eddy County, New Mexico. As of December 31, 2004 our Aurora
      division had 200 gross (42.35 net) oil and gas wells, 7,956 gross (2,739 net)
      acres of developed wells and 408,379 gross (276,459 net) acres of undeveloped
      wells. With the acquisition of Aurora and with the proceeds that we received
      from the private placements in January 2005, we have greatly expanded our
      drilling program, as described below.




At
      the
      completion of our 2005 fiscal year in September, we were continuing to evaluate
      the performance of our Cadence division's natural gas wells in DeSoto Parish.
      Along with our partner, Bridas Energy, we have not made plans to drill
      additional wells at that location. In the fiscal year 2005, we drilled four
      new
      wells on our West Electra Lake Unit and a new well on our E lease, all in
      Wilbarger County, Texas, completed the seismic evaluation process on the north
      block of our Kansas acreage, and drilled two exploratory wells on the property,
      participated for a working interest in development wells being drilled in Eddy
      County, New Mexico, and acquired an interest in a company that is participating
      for a working interest in an exploratory well in Tennessee.




-2-




We
      plan
      to participate in the drilling of approximately 200 gross wells in the Michigan
      Antrim Shale and the New Albany Shale during 2006. Through September 30, 2005,
      we have drilled 298 gross (194 net) wells in the Michigan Antrim Shale. We
      have
      a development plan for the Michigan Antrim Shale for the next three years.
      We
      are also formulating a development plan for the New Albany Shale in Indiana
      and
      Kentucky. We continue to explore different sources of possible equity financing
      and credit facilities to be sure that we have sufficient resources to achieve
      our 2006 goals.




**Oil
      and Natural Gas Operations**




*DeSoto
      Parish, Louisiana*




We
      leased
      over 4,800 acres (2,160 net acres) in DeSoto Parish (approximately 40 miles
      south of Shreveport, Louisiana) in the summer of 2001 and throughout 2002.
      Our
      acreage is southwest of the Holly Field and southeast of the Bethany Longstreet
      Field, both extensively drilled and developed since 1996 by Sonat (now El Paso
      Corporation). In April 2003, we contributed these leases to a joint exploration
      and development program with Bridas Energy, which has operations in the
      Texas-Louisiana Gulf Coast area. Under this program, Bridas Energy is the
      operator of the DeSoto Parish properties. Bridas Energy is a wholly-owned
      subsidiary of Bridas Corporation, an Argentinean-based private, independent
      energy company with headquarters in Buenos Aires.




Under
      the
      terms of our joint exploration agreement with Bridas Energy, we assigned Bridas
      Energy a 55% working interest in all of the acreage constituting the area of
      mutual interest of our DeSoto Parish leases in return for a cash payment of
      $50,000. Bridas Energy agreed to fund all costs of drilling, completing and
      bringing to production the initial test well, the Ardis-Martin Timber #27-1,
      drilled during June 2003, in Section 27 of this prospect. Upon successful
      completion of this test well, we conveyed an additional 20% working interest
      to
      Bridas Energy in that well and all other leases covering acreage in Section
      27,
      leaving us a 25% working interest in Section 27. We retain a 45% working
      interest in all other wells on the leased acreage in this prospect and a lesser
      working interest in any wells drilled in the area of mutual interest around
      the
      leased acreage, depending upon the amount of acreage leased by each respective
      party in that particular section.




As
      of
      September 30, 2005 we had nine producing wells in this field. During the month
      of September 2005, these wells produced an aggregate of 25,959 MCF of natural
      gas on a net basis to us. At September 30, 2005, twelve wells had produced
      an
      aggregate of 192,663 MCF of natural gas on a net basis to us. In May, 2005
      one
      well was removed from production due to low output.




As
      of
      September 30, 2005, all but two of our producing wells in DeSoto Parish were
      from the Cotton Valley formation. The Cotton Valley formation lies immediately
      below the Hosston, with the best sands typically extending to about 10,300
      feet.
      Of the eleven producing wells as of September 30, 2005, we have a 25% working
      interest and an approximate 20% net revenue interest in four of them, a 45%
      working interest and an approximate 36% net revenue interest in six of them,
      and
      a 25% working interest and an approximate 18% net revenue interest in one of
      them.




The
      DeSoto Parish properties are located on a major anti-clinorium on the southeast
      side of the Sabine Uplift. The Sabine Uplift is a large structure that is
      related to the cretaceous and younger rocks in the established oil and gas
      fields of northeast Texas and northern Louisiana. In this area, wells from
      these
      formations produce approximately 35% to 50% of the well's total anticipated
      output in the first 24 months of production, with the remainder produced over
      12
      to 15 years.




Our
      drilling and completion costs for these DeSoto Parish wells drilled to the
      Cotton Valley formation, to the 8/8ths interest, were approximately $1.25
      million to $1.3 million per well. However, costs to drill and complete wells
      to
      this depth in this area have increased significantly due to rapidly accelerating
      materials and labor costs. These increases will greatly affect our future
      decisions about drilling further wells in this field.




-3-




*Wilbarger
      County, Texas*




Our
      property in Texas is located on the Waggoner Ranch, a privately-held ranch
      in
      Wilbarger County, approximately 50 miles northwest of Wichita Falls, Texas,
      and
      15 miles south of the Oklahoma border. Since October 2001, we have conducted
      exploration activities on the Waggoner Ranch. The W.T. Waggoner Estate is the
      operator of all of our wells on the Waggoner Ranch and the sole purchaser of
      all
      production from these properties. We logged our first productive well in this
      field in January 2002. As of September 30, 2005, we owned interests in nine
      wells on these properties, producing an aggregate of approximately 54 net
      working interest barrels per day, to the 8/8ths interest, of 35 (degree) API
      sweet crude oil.




The
      major
      geologic feature in this part of north Texas is the Red River Arch, which
      consists of Permian and Leonardon shales and sands. This structure has
      historically produced more than 150 million barrels of oil from several geologic
      features, including the Canyon limestone formation. Our primary targets on
      this
      prospect are oil-bearing pinnacle reefs in the Canyon limestone formation,
      typically located between 3,000 and 3,600 feet. We are producing oil from three
      areas of the Ranch: the east side of Electra Lake, referred to as the Virgin
      Reef Prospect, and the west side of Electra Lake, referred to as the West
      Electra Lake Prospect, and from an area north of Electra Lake referred to as
      North Electra.




The
      Virgin Reef Leasehold consists of approximately 400 acres. In August 2002,
      we
      signed an exploration agreement with the Waggoner Ranch on 650 acres in the
      West
      Electra Lake Prospect, with a surrounding 1/2 mile area of mutual interest,
      from
      which our current production comes. The West Electra Lake Leasehold currently
      consists of an aggregate of 532 acres under lease and a 1/2 mile area of mutual
      interest surrounding such acreage. In March, 2005 we signed an additional lease
      agreement with the Waggoner Ranch on acreage north and west of Electra Lake
      which currently consists of an aggregate of 700 acres under lease and which
      also
      has mutual interest surrounding such acreage.




We
      have
      two producing wells on the Virgin Reef Prospect, the #1A in which we have a
      60%
      working interest and a 45.6% net revenue interest and the #1B well, in which
      we
      have 100% working interest and a 76% net revenue interest. The #1A well was
      logged in January 2002 and showed four pay zones between 2,400 feet and 3,002
      feet. This well is currently producing from the Lower Milham Sand at a depth
      of
      approximately 2,500 feet. We have already produced this well from the deeper
      Canyon formation zones and re-completed the well in the Lower Milham zone.
      One
      more zone in this well remains to be completed. This well produced an average
      of
      approximately 12.5 net working interest barrels per day during September 2005.
      The other producing well, the #1B, well is producing at only a nominal rate.




In
      August
      2002, we began developing the West Electra Lake Prospect. We logged our first
      well in the first quarter of calendar 2003. We have three producing wells in
      this prospect, all of which are producing from the upper Milham Sand at a depth
      of approximately 2,600 feet. The first well, the West Electra Lake #1, in which
      we have a 45% working interest and a 34.2% net revenue interest, has 10 feet
      of
      net pay. The West Electra Lake #2 and #3 wells, in which we have a 50% working
      interest and a 38% net revenue interest, were both drilled in June 2003 and
      encountered 10 feet and 11 feet of net pay, respectively, in the same zone.
      These three wells are subject to Texas Railroad Commission production limits
      and
      during September 2005, produced at the rate of an aggregate of approximately
      25
      barrels of oil per day, which is below the maximum allowable rate of an
      aggregate of 120 barrels of oil per day, with the pumps operating for only
      eight
      hours per day. At this time we expect that rate of production to continue for
      at
      least the next ten years, subject to normal decline. Drilling and completion
      costs for the wells on the West Electra Lake Prospect have ranged from
      approximately $160,000 to $220,000 per well, on an 8/8th basis.




In
      December 2004 we commenced a program to drill three more wells on the West
      Electra Lake unit. The first well was logged on December 7, 2004, and indicated
      the expected Milham pay interval, as well as an unexpected 12 feet of pay in
      the
      Saddle Creek formation at about 1700 feet. The second new well was logged on
      December 18, 2004 and encountered some ten feet of net pay in the Upper Milham
      formation. Both of these wells were completed as of January 31, 2005 and
      commenced producing commercial quantities of oil in March 2005. Four new wells
      were drilled in March and April, 2005 in the West Electra Lake area. As of
      September 30, 2005, three of these new wells are producing commercial quantities
      of oil. The forth well encountered shows of natural gas, but as there is no
      gas
      pipeline in the area, this well has been capped. We drilled four more
      development wells in the West Electra Lake area during September and October
      of
      2005.




-4-




We
      have
      drilled four non-commercial wells on the Virgin Reef and West Electra Leases.
      In
      May, 2002 we drilled the #2A well which targeted the lower Milham Sand
      formation. This well was only marginally productive, so we converted it to
      a
      saltwater disposal well. In December, 2002 we drilled the #2B well which
      targeted a reef prospect in the Canyon limestone formation. The #2B well was
      a
      dry hole. In July, 2004 we drilled the 1D and encountered only a sub economic
      pay in the Dyson sand. The well was therefore plugged and abandoned.




*Matagorda
      County, Texas*




We
      completed the leasing of 58 acres in Matagorda County, Texas in September 2005
      on a salt dome prospect. In October 2005 we drilled our first well on this
      prospect and it was determined to be a commercially viable gas well. The
      drilling and completion costs on this well were approximately $317,591. We
      sold
      a 20% working interest in this well for $100,000 and retained 80% of the working
      interest. We are currently awaiting hook-up of this well to a nearby gas
      pipeline. The Operator of the well will be G.L. McLeod, Inc.




*Michigan*




In
      December 2002, through our Cadence division, we began participating in a natural
      gas drilling program in Alpena County, Michigan. As of September 30, 2005,
      we
      had a 22.5% working interest before payout, 22.5% after payout, 20% net revenue
      interest before payout, 18% after payout), in ten producing wells in Alpena
      County. Production commenced from this field in June 2003. See `Antrim Shale'
      subsection below".




*New
      Mexico*




In
      June
      2004, we participated for a 20% working interest, 15% net revenue interest,
      in
      the Santa Nina Prospect in Eddy County, NM. This prospect was developed by
      and
      is operated by SDX Resources of Midland, TX, an experienced operator with over
      20 years of operational experience in the Permian Basin. The well was completed
      in July 2004, with an initial flow rate in excess of 50 barrels of oil per
      day,
      plus natural gas. The well was produced for some 40 days, and then shut in
      to
      allow a gas pipeline to be attached. This work is in process. We received our
      first production check for this well in October 2004.




Early
      in
      2004, we announced that we had signed an agreement with SDX Resources for an
      option to participate for up to a 25% working interest, 20% net revenue
      interest, in up to 17 development wells in a project called the Sparkplug Unit.
      These wells will be offsetting existing production in the San Andreas and Yeso
      formations to a maximum depth of about 5,000 feet. Drilling on the initial
      development well, in which we elected to take a 20% working interest, commenced
      on December 16, 2004. Initial results indicate multiple pay horizons in the
      San
      Andreas formation and the well was completed in February 2005. As a result
      of
      subsequent low production rates, the operator, SDX, has determined to dispose
      of
      this well; the sale of the well is in process.




*Tennessee*




In
      August
      2004 we acquired an equity interest in TN Oil Company, which owns leases
      covering some 1500 acres prospective for oil in central and north central
      Tennessee. Subsequent to the end of the fiscal year, we elected to participate
      for 100% of the working interest in a well being drilled by TN Oil, as operator,
      to a depth of some 1700 feet. This well targeted oil production from the
      Murfreesboro and Knox formations. The well was spudded in December 2004. Based
      upon the well logs, our geologists determined that this well was non-commercial
      and elected to plug the well. A second non-commercial drill test was conducted
      by TN Oil in November 2005. The equity stake of the Company in TN Oil Co. is
      approximately 14% as of September 30, 2005.




*Western
      Kansas*




Our
      Kansas oil exploration project is in the Anadarko Basin in Lane and Ness
      Counties, Kansas. In June 2004, we completed our first leasing program in the
      area, consisting of approximately 28,000 acres. We have a 100% working interest
      and an approximate 82.5% net revenue interest in these leases. During September
      and October 2004, we completed a three dimensional seismic shooting program
      on
      the 13,000 acres which constitute the Cadence North Block. During the third
      quarter of 2005, we drilled our first two exploratory wells on the north block
      of its Kansas acreage. The first test well did not encounter commercial
      quantities of oil, and was plugged as a dry hole. The second well has been
      in
      production for the last 60 days and has produced commercially viable quantities
      of oil. The Operator of the project is SEDONA Oil & Gas
      Corporation.




-5-




**Antrim
      Shale Operations**




Antrim
      Shale is a black shale that underlies the entire Michigan Basin. The shale
      is
      very thick (140 to over 200 feet) and has a high percentage organic content
      (15%
      to over 20%). Due to the nature of the natural fractures in the Antrim Shale,
      production will vary from well to well.




The
      productive, fractured trend for the Antrim Shale runs across the northern
      portion of the Michigan Basin from Lake Huron to Lake Michigan (160 miles).
      Gas
      wells have been drilled and produced in the Antrim Shale from depths of 250
      feet
      down to 1,500 feet. A high percentage of the wells drilled in the Antrim Shale
      have been put into production, although as noted above, levels of production
      vary from well to well. Over 8,000 wells are currently producing in the Antrim
      Shale. In recent years, 200 to 300 wells have been drilled annually. It is
      expected that a similar number of wells will be drilled in 2006.




The
      gas
      produced from the Antrim Shale is a combination of thermogenic and biogenic
      gas.
      At shallower depths the gas is primarily biogenic due to the presence of
      microbes in the low to medium saline waters. The low-density pay zones in the
      Antrim Shale are over 100 feet thick. Methane gas is continuously being
      generated by anaerobic bacteria that feed on CO2, organic material, and the
      heavier thermogenic gases stored in the shale.




The
      Antrim Shale gas adsorbs to organic material in a similar manner to coal seams.
      Water in the natural fractures of the shale provides a trapping mechanism to
      hold the gas in place. As the water is produced to the surface, lowering the
      fluid and pressure in the reservoir, gases are released from the organic
      material and are produced to the surface. At depths of less than 1,500 feet,
      the
      gas-in-place is typically 90% methane or greater, with the balance being CO2
      and
      some heavier thermogenic gases.




The
      oldest Antrim Shale gas field was drilled in the 1940s. It is still in
      production today. The production curve for the shale typically contains a peak
      rate of gas occurring after the first two years of production when the shale
      reservoir has been thoroughly de-watered. Peak rate production usually continues
      for some time. Cash values of production may be better five years or more into
      the life of a well than in the first six months of production, since dewatering
      takes up to two years to complete. After the water is off the formation and
      the
      gas is able to fully release from the shale into the well bore, the rate of
      production will typically begin to decline hyperbolically to a slow 2% to 3%
      exponential decline per year.




We
      have
      identified the Michigan Antrim Shale as an area with natural fractures using
      a
      variety of diagnostic tests, including a review of production trends, fracture
      imaging logs and geological mapping. In management's opinion, based upon
      performance information from almost 8,000 wells in similar circumstances, areas
      with natural fractures in shale have good production potential.




We
      currently plan to focus significant development activity over the next few
      years
      in the Michigan Antrim Shale. If sufficient capital is procured, we plan to
      drill up to 500 gross wells in the Michigan Antrim Shale over the next three
      years. Management believes that so long as our existing credit facility remains
      available and we are able to increase it as production increases, we will have
      sufficient financing to achieve this goal. We are, however, exploring possible
      avenues of additional equity financing. Changes in circumstances could
      necessitate more financing than currently contemplated, such as greater than
      budgeted costs or lower than expected production or gas prices. Other variables
      that will affect our ability to achieve our goals include unexpected drilling
      results, a shortage of available drilling rigs, delays in testing and drilling,
      difficulties in acquiring leases, a shortage of transportation pipelines, and
      new opportunities that cause management to change focus. Any one of these
      variables could cause actual results to differ materially from our current
      business plan.




-6-




**Samson
      Transaction**




On
      May
      14, 2004, we entered into a Purchase and Sale Agreement ("PSA") and Exploration
      Agreement with Samson Resources Company ("Samson") with respect to a substantial
      portion of our Michigan Antrim Shale properties. Pursuant to the PSA, we
      assigned to Samson 80% of our interest in the following assets:




·
            Our
                working interests in all of our producing wells and related leaseholds
                in
                the Michigan Antrim comprising a total of 116 permitted wells, 66
                of which
                had been drilled, and approximately 6,521 proved developed producing
                net
                leasehold acres.




·
            Our
                interest in approximately 15,000 acres of undeveloped leaseholds
                in the
                Michigan Antrim. We did not include all of our Michigan Antrim leaseholds
                in this transaction, but limited this assignment to leases within
                an Area
                of Mutual Interest ("AMI") located generally in Alcona and Alpena
                Counties
                and the eastern 3/4ths of Montmorency County.




·
            Our
                interest in an approximately 3.5 mile long pipeline that services
                the
                producing wells assigned, including equipment, leases, easements
                and
                permits.




·
            Our
                interest in material contracts, such as marketing, transportation
                and gas
                treatment contracts, development agreements, unitization agreements,
                and
                equipment leases that relate to the assigned acreage.




Samson
      paid us $6,433,890 for these assets. With respect to the wells and leaseholds
      for which we served as operator, Samson was appointed as a replacement operator.
      The assignment was given a March 1, 2004 effective date.




The
      Exploration Agreement addresses development within the AMI with respect to
      leases that are jointly owned or jointly acquired by both us and Samson. The
      Exploration Agreement generally provides as follows:




·
            Lease
                maintenance and acquisition expenses will be paid 80% by Samson and
                20% by
                us.




·
            Samson
                will be designated as the operator, but will hire us to conduct or
                oversee
                pre-drilling activities and operations for wells drilled in the AMI.
                We
                will specifically be responsible for lease acquisition; staking and
                surveying of wells to be drilled; regulatory and administrative matters
                such as well permitting, pipeline permitting and compliance with
                bonding
                requirements; title review and title curative; surface/access negotiations
                and settlements; and location preparation. Samson will pay us $750
                per
                well drilled for these activities, an expense to which we are not
                required
                to contribute.




·
            Samson
                is responsible for the receipt and distribution of all revenues.




·
            For
                the first 150 wells drilled pursuant to the Exploration Agreement,
                Samson
                will pay 88% of the actual cost to drill and complete, and we will
                pay
                12%. This includes costs for gathering and surface equipment that
                are
                included in the Authority for Expenditure ("AFE") prepared by Samson.
                This
                is called a "promoted" share. Samson's obligation is, however, capped
                at
                110% of the estimated drilling and completion costs for the well
                as
                reflected in the AFE.




·
            From
                the 151st well forward, Samson will pay 80% of the development costs
                and
                we will pay 20%.




·
            The
                working interest for each well will be owned 80% by Samson and 20%
                by us.
                All operating costs, costs associated with compression, treatment
                (such as
                CO2 removal), processing or road use/access, and expenses associated
                with
                pipeline, gathering or surface facilities not included in the AFE
                for the
                well, will track the working interest percentages. Revenue participation
                will also track the working interest percentages.




·
            Each
                party has a preferential right to purchase (right of first refusal)
                that
                applies if the other party seeks to assign its interest in a lease
                or well
                within the AMI.




-7-




As
      of
      September 30, 2005, approximately 83 wells have been drilled under the
      Exploration Agreement. Of these, 56 are producing, 19 are not yet in production,
      four are salt water disposal wells, and four were plugged and abandoned.




*CDX
      Transaction*




In
      January 2002, we sold the leases for several Antrim prospects to CDX Gas, LLC
      ("CDX"). In 2004, we entered into a Farmout Agreement with CDX with respect
      to
      an area of mutual interest that included much of the acreage we had sold to
      CDX.
      On December 1, 2005, we entered into an Exchange Agreement with CDX rescinding
      all prior agreements and agreeing to effectuate an exchange, pursuant to which
      CDX will assign to us all of CDX's interest (including reversionary interests)
      in Michigan Antrim Shale properties, including the Black Bear and Almira-Long
      Lake properties. In return, we will assign to CDX all of our interest (including
      reversionary interests) in the CDX Indiana and Kentucky New Albany Shale
      properties (with non-material exceptions), including the Corydon,
      Dumada-Loogootee, Maria Creek, Orleans, Jordan and Hogback properties.




*Samson
      Antrim Projects*




As
      of
      September 30, 2005, we owned the following properties in the Michigan Antrim
      Shale, which are part of the Samson joint venture.




·
            The
                Treasure Island Antrim Project is located in Alpena County, Michigan,
                and
                consists of approximately 2,373 acres. This project currently has
                26
                wells. Twenty-three of these wells are producing commercial rates
                of gas.
                Two of these wells have been plugged and abandoned. One Salt Water
                Disposal Well has also been drilled. Production from the initial
                wells in
                the project began in October 2003. Gas is transported on the DTE
                Alpena LP
                Pipeline and sold into the Alpena Gaylord line. The project is expected
                to
                have a production life of approximately 30 to 40 years. We currently
                own
                an 18% working interest.




·
            The
                Black Bean Antrim Project is located in Alpena County, Michigan,
                and
                consists of approximately 4,385 acres. This project is currently
                divided
                into four separate projects, as described below. Gas from this project
                is
                sold through the Paxton Quarry facility into the Thunder Bay Pipeline.
                The
                project is expected to have a producing life of approximately 30
                to 40
                years.




·
            Black
                Bean #1 currently has 16 drilled wells. Thirteen of these wells have
                been
                completed and are producing commercial rates of gas. Two wells have
                been
                plugged and abandoned, and one Salt Water Disposal Well has been
                drilled.
                Our business plan contemplates that five additional wells, in addition
                to
                those currently permitted, will be drilled as part of Black Bean
                #1. We
                and our affiliates currently own approximately a 15.5% working interest
                in
                the Black Bean #1 project.




·
            Black
                Bean #2 currently has two drilled wells which have been completed
                and are
                producing commercial rates of gas. Two more wells have been permitted,
                but
                have not yet been drilled. Our business plan contemplates that five
                additional wells in addition to those currently permitted, will be
                drilled
                as part of Black Bean #2. We currently hold approximately a 28.72%
                working
                interest in Black Bean #2.




·
            Black
                Bean #3 currently has four drilled wells which have been completed
                and are
                producing commercial rates of gas. One more well has been permitted,
                but
                has not yet been drilled. We currently hold approximately a 29.22%
                working
                interest in Black Bean #3.




·
            Black
                Bean #4 does not yet have any wells that have been drilled. No specific
                drilling plans have yet been proposed. We will hold approximately
                a 20.00%
                working interest in Black Bean #4.




-8-




·
            The
                Beyer Antrim Natural Gas Field Project is located in Alpena, Michigan.
                It
                consists of approximately 2,575 acres. This project currently has
                18
                drilled wells. Sixteen are producing commercial rates of gas. One
                well has
                been plugged and abandoned. One Salt Water Disposal Well has also
                been
                drilled. Two additional wells have been permitted but not yet been
                drilled. Our business plan contemplates that, in addition to those
                wells
                currently permitted, one more well will be permitted and drilled.
                Production began in this field in February 2002. Gas is sold through
                the
                Paxton Quarry Facility into the Thunder Bay Pipeline. The project
                should
                have a production life of approximately 30 years. We and our affiliates
                currently own a 7.639% working interest in this project.




·
            The
                Paxton Quarry Antrim Project is located in Alpena County, Michigan,
                and
                consists of approximately 2,485 acres. Currently, 18 wells have been
                drilled. Fifteen wells have been completed and are producing commercial
                rates of gas. Two of the wells have been plugged and abandoned. One
                of the
                wells is a Salt Water Disposal Well. Production from this field began
                in
                November 1998. Gas is sold into the Thunder Bay Pipeline. The project
                should have a production life of approximately 30 years. We own a
                19.8%
                working interest in this project.




·
            The
                Clear Lake Project is located in Alpena County, Michigan, and consists
                of
                approximately 4,148 acres. Two wells have been drilled in this project.
                They are not yet in production. Gas will be sold into the Thunder
                Bay
                Pipeline. We currently hold a 20% working interest in this project.




·
            The
                Discard Project is located in Alpena County, Michigan, and consists
                of
                approximately 1,512 acres. One well has been drilled in this project.
                It
                is not yet in production. Four more wells have been permitted, but
                have
                not yet been drilled. Gas will be sold into the Thunder Bay Pipeline.
                We
                currently hold a 20% working interest in this project.




·
            The
                Gehrke Project is located in Alpena County, Michigan, and consists
                of
                approximately 2,698 acres. Twenty-one wells have been drilled in
                this
                project. Seventeen are producing commercial rates of gas. Four more
                wells
                have been permitted, but have not yet been drilled. Our business
                plan
                contemplates that one more well in addition to the wells currently
                permitted will be drilled as a part of this project. Gas is sold
                into the
                Thunder Bay Pipeline. We currently hold a 20% working interest in
                this
                project.




·
            The
                Green Bean #1 Project is located in Alpena County, Michigan, and
                consists
                of approximately1,696 acres. One well has been drilled in this project,
                but is not yet in production. Six wells have been permitted, but
                not yet
                drilled. Our current business plan contemplates that a total of 13
                wells
                will be drilled in this project. Gas will be sold into the Paxton
                Quarry
                Facility and then into the Thunder Bay Pipeline. We currently hold
                a 20%
                working interest in this project.




·
            The
                Green Bean #2 Project is located in Alpena County, Michigan, and
                consists
                of approximately 940 acres. Three wells have been drilled in this
                project.
                They are not yet in production. Five more wells have been permitted,
                but
                have not yet been drilled. Our current business plan contemplates
                that a
                total of 12 wells will ultimately be drilled in this project. Gas
                will be
                sold into the Paxton Quarry Facility and then into the Thunder Bay
                Pipeline. We currently hold a 39.22% working interest in this project.




·
            The
                Leeseberg #1 Project is located in Alpena County, Michigan, and consists
                of approximately 429 acres. No wells have yet been drilled in this
                project, but three wells have been permitted. Our current business
                plan
                contemplates that a total of seven wells will be drilled in this
                project.
                Gas will be sold into the Thunder Bay Pipeline. We currently hold
                a 20%
                working interest in this project.




·
            The
                Leeseberg #2 Project is located in Alpena County, Michigan, and consists
                of approximately 1,094 acres. No wells have yet been drilled in this
                project, but two wells have been permitted. Our current business
                plan
                contemplates that a total of five wells will be drilled in this project.
                Gas will be sold into the Thunder Bay Pipeline. We currently hold
                a 20%
                working interest in this project.




-9-




·
            The
                Mackinaw #1 Project is located in Alpena County, Michigan, and consists
                of
                approximately 1,670 acres. No wells have yet been drilled in this
                project,
                but 10 wells have been permitted. Our current business plan contemplates
                that a total of 12 wells will be drilled in this project. Gas will
                be sold
                into the Thunder Bay Pipeline. We currently hold a 20% working interest
                in
                this project.




·
            The
                Mackinaw #2 Project is located in Alpena County, Michigan, and consists
                of
                approximately2,520 acres. Nine wells have been drilled in this project.
                Five of these are in production. Five more wells have been permitted,
                but
                have not yet been drilled. Our current business plan contemplates
                that a
                total of 18 wells will be drilled in this project. Gas will be sold
                into
                the Thunder Bay Pipeline. We currently hold a 20% working interest
                in this
                project.




·
            The
                Mt. Mohican Project is located in Alcona County, Michigan, and consists
                of
                approximately 15,447 acres. Three wells have been drilled in this
                project.
                They are not yet in production. Ten more wells have been permitted,
                but
                have not yet been drilled. Our current business plan contemplates
                that a
                total of 61 wells will be drilled in this project. The pipeline to
                be used
                has not yet been determined. We currently hold a 20% working interest
                in
                this project.




·
            The
                Nicholson Hill #1 Project is located in Alpena County, Michigan,
                and
                consists of approximately 569 acres. Two wells have been drilled
                in this
                project. They have been completed and are producing. Two more wells
                have
                been permitted, but have not yet been drilled. Our current business
                plan
                contemplates that a total of five wells will be drilled in this project.
                Gas will be sold into the Thunder Bay Pipeline. We currently hold
                a 20%
                working interest in this project.




·
            The
                Nicholson Hill #2 Project is located in Alpena County, Michigan,
                and
                consists of approximately 2,967 acres. One well has been drilled.
                It is
                not yet in production. Our current business plan contemplates that
                a total
                of 11 wells will be drilled in this project. Gas will be sold into
                the
                Thunder Bay Pipeline. We currently hold a 20% working interest in
                this
                project.




·
            The
                Nicholson Hill #3 Project is located in Alpena County, Michigan,
                and
                consists of approximately 1,459 acres. One well has been drilled.
                It is
                not yet in production. Our current business plan contemplates that
                a total
                of 11 wells will be drilled in this project. Gas will be sold into
                the
                Thunder Bay Pipeline. We currently hold a 20% working interest in
                this
                project.




·
            The
                Northwest Michigan Project is located in Benzie County, Michigan,
                and
                consists of approximately 20,478 acres. Two wells have been drilled,
                one
                of which has been plugged and abandoned. The other well is not in
                production. No further wells are currently scheduled to be drilled
                in this
                project, but the plans could change in the future.




·
            The
                Sequin Project is located in Alpena County, Michigan, and consists
                of
                approximately 1,776 acres. Eighteen wells have been drilled. Sixteen
                of
                these wells are producing commercial quantities of gas, one well
                has been
                plugged and abandoned, and one well is a salt water disposal well.
                We
                currently hold a 20% working interest in this project.




-10-




*Hudson
      Antrim Project*




The
      Hudson Antrim Project is located in Charlevoix County, Michigan. It is being
      developed in a joint venture with Oilfield Investments, Ltd. ("Oilfield"),
      an
      affiliate of O.I.L. Energy Corp. This project is currently divided into eight
      separate units, as described below. Gas produced from this project will
      initially flow to the central production and processing facility owned by Hudson
      Pipeline & Processing Co., LLC. Information as of September 30, 2005
      follows:




·
            The
                Hudson 34 unit is comprised of approximately 1,438 acres, and to
                date has
                two salt water disposal wells, 21 wells producing commercial quantities
                of
                gas, and one well that has been plugged and abandoned. An additional
                three
                wells have been permitted but are not yet drilled. We hold a 46.58%
                working interest before payout and a 45.33% working interest after
                payout.
                Oilfield is the operator.




·
            The
                Hudson SW unit is comprised of approximately 1,122 acres, and to
                date has
                two saltwater disposal wells, 21 wells producing commercial quantities
                of
                gas, and three wells not yet in production. We hold a 37.54% working
                interest before payout and a 36.54% working interest after payout.
                Oilfield is the operator.




·
            The
                Hudson NE unit is comprised of approximately 1,312 acres, and to
                date has
                one salt water disposal well, 21 wells that are producing commercial
                quantities of gas, one well that has been plugged and abandoned,
                and four
                gas wells that are not yet in production. Three additional wells
                have been
                permitted, but are not yet drilled. We hold a 48.54% working interest
                before payout and a 47.29% working interest after payout. We are
                the
                operator.




·
            The
                Hudson NW unit is comprised of approximately 2,096 acres. Nineteen
                wells
                have been drilled in this unit, none of which are yet in production.
                Two
                are salt water disposal wells. An additional five wells have been
                permitted, but are not yet drilled. Our current business plan contemplates
                that a total of 25 wells will be drilled in this unit. We hold a
                76.08%
                working interest before payout. We are the operator.




·
            The
                Hudson #13 unit is comprised of approximately 379 acres. To date,
                one well
                has been drilled, It is not yet in production. An additional seven
                wells
                have been permitted but are not yet drilled. Our current business
                plan
                contemplates that a total of eight wells will be drilled in this
                unit. We
                hold a 31% working interest before payout and a 30% working interest
                after
                payout. We are the operator.




·
            The
                Hudson #19 unit is comprised of approximately 249 acres. To date,
                three
                wells have been drilled, but are not yet in production. We do not
                currently plan to drill additional wells in this Unit. We hold a
                78%
                working interest before payout and a 76.75% working interest after
                payout.
                We are the operator.




·
            The
                Hudson West unit is comprised of approximately 616 acres. To date,
                three
                wells have been drilled. Two of these are awaiting hook-up and are
                not yet
                in production. One has been plugged and abandoned. Our current business
                plan contemplates that a total of 14 wells will be drilled in this
                unit.
                We hold a 44% working interest. We are the operator.




·
            The
                Hudson Joint unit is comprised of approximately 1,867 acres for which
                we
                do not yet have a business plan. We hold a 50% working interest before
                payout.




-11-




The
      table
      below demonstrates the results of operations of the foregoing Hudson projects
      from January 1, 2005 through September 30, 2005:




GROSS
                  PROJECT PRODUCTIONProductionMonth
              
              Hudson
                34
              
              #
                  of
                Wells
              
              Hudson
                SW
              
              #
                  of
                Wells
              
              Hudson
                NE
              
              #
                  of
                Wells
              
              Total
                  MCF’s
              
              Total
                WellsJanuary-05
              
              
              25,475
              
              
              17
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              25,475
              
              
              17February-05
              
              
              24,875
              
              
              17
              
              
              5,981
              
              
              2
              
              
              –
              
              
              –
              
              
              30,856
              
              
              19March-05
              
              
              25,343
              
              
              17
              
              
              10,345
              
              
              10
              
              
              –
              
              
              –
              
              
              35,688
              
              
              27April-05
              
              
              24,081
              
              
              17
              
              
              16,540
              
              
              13
              
              
              6,794
              
              
              8
              
              
              47,415
              
              
              38May-05
              
              
              22,265
              
              
              18
              
              
              23,854
              
              
              13
              
              
              29,796
              
              
              11
              
              
              75,915
              
              
              42June-05
              
              
              24,965
              
              
              21
              
              
              26,222
              
              
              13
              
              
              36,336
              
              
              11
              
              
              87,523
              
              
              45July-05
              
              
              27,738
              
              
              21
              
              
              34,810
              
              
              14
              
              
              41,526
              
              
              17
              
              
              104,074
              
              
              52August-05
              
              
              29,549
              
              
              21
              
              
              34,119
              
              
              14
              
              
              58,591
              
              
              21
              
              
              122,259
              
              
              56September-05
              
              
              31,429
              
              
              21
              
              
              38,903
              
              
              14
              
              
              70,722
              
              
              21
              
              
              141,054
              
              
              56TOTALS
              
              
              235,720
              
              
              
              
              
              190,774
              
              
              
              
              
              243,765
              
              
              
              
              
              670,259
  NET
                  PROJECT PRODUCTIONProductionMonth
              
              Hudson
                34
              
              #
                  of
                NetWells
              
              Hudson
                SW
              
              #
                  of
                NetWells
              
              Hudson
                NE
              
              #
                  of
                NetWells
              
              Total
                  MCF’s
              
              Total
                NetWellsJanuary-05
              
              
              10,164
              
              
              7
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              10,164
              
              
              7February-05
              
              
              9,396
              
              
              7
              
              
              1,826
              
              
              1
              
              
              –
              
              
              –
              
              
              11,222
              
              
              8March-05
              
              
              9,706
              
              
              7
              
              
              3,181
              
              
              3
              
              
              –
              
              
              –
              
              
              12,887
              
              
              10April-05
              
              
              9,223
              
              
              7
              
              
              5,085
              
              
              4
              
              
              2,671
              
              
              3
              
              
              16,979
              
              
              14May-05
              
              
              8,528
              
              
              7
              
              
              9,004
              
              
              4
              
              
              11,801
              
              
              4
              
              
              29,333
              
              
              15June-05
              
              
              9,562
              
              
              8
              
              
              8,062
              
              
              4
              
              
              14,391
              
              
              4
              
              
              32,014
              
              
              16July-05
              
              
              10,624
              
              
              8
              
              
              10,703
              
              
              4
              
              
              16,446
              
              
              7
              
              
              37,773
              
              
              19August-05
              
              
              11,317
              
              
              8
              
              
              10,490
              
              
              4
              
              
              23,205
              
              
              8
              
              
              45,012
              
              
              21September-05
              
              
              12,037
              
              
              8
              
              
              11,961
              
              
              4
              
              
              28,009
              
              
              8
              
              
              52,008
              
              
              21TOTALS
              
              
              90,557
              
              
              
              
              
              60,312
              
              
              
              
              
              96,523
              
              
              
              
              
              247,392





**Other
      Antrim Projects**




Information
      on other Michigan Antrim drilling projects as of September 30, 2005 follows:




·
            The
                1500 Antrim Mio Project is located in Oscoda County, and consists
                of
                approximately 17,365 acres. One well has been drilled in the project.
                It
                is not yet in production. A salt water disposal well has also been
                drilled. Two more wells have been permitted, but have not yet been
                drilled. Our current business plan contemplates that a total of 18
                wells
                will be drilled in this project. The pipeline to be used has not
                yet been
                determined. We hold a 48.33% working interest in this project. We
                are the
                operator.




·
            The
                Blue Chip Project is located in Montmorency County, Michigan, and
                consists
                of approximately 1,800 acres. One well has been drilled in this project
                but is not yet in production. Another four wells have been permitted.
                Our
                current business plan contemplates that a total of eight wells will
                be
                drilled in this project. Gas will be sold into the MichCon Wet Header
                Pipeline. We hold a 100% working interest in this project, and we
                are the
                operator.




·
            The
                Arrowhead Project is located in Montmorency County, Michigan, and
                consists
                of approximately 3,683 acres. Ten wells have been drilled in this
                project,
                but are not yet in production. Another five wells have been permitted
                but
                are not yet drilled. Our current business plan contemplates that
                a total
                of 24 wells will be drilled in this project. Gas will be sold into
                the
                MichCon Wet Header Pipeline. We currently hold a 100% working interest
                in
                this project before payout and an 80% working interest after payout.
                We
                are the operator.




·
            The
                400 Antrim Project is located in Cheboygan County, Michigan, and
                consists
                of approximately 5,433 acres. No wells have yet been drilled. Four
                wells
                have been permitted. We hold a 100% working interest in this project,
                and
                we are the operator.




-12-




·
            The
                Black Bear Central unit consists of approximately 2,178 acres. Five
                wells
                have been drilled, but are not yet in production. One salt water
                disposal
                well has also been drilled. Thirteen more wells have been permitted,
                but
                have not yet been drilled. Our current business plan contemplates
                that a
                total of 27 wells will be drilled in this unit. Production will be
                sold
                through the Hudson and Dogwood Pipelines. We hold a 100% working
                interest
                in this unit before payout, and a 60% working interest after payout.
                We
                are the operator.




·
            The
                Dover project consists of approximately 505 acres. To date, it has
                two
                wells producing commercial quantities of gas and one salt water disposal
                well. Production is sold through the North Charlton 7 Pipeline. No
                additional wells are planned for this project. We hold a 20% working
                interest in this project. Savoy Energy is the operator.




·
            Undeveloped
                acreage - We have acquired mineral rights for prospects that are
                being
                held for development in future years. As of September 30, 2005, this
                involved approximately 31,831 gross acres in 21 prospects at varying
                working interest percentages.




*New
      Albany Shale Operations*




The
      New
      Albany Shale is found in the Illinois Basin, much of which is located in the
      state of Indiana. The New Albany Shale is at least 100 feet thick throughout
      Indiana, with proven producing pay zones throughout. The shale is capped by
      a
      very thick, dense, gray-green shale (Borden Shale). The play covers 6,000,000
      acres.




In
      the
      New Albany Shale, a well commonly produces water along with the gas. It was
      learned in the early 1900's that a simple open-hole completion in the very
      top
      of the shale would yield commercial gas wells that would last for many years,
      even while producing some water. Vertical fractures in the shale feed the gas
      flow at the top of the shale. The potential of these wells was seldom realized
      in the early to mid twentieth century, as the production systems for handling
      the water were limited. However, with current technology, the water can be
      dealt
      with cost effectively. As a result, the water produced can be kept off of the
      shale, allowing better rates of gas production. Utilizing the success of simple
      completions and modern water production systems, long-term production of natural
      gas is achieved.




Current
      recoverability of gas from vertical wells to the black shale is estimated
      typically at 15% to 20% of gas-in-place. On a well-to-well basis, this
      recoverability varies depending on the natural fracture intensity associated
      with each well bore. Production volumes from the black shale are related mostly
      to the ability to desorb gas from the shale. Removing the hydrodynamic trap
      on
      the shale is the key to producing shale gas. This is accomplished with a large
      sump drilled downward from the lowest point in the well bore. Water is produced
      to the surface for disposal in approved salt water disposal wells with electric
      submersible pumps. As the water pressure in the fractures is removed from the
      shale, the gas begins to release through open natural fractures. The lower
      the
      producing pressure of the well bore, the greater its capacity to produce gas.
      We
      utilize production systems that keep the pressure low from the reservoir to
      the
      sales line. Included in development plans are drilling under balanced whenever
      possible, producing gas from wells at low pressures and designing pipeline
      and
      facility systems to operate at less than 250 pounds of pressure. This will
      also
      be the maximum pressure maintained through our CO2 reduction units.




Significant
      research and study has been conducted to evaluate the producibility of the
      New
      Albany Shale. In cooperation with the Gas Research Institute, we combined
      resources and data with 11 other industry partners in a shale gas producibility
      consortium lasting almost two years (concluded in 1999). The consortium
      identified critical differences and similarities of the New Albany Shale play
      to
      other shale plays. Reserve studies were conducted on behalf of the consortium
      by
      Schlumberger Holditch & Associates ("Schlumberger"), a third party
      engineering firm, for both vertical producing wells and horizontal wells. Since
      then, we have participated in 15 pilot horizontal well drilling programs across
      multiple counties which support the conclusions of the consortium. With the
      data
      from these pilot wells, we have established a development concept for the New
      Albany Shale, which we hope to begin implementing in 2006. Numerous interstate
      pipelines intersect the New Albany Shale acreage in which we hold working
      interests and residual overriding royalty interests.




-13-




We
      continue to actively explore opportunities in the New Albany Shale. Although
      we
      have sold off large portions of the leases we have acquired to joint venture
      partners, we continue to aggressively lease new projects, which we plan to
      develop once management has an opportunity to learn from our joint venture
      partners what geological work and drilling methods are most efficient in this
      area. In many cases, when we have sold leases in the New Albany Shale, we have
      retained a carried working interest or overriding royalty interests as described
      in more detail below.




*Wiser
      Oil Transaction*




In
      a
      joint venture with the Wiser Oil Company ("Wiser"), we acquired approximately
      10,143 acres of leasehold in Pike County, Indiana, in the New Albany Shale
      play.
      In 2003, we drilled three horizontal wells in the Pike project. We have now
      transferred operations to Wiser, but have retained working interests and carried
      working interests, as follows:




Test
      Wells: 21.25% working interest First 50 Subsequent Wells:




Before
      Payout - NRI 87.5% or greater: 29.125% working interest (of which 7.875% is
      carried by Wiser to the point of the sales meter) Before Payout - NRI below
      87.5%: 26.125% working interest (of which 4.875% is carried by Wiser to the
      point of the sales meter) After Payout: 31% working interest




After
      First 50 Subsequent Wells: carried working interest is reduced from a
      proportionate 10% to a proportionate 7.5%




"Payout"
      means the first day of the month following the point that 100% of costs
      associated with the well or group of wells flowing through one sales meter
      has
      been recouped out of net revenues.




Since
      entering into this joint venture arrangement no significant new development
      activity has occurred. The number of acres of leaseholds in the project is
      now
      approximately 8,536. Wiser has recently been sold to Forest Corporation.




*Quicksilver
      Transactions*




In
      February 2003, we sold two major blocks of mineral leases and related assets
      to
      Quicksilver Resources, Inc. of Fort Worth, Texas ("Quicksilver"). We sold our
      interests in the Georgetown Fault, Corydon, Organ Creek, Graben, M-J, J-L and
      Orleans Projects to Quicksilver. We delivered an 80% net revenue interest for
      these leases. To the extent we owned more than an 80% net revenue interest
      before the assignment, we retained the balance as an overriding royalty
      interest.




*Indiana
      Joint Venture*




We
      entered into a Development Agreement (the “Development Agreement”) dated
      December 6, 2003, for a joint venture with Wabash Energy Partners, L.P.
      (“Wabash”), to acquire and develop mineral leases for the New Albany Shale gas
      play in Indiana. As described below, Wabash also owns a 20% membership interest
      in Aurora Operating, L.L.C.




On
      October 13, 2005, we entered into a Purchase and Sale Agreement (the “Wabash
      Purchase Agreement”) with Wabash. Under the Wabash Purchase Agreement, we agreed
      to purchase all of Wabash’s interest in the leases that were acquired under the
      Development Agreement, Wabash’s 20% interest in Aurora Operating, L.L.C., and
      the interest that Wabash has in a farmout agreement it had previously entered
      into jointly with Aurora relating to certain additional Indiana leaseholds.
      Upon
      closing of the transaction, the Development Agreement will be terminated. The
      closing is scheduled to occur by February 1, 2006. There are certain conditions
      to closing that must be satisfied before a closing will occur.




On
      November 15, 2005, we entered into a Purchase and Sale Agreement (the “New
      Albany Agreement”) with New Albany-Indiana, LLC (“New Albany”), pursuant to
      which New Albany has agreed to purchase from us an undivided 48.75% working
      interest (40.7% net revenue interest) in the leaseholds that are the subject
      to
      the Wabash Purchase Agreement. In addition, at the closing of the New Albany
      purchase, we will grant New Albany an option, exercisable for a period of 18
      months at a fixed price per acre, to acquire a 50% working interest in
      additional acreage leased or acquired by us within certain other specified
      counties located in Indiana. The closing is scheduled to occur by February
      1,
      2006. There are certain conditions to closing that must be satisfied before
      a
      closing occurs. New Albany is owned 50% by College Oak Investments, Inc. and
      50
      % by Rex Energy Operating Corp. We will serve as operator for all of the wells
      drilled that we participate in under the New Albany Agreement.




-14-




The
      effect of the Wabash Purchase Agreement and the New Albany Agreement is to
      substitute New Albany as our joint venture partner for the Indiana acreage
      in
      question, increase our ownership position from a 17.5% working interest to
      a
      48.75% working interest (40.7063% net revenue interest), and provide that we
      will be the operator for these Indiana wells.




*El
      Paso Transactions*




On
      November 4, 2003, we entered into an Assignment Agreement with El Paso
      Production Company ("El Paso") on behalf of the Company and Aurora Operating,
      L.L.C., under which we agreed to assign to El Paso the mineral leases for
      approximately 90,000 acres located in Dubois, Knox, Martin and Daviess Counties
      in Indiana (the "Dumada AMI"). These acres fall within the potential New Albany
      Shale gas development region. The Assignment Agreement also reserves to El
      Paso
      the right to require us to exercise an option that we have with respect to
      the
      mineral leases owned by Highway Resources, Inc., and resell them to El Paso
      at
      our acquisition price.




With
      respect to all mineral leases acquired by El Paso under the Assignment
      Agreement, we have retained a 5% carried working interest in the first 50 wells
      drilled, including salt water disposal wells, horizontal pilot wells, and wells
      drilled for the purpose of taking core samples, in addition to wells drilled
      for
      the purpose of taking gas production. With respect to wells drilled for the
      purpose of gas production, El Paso must bear the expenses for our 5% working
      interest associated with drilling, testing, completing and connecting the well
      to the lease sales meter, but we must bear our expenses associated with costs
      and expenses incurred after connection to the lease meter, plus all costs
      associated with catastrophic events. With respect to salt water disposal wells,
      El Paso must bear the expenses for our 5% working interest associated with
      drilling, casing, stimulating, testing, equipping of and first successful
      injection of water into the well, and we must bear our associated costs and
      expenses after the first successful injection of salt water into the well.
      With
      respect to wells drilled for the purpose of taking core samples, El Paso must
      bear all of the expenses for our 5% working interest. Starting with the 51st
      well, we must bear 5% of all costs and expenses.




El
      Paso
      will own 100% of all gathering systems, flow lines, facilities, appurtenance
      and
      equipment it installs down stream of the lease meter. We must bear our 5% of
      costs associated with compression treatment, gathering and transportation
      charges related to gas and water produced.




El
      Paso
      agreed to drill three horizontal pilot wells and three salt water disposal
      wells
      in the Dumada AMI subject to a $2,225,000 expense cap. It has agreed to make
      a
      good faith effort to lease a minimum of 50,000 net acres within the Dumada
      AMI
      to support this drilling commitment, subject to a $1,000,000 expense cap. In
      late 2004 El Paso notified us that it has now satisfied this commitment.




Through
      September 30, 2005, El Paso had drilled seven gas wells in the Dumada AMI.
      These
      wells are waiting on pipeline installation and are not yet in production. The
      total acres leased in the El Paso Dumada AMI as of September 30, 2005 is
      approximately 162,328.




The
      Assignment Agreement provided that after drilling the pilot wells, El Paso
      had
      until January 3, 2005 to decide whether to retain some or all of the mineral
      leases in the Dumada AMI we had previously assigned to it. On December 30,
      2004,
      El Paso notified us of its election to retain all of the leases. The retention
      election was closed on January 6, 2005, at which time, El Paso paid us
      $7,321,000.




On
      July
      9, 2004, we entered into a separate Purchase and Sale Agreement with El Paso
      concerning 8,843.38 gross and net leasehold acres located in Daviess County,
      Indiana. These are the leases originally owned by Highway Resources, Inc.
      addressed in the original Assignment Agreement. El Paso acquired an undivided
      95% working interest in these leases, and we retained a 5% working interest.
      El
      Paso paid us $349,829, which is the same price that we paid Highway Resources,
      Inc. for the leases.




-15-




*CDX
      Transaction*




In
      2001
      and 2002, we sold leasehold acreage to CDX from the New Albany Shale formation.
      That includes: approximately 33,217 acres in Breckinridge and Meade Counties,
      Kentucky; approximately 13,967 acres in the Maria Creek project located in
      Knox
      and Sullivan Counties, Indiana; approximately 1,723 acres in Harrison County,
      Indiana; approximately 11,918 acres in the Loogootee project located in Daviess,
      Dubois and Martin Counties, Indiana; and approximately 39,800 acres in
      Washington and Floyd Counties, Indiana. In each case, we retained a 5% carried
      working interest before payout and an additional 15% carried working interest
      after payout. As noted above, on December 1, 2005, we entered into an Exchange
      Agreement with CDX in which we agreed to give up our entire interest in these
      projects in return for receiving an assignment of all of CDX's interest in
      certain Michigan Antrim Shale properties.




*Knox
      Gas Development Project*




In
      February 2005, we entered into a Development Agreement with Horizontal Systems,
      Inc. of Casey, Illinois ("HSI"). This agreement has since been amended twice
      to
      expand the area of mutual interest to which it applies. It now applies to most
      of Knox County, Indiana, with limited specified exceptions, and is called the
      Knox Gas Development Project. Under this Development Agreement, we will own
      75%
      of the working interest in the project and HSI will own 25%. Neither party
      will
      retain overriding royalties. We are responsible for acquiring all of the leases
      in the project area, but will acquire them in HSI's name. HSI will initially
      be
      the operator, though we have retained the right to assume operations, in our
      discretion. For the first 25 wells drilled, we will pay 75% of costs plus 10%.
      Thereafter, we will be responsible for only 75% of costs. The Development
      Agreement provides that at least two horizontal wells will be drilled in the
      project in 2005. As of September 30, 2005, one of these wells had been drilled,
      but is not yet in production, and 19,155 acres of leasehold had been acquired.




*Other
      New Albany Shale Projects*




We
      have
      acquired other mineral rights in New Albany Shale projects that are being held
      for development in future years. As of September 30, 2005, we have acquired
      111,818 acres of leasehold in 11 different fields in the New Albany Shale in
      Indiana, and 44,277 acres of leaseholds in two fields in Kentucky, all at a
      100%
      working interest.




**Crossroads
      Project**




Henry
      County, Ohio was the site of oil and gas exploration in 1885, 1975 and 1985.
      Each time gas was found with some oil. Because there was no pipeline to
      transport gas to market from this area, the 1985 effort was abandoned by the
      operator. In 1995, Crossroads Pipeline Company converted a 20-inch oil transport
      line that runs through Henry County into a natural gas transport line. This
      opened the area to natural gas exploration and production.




In
      1998,
      we began leasing land in Henry County for what is known as the Crossroads
      Project. In July 1998, three exploratory wells that had previously been drilled
      were drilled out again and tested. In January 1999, we initiated development
      by
      drilling out an additional four pre-existing wells and acquiring four producing
      wells. As of September 30, 2005, there are 10 producing wells. We have an
      additional leasehold targeting an area with potential of more than 200 wells.
      We
      originally owned 76% of the leasehold and working interests in this acreage.




On
      March
      31, 2004, we entered into a Development Agreement with Oil & Gas Engineering
      GmbH, an Austrian Company ("OGE") with respect to the Crossroads project. OGE
      purchased all of our interest in this project. OGE agreed to expend $2,600,000
      developing the project, subject to certain limitations. OGE immediately advanced
      us $94,000 to be used for getting the existing wells back in production. The
      remainder of the $2,600,000 will be spent only as supported by seismic analysis
      to develop another seven wells. OGE's obligation to expend funds will cease
      at
      the time the Crossroads project is producing at least 2,000 MCF per day, even
      if
      the full $2,600,000 has not yet been expended. If either this minimum production
      level has not been achieved or the full $2,600,000 has not been expended by
      March 1, 2006, all of the assets will be reassigned to us.




-16-




Although
      OGE will be in control of all decision making with respect to the exploration
      and development of the wells in the Crossroads project, OGE is required to
      subcontract to us the actual field operations, unless we decide we do not want
      to continue in this role. Until OGE receives net revenue from production from
      the Crossroads Project in the amount of the committed funds actually expended
      by
      OGE, OGE will receive 90% of net revenues and we will receive 10%. Thereafter,
      OGE will receive 75% of net revenues and we will receive 25%. If the project
      is
      abandoned and shut in, OGE will pay up to $500,000 of the associated costs,
      and
      we will pay for anything over $500,000, if any. Since this agreement was entered
      into on March 31, 2004 until recently, only minimal development activity had
      occurred. We have now drilled a salt water disposal well. In June 2005, gas
      plant operations were started, with nominal production to date as the 10 shut-in
      wells are being brought back into production.




**The
      Eastern Group**




In
      December 1997 we acquired from Jet Exploration, Inc. ("Jet") small interests
      in
      Antrim shale wells in three projects located in Alcona County, Michigan. We
      have
      a 2.3% working interest before payout and 3.68% after payout in the Devil River
      Project where 10 wells began producing in November of 1998. We have a 1.5%
      working interest in the Blue Spruce Project, which began producing in September
      1997 and has 16 producing gas wells and one salt water disposal well. We own
      a
      1.8% working interest before payout and 3.18% after payout in the Timm Project
      that started producing in August of 1998 and has 21 wells producing. The
      majority interest owner and Operator of these projects is Petroleum Development
      Corporation of West Virginia. These wells are producing a positive cash flow
      to
      us.




**Beregsasi
      Reef Field**




The
      Beregsasi is a one-well field located in Sterling Heights, Michigan. West Bay
      Exploration is the operator. The well is producing oil and gas from the Niagaran
      formation. Production began in August 1999. We own a 9% working interest.




**Church
      Lake Field**




The
      Church Lake Field is a six-well oil field in the Richfield formation in northern
      Michigan which produces an average of 32 barrels of oil per day. Petroleum
      Development Corporation is the operator of this field and major interest holder.
      We have a 17.5% working interest in the third through the sixteenth wells and
      a
      22.5% working interest in an additional five wells.




**Miscellaneous
      Well Interests**




We
      acquired small interests in numerous fields in 2000. We do not serve as operator
      for any of these interests. They generate an overall positive cash flow to
      us.




**Drilling
      Funds**




We
      have
      acted as promoter and manager for three drilling funds, as follows:




·
            Aurora
                Investments, LLC was formed in 2001. Membership interests totaling
                $954,000 were sold to 15 investors. Aurora Investments, LLC purchased
                a
                41.63% working interest in 14 natural gas wells drilled in the Beyer
                Antrim project in Alpena County, Michigan. As a result of the Samson
                Transaction, the working interest was reduced to 1.98%. We have accepted
                a
                distribution of our prorated share of the working interests in the
                leases
                owned by Aurora Investments, LLC. As a result, we no longer have
                an equity
                interest in Aurora Investments, LLC. However, we continue to serve
                as
                manager of Aurora Investments, LLC, and are entitled to receive a
                fee
                equal to $300 per net well per month as compensation for overseeing
                operations and production.




-17-




·
            Beyer
                Antrim Company, L.L.C. was formed in 2002. A membership interest
                totaling
                $650,000 was sold to one outside investor. Beyer Antrim Company,
                L.L.C.
                purchased a 16.14% working interest in 14 natural gas wells drilled
                in the
                Beyer Antrim project in Alpena County, Michigan. As a result of the
                Samson
                Transaction, the working interest was reduced to .71%. We have accepted
                a
                distribution of our prorated share of the working interests in the
                leases
                owned by Beyer Antrim Company, L.L.C. As a result, we no longer have
                an
                equity interest in Beyer Antrim Company, L.L.C. However, we continue
                to
                serve as a manager of Beyer Antrim Company, L.L.C., and are entitled
                to
                receive a fee equal to $300 per net well per month as compensation
                for
                overseeing operations and production.




·
            Aurora
                Natural Gas Production, LLC was formed in 2002. Membership interests
                totaling $455,000 were sold to 13 investors. Aurora Natural Gas
                Production, LLC purchased a 17% working interest in 10 natural gas
                wells
                in the Black Bean #1 Antrim project located in Alpena County, Michigan.
                As
                a result of the Samson Transaction, the working interest was reduced
                to
                0.60%. We have accepted a distribution of our prorated share of the
                working interests in the leases owned by Aurora Natural Gas Production,
                LLC. As a result, we no longer have an equity interest in Aurora
                Natural
                Gas Production, LLC. However, we continue to serve as manager of
                Aurora
                Natural Gas Production, LLC, and are entitled to receive a fee equal
                to
                $300 per net well per month as compensation for overseeing operations
                and
                production.




**Financing
      Subsidiary**




Aurora
      Antrim North, L.L.C. ("AAN") is a wholly-owned subsidiary of our Aurora
      subsidiary. It is the borrower under the TCW Energy, et al. credit facility,
      and
      holds those assets pledged as collateral under the credit facility. These assets
      include all of our Michigan Antrim Shale properties located in Alcona, Alpena,
      Charlevoix, Cheboygan, Montmorency, and Otsego Counties, and an interest in
      the
      Hudson Pipeline & Processing Co., LLC, as described below.




**Other
      Subsidiaries and Affiliates**




Aurora
      Operating, L.L.C. ("AOC"), owns an interest in approximately 56,000 acres of
      New
      Albany Shale leasehold interests in Martin, Daviess and Dubois Counties,
      Indiana. Our Aurora subsidiary originally owned a 71% membership interest,
      with
      the balance owned by 11 unrelated limited liability company members. On November
      21, 2003, we sold a portion of our membership interest to Wabash Energy
      Partners, L.P. ("Wabash"), resulting in Wabash holding a 20% membership interest
      while we continue to own a 51% membership interest. As described above, on
      October 13, 2005 we entered into the Wabash Purchase Agreement. At the closing,
      which is scheduled to occur by February 1, 2006, we will repurchase this
      membership interest from Wabash and again own a 71% membership
      interest.




Aurora
      Production, L.L.C. is the nominal owner of a number of override interests in
      the
      New Albany Shale projects. These assets have been assigned to Indiana Royalty
      Trustory, L.L.C. by letter agreement, but lease assignments have not yet been
      recorded. Our Aurora subsidiary owns a 51% membership interest in Aurora
      Production, L.L.C. for purposes of voting, but receive only 50% of net revenue
      distributions. The balance is owned by LaVanway Capital & Trade Corporation.
      All operations of Aurora Production, L.L.C. ceased as of December 31, 2003.
      As
      we acquire new interests in New Albany Shale projects, we are acquiring them
      in
      the name of our Aurora subsidiary, and not through Aurora Production, L.L.C.




Indiana
      Royalty Trustory, L.L.C. ("IRT") owns an overriding royalty in the amount of
      2.5% on approximately 60,000 acres in the New Albany Shale in Indiana. Certain
      assets are also in the process of being assigned from Aurora Production, L.L.C.,
      as described above. Our Aurora subsidiary owns a 50% membership interest in
      IRT.
      The balance is owned by LaVanway Capital & Trade Corporation.




-18-




Hudson
      Pipeline & Processing Co., LLC ("Hudson") owns a facility plant, pipeline,
      rights-of-way and meter used by nearby Antrim wells, and processes the gas
      produced from those wells. AAN owns a 48.75% membership interest in this limited
      liability company. The balance is owned by O.I.L. Energy Corp. ("OIL"), and
      Major Pipeline, LLC. After Hudson receives revenues equal to 125% of the amount
      spent on construction of the pipeline by AAN and OIL, Major Pipeline, LLC will
      receive an increased ownership percentage, and AAN's interest will drop to
      47.50%.




Geopetra
      Partners. LLC ("Geopetra") is a limited liability company engaged primarily
      in
      the identification and evaluation for acquisition of oil and gas properties
      and
      interests in entities which hold such properties and interests, identification
      and evaluation of areas to be explored and developed for the production of
      oil
      and gas, and providing consulting services to its members in connection with
      other oil and gas properties and interests, operations and activities. Geopetra
      was formed on April 1, 2005. Our Aurora subsidiary owns a 30% interest in
      Geopetra for which we paid $14,000. To date, Geopetra's operations have not
      been
      significant.




**Oil
      and Gas Reserves**




The
      following table presents information regarding proved reserves of oil
      attributable to our Cadence division's interests in producing properties in
      Wilbarger County, Texas, and De Soto Parish, LA as of September 30, 2005. The
      information regarding reserves is based on proved reserves reports prepared
      by
      Ralph E. Davis Associates, Inc., Houston, Texas, independent petroleum
      engineers. The following report (and table) do not include information on our
      interests in gas wells located in Alpena County, MI as no engineering study
      has
      been undertaken of these wells as of the date of this report. Ralph E. Davis's
      audit was based upon review of production histories and other geological,
      economic, ownership and engineering data we provided. All of the reserves
      presented in the following table are proved, developed reserves.




Estimates
      of our future net revenues from proved reserves are discounted to present value
      using an annual discount rate of 10% (the PV-10 Value), using oil and gas prices
      in effect as of the dates of such estimates, held constant throughout of the
      life of the properties. Proved reserves as of September 30, 2005 were estimated
      based upon the price for oil and gas actually received by Cadence on September
      30, 2005 which was $63.09 per barrel of oil and $11.23 per MMBTU of gas.




The
      following table contains estimates of future net revenues presented on the
      basis
      of unescalated prices and costs and their PV-10 Value. We deducted operating
      costs which were calculated as the average operating cost from April, 2005
      to
      September, 2005. For newer wells having produced less than six months the costs
      for the available months were averaged. The future net revenues are estimated
      based upon reserve volumes which are estimated by performance methods,
      volumetrically, or by analogy to surrounding wells. Many of these wells have
      produced long enough that a definitive performance trend can be determined
      and
      extrapolated into the future. We made no provision for income taxes. The
      estimates of future net revenues and their present value differ in this respect
      from the standardized measure of discounted future net cash flows contained
      in
      the supplemental information to this report which is calculated after provision
      for future income taxes.




Cadence
                  Division Revenues
 ESTIMATED
                  NETRESERVES
              
              ASSUMED
              
              FUTURE
                  NET INCOMEPROVED
                RESERVES
              
              (MBBLS/MMCF)
              
              PRICE
                  ($BBL/MCF)
              
              UNDISCOUNTED
              
              PV-10Producing
                  Oil
              
              
              59.4
              
              $
              63.09
              
              $
              2,774,400
              
              $
              2,188,500Producing
                  Gas
              
              
              505.3
              
              $
              11.23
              
              $
              4,425,900
              
              $
              3,202,000Total
                  Future Net Income
              
              
              
              
              
              
              
              $
              7,200,300
              
              $
              5,390,500





The
      following table presents information regarding proved reserves of gas
      attributable to our Aurora division's Michigan Antrim Shale projects as of
      December 31, 2004. This information is based on a reserve report prepared by
      Data & Consulting Services, a division of Schlumberger Technology
      Corporation of Pittsburgh, Pennsylvania. According to this report, over 86%
      of
      our proved reserves are classified as either "proved developed non-producing"
      or
      "proved undeveloped." The following reserve report (and table) do not include
      information on the New Albany Shale gas reserves located in Indiana, the gas
      reserves associated with the Crossroads project located in Ohio, or any oil
      reserves. No reserve report has been prepared for these properties.




-19-




We
      only
      obtain a reserve report that follows SEC reporting requirements annually at
      the
      end of each fiscal year. We have received a reserve report for our Michigan
      Antrim Shale properties as of August 1, 2005, but it was prepared for financing
      purposes and does not meet SEC reporting requirements.




The
      December 31, 2004 reserve report described below is prepared using the
      assumption that each well will produce for 40 years. Antrim Shale wells
      generally produce for extended periods of time. As noted above, the oldest
      Antrim Shale field in Michigan was drilled in the 1940s and it is still in
      production today. Estimates of our future net revenues from proved reserves
      are
      discounted to present value using an annual discount rate of 10% (the PV-10
      Value), using gas prices in effect as of the date of the estimate held constant
      throughout the life of the properties. For the table below, except for the
      Alpena Beyer Unit, the Value of the reserves was calculated based on the spot
      price at which we sold our gas on December 31, 2004, which was $6.195 per MCF.
      For the Alpena Beyer Unit, the calculation was based on an existing contract
      price of $4.00 per MCF in 2004, $4.37 per MCF in 2005, and $5.00 per MCF for
      all
      later years.




**AURORA
      SUBSIDIARY RESERVES AT DECEMBER 31, 2004**




Proved
                (1)
              Developed(2)
              Producing
            
            Proved
                (1)
              Developed(2)
              Non-Producing
            
            Proved(1)
              Undeveloped
                (2)
            
            Total
                Proved
              ReservesEstimated
                remaining net reserves (mmscf)
            
            
            4,818.71
            
            
            7,701.00
            
            
            22,429.70
            
            
            34,949.41Undiscounted
                future net income before taxes
            
            $
            21,814,860
            
            $
            29,719,820
            
            $
            77,015,290
            
            $
            128,549,970Future
                net income before taxes with PV-10 discount
            
            $
            8,130,430
            
            $
            12,987,160
            
            $
            26,890,550
            
            $
            48,008,140





(1)
            Proved
                reserves are those quantities of gas which, by analysis of geological
                and
                engineering data, can be estimated with reasonable certainty to be
                commercially recoverable from known reservoirs and under current
                economic
                conditions, operating methods, and government regulations.


(2)
            Developed
                reserves are expected to be recovered from existing wells. Undeveloped
                reserves are expected to be recovered: (a) from new wells on undrilled
                acreage; (b) from deepening existing wells to a different reservoir;
                or
                (c) where relatively large expenditure is required to recomplete
                an
                existing well or install production or transportation facilities
                for
                primary or improved recovery projects.




The
      report also places an estimated net present value on our interest in the Hudson
      Unit Pipelines at $2,503,490.




For
      purposes of calculating collateral coverage, our loan agreement with TCW Energy,
      et al., requires the use of a formula that is based in part on historical
      monthly averages instead of year-end prices. The reserve report prepared using
      this formula shows total proved reserves valued at $43,795,180 at December
      31,
      2004. Because of the inherent uncertainty in predicting future oil and gas
      prices, the present value of reserve assets cannot be determined with
      certainty.




-20-




**Production
      Information**




The
      following tables summarize sales volumes, sales prices, and production cost
      information for our Cadence division's net oil and gas production for the
      two-year period ended September 30, 2005. "Net" production is production that
      is
      owned by our Cadence division directly or indirectly and is produced to our
      interest after deducting royalty, and other similar interests. This table
      includes information from production from the oil wells in Wilbarger County,
      Texas, and Eddy County, New Mexico and from gas wells in De Soto Parish,
      Louisiana and from Alpena County, Michigan.




**Cadence
      Production**




Oil
                Production
            
            Twelve
                months Ended September 30,2005
            
            2004Total
                Net Revenues
            
            $
            800,103
            
            $
            837,305Net
                Sales Volume (Bbls)
            
            
            16,885
            
            
            25,887Average
                Sales Price (per Bbl.)
            
            $
            51.64
            
            $
            36.11Average
                Production Cost (per Bbl.)
            
            $
            3.32
            
            $
            2.61





Gas
                Production
            
            Twelve
                months Ended September 30,2005
            
            2004Total
                Net Revenues
            
            $
            1,449,393
            
            $
            1,676,948Net
                Sales Volume (mcf)
            
            
            199,703
            
            
            294,718Average
                Sales Price (per mcf.)
            
            $
            7.26
            
            $
            5.69Average
                Production Cost (per mcf.)
            
            $
            2.47
            
            $
            1.12





The
      following tables summarize sales volumes, sales prices, and production cost
      information for our Aurora division's net oil and gas production for the
      two-year period ended December 31, 2004. "Net" production is production that
      is
      owned by our Aurora division directly or indirectly and is produced to Aurora's
      interest after deducting royalty and other similar burdens. This table includes
      information about natural gas production from the Hudson, Treasure Island,
      Black
      Bean, Beyer, Blue Spruce, Timm, Devil River and Paxton Quarry Antrim Shale
      projects in Michigan and oil production from the Bergsasi well and the Church
      Lake field in Michigan.




**Aurora
      Production**




Gas
                Production
            
            Twelve
                months Ended December 31,2004
            
            2003Net
                RevenuesMichigan
            
            $
            726,333
            
            
            810,424Indiana
            
            $
            7,076
            
            $
            87,537Total
            
            $
            733,409
            
            $
            897,961Net
                Sales Volume (mcf)Michigan
            
            
            149,502
            
            
            192,787Indiana
            
            
            1,739
            
            
            21,665Total
            
            
            151,241
            
            
            214,452Average
                Sales Price (per mcf)
            
            $
            4.91
            
            $
            4.27
            (2)Average
                Production Cost (per mcf)
            
            $
            3.51
            (1)
            $
            3.00
            (2)





Oil
                Production
            
            Twelve
                months Ended December 31,2004
            
            2003Total
                Net Revenues (Michigan)
            
            $
            226,600
            
            $
            196,650Net
                Sales Volume (Bbls) (Michigan)
            
            
            4,798
            
            
            6,953Average
                Sales Price (per Bbl)
            
            $
            47.22
            
            $
            26.10
            (2)Average
                Production Cost (per Bbl)
            
            $
            18.65
            (1)
            $
            12.65
            (2)





(1)
            The
                average gas production cost for 2004 is increased due to additional
                operating expenses incurred in one particular project area which
                was
                shut-in most of the year. If this project was removed from the
                calculation, the average production cost per mcf would be $3.14.
                The
                Paxton Quarry field has higher production costs than the average
                because
                it was acquired from another operator and is in need of repairs.
                Additional wells are not expected to be added to this field. Production
                costs in other fields are expected to decline on a per-mcf basis
                as more
                wells are put on line. Accordingly, management expects the average
                production costs to decline to below $3.14 per mcf over time, consistent
                with the industry average from other operators who operate wells
                in the
                Michigan Antrim.


(2)
            The
                2003 numbers for average sales price and average production cost
                are
                approximate, based on estimated sales volumes. The software our Aurora
                division used in 2003 did not record per-unit sales volume.




-21-


**Oil
      and Gas Wells**




The
      following table sets forth the number of gross and net productive wells owned
      by
      our Cadence division on the stated dates.




Oil
                Wells
            
            Gas
                Wells
            
            Total
                WellsSeptember
                30, 2005Gross(1)
            
            
            9.00
            
            
            11.00
            
            
            20.00Net(1)
            
            
            5.10
            
            
            4.70
            
            
            9.86September
                30, 2004Gross(1)
            
            
            6.00
            
            
            10.00
            
            
            16.00Net(2)
            
            
            3.70
            
            
            2.30
            
            
            6.00





(1)
            Gross
                wells are the total wells in which a working interest is owned.


(2)
            Net
                wells are the sum of fractional working interests owned in gross
                wells.




The
      following table sets forth the number of gross and net productive wells owned
      by
      our Aurora division on the stated dates.




Oil
                Wells
            
            Gas
                Wells
            
            Total
                WellsDecember
                31, 2004Gross(1)
            
            
            8.00
            
            
            192.00
            
            
            200.00Net(2)
            
            
            1.86
            
            
            40.49
            
            
            42.35December
                31, 2003Gross(1)
            
            
            8.00
            
            
            105.00
            
            
            113.00Net(2)
            
            
            1.86
            
            
            42.8
            
            
            44.66





(1)
            Gross
                wells are the total wells in which a working interest is owned.


(2)
            Net
                wells are the sum of fractional working interests owned in gross
                wells.


(3)
            The
                increase in gross wells with a corresponding decrease in net wells
                from
                2003 to 2004 was attributable largely to the sale of 80% of the leaseholds
                in the Michigan Antrim to Samson during 2004, as described above.


(4)
            Most
                of the productive wells our Aurora division owned at December 31,
                2004
                were drilled during the third and fourth quarters of 2004, and saw
                little
                actual production during the year. Using a weighted average approach
                for
                the time of actual production, our Aurora division had 10.6 net wells
                in
                actual production for the entire 2004 year.




All
      of
      our Aurora division's productive wells are located in Michigan.





**Oil
      and Gas Acreage**




The
      following table sets forth the number of acres of oil and gas leases owned
      by
      our Cadence divisions of September 30, 2005.




Developed(1)
            
            Undeveloped(2)Gross
            
            Net
            
            Gross
            
            NetLouisiana
            
            
            4800
            
            
            2032
            
            
            0
            
            
            0Texas
            
            
            2290
            
            
            1165
            
            
            0
            
            
            0Michigan
            
            
            1891
            
            
            425
            
            
            0
            
            
            0Kansas
            
            
            160
            
            
            160
            
            
            27,840
            
            
            27,840Total
            
            
            9,141
            
            
            3,782
            
            
            27,840
            
            
            27,840





(1)
            The
                number of acres which are allocated or assignable to producing wells
                or
                wells capable of production.


(2)
            Lease
                acreage on which wells have not been participated in or completed
                to a
                point that would permit the production of commercial quantities of
                oil and
                natural gas regardless of whether such acreage contains proved reserves.




-22-




The
      following table sets forth the number of acres of oil and gas leases owned
      by
      our Aurora division at December 31, 2004. These are rounded to whole
      numbers.




Developed(1)
            
            Undeveloped(2)Gross
            
            Net
            
            Gross
            
            NetGasMichigan
            
            
            7,956
            
            
            2,739
            
            
            100,324
            
            
            52,799Indiana
            
            
            –
            
            
            –
            
            
            284,576
            
            
            214,487Ohio
            
            
            –
            
            
            –
            
            
            15,350
            
            
            1,044Illinois
            
            
            –
            
            
            –
            
            
            1,632
            
            
            1,632Kentucky
            
            
            –
            
            
            –
            
            
            6,497
            
            
            6,497Total
            
            
            7,956
            
            
            2,739
            
            
            408,379
            
            
            276,459





(1)
            "Developed"
                refers to the number of acres which are allocated or assignable to
                producing wells or wells capable of production.


(2)
            "Undeveloped"
                refers to lease acreage on which wells have not been developed or
                completed to a point that would permit the production of commercial
                quantities of oil or natural gas regardless of whether such acreage
                contains proved reserves.




**Drilling
      Activities**




The
      following table sets forth our Cadence division's drilling results for the
      twelve months ended September 30, 2005, and 2004:




Gross
                Wells
            
            Net
                WellsFiscalYear
            
            Type
                of Well
            
            Total
            
            Productive
                (2)
            
            Dry(2)
            
            Abandoned(4)
            
            Total
            
            Productive
            
            Dry
            
            Abandoned2005
            
            
            Exploratory(1)
            
            
            2
            
            
            1
            
            
            1
            
            
            0
            
            
            2
            
            
            1
            
            
            1
            
            
            0Development(1)
            
            
            7
            
            
            6
            
            
            1
            
            
            0
            
            
            3.45
            
            
            2.95
            
            
            0.5
            
            
            02004
            
            
            Exploratory(1)
            
            
            3.0
            
            
            1
            
            
            1
            
            
            0
            
            
            2
            
            
            2
            
            
            1.0
            
            
            0Development(1)
            
            
            11
            
            
            7
            
            
            2
            
            
            2
            
            
            4.3
            
            
            2.5
            
            
            0.9
            
            
            0.9





(1)
            An
                exploratory well is a well drilled either in search of a new, as
                yet
                undiscovered oil or gas reservoir or to greatly extend the known
                limits of
                a previously discovered reservoir. A development well is a well drilled
                within the presently proved productive area of an oil or gas reservoir,
                as
                indicated by reasonable interpretation of available data, with the
                objective of completing in that reservoir.


(2)
            A
                productive well is an exploratory or development well found to be
                capable
                of producing either oil or gas in sufficient quantities to justify
                completion as an oil or gas well.


(3)
            A
                dry well is an exploratory or development well that is not a producing
                well.


(4)
            An
                abandoned well is a well that has either been plugged or has been
                converted to another use. We have converted this Texas well to a
                salt
                water disposal well. Two of the DeSoto Parish wells produced limited
                quantities of gas for a time, but are no longer producing any gas
                and are
                considered abandoned for the purposes of this table.






-23-





The
      following table sets forth our Aurora division's drilling results for the twelve
      months ended December 31, 2004 and 2003. The table does not include
      salt
      water disposal wells drilled. In 2004, our Aurora division drilled 6 gross
      and
      2.39 net salt water disposal wells. In 2003, our Aurora division drilled 1.00
      gross and 0.07 net salt water disposal wells.




Gross
                Wells
            
            
            
            
            
            Net
                WellsFiscalYear
            
            Type
                of Well
            
            Total
            
            Productive
                (2)
            
            Dry(3)
            
            Abandoned(4)
            
            Total
            
            Productive(2)
            
            Dry(3)
            
            Abandoned(4)2004
            
            
            Exploratory(1)Michigan
            
            
            –
            
            
            –
            
            
            --
            
            
            --
            
            
            –
            
            
            –
            
            
            –
            
            
            –Indiana
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –Total
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –Development(1)Michigan
            
            
            87
            
            
            84
            
            
            3
            
            
            –
            
            
            26.24
            
            
            25.06
            
            
            1.18
            
            
            –Indiana
            
            
            4
            
            
            –
            
            
            –
            
            
            4
            
            
            0.20
            
            
            –
            
            
            --
            
            
            0.20Total
            
            
            91
            
            
            84
            
            
            3
            
            
            4
            
            
            26.44
            
            
            25.06
            
            
            1.18
            
            
            0.202003
            
            
            Exploratory(1)Michigan
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –Indiana
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –Total
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –Development(1)Michigan
            
            
            27
            
            
            27
            
            
            –
            
            
            –
            
            
            5.06
            
            
            5.06
            
            
            –
            
            
            –Indiana
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –Total
            
            
            27
            
            
            27
            
            
            –
            
            
            –
            
            
            5.06
            
            
            5.06
            
            
            –
            
            
            –





(1)
            An
                exploratory well is a well drilled either in search of a new, as
                yet
                undiscovered oil or gas reservoir or to greatly extend the known
                limits of
                a previously discovered reservoir. A development well is a well drilled
                within the presently proved productive area of an oil or gas reservoir,
                as
                indicated by reasonable interpretation of available data, with the
                objective of completing in that reservoir.


(2)
            A
                productive well is an exploratory or development well found to be
                capable
                of producing either oil or gas in sufficient quantities to justify
                completion as an oil or gas well.


(3)
            A
                dry well is an exploratory or development well that is not a producing
                well.


(4)
            An
                abandoned well is a well that has either been plugged or has been
                converted to another use.




**Drilling
      Techniques and Arrangements**




For
      gas
      wells, our Aurora division uses a production system that is designed to achieve
      low pressure on the wells, pipelines, facilities and reservoir. This is done
      by
      keeping natural fractures open to the well bore, and by using low-pressure
      gas
      processing near well sites. Using this low-pressure production approach, our
      Aurora division seeks to increase the recoverability of gas production that
      would otherwise be held in the reservoir.




Our
      Aurora division usually uses a simple proven completion procedure. This
      procedure involves drilling through several pay zones, setting and cementing
      casing, and drilling a rat-hole, which is used for gas-water separation. The
      use
      of specially designed cement around the casing helps avoid plugging off natural
      fractures. Imaging logs are used to identify which zones are best fractured
      and
      will yield commercial gas production.




In
      order
      to contain costs, our Aurora division tries to keep facilities for gas
      processing decentralized. Salt water disposal wells are drilled close to the
      compression facilities, central to each field's wells. Skid mounted separators
      that can be easily downsized are used at the site of the salt water disposal
      wells. The localized disposal of water reduces power demand. Different
      reservoirs contain different amounts of water. Aurora cannot accurately predict
      the actual amount of time required for dewatering with respect to each well.
      The
      period of time when the volume of gas that is produced is limited by the
      dewatering process could be as much as two years, thereby delaying revenue
      production.




Skid
      mounted compressors are used by our Aurora division in a series to maximize
      compression to the transportation line. Our Aurora division will also seek
      to
      maintain low pressure in the gathering systems. Gas will be drawn at low
      wellhead pressure using a five and one-half inch or seven inch production
      casing.




One
      strategy that our Aurora division uses to minimize costs is to minimize the
      use
      of land surface. This is accomplished by using small well sites in open areas
      near roads, and by not building central processing facilities, but instead
      using
      localized facilities as described above. Truck mounted drilling rigs may be
      used. Our Aurora division may use other drilling, completion and operating
      procedures if, in management's opinion, these alternative procedures will
      produce a higher rate of gas from the shale.




-24-




Our
      Aurora division's gas wells will be drilled by outside drilling companies.
      We
      have two turnkey drilling agreements in place for our Michigan Antrim drilling
      areas that give us preferential access to two drilling rigs. Management believes
      that there is currently enough capacity available in the areas in which Aurora
      is working that we will not have a problem finding one or more drilling
      companies available to meet our time schedule for drilling wells. However,
      over
      time, circumstances could change as development activity in the industry picks
      up.




The
      availability of experienced and competent drilling, completion and facilities
      installation production laborers and vendors could affect the timing of when
      the
      wells are completed and producing revenues. If there is a shortage of field
      workers, it will take longer to begin to generate revenues from new wells.
      From
      time to time, the oil and gas industry also experiences equipment shortages,
      resulting in back orders for needed equipment. If this occurs before the wells
      are drilled, completed and put into production, it will take longer for the
      wells to begin to generate revenues.




The
      oil
      and gas industry has historically experienced periods of rapidly increasing
      drilling and production costs, frequently during times of increased drilling
      activities. If significant cost increases occur with respect to our development
      activity, we may have to reduce the number of wells we drill.




After
      the
      wells are completed and put into production, we may decide that additional
      work
      needs to be done beyond routine maintenance. It is frequently the case that
      at
      some point in the life of a well additional work may be appropriate in order
      to
      increase production, such as reworking, recompletion, deepening or sidetracking
      of existing wells; or the installation of secondary tertiary or other enhanced
      recovery methods. We reserve the right to engage in production-enhancing
      operations of this type, even if it results in a temporary reduction in cash
      flow.




**Sale
      and Production**




We
      use
      different strategies for gas sales depending on the location of the field and
      the local markets. In some locations, we use proprietary CO2 reduction units
      to
      process our own gas and sell it to nearby local markets. In other cases, we
      connect to nearby high pressure pipelines. We are not currently aware of any
      problems with pipeline availability. However, because of the nature of natural
      gas development, there may be periods of time when pipeline capacity is
      inadequate to meet our transportation needs. It is often the case that as new
      development comes on line, pipelines are close to or at capacity before new
      pipelines are built.




During
      periods when pipeline capacity is inadequate, if we are relying on pipeline
      transportation, we may be forced to reduce production or incur additional
      expense as existing production is compressed to fit into existing pipelines.
      As
      production increases, more compression is generally required to compress the
      production into the pipeline. As more compression is required, production costs
      increase, primarily because more fuel is required in the compression process.
      Furthermore, because compression is a mechanical process, a breakdown may occur
      that will prevent the delivery of gas until repairs are made.




We
      rely
      heavily on the spot markets to sell our gas. As a result, there is no assurance
      at what price we will be able to sell our gas. Only approximately 30% of the
      gas
      that is consumed in Michigan is produced in Michigan. As a result, gas produced
      in Michigan typically receives a premium above the New York Mercantile Exchange
      spot market price.




Prices
      for gas and oil fluctuate fairly widely based on supply and demand. Supply
      and
      demand are influenced by weather, foreign policy and industry practices. For
      example, demand for gas has increased in recent years due to a trend in the
      power plant industry to move away from using oil and coal as a fuel source,
      to
      using gas, because gas is a cleaner fuel. Nonetheless, in light of historical
      fluctuations in prices, there can be no assurance at what price we will be
      able
      to sell our gas and oil. It is possible that gas prices will be low at the
      time
      periods in which the wells are most productive, thereby damaging overall
      returns. It is possible that prices will drop so low that production will become
      uneconomical. Ongoing production costs that will continue include equipment
      maintenance, compression and pumping costs. If production becomes uneconomical,
      we may discontinue production until prices improve.




-25-




**Unitization
      of Production**




The
      production of some or all of our wells may be unitized (connected by agreement)
      with the production from wells we have already drilled or from wells drilled
      by
      other owner/operators in the same fields. Any subsequent wells drilled within
      the fields may also be unitized with existing wells, including our wells.
      Typically, we only unitize a well that we have drilled or a well that we have
      has purchased from other companies.




If
      other
      companies are involved, the method used for the unitization will be to add
      together all of the acquisition and development costs from each of the
      participants within the field, and then calculate the working interest
      percentage of each participant based on the percentage of total costs that
      were
      contributed by that participant. Thus, working interest percentages will be
      recalculated each time a well or a group of wells are put into production.
      All
      costs are included in this calculation, including costs for infrastructure
      development as well as drilling costs.




The
      unitization of wells reduces the risk associated with any specific well in
      which
      we own a working interest. In addition, the sharing of infrastructure costs,
      such as the cost of the salt water disposal wells, should result in a lower
      per-well operating expense for all of the wells in the field. In fields with
      multiple owners where wells are being unitized, there may be certain
      disadvantages to earlier investors when a field is unitized




**Credit
      Facilities**




**TCW**




On
      August
      12, 2004 our Aurora division through its AAN subsidiary, closed on a line of
      credit facility with TCW Energy, et al. ("TCW"). At closing, Aurora was given
      an
      initial credit availability of $10,000,000. As the assets in Aurora become
      proved reserves the credit availability was increased, up to a maximum of
      $30,000,000. On June 10, 2005 we drew an additional $10,000,000 in credit,
      and
      on September 30, 2005, we drew another $10,000,000 in credit. On December 8,
      2005, we entered into an amendment to the credit facility with TCW, increasing
      the maximum amount available on the line of credit to $50 million. On December
      13, 2005, we drew another $10 million in credit. Our principal balance
      outstanding as of December 13, 2005 is $40 million.




The
      TCW
      credit facility bears interest at a fixed rate of 11.5% per annum on the
      outstanding principal balance, calculated and payable in arrears. Interest
      payments are due on the second to last business day of each March, June,
      September and December (each a "Quarterly Payment Date"). The credit facility
      matures on September 30, 2009, at which time any outstanding principal is due
      and payable. Beginning on September 29, 2005, and on each Quarterly Payment
      Date
      thereafter, AAN is required to make a principal payment equal to 75% of adjusted
      net cash flow from the assets serving as collateral for the credit facility.
      In
      the event of default, this increases to 100%. So long as AAN is not in default
      and is in compliance with the financial covenants, AAN is allowed to distribute
      to us 25% of the adjusted net cash flow, plus $300,000 annually to fund general
      and administrative expenses.




At
      the
      closing of the financing, Aurora conveyed to TCW a 4% overriding royalty
      interest net to Aurora's interest, in all of Aurora's existing oil and gas
      leases in the counties of Alcona, Alpena, Charlevoix, Cheboygan, Montmorency
      and
      Otsego in the State of Michigan. Additionally, Aurora is required to convey
      a 4%
      overriding royalty interest, net to its interest, in any new leases acquired
      in
      these counties while the loan is outstanding. The overriding royalty interest
      conveyed to TCW will not bear any operation, transportation, marketing,
      compression or similar charges except for those expenses paid to parties not
      affiliated with Aurora.




The
      notes
      issued to TCW may be prepaid after August 15, 2006, but a prepayment penalty
      will be imposed for prepayments made prior to August 15, 2008. TCW has been
      granted observer rights to the board of managers of AAN and the Board of
      Directors of Aurora. Aurora is required to provide TCW with a semi-annual
      engineering report. Aurora is required to pay an affiliate of TCW a 1.5%
      origination fee for each advance taken.




-26-




**Northwestern
      Bank Line of Credit**




On
      October 12, 2005, our Aurora division entered into a $7,500,000 line of credit
      promissory note with Northwestern Bank of Traverse City, Michigan ("Northwestern
      Bank"). This credit facility is being used as a typical line of credit, with
      draws being made periodically as needed, and payments being made when funds
      are
      available. The principal balance therefore fluctuates often.




The
      Northwestern Bank line of credit matures on October 15, 2006. It carries
      interest at Wall Street Prime, initially 6.75% per year. Interest is payable
      monthly. Principal is payable at maturity, subject to the Northwestern Bank's
      right to accelerate the due date in the event of default. The loan is secured
      by
      the personal guaranties of William W. Deneau, Thomas W. Tucker and John V.
      Miller, Jr. It is also secured by all of the personal property of JetX, L.L.C.,
      a company that is owned in equal shares by Messrs. Deneau, Tucker and Miller.
      Messrs. Deneau, Tucker and Miller have also agreed to pledge 10% of their shares
      of Cadence common stock as collateral on the loan. We have agreed that the
      indebtedness to TCW will at no time exceed 55% of the total modified NPV 10
      reserves held as collateral by TCW. We are also required to provide Northwestern
      Bank a revised independent reserve study every six months during the time the
      loan is outstanding, with the next report due no later than January 31, 2006.
      We
      are required to maintain a collateral coverage ratio not to exceed 1.2, as
      calculated twice per year.




**Mortgage
      Loan**




On
      September 19, 2005, our Aurora division obtained an office condominium mortgage
      loan from Northwestern Bank in the amount of $2,950,000. The repayment schedule
      is monthly interest only for three successive months starting on November 1,
      2005, and beginning on February 1, 2006, principal and interest in 32 monthly
      payments of $21,969. The loan bears interest at the rate of 6.5% per year.
      The
      maturity date is October 1, 2008. The loan proceeds were used to purchase the
      office condominium and to pay for interior improvements to the premises.




**Insurance**




The
      oil
      and gas business involves operating hazards such as well blowouts, craterings,
      explosions, uncontrollable flows of crude oil, natural gas or well fluids,
      fires, formations with abnormal pressures, pipeline ruptures or spills,
      pollution, releases of toxic gas and other environmental hazards and risks.
      Personal injuries, damage to property and equipment, reservoir damage, or loss
      of reserves may occur if such a catastrophe occurs, any one of which could
      cause
      us to experience substantial losses. In addition, we may be liable for
      environmental damage caused by previous owners of properties we purchase or
      lease.





Our
      Aurora division maintains insurance for potential losses at the level management
      deems reasonable. However, certain risks of loss are either uninsurable or
      not
      economically insurable. An uninsured loss may hurt our financial performance
      and
      condition. We currently have the following insurance coverage which is effective
      until


December
      31, 2005:





POLICY
                TYPE
            
            LIMITWorker's
                Compensation & Employment Liability
            
            Worker's
                Compensation; Statutory Employer's Liability -
                $1,000,000General
                Liability
            
            Each
                occurrence - $1,000,000;
              Damages
                to Rented Premises - $100,000;
              Medical
                Exp - $10,000;
              Personal
                & Adv. Injury - $1,000,000;
              General
                Aggregate - $2,000,000;
              Products-Comp
                -$2,000,000Automobile
            
            $1,000,000
                per occurrenceExcess/Umbrella
                Liability
            
            $5,000,000
                per occurrence and aggregateProperty/Pollution
            
            $1,059,600
                (property coverage);
              $1,000,000
                (pollution limit)Well
                Control
            
            $2,000,000
                limit




-27-


**Employees**




As
      of
      November 15, 2005, we have 31 full time employees and one part time employee.
      We
      are not a party to any collective bargaining agreements.




**Service
      Mark**




We
      have
      been granted a service mark registration (Registration No. 2,214,144) from
      the
      United States Patent and Trademark Office for the Aurora logo. The registration
      date is December 29, 1998, and the registration is valid for 10 years. We do
      not
      own any other patents, trademarks, licenses, franchises or concessions.




**Legal
      Proceedings**




There
      are
      no currently threatened or pending claims against us.




**Risks
      Related to our Business**




**THE
      INTEGRATION OF THE CADENCE AND AURORA BUSINESSES MAY BE COSTLY AND THE FAILURE
      TO SUCCESSFULLY EFFECT THE INTEGRATION MAY ADVERSELY AFFECT OUR BUSINESS,
      RESULTS OF OPERATIONS AND FINANCIAL CONDITION.**




Our
      ability to realize some of the anticipated benefits of the acquisition of Aurora
      will depend in part on our ability to integrate Aurora's operations and
      Cadence's operations in a timely and efficient manner. The integration process
      may require significant efforts from each company, although the fact that we
      do
      not have offices to dismantle or staff to integrate may make this process easier
      in this case than is true for many other mergers. Nonetheless, the integration
      process may distract our management's attention from the day-to-day business
      of
      the combined company. If we are unable to successfully integrate the operations
      of the two companies or if this integration process is delayed or costs more
      than expected, our business, operating results and financial condition may
      be
      negatively impacted.




**WE
      CONTINUE TO EXPERIENCE SIGNIFICANT OPERATING LOSSES.**




We
      reorganized our business in July 2001 to pursue oil and gas exploration and
      development opportunities and in October 2005 increased our business activities
      through the acquisition of Aurora. We have a limited operating history in our
      current form. Since July 2001, our Cadence division's operating costs have
      exceeded its revenue in each quarter. Our Cadence division has incurred
      cumulative net losses of approximately $13,477,034 from June 30, 2001 through
      September 30, 2005. We may also experience a loss in our Cadence division in
      2006. Our Cadence division may not be able to obtain or maintain any level
      of
      revenues, natural gas and crude oil reserves or production. If our Cadence
      division is unsuccessful in these efforts it may never achieve profitability.




Our
      Aurora division reported profit from operations during the twelve months ended
      December 31, 2002 and 2003, and a loss from operations during the twelve months
      ended December 31, 2004. The loss for the twelve months ended December 31,
      2004
      was directly attributable to financing expenses and expenses associated with
      the
      sale of assets. We also expect that our Aurora division will operate at a loss
      for the twelve months ended December 31, 2005. Part of the reason for this
      is an
      accounting issue associated with the acquisition of Aurora, which required
      us to
      amortize Cadence's intangible assets over a period of three years. This will
      result in a non-cash expense deduction of approximately $1,535,000 on our profit
      and loss statement for the twelve months ended December 31, 2005. In addition,
      our Aurora division has been drilling wells in 2005 from which cash flow from
      production will not be generated until 2006. Our Aurora division may be unable
      to return to and maintain profitability.




-28-




**WE
      MAY BE UNABLE TO MAKE ACQUISITIONS OF PRODUCING PROPERTIES OR PROSPECTS OR
      SUCCESSFULLY INTEGRATE THEM INTO OUR OPERATIONS.**




Acquisitions
      of producing properties and undeveloped oil and gas leases have been an
      essential part of our long-term growth strategy. We may not be able to identify
      suitable acquisitions in the future or to finance these acquisitions on
      favorable terms or at all. In addition, we compete against other companies
      for
      acquisitions, many of whom have substantially greater managerial and financial
      resources than us. The successful acquisition of producing properties and
      undeveloped oil and gas leases require an assessment of such properties'
      potential oil and gas resources, future oil and gas prices, development costs,
      operating costs, potential environmental and other liabilities and other factors
      beyond our control. These assessments are necessarily inexact and their accuracy
      inherently uncertain. Such a review may not reveal all existing or potential
      problems, nor will it necessarily permit us to become sufficiently familiar
      with
      the properties to fully assess their merits and deficiencies. Significant
      acquisitions can change the nature of our operations and business depending
      upon
      the character of the acquired properties, which may be substantially different
      in operating and geological characteristics or geographic location than existing
      properties. Our acquisitions may not be integrated successfully into our
      operations and may not achieve desired profitability objectives.




**WE
      DO NOT HAVE COMPLETE MANAGEMENT CONTROL OVER ALL OUR PROPERTIES.**




Our
      Cadence division does not operate any of the properties in which we have an
      interest. Our Aurora subsidiary conducts most of its oil and gas exploration,
      development and production activities in joint ventures with others. In some
      cases, Aurora acts as operator and retains significant management control.
      In
      other cases, Aurora has reserved only an overriding royalty interest and has
      surrendered all management rights. In still other cases, Aurora has reserved
      the
      right to participate in management decisions, but does not have ultimate
      decision-making authority. As a result of these varying levels of management
      control, in a large portion of the properties in which we have an interest,
      we
      have no control over:




·
            the
                number of wells to be drilled;




·
            the
                location of wells to be drilled;




·
            the
                timing of drilling and recompleting of wells;




·
            the
                field company hired to drill and maintain the wells;




·
            the
                timing and amounts of production;




·
            the
                approval of other participants in drilling wells;




·
            development
                and operating costs;




·
            capital
                calls on working interest owners; and




·
            negative
                gas balance conditions.




These
      and
      other aspects of the operation of our properties and the success of our drilling
      and development activities will in many cases be dependent on the expertise
      and
      financial resources of our joint venture partners and third-party operators.




**WE
      MAY LOSE KEY MANAGEMENT PERSONNEL.**




Our
      current management team has substantial experience in the oil and gas business.
      We do not have employment agreements with any members of our management team.
      The loss of any of these individuals could adversely affect our business. If
      one
      or more members of our management dies, becomes disabled or otherwise
      voluntarily terminates employment with us, there is no assurance that a suitable
      or comparable substitute will be found.




-29-




**MOST
      OF OUR AURORA DIVISION'S PROVED RESERVES ARE NOT YET PRODUCING.**




Of
      our
      Aurora division's proved reserves at December 31, 2004, approximately 22% are
      classified as "proved developed non-producing" and approximately 64% are
      classified as "proved undeveloped." Production revenues from estimated proved
      developed non-producing reserves will not be realized until some time in the
      future, after we have installed supporting infrastructure or taken other
      necessary steps. It will be necessary to incur additional capital expenditures
      to install this required infrastructure. Production revenues from estimated
      proved undeveloped reserves will not be realized until after such time, if
      ever,
      as we make significant capital expenditures with respect to the development
      of
      such reserves, including expenditures to fund the cost of drilling wells and
      building the supporting infrastructure. The reserve data assumes that we will
      make significant capital expenditures to develop our reserves. Although we
      have
      prepared estimates of the costs associated with developing these reserves in
      accordance with industry standards, no assurance can be given that our estimates
      of capital expenditures will prove accurate, that our financing sources will
      be
      sufficient to fully fund our planned development activities, or that development
      activities will be either successful or in accordance with our schedule. We
      cannot control the performance of our joint venture partners on whom we depend
      for development of a substantial number of properties in which we have an
      economic interest and which are included in our reserves. Further, any
      significant decrease in oil and gas prices or any significant increase in the
      cost of development could result in a significant reduction in the number of
      wells drilled. No assurance can be given that any wells will yield commercially
      viable quantities.




**OUR
      AURORA DIVISION'S CREDIT FACILITY HAS OPERATING RESTRICTIONS AND FINANCIAL
      COVENANTS THAT LIMIT ITS FLEXIBILITY AND MAY LIMIT ITS BORROWING CAPACITY.**




The
      TCW
      Energy credit facility limits the amount of earnings from production that our
      Aurora division has access to for the properties pledged as collateral on the
      loan, and has numerous other operational restrictions that limit our Aurora
      division's flexibility. The credit facility also requires our Aurora division's
      borrowing subsidiary to maintain certain ratios of collateral asset values
      to
      debt and proved developed producing reserves value to debt. If the ratio
      requirements are not satisfied, curative action may be required, such as
      repaying a part of the outstanding principal or pledging more assets as
      collateral, and our Aurora division's borrowing subsidiary will be unable to
      draw more funds to use in development.




The
      value
      of the assets held by our Aurora division's borrowing subsidiary will depend
      on
      the then current commodity prices for natural gas. If prices drop significantly,
      our Aurora division may have trouble satisfying the ratio covenants of the
      credit facility. As noted below, oil and gas prices are volatile. If our Aurora
      division is unable to make use of this credit facility, it may be difficult
      to
      find replacement sources of financing to use for working capital, capital
      expenditures, drilling, technology purchases or other purposes. Even if
      replacement financing is available, it may be on less advantageous terms than
      the TCW Energy, credit facility.




**SOME
      OF OUR AURORA DIVISION’S BANK ACCOUNTS ARE NOT FULLY INSURED.**




Some
      of
      our Aurora division's bank accounts periodically exceed the $100,000 limit
      of
      FDIC insurance for deposits. In the unlikely event that Aurora's bank should
      fail, it is possible that our Aurora division will lose some of its funds on
      deposit.




**OUR
      DRILLING ACTIVITIES MAY BE UNSUCCESSFUL.**




We
      cannot
      predict prior to drilling and testing a well whether the well will be productive
      or whether we will recover all or any portion of our investment in the well.
      Our
      drilling for oil and natural gas may involve unprofitable efforts, not only
      from
      dry holes but from wells that are productive but do not produce sufficient
      quantities to cover drilling and completion costs, and thus which are not
      economically viable. Our efforts to identify commercially productive reservoirs,
      such as studying seismic data, the geology of the area and production history
      of
      adjoining fields, do not conclusively establish that oil and gas is present
      in
      commercial quantities. If our drilling efforts are unsuccessful, our
      profitability will be adversely affected.




-30-




**PRODUCTION
      LEVELS CANNOT BE PREDICTED WITH CERTAINTY.**




Until
      a
      well is drilled and has been in production for a number of months, we will
      not
      know what volume of production we can expect to achieve from the well. Even
      after a well has achieved its full production capacity, we cannot be certain
      how
      long the well will continue to produce or the production decline that will
      occur
      over the life of the well. Estimates as to production volumes and production
      life are based on studies of similar wells, and therefore speculative and not
      fully reliable. As a result, our revenue budgets for producing wells may prove
      to be inaccurate.




**PRODUCTION
      DELAYS MAY OCCUR.**




In
      order
      to generate revenues from the sale of oil and gas production from new wells,
      we
      must complete significant development activity. Delays in receiving governmental
      permits, adverse weather conditions, a shortage of labor or parts, and/or
      dewatering time frames may cause production delays, as discussed below. These
      delays will mean that we will be delayed in achieving revenues from these new
      wells.




Oil
      and
      gas producers often compete for experienced and competent drilling, completion
      and facilities installation vendors and production laborers. The unavailability
      of experienced and competent vendors and laborers may cause development and
      production delays.




From
      time
      to time, vendors of equipment needed for oil and gas drilling and production
      become backlogged, forcing delays in development until suitable equipment can
      be
      obtained.




For
      each
      new well, before drilling can commence, we will have to obtain a drilling permit
      from the state in which the well is located. We will also have to obtain a
      permit from the United States Environmental Protection Agency for each salt
      water disposal well. It is possible that for reasons outside of our control,
      the
      issuance of the required permits will be delayed, thereby delaying the time
      at
      which production is achieved.




Adverse
      weather may foreclose any drilling or development activity, forcing delays
      until
      more favorable weather conditions develop. This is more likely to occur during
      the winter and spring months, but may occur at other times of the year.




Different
      natural gas reservoirs contain different amounts of water. The actual amount
      of
      time required for dewatering with respect to each well cannot be predicted
      with
      accuracy. The period of time when the volume of gas that is produced is limited
      by the dewatering process may be extended, thereby delaying revenue production.




**OIL
      AND GAS PRICES ARE VOLATILE. A SUBSTANTIAL DECREASE IN OIL AND NATURAL GAS
      PRICES COULD ADVERSELY AFFECT OUR BUSINESS.**




Our
      revenues, profitability and future growth depend in part on prevailing natural
      gas and crude oil 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 natural gas and crude oil that we
      can
      economically produce. It is possible that prices will be low at the time periods
      in which the wells are most productive, thereby damaging overall returns. It
      is
      possible that prices will drop so low that production will become uneconomical.
      Ongoing production costs that will continue include equipment maintenance,
      compression and pumping costs. If production becomes uneconomical, we may decide
      to discontinue production until prices improve.




-31-




Prices
      for natural gas and crude oil fluctuate widely, as evidenced by the volatility
      in natural gas prices in response to the war between the United States and
      Iraq.
      The prices for oil and natural gas are subject to a variety of factors beyond
      our control, including:




·
            the
                level of consumer product demand;




·
            weather
                conditions;




·
            domestic
                and foreign governmental regulations;




·
            the
                price and availability of alternative fuels;




·
            political
                conditions in oil and gas producing regions;




·
            the
                domestic and foreign supply of oil and gas;




·
            market
                uncertainty; and




·
            worldwide
                economic conditions.




**PIPELINE
      CAPACITY MAY BE INADEQUATE.**




Because
      of the nature of natural gas development, there may be periods of time when
      pipeline capacity is inadequate to meet our gas transportation needs. It is
      often the case that as new development comes on line, pipelines are close to
      or
      at capacity. During periods when pipeline capacity is inadequate, we may be
      forced to reduce production or incur additional expense as existing production
      is compressed to fit into existing pipelines.




**OUR
      RELIANCE ON THIRD PARTIES FOR GATHERING AND DISTRIBUTION COULD CURTAIL FUTURE
      EXPLORATION AND PRODUCTION ACTIVITIES.**




The
      marketability of our production will depend on the proximity of our reserves
      to
      and the capacity of, third party facilities and services, including oil and
      natural gas gathering systems, pipelines, trucking or terminal facilities,
      and
      processing facilities. The unavailability or insufficient capacity of these
      facilities and services could force us to shut-in producing wells, delay the
      commencement of production, or discontinue development plans for some of our
      properties, which would adversely affect our financial condition and
      performance.




**THERE
      IS A POTENTIAL FOR INCREASED COSTS.**




The
      oil
      and gas industry has historically experienced periods of rapidly increasing
      drilling and production costs, frequently during times of increased drilling
      activity. If significant cost increases occur with respect to our development
      activity, we may have to reduce the number of wells we drill, which may
      adversely affect our financial performance.




**WE
      MAY INCUR COMPRESSION DIFFICULTIES AND EXPENSE.**




As
      production of natural gas increases, more compression is generally required
      to
      compress the production into the pipeline. As more compression is required,
      production costs increase, primarily because more fuel is required in the
      compression process. Furthermore, because compression is a mechanical process,
      a
      breakdown may occur that will cause us to be unable to deliver gas until repairs
      are made.




**UNITIZATION
      PRESENTS SOME RISKS.**




Some
      or
      all of our wells will be unitized with wells owned by other owners within the
      same field. Because unitization of production combines the operating results
      of
      more than one owner of wells, there is a risk that the performance of the wells
      we do not own will lower our financial performance if the wells we do not own
      do
      not perform as well as the wells we do own. In addition, it may be argued that
      the owners of wells developed later in a field have an advantage because they
      have more production history upon which to evaluate the investment, they are
      able to use their money for other purposes before committing their resources
      to
      the wells in the field, and they are getting the benefit of all reserves when
      some of the reserves have already been depleted. Nonetheless, in management's
      opinion, these risks may be outweighed in some circumstances by the benefit
      of
      spreading the costs of infrastructure over a greater number of wells, thereby
      reducing the costs per well for all owners of wells in the field.




-32-




**THE
      FAILURE TO DEVELOP RESERVES COULD ADVERSELY AFFECT OUR PRODUCTION AND CASH
      FLOWS.**




Our
      success depends upon our ability to find, develop or acquire oil and gas
      reserves that are economically recoverable. We will need to conduct successful
      exploration or development activities or acquire properties containing proved
      reserves, or both. The business of developing or acquiring oil and gas reserves
      is capital intensive. We may not be able to make the necessary capital
      investment to expand our oil and natural gas reserves from cash flows and
      external sources of capital may be limited or unavailable. Our drilling
      activities may not result in significant reserves and we may not have continuing
      success drilling productive wells. Exploratory drilling involves more risk
      than
      development drilling because exploratory drilling is designed to test formations
      for which proved reserves have not been discovered. Additionally, while our
      revenues may increase if prevailing oil and gas prices increase significantly,
      our finding costs for reserves also could increase and we may not be able to
      finance additional exploration or development activities.




**THE
      OIL AND NATURAL GAS RESERVE DATA INCLUDED IN THIS DOCUMENT ARE ESTIMATES BASED
      ON ASSUMPTIONS THAT MAY BE INACCURATE AND EXISTING ECONOMIC AND OPERATING
      CONDITIONS THAT MAY DIFFER FROM FUTURE ECONOMIC AND OPERATING CONDITIONS.**




Reservoir
      engineering is a subjective and inexact process of estimating underground
      accumulations of oil and natural gas that cannot be measured in an exact manner
      and is based upon assumptions that may vary considerably from actual results.
      Accordingly, reserve estimates may be subject to downward or upward adjustment.
      Actual production, revenue and expenditures with respect to our reserves will
      likely vary from estimates, and such variances may be material. Information
      regarding discounted future net cash flows should not be considered as the
      current market value of the estimated oil and natural gas reserves that will
      be
      attributable to our properties. The estimated discounted future net cash flows
      from proved reserves are based on prices and costs as of the date of the
      estimate, while actual future prices and costs may be materially higher or
      lower. Actual future net cash flows also will be affected by factors such as
      the
      amount and timing of actual production, supply and demand for oil and natural
      gas, increases or decreases in consumption, and changes in governmental
      regulations or taxation. The reserve report for Aurora's properties assumes
      that
      production will be generated from each well for a period of 40 years. Because
      production is expected for such an extended period of time, the probability
      is
      enhanced that conditions at the time of production will vary materially from
      the
      current conditions used to calculate future net cash flows. In addition, the
      10%
      discount factor, which is required by the Financial Accounting Standards Board
      in Statement of Financial Account Standards No. 69 to be used on calculating
      discounted future net cash flows for reporting purposes, is not necessarily
      the
      most appropriate discount factor based on interest rates in effect from time
      to
      time and risks that will be associated with our operations or the oil and
      natural gas industry in general.




**WE
      MAY HAVE DIFFICULTY FINANCING OUR PLANNED GROWTH.**




We
      have
      experienced and expect to continue to experience substantial capital expenditure
      and working capital needs, particularly as a result of our property acquisition
      and development drilling activities. We may require additional financing, in
      addition to cash generated from our operations, to fund our planned growth.
      If
      our cash flow from operations is not sufficient to satisfy our capital
      expenditure requirements, additional financing may not be available to us on
      acceptable terms or at all. If additional capital resources are unavailable,
      we
      may be forced to curtail our acquisition, development drilling and other
      activities or to sell some of our assets on an untimely or unfavorable basis.




**WE
      MAY NOT HAVE GOOD AND MARKETABLE TITLE TO OUR PROPERTIES.**




It
      is
      customary in the oil and gas industry that upon acquiring an interest in a
      non-producing property, only a preliminary title investigation be done at that
      time and that a drilling title opinion be done prior to the initiation of
      drilling, neither of which can substitute for a complete title investigation.
      We
      have followed this custom and intend to continue to follow this custom in the
      future. Furthermore, title insurance is not available for mineral leases, and
      we
      will not obtain title insurance or other guaranty or warranty of good title.
      If
      the title to our prospects should prove to be defective, we could lose the
      costs
      that we have incurred in their acquisition, or incur substantial costs for
      curative title work.




-33-




**COMPETITION
      IN OUR INDUSTRY IS INTENSE, AND WE ARE SMALLER AND HAVE A MORE LIMITED OPERATING
      HISTORY THAN MOST OF OUR COMPETITORS.**




We
      will
      compete with major and independent oil and gas companies for property
      acquisitions and for the equipment and labor required to operate and develop
      these properties. Most of our competitors have substantially greater financial
      and other resources than we do. In addition, larger competitors may be able
      to
      absorb the burden of any changes in federal, state and local laws and
      regulations more easily than we can, which would adversely affect our
      competitive position. These competitors may be able to pay more for exploratory
      prospects and productive natural gas and oil properties and may be able to
      define, evaluate, bid for and purchase a greater number of properties and
      prospects than we can. Our ability to explore for oil and gas prospects and
      to
      acquire additional properties in the future will depend on our ability to
      conduct operations, to evaluate and select suitable properties and to complete
      transactions in this highly competitive environment.




**OIL
      AND NATURAL GAS OPERATIONS INVOLVE VARIOUS RISKS.**




The
      oil
      and gas business involves operating hazards such as well blowouts, craterings,
      explosions, uncontrollable flows of crude oil, natural gas or well fluids,
      fires, formations with abnormal pressures, pipeline ruptures or spills,
      pollution, releases of toxic gas and other environmental hazards and risks.
      Personal injuries, damage to property and equipment, reservoir damage, or loss
      of reserves may occur if such a catastrophe occurs, any one of which could
      cause
      us to experience substantial losses. In addition, we may be liable for
      environmental damage caused by previous owners of properties purchased or leased
      by us.




Federal
      and state regulation of oil and gas production and transportation, tax and
      energy policies, changes in supply and demand and general economic conditions
      all could adversely affect our ability to produce and market our natural gas
      and
      crude oil. Production from gas wells in many geographic areas of the United
      States, including Louisiana and Texas, has been curtailed or shut-in for
      considerable periods of time due to a lack of market demand, and such
      curtailments may continue for a considerable period of time in the future.
      There
      may be an excess supply of gas in areas where our operations will be conducted.
      In such event, it is possible that there will be no market or a very limited
      market for our production.




As
      a
      result of operating hazards, regulatory risks and other uninsured risks, we
      could incur substantial liabilities to third parties or governmental entities,
      the payment of which could reduce or eliminate funds available for exploration,
      development or acquisitions.




**WE
      LACK INSURANCE THAT COULD LOWER RISKS TO OUR INVESTORS.**




As
      of
      September 30, 2005, our Cadence division had procured an errors and omissions
      policy for its directors and officers, but had not obtained any other insurance
      policies. Our Cadence division has historically chosen to rely only on the
      insurance provided by the well operators, and over which our Cadence division
      has no control. Our Cadence division's properties are therefore at risk of
      loss
      in the event of a catastrophic event.




Our
      Aurora division has procured insurance policies for general liability,
      property/pollution, well control, workers' compensation and automobile, as
      well
      as a $5 million excess liability umbrella policy. Nonetheless, the policy limits
      may be inadequate in the case of a catastrophic loss, and there are some risks
      that are not insurable. An uninsured loss could adversely affect our financial
      performance.




-34-




**WE
      ARE SUBJECT TO COMPLEX FEDERAL, STATE AND LOCAL LAWS AND REGULATIONS THAT COULD
      ADVERSELY AFFECT OUR BUSINESS.**




Oil
      and
      gas operations are subject to various federal, state and local government laws
      and regulations, which may be changed from time to time in response to economic
      or political conditions. Matters that are typically regulated include:




·
            discharge
                permits for drilling operations;




·
            drilling
                bonds;




·
            reports
                concerning operations;




·
            spacing
                of wells;




·
            unitization
                and pooling of properties;




·
            environmental
                protection; and




·
            taxation.




From
      time
      to time, regulatory agencies have imposed price controls and limitations on
      production by restricting the rate of flow of oil and gas wells below allowed
      production capacity to conserve supplies of natural gas and crude oil. We also
      are subject to changing and extensive tax laws, the effects of which we cannot
      predict.




The
      development, production, handling, storage, transportation and disposal of
      natural gas and crude oil, by-products and other substances and materials
      produced or used in connection with oil and gas operations are subject to laws
      and regulations primarily relating to protection of human health and the
      environment. The discharge of natural gas, crude oil or pollutants into the
      air,
      soil or water may give rise to significant liabilities on our part to the
      government and third parties and may result in the assessment of civil or
      criminal penalties or require us to incur substantial costs of remediation.




Legal
      and
      tax requirements frequently are changed and subject to interpretation, and
      we
      are unable to predict the ultimate cost of compliance with these requirements
      or
      their effect on our operations. Existing laws or regulations, as currently
      interpreted or reinterpreted in the future, could harm our business, results
      of
      operations and financial condition.




**Risks
      Related to the Ownership of Our Stock**




**WE
      MAY EXPERIENCE VOLATILITY IN OUR STOCK PRICE, WHICH COULD NEGATIVELY AFFECT
      YOUR
      INVESTMENT, AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR ABOVE THE
      PRICE** **YOU PAID FOR IT.**




The
      market price of our common stock may fluctuate significantly in response to
      a
      number of factors, some of which are beyond our control, including:




·
            quarterly
                variations in operating results;




·
            changes
                in financial estimates by securities analysts;




·
            changes
                in market valuations of other similar companies;




·
            announcements
                by us or our competitors of new products or of significant technical
                innovations, contracts, acquisitions, strategic partnerships or joint
                ventures;




·
            additions
                or departures of key personnel;




·
            any
                deviations in net sales or in losses from levels expected by securities
                analysts; and




·
            future
                sales of common stock.




In
      addition, the stock market has recently experienced extreme volatility that
      has
      often been unrelated to the performance of particular companies. These market
      fluctuations may cause our stock price to fall regardless of our
      performance.




-35-




**BECAUSE
      OUR SECURITIES TRADE ON THE OTC BULLETIN BOARD, YOUR ABILITY TO SELL YOUR** **SHARES
      IN THE SECONDARY MARKET MAY BE LIMITED.**




Our
      shares of common stock have been listed and principally quoted on the Nasdaq
      OTC
      Bulletin Board since May 1994. Because our securities currently trade on the
      OTC
      Bulletin Board, they are subject to the rules promulgated under the Securities
      Exchange Act of 1934, as amended, which impose additional sales practice
      requirements on broker-dealers that sell securities governed by these rules
      to
      persons other than established customers and "accredited investors" (generally,
      individuals with a net worth in excess of $1,000,000 or annual individual income
      exceeding $200,000 or $300,000 jointly with their spouses). For such
      transactions, the broker-dealer must determine whether persons that are not
      established customers or accredited investors qualify under the rule for
      purchasing such securities and must receive that person's written consent to
      the
      transaction prior to sale. Consequently, these rules may adversely effect the
      ability of purchasers to sell our securities and otherwise affect the trading
      market in our securities. Because our shares are deemed "penny stocks," you
      may
      have difficulty selling them in the secondary trading market.




The
      Securities and Exchange Commission has adopted regulations which generally
      define a "penny stock" to be any equity security that has a market price (as
      defined in the regulations) less than $5.00 per share or with an exercise price
      of less than $5.00 per share, subject to certain exceptions. Additionally,
      if
      the equity security is not registered or authorized on a national securities
      exchange or Nasdaq, the equity security also would constitute a "penny stock."
      As our common stock falls within the definition of penny stock, these
      regulations require the delivery, prior to any transaction involving our common
      stock, of a risk disclosure schedule explaining the penny stock market and
      the
      risks associated with it. Disclosure is also required to be made about
      compensation payable to both the broker-dealer and the registered representative
      and current quotations for the securities. In addition, monthly statements
      are
      required to be sent disclosing recent price information for the penny stocks.
      The ability of broker/dealers to sell our common stock and the ability of
      shareholders to sell our common stock in the secondary market would be limited.
      As a result, the market liquidity for our common stock would be severely and
      adversely affected. We can provide no assurance that trading in our common
      stock
      will not be subject to these or other regulations in the future, which would
      negatively affect the market for our common stock.




**A
      LARGE NUMBER OF SHARES WILL BE ELIGIBLE FOR FUTURE SALE AND MAY DEPRESS OUR
      STOCK PRICE.**




Our
      shares that are eligible for future sale may have an adverse effect on the
      market price of our common stock. As of December 15, 2005, there
      were 59,041,685 our common stock outstanding. As of December 15,
      2005
      over 31,134,704 shares of our common stock will be freely tradeable without
      substantial restriction or the requirement of future registration under the
      Securities Act of 1933, as amended. The majority of the remainder of our
      outstanding shares, most of which are held by our officers, directors and
      greater than 5% shareholders, may be sold without registration under the
      exemption from registration provided by Rule 144 under the Securities Act.
      However, in connection with the merger of Cadence and Aurora, certain of our
      officers directors and shareholders have agreed not to sell more than 10% of
      their respective holdings of our common stock, measured immediately prior to
      the
      merger, for a period of 36 months following the merger, representing an
      aggregate of approximately 770,745 shares of our common stock. In addition,
      William Deneau, John Miller and John Tucker, our President, Vice President
      of
      Exploration & Production and Vice President of Land & Development,
      respectively, and each of their affiliates, have executed lock-up agreements
      in
      which they agree not to sell more than 10% of the shares of our common stock
      that they receive in the merger for a period of 36 months, representing an
      aggregate of approximately 974,288 shares of our common stock. In addition,
      as
      of December 15, 2005, an additional 11,967,418 shares were subject to
      outstanding options or warrants or were issuable upon the conversion of our
      Class A Preferred Shares.




Sales
      of
      substantial amounts of our common stock, or a perception that such sales could
      occur, and the existence of options or warrants to purchase shares of our common
      stock at prices that may be below the then current market price of the common
      stock, could adversely affect the market price of our common stock and could
      impair our ability to raise capital through the sale of our equity
      securities.




-36-




**WE
      DO NOT HAVE CUMULATIVE VOTING AND A SMALL NUMBER OF EXISTING SHAREHOLDERS
      CONTROL CADENCE, WHICH COULD LIMIT YOUR ABILITY TO INFLUENCE THE OUTCOME OF
      SHAREHOLDER VOTES.**




Our
      shareholders do not have the right to cumulative votes in the election of our
      directors. Cumulative voting, in some cases, could allow a minority group to
      elect at least one director to our board. Because there is no provision for
      cumulative voting, a minority group will not be able to elect any directors.
      Accordingly, the holders of a majority of the shares of common stock, present
      in
      person or by proxy, will be able to elect all of the members of our board of
      directors.




In
      connection with the closing of the merger of Cadence and Aurora, certain of
      our
      shareholders, including certain former Aurora shareholders who became
      shareholders of us in connection with the merger, executed and delivered voting
      agreements pursuant to which they agreed, for a period of 36 months, to vote
      an
      aggregate of 22,740,830 of their shares of our common stock in favor of (i)
      five
      directors designated by William W. Deneau, who shall initially be William W.
      Deneau, Earl V. Young, Gary J. Myles, Richard Deneau, and Ronald E. Huff; and
      (ii) two directors designated by William W. Deneau from among our Board of
      Directors immediately before the closing of the merger, who shall initially
      be
      Howard Crosby and Kevin Stulp. In addition, such shareholders agreed to vote
      all
      of their shares of common stock to ensure that the size of our Board of
      Directors will be set and remain at seven directors. In addition, also in
      connection with the closing of the merger, certain of our shareholders executed
      and delivered irrevocable proxies naming, for a period of 36 months, William
      W.
      Deneau and Lorraine King as proxies to vote an aggregate of 10,102,286 shares
      of
      our common stock held by such shareholders in the manner determined by such
      proxies. These provisions will limit your ability to influence the outcome
      of
      shareholder votes including votes concerning the election of directors, the
      adoption or amendment of provisions in our articles of incorporation or bylaws
      and the approval of mergers and other significant corporate transactions for
      a
      period of three years following closing of the merger.




**OUR
      ARTICLES OF INCORPORATION CONTAIN PROVISIONS THAT DISCOURAGE A CHANGE OF
      CONTROL.**




Our
      articles of incorporation contain provisions that could discourage an
      acquisition or change of control without our board of directors' approval.
      Our
      articles of incorporation authorize our board of directors to issue preferred
      stock without shareholder approval. If our board of directors elects to issue
      preferred stock, it could be more difficult for a third party to acquire control
      of us, even if that change of control might be beneficial to our shareholders.




-37-


CADENCE
      Pro Forma Information




**CADENCE
        RESOURCES CORPORATION**
 **UNAUDITED
          PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET** **SEPTEMBER
            30,2005**


Pro
                          Forma Adjustments
                      
                      CombinedCadence
                      
                      Aurora
                      
                      (See
                          detailed summary in Note (g)
                      
                      Pro
                          FormaDR
                      
                      CR
                      
                      Balance**ASSETS**CURRENT
                          ASSETSCash
                          and cash equivalents
                      
                      $
                      1,694,838
                      
                      $
                      10,937,632
                      
                      $
                      -
                      
                      
                      
                      
                      $
                      12,632,470Accounts
                          receivable
                      
                      
                      491,324
                      
                      
                      4,542,815
                      
                      
                      
                      
                      
                      
                      
                      
                      5,034,139Other
                          Current Assets
                      
                      
                      103,348
                      
                      
                      246,481
                      
                      
                      
                      
                      
                      
                      
                      
                      349,829TOTAL
                          CURRENT ASSETS
                      
                      
                      2,289,510
                      
                      
                      15,726,928
                      
                      
                      -
                      
                      
                      -
                      
                      
                      18,016,438OIL
                          AND GAS PROPERTIESFULL
                          COST
                      
                      
                      -
                      
                      
                      33,198,842
                      
                      
                      15,212,303
                      
                      
                      52,850
                      
                      
                      48,358,295OIL
                          AND GAS PROPERTIESSUCCESSFUL
                          EFFORTS
                      
                      
                      3,081,428
                      
                      
                      -
                      
                      
                      52,850
                      
                      
                      3,134,278
                      
                      
                      -PROPERTY
                          AND EQUIPMENT, NET
                      
                      
                      2,167
                      
                      
                      295,643
                      
                      
                      -
                      
                      
                      -
                      
                      
                      297,810OTHER
                          ASSETSGoodwill
                      
                      
                      -
                      
                      
                      -
                      
                      
                      16,277,096
                      
                      
                      -
                      
                      
                      16,277,096Identifiable
                          Intangibles (net)
                      
                      
                      -
                      
                      
                      -
                      
                      
                      4,605,000
                      
                      
                      1,023,333
                      
                      
                      3,581,667Other
                          assets
                      
                      
                      1,067,717
                      
                      
                      2,255,610
                      
                      
                      633,521
                      
                      
                      750,000
                      
                      
                      3,206,848**TOTAL
                          ASSETS**
                      
                      $
                      6,440,822
                      
                      
                      51,477,023
                      
                      $
                      36,780,770
                      
                      $
                      4,960,461
                      
                      $
                      89,738,154**LIABILITIES
                          AND STOCKHOLDERS' EQUITY**CURRENT
                          LIABILITIESAccounts
                          payable and accrued expenses
                      
                      $
                      446,166
                      
                      $
                      4,491,624
                      
                      $
                      -
                      
                      $
                      -
                      
                      
                      4,937,790Notes
                          payable - related party
                      
                      
                      
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -Other
                          Liabilities
                      
                      
                      119,147
                      
                      
                      236,850
                      
                      
                      -
                      
                      
                      -
                      
                      
                      355,997TOTAL
                          CURRENT LIABILITIES
                      
                      
                      565,313
                      
                      
                      4,728,474
                      
                      
                      -
                      
                      
                      -
                      
                      
                      5,293,787LONG-TERM
                          DEBT
                      
                      
                      -
                      
                      
                      30,080,905
                      
                      
                      -
                      
                      
                      -
                      
                      
                      30,080,905MINORITY
                          INTEREST IN NET ASSETSOF
                          SUBSIDIARIES
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -REDEEMABLE
                          PREFERRED STOCK
                      
                      
                      59,925
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      59,925STOCKHOLDERS'
                          EQUITYCommon
                          stock
                      
                      
                      209,113
                      
                      
                      19,046
                      
                      
                      6,000
                      
                      
                      367,878
                      
                      
                      590,037Additional
                          paid-in capital
                      
                      
                      30,918,122
                      
                      
                      19,351,780
                      
                      
                      28,771,797
                      
                      
                      35,730,766
                      
                      
                      57,228,872Accumulated
                          deficit
                      
                      
                      (24,797,883
                      )
                      
                      (2,703,182
                      )
                      
                      3,885,369
                      
                      
                      28,384,830
                      
                      
                      (3,001,604
                      )Accumulated
                          other comprehensive loss
                      
                      
                      (513,768
                      )
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      (513,768
                      )TOTAL
                          STOCKHOLDERS' EQUITY
                      
                      
                      5,815,584
                      
                      
                      16,667,644
                      
                      
                      32,663,166
                      
                      
                      64,483,475
                      
                      
                      54,303,537**TOTAL
                          LIABILITIES AND****STOCKHOLDERS'
                          EQUITY**
                      
                      $
                      6,440,822
                      
                      $
                      51,477,023
                      
                      $
                      69,443,935
                      
                      $
                      69,443,936
                      
                      $
                      89,738,154
 See
            accompanying notes to unaudited pro forma financial
            statements.


-38-


**CADENCE
        RESOURCES CORPORATION**
 **UNAUDITED
          PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
          OPERATIONS**
 **YEAR
        ENDED SEPTEMBER 30, 2005**
 Pro
                    Forma
                
                CombinedCadence
                    (1)
                
                Aurora
                
                Adjustments
                
                ProformaDR
                
                CR**REVENUES**Oil
                    and gas sales
                
                $
                2,413,046
                
                $
                3,103,990
                
                
                
                
                
                
                
                $
                5,517,036Other
                    income
                
                
                100,000
                
                
                499,403
                
                
                
                
                
                
                
                
                599,403Total
                    Revenues
                
                
                2,513,046
                
                
                3,603,393
                
                
                -
                
                
                -
                
                
                6,116,439**OPERATING
                    AND ADMINISTRATIVE EXPENSES**Depreciation,
                    depletion and amortization
                
                
                2,683,279
                
                
                470,437
                
                
                1,263,329
                
                
                
                
                
                4,417,044Officers'
                    and directors' compensation
                
                
                1,105,328
                
                
                -
                
                
                
                
                
                
                
                
                1,105,328Consulting
                    & other professional services
                
                
                104,595
                
                
                -
                
                
                
                
                
                
                
                
                104,595Oil
                    and gas lease expenses
                
                
                612,624
                
                
                -
                
                
                
                
                
                612,624
                
                
                -Oil
                    and gas consulting
                
                
                165,000
                
                
                -
                
                
                
                
                
                165,000
                
                
                -Exploration
                    and drilling
                
                
                235,959
                
                
                -
                
                
                
                
                
                235,959
                
                
                -Production
                    and lease operating expenses
                
                
                178,437
                
                
                1,377,878
                
                
                
                
                
                
                
                
                1,556,315State
                    Taxes
                
                
                -
                
                
                334,199
                
                
                
                
                
                
                
                
                334,199Other
                    general and administrative
                
                
                996,127
                
                
                2,205,557
                
                
                
                
                
                
                
                
                3,201,684Total
                    Expenses
                
                
                6,081,349
                
                
                4,388,072
                
                
                1,263,329
                
                
                1,013,583
                
                
                10,719,166**LOSS
                    FROM OPERATIONS**
                
                
                (3,568,303
                )
                
                (784,678
                )
                
                1,263,329
                
                
                1,013,583
                
                
                (4,602,727
                )**OTHER
                    INCOME (EXPENSE)**Interest
                    income
                
                
                10,173
                
                
                263,223
                
                
                
                
                
                
                
                
                273,396Interest
                    expense and loan fees
                
                
                (1,138,987
                )
                
                (540,113
                )
                
                
                
                
                
                
                
                (1,679,100
                )Other
                    income
                
                
                846
                
                
                -
                
                
                
                
                
                
                
                
                846Loss
                    on sale of investment
                
                
                (66,006
                )
                
                -
                
                
                
                
                
                
                
                
                (66,006
                )Loss
                    on disposition and impairment of assets
                
                
                -
                
                
                -
                
                
                
                
                
                
                
                
                -Total
                    Other Income (Expense)
                
                
                (1,193,974
                )
                
                (276,890
                )
                
                -
                
                
                -
                
                
                (1,470,864
                )**LOSS
                    BEFORE MINORITY INTEREST ALLOCATION****AND
                    INCOME TAX PROVISION**
                
                
                (4,762,277
                )
                
                (1,061,568
                )
                
                1,263,329
                
                
                1,013,583
                
                
                (6,073,591
                )**OTHER
                    COMPREHENSIVE INCOME (LOSS)**Unrealized
                    gain (loss) on market value of investments
                
                
                (49,201
                )
                
                -
                
                
                -
                
                
                -
                
                
                (49,201
                )**MINORITY
                    INTEREST IN LOSS OF SUBSIDIARIES**
                
                
                -
                
                
                147,413
                
                
                -
                
                
                -
                
                
                147,413**LOSS
                    BEFORE INCOME TAX PROVISION**
                
                
                (4,811,478
                )
                
                (914,155
                )
                
                1,263,329
                
                
                1,013,583
                
                
                (5,975,379
                )**INCOME
                    TAX PROVISION**
                
                
                -
                
                
                -
                
                
                
                
                
                
                
                
                -**NET
                    LOSS**
                
                $
                (4,811,478
                )
                $
                (914,155
                )
                
                1,263,329
                
                
                1,013,583
                
                $
                (5,975,379
                )**PROFORMA
                    LOSS PER SHARE**Including
                    effect ofsubsequent
                    stock issuances
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (0.10
                )Excluding
                    effect ofsubsequent
                    stock issuances
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (0.15
                )


See
      accompanying notes to unaudited pro forma financial statements.


-39-


**CADENCE
            RESOURCES CORPORATION**


NOTES
        TO
        PRO FORMA FINANCIAL STATEMENTS


****NOTE
      1 - MERGER AGREEMENT****




On
        January 31, 2005, Cadence Resources Corporation (Cadence) entered into a
        definitive merger agreement with Aurora Energy, Ltd. (Aurora) whereby Cadence
        will acquire 100% of the outstanding stock and options of Aurora. Consideration
        in this transaction will consist of the issuance of two shares of common
        stock
        of Cadence for every one share of outstanding stock of Aurora, and the issuance
        of two options for the purchase of stock in Cadence for each option outstanding
        of Aurora.
 
 Evaluation
        of the facts in this transaction indicates that the Aurora stockholder group
        will receive the largest portion of the voting rights, will have the majority
        number of members of the board of directors, and will dominate senior
        management. Accordingly, under FAS 141, Aurora is treated as the acquirer
        for
        accounting purposes and, accordingly reverse acquisition accounting has been
        applied to this business combination. As the registrant, the equity structure
        of
        Cadence remains the equity structure of the ongoing entity.
 
 The
        merger will be accounted for as a reverse acquisition application of the
        purchase method of accounting by Cadence, with Aurora treated as the accounting
        acquirer. As such, the purchase price assigned to this transaction is equal
        to
        $41,546,351 determined as follows:
 
 Fair
                  value of Cadences’ common stock outstanding at January 1,
                  2005:
              
              $
              33,951,817Fair
                  value of Cadences’ stock options outstanding at January 1,
                  2005
              
              
              536,210Fair
                  value of Cadence’s warrants outstanding at January 1, 2005
              
              
              7,058,324Total
                  purchase price
              
              $
              41,546,351
 
 The
        $33,951,816 is computed as 20,702,327 shares of Cadence multiplied by $1.64
        (per
        share sales price of Cadence common stock as reported on the OTC Bulletin
        Board
        as of January 31, 2005).
 
 The
        accompanying pro forma financial statements contain adjustments to characterize
        the transactions of Cadence as those of Aurora for the periods presented.
        Both
        the Cadence and Aurora pro forma statements of operations are presented for
        the
        twelve months ended September 30, 2005.
 
 The
        pro
        forma balance sheet is presented at September 30, 2005 for Aurora and Cadence.
        In compiling this balance sheet, the $41,546,351 purchase price has been
        allocated between the following categories (1) Unproved oil and gas properties,
        (2) Other investments (3) Intangible assets and (3) goodwill. This pro forma
        balance sheet is based on management’s preliminary estimates of acquired fair
        values as of the date of the merger.







40




**CADENCE
      RESOURCES CORPORATION**


NOTES
          TO
          PRO FORMA FINANCIAL STATEMENTS
 CadenceBalances
                    
                    FMV
                    
                    Adjusted
                    
                    Activity
                    
                    BalancesBook
                        Value of Cadence Assets
                    
                    1/31/2005
                    
                    Adjustments
                    
                    Balances
                    
                    2/1-9/30
                    
                    9/30/05Current
                        Assets
                    
                    
                    8,600,202
                    
                    
                    
                    
                    
                    8,600,202
                    
                    
                    (6,310,692
                    )
                    
                    2,289,510Oil
                        & Gas Properties, Property & Equip
                    
                    
                    3,653,613
                    
                    
                    11,353,113
                    
                    
                    15,006,726
                    
                    
                    (570,018
                    )
                    
                    14,436,708Investments
                    
                    
                    938,955
                    
                    
                    633,521
                    
                    
                    1,572,476
                    
                    
                    (68,644
                    )
                    
                    1,503,832Mineral
                        rights
                    
                    
                    197,406
                    
                    
                    
                    
                    
                    197,406
                    
                    
                    -
                    
                    
                    197,406Non
                        Compete
                    
                    
                    
                    
                    
                    3,265,000
                    
                    
                    3,265,000
                    
                    
                    
                    
                    
                    3,265,000Proprietary
                        Business Relationship
                    
                    
                    
                    
                    
                    1,340,000
                    
                    
                    1,340,000
                    
                    
                    
                    
                    
                    1,340,000Goodwill
                    
                    
                    
                    
                    
                    16,277,096
                    
                    
                    16,277,096
                    
                    
                    
                    
                    
                    16,277,096-
                    
                    
                    
                    
                    
                    -Less:
                        Liabilities as of 9/30/05
                    
                    
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    
                    
                    -Accounts
                        payable and accrued expenses
                    
                    
                    (400,154
                    )
                    
                    
                    
                    
                    (400,154
                    )
                    
                    (165,159
                    )
                    
                    (565,313
                    )Notes
                        Payable-Long Term
                    
                    
                    (4,252,476
                    )
                    
                    
                    
                    
                    (4,252,476
                    )
                    
                    4,252,476
                    
                    
                    -Other
                        Liabilities
                    
                    
                    -
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    
                    
                    -Redeemable
                        Preferred Stock
                    
                    
                    (59,925
                    )
                    
                    
                    
                    
                    (59,925
                    )
                    
                    
                    
                    
                    (59,925
                    )-Other
                        Adjustments:
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -Cadence
                        activity from date of merger
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -through
                        September 30, 2005
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    
                    
                    2,862,037
                    
                    
                    2,862,037Total
                        Purchase Price allocated
                    
                    
                    8,677,621
                    
                    
                    32,868,730
                    
                    
                    41,546,351
                    
                    
                    -
                    
                    
                    41,546,351
  **NOTE
                2 - SUMMARY OF PRO FORMA ADJUSTMENTS**
 
 **PRO
                FORMA ADJUSTMENTS - September 30, 2005**
 (a)
                To
                reclassify the working interest in properties owned by Aurora and
                purchased by
                Cadence. Additionally, reclassification of the depletion and/or amortization
                of
                the property have been completed to the proper owner.
 
 (b)
                To
                increase the outstanding shares of Aurora on a two-for-one basis
                in accordance
                with the definitive merger agreement and to adjust par value of the
                revised
                outstanding shares of common stock of Aurora to the par value of
                Cadence.
 
 (c)
                To
                eliminate the accumulated deficit of Cadence to additional paid-in
                capital as
                part of the value of the acquisition upon merger.
 
 (d)
                To
                reflect the fair market value at January 31, 2005, the date of the
                definitive
                merger agreement, the shares outstanding in Cadence were multiplied
                the per
                share sales price as listed on the OTC Bulletin Board as of January
                31, 2005
                ($1.64), with the resulting increase in value allocated between oil
                and gas
                properties, other investments, goodwill and other intangible assets.
                Amortization has been computed in the accompanying pro forma as follows;
                $4,605,000 of estimated intangible assets amortized over 36 months
                (estimated
                useful life of the other intangible assets) for a total of $1,023,333
                in
                amortization expense.
 
 (e)
                To
                conform the oil and gas properties owned by Cadence to the full cost
                method as
                used by Aurora, the accounting acquirer. Note, the oil and gas exploration
                and
                intangible drilling expenses of Cadence under the successful efforts
                method have
                been adjusted to give pro forma effect to conform to the treatment
                of these
                expenditures under the full cost method used by Aurora. The net addition
                to oil
                and gas properties in converting from successful efforts to full
                cost is
                $724,912 and is recorded on the balance sheet as an addition to the
                oil and gas
                properties and adjustment to net deficit.


41


**CADENCE
        RESOURCES CORPORATION**
 NOTES
            TO
            PRO FORMA FINANCIAL STATEMENTS


The
        table
        below sets out in detail the effect of changing to full cost by period to
        highlight the amounts reflected in the statements of operations for the period
        ended September 30, 2005




**Summary
                  of Difference by Reporting Period**2005
              
              2004
              
              2003
              
              2002
              
              TotalsNet
                  exploration costs added back
              
              
              1,013,583
              
              
              805,136
              
              
              422,172
              
              
              260,786
              
              
              2,501,677Depletion,
                  depreciation and amortization andimpairment
                  under respective methods
              
              
              (239,995
              )
              
              (1,323,975
              )
              
              (192,718
              )
              
              (20,076
              )
              
              (1,776,765
              )Net
                  Change in asset value
              
              
              773,588
              
              
              (518,839
              )
              
              229,454
              
              
              240,710
              
              
              724,912





(f)
      To eliminate the investment in Aurora by Cadence.






42




**CADENCE
      RESOURCES CORPORATION**


NOTES
          TO
          PRO FORMA FINANCIAL STATEMENTS




(j)
      The
      effects of the above transactions are summarized as follows:


**BALANCE
                      SHEET ACCOUNT**
                  
                  **Note
                      Ref**
                  
                  **AMOUNT****(2)****OIL
                      AND GAS PROPERTIES (NET) USING FULL COST**Beginning
                      Balance (combined companies)
                  
                  
                  
                  
                  
                  
                  
                  $
                  33,198,842Reclassification
                      of working interest in properties owned by Aurora and purchased
                      by
                      Cadence,
                  
                  
                  
                  
                  
                  (a)
                  
                  
                  528,503Reclassification
                      of depletion and/or amortization associated with above reclassification
                      of
                      working interest
                  
                  
                  
                  
                  
                  (a)
                  
                  
                  (52,850
                  )Estimated
                      allocation of purchase price to oil and gas properties based
                      on fair
                      market valuation of unproved Cadence properties
                  
                  
                  
                  
                  
                  (d)
                  
                  
                  11,353,113Reclassification
                      of Cadence properties from successful efforts to full cost
                  
                  
                  
                  
                  
                  (e)
                  
                  
                  2,626,496Record
                      upward net adjustment from successful efforts to full cost
                  
                  
                  
                  
                  
                  (e)
                  
                  
                  732,510Total
                      pro forma adjustments to oil and gas properties under full
                      cost
                  
                  
                  
                  
                  
                  
                  
                  
                  15,187,772Ending
                      pro forma balance
                  
                  
                  
                  
                  
                  
                  
                  $
                  48,386,614**(3)****OIL
                      AND GAS PROPERTIES (NET) USING SUCCESSFUL EFFORTS**Beginning
                      Balance (combined companies)
                  
                  
                  
                  
                  
                  
                  
                  $
                  3,102,149Reclassification
                      of working interest in properties owned by Aurora and purchased
                      by
                      Cadence,
                  
                  
                  
                  
                  
                  (a)
                  
                  
                  (528,503
                  )Reclassification
                      of depletion and/or amortization associated with above reclassification
                      of
                      working interest
                  
                  
                  
                  
                  
                  (a)
                  
                  
                  52,850Reclassification
                      of Cadence properties from successful efforts to full cost
                  
                  
                  
                  
                  
                  (d)
                  
                  
                  (2,626,496
                  )Total
                      pro forma adjustments to oil and gas properties under successful
                      efforts
                  
                  
                  
                  
                  
                  
                  
                  $
                  (3,102,149
                  )Ending
                      pro forma balance
                  
                  
                  
                  
                  
                  
                  
                  $
                  -$
                  3,102,149**(4)****GOODWILL**Beginning
                      Balance (combined companies)
                  
                  
                  
                  
                  
                  
                  
                  $
                  -Estimated
                      allocation of purchase price to goodwill based on estimated
                      fair market
                      valuation
                  
                  
                  
                  
                  
                  (d)
                  
                  
                  16,277,096Ending
                      pro forma balance
                  
                  
                  
                  
                  
                  
                  
                  $
                  16,277,096**(4)****OTHER
                      INTANGIBLE ASSETS (NET)**Beginning
                      Balance (combined companies)
                  
                  
                  
                  
                  
                  
                  
                  
                  -Estimated
                      allocation of purchase price to intangibles based on estimated
                      fair market
                      valuation
                  
                  
                  
                  
                  
                  (d)
                  
                  
                  4,605,000Amortization
                      expense ($4,605,000 estimated intangibles over 36 months)
                  
                  
                  
                  
                  
                  (d)
                  
                  
                  (1,023,333
                  )Ending
                      pro forma balance
                  
                  
                  
                  
                  
                  
                  
                  
                  3,581,667**(4)****OTHER
                      ASSETS**Beginning
                      Balance (combined companies)
                  
                  
                  
                  
                  
                  
                  
                  
                  3,323,327Estimated
                      allocation of purchase price to other investments based on
                      estimated fair
                      market valuation
                  
                  
                  
                  
                  
                  (d)
                  
                  
                  633,251Eliminate
                      Cadence investment in Aurora Stock
                  
                  
                  
                  
                  
                  (d)
                  
                  
                  (750,000
                  )Ending
                      pro forma balance
                  
                  
                  
                  
                  
                  
                  
                  
                  3,206,578**(5)****COMMON
                      STOCK**Beginning
                      Balance (combined companies)
                  
                  
                  
                  
                  
                  
                  
                  
                  228,159Issuance
                      of Cadence Stock for Aurora Stock on a 2-for 1 basis
                  
                  
                  
                  
                  
                  (d)
                  
                  
                  19,046Adjust
                      par value of revised outstanding shares of common stock of
                      Aurora to par
                      value of Cadence
                  
                  
                  
                  
                  
                  (d)
                  
                  
                  348,832Remove
                      the investment in Aurora by Cadence
                  
                  
                  
                  
                  
                  (f)
                  
                  
                  (6,000
                  )Total
                      pro forma adjustments
                  
                  
                  
                  
                  
                  
                  
                  
                  361,878Ending
                      pro forma balance
                  
                  
                  
                  
                  
                  
                  
                  
                  590,037**(6)****ADDITIONAL
                      PAID IN CAPITAL**Beginning
                      Balance (combined companies)
                  
                  
                  
                  
                  
                  
                  
                  
                  50,269,902Issuance
                      of Cadence Stock for Aurora Stock on a 2-for 1 basis
                  
                  
                  
                  
                  
                  (b)
                  
                  
                  (19,046
                  )Adjust
                      par value of revised outstanding shares of common stock of
                      Aurora to par
                      value of Cadence
                  
                  
                  
                  
                  
                  (b)
                  
                  
                  (348,832
                  )To
                      close the accumulated deficit of Cadence
                  
                  
                  
                  
                  
                  (c)
                  
                  
                  (27,727,754
                  )Record
                      net purchase price after allocation to Cadence net assets ($41,546,351
                      -
                      $5,781,667)
                  
                  
                  
                  
                  
                  (d)
                  
                  
                  35,764,684Remove
                      the investment in Aurora by Cadence
                  
                  
                  
                  
                  
                  (f)
                  
                  
                  (744,000
                  )Total
                      pro forma adjustments
                  
                  
                  
                  
                  
                  
                  
                  
                  6,925,052Ending
                      pro forma balance
                  
                  
                  
                  
                  
                  
                  
                  
                  57,194,954**(7)****ACCUMULATED
                      DEFICIT**Beginning
                      Balance (combined companies)
                  
                  
                  
                  
                  
                  
                  
                  
                  27,534,982To
                      close the accumulated deficit of Cadence
                  
                  
                  
                  
                  
                  (c)
                  
                  
                  (27,727,754
                  )Adjust
                      for Cadence 2/1/05-6/30/05 activity after allocation of net
                      1/31/05
                      assets
                  
                  
                  
                  
                  
                  (d)
                  
                  
                  2,895,954Record
                      8 months amortization on intangible assets ($4,605,000 over
                      36
                      months)
                  
                  
                  
                  
                  
                  (d)
                  
                  
                  1,023,333Record
                      upward net adjustment from successful efforts to full cost
                  
                  
                  
                  
                  
                  (e)
                  
                  
                  (732,510
                  )Total
                      pro forma adjustments
                  
                  
                  
                  
                  
                  
                  
                  
                  (24,540,977
                  )Ending
                      pro forma balance
                  
                  
                  
                  
                  
                  
                  
                  
                  2,994,005






43




**Item
      2.  Description of Properties**





In
      addition to the properties described above in Item 1, we have certain non-oil
      and gas properties as described below.




On
      September 19, 2005, we purchased a commercial condominium unit in the Copper
      Ridge Professional Center Five. This condominium project is located in Traverse
      City, Michigan. Our space is approximately 14,645 square feet on the second
      floor of the building, plus common areas and 15 covered parking spaces. We
      moved
      into this space on December 5, 2005.




We
      are
      subject to an existing lease on our previous office space with South 31, L.L.C.
      This lease runs through March 31, 2007. Monthly rent is $8,700. We are in
      negotiations to buy out the balance of this lease. Its status is not yet
      resolved.




We
      also
      have non-oil and gas mineral rights in a number of properties, although we
      do
      not presently consider them to be material to our business on a going forward
      basis.




44




**Item
      3.  Legal Proceedings**





There
      are
      no currently threatened or pending claims against Cadence.





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





There
      were no matters submitted to a vote of security holders for the quarter ended
      September 30, 2005.





**PART
      II**





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





**Market
      for Our Common Stock**




Our
      common stock trades under the symbol CDNR.BB on the Over-the-Counter Bulletin
      Board Electronic Quotation System maintained by the National Association of
      Securities Dealers, Inc. Approximately 15 professional market makers hold
      themselves out as willing to make a market in our common stock. Following is
      information about the range of high and low bid prices for our common stock
      for
      each fiscal quarter in the last two fiscal years. These quotations reflect
      inter-dealer prices, without retail mark-up, mark-down or commission, and may
      not necessarily represent actual transactions.




**Quarter
                Ended**
            
            **High
                Bid Quotation**
            
            **Low
                Bid Quotation**December
                31, 2003
            
            $
            3.60
            
            $
            2.75March
                31, 2004
            
            $
            4.60
            
            $
            3.25June
                30, 2004
            
            $
            3.40
            
            $
            1.62September
                30, 2004
            
            $
            2.50
            
            $
            0.88December
                31, 2004
            
            $
            1.65
            
            $
            0.98March
                31, 2005
            
            $
            1.70
            
            $
            1.09June
                30, 2005
            
            $
            2.65
            
            $
            2.11September
                30, 2005
            
            $
            3.35
            
            $
            1.86





**Equity
      Compensation Plan Information**




Our
        Board
        of Directors adopted a written stock option plan which was approved by our
        shareholders in 2004. This plan provides for the grant of options or
        restricted share amounts for up to 1,000,000 shares of common stock.
        From
        time to time our Board of Directors has in the past, and may in the future,
        issue to consultants or other third parties options or warrants that are
        not
        pursuant to the plan for compensatory purposes or pursuant to financings.
        The
        table below sets forth certain information as of September 30, 2005 regarding
        the shares of our common stock (i) available for grant or granted pursuant
        to
        outstanding stock options or (ii) issuable upon exercise of options or warrants
        granted as compensation for services.




**Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights**
            
            **Weighted-average
                exercise price of outstanding options, warrants and
                rights**
            
            **Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities in the first column of this
                table)**Compensatory
                warrants or options approved by security holders
            
            
            400,000
            
            $
            2.29
            
            
            399,500Compensatory
                warrants or options not approved by security holders
            
            
            880,140
            
            $
            1.69
            
            
            N/A







45




**Holders**




As
      of
      December 15, 2005, there were 537 holders of record of our common stock,
      although we believe that there are additional beneficial owners of our common
      stock who own their shares in “street name.”




**Dividends**




There
      have been no cash dividends declared on our common stock since our company
      was
      formed. Dividends are declared at the sole discretion of our board of directors.
      It is not anticipated that any dividends will be declared for the foreseeable
      future on our common stock.





**Recent
      Sales of Unregistered Equity Securities**





At
      the
      time of issuance, each investor or recipient of unregistered securities was
      either an accredited investor or a sophisticated investor. Each investor had
      access to Cadence's most recent Form 10-KSB, all quarterly and periodic reports
      filed subsequent to such Form 10-KSB and Cadence's most recent proxy materials.




Between
      April and June 2002, Cadence sold an aggregate of 1,932,802 units to 5
      accredited investors, each unit consisting of one share of common stock and
      a
      warrant to purchase one share of common stock, for an aggregate of $579,840.60.
      Each warrant was exercisable at a price of $.15 per share and have all been
      exercised. No sales commissions were paid in connection with this transaction.
      The Units were issued in reliance upon the exemption from registration provided
      by Section 4(2) of the Securities Act. On October 23, 2002, Cadence issued
      1,815,316 shares of common stock to four accredited investors upon the cashless
      exercise of the warrants granted in the April through June 2002 offering. On
      September 15, 2003, Cadence issued 141,668 shares of its common stock to three
      accredited investors upon the cashless exercise of the warrants granted in
      the
      April through June 2002 offering. No sales commissions were paid in connection
      with the exercise of the warrants. The shares were issued in reliance upon
      the
      exemption from registration provided by Section 4(2) of the Securities Act.




Between
      November 2002 and March 2003, Cadence issued 34,950 shares of Class A Preferred
      Shares to 8 investors who were not US persons under Regulation S of the
      Securities Act for an aggregate of $52,425. No sales commissions were paid
      in
      connection with this transaction. The shares were issued in reliance upon the
      exemption from registration provided by Regulation S of the Securities Act.




During
      fiscal 2003, Howard M. Crosby made two loans to Cadence. One loan in December
      2002 was in the principal amount of $70,000, bearing interest at 5% and the
      other loan made in February 2003 in the principal amount of $50,000 bearing
      interest at a rate of 8%. Cadence issued 14,000 shares of its common stock
      as an
      inducement to making the $70,000 loan and 20,000 shares as an inducement to
      making the $50,000 loan. Cadence repaid $60,000 and has agreed to issue 4,000
      shares of its common stock in repayment of the remaining $10,000 principal
      amount outstanding on the $70,000 loan. Cadence repaid $25,000 of the $50,000
      loan in cash and issued 25,000 shares of its common stock to repay the remaining
      $25,000 principal amount outstanding. No sales commissions were paid in
      connection with these transactions. The shares were issued in reliance upon
      the
      exemption from registration provided by Section 4(2) of the Securities Act.




In
      February 2003, Kevin Stulp, one of Cadence's directors, made a bridge loan
      to
      Cadence in the principal amount of $50,000, bearing interest of 8% per annum.
      Cadence issued 20,000 shares of its stock to Mr. Stulp as an inducement to
      making the loan. On May 28, 2003, Cadence repaid $25,000 of the loan. At
      September 30, 2004, the Company issued 25,000 shares of its stock in full
      payment of the remaining loan principal of $25,000. In July 2003, Cadence issued
      100,000 shares of common stock to Mr. Stulp upon the exercise of a warrant
      at
      $.75 per share. No sales commissions were paid in connection with these
      transactions. The shares were issued in reliance upon the exemption from
      registration provided by Section 4(2) of the Securities Act.




On
      February 4, 2003, Cadence issued an aggregate of 150,000 shares of its common
      stock to four of its officers and/or directors in consideration of services
      provided to Cadence. No sales commissions were paid in connection with this
      transaction. The shares were issued in reliance upon the exemption from
      registration provided by Section 4(2) of the Securities Act.




46




On
      February 19, 2003, Cadence issued 5,000 shares of its common stock to one
      sophisticated investor in consideration of certain consulting services provided
      to Cadence. No sales commissions were paid in connection with this transaction.
      The shares were issued in reliance upon the exemption from registration provided
      by Section 4(2) of the Securities Act.




On
      February 19, 2003, Cadence issued 40,000 shares of its common stock to an
      accredited investor as an inducement for making a loan to Cadence of $100,000.
      No sales commissions were paid in connection with this transaction. The shares
      were issued in reliance upon the exemption from registration provided by Section
      4(2) of the Securities Act.




Between
      April and May 2003, Cadence issued an aggregate of 44,000 shares of its common
      stock to two sophisticated investor in consideration of certain consulting
      services provided to Cadence. No sales commissions were paid in connection
      with
      this transaction. The shares were issued in reliance upon the exemption from
      registration provided by Section 4(2) of the Securities Act.




On
      May 7,
      2003, Cadence issued an aggregate of 75,000 shares of its common stock to four
      of its officers and/or directors in consideration of services provided to
      Cadence. No sales commissions were paid in connection with this transaction.
      The
      shares were issued in reliance upon the exemption from registration provided
      by
      Section 4(2) of the Securities Act.




On
      May 7,
      2003, Cadence issued 10,000 shares of its common stock to one sophisticated
      investor in consideration of certain consulting services provided to Cadence.
      No
      sales commissions were paid in connection with this transaction. The shares
      were
      issued in reliance upon the exemption from registration provided by Section
      4(2)
      of the Securities Act.




Between
      May and August 2003, Cadence sold an aggregate of 730,000 shares of its common
      stock to 16 accredited investors for an aggregate of $710,000. No sales
      commissions were paid in connection with this transaction. The shares were
      issued in reliance upon the exemption from registration provided by Section
      4(2)
      of the Securities Act.




On
      February 19, 2003, Cadence issued 6,000 shares of its common stock to one
      sophisticated investor in consideration for a loan of $30,000, which was
      subsequently repaid.




In
      June
      2003, Nathan Low loaned $300,000 to Cadence Resources Corporation Limited
      Partnership, of which Cadence was the sole general partner and Mr. Low was
      the
      sole limited partner. As partial inducement for making this loan, Cadence issued
      Mr. Low 120,000 shares of common stock. No sales commissions were paid in
      connection with this transaction. The shares were issued in reliance upon the
      exemption from registration provided by Section 4(2) of the Securities Act.




In
      July
      2003, CGT Management, Ltd. loaned Cadence $300,000 at 10% interest. See "Related
      Parties Transactions." As an inducement for making the loan, Cadence issued
      120,000 shares to CGT Management. No sales commissions were paid in connection
      with this transaction. The shares were issued in reliance upon the exemption
      from registration provided by Section 4(2) of the Securities Act.




On
      July
      1, 2003, Cadence issued an aggregate of 95,000 shares of its common stock to
      four of its officers and/or directors in consideration of services provided
      to
      Cadence. No sales commissions were paid in connection with this transaction.
      The
      shares were issued in reliance upon the exemption from registration provided
      by
      Section 4(2) of the Securities Act.




In
      August
      2003, Cadence issued 102,000 shares of its common stock to four sophisticated
      investors in consideration of certain consulting services provided to Cadence.
      No sales commissions were paid in connection with this transaction. The shares
      were issued in reliance upon the exemption from registration provided by Section
      4(2) of the Securities Act.




47




On
      September 15, 2003, Cadence issued an aggregate of 95,000 shares of its common
      stock to four of its officers and/or directors in consideration of services
      provided to Cadence. No sales commissions were paid in connection with this
      transaction. The shares were issued in reliance upon the exemption from
      registration provided by Section 4(2) of the Securities Act.




Between
      September and October 2003, Cadence sold an aggregate of 1,721,400 shares of
      its
      common stock to 29 accredited investors for an aggregate of $4,303,500. Sales
      commissions consisting of (i) $376,565 in cash, (ii) 11,000 shares of common
      stock valued at $2.90 per share or $31,900 in the aggregate and (iii) options
      to
      purchase 162,140 shares of common stock at $2.50 per share to one finder or
      an
      entity controlled by such finder, and additional fees totaling $11,250 to two
      other finders. All finders are accredited investors. The shares and warrant
      were
      issued in reliance upon the exemption from registration provided by Section
      4(2)
      of the Securities Act.




On
      January 23, 2004, Cadence issued 5,000 shares of its common stock and an option
      to purchase 75,000 shares of its common stock to each of Glenn DeHekker and
      Jeffrey M. Christian in consideration of their becoming directors of Cadence.
      The shares and options were issued in reliance upon the exemption from
      registration provided by Section 4(2) of the Securities Act.




On
      January 23, 2004, Cadence issued an option to purchase 250,000 shares of its
      common stock to Douglas Newby in consideration of his becoming a Vice President
      of Cadence. The options were issued in reliance upon the exemption from
      registration provided by Section 4(2) of the Securities Act.




On
      February 25, 2004, Cadence issued 15,000 shares to David Nahmias and 15,000
      shares to Lyons Capital, LLC in consideration of services provided to Cadence.
      The shares were issued in reliance upon the exemption from registration provided
      by Section 4(2) of the Securities Act.




On
      April
      2, 2004, Cadence sold 120 units, each of which consisted of a note in the
      principal amount of $50,000 and a warrant to purchase 6,375 shares of Common
      Stock, exercisable at $4.00 per share, to seven accredited investors for an
      aggregate sales price of $6,000,000. As compensation for his services in
      connection with this private placement, Cadence paid Nathan A. Low, an
      accredited investor, $300,000 and issued him a warrant to purchase 76,500 shares
      of Common Stock, exercisable at $4.00 per share. On January 31, 2004, Cadence
      paid off the notes without a prepayment penalty in exchange for the exercise
      price of the warrants being reduced to $1.25. All the warrants described in
      this
      paragraph expire on April 2, 2007. The shares and warrant were issued in
      reliance upon the exemption from registration provided by Section 4(2) of the
      Securities Act.




On
      April
      15, 2004 Cadence issued 10,000 shares each to Glenn DeHekker, Jeff Christian,
      and Kevin Stulp for Director services for two quarters. On the same date Cadence
      also issued 5,000 shares each to Howard Crosby and John Ryan for Director
      services for one quarter, and 5,000 shares each to Howard Crosby, John Ryan,
      and
      Doug Newby for Officer services for one quarter. The shares were issued in
      reliance upon the exemption from registration provided by Section 4(2) of the
      Securities Act.




On
      June
      2, 2003, Cadence issued 6,000 shares to Proteus Capital Corp. in consideration
      of services rendered to the Company. On the same date Cadence issued 10,000
      shares to Robert Denison upon exercise of warrants at $1.35. The shares were
      issued in reliance upon the exemption from registration provided by Section
      4(2)
      of the Securities Act.




On
      August
      20, 2004 Cadence issued 25,000 shares to Howard Schraub and 17,500 shares to
      Lyons Capital LLC for professional services rendered. On the same date Cadence
      issued 5,000 shares to Glenn DeHekker, Kevin Stulp and Jeff Christian for
      quarterly services as Directors to the Company, and issued 5,000 shares to
      Doug
      Newby for quarterly services as an Officer of the Company. Also on the same
      date
      Cadence issued 15,000 shares to RMB International (Dublin), Limited as a
      break-up fee for a proposed debt financing. In each case the shares were issued
      in reliance upon the exemption from registration provided by Section 4(2) of
      the
      Securities Act.




On
      January 31, 2005, Cadence issued 7,810,000 shares of common stock and warrants
      to purchase 14,050,000 shares of common stock at an exercise price of $1.75
      per
      shares to 22 accredited investors for $9,762,500. Sunrise Securities
      Corporation, an affiliate of Nathan Low (a shareholder of Cadence), will receive
      a commission equal to $926,250 and a warrant to purchase 2,186,000 shares of
      Cadence's common stock at an exercise price of $1.75 per share for services
      rendered as the placement agent in the transaction. All the warrants described
      in this paragraph expire on January 31, 2009. The shares were issued in reliance
      upon the exemption from registration provided by Section 4(2) of the Securities
      Act.




On
        September 30, 2005, Cadence issued options to purchase 50,000 shares of our
        common stock to each of the five members of our board of directors (i.e.,
        options to purchase an aggregate of 250,000 shares).  These options
        are
        exercisable for $1.42 per share.  The options were issued in reliance
        upon
        the exemption from registration provided by Section 4(2) of the Securities
        Act.


On
        October 31, 2005, Cadence issued warrants to purchase 37,500 shares
        of our
        common stock to each of three individuals (i.e., warrants to purchase an
        aggregate of 112,500 shares) upon the individuals’ resignations from our Board
        of Directors. Of the warrants issued to each such individual, warrants to
        purchase 12,500 shares (or an aggregate of 37,500 for all three individuals)
        were exercisable for $2.23 a share, warrants to purchase 12,500 shares (or
        an
        aggregate of 37,500 for all three individuals) were exercisable for $2.53
        a
        share and warrants to purchase 12,500 shares (or an aggregate of 37,500 for
        all
        three individuals) were exercisable for $3.28 a share. The warrants were
        issued
        in reliance upon the exemption from registration provided by Section 4(2)
        of the
        Securities Act.




48




**Item
      6.  Management’s Discussion and Analysis or Plan of
      Operations**




*You
      should read the following discussion in conjunction with the Cadence Resources
      Corporation financial statements, together with the notes to those statements,
      included elsewhere in this report. The following discussion contains
      forward-looking statements that involve risks, uncertainties, and assumptions
      such as statements of our plans, objectives, expectations, and intentions.
      Our
      actual results may differ materially from those discussed in these
      forward-looking statements because of the risks and uncertainties inherent
      in
      future events.*




**Overview**




*General.* We were
      incorporated in Utah on April 7, 1969 to explore and mine natural resources
      under the name Royal Resources, Inc. In January 1983, we changed our name to
      Royal Minerals, Inc. In March 1994, we changed our name to Consolidated Royal
      Mines, Inc. In September 1995, we changed our name to Royal Silver Mines, Inc.
      On May 2, 2001 we changed our name to Cadence Resources Corporation in
      connection with a corporate reorganization to focus our operations on oil and
      gas exploration.




As
      a
      result of our recent acquisition of Aurora Energy, Ltd. (“Aurora”) which, as
      described below, was consummated after the date of the most recent financial
      statements contained in this report on Form 10-KSB, we manage our business
      through two divisions - Cadence and Aurora. Our audited financial statements
      set
      forth beginning on page F-1 to this report on Form 10-KSB reflect financial
      information pertaining to our Cadence division prior to the acquisition of
      Aurora. Included at the end of Item 2 of this report on Form 10-KSB are pro
      forma financial statements containing certain financial information of Cadence
      and Aurora together.




The
      management discussion and analysis in this section, except as otherwise
      specifically stated, pertains to the financial condition and results of
      operation of our Cadence division during periods prior to the acquisition of
      Aurora. References in this management discussion and analysis to “we” and “our”
      and similar pronouns and other terms refer to our Cadence division prior to
      the
      Aurora acquisition, unless otherwise stated.




*Acquisition
      of Aurora.* We
      acquired Aurora on October 31, 2005 through the merger of our wholly-owned
      subsidiary with and into Aurora. As a result of that merger, Aurora became
      our
      wholly-owned subsidiary. The acquisition of Aurora will be accounted for as
      a
      reverse merger, with Aurora being the acquiring party for accounting purposes.
      Aurora’s revenues for the nine-month period ended September 30, 2005 were
      $3,644,698, compared with our revenues of $1,783,287 during the nine-month
      period ended June 30, 2005. Aurora’s total assets as of September 30, 2005 were
      $51,477,023, compared with our total assets of $6,414,653 as of the same date.




In
      connection with the acquisition of Aurora, we issued an aggregate of 37,512,366
      shares of our common stock to the former shareholders of Aurora, and have
      reserved an additional 10,497,328 shares of our common stock for issuance upon
      exercise of options or warrants that had been issued by Aurora prior to the
      acquisition and that were previously exercisable for shares of the common stock
      of Aurora.




As
      a
      result of the acquisition of Aurora, we will revise certain of our accounting
      principles applicable to our oil and gas properties, and have changed our
      accounting fiscal year to end on December 31, commencing December 31,
      2005.
      See the caption " - Future Changes in Accounting Principles” within this
      management discussion and analysis.




49




We
      are
      engaged in acquiring, exploring, developing, and producing oil and gas
      properties. We have operations in Wilbarger County, Texas, DeSoto Parish,
      Louisiana, Eddy County, New Mexico and Alpena County, Michigan. We also have
      leased interests in western Kansas and southern Texas. We also own a number
      of
      non-producing properties described below that are in various stages of
      development.




Our
      goal
      is to generate revenues from the sale of oil and gas production sufficient
      to
      support ongoing development. Once wells are drilled and in production, the
      underlying gas reserves will be characterized as proved developed producing
      reserves. As a general rule, once the underlying resources are characterized
      as
      proved developed producing reserves, the underlying assets can be pledged to
      support debt financing.




*January
      2005 Private Placement.* On
      January 31, 2005, we sold to 22 accredited investors in a private placement
      transaction, for $9,762,500, 7,810,000 shares of common stock and warrants
      to
      purchase 14,050,000 shares of common stock at an exercise price of $1.75 per
      share. For services rendered in connection with the transaction, we compensated
      a principal stockholder in the form of $976,250 in cash, 859,000 shares of
      our
      common stock warrants to purchase 781,000 shares of common stock at an exercise
      price of $1.25 a share. Of the proceeds raised in our January 31, 2005 private
      placement, $5,000,000 was used to prepay outstanding promissory notes issued
      by
      us in April 2004. In
      addition, on January 31, 2005, Aurora sold to six accredited investors in a
      private placement transaction, for $12,550,000, shares of Aurora common stock
      and warrants to purchase Aurora common stock that, as a result of the merger,
      became 10,040,000 shares of our common stock and warrants to purchase 3,800,000
      shares of our common stock at an exercise price of $1.75 per share. For services
      rendered in connection with the Aurora private placement, we compensated a
      principal stockholder in the form of $1,255,000 in cash, shares of Aurora common
      stock and warrants to purchase Aurora common stock that, as a result of the
      merger, became 1,104,400 shares of our common stock and warrants to purchase
      1,004,000 shares of our common stock at an exercise price of $1.25 per share.
      The proceeds of the Aurora private placement were used substantially in Aurora’s
      expanded drilling program during 2005 and for general working capital
      purposes.




*Continuing
      Losses.* We have
      had net losses from operations each year since inception, and there can be
      no
      assurance that we will be profitable in the future. Our financial results depend
      upon many factors that impact our results of operations including:





·
            The
                sales prices of natural gas and crude oil.


·
            The
                volume of sales of natural gas and crude
                oil.


·
            The
                availability of financial resources to meet cash flow
                needs.


·
            The
                level and success of exploitation and development
                activity.





**Results
      of Operation**




**Comparison
      of Fiscal Year Ended September 30, 2005**


**to
      Fiscal Year ended September 30, 2004**





**Revenues**





We
      derive
      revenues from the sale of oil and gas produced at wells in which we have an
      economic interest. All sales of oil and gas production are arranged by our
      partners who operate the wells and with whom we are developing the respective
      oil and gas properties. Revenue for oil and gas sales reported in our statements
      of operations and comprehensive loss are stated after deducting royalty amounts
      payable to property owners and other third parties.





During
      the fiscal year ended September 30, 2005 (“fiscal 2005”), revenues from oil and
      gas sales were $2,413,046, reflecting a decrease of $128,401, or 5.1%, compared
      with revenues from oil and gas sales of $2,541,447 during the fiscal year ended
      September 30, 2004 (“fiscal 2004”). This decrease was attributable to decreased
      quantities of production during fiscal 2005 compared with fiscal 2004 which
      were
      substantially offset by higher commodity prices realized in fiscal 2005 and,
      to
      a lesser extent, by additional production resulting from the commencement of
      pumping at certain additional wells at the West Electra Lake Prospect late
      in
      fiscal 2005




50





Revenues
      for fiscal 2005 were primarily from production from our wells in Texas,
      Louisiana and Michigan. These revenues were derived from the sale of 16,885
      net barrels of oil at an average price of $51.64 per barrel from our wells
      in
      Texas and 199,703 MCF of natural gas at an average price of $7.26 per MCF from
      our wells in Louisiana and Michigan. The decrease in production from our wells
      during fiscal 2005 compared with fiscal 2004 was primarily attributable
      to:





·
            A
                decrease in the quantities pumped from Virgin Reef Prospect well
                #1A, in
                which we have 60% of the working interest. During September 2004,
                this
                well produced an average of approximately 50 net working interest
                barrels
                per day; by September 2005, production at this well had declined
                to less
                than 20 net working interest barrels per day.





·
            A
                general decrease in the quantities pumped from the initial West Electra
                Lake Prospect wells in which we have an interest.





As
      of
      September 30, 2005 we had interests in nine producing oil wells in Wilbarger
      County, Texas, eleven producing natural gas wells in DeSoto Parish, Louisiana,
      an interest in nine producing gas wells in Alpena County, Michigan and a
      minority interest in a producing well in Eddy County, New Mexico. As of
      September 30, 2005 we had 20 gross (9.86 net) oil and gas wells, 7,250 gross
      (3,357 net) acres of developed wells and 27,840 gross (27,840 net) acres
      of
      undeveloped wells. Using the net proceeds from the private placement in January
      2005, after repayment of promissory notes we issued in 2004 and payment of
      commissions,, we expanded our drilling program during fiscal 2005.





As
      a
      result of our evaluation of the performance of our natural gas wells in DeSoto
      Parish, which we have been developing with our partner Bridas Energy, we
      determined not to drill additional wells at that location. In the first two
      quarters of fiscal 2005, we drilled four new wells on our West Electra Lake
      Unit
      and a new well on our E lease, all in Wilbarger County, TX, completed the
      seismic evaluation process on the north block of our Kansas acreage,
      participated for a working interest in development wells being drilled in Eddy
      County, NM and participated for a working interest in an exploratory well in
      Tennessee.




**Expenses**




Our
      expenses principally fall within two general categories: oil and gas operating
      expenses and general and administrative expenses. Oil and gas operating expenses
      include consulting fees for technical and professional services related to
      oil
      and gas activities, leases, drilling expenses, exploration expenses, depletion,
      depreciation and amortization of oil and gas properties and related equipment,
      and other expenses related to the procurement and development of oil and gas
      properties. General and administrative expenses include officer compensation,
      rent, travel, accounting, auditing and legal fees associated with SEC filings,
      directors fees, investor relations and related consulting fees, stock transfer
      fees and other items associated with the costs of being a public entity.




The
      following table is a comparison of our two general categories of expenses for
      fiscal 2005 and fiscal 2004, and the percentages each of these categories
      comprise of total expenses:




YEAR
                ENDED SEPTEMBER 30,2005
            
            20042005
            
            %
                of 2005
              Total
                Expenses
            
            2004
            
            %
                of 2004
              Total
                ExpensesExpenses
                from Oil and Gas Operations
            
            $
            3,875,299
            
            
            62.3
            %
            $
            3,643,666
            
            
            58.8
            %Corporate
                and Administrative Overhead
            
            $
            2,341,258
            
            
            37.7
            %
            $
            2,551,269
            
            
            41.2
            %Total
                Expenses
            
            $
            6,216,557
            
            
            100
            %
            $
            6,194,935
            
            
            100
            %




51




The
      comparable year-to-year increases in oil and gas related expenditures are
      summarized in the following table, which reflects the major expense categories
      for expenses from oil and gas operations for fiscal 2005 and fiscal
      2004.




YEAR
                ENDED SEPTEMBER 30,2005
            
            20042004
            
            %
                of Total Expenses
            
            2003
            
            %
                of Total ExpensesExploration
                and drilling
            
            $
            235,959
            
            
            6.1
            %
            $
            134,452
            
            
            3.7
            %Depreciation,
                depletion and amortization
            
            
            2,683,279
            
            
            69.2
            %
            
            2,663,695
            
            
            73.1
            %Oil
                and gas lease and operating expenses
            
            
            611,143
            
            
            15.8
            %
            
            565,148
            
            
            15.5
            %Oil
                and gas production costs
            
            
            178,437
            
            
            4.6
            %
            
            174,836
            
            
            4.8
            %Oil
                and gas consulting
            
            
            165,000
            
            
            4.3
            %
            
            105,535
            
            
            2.9
            %Total
                Expenses from oil and gas operations
            
            $
            3,875,299
            
            
            100
            %
            $
            3,643,666
            
            
            100
            %





*Oil
      and Gas Operating Expenses.* Exploration and drilling expenses increased to
      $235,959 in fiscal 2005 from $134,452 in fiscal 2004, an increase of $101,507,
      or 75.5%, and o il
      and
      gas consulting expenses increased to
      $165,000 in fiscal 2005 from $105,535 in fiscal 2004, an increase of $59,465,
      or
      56.3%. These increases were a result of our increased drilling activities
      beginning during the second quarter of fiscal 2005 which we funded from the
      net
      proceeds of the January 31, 2005 private placement.





Depreciation,
      depletion and amortization increased to $2,683,279 in fiscal 2005 from
      $2,663,695 in fiscal 2004, an increase of $19,584, or 0.7%. We recognize
      depletion of well-specific expenditures based on the amount of production during
      the year compared with the estimate of proved reserves at the beginning of
      the
      year. During fiscal 2005 we recognized depletion of substantially all of the
      depletable expenditures at the Texas properties due to the due to the fact
      that
      our independent engineer’s report as of October 1, 2004 estimated that our total
      reserves at the Texas properties were less than the amount of actual production
      from those properties during fiscal 2005. Similarly, the relatively high level
      of our depletion expense during fiscal 2004 resulted from the fact that our
      independent engineer’s report as of October 1, 2003 estimated that our total
      reserves were less than the amount of oil and gas was actually produced during
      fiscal 2005. In addition, deprecation during fiscal 2005 was increased over
      fiscal 2004 due to the greater amount of depreciable assets recorded after
      our
      expenditures associated with our increased drilling activities.





Oil
      and
      gas lease and operating expenses increased to
      $612,624 in fiscal 2005 from $565,148 in fiscal 2004, an increase of $47,476,
      or
      8.4%, and o il
      and
      gas production costs increased to
      $178,437 in fiscal 2005 from $174,836 in fiscal 2004, an increase of $3,601,
      or
      2.1%. These increases are attributable to the fact that we had a greater number
      of wells in operation during fiscal 2005 compared with fiscal 2004, and the
      fact
      that service providers to the oil and gas industry were generally busier during
      fiscal 2005 compared with fiscal 2004, resulting in higher prices being charged
      generally by service providers; the effects of these two factors were partially
      offset by the impact on these expense categories of our reduced production
      of
      oil and gas during fiscal 2005.





*General
      and Administrative.* During
      fiscal 2005, management and the Compensation Committee of our Board of Directors
      determined to reduce cash salaries and bonuses to our executives and reduce
      the
      extent we rely on outside consultants for management services. In addition
      to
      reduced cash compensation, we compensated our directors and officers with equity
      grants, including stock options. As a result of cash and equity compensation,
      officers and directors compensation increased to $991,403 in fiscal 2005 from
      $725,485 in fiscal 2004. Consulting expenses decreased to $70,166 in fiscal
      2005
      from $319,338 in fiscal 2004, a decrease of $249,172, or 78.0%. Other general
      and administrative expenses decreased to
      $1,252,267 in fiscal 2005 from $1,506,446 in fiscal 2004, a decrease of
      $254,179, or 16.9%, which was attributable to the fact that the fiscal 2004
      amount included a greater amount of expenses attributable to debt and equity
      financings and the expenses of registering shares of our common stock for
      secondary sales by certain of our stockholders.





*Other
      Income (Expenses).* The
      principal significant changes in these expenses included (i) a reduction of
      $92,821 in interest expense and loan fees due to the fact that we repaid the
      $6
      million of promissory notes we issued in an April 2004 private placement; these
      notes were repaid from the proceeds of the January 31, 2005 private placement;
      (ii) recognition of $660,559 as a loss on repayment of debt which consisted
      of
      unamortized deferred financing costs from our April 2004 loan financing and
      which were written off upon the repayment of the loans in connection with the
      January 31, 2005 private placement; and (iii) the absence of any impairment
      charge on assets during fiscal 2005, whereas in fiscal 2004 we recognized an
      impairment of $1,236,365 in connection with wells drilled during fiscal 2004
      at
      our Desoto Parish, Louisiana properties.




52





**Comparison
      of Fiscal Year Ended September 30, 2004**


**to
      Fiscal Year ended September 30, 2003**





**Revenues**





During
      fiscal 2004, revenues from oil and gas sales were $2,541,447, reflecting an
      increase of more than five times the revenues from oil and gas sales of $337,355
      during the fiscal year ended September 30, 2003. This increase was primarily
      attributable to increased quantities of production and higher commodity prices
      realized in fiscal 2004. Revenues for fiscal 2004 were primarily from production
      from our wells in Texas, Louisiana and Michigan. Revenue during fiscal 2004
      came
      from the sale of 25,887 net barrels of oil at an average price of $36.11 per
      barrel from Cadence's wells in Texas and 37,517 MCF of natural gas at an average
      price of $5.83 per MCF from Cadence's wells in Louisiana and Michigan. Revenues
      from oil and gas sales during the fiscal year ended September 30, 2003 came
      from
      the sale of 11,447 net barrels of oil at an average price of $29.47 per barrel.
      There was no production from Cadence's wells in Louisiana or Michigan in fiscal
      2003. Cadence also realized a cash receipt of $50,000 in April 2003 from Bridas
      Energy upon transfer of drilling and production rights in Cadence's leasehold
      acreage in DeSoto Parish, Louisiana that Cadence is currently exploring with
      them on a joint basis.





During
      the year ended September 30, 2004, substantially all of our revenues were
      derived from our interests in five producing oil wells in Wilbarger County,
      Texas and eleven producing natural gas wells in DeSoto Parish, Louisiana. We
      received small revenues from our interest in nine producing gas wells in Alpena
      County, Michigan and in September 2004 received its first production revenue
      from a minority interest in a producing well in Eddy County, New Mexico.





**Expenses**




The
      following table is a comparison of our two general categories of expenses for
      fiscal 2004 and the year ended September 30 2003 (“fiscal 2003”), and the
      percentages each of these categories comprise of total expenses:




YEAR
                ENDED SEPTEMBER 30,2004
            
            20032004
            
            %
                of 2004 Total Expenses
            
            2003
            
            %
                of 2003 Total ExpensesExpenses
                from Oil and Gas Operations
            
            $
            3,643,666
            
            
            58.8
            %
            $
            583,393
            
            
            28.7
            %Corporate
                and Administrative Overhead
            
            $
            2,551,269
            
            
            41.2
            %
            $
            1,446,756
            
            
            71.3
            %Total
                Expenses
            
            $
            6,194,935
            
            
            100.0
            %
            $
            2,030,149
            
            
            100.0
            %





Year-to-year
      comparisons in oil and gas related expenditures are summarized in the following
      table, which reflects the major expense categories for expenses from oil and
      gas
      operations for fiscal 2004 and fiscal 2003.




YEAR
                ENDED SEPTEMBER 30,2004
            
            20032004
            
            %
                of Total Expenses
            
            2003
            
            %
                of Total ExpensesExploration
                and drilling
            
            $
            134,452
            
            
            3.7
            %
            $
            109,968
            
            
            18.8
            %Depreciation,
                depletion and amortization
            
            
            2,663,695
            
            
            73.1
            %
            
            57,310
            
            
            9.8
            %Oil
                and gas lease expenses
            
            
            565,148
            
            
            15.5
            %
            
            302,204
            
            
            51.8
            %Oil
                and gas production costs
            
            
            174,836
            
            
            4.8
            %
            
            34,577
            
            
            6.0
            %Oil
                and Gas lease operating expenses
            
            
            0
            
            
            0.0
            %
            
            19,334
            
            
            3.3
            %Oil
                and gas consulting
            
            
            105,535
            
            
            2.9
            %
            
            60,000
            
            
            10.3
            %Total
                Expenses from oil and gas operations
            
            $
            3,643,666
            
            
            100
            %
            $
            583,393
            
            
            100
            %






53




In
      the
      aggregate, oil and gas operating expenses increased over six-fold from the
      prior
      year, primarily as a result of our increased drilling activity during fiscal
      2004. We recognized as expense substantially all of the depletable costs
      incurred during fiscal 2004 because our engineer’s report as of October 1, 2003
      estimated that our total reserves were less than the amount of our production
      during fiscal 2004. Although
      our exploration and drilling expenses and oil and gas lease expenses increased
      by some $24,000 from fiscal 2003, by far the largest increase in oil and gas
      related expenses resulted from our decision to impair the carrying value of
      five
      De Soto Parish gas wells, as mentioned above, as well as a downward adjustment
      in the total gas reserves as determined by Ralph E Davis and Associates, the
      independent petroleum engineers.





Our
      general and administrative expenses increased from fiscal 2003 to fiscal 2004
      by
      approximately $1,104,000, principally because of increased legal costs paid
      to
      outside counsel in connection with the filing of two separate SB-2 registration
      statements during the course of the fiscal year. These registration statements
      also substantially increased the amounts paid to outside accountants as well.




**Capital
      Resources and Liquidity**




Since
      September 30, 2002, we have funded our operations principally through the
      private sale of equity securities, borrowings from third party individuals
      and,
      to an increasing extent in recent months, cash flow from the sale of oil and
      gas
      produced by our wells. With the acquisition of Aurora, we will consider
      continuing Aurora’s practice of funding operations partly through credit
      facilities with industry lenders, and will review other alternative financing
      options appropriate to the increased size of our operations and asset base.




The
      level
      of our current assets at September 30, 2005, approximately $2.2 million, was
      relatively constant compared with the $2.3 million of our current assets at
      September 30, 2004. We maintained this relatively stable level of current assets
      as a result of the net proceeds of the January 31, 2005 private placement of
      equity securities (approximately $7.8 million) and expenditures on the repayment
      of indebtedness ($5.0 million), on oil and gas properties and on certain
      investments.




In
      February 2004, we borrowed $410,000 in short term notes from three directors
      and
      a company of which two officers and directors are also affiliated. These notes
      bore interest at the rate of 12% per annum, and were repaid in full in April
      2004. On April 2, 2004, we issued $6,000,000 of senior secured notes to seven
      individual investors. Each $50,000 principal amount of the notes was accompanied
      by warrants to purchase 6,375 shares of our common stock, or an aggregate of
      765,000 shares, at a price of $4.00 per share. The warrants expire on April
      2,
      2007. During this reporting period these secured notes were repaid in full.
      In
      conjunction with early repayment of the notes, the exercise price of the
      warrants was reduced to $1.25.




We
      realized net proceeds of $941,900 from the sale of our common stock and warrants
      during fiscal year 2002, net proceeds of approximately $4,830,000 from the
      sale
      of our common stock, preferred stock and warrants during the year ended
      September 30, 2003. Additionally, we received net proceeds of $288,500 from
      the
      sale of common stock and exercise of warrants during the year ended September
      30, 2004.




In
      the
      periods ended September 30, 2003, 2004 and 2005, we received approximately
      $16,000, $14,000 and $48,000, respectively, from the sale of investments in
      various public companies. The sales of these investments were made to fund
      our
      working capital needs. Prior to our refocus upon the exploration and development
      of oil and gas properties, we would from time to time make investments in public
      companies. These investments were passive in nature and were generally
      relatively small. Given our focus on oil and gas, future investments of this
      nature are likely to be limited to opportunities that are of some strategic
      value to our core oil and gas business and are likely to be less passive in
      nature.




54




During
      the year ended September 30, 2003, we had total borrowings of $600,000, of
      which
      $140,000 was repaid in cash. As of September 30, 2003, $50,000 was owed to
      Nathan Low Family Trust, a shareholder, $85,000 was owed to Mr. Crosby, $25,000
      was owed to Kevin Stulp, a director, and $300,000 was owed to CGT Management
      Ltd. All of such amounts were repaid by in October of 2003. During the year
      ended September 30, 2004, we borrowed $410,000 in short-term notes from certain
      of our officers, directors, and other insiders, as well as $1,000,000 of
      non-interest bearing short-term notes received in late March 2004. These
      liabilities were repaid in full in April 2004.




On
      January 31, 2005, we entered into a share purchase agreement with twenty-two
      accredited investors pursuant to which the investors purchased 7,810,000 shares
      of common stock and common stock warrants enabling the warrant holders to
      purchase 14,050,000 shares of common stock at an exercise price of $1.75 per
      share. The aggregate proceeds from the security sales were $9,762,500 before
      commissions. The proceeds of this financing were used in part to retire the
      April 2, 2004 debt financing and all accrued interest thereon.




We
      spent
      $321,538 in fiscal 2003, $565,148 in fiscal 2004 and $612,624 in fiscal 2005
      for
      oil and gas lease expenses and lease operating expenses. In the same periods
      we
      spent $145,000, $308,000 and $414,396, respectively, for oil and gas drilling,
      production and operating expenses. Historically, we have obtained professional
      oil and gas geologic and engineering services solely on a consulting basis.
      We
      spent approximately $591,000 in fiscal 2003, $424,873 in fiscal 2004 and
      $262,588 in fiscal 2005 for consulting services in various disciplines.




**Recent
      Accounting Pronouncements**




Reference
      is made to Note 2 to the Financial Statements included elsewhere in this report
      for a description of certain recently issued accounting pronouncements. We
      do
      not expect any of such recently issued accounting pronouncements to have a
      material effect on our consolidated financial position or results of operations.




**Future
      Changes in Accounting Principles**





As
      a
      result of the acquisition of Aurora, we will changes certain of our accounting
      policies, as described below. These changes will be reflected in our financial
      statements for the fiscal year ending December 31, 2005 to be included in a
      form
      10-KSB to be filed with the U.S. Securities and Exchange Commission.





·
            Aurora
                will be treated as the acquirer for accounting purposes, and accordingly,
                reverse acquisition accounting will be applied to the business
                combination, with Aurora as the accounting acquirer.





·
            We
                will measure the cost of the business acquired by reference to the
                fair
                value of the target’s securities (*i.e.,*shares of Cadence common stock, including outstanding options and
                warrants
                to purchase such shares) at the date of the merger agreement, January
                31,
                2005, or approximately $41,500,000.





·****
            Cadence
                will uniformly apply the full cost method to all of its oil and gas
                operations in both its divisions, accordingly, the successful efforts
                method that had previously been used by the Cadence division will
                be
                changed to the full cost method.





·****
            Cadence
                will initially use the intrinsic value method under APB Opinion 25
                in
                accounting for stock-based compensation, until adoption of FAS 123(R).
                However, stock options outstanding as of the date of the merger will
                not
                be accounted for under APB Opinion 25 nor FAS 123 because those options
                were fully vested and their fair value will be included in the cost
                of the
                business acquired, as discussed above.




55


**Item
      7.  Financial Statements**





The
      Financial Statements of the Company appear at pages F-1 to F-27.





**Item
      8. Changes in and Disagreements with Accountants.**





There
      have been no disagreements with accountants on accounting and financial
      disclosures from the inception of the Company through the date of this Annual
      Report.





**Item
      8A. Controls and Procedures.**





The
      Company conducted an evaluation, under the supervision and with the
      participation of the Company's Chief Executive Officer and Chief Financial
      Officer, of the effectiveness of the design and operation of the Company's
      disclosure controls and procedures, as defined in rules promulgated under the
      Securities Exchange Act of 1934, as amended, as of September 30, 2005. Based
      upon the evaluation, the Chief Executive Officer and the Chief Financial Officer
      have concluded that these disclosure controls and procedures are
      effective.





There
      have been no changes in the Company's internal controls over financial reporting
      that has materially affected or is reasonably likely to materially affect the
      Company's internal controls over financial reporting.




56


**PART
      III**





**Item
      9. Directors, Executive Officers, Promoters and Control
      Persons**





The
      following table sets forth the name, age and position of each of our officers
      and directors as of December 15, 2005.





**Name**
            
            **Age**
            
            **Position(s)
                with the Company**William
                W. Deneau
            
            61
            
            Director,
                President, Chairman of Board of DirectorsHoward
                M. Crosby
            
            53
            
            Director,
                Vice Chairman of Board of DirectorsLorraine
                M. King
            
            40
            
            Chief
                Financial OfficerJohn
                V. Miller, Jr.
            
            47
            
            Vice
                President of Exploration and ProductionThomas
                W. Tucker
            
            63
            
            Vice
                President of Land and DevelopmentJohn
                P. Ryan
            
            43
            
            SecretaryKevin
                D. Stulp
            
            49
            
            DirectorRonald
                E. Huff
            
            50
            
            Director,
                TreasurerRichard
                Deneau
            
            59
            
            DirectorGary
                J. Myles
            
            60
            
            DirectorEarl
                V. Young
            
            64
            
            Director





To
      the
      best of our knowledge, none of our directors have been convicted in a criminal
      proceeding, excluding traffic violations or similar misdemeanors, or has been
      a
      party to any judicial or administrative proceeding during the past five years,
      except for matters that were dismissed without sanction or settlement, that
      resulted in a judgment, decree or final order enjoining the person from future
      violations of, or prohibiting activities subject to, federal or state securities
      laws, or a finding of any violation of federal or state securities
      laws.





**William
      W. Deneau** has
      served as Cadence's President and Chairman of the Board of Directors since
      October 2005. Mr. Deneau became an employee of Aurora at the time he sold his
      interest in Jet/LaVanway Exploration, L.L.C. to Aurora in exchange for Aurora's
      stock on April 22, 1997. From April 1997 to October2005, Mr. Deneau was
      responsible for managing Aurora's affairs and officially became a Director
      of
      Aurora on June 25, 1997 and the President of Aurora on July 17, 1997. Since
      1987, Mr. Deneau has also been the President, a Director, and the sole owner
      of
      White Pine Land Services, Inc. of Traverse City, Michigan. Prior to March 1,
      1997, White Pine Land Services, Inc. was a 35-member company engaged in the
      business of providing real estate services to oil and gas companies. On March
      1,
      1997, White Pine Land Services, Inc. sold its business to a newly formed
      corporation, White Pine Land Company. White Pine Land Services, Inc. continues
      to exist for the purpose of managing its investments. William W. Deneau is
      the
      brother of Richard Deneau, one of our directors




**Howard
      Crosby** has
      served as Cadence's Vice Chairman of the Board of Directors since October 2005
      and as a Director since February 1994. From February 1994 to October 2005 Mr.
      Crosby served as Cadence's President and from January 1998 until October 2005
      he
      served as Cadence's Treasurer. Since 1989, Mr. Crosby has been president of
      Crosby Enterprises, Inc., a family-owned business advisory and public relations
      firm. Mr. Crosby received a B.A. degree from the University of Idaho. Mr. Crosby
      is also an officer and director of White Mountain Titanium Corporation., a
      publicly traded mining exploration company, High Plains Uranium, Inc., Sundance
      Diamonds Corporation, Dotson Exploration Company and Nevada-Comstock Mining
      Company (formerly Caledonia Silver-Lead Mines Company), all of the latter being
      privately held companies.




57




**Lorraine
      M. King** has
      served as Cadence's Chief Financial Officer since October 2005. Ms. King became
      an employee of Aurora on May 29, 2001 and from March 2003 to October 2005 served
      as its Chief Financial Officer. From November 1, 1992 through May 4, 2001,
      Ms.
      King served as Chief Financial Officer of Wepco Energy, LLC, an independent
      gas
      producer based in Traverse City, Michigan. Ms. King began her career in public
      accounting with BDO Seidman, where she spent four years as a tax manager working
      primarily with oil and gas clients.




**John
      V. Miller** has
      served as Cadence's Vice President of Exploration and Production since October
      2005. Mr. Miller became an employee of Aurora at the time he sold his interest
      in Jet/LaVanway Exploration, L.L.C. to Aurora in exchange for Aurora's stock
      on
      April 22, 1997. From April 1997 to October 2005, he was responsible for
      overseeing exploration and development activities for Aurora. From June 1997
      to
      October 2005 he served as a Director of Aurora and from July 1997 to October
      2005 he served as Vice President of Exploration and Production of Aurora. In
      1994, Mr. Miller joined Jet Exploration, Inc. of Traverse City, Michigan as
      a
      Vice President with responsibility for getting Jet Exploration, Inc. into the
      shale gas play in Michigan and Indiana. He was the driving force behind the
      establishment of Jet/LaVanway Exploration, L.L.C. and its effort in southern
      Indiana. Mr. Miller left the position with Jet Exploration, Inc. to join Aurora.
      From 1988 to 1994, Mr. Miller worked for White Pine Land Services, Inc. of
      Traverse City, Michigan, as a land manager.




**Thomas
      W. Tucker** ,
      has
      served as Cadence's Vice President of Land and Development since October 2005.
      Mr. Tucker became an employee of Aurora at the time he sold his interest in
      Jet/LaVanway Exploration, L.L.C. to Aurora in exchange for Aurora's stock on
      April 22, 1997. From April 1997 to October 2005 he has been responsible for
      overseeing land development activities for Aurora. From June 1997 to October
      2005 he served as a Director of Aurora and from July 1997 to October 2005 he
      served as Vice President of Land and Development of Aurora. Mr. Tucker founded
      Jet Oil Corporation with his father in 1982. After his father's death, Mr.
      Tucker founded Jet Exploration, Inc. in 1987. Mr. Tucker has been the President
      of Jet Exploration, Inc. since its inception. Jet Exploration, Inc. no longer
      takes on any new projects, and its existing projects are being allowed to run
      out their course.




**John
      P. Ryan** ,
      served
      as a Director of Cadence from April 1997 to October 2005 and has served as
      Cadence's Secretary since 1998. From September 1996 to October 2005 he served
      as
      Cadence's Vice President of Corporate Development. Mr. Ryan is a degreed mining
      engineer. From August, 2000 to the present, he has served as a Director and
      the
      Chief Financial Officer of Trend Mining Company, a publicly traded mineral
      exploration and development company and since February 2004 he has served as
      an
      officer and director of White Mountain Titanium Corporation, a publicly traded
      mining exploration company. Other companies with which Mr. Ryan holds an officer
      and/or director position include Bio-Quant, Inc., Nevada-Comstock Mining
      Company, High Plains Uranium, Inc., GreatWall Gold Corporation, Sundance
      Diamonds Corporation, TN Oil Co., and Dotson Exploration Company. Many of these
      companies have only minimal activity and require only a small amount of Mr.
      Ryan's time. Mr. Ryan is a former U.S. Naval Officer and obtained a B.S. in
      Mining Engineering from the University of Idaho and a Juris Doctor from Boston
      College Law School.




**Kevin
      D. Stulp** ,
      has
      served as a Director of Cadence since March 1997. Since August 1995, Mr. Stulp
      has variously worked as consultant with Forte Group, on the board of the Bible
      League, and is active with various other non-profit organizations. From December
      1983 to July 1995, Mr. Stulp held various positions with Compaq Computer
      Corporation, including industrial engineer, new products planner, manufacturing
      manager, director of manufacturing and director of worldwide manufacturing
      reengineering. Mr. Stulp holds a B.S.L.E. from Calvin College, Grand Rapids,
      Michigan, a B.S.M.E. in Mechanical Engineering, and an M.B.A. from the
      University of Michigan.




**Ronald
      E. Huff, CPA** ,
      has
      served as Cadence's Treasurer since October 2005 and has served as a Director
      of
      Cadence since November 21, 2005. Mr. Huff is currently the Chief Financial
      Officer and Vice President of Finance for Visual Edge Technology, Inc., a
      position he has held since 2004. Visual Edge Technology, Inc. is a California
      holding company engaged in acquiring imaging companies. From 1999 to 2004,
      Mr.
      Huff was a Principal and Founder of TriMillennium Ventures, LLC, a private
      equity investment company located in the Columbus, Canton, Akron, Cleveland,
      Ohio corridor. Mr. Huff worked for Belden & Blake Corporation from 1986 to
      1999 as its Chief Financial Officer and was also its President from 1997 to
      1999. Belden & Blake Corporation acquires properties, explores for and
      develops oil and gas reserves and markets natural gas, primarily in the
      Appalachian and Michigan Basins. It went through a successful initial public
      offering in 1992, and was acquired by Texas Pacific Group in 1997. From 1983
      to
      1986 Mr. Huff was the Chief Accounting Officer of Zilkha Petroleum, from 1980
      to
      1983 he was a financial analyst for Southern Natural Resources, a natural gas
      marketing company, and from 1977 to 1980 he was a corporate accountant with
      Transco Companies Incorporated. Mr. Huff has agreed to chair Cadence's Audit
      Committee.




58




**Richard
      Deneau** ,
      has
      served as a Director of Cadence since November 21, 2005. Mr. Deneau retired
      from
      Anchor Glass Container Corporation ("Anchor") in 2004, where he served as a
      Director and President from 1997 to 2004. He was also the Chief Operating
      Officer from 1997 to 2002, and the Chief Executive Officer from 2002 until
      his
      retirement. Anchor, which is publicly traded and listed on NASDAQ, is the third
      largest glass container manufacturer in the United States, with annual revenues
      of about $750 million. When Richard Deneau joined Anchor, it was a financially
      troubled company. He designed and implemented strategies to turn its financial
      performance around. One of the strategies involved a Chapter 11 bankruptcy
      filing in April, 2002. The purpose of this filing was to provide assurance
      to a
      new investor that all prior claims had been extinguished. Prior to working
      for
      Anchor, Richard Deneau served in management at Ball Foster Glass Container
      Corp., American National Can, Foster Forbes Glass and First National Bank of
      Lapeer. He served as an auditor with Ernst & Ernst after graduating from
      Michigan State University in 1968. Richard Deneau is the brother of William
      Deneau, who is the President, CEO and a Director of Aurora. Richard Deneau
      is
      the brother of William W. Deneau our President and Chairman of the Board of
      Directors.




**Gary
      J. Myles** ,
      has
      served as a Director of Cadence since November 21, 2005. From June 1997 to
      October 2005 Mr. Myles served as a Director of Aurora. He is currently retired.
      Prior to his retirement, Mr. Myles served as Vice President and Consumer Loan
      Manager for Fifth Third Bank of Northern Michigan (previously Old Kent Mortgage
      Company), a wholly owned subsidiary of Fifth Third Bank (previously Old Kent
      Financial Corporation). As the Affiliate Consumer Loan Manager , Mr. Myles
      was
      based in Traverse City, Michigan, and had full bottom line responsibility for
      the mortgage and indirect consumer loan departments generating net revenue
      of
      $3,500,000 annually. Mr. Myles had been with Fifth Third Bank and its
      predecessor, Old Kent Mortgage Company, since July 1988. Mr. Myles also owns
      Foster Care, Ltd., a closely held company for which he serves as a Director,
      President and Treasurer.




**Earl
      V. Young** ,
      has
      served as a Director of Cadence since November 21, 2005. From March 2001 to
      October 2005 Mr. Young served as Director of Aurora. He is currently President
      of Earl Young & Associates of Dallas, Texas, which he founded in 1999. From
      1996 to 1999, Mr. Young was the Senior Vice President of Corporate Development
      for American Mineral Fields, Inc. of Dallas, Texas. From 1993 to 1996, Mr.
      Young
      was a principal in Young & Lowe, which offered business consulting services
      to small capitalization companies. Prior to 1993, Mr. Young was involved in
      the
      investment banking business. He is President of the US/Madagascar Business
      Council headquartered in Washington, D.C. and a Director of the Corporate
      Council on Africa in Washington D.C. Mr. Young was a gold medalist in the Summer
      Olympic Games in 1960 in track, has served as President of the Southwest Chapter
      of Olympians, and was the founding chairman of the Olympians for Olympians
      Relief Committee.




To
      our
      knowledge, no director, officer or affiliate of the Company, and no owner of
      record or beneficial owner of more than five percent (5%) of our securities,
      or
      any associate of any such director, officer or security holder is a party
      adverse to us or has a material interest adverse to us in reference to pending
      litigation.




**Indemnification**





Our
      bylaws provide that our directors and officers will be indemnified to the
      fullest extent permitted by the Utah Corporation Code. However, such
      indemnification does not apply to acts of intentional misconduct, a knowing
      violation of law, or any transaction where an officer or director personally
      received a benefit in money, property, or services to which the director was
      not
      legally entitled.




Insofar
      as indemnification for liabilities arising under the Securities Act may be
      permitted to directors, officers and controlling persons of the small business
      issuer pursuant to the foregoing provisions, or otherwise, we have been advised
      that in the opinion of the Securities and Exchange Commission such
      indemnification is against public policy as expressed in the Securities Act
      and
      is, therefore, unenforceable.




59




**Board
      of Directors' Meetings and Committees**




During
      the fiscal year ended September 30, 2005, our audit and compensation committees
      consisted of Messrs. Christian, DeHekker and Stulp. As a result of the
      resignations of Messrs. Christian and DeHekker from the Board of Directors
      effective October 31, 2005, Mr. Stulp was the sole remaining member of these
      committees.




On
      December 5, 2005, our Board of Directors reconstituted our Board Committees
      as
      follows:




·
            Audit
                Committee: Ronald E. Huff (Chairperson), Gary J. Myles and Earl V.
                Young;




·
            Compensation
                Committee: Howard M. Crosby, Kevin D. Stulp and Earl V. Young (Earl
                Young
                has been elected chairperson); and




·
            Nominating
                and Corporate Governance Committee: Gary J. Myles, Howard M. Crosby
                and
                Kevin D. Stulp.




The
      Board
      of Directors has designated the following directors as independent directors:
      Gary J. Myles, Ronald E. Huff, Kevin D. Stulp and Earl V. Young.




**Nominations
      for Directors**




Our
      Nominating and Corporate Governance Committee will propose, and our Board will
      adopt, a formal policy regarding qualifications of director candidates.
      Currently, in evaluating director nominees, our Board considers a variety of
      factors, including the appropriate size of our Board of Directors; the needs
      of
      our company with respect to the particular talents and experience of our
      directors; the knowledge, skills and experience of nominees, including
      experience in the oil and gas industry, finance, administration or public
      service, in light of prevailing business conditions and the knowledge, skills
      and experience already possessed by other members of our Board; experience
      with
      accounting rules and practices; and the desire to balance the benefit of
      continuity with the periodic injection of the fresh perspective provided by
      new
      Board members.




To
      date,
      we have not engaged third parties to identify or evaluate or assist in
      identifying potential nominees, although we reserve the right in the future
      to
      retain a third party search firm, if necessary.




During
      the fiscal year ended September 30, 2005, our Board of Directors met six times,
      and our Audit and Nominating Committees each met twice. No director attended
      fewer than 75% of the meetings of our Board or of each committee of which he
      was
      a member.




Our
      Board
      of Directors does not currently provide a process for securityholders to send
      communications to our Board of Directors as our management believes that until
      this point it has been premature given the limited liquidity of our common
      stock
      to develop such processes. Our Nominating and Corporate Governance Committee
      is
      now working on a stockholders’ communications policy to be adopted by our Board
      of Directors.




In
      connection with the closing of the merger or Cadence and Aurora, certain of
      our
      shareholders, including certain former Aurora shareholders who became
      shareholders of the Cadence in connection with the merger, executed and
      delivered voting agreements pursuant to which they agreed, for a period of
      36
      months, to vote an aggregate of 22,740,830 of their shares of our common stock
      in favor of (i) five directors designated by William W. Deneau, who shall
      initially be William W. Deneau, Earl V. Young, Gary J. Myles, Richard Deneau,
      and Ronald E. Huff; and (ii) two directors designated by William W. Deneau
      from
      among the our Board of Directors immediately before the closing of the merger,
      who shall initially be Howard M. Crosby and Kevin D. Stulp. In addition, such
      shareholders agreed to vote all of their shares of our common stock to ensure
      that the size of our Board of Directors will be set and remain at seven
      directors.




In
      addition, also in connection with the closing of the merger, certain of our
      shareholders executed and delivered irrevocable proxies naming, for a period
      of
      36 months, William W. Deneau and Lorraine King as proxies to vote an aggregate
      of 10,102,286 shares of our common stock held by such shareholders in the manner
      determined by such proxies.




60




**Audit
      Committee**




The
      audit
      committee: (i) appoints the Company’s independent auditors and monitors the
      independence of the Company’s independent auditors; (ii) reviews the Company’s
      policies and procedures on maintaining its accounting records and the adequacy
      of its internal controls; (iii) reviews management’s implementation of
      recommendations made by the independent auditors and internal auditors; (iv)
      considers and pre-approves the range of audit and non-audit services performed
      by independent auditors and fees for such services; and (v) reviews and votes
      on
      all transactions between the Company and any of its officers, directors or
      other
      affiliates.




We
      have
      appointed an audit committee comprised of Ronald E. Huff, Gary J. Myles and
      Earl V. Young, each of whom is an independent outside director, and
      one of
      whom, Ronald E. Huff, is a financial expert with knowledge of financial
      statements, generally accepted accounting principles and accounting procedures
      and disclosure rules.




**Section
      16(a) Beneficial Ownership Reporting Compliance**





Section
      16(a) of the Securities Exchange Act of 1934 requires certain defined persons
      to
      file reports of and changes in beneficial ownership of a registered security
      with the Securities and Exchange Commission and the National Association of
      Securities Dealers in accordance with the rules and regulations promulgated
      by
      the Commission to implement the provisions of Section 16. Under the regulatory
      procedure, officers, directors, and persons who own more than ten percent of
      a
      registered class of a company's equity securities are also required to furnish
      the Company with copies of all Section 16(a) forms they file.





To
      the
      Company's knowledge, based solely on a review of the copies of Forms 3, 4 and
      5
      furnished to the Company between October 1, 2004 through September 30, 2005,
      the
      Company's officers, directors and greater than 10% beneficial owners complied
      with all Section 16(a) filing requirements except as follows: Rubicon Master
      Fund filed a late Form 3 for two transactions that occurred on January 31,
      2005;
      Jeffrey M. Christian filed a late Form 4 for the two transactions that occurred
      on January 7, 2005; Glenn DeHekker filed a late Form 4 for the one transaction
      that occurred on June 8, 2005 and a late Form 4 for six transactions that
      occurred March 1, 2004, January 7, 2005 and June 8, 2005; Nathan A. Low filed
      a
      late Form 4 for seven transactions that occurred on January 1, 2005; John P.
      Ryan filed a late Form 4 for four transactions that occurred on January 7,
      2005;
      Kevin D. Stulp filed a late Form 4 for one transaction that occurred on December
      31, 2004 and a late Form 4 for one transaction that occurred on January 17,
      2005; Glenn DeHekker filed a late Form 5 for three transactions that occurred
      on
      March 31, 2004, August 20, 2004 and January 17, 2005; and Kevin D. Stulp filed
      a
      late Form 5 for two transactions that occurred on April 21, 2004 and September
      27, 2004.




**Code
      of Ethics**





We
      have
      adopted a Code of Ethics that applies to our principal executive officer and
      senior financial officers. Please see Item 13, Exhibit 14.





**Item
      10. Executive Compensation**




Prior
      to
      the date of the merger of Cadence and Aurora, the Company's executive officers
      functioned as executive officers of, and were compensated by, Cadence or Aurora,
      as the case may be. The following sets forth the annual and long-term
      compensation for services in all capacities to Cadence for the fiscal years
      ended September 30, 2005, 2004 and 2003 paid to our Chief Executive Officer
      and
      the other executive officer who was serving as an executive officer at the
      end
      of the last completed fiscal year. Messrs. Crosby and Ryan served as President
      and Treasurer and Vice President and Secretary, respectively, of Cadence prior
      to the merger of Cadence and Aurora. This compensation information relates
      to
      compensation received by the named executive officer while employed by
      Cadence prior to the merger of Cadence and Aurora.




61





**Summary
      Compensation Table**


**Long-Term
                    Compensation****Awards****Annual
                    Compensation**
                
                **Restricted**
                
                **Securities
                    Underlying****Name
                    and Principal Position**
                
                **Year**
                
                **Salary
                    ($)**
                
                **Bonus**
                
                **Stock**
                
                **Options/SARs**Howard
                    M. Crosby
                
                
                2005
                
                
                133,775
                
                
                –
                
                
                30,000
                
                
                50,000President
                    and Treasurer
                
                
                2004
                
                
                61,500
                
                
                –
                
                
                –
                
                
                –2003
                
                
                62,500(1
                )
                
                –
                
                
                80,000
                
                
                –John
                    P. Ryan
                
                
                2005
                
                
                142,425
                
                
                –
                
                
                30,000
                
                
                50,000Vice
                    President and Secretary
                
                
                2004
                
                
                70,336
                
                
                –
                
                
                –
                
                
                –2003
                
                
                62,500
                    (2
                )
                
                –
                
                
                80,000
                
                
                –





(1)
            The
                cash portion of Mr. Crosby’s salary for fiscal 2003 was $62,500, of which
                he received $18,000 in fiscal 2003, payment of the remaining $44,500
                having been deferred until after the end of fiscal 2003. In addition,
                he
                received 80,000 shares of Cadence common stock, 20,000 per quarter.
                These
                were valued at 50% of the closing price at the end of the quarter
                for
                which the shares were awarded: $17,000 for the first quarter, $14,500
                for
                the second quarter, $17,000 for the third quarter and $32,500 for
                the
                fourth quarter, for a total of $80,500 in stock compensation and
                $143,500
                in total compensation.


(2)
            The
                cash portion of Mr. Ryan’s salary for fiscal 2003 was $62,500. In
                addition, he received 80,000 shares of Cadence common stock, 20,000
                per
                quarter. These were valued at 50% of the closing price at the end
                of the
                quarter for which the shares were awarded: $17,000 for the first
                quarter,
                $14,500 for the second quarter, $16,500 for the third quarter and
                $32,500
                for the fourth quarter, for a total of $80,500 in stock compensation
                and
                $143,500 in total compensation.




**OPTION
      GRANTS IN LAST FISCAL YEAR (October 1, 2004 - September 30,
      2005)**





**NAME**
            
            **Number
                Of Securities Underlying Options**
              **Granted
                (1)**
            
            **%
                Of Total Options Granted To Employees In The Fiscal
                Year**
            
            **Exercise**
              **Price**
            
            **Expiration**
              **Date**
            
            **Potential
                Realizable Value at Assumed Annual Rate of Stock Price Appreciation
                For
                Option Term****5%**
            
            **10%**Howard
                M. Crosby
            
            
            50,000
            
            
            50
            
            $
            1.21
            
            
            January
                7, 2008
            
            $
            110,259
            
            $
            144,896John
                P. Ryan
            
            
            50,000
            
            
            50
            
            $
            1.21
            
            
            January
                7, 2008
            
            $
            110,259
            
            $
            144,896






62


**AGGREGATED
      OPTION EXERCISES IN LAST FISCAL YEAR-END**


**AND
      FISCAL YEAR-END OPTION VALUES TABLE**





The
      following table contains information concerning the number of shares acquired
      and value realized from the exercise of options by the named executive officers
      during fiscal 2004 and the number of unexercised options held by the named
      executive officers at September 30, 2005.




**NUMBER
                OF SHARES OF COMMON STOCK UNDERLYING UNEXERCISED OPTIONS AT YEAR
                END**
              **(SEPTEMBER
                30 2005)**
            
            **VALUE
                OF UNEXERCISED IN-THE-MONEY OPTIONS AT YEAR END**
              **(SEPTEMBER
                30 2005) (1**)**NAME**
            
            **EXERCISABLE**
            
            **UNEXERCISABLE**
            
            **EXERCISABLE**
            
            **UNEXERCISABLE**Howard
                M. Crosby
            
            
            50,000
            
            
            –
            
            $
            107,000
            
            
            –John
                P. Ryan
            
            
            50,000
            
            
            –
            
            $
            107,000
            
            
            –





(1)
            Options
                are “in-the-money” if the market price of a share of common stock exceeds
                the exercise price of the option.




Cadence
      has no retirement, pension or profit sharing program for the benefit of its
      directors, officers or other employees, but the Board of Directors may recommend
      one or more such programs for adoption in the future.




**Compensation
      of Directors**




All
      directors are reimbursed for out-of-pocket expenses in connection with
      attendance at meetings of the Board of Directors. We have in the past
      compensated our directors in cash and in shares of our common stock, and has
      generally in the past granted options to Directors upon joining the Board.
      During the fiscal year ended September 30, 2005, each non-employee director
      received (1) $5,000 and 5,000 shares of restricted stock per quarter of
      completed service, (2) 2,500 restricted shares of common stock for each year
      of
      service on any committee of the Board of Directors, (3) $2,500 for chair of
      the
      Audit Committee and $1,000 for any other committee which they chair; and each
      Director (employee or non employee) was entitled to an option to purchase 50,000
      shares of our common stock on the anniversary of his appointment to the Board.
      Board members may be granted additional stock options pursuant to Board
      recommendation and approval. We also have in the past paid our non-employee
      directors $1,600 for each board meeting they attend in person and $750 for
      each
      telephonic meeting and employee directors $600 for each board meeting they
      attend in person.




During
      the fiscal year ended September 30, 2005, Messrs. Christian, DeHekker and Stulp,
      the three non-employee directors, each received options to purchase 50,000
      shares of our common stock at an exercise price of $1.42 per share, and Messrs.
      Crosby and Ryan, the employee directors, each received options to purchase
      50,000 shares of our common stock at an exercise price of $1.21 per share.
      Also
      for the 2005 fiscal year, Messrs. Christian, Crosby, DeHekker, Ryan and Stulp
      each received 15,000 shares of our common stock per quarter for the first three
      quarters of 2005 as compensation for the service on the board of directors.
      Messrs. DeHekker and Stulp received an additional 4,000 shares of our common
      stock for their service on a committee of the board of directors.




In
      addition, subsequent to September 30, 2005, each of Messrs. Christian, DeHekker
      and Ryan, the resigning directors, received warrants to purchase an aggregate
      of
      37,500 shares of our common stock, consisting of a warrant to purchase 12,500
      shares of our common stock for a purchase price of $2.53 per share, a warrant
      to
      purchase 12,500 shares of our common stock for a purchase price of $2.23 per
      share, a warrant to purchase 12,500 shares of our common stock for a purchase
      price of $3.28 per share.




There
      are
      no contractual arrangements with any member of the Board of
      Directors.




**Bonuses
      and Deferred Compensation**




We
      do not
      have any bonus, deferred compensation or retirement plan.




63




**Stock
      Options**




In
      February, 2004 the Board adopted the 2004 Stock Option and Stock Award Plan
      which was approved by our shareholders in May, 2004 and under which up to
      1,000,000 shares of our common stock could be awarded as share awards or options
      and based upon merit of work performed as well as a retention tool. As of
      September 30, 2005, 625,500 shares or options have been awarded under this
      plan,
      of which 400,000 options are currently outstanding and exercisable.




Prior
      to
      the 2004 Stock Option and Stock Award Plan, our Board of Directors chose to
      make
      option or warrant awards to select officers, directors, consultants, or
      shareholder/investors in order to induce them to assist it in implementing
      its
      business plan and to provide long term additional incentive. These options
      or
      warrants, as awarded, were not awarded pursuant to a plan but were specific
      individual awards with varying terms and conditions. In some instances, our
      Board of Directors reserved the right to cancel these awards for non-performance
      or other reasons, or established a vesting schedule pursuant to which the award
      is earned.




**Employment
      Contracts, Termination of Employment and Change of Control
      Arrangements**




There
      are
      no compensatory plans or arrangements, including payments to be received from
      us, with respect to any person named in the Summary Compensation Table above,
      that would in any way result in payments to any such person because of his
      resignation, retirement, or other termination of such person’s employment with
      us or the our subsidiaries, or any change in control of us, or a change in
      the
      person’s responsibilities following a change of control.




**Compensation
      Committee Report**




*Compensation
      Philosophy.* The
      philosophy of the our Compensation Committee for the fiscal year ended September
      30, 2005 was to provide competitive levels of compensation that are appropriate
      given the performance and commitment of the Company’s executive officers
      compared with similarly situated executives in the oil and gas industry; link
      management’s pay to the achievement of the Company’s annual and long-term
      performance goals; and assist the Company in attracting and retaining qualified
      management. However, because of the limited number of companies that can be
      compared to the Company in terms of stage of resource development, net income,
      and similar items, a significant amount of subjectivity was involved in the
      decisions of the Compensation Committee.




*Base
      Salaries.* Base
      salaries for management employees are determined initially by evaluating the
      responsibilities of the position held and the experience of the individual,
      and
      by reference to the competitive marketplace for management services, including
      a
      comparison of base salaries for comparable positions at comparable companies
      within the oil and gas industry. Annual salary adjustments are determined by
      evaluating the competitive marketplace, the performance of the Company, the
      performance of the executive, and any increased responsibilities assumed by
      the
      executive. The Compensation Committee believes the base salaries of executive
      officers are at or below those of similarly situated executives in the oil
      and
      gas industry.




*Bonus
      Arrangement.* To
      encourage and reward outstanding corporate and individual performance, the
      Company from time to time considers awarding merit bonuses to its executive
      officers, based on the Company’s operating results and the achievement of
      certain defined major business objectives.




C *ompensation
      of Chief Executive Officer.* The
      amount of the Chief Executive Officer’s compensation for the fiscal year ended
      September 30, 2005 was determined in accordance with the principles discussed
      in
      the foregoing paragraphs and was based upon a subjective evaluation by the
      Committee of the leadership demonstrated by Mr. Crosby during the fiscal
      year.




**Item
      11. Security Ownership of Certain Beneficial Owners and
      Management**





The
      following table sets forth, as of November 1, 2005, certain information
      regarding the ownership of voting securities of Cadence by each stockholder
      known to our management to be (i) the beneficial owner of more than 5% of our
      outstanding Common Stock, (ii) our directors, (iii) our current executive
      officers and (iv) all executive officers and directors as a group. We believe
      that, except as otherwise indicated, the beneficial owners of the Common Stock
      listed below, based on information furnished by such owners, have sole
      investment and voting power with respect to such shares.




64




Unless
      otherwise specified, the address of each of the persons set forth below is
      in
      care of Cadence Resources Corporation, 4110 Copper Ridge Drive, Suite 100,
      Traverse City, Michigan, 49684.


**Name
                  and Address****of
                  Beneficial Owner (1)**
                
                **Amount
                    and Nature of Beneficial Ownership(2)**
                
                **Percent
                    of**
                  **Outstanding
                    Shares(2)**Howard
                    M. Crosby
                
                
                1,477,808
                    (3
                )
                
                2.50
                %John
                    P. Ryan
                
                
                1,006,124
                    (4
                )
                
                1.70
                %Kevin
                    D. Stulp
                
                
                527,500
                    (5
                )
                
                0.89
                %Nathan
                    A. Low Roth IRA and affiliates
                  641
                    Lexington Avenue
                  New
                    York, New York 10022
                
                
                5,052,142
                    (6
                )
                
                8.56
                %Thomas
                    Kaplan
                  154
                    West 18th Street
                  New
                    York, New York 10011
                
                
                3,090,992
                    (7
                )
                
                5.23
                %Rubicon
                    Master Fund (8)
                  c/o
                    Rubicon Fund Management LLP
                  P103
                    Mount Street
                  London
                    W1K 2TJ, UK
                
                
                8,000,000
                    (9
                )
                
                13.55
                %Crestview
                    Capital Master, LLC
                  95
                    Revere Drive, Suite A
                  Northbrook,
                    Illinois, 60062
                
                
                4,000,000(10
                )
                
                6.77
                %William
                    W. Deneau
                
                
                4,232,500
                    (11
                )
                
                7.17
                %Gary
                    J. Myles
                
                
                259,998
                    (12
                )
                
                0.44
                %Earl
                    V. Young
                
                
                386,204
                    (13
                )
                
                0.65
                %Richard
                    Deneau
                
                
                –
                
                
                –Ronald
                    E. Huff
                
                
                –
                
                
                –John
                    V. Miller, Jr.
                
                
                3,289,762
                    (14
                )
                
                5.57
                %Thomas
                    W. Tucker
                
                
                3,848,194(15
                )
                
                6.52
                %Lorraine
                    M. King
                
                
                360,000
                    (16
                )
                
                0.61
                %All
                    executive officers and directorsas
                    a group (11 persons)
                
                
                15,382,390
                    (17
                )
                
                26.05
                %





(1)
            Addresses
                are only given for holders of more than 5% of the outstanding Common
                Stock
                of Cadence.


(2)
            A
                person is deemed to be the beneficial owner of a security if such
                person
                has or shares the power to vote or direct the voting of such security
                or
                the power to dispose or direct the disposition of such security.
                A person
                is also deemed to be a beneficial owner of any securities if that
                person
                has the right to acquire beneficial ownership within 60 days of the
                date
                hereof. Except as otherwise indicated the named entities or individuals
                have sole voting and investment power with respect to the shares
                of Common
                Stock beneficially owned.


(3)
            Includes
                270,000 shares of Company Common Stock held by Crosby Enterprises,
                Inc.,
                40,000 shares of Company Common Stock owned by the Crosby Family
                Living
                Trust, 130,000 shares of Company Common Stock owned by CORK Investments,
                Inc. and options to purchase 50,000 shares of Company Common
                Stock.


(4)
            Includes
                options currently exercisable for 50,000 shares of Company Common
                Stock
                and warrants currently exercisable for 37,500 shares of Company Common
                Stock, 172,875 shares of Company Common Stock owned by Nancy Martin-Ryan,
                45,000 shares of Company Common Stock owned by John Ryan as custodian
                for
                Karen Ryan, 45,000 shares of Company Common Stock owned by John Ryan
                as
                custodian for Patrick Ryan, 150,000 shares of Company Common Stock
                owned
                by J.P. Ryan Company, Inc., and 87,500 shares of Company Common Stock
                owned by Andover Capital Corporation.


(5)
            Includes
                options currently exercisable for 50,000 shares of Company Common
                Stock
                and warrants currently exercisable for 100,000 shares of Company
                Common
                Stock, 2,750 shares of Company Common Stock owned by the Kevin Dale
                Stulp
                IRA and 1,750 shares of Company Common Stock owned by the Kevin and
                Marie
                Stulp Charitable Remainder Unitrust of which Mr. Stulp is a co-trustee.


(6)
            Based
                on information included in an amendment to Schedule 13D/A filed with
                the
                SEC on November 10, 2005, Nathan A. Low has the sole power to vote
                or
                direct the vote of, and the sole power to direct the disposition
                of, the
                shares held by the Nathan A. Low Roth IRAs and the shares held by
                him
                individually, which total 4,034,767 shares of Company Common Stock,
                which
                includes 108,375 shares of Company Common Stock issuable upon exercise
                of
                warrants. Although Nathan A. Low has no direct voting or dispositive
                power
                over an aggregate 1,017,375 shares of Company Common Stock held by
                Lisa
                Low as trustee for the Nathan A. Low Family Trust and as custodian
                for the
                Neufeld minor children, he may be deemed to beneficially own those
                shares
                because his wife, Lisa Low, is the trustee of the Family Trust and
                custodian for the Neufeld children. Similarly, Nathan A. Low may
                be deemed
                to beneficially own those shares of Company Common Stock underlying
                options and warrants (a total of 157,375 shares of Company Common
                Stock)
                held for the benefit of his children, because his wife has sole voting
                and
                dispositive power over such shares. Therefore, Nathan A. Low reports
                shared voting and dispositive power over 5,052,142 shares of Company
                Common Stock.


(7)
            Consists
                of 480,811 shares of Company Common Stock owned by LCM Holdings LDC;
                480,811 shares of Company Common Stock owned by Electrum Resources,
                LLC;
                and 1,329,370 shares of Company Common Stock owned by Electrum Capital,
                LLC. Does not include warrants to purchase 800,000 shares of Company
                Common Stock, which warrants were acquired January 31,
                2005.


(8)
            Pursuant
                to investment agreements, each of Rubicon Fund Management Ltd., a
                company
                organized under the laws of the Cayman Islands, which we refer to
                in this
                footnote as Rubicon Fund Management Ltd., and Rubicon Fund Management
                LLP,
                a limited liability partnership organized under the laws of the United
                Kingdom, which we refer to in this footnote as Rubicon Fund Management
                LLP, Mr. Paul Anthony Brewer, Mr. Jeffrey Eugene Brummette, Mr. William
                Francis Callanan, Mr. Vilas Gadkari, Mr. Robert Michael Greenshields
                and
                Mr. Horace Joseph Leitch III, share all investment and voting power
                with
                respect to the securities held by Rubicon Master Fund. Mr. Brewer,
                Mr.
                Brummette, Mr. Callanan, Mr. Gadkari, Mr. Greenshields and Mr. Leitch
                control both Rubicon Fund Management Ltd. and Rubicon Fund Management
                LLP.
                Each of Rubicon Fund Management Ltd., Rubicon Fund Management LLP,
                Mr.
                Brewer, Mr. Brummette, Mr. Callanan, Mr. Gadkari, Mr. Greenshields
                and Mr.
                Leitch disclaim beneficial ownership of these
                securities.


(9)
            Based
                on Form 3 - Initial Statement of Beneficial Ownership of Securities
                filed
                with the Securities and Exchange Commission by Rubicon Master Fund
                on
                April 13, 2005. Does not include warrants to purchase 8,000,000 shares
                of
                Company Common Stock, which warrants were acquired January 31,
                2005.


(10)
            Does
                not include warrants to purchase 4,000,000 shares of Company Common
                Stock,
                which warrants were acquired January 31,
                2005.


(11)
            Includes
                3,272,000 shares of Company Common Stock held by the Patricia A.
                Deneau
                Trust, 340,500 shares of Company Common Stock owned by the Denthorn
                Trust,
                20,000 shares of Company Common Stock held by White Pine Land Services
                and
                options currently exercisable for 600,000 shares of Company Common
                Stock.


(12)
            Includes
                options currently exercisable for 199,998 shares of Company Common
                Stock.


(13)
            Includes
                options currently exercisable for 199,998 shares of Company Common
                Stock.


(14)
            Includes
                1,000,000 shares of Company Common Stock held by Miller Resources,
                Inc.,
                1,689,762 shares of Company Common Stock owned by Circle M, LLC and
                options currently exercisable for 600,000 shares of Company Common
                Stock.


(15)
            Includes
                1,607,574 shares of Company Common Stock held by the Sandra L. Tucker
                Trust, 24,646 shares of Company Common Stock owned by Jet Exploration,
                Inc., 1,615,974 shares of Company Common Stock owned by the Thomas
                W.
                Tucker Trust and options currently exercisable for 600,000 shares
                of
                Company Common Stock.


(16)
            Includes
                options currently exercisable for 160,000 shares of Company Common
                Stock.


(17)
            Includes
                options and warrants currently exercisable for an aggregate of 2,597,497
                shares of Company Common Stock.







65




**Item
      12. Certain Relationships and Related Transactions******




On
      January 31, 2005, Cadence entered into a purchase agreement (the "Purchase
      Agreement") with twenty two accredited investors pursuant to which the investors
      purchased 7,810,000 shares of common stock and warrants to purchase 14,050,000
      shares of common stock at an exercise price of $1.75 per share for $9,762,500.
      The Nathan A. Low Family Trust dated 4/12/96 and Bear Stearns as Custodian
      for Nathan A. Low Roth IRA, both of which are controlled by Nathan Low, a
      greater than 10% holder of Cadence's common stock, invested in Cadence pursuant
      to the Purchase Agreement. Sunrise Securities Corporation, an affiliate of
      Nathan Low, received a commission equal to $976,250 and a warrant to purchase
      2,186,000 shares of Cadence's common stock for services rendered as the
      placement agent in the transaction.




On
      January 31, 2005, Cadence entered into an agreement with the seven accredited
      investors in its April 2004 private placement pursuant to which the Company
      was
      permitted to repay the $6,000,000 in notes held by such investors without any
      prepayment penalties in exchange for the exercise price of the warrants to
      purchase 765,000 shares of common stock issued in the April 2004 private
      placement being reduced from $4.00 per share to $1.25 per share. $5,000,000
      of
      the notes were repaid in cash and $1,000,000 of the notes were converted into
      common stock and warrants of Cadence pursuant to the Purchase Agreement. Nathan
      Low, a greater than 10% holder of Cadence's common stock, and Lisa Low, Nathan
      Low's wife, as Custodian for Gabriel S. Low UNYGMA were two of the eight
      accredited investors involved in this transaction. In connection with this
      transaction, the exercise price of the warrants to purchase 76,500 shares of
      common stock held by Nathan A. Low, who acted as a finder in the April 2004
      private placement, were also reduced to $1.25 per share.




Our
      Aurora subsidiary has a lease for office and storage space from South 31, L.L.C.
      William W. Deneau and Thomas W. Tucker each own one-third of South 31, L.L.C.
      The storage building contains four other storage units that are leased to
      unrelated third parties at the same rate that our Aurora subsidiary pays. We
      are
      negotiating with South 31, L.L.C. for a release of the office lease, which
      runs
      through March 31, 2007.




Messrs.
      Deneau, Tucker and Miller, who are officers and directors of us, are all
      involved as equity owners in numerous corporations and limited liability
      companies that are active in the oil and gas business. Existing affiliations
      involving co-ownership of projects in which our Aurora subsidiary is active,
      are
      itemized below.




Messrs.
      Deneau, Tucker and Miller own equal shares in JetX, LLC, an exploration company
      that owns a 10% working interest in the Treasure Island project.




Mr.
      Miller has an ownership interest in Miller Resources, Inc., Miller Resources
      1994-1, and Miller Resources 1996-1, which own working interests of 1%, 0.5%
      and
      1% respectively, in the Beyer project. Mr. Miller also has an ownership interest
      in Energy Ventures, LLC, which owns a .75% working interest in the Black Bean
      project.




Messrs.
      Deneau, Tucker and Miller own Jet Exploration, Inc. which owns an approximate
      1%
      working interest in the Beregasi well.




It
      is
      probable that on occasion, we will find it necessary or appropriate to deal
      with
      other entities in which Messrs. Deneau, Tucker and Miller have an
      interest.




On
      September 7, 2004, the Patricia A. Deneau Trust, DTD 10/12/95, borrowed $100,000
      from our Aurora subsidiary to purchase shares of Aurora common stock from an
      Aurora stockholder. This trust is controlled by William W. Deneau. The loan
      was
      evidenced by an unsecured demand promissory note bearing interest at the rate
      of
      4.5% per year. The promissory note has been repaid in full. The shares purchased
      by the trust were subsequently sold by the trust to Ms. King.




66




**Item
      13. Exhibits**





(a)
            *Exhibits*





Exhibit
                  No.
              
              Document
                  Description3.1(1)
              
              Restated
                  Articles of Incorporation of Cadence Resources
                  Corporation3.2(2)
              
              Bylaws
                  of Cadence Resources Corporation4.1(1)
              
              Articles
                  of Amendment to the Articles of Incorporation, relating to the
                  Class A
                  Preferred Stock4.2(3)
              
              Form
                  of Promissory Note in favor of the investors in the April 2, 2002
                  private
                  placement 4.3(3) Form of Warrant issued to the investors in the
                  April 2,
                  2002 private placement 4.4(4) Voting Agreement between Cadence
                  Resources
                  Corporation and its stockholders 5.1 Opinion of Troutman Sanders
                  LLP, as
                  to the validity of the Securities being registered
                  hereunder9.1
              
              Voting
                  Agreement executed in connection with the merger10.1(1)
              
              Form
                  of Joint Exploration Agreement with Bridas Energy USA, Inc. dated
                  April
                  30, 200310.2(1)
              
              Lease
                  Acquisition and Participation Agreement with Aurora Energy, Ltd.
                  dated
                  December 8, 200210.3(1)
              
              Consulting
                  Agreement with Lucius C. Geer dated August 1, 200310.4(1)
              
              Agreement
                  dated effective September 30, 2003 with Nathan A. Low, Sunrise
                  Securities
                  Corporation and Cadence Resources Corporation Limited
                  Partnership10.5(3)
              
              Securities
                  Purchase Agreement between Cadence Resources Corporation and the
                  investors
                  signatory thereto, dated April 2,200410.6(3)
              
              Security
                  Agreement between Cadence Resources Corporation and the investors
                  signatory thereto, dated April 2, 200410.7(4)
              
              Agreement
                  and Plan Of Merger dated as of January 31, 2005 between Cadence
                  Resources
                  Corporation, Aurora Acquisition Corp. and Aurora Energy,
                  Ltd.10.84)
              
              Development
                  Agreement between Aurora Energy, Ltd. and Oil & Gas engineering GmbH,
                  dated March 31, 200410.9(4)
              
              Exploration
                  Agreement between Aurora Energy, Ltd. and Samson Resources Company,
                  dated
                  May 14, 200410.10
              
              First
                  Amended and Restated Note Purchase Agreement between Aurora Antrim
                  North,
                  LLC, et. al. and TCW Asset Management Company, dated December 8,
                  200510.11(5)
              
              Amendment
                  No.1 to Agreement and Plan of Merger14(6)
              
              Code
                  of Ethics21.1
              
              Subsidiaries23.1
              
              Consent
                  of Ralph E. Davis Associates, Inc.23.2
              
              Consent
                  of Williams & Webster, P.S.
 31.1
                
                Rule
                    13a-14(a) Certification of Principal Executive Officer.31.2
                
                Rule
                    13a-14(a) Certification of Principal Financial and Accounting
                    Officer.32.1
                
                Section
                    1350 Certification of Principal Executive Officer.32.2
                
                Section
                    1350 Certification of Principal Financial and Accounting
                    Officer.





(1)
            Filed
                as an exhibit to the registrant's 10-KSB for the fiscal year ended
                September 30, 2003, filed with the SEC on January 13, 2004


(2)
            Filed
                as an exhibit to the registrant's Current Report on Form 8-K, filed
                with
                the SEC on December 9, 2005


(3)
            Filed
                as an exhibit to the registrant's Current Report on Form 8-K dated
                April
                5, 2004, filed with the SEC on April 5, 2004


(4)
            Filed
                as an exhibit to the registrant's Form S-4 Registration Statement
                filed
                with the SEC on May 13, 2005.


(5)
            Filed
                as an exhibit to Amendment No. 1 to the registrant's Form S-4 Registration
                Statement filed with the SEC on August 23, 2005




(6)
            Filed
                as an exhibit to the Company’s 10-KSB for the fiscal year ended September
                30, 2003, filed January 13, 2004, and incorporated by reference
                herein.




67




**Item
      14.****Principal Accountant Fees And Services**





The
      Company's Board and Audit Committee reviews and approves audit and permissible
      non-audit services performed by Williams & Webster P.S., as well as the fees
      charged by Williams & Webster P.S. for such services. In its review of
      non-audit service fees and its appointment of Williams & Webster P.S. as the
      Company's independent accountants, the audit committee considered whether the
      provision of such services is compatible with maintaining the independence
      of
      Williams & Webster P.S. All of the services provided and fees charged by
      Williams & Webster P.S. in 2005 were pre-approved by the Audit
      Committee.




**Audit
      Fee**




The
      aggregate fees billed by Williams & Webster P.S. for professional services
      for the audit of the annual financial statements of the Company, reviews of
      the
      financial statements included in the Company's quarterly reports on Form 10-QSB
      for 2005 and 2004, and review of the S-4 registration statement and two SB-2
      registration statements filed by the Company during the reporting period were
      approximately $130,000 and $107,000, respectively, net of expenses.




**Audit
      Related Fees**




There
      were no other fees billed by Williams & Webster P.S. during the last two
      fiscal years for assurance and related services that were reasonably related
      to
      the performance of the audit or review of the Company's financial statements
      and
      not reported under "Audit Fees" above.




**Tax
      Fees**




There
      were an additional $9,936 of fees billed by Williams & Webster P.S. during
      the last two fiscal years for professional services rendered by Williams &
      Webster P.S. for tax compliance.




**All
      Other Fees**




There
      were no o ther
      fees
      billed by Williams & Webster P.S. during the last two fiscal
      years.




68




**SIGNATURES**





In
      accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
      the
      registrant has duly caused this annual report on Form 10-KSB to be signed on
      its
      behalf by the undersigned thereto duly authorized.





**CADENCE
                RESOURCES CORPORATION**Date: 
                December 28, 2005
              By:
              /s/ WILLIAM
                W. DENEAUName:  
                  William W. Deneau
                Title:     
                  President


Pursuant
      to the requirements of the Securities Exchange Act of 1934, this annual report
      on Form 10-KSB has been signed below by the following persons on behalf of
      the
      registrant and in the capacities and on the dates indicated.








SIGNATURE
            
            OFFICE
            
            DATE/s/
              William W. Deneau
            
            President
                and Director
            
            December
                28, 2005William
              W. Deneau
            
            (Principal
              Executive Officer)/s/
                Lorraine M. King
            
            Chief
                Financial Officer
            
            December
                28, 2005Lorraine
              M. King
            
            (Principal
              Financial Officer)/s/
                Howard M. Crosby
            
            Director
            
            December
                28, 2005Howard
              M. Crosby/s/
              Kevin D. Stulp
            
            Director
            
            December
                28, 2005Kevin
              D. Stulp/s/
                Ronald E. Huff
            
            Director
            
            December
                28, 2005Ronald
              E. Huff/s/ Richard
              Deneau
            
            Director
            
            December
                28, 2005Richard
              Deneau/s/
              Gary J. Myles
            
            Director
            
            December
                28, 2005Gary
              J. Myles/s/
              Earl V. Young
            
            Director
            
            December
                28, 2005Earl
              V. Young






69







The
        Board
        of Directors
 Cadence
        Resources Corporation
 Traverse
        City, Michigan
 
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 
 We
        have
        audited the accompanying balance sheet of Cadence Resources Corporation as
        of
        September 30, 2005, 2004 and 2003, and the related statements of operations,
        stockholders’ equity and cash flows for the years then ended. These financial
        statements are the responsibility of the Company’s management. Our
        responsibility is to express an opinion on these financial statements based
        on
        our audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audits to obtain reasonable assurance about whether the
        financial statements are free of material misstatement. An audit includes
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the financial statements. An audit also includes assessing the accounting
        principles used and significant estimates made by management, as well as
        evaluating the overall financial statement presentation. We believe that
        our
        audits provide a reasonable basis for our opinion.
 
 In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the financial position of Cadence Resources Corporation
        as of
        September 30, 2005, 2004 and 2003, and the results of its operations,
        stockholders equity and its cash flows for the year then ended in conformity
        with accounting principles generally accepted in the United States of
        America.
 
  /s/
        Williams & Webster, P.S.
 Williams
        & Webster, P.S.
 *Certified
        Public Accountants*
 Spokane,
        Washington
 December
        27, 2005




F-1




**CADENCE
                      RESOURCES CORPORATION****BALANCE
                      SHEETS**
  September
                      30,2005
                  
                  2004
                  
                  2003**ASSETS**CURRENT
                    ASSETSCash
                  
                  $
                  1,694,838
                  
                  $
                  1,922,993
                  
                  $
                  3,619,345Oil
                      & gas revenue receivable
                  
                  
                  491,324
                  
                  
                  335,407
                  
                  
                  84,575Receivable
                      from working interest owners
                  
                  
                  –
                  
                  
                  –
                  
                  
                  12,873Notes
                      receivable
                  
                  
                  20,720
                  
                  
                  8,720
                  
                  
                  3,720Prepaid
                      expenses
                  
                  
                  82,203
                  
                  
                  39,410
                  
                  
                  5,925Other
                      current assets
                  
                  
                  425
                  
                  
                  425
                  
                  
                  425TOTAL
                      CURRENT ASSETS
                  
                  
                  2,289,510
                  
                  
                  2,306,955
                  
                  
                  3,726,863OIL
                      AND GAS PROPERTIES, USINGSUCCESSFUL
                      EFFORTS ACCOUNTINGProved
                      properties
                  
                  
                  6,865,384
                  
                  
                  5,731,108
                  
                  
                  590,747Unproved
                      properties
                  
                  
                  661,672
                  
                  
                  505,501
                  
                  
                  833,836Wells
                      and related equipment and facilities
                  
                  
                  1,090,263
                  
                  
                  855,562
                  
                  
                  202,886Support
                      equipment and facilities
                  
                  
                  585,602
                  
                  
                  506,427
                  
                  
                  151,963Prepaid
                      oil and gas leases
                  
                  
                  473,056
                  
                  
                  456,219
                  
                  
                  395,973Less
                      accumulated depreciation, depletion, amortization and
                      impairment
                  
                  
                  (6,594,549
                  )
                  
                  (3,911,939
                  )
                  
                  (61,611
                  )TOTAL
                      OIL AND GAS PROPERTIES
                  
                  
                  3,081,428
                  
                  
                  4,142,878
                  
                  
                  2,113,794PROPERTY
                      AND EQUIPMENTFurniture
                      and equipment
                  
                  
                  4,785
                  
                  
                  4,785
                  
                  
                  1,660Less
                      accumulated depreciation
                  
                  
                  (2,618
                  )
                  
                  (1,949
                  )
                  
                  (1,451
                  )TOTAL
                      PROPERTY AND EQUIPMENT
                  
                  
                  2,167
                  
                  
                  2,836
                  
                  
                  209OTHER
                      ASSETSInvestments
                  
                  
                  870,311
                  
                  
                  238,088
                  
                  
                  394,454Mineral
                      properties available for sale
                  
                  
                  197,406
                  
                  
                  197,406
                  
                  
                  246,757TOTAL
                      OTHER ASSETS
                  
                  
                  1,067,717
                  
                  
                  435,494
                  
                  
                  641,211**TOTAL
                      ASSETS**
                  
                  $
                  6,440,822
                  
                  $
                  6,888,163
                  
                  $
                  6,482,077
 The
        accompanying notes are an integral part of these financial
        statements
   F-2
  **CADENCE
                      RESOURCES CORPORATION****BALANCE
                      SHEETS**
 September
                    30,2005
                
                2004
                
                2003**LIABILITIES
                    AND STOCKHOLDERS' EQUITY**CURRENT
                  LIABILITIESAccounts
                    payable
                
                $
                446,166
                
                $
                358,588
                
                $
                584,866Revenue
                    distribution payable
                
                
                23,410
                
                
                32,387
                
                
                68,929Payable
                    to related party
                
                
                –
                
                
                300,000
                
                
                550,000Accrued
                    compensation
                
                
                80,000
                
                
                –
                
                
                94,920Accrued
                    interest - related party
                
                
                –
                
                
                3,548
                
                
                15,752Accrued
                    Dividends
                
                
                15,737
                
                
                –
                
                
                –Interest
                    payable - secured notes
                
                
                –
                
                
                1,233
                
                
                –Notes
                    payable - related party
                
                
                –
                
                
                -
                
                
                460,000TOTAL
                    CURRENT LIABILITIES
                
                
                565,313
                
                
                695,756
                
                
                1,774,467LONG-TERM
                    DEBTSecured
                    notes, net of discount
                
                
                –
                
                
                5,071,147
                
                
                –COMMITMENTS
                    AND CONTINGENCIES
                
                
                –
                
                
                –
                
                
                –REDEEMABLE
                    PREFERRED STOCK
                
                
                59,925
                
                
                59,925
                
                
                59,925STOCKHOLDERS'
                    EQUITYCommon
                    stock, $0.01 par value; 100,000,000shares
                    authorized,20,991,327,
                    12,892,327,and
                    12,512,827 shares issued and outstanding,respectively
                
                
                209,113
                
                
                128,923
                
                
                125,128Additional
                    paid-in capital
                
                
                24,316,680
                
                
                18,995,458
                
                
                18,343,422Stock
                    options
                
                
                2,128,330
                
                
                1,642,614
                
                
                1,210,704Stock
                    warrants
                
                
                4,473,112
                
                
                794,512
                
                
                51,375Accumulated
                    deficit
                
                
                (24,797,883
                )
                
                (20,035,605
                )
                
                (14,863,687
                )Accumulated
                    other comprehensive loss
                
                
                (513,768
                )
                
                (464,567
                )
                
                (219,257
                )TOTAL
                    STOCKHOLDERS' EQUITY
                
                
                5,815,584
                
                
                1,061,335
                
                
                4,647,685**TOTAL
                    LIABILITIES AND STOCKHOLDERS'****EQUITY**
                
                $
                6,440,882
                
                $
                6,888,163
                
                $
                6,482,077
 The
          accompanying notes are an integral part of these financial
          statements
  F-3
  **CADENCE
                      RESOURCES CORPORATION****STATEMENTS
                      OF OPERATIONS AND COMPREHENSIVE
                      LOSS**
  Years
                      Ended September 30,2005
                  
                  2004
                  
                  2003REVENUESOil
                      and gas sales
                  
                  $
                  2,413,046
                  
                  $
                  2,541,447
                  
                  $
                  337,355Sale
                      of drilling and production rights
                  
                  
                  100,000
                  
                  
                  –
                  
                  
                  50,000Total
                      Revenues
                  
                  
                  2,513,046
                  
                  
                  2,541,447
                  
                  
                  387,355OPERATING
                      AND ADMINISTRATIVE EXPENSESDepreciation,
                      depletion and amortization
                  
                  
                  2,683,279
                  
                  
                  2,663,695
                  
                  
                  57,310Officers'
                      and directors' compensation
                  
                  
                  1,105,328
                  
                  
                  725,485
                  
                  
                  528,727Consulting
                  
                  
                  104,595
                  
                  
                  319,338
                  
                  
                  531,137Oil
                      and gas lease and operating expenses
                  
                  
                  612,624
                  
                  
                  565,148
                  
                  
                  321,538Oil
                      and gas consulting
                  
                  
                  165,000
                  
                  
                  105,535
                  
                  
                  60,000Exploration
                      and drilling
                  
                  
                  235,959
                  
                  
                  134,452
                  
                  
                  109,968Oil
                      and gas production costs
                  
                  
                  178,437
                  
                  
                  174,836
                  
                  
                  34,577Other
                      general and administrative
                  
                  
                  996,128
                  
                  
                  1,506,446
                  
                  
                  386,892Total
                      Expenses
                  
                  
                  6,081,350
                  
                  
                  6,194,935
                  
                  
                  2,030,149LOSS
                      FROM OPERATIONS
                  
                  
                  (3,568,304
                  )
                  
                  (3,653,488
                  )
                  
                  (1,642,794
                  )OTHER
                      INCOME (EXPENSE)Interest
                      income
                  
                  
                  10,173
                  
                  
                  18,874
                  
                  
                  136Interest
                      expense and loan fees
                  
                  
                  (1,138,987
                  )
                  
                  (302,955
                  )
                  
                  (227,978
                  )Partnership
                      income (loss)
                  
                  
                  –
                  
                  
                  –
                  
                  
                  (15,200
                  )Gain
                      (loss) on debt forgiveness
                  
                  
                  –
                  
                  
                  –
                  
                  
                  (4,699
                  )Gain
                      (loss) on repayment of debt
                  
                  
                  
                  
                  
                  –
                  
                  
                  –Other
                      income
                  
                  
                  846
                  
                  
                  11,172
                  
                  
                  –Loss
                      on sale of investment
                  
                  
                  (66,006
                  )
                  
                  (9,156
                  )
                  
                  –Loss
                      on disposition and impairment of assets
                  
                  
                  –
                  
                  
                  (1,236,365
                  )
                  
                  (67,020
                  )Total
                      Other Income (Expense)
                  
                  
                  (1,193,974
                  )
                  
                  (1,518,430
                  )
                  
                  (314,761
                  )LOSS
                      BEFORE TAXES
                  
                  
                  (4,762,278
                  )
                  
                  (5,171,918
                  )
                  
                  (1,957,555
                  )INCOME
                      TAXES BENEFIT
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –NET
                      LOSS
                  
                  
                  (4,762,278
                  )
                  
                  (5,171,918
                  )
                  
                  (1,957,555
                  )OTHER
                      COMPREHENSIVE INCOME (LOSS)Unrealized
                      gain (loss) in market value ofinvestments
                  
                  
                  (49,201
                  )
                  
                  (245,311
                  )
                  
                  29,297COMPREHENSIVE
                      LOSS
                  
                  $
                  (4,811,479
                  )
                  $
                  (5,417,229
                  )
                  $
                  (1,928,258
                  )LOSS
                      PER COMMON SHARE BASIC AND DILUTED:NET
                      LOSS PER COMMON SHARE
                  
                  $
                  (0.26
                  )
                  $
                  (0.41
                  )
                  $
                  (0.21
                  )WEIGHTED
                      AVERAGE NUMBER OFCOMMON
                      SHARES OUTSTANDING,BASIC
                      AND DILUTED
                  
                  
                  18,279,285
                  
                  
                  12,715,619
                  
                  
                  9,348,374
 The
          accompanying notes are an integral part of these financial
          statements
  F-4
 **CADENCE
                    RESOURCES CORPORATION****STATEMENTS
                    OF STOCKHOLDERS' EQUITY**AccumulatedCommon
                    Stock
                
                Additional
                
                
                
                
                
                
                
                Other
                
                TotalNumber
                
                
                
                Paid-in
                
                Stock
                
                Stock
                
                Accumulated
                
                Comprehensive
                
                Stockholders'of
                  Shares
                
                Amount
                
                Capital
                
                Options
                
                Warrants
                
                Deficit
                
                Loss
                
                EquityBalanceOctober
                    1, 2002
                
                
                6,866,210
                
                $
                68,662
                
                $
                13,291,965
                
                $
                626,790
                
                $
                233,334
                
                $
                (12,906,132
                )
                $
                (248,554
                )
                $
                1,066,065Shares
                    issued for cash withwarrantsattached
                    at an average of $0.52per
                    unit
                
                
                212,500
                
                
                2,125
                
                
                56,500
                
                
                -
                
                
                51,375
                
                
                -
                
                
                -
                
                
                110,000Shares
                    issued to officers, directorsand
                    others for services at $0.78to
                    $1.80
                
                
                496,500
                
                
                4,965
                
                
                535,710
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                540,675Shares
                    issued for loanconsiderationat
                    $1.08 per share
                
                
                220,000
                
                
                2,200
                
                
                204,800
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                207,000Shares
                    issued for exercise ofoptionsat
                    $0.75 per share
                
                
                100,000
                
                
                1,000
                
                
                142,100
                
                
                (68,100
                )
                
                -
                
                
                -
                
                
                -
                
                
                75,000Shares
                    issued from exercise ofwarrants
                
                
                1,956,984
                
                
                19,569
                
                
                213,765
                
                
                -
                
                
                (233,334
                )
                
                -
                
                
                -
                
                
                -Shares
                    issued for cash at $0.80
                  to
                    $2.50
                    per share, net of financingfee
                    of $347,850
                
                
                2,525,183
                
                
                25,252
                
                
                4,216,347
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                4,241,599Options
                    issued for financing
                
                
                -
                
                
                -
                
                
                (429,671
                )
                
                429,671
                
                
                -
                
                
                -
                
                
                -
                
                
                -Shares
                    issued for related partyloanfee
                    at $1.00 per share
                
                
                120,000
                
                
                1,200
                
                
                118,800
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                120,000Conversion
                    of shares ofCelebrationfor
                    shares of Cadence commonstock
                
                
                14,250
                
                
                143
                
                
                (143
                )
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Options
                    issued to consultants forservices
                
                
                -
                
                
                -
                
                
                -
                
                
                222,343
                
                
                -
                
                
                -
                
                
                -
                
                
                222,343Miscellaneous
                    adjustment
                
                
                1,200
                
                
                12
                
                
                (12
                )
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Dividends
                    paid on preferred stock
                
                
                -
                
                
                -
                
                
                (6,739
                )
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (6,739
                )Net
                    loss for the year endedSeptember
                    30, 2003
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (1,957,555
                )
                
                -
                
                
                (1,957,555
                )Unrealized
                    gain on market valueofinvestments
                    (unaudited)
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                29,297
                
                
                29,297Balance,
                    September 30, 2003
                
                
                12,512,827
                
                $
                125,128
                
                $
                18,343,422
                
                $
                1,210,704
                
                $
                51,375
                
                $
                (14,863,687
                )
                $
                (219,257
                )
                $
                4,647,685
 F-5
  **CADENCE
                          RESOURCES CORPORATION****STATEMENTS
                          OF STOCKHOLDERS' EQUITY**
 AccumulatedCommon
                    Stock
                
                Additional
                
                
                
                
                
                
                
                Other
                
                TotalNumber
                
                
                
                Paid-in
                
                Stock
                
                Stock
                
                Accumulated
                
                Comprehensive
                
                Stockholders'of
                    Shares
                
                Amount
                
                Capital
                
                Options
                
                Warrants
                
                Deficit
                
                Loss
                
                EquityBalanceSeptember
                    30, 2003
                
                
                12,512,827
                
                $
                125,128
                
                $
                18,343,422
                
                $
                1,210,704
                
                $
                51,375
                
                $
                (14,863,687
                )
                $
                (219,257
                )
                $
                4,647,685Issuance
                    of common stock for cashat
                    $2.50 per share
                
                
                110,000
                
                
                1,100
                
                
                273,900
                
                
                –
                
                
                –
                
                
                –
                
                
                –
                
                
                275,000Shares
                    issued for services at$0.88
                    to $2.50 per share
                
                
                99,500
                
                
                995
                
                
                143,960
                
                
                –
                
                
                –
                
                
                –
                
                
                –
                
                
                144,955Shares
                    issued for officer anddirector
                    fees at $0.76 to $2.23per
                    share
                
                
                120,000
                
                
                1,200
                
                
                183,200
                
                
                –
                
                
                –
                
                
                –
                
                
                –
                
                
                184,400Share
                    issued for exercise ofwarrants
                    @ $1.35 per share
                
                
                10,000
                
                
                100
                
                
                15,500
                
                
                –
                
                
                (2,100
                )
                
                –
                
                
                –
                
                
                13,500Shares
                    issued for financing expenseat
                    $0.76 per share
                
                
                15,000
                
                
                150
                
                
                11,475
                
                
                –
                
                
                –
                
                
                –
                
                
                –
                
                
                11,625Shares
                    issued for repayment ofrelated
                    party loan at $1.00 pershare
                
                
                25,000
                
                
                250
                
                
                24,750
                
                
                –
                
                
                –
                
                
                –
                
                
                –
                
                
                25,000Options
                    issued for financing fees
                
                
                
                
                
                
                
                
                
                
                
                71,910
                
                
                
                
                
                
                
                
                
                
                
                71,910Options
                    issued to officers anddirectors
                    for services
                
                
                –
                
                
                –
                
                
                –
                
                
                360,000
                
                
                
                
                
                
                
                
                
                
                
                360,000Dividends
                    paid
                
                
                –
                
                
                –
                
                
                (749
                )
                
                –
                
                
                –
                
                
                –
                
                
                –
                
                
                (749
                )Deferred
                    financing cost
                
                
                –
                
                
                –
                
                
                –
                
                
                –
                
                
                745,237
                
                
                –
                
                
                –
                
                
                745,237Net
                    loss for the year endedSeptember
                    30, 2004
                
                
                –
                
                
                –
                
                
                –
                
                
                –
                
                
                –
                
                
                (5,171,918
                )
                
                –
                
                
                (5,171,918
                )Unrealized
                    loss on market valueof
                    investments
                
                
                –
                
                
                –
                
                
                –
                
                
                –
                
                
                –
                
                
                –
                
                
                (245,310
                )
                
                (245,310
                )Balance
                    September 30, 2004
                
                
                12,892,327
                
                
                128,923
                
                
                18,995,458
                
                
                1,642,614
                
                
                794,512
                
                
                (20,035,605
                )
                
                (464,567
                )
                
                1,061,335Issuance
                    of common stock and warrants forcash
                    at $1.25 per unit
                
                
                7,010,000
                
                
                70,100
                
                
                4,300,275
                
                
                –
                
                
                3,415,875
                
                
                –
                
                
                –
                
                
                7,786,250Issuance
                    of common stock and warrants forpayment
                    of note payable at $1.25 per unit,less
                    expenses of offering of $976,250
                
                
                800,000
                
                
                8,000
                
                
                722,000
                
                
                –
                
                
                270,000
                
                
                –
                
                
                –
                
                
                1,000,000Common
                    stock issued to officersand
                    directors at an average of $1.47per
                    share
                
                
                160,500
                
                
                1,605
                
                
                233,985
                
                
                –
                
                
                –
                
                
                –
                
                
                –
                
                
                235,590Shares
                    issued from exercise ofwarrants
                
                
                27,500
                
                
                275
                
                
                44,125
                
                
                –
                
                
                (7,275
                )
                
                –
                
                
                –
                
                
                37,125Shares
                    issued from cashless exercise of options
                
                
                21,000
                
                
                210
                
                
                36,574
                
                
                (36,784
                )
                
                –
                
                
                –
                
                
                –
                
                
                –Options
                    issued to officers anddirectors
                    for services
                
                
                –
                
                
                –
                
                
                –
                
                
                522,500
                
                
                –
                
                
                –
                
                
                –
                
                
                522,500Accrued
                    Dividends
                
                
                –
                
                
                –
                
                
                (15,737
                )
                
                –
                
                
                –
                
                
                –
                
                
                –
                
                
                (15,737
                )Net
                    loss for the year endedSeptember
                    30, 2005
                
                
                –
                
                
                –
                
                
                –
                
                
                –
                
                
                –
                
                
                (4,762,278
                )
                
                –
                
                
                (4,762,278
                )Unrealized
                    loss on market valueof
                    investments
                
                
                –
                
                
                –
                
                
                –
                
                
                –
                
                
                –
                
                
                –
                
                
                (49,201
                )
                
                (49,201
                )Balance
                    September 30, 2005
                
                
                20,911,327
                
                $
                209,113
                
                $
                24,316,680
                
                $
                2,128,330
                
                $
                4,473,112
                
                $
                (24,797,883
                )
                $
                (513,768
                )
                $
                5,815,584
 The
          accompanying notes are an integral part of these financial
          statements
    F-6
  **CADENCE
                      RESOURCES CORPORATION****STATEMENTS
                      OF CASH
                      FLOWS**
  Year
                      EndedSeptember
                      30,2005
                  
                  2004
                  
                  2003CASH
                      FLOWS FROM OPERATING ACTIVITIESNet
                      loss
                  
                  $
                  (4,762,278
                  )
                  $
                  (5,171,918
                  )
                  $
                  (1,957,555
                  )Adjustments
                      to reconcile net loss to net cashused
                      by operating activities:Loss
                      (gain) on sale of investments
                  
                  
                  66,006
                  
                  
                  9,156
                  
                  
                  67,020Impairment
                      of long-lived assets
                  
                  
                  –
                  
                  
                  1,236,365
                  
                  
                  –Partnership
                      loss
                  
                  
                  –
                  
                  
                  –
                  
                  
                  15,200Gain
                      (loss) on debt forgiveness
                  
                  
                  –
                  
                  
                  –
                  
                  
                  4,699Depreciation,
                      depletion and amortization
                  
                  
                  2,683,279
                  
                  
                  2,663,695
                  
                  
                  57,310Issuance
                      of common stock for services
                  
                  
                  235,590
                  
                  
                  144,955
                  
                  
                  540,675Issuance
                      of common stock forexpenses
                  
                  
                  –
                  
                  
                  196,025
                  
                  
                  –Amortization
                      of deferred financing fees
                  
                  
                  928,853
                  
                  
                  279,919
                  
                  
                  -Issuance
                      of common stock for loanrepayment
                  
                  
                  –
                  
                  
                  25,000
                  
                  
                  -Issuance
                      of common stock for loanconsideration
                  
                  
                  –
                  
                  
                  –
                  
                  
                  327,000Issuance
                      of stock options forservices
                  
                  
                  522,500
                  
                  
                  360,000
                  
                  
                  222,343Issuance
                      of stock options forfinancing
                      fees
                  
                  
                  –
                  
                  
                  71,910
                  
                  
                  –Investment
                      given for services
                  
                  
                  –
                  
                  
                  –
                  
                  
                  14,700Changes
                      in assets and liabilities:Oil
                      & gas revenue receivable
                  
                  
                  (155,917
                  )
                  
                  (250,832
                  )
                  
                  (58,452
                  )Receivable
                      from working interest owners
                  
                  
                  –
                  
                  
                  12,873
                  
                  
                  3,164Notes
                      receivable
                  
                  
                  –
                  
                  
                  (5,000
                  )
                  
                  6,058Prepaid
                      expenses
                  
                  
                  (42,793
                  )
                  
                  (33,485
                  )
                  
                  21,575Deposit
                  
                  
                  –
                  
                  
                  –
                  
                  
                  6Prepaid
                      mineral leases
                  
                  
                  (16,837
                  )
                  
                  –
                  
                  
                  (218,796
                  )Accounts
                      payable
                  
                  
                  87,578
                  
                  
                  (226,278
                  )
                  
                  1,082Revenue
                      distribution payable
                  
                  
                  (8,977
                  )
                  
                  (36,542
                  )
                  
                  54,094Deferred
                      working interest
                  
                  
                  –
                  
                  
                  –
                  
                  
                  (22,184
                  )Accrued
                      expenses
                  
                  
                  95,737
                  
                  
                  (94,920
                  )
                  
                  28,659Interest
                      payable
                  
                  
                  (3,548
                  )
                  
                  (12,204
                  )
                  
                  15,752Interest
                      payable-secured notes
                  
                  
                  (1,233
                  )
                  
                  1,233
                  
                  
                  –Payable
                      to related parties
                  
                  
                  -
                  
                  
                  (550,000
                  )
                  
                  (2,500
                  )Net
                      cash provided (used) by operating activities
                  
                  
                  (372,040
                  )
                  
                  (1,380,048
                  )
                  
                  (880,150
                  )CASH
                      FLOWS FROM INVESTING ACTIVITIESPurchase
                      of investments
                  
                  
                  (749,040
                  )
                  
                  (112,360
                  )
                  
                  (32,795
                  )Purchase
                      and development of proved andunproved
                      properties
                  
                  
                  (1,290,447
                  )
                  
                  (4,542,760
                  )
                  
                  (629,383
                  )Purchase
                      of fixed assets
                  
                  
                  (387,728
                  )
                  
                  (981,660
                  )
                  
                  (182,587
                  )Sale
                      of investments
                  
                  
                  47,725
                  
                  
                  14,420
                  
                  
                  16,614Net
                      cash provided (used) by investing activities
                  
                  
                  (2,379,490
                  )
                  
                  (5,622,360
                  )
                  
                  (828,151
                  )CASH
                      FLOWS FROM FINANCING ACTIVITIESIssuance
                      of common stock for cash
                  
                  
                  7,823,375
                  
                  
                  288,500
                  
                  
                  4,728,324Issuance
                      of redeemable preferred stock
                  
                  
                  –
                  
                  
                  –
                  
                  
                  59,925Issuance
                      of warrants for cash
                  
                  
                  –
                  
                  
                  –
                  
                  
                  46,125Payments
                      of preferred stock dividends
                  
                  
                  –
                  
                  
                  (749
                  )
                  
                  (6,739
                  )Proceeds
                      from secured notes payable
                  
                  
                  –
                  
                  
                  5,920,000
                  
                  
                  –Payments
                      of note payable to related party
                  
                  
                  (300,000
                  )
                  
                  –
                  
                  
                  –Proceeds
                      from notes payable and loans payable
                  
                  
                  –
                  
                  
                  115,000
                  
                  
                  600,000Payments
                      of notes payable
                  
                  
                  (5,000,000
                  )
                  
                  (1,016,695
                  )
                  
                  (140,000
                  )Net
                      cash provided by financing activities
                  
                  
                  2,523,375
                  
                  
                  5,306,056
                  
                  
                  5,287,635Net
                      increase (decrease) in cash
                  
                  $
                  (228,155
                  )
                  $
                  (1,696,352
                  )
                  $
                  3,579,334
 The
          accompanying notes are an integral part of these financial
          statements
   F-7
 **CADENCE
                      RESOURCES CORPORATION****STATEMENTS
                      OF CASH FLOWS**
  Year
                      EndedSeptember
                      30,2005
                  
                  2004
                  
                  2003Net
                      increase (decrease) in cash (balance forward)
                  
                  $
                  (228,155
                  )
                  $
                  (1,696,352
                  )
                  $
                  3,579,334Cash,
                      beginning of period
                  
                  
                  1,922,993
                  
                  
                  3,619,345
                  
                  
                  40,011Cash,
                      end of period
                  
                  $
                  1,694,838
                  
                  $
                  1,922,993
                  
                  $
                  3,619,345SUPPLEMENTAL
                      CASH FLOW DISCLOSURE:Income
                      taxes paid
                  
                  $
                  –
                  
                  $
                  –
                  
                  $
                  –Interest
                      paid
                  
                  $
                  –
                  
                  $
                  –
                  
                  $
                  –NON-CASH
                      INVESTING AND FINANCINGACTIVITIES:Common
                      stock issued for services rendered,accrued
                      compensation and prepaid expenses
                  
                  $
                  235,590
                  
                  $
                  144,955
                  
                  $
                  540,675Common
                      stock issued for exchange of debt
                  
                  $
                  1,000,000
                  
                  $
                  25,000
                  
                  $
                  –Common
                      stock issued in exchange for investments
                  
                  $
                  –
                  
                  $
                  –
                  
                  $
                  –Common
                      stock issued for reimbursementof
                      expenses paid
                  
                  $
                  –
                  
                  $
                  196,025
                  
                  $
                  –Common
                      stock issued for loan consideration
                  
                  $
                  –
                  
                  $
                  –
                  
                  $
                  327,000Investment
                      given for related party receivable
                  
                  $
                  –
                  
                  $
                  –
                  
                  $
                  –Investment
                      given for consulting services
                  
                  $
                  –
                  
                  $
                  –
                  
                  $
                  14,700Stock
                      options issued for services
                  
                  $
                  522,500
                  
                  $
                  360,000
                  
                  $
                  222,343Stock
                      options issued for financing fees
                  
                  $
                  –
                  
                  $
                  71,910
                  
                  $
                  –Exchange
                      of unproved property leases forinterest
                      in limited partnership
                  
                  $
                  –
                  
                  $
                  –
                  
                  $
                  –Stock
                      issued for exercise of warrants
                  
                  $
                  37,125
                  
                  $
                  –
                  
                  $
                  233,334Issuance
                      of accounts payable to related partyfor
                      financing fees
                  
                  $
                  –
                  
                  $
                  300,000
                  
                  $
                  –Conversion
                      of investment to note receivable
                  
                  $
                  12,000
                  
                  $
                  –
                  
                  $
                  –
 The
          accompanying notes are an integral part of these financial
          statements
   F-8
  **CADENCE
        RESOURCES CORPORATION**
 **NOTES
          TO THE FINANCIAL STATEMENTS**
 **September
          30, 2005**
 
  **NOTE
          1** - **ORGANIZATION AND DESCRIPTION OF BUSINESS**
 
 Cadence
          Resources Corporation (formerly Royal Silver Mines, Inc.) hereinafter (“Cadence”
          or “the Company”) was incorporated in April 1969 under the laws of the State of
          Utah primarily for the purpose of acquiring and developing mineral properties.
          The Company changed its name from Royal Silver Mines, Inc. to Cadence Resources
          Corporation on May 2, 2001. On October 31, 2005, the Company acquired Aurora
          Energy, Ltd (“Aurora) in a transaction that will be accounted for as a reverse
          merger with Aurora as the acquiring party for accounting purposes (the
“Aurora
          Acquisition”).
 
 The
          Company has elected a September 30 fiscal year-end. Subsequent to the closing
          of
          the Aurora Acquisition, the Company’s board of directors has elected to change
          the fiscal year-end of the Company to December 31, in order to coincide
          with the
          fiscal year-end of Aurora.
 
 On
          July
          1, 2001, Cadence developed a plan for acquisition, exploration and development
          of oil and gas properties and accordingly began a new exploration stage
          as an
          energy project development company. Prior to this, Cadence conducted its
          business as a “junior” mineral resource company, meaning that it intended to
          receive income from property sales or joint ventures of its mineral projects
          with larger companies. The Company continues to hold several mineral properties,
          which are described in Note 3.
 
 The
          costs
          of prepaid oil and gas leases ($473,056 and $456,219, respectively) included
          in
          the accompanying balance sheets as of September 30, 2005 and 2004 are
          principally related to natural gas properties. The Company has not determined
          whether the properties located in New Mexico contain economically recoverable
          gas reserves. The ultimate realization of the Company’s investment in oil and
          gas properties in these locations is dependent upon finding and developing
          economically recoverable reserves, the ability of the Company to obtain
          financing or make other arrangements for development and upon future profitable
          production. The ultimate realization of the Company’s investment in these oil
          and gas properties cannot be determined at this time and, accordingly,
          no
          provision for any asset impairment that may result in the event the Company
          is
          not successful in developing these properties, has been made in the accompanying
          financial statements. The Company has completed reserve studies on each
          of its
          properties located, except for those located in New Mexico.
 
 **NOTE
          2** - **SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
 
 This
          summary of significant accounting policies of Cadence Resources Corporation
          is
          presented to assist in understanding the Company’s financial statements. The
          financial statements and notes are representations of the Company’s management,
          which is responsible for their integrity and objectivity. These accounting
          policies conform to accounting principles generally accepted in the United
          States of America and have been consistently applied in the preparation
          of the
          financial statements.
  Accounting
          Method
  The
          Company’s financial statements are prepared using the accrual method of
          accounting in accordance with accounting principles generally accepted
          in the
          United States of America.
 
 Cash
          Equivalents
  The
          Company considers all highly liquid investments with a maturity of three
          months
          or less when purchased to be cash equivalents.
 
 Derivative
          Instruments
  The
          Financial Accounting Standards Board issued Statement of Financial Accounting
          Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging
          Activities,” as amended by SFAS No. 137, “Accounting for Derivative Instruments
          and Hedging Activities - Deferral of the Effective Date of FASB No. 133”, and
          SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging
          Activities” and SFAS No. 149, “Amendment of Statement No. 133 on Derivative
          Instruments and Hedging Activities.” These standards establish accounting and
          reporting standards for derivative instruments, including certain derivative
          instruments embedded in other contracts, and for hedging activities. They
          require that an entity recognize all derivatives as either assets or liabilities
          in the balance sheet and measure those instruments at fair value.
  F-9
  **CADENCE
            RESOURCES CORPORATION**
 **NOTES
            TO THE FINANCIAL STATEMENTS**
 **September
            30, 2005**
 If
          certain conditions are met, a derivative may be specifically designated
          as a
          hedge, the objective of which is to match the timing of gain or loss recognition
          on the hedging derivative with the recognition of (i) the changes in the
          fair
          value of the hedged asset or liability that are attributable to the hedged
          risk
          or (ii) the earnings effect of the hedged forecasted transaction. For a
          derivative not designated as a hedging instrument, the gain or loss is
          recognized in income in the period of change.
 
 Historically,
          the Company has not entered into derivatives contracts to hedge existing
          risks
          or for speculative purposes.
 
 At
          September 30, 2005 and for the periods covered in these statements, the
          Company
          has not engaged in any transactions that would be considered derivative
          instruments or hedging activities.
 
 Environmental
          Remediation and Compliance
  Expenditures
          for ongoing compliance with environmental regulations that relate to current
          operations are expensed or capitalized as appropriate. Expenditures resulting
          from the remediation of existing conditions caused by past operations that
          do
          not contribute to future revenue generations are expensed. Liabilities
          are
          recognized when environmental assessments indicate that remediation efforts
          are
          probable and the costs can be reasonably estimated.
 
 Estimates
          of such liabilities are based upon currently available facts, existing
          technology and presently enacted laws and regulations taking into consideration
          the likely effects of inflation and other societal and economic factors,
          and
          include estimates of associated legal costs. These amounts also reflect
          prior
          experience in remediating contaminated sites, other companies’ clean-up
          experience and data released by The Environmental Protection Agency or
          other
          organizations. Such estimates are by their nature imprecise and can be
          expected
          to be revised over time because of changes in government regulations,
          operations, technology and inflation. Recoveries are evaluated separately
          from
          the liability and, when recovery is assured, the Company records and reports
          an
          asset separately from the associated liability. At September 30, 2005,
          the
          Company had no accrued liabilities for compliance with environmental
          regulations.
 
 Estimates
  The
          process of preparing financial statements in conformity with accounting
          principles generally accepted in the United States of America requires
          the use
          of estimates and assumptions regarding certain types of assets, liabilities,
          revenues, and expenses. Such estimates primarily relate to the valuation
          assigned to options and warrants utilizing the Black-Scholes calculation,
          depletion expense utilizing oil and gas reserve studies and unsettled
          transactions and events as of the date of the financial statements. Accordingly,
          upon settlement, actual results may differ from estimated amounts.
 
 Fair
          Value of Financial Instruments
  The
          carrying amounts for cash, receivables, deposits, payables, and advances
          from
          related parties approximate their fair value.
 
 Fair
          Value Standards
  The
          Company has adopted the fair value accounting rules to record all transactions
          in equity instruments for goods or services.
  F-10
 
 Impaired
          Asset Policy
  The
          Company adopted Statement of Financial Accounting Standards No. 144 titled
          “Accounting for Impairment of Disposal of Long-Lived Assets.” In complying with
          this standard, the Company reviews its long-lived assets quarterly to determine
          if any events or changes in circumstances have transpired which indicate
          that
          the carrying value of its assets may not be recoverable. The Company determines
          impairment by comparing the undiscounted future cash flows estimated to
          be
          generated by its assets to their respective carrying amount whenever events
          or
          changes in circumstances indicate that an asset may not be recoverable.
          Due to
          significant write-downs and write-offs taken in 2004 and in prior years,
          the
          Company does not believe any further adjustments are needed to the carrying
          value of its assets at September 30, 2005. See Note 3.
 
 Investments
  Investments,
          principally consisting of equity securities of private and small public
          companies, are stated at current market value.
 
 Loss
          Per Share
  Loss
          per
          share was computed by dividing the net loss by the weighted average number
          of
          shares outstanding during the year. The weighted average number of shares
          was
          calculated by taking the number of shares outstanding and weighting them
          by the
          amount of time they were outstanding. Outstanding options and warrants
          were not
          included in the computation of diluted loss per share because their inclusion
          would be antidilutive.
  Mineral
          Properties
  Costs
          of
          acquiring, exploring and developing mineral properties are capitalized
          by
          project area. Costs to maintain the mineral rights and leases are expensed
          as
          incurred. When a property reaches the production stage, the related capitalized
          costs will be amortized, using the units of production method on the basis
          of
          periodic estimates of ore reserves. At September 30, 2005, 2004, and 2003
          the
          cost of the Company’s mineral properties are included in other assets in the
          accompanying financial statements, as the Company has changed its focus
          from
          minerals exploration to oil and gas.
 
 Mineral
          properties are periodically assessed for impairment of value and any losses
          are
          charged to operations at the time of impairment.
 
 Should
          a
          property be abandoned, its capitalized costs are charged to operations.
          The
          Company charges to operations the allocable portion of capitalized costs
          attributable to properties sold. Capitalized costs are allocated to properties
          sold based on the proportion of claims sold to the claims remaining within
          the
          project area.
 
 Oil
          and Gas Properties
  The
          Company uses the successful efforts method of accounting for oil and gas
          producing activities. Costs to acquire mineral interests in oil and gas
          properties, to drill and equip exploratory wells that find proved reserves,
          and
          to drill and equip development wells are capitalized. Costs to drill exploratory
          wells that do not find proved reserves, geological and geophysical costs,
          and
          costs of carrying and retaining unproved properties are expensed.
 
 Unproved
          oil and gas properties that are individually significant are periodically
          assessed for impairment of value, and a loss is recognized at the time
          of
          impairment by providing an impairment allowance. Other unproved properties
          are
          amortized based on the Company’s experience of successful drilling and average
          holding period. Capitalized costs of producing oil and gas properties,
          after
          considering estimated dismantlement and abandonment costs and estimated
          salvage
          values, are depreciated and depleted by the unit-of-production method.
          Support
          equipment and other property and equipment are depreciated over their estimated
          useful lives.
  F-11
  **CADENCE
            RESOURCES CORPORATION**
 **NOTES
            TO THE FINANCIAL STATEMENTS**
 **September
            30, 2005**
 On
          the
          sale or retirement of a complete unit of a proven property, the cost and
          related
          accumulated depreciation, depletion, and amortization are eliminated from
          the
          property accounts, and the resultant gain or loss is recognized. On the
          retirement or sale of a partial unit of proven property, the cost is charged
          to
          accumulated depreciation, depletion, and amortization with a resulting
          gain or
          loss recognized in income.
 
 On
          the
          sale of an entire interest in an unproved property for cash or cash equivalent,
          gain or loss on the sale is recognized, taking into consideration the amount
          of
          any unrecorded impairment if the property had been assessed individually.
          If a
          partial interest in an unproved property is sold, the amount received is
          treated
          as a reduction of the cost of the interest retained.
  Principles
          of Consolidation
  The
          financial statements include those of the Cadence Resources Corporation
          and
          Celebration Mining Company. All significant inter-company accounts and
          transactions have been eliminated. The financial statements are not considered
          consolidated statements since Cadence Resources Corporation was the successor
          by
          merger to Celebration Mining Company.
 
 Provision
          For Taxes
  Income
          taxes are provided based upon the liability method of accounting pursuant
          to
          Statement of Financial Accounting Standards No. 109 “Accounting for Income
          Taxes” (herein after "SFAS No. 109"). Under this approach, deferred income
          taxes are recorded to reflect the tax consequences in future years of
          differences between the tax basis of assets and liabilities and their financial
          reporting amounts at each year-end. A valuation allowance is recorded against
          deferred tax assets if management does not believe the Company has met
          the “more
          likely than not” standard imposed by SFAS No. 109 to allow recognition of such
          an asset.
 
 Recent
          Accounting Pronouncements
  In
          May
          2005, the Financial Accounting Standards Board, or FASB, issued Statement
          of
          Financial Accounting Standards, “Accounting Changes and Error Corrections”
          (hereinafter "SFAS No. 154")  which replaces Accounting Principles
          Board
          Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting
          Changes in Interim Financial Statements -- An Amendment of APB Opinion
          No. 28.”
          SFAS No. 154 provides guidance on accounting for and reporting changes
          in
          accounting principle and error corrections. SFAS No. 154 requires that
          changes
          in accounting principle be applied retrospectively to prior period financial
          statements and is effective for fiscal years beginning after December 15,
          2005.
          The Company does not expect SFAS No. 154 to have a material impact on our
          consolidated financial position, results of operations, or cash
          flows.
  In
          December 2004, the Financial Accounting Standards Board issued Statement
          of
          Financial Accounting Standards No. 153. This statement addresses the measurement
          of exchanges of nonmonetary assets. The guidance in APB Opinion No. 29,
          “Accounting for Nonmonetary Transactions,” is based on the principle that
          exchanges of nonmonetary assets should be measured based on the fair value
          of
          the assets exchanged. The guidance in that opinion, however, included certain
          exceptions to that principle. This statement amends Opinion 29 to eliminate
          the
          exception for nonmonetary exchanges of similar productive assets and replaces
          it
          with a general exception for exchanges of nonmonetary assets that do not
          have
          commercial substance. A nonmonetary exchange has commercial substance if
          the
          future cash flows of the entity are expected to change significantly as
          a result
          of the exchange. This statement is effective for financial statements for
          fiscal
          years beginning after June 15, 2005. Earlier application is permitted for
          nonmonetary asset exchanges incurred during fiscal years beginning after
          the
          date of this statement is issued. Management believes the adoption of this
          statement will have no impact on the financial statements of the Company.
  In
          December 2004, the Financial Accounting Standards Board issued Statement
          of
          Financial Accounting Standards No. 152, which amends FASB statement No.
          66,
“Accounting for Sales of Real Estate,” to reference the financial accounting and
          reporting guidance for real estate time-sharing transactions that is provided
          in
          AICPA Statement of Position (SOP) 04-2, “Accounting for Real Estate Time-Sharing
          Transactions.” This statement also amends FASB Statement No. 67, “Accounting for
          Costs and Initial Rental Operations of Real Estate Projects,” to state that the
          guidance for (a) incidental operations and (b) costs incurred to sell real
          estate projects does not apply to real estate time-sharing transactions.
          The
          accounting for those operations and costs is subject to the guidance in
          SOP
          04-2. This statement is effective for financial statements for fiscal years
          beginning after June 15, 2005. Management believes the adoption of this
          statement will have no impact on the financial statements of the
          Company.
  F-12
 **CADENCE
            RESOURCES CORPORATION**
 **NOTES
            TO THE FINANCIAL STATEMENTS**
 **September
            30, 2005**
 In
          December 2004, the Financial Accounting Standards Board issued a revision
          to
          Statement of Financial Accounting Standards No. 123R, “Accounting for Stock
          Based Compensation.” This satement supercedes APB Opinion No. 25, “Accounting
          for Stock Issued to Employees,” and its related implementation guidance. This
          statement establishes standards for the accounting for transactions in
          which an
          entity exchanges its equity instruments for goods or services. It also
          addresses
          transactions in which an entity incurs liabilities in exchange for goods
          or
          services that are based on the fair value of the entity’s equity instruments or
          that may be settled by the issuance of those equity instruments. This statement
          focuses primarily on accounting for transactions in which an entity obtains
          employee services in share-based payment transactions. This statement does
          not
          change the accounting guidance for share based payment transactions with
          parties
          other than employees provided in Statement of Financial Accounting Standards
          No.
          123. This statement does not address the accounting for employee share
          ownership
          plans, which are subject to AICPA Statement of Position 93-6, “Employers’
          Accounting for Employee Stock Ownership Plans.” The Company believes adoption of
          this statement will have an immaterial effect on the financial statements
          of the
          Company, as the Company currently accounts for stock based compensation
          under
          SFAS 123.
  In
          November 2004, the Financial Accounting Standards Board (FASB) issued
          SFAS No. 151, “ Inventory
          Costs— an amendment of ARB No. 43, Chapter 4 .”
          This
          statement amends the guidance in ARB No. 43, Chapter 4, “Inventory
          Pricing,” to clarify the accounting for abnormal amounts of idle facility
          expense, freight, handling costs, and wasted material (spoilage).
          Paragraph 5 of ARB 43, Chapter 4, previously stated that
“. . . under
          some circumstances, items such as idle facility expense, excessive spoilage,
          double freight, and rehandling costs may be so abnormal as to require treatment
          as current period charges. . . .” This statement requires that those items be
          recognized as current-period charges regardless of whether they meet the
          criterion of “so abnormal.” In addition, this statement requires that allocation
          of fixed production overheads to the costs of conversion be based on the
          normal
          capacity of the production facilities. This statement is effective for
          inventory
          costs incurred during fiscal years beginning after June 15, 2005.
          Management does not believe the adoption of this statement will have any
          immediate material impact on the Company as the Company maintains no inventory.
 
 Reclassifications
  Certain
          amounts from prior periods have been reclassified to conform to the current
          period presentation. These reclassifications have resulted in no changes
          to the
          Company’s accumulated deficit and net losses presented.
 
 Revenue
          Recognition
  Cadence
          began producing revenues during July 2002. Oil and gas revenues are recorded
          using the sales method. Under this method, the Company recognizes revenues
          based
          on actual volumes of oil and gas sold to purchasers.
 
 **NOTE
          3 - MINERAL PROPERTIES**
 
 Over
          the
          last three fiscal years, the Company’s mineral properties have for the most part
          been disposed of or written off as the Company’s focus and direction has shifted
          to oil and gas production.
  F-13
  **CADENCE
            RESOURCES CORPORATION**
 **NOTES
            TO THE FINANCIAL STATEMENTS**
 **September
            30, 2005**
 Utah
          Property
  The
          Company has elected to retain its 25% undivided interest in the Vipont
          Mine
          located in northwest Utah. This interest was carried on the Company’s books at
          $246,757 at September 30, 2003 and 2002. During the year ended September
          30,
          2004, the Company elected to reduce the interest’s carrying value to $197,406 in
          order to better reflect its market value. This asset is included in “other
          assets” on the Company’s balance sheet.
 
 Mineral
          Properties in North Idaho
  At
          September 30, 2005, the Company, directly and through its subsidiary,
          Celebration Mining Company, held unpatented mining claims in the Coeur
          d’Alene
          Mining District in distinct groups called the South Galena Group, Moe Group,
          Rock Creek Group and Palisades Group. The Company has undertaken only minimal
          exploration and development work on these properties, such as general geological
          reconnaissance and claim-staking activities. All of these claims have been
          written off as permanently impaired.
 
 During
          fiscal 2005, the Company entered into a mineral lease with Gold Creek Mines,
          Inc. on the Gold Creek claims consisting of 27 patented and 5 unpatented
          mining
          claims. The lease is for an initial term of twenty years and so long thereafter
          as minerals are produced from the property. The Company is obligated to
          spend
          $50,000 during the first two years of the lease on mineral exploration
          activities. Additionally, during the first two years of the lease, the
          Company
          is obligated to pay advance royalty payments of $750 per month, increasing
          to
          $1,000 per month during the second two year period, and $1,500 per month
          thereafter. At the inception of the lease, the Company made a one time
          advance
          royalty payment of $53,000 to the lessor.
 
 Other
          Mineral Property Information
 
 Celebration
          Mining Company (“Celebration”), a wholly owned subsidiary of Cadence, was
          incorporated for the purpose of identifying, acquiring, exploring and developing
          mining properties. Celebration was organized on February 17, 1994 as a
          Washington corporation. Celebration has not yet realized any revenues from
          its
          operations.
 
 On
          August
          8, 1995, Cadence and Celebration completed an agreement and plan of
          reorganization whereby the Company issued 207,188 shares of its common
          stock and
          72,750 warrants in exchange for all of the outstanding common stock of
          Celebration. Immediately prior to the agreement and plan of reorganization,
          the
          Company had 118,773 common shares issued and outstanding.
 
 The
          acquisition was accounted for as a purchase by Celebration of Cadence,
          because
          the shareholders of Celebration controlled the Company after the acquisition.
          Therefore, Celebration is treated as the acquiring entity. There was no
          adjustment to the carrying value of the assets or liabilities of Cadence
          in the
          exchange as the market value approximated the net carrying value. Cadence
          is the
          acquiring entity for legal purposes and Celebration is the surviving entity
          for
          accounting purposes.
 
 As
          a
          result of the Company’s entering a new exploration stage on July 1, 2001, the
          Company elected to dispose of its mineral properties and has accordingly
          reclassified those remaining properties, which total $197,406 at September
          30,
          2005, as other assets. The Company has not determined whether these mineral
          exploration properties contain ore reserves that are economically recoverable,
          and is in the process of disposing of these properties. The ultimate realization
          of the Company’s investment in these properties cannot be determined at this
          time and, accordingly, no provision for any asset impairment that may result
          in
          the event the Company is not successful in selling these properties has
          been
          made in the accompanying financial statements.
  F-14
 
 **CADENCE
            RESOURCES CORPORATION**
 **NOTES
            TO THE FINANCIAL STATEMENTS**
 **September
            30, 2005**
 **NOTE
          4 - PROPERTY AND EQUIPMENT**
 
 Property
          and equipment are recorded at cost. Major additions and improvements are
          capitalized. Minor replacements, maintenance and repairs that do not increase
          the useful life of the assets are expensed as incurred. Depreciation of
          property
          and equipment is determined using the straight-line method over the expected
          useful lives of the assets of five to ten years. Depreciation, depletion
          and
          amortization expense for the years ended September 30, 2005, 2004, and
          2003 was
          $2,683,279, $2,663,695 and $57,310, respectively.
 
 **NOTE
          5 - INVESTMENTS**
 
 The
          Company’s investment securities are classified as available for sale securities
          which are recorded at fair value on the balance sheet as investments. The
          change
          in fair value during the period is excluded from earnings and recorded
          net of
          tax as a component of other comprehensive income. The Company has no investments
          which are classified as trading securities.
  At
          September 30, 2005, 2004, and 2003, the market values of stock investments
          were
          as follows:
  2005
                
                2004
                
                2003Elite
                    Logistics, Inc.
                
                $
                204
                
                $
                204
                
                $
                656Ashington
                    Mining Company
                
                
                –
                
                
                5,709
                
                
                5,709Enerphaze
                    Corporation
                
                
                261
                
                
                655
                
                
                982Integrated
                    Pharmaceuticals, Inc.
                
                
                10,520
                
                
                27,984
                
                
                9,406Metalline
                    Mining Company
                
                
                –
                
                
                1,605
                
                
                925Nevada-Comstock
                    (formerly Caledonia Silver-Lead Mines, Inc.)
                
                
                –
                
                
                12,000
                
                
                –Rigid
                    Airship Tech
                
                
                –
                
                
                310
                
                
                310Trend
                    Mining Company
                
                
                17,923
                
                
                27,083
                
                
                24,483Western
                    Goldfields, Inc.
                
                
                16,053
                
                
                102,148
                
                
                351,373TN
                    Oil Co
                
                
                65,000
                
                
                50,000
                
                
                –White
                    Mtn Titanium
                
                
                7,350
                
                
                9,940
                
                
                –Aurora
                    Energy
                
                
                750,000
                
                
                –
                
                
                –Abot
                    Mining
                
                
                3,000
                
                
                –
                
                
                –Other
                    investments
                
                
                –
                
                
                450
                
                
                610Total
                
                $
                870,311
                
                $
                238,088
                
                $
                394,454
 
 The
          carrying value of these shares is reevaluated at each reporting period
          and
          adjustments, if appropriate, are made to the carrying value of these securities.
          Of all the aforementioned investments owned by the Company at September
          30,
          2005, only Trend Mining Company, Abot Mining, Metalline Mining Company,
          Western
          Goldfields, Inc., White Mtn Titanium, and Integrated Pharmaceuticals are
          public
          companies with a trading market.
 
 Other
          information regarding the Company’s investments follows:
 
 Enerphaze
          Corporation
  In
          October 2001, the Company received 8,000 shares of Enerphaze Corporation
          common
          stock in payment of a $15,000 note receivable. In January and February
          2002, the
          Company received 65,000 shares of Enerphaze Corporation common stock in
          exchange
          for 400,000 shares of the Company’s common stock. No gain or loss was recognized
          on these transactions.
  F-15
  **CADENCE
            RESOURCES CORPORATION**
 **NOTES
            TO THE FINANCIAL STATEMENTS**
 **September
            30, 2005**
 Nevada-Comstock
          Mining Company (formerly Caledonia Silver-Lead Mines, Inc.)
  The
          Company on October 31, 2001 received 3,501,980 shares of the $0.10 par
          value
          common stock of Caledonia Silver-Lead Mines, Inc. (an affiliated company)
          in
          exchange for its Kil Group
 and
          West
          Mullan Group claims. The stock received was recorded at its par value of
          $350,198 which, in the opinion of management, approximates its fair value.
          At
          September 30, 2003, this investment was written off to reflect the mining
          company’s dormancy. In the year ended September 30, 2004, the Company’s
          investment in the mining company increased to $12,000 as funds were advanced
          to
          cover annual filing fees on patented mining claims. During the year ended
          September 30, 2005, this investment was converted to a note receivable,
          to more
          accurately reflect the actual character of the payment of the filing
          fees.
 
 TN
          Oil
          Company
  In
          August
          2004, the Company acquired a 25% equity ownership in TN Oil Company, which
          owns
          oil leases in central and north central Tennessee. Due to additional investments
          by outside parties, the ownership interest in the TN Oil Company has been
          reduced to 14% at September 30, 2005.
 
 Western
          Goldfields, Inc.
  In
          2002,
          the Company exchanged fully depreciated mining equipment for shares of
          a
          privately held business, Calumet Mining Company, which was eventually acquired
          by Western Goldfields, Inc. Upon completion of the acquisition, the Company
          received 160,000 shares of Western’s common stock. During 2003, the Company
          acquired an additional 21,200 shares of Western stock for $24,730. At September
          30, 2005, the fair market value of the Company’s holdings in Western was
          $16,053.
  **NOTE
          6 - COMMON STOCK**
 
 During
          the year ended September 30, 2005, the Company issued 160,500 shares of
          its
          common stock to officers and directors for services valued at $235,590.
          Additionally, the Company issued 800,000 units consisting of stock and
          warrants
          in payment of loans of $1,000,000, and 7,010,000 units consisting of stock
          and
          warrants in a private placement for net cash proceeds of $7,786,250. The
          Company
          paid a finder’s fee to a related party in the amount of $976,250, for assistance
          in this private placement. The Company also had 27,500 previously issued
          warrants exercised at $1.35 per share and issued 21,000 shares of its common
          stock upon a cashless exercise of warrants.
 
 During
          the year ended September 30, 2004, the Company issued 219,500 shares of
          its
          common stock to officers, directors and consultants for services valued
          at
          $329,355, 25,000 shares in repayment of a related party loan of $25,000,
          15,000
          shares for financing expense valued at $11,625, 110,000 shares for cash
          proceeds
          of $275,000. Warrants previously issued were exercised for 10,000 shares
          at
          $1.35 per share.
 
 During
          the year ended September 30, 2003, the Company sold 212,500 units to investors
          at prices ranging from $0.50 to $0.80 per unit in a private placement.
          Each unit
          consists of one share of common stock and one warrant exercisable at $1.35
          per
          common share for three years. Sales of these units generated cash proceeds
          of
          $110,000. Warrants previously issued (2,320,175) were exercised for 1,956,984
          shares of common stock in “cashless” redemptions. (See Note 9.) During this same
          period the Company sold 2,625,183 shares of its common stock for $4,316,599
          net
          of expenses of $347,850. The Company also issued 496,500 shares of its
          common
          stock to officers, directors and consultants for services valued at $540,675
          and
          220,000 shares for loan consideration valued at $207,000. In addition,
          the
          Company issued to a related party an additional 120,000 shares valued at
          $120,000 as an inducement for a loan. The value of this inducement was
          used to
          reduce the payable to related party.
  F-16
 
 **CADENCE
            RESOURCES CORPORATION**
 **NOTES
            TO THE FINANCIAL STATEMENTS**
 **September
            30, 2005**
 **NOTE
          7 - REDEEMABLE PREFERRED STOCK**
 
 On
          April
          23, 2001, the Company’s board of directors authorized 20,000,000 shares of
          preferred stock with a par value of $0.01 per share and rights and preferences
          to be determined. No shares were issued and outstanding as of September
          30,
          2002. During the year ended September 30, 2003, the Company issued 34,950
          shares
          of its Class A preferred stock to investors at prices ranging from $1.50
          to
          $2.00 per share for aggregate proceeds of $59,925. The shares are convertible
          to
          common stock at a price of $1.50 to $2.00 per share under certain terms
          and
          conditions. At September 30, 2003, the shares carried a preferred dividend
          of
          15% per annum. During the year ended September 30, 2004, the dividend feature
          was temporarily suspended because certain conditions, which
          required
          the payment of dividends, were considered satisfied. The Class A shares
          mature
          seven years from the date of issuance. At maturity, the Class A shares
          will be
          redeemed for cash or common stock at Cadence’s option in an amount equal to the
          amount paid by the investors for the shares plus any accrued and unpaid
          dividends. If shares of common stock are to be issued at maturity, the
          conversion price shall be determined by the average closing bid price for
          the 20
          trading days prior to the maturity date.
 
 At
          September 30, 2005,  the Company owed $15,737 of accrued dividends
          to
          preferred shareholders. There were no accrued dividends outstanding at
          September
          30, 2004 and 2003.
  **NOTE
          8 - COMMON STOCK OPTION AND AWARD PLAN**
 
 In
          January 1992, the shareholders of Cadence approved a 1992 Stock Option
          and Stock
          Award Plan under which up to ten percent of the issued and outstanding
          shares of
          the Company’s common stock could be awarded based on merit or work performed. As
          of September 30, 2005, the Company had awarded 638 shares of common stock
          under
          the Plan.
 
 The
          Company has a stock-based compensation plan whereby the Company’s board of
          directors may grant common stock to its employees and directors. Over the
          years,
          a total of 72,750 options have been granted under the plan. These options
          have
          been forfeited and none have been exercised through the year ending September
          30, 2005. The old existing options are attributed to the merger of Celebration
          Mining Company with Royal in August 1995.
 
 The
          Company’s board of directors has made option awards to select officers,
          directors, consultants and shareholder/investors. These common stock options
          were not awarded pursuant to a qualified plan and carry various terms and
          conditions. The Company granted a total of 750,000 common stock options
          at an
          average exercise price of $1.08 per share during the year ended September
          30,
          2002 and granted 287,140 common stock options at an average exercise price
          of
          $2.23 during the year ended September 30, 2003.
 
 During
          the year ended September 30, 2005, the Company granted 250,000 options
          to
          officers and directors with an exercise price of $1.42. These options were
          granted as compensation  to said officers and directors.
 
 During
          the year ended September 30, 2004, the Company issued 400,000 stock options
          to
          two directors and one officer with an exercise price of $3.73. These options
          were granted upon the acceptance by the individual of the position of officer
          and/or director and the approval of the Company’s qualified stock option plan at
          its April 2004 annual shareholders meeting. The Company also granted during
          the
          year ended September 30, 2004 an option to purchase 76,500 shares of stock
          to a
          shareholder valued at $71,910 as a fee for his services in relation to
          finding
          investors for the senior secured notes. See Note 9 and Note 12.
 
 All
          options granted were exercisable immediately. The Company’s board of directors
          has reserved the right to cancel these awards for non-performance or other
          reasons. Further, in accordance with the terms of the stock option plan,
          under
          most circumstances, officer and director options must be exercised within
          90
          days of the departure of an officer or director from the Company. As a
          result,
          250,000 of the options granted with an exercise price of $3.73 expired
          in the
          year ended September 30, 2005
 
 The
          following assumptions were made in estimating fair value during the year
          ended
          September 30, 2005: risk free interest rate of 4%, volatility of 41%, expected
          life of 2.33 years and no expected dividends. The value of these options,
          in the
          aggregate amount of $522,500 is included in the Company’s statement of
          operations for 2005. The following assumptions were made in estimating
          fair
          value during the year ended September 30, 2004: risk free interest rate
          of 4%,
          volatility of 39%, expected life of three years and no expected dividends.
          The
          value of these options, in the aggregate amount of $431,910, was included
          in the
          Company’s statement of operations for 2004. The following assumptions were made
          in estimating fair value during the year ended September 30, 2003: risk-free
          interest rate of 3% to 4%, volatility of 106% to 337%, expected life of
          4 to 5
          years and no expected dividends. The value of these options in the amount
          of
          $222,343 was included in the Company’s statement of operations for 2003. The
          value of options issued in 2003 for financing fees in the amount of $429,671
          was
          deducted against additional paid-in capital, as a cost of selling common
          stock.
  F-17
 **CADENCE
            RESOURCES CORPORATION**
 **NOTES
            TO THE FINANCIAL STATEMENTS**
 **September
            30, 2005**
 
 Following
          is a summary of the stock options during the years ended September 30,
          2005,
          2004, and 2003:
 Number
                        of
                      Shares
                        Under
                      Options
                    
                    WeightedAverage
                      ExercisePriceOutstanding
                        at 10/1/2002
                    
                    
                    750,000
                    
                    $
                    1.08Granted
                    
                    
                    287,140
                    
                    
                    2.23Exercised
                    
                    
                    (100,000
                    )
                    
                    (0.68
                    )Expired
                        or forfeited
                    
                    
                    –
                    
                    
                    –Outstanding
                        at 9/30/2003
                    
                    
                    937,140
                    
                    $
                    1.47Options
                        exercisable at 9/30/2003
                    
                    
                    937,140
                    
                    $
                    1.47Weighted
                        average fair value of options grantedduring
                        the year ended 9/30/2003
                    
                    $
                    2.27Outstanding
                        at 10/1/2003
                    
                    
                    937,140
                    
                    $
                    1.47Granted
                    
                    
                    476,500
                    
                    
                    3.77Exercised
                    
                    
                    –
                    
                    
                    –Expired
                        or forfeited
                    
                    
                    –
                    
                    
                    –Outstanding
                        at 9/30/2004
                    
                    
                    1,413,640
                    
                    $
                    2.25Options
                        exercisable at 9/30/2004
                    
                    
                    1,413,640
                    
                    $
                    2.25Weighted
                        average fair value of options grantedduring
                        the year ended 9/30/2004
                    
                    $
                    0.91Outstanding
                        at 10/1/2004
                    
                    
                    1,413,640
                    
                    $
                    2.25Granted
                    
                    
                    250,000
                    
                    
                    1.42Exercised
                    
                    
                    –
                    
                    
                    –Expired
                        or forfeited
                    
                    
                    (500,000
                    )
                    
                    (2.62
                    )Outstanding
                        at 9/30/2005
                    
                    
                    1,163,640
                    
                    $
                    1.91Options
                        exercisable at 9/30/2005
                    
                    
                    1,163,640
                    
                    $
                    1.91Weighted
                        average fair value of options grantedduring
                        the year ended 9/30/2005
                    
                    $
                    2.09
 
 F-18
  **CADENCE
            RESOURCES CORPORATION**
 **NOTES
            TO THE FINANCIAL STATEMENTS**
 **September
            30, 2005**
 Exercise
                    Date
                
                Number
                    of
                  Shares
                  Under
                    Options
                
                Weighted
                      AveragePrice
                    per ShareOn
                    or before March 1, 2007
                
                
                450,000
                
                $
                1.74On
                    or before April 2, 2007
                
                
                76,500
                
                $
                4.00On
                    or before July 8, 2007
                
                
                100,000
                
                $
                1.35On
                    or before June 18, 2007
                
                
                50,000
                
                $
                1.70On
                    or before June 1, 2007
                
                
                75,000
                
                $
                2.00On
                    or before January 7, 2008
                
                
                250,000
                
                $
                1.42On
                    or before September 30, 2008
                
                
                162,140
                
                $
                2.50
 
 In
          July
          2003, 100,000 of the outstanding options were exercised for the purchase
          of
          100,000 shares of the Company’s common stock.
 
 The
          following table gives information about the Company’s common stock that may be
          issued upon the exercise of options under all of the Company existing stock
          option plans as of September 30, 2005
 RemainingExercise
                
                Number
                    of
                
                Weighted
                    Average
                
                Contractual
                    Life
                
                Number
                
                Weighted
                    AveragePrices
                
                Shares
                    Under Options
                
                Exercise
                    Price
                
                (in
                    years)
                
                Exercisable
                
                Exercise
                    Price$0.75
                
                
                300,000
                
                $
                0.75
                
                
                .42
                
                
                300,000
                
                $
                0.751.35
                
                
                100,000
                
                
                1.35
                
                
                .75
                
                
                100,000
                
                
                1.351.42
                
                
                250,000
                
                
                1.42
                
                
                2.33
                
                
                250,000
                
                
                1.421.70
                
                
                50,000
                
                
                1.70
                
                
                .75
                
                
                50,000
                
                
                1.702.00
                
                
                75,000
                
                
                2.00
                
                
                1.67
                
                
                75,000
                
                
                2.002.50
                
                
                162,140
                
                
                2.50
                
                
                3.00
                
                
                162,140
                
                
                2.503.73-4.00
                
                
                226,500
                
                
                3.82
                
                
                2.50
                
                
                226,500
                
                
                3.821,163,640
                
                $
                1.91
                
                
                
                
                
                1,163,640
                
                $
                1.91
 
 Stock
          Award Plan
  During
          the year ended September 30, 2001, the Company’s board of directors approved the
          issuance of 15,000 shares of the Company’s common stock per quarter to each
          entitled director as compensation for service to the Company and 5,000
          shares of
          the Company’s common stock per quarter to officers in addition to their salaried
          compensation for services.
 
 **NOTE
          9 - COMMON STOCK WARRANTS**
 
 During
          the year ended September 30, 2003, the Company issued 212,500 shares of
          stock
          with 212,500 warrants attached, and 25,000 warrants related to a July 2002
          purchase. The warrants were valued at $51,375 using the Black-Scholes Option
          Price Calculation. The following assumptions were made is estimating fair
          value:
          risk free interest rate is 5%, volatility is 100%, expected life is 3 years
          and
          no expected dividends. These warrants may be used to purchase 237,500 shares
          of
          the Company’s common stock at $1.35 per share. The warrants remain exercisable
          through October 15, 2005. As of the date of these financial statements,
          200,000
          of these warrants remain outstanding and exercisable.
 
 During
          the year ended September 30, 2004, the Company issued certain note holders
          warrants to purchase a total of 765,000 shares of common stock, exercisable
          at
          $4.00 per share, expiring in three years. Both the number of warrants and
          the
          exercise price are adjustable, dependent upon certain future equity transactions
          of the Company. The warrants were valued at $745,237 using the Black-Scholes
          Option Price Calculation. The following assumptions were made in estimating
          fair
          value: risk-free interest rate is 5%, volatility is 100%, expected life
          is three
          years and no expected dividends. During the year ended September 30, 2005,
          the
          Company paid back the notes which were related to these warrants. As an
          incentive to the note holders to allow the Company to redeem the notes
          prematurely, the Company modified the exercise price of the warrants to
          $1.75.
          Using current Black-Scholes calculations, the Company incurred no additional
          charges to its financial statements with this modification.
 
 During
          the year ended September 30, 2005, the Company issued warrants to purchase
          a
          total of 14,050,000 shares of stock. These warrants were attached to 7,810,000
          shares of stock which were issued for cash and debt. The warrants were
          valued at
          $3,685,875 using the Black-Scholes Option Price Calculation. The following
          assumptions were made in estimating fair value during the year ended September
          30, 2005: risk free interest rate of 4%, volatility of 41%, expected life
          of 3
          years and no expected dividends. See Note 6.
  F-19
  **CADENCE
            RESOURCES CORPORATION**
 **NOTES
            TO THE FINANCIAL STATEMENTS**
 **September
            30, 2005**
 **NOTE
          10 - OIL AND GAS PROPERTIES**
 
 The
          Company’s oil and gas producing activities are subject to laws and regulations
          controlling not only their exploration and development, but also the effect
          of
          such activities on the environment. Compliance with such laws and regulations
          may necessitate additional capital outlays, affect the economics of a project,
          and cause changes or delays in the Company’s activities. The Company’s oil and
          gas properties are valued at the lower of cost or net realizable
          value.
 
 Louisiana
  During
          the fourth quarter of the year ended September 30, 2001, the Company began
          leasing acreage in a natural gas field in Desoto Parish, Louisiana. As
          of the
          date of these financial statements, the Company has leased over 4,250 acres.
          At
          September 30, 2005 and September 30, 2004, Louisiana leases of $42,711
          and
          $42,711, respectively, are included in the attached financial statements
          as part
          of proved properties. Under the terms of a joint operating agreement with
          Bridas
          Energy USA, Bridas commenced drilling wells, 13 of which were completed
          and of
          these 9 are producing at September 30, 2005. The Company has various working
          interests in and net revenue interests in the wells drilled. Bridas is
          the
          operator of all of Cadence’s properties in Louisiana.
 
 Texas
  During
          the year ended September 30, 2002, the Company acquired an exploration
          permit
          and lease option agreement for an oil well project in Wilbarger County,
          Texas
          known as the Waggoner Ranch Project. During the quarter ended March 31,
          2002
          under the terms of a joint operating agreement with the W.T. Waggoner Estate,
          Waggoner drilled an initial test well. By September 30, 2005, Waggoner
          had
          drilled a total of eight wells in Wilbarger County, of which five were
          producing
          oil. The W.T. Waggoner Estate is the operator of all of Cadence’s properties in
          Wilbarger County and the sole purchaser of all production from these
          properties.
 
 During
          the year ended September 30, 2002, the Company sold 40% of the working
          interest
          in its initial well in this area (known as the “1A” well) to private investors
          and two officers of the Company for $210,000. The Company’s initial cost in the
          portion of the prospect sold totaled $3,200.
 
 During
          February 2003, the Company completed the West Electra Lake Well on the
          Waggoner
          Ranch Project. The Company entered into a 45% working interest joint operating
          agreement with the Waggoner Ranch for the operations conducted on this
          acreage.
          In the quarter ending September 30, 2003, the Company drilled and completed
          two
          additional wells on the West Electra Lake joint venture operating area
          on the
          Waggoner Ranch. The Company owns a 50% working interest in these last two
          wells.
 
 At
          September 30, 2005, 2004 and 2003, prepaid oil and gas leases relating
          to Texas
          property of $13,954, $6,500 and $4,500, respectively, are included in the
          attached financial statements.
 
 Michigan
  In
          December 2002, the Company began participating in a natural gas drilling
          program
          in Alpena County, Michigan with Aurora Energy, Ltd. As of September 30,
          2005,
          Cadence had a 22.5% working interest (before payout, 20% after payout),
          18% net
          revenue interest (before payout, 16% after payout), in ten producing wells
          in
          Alpena County. Production commenced from this field in June 2003. Aurora
          is the
          operator of all of Cadence’s properties in Alpena County. At September 30, 2005,
          and 2004, Michigan leases totaling $ $96,375 are included in the attached
          financial statements as unproved property.
  F-20
  **CADENCE
            RESOURCES CORPORATION**
 **NOTES
            TO THE FINANCIAL STATEMENTS**
 **September
            30, 2005**
 Kansas
  During
          the year ended September 30, 2003, and 2004, the Company leased over 26,000
          acres of land in the Anadarko Basin in west central Kansas. No drilling
          has
          commenced on any of this acreage. Cadence holds a 100% working interest
          and 82%
          net revenue interest in these leases.
 
 At
          September 30, 2005, $270,669 of the leases in Kansas are included as proved
          properties and in 2004, $253,213 of leases in Kansas are included as unproved
          property in the Company’s financial statements.
 
 New
          Mexico
  At
          September 30, 2005 and 2004, $9,600 and $57,420, respectively, of leases
          in New
          Mexico are included in the attached financial statements as unproved
          property.
 
 In
          June
          2004, the Company began participating for a 20% working interest and 15%
          net
          revenue interest in the Santa Nina Prospect in Eddy County. Earlier in
          the year,
          the Company signed an agreement with SDX Resources to participate for up
          to a
          25% working interest and 20% net revenue interest in up to 17 development
          wells
          in a project called the Sparkplug Unit.
  **NOTE
          11 - NOTES PAYABLE - RELATED PARTIES**
 
 All
          of
          the Company’s notes payable are considered short-term. At September 30, 2005 and
          2004, the Company had no outstanding notes payable to related parties.
          At
          September 30, 2003, the Company owed the following notes:
 
 2003Nathan
                    Low Family Trust (a shareholder of the Company), secured by assignment
                    of
                    a prorata interest in gas producing properties located in Alpena
                    County,
                    Michigan, interest at 8%, dated February 24, 2003, originally
                    due on April
                    4, 2003, extended to December 31, 2003.
                
                $
                50,000Kevin
                    Stulp (a shareholder of the Company),interest at 8%, dated February
                    24,
                    2003, originally due on April 5, 2003, extended to December 31,
                    2003.
                
                
                25,000Howard
                    Crosby (an officer and shareholder of the Company), interest
                    at 8%, dated
                    February 24, 2003, originally due on April 5, 2003, extended
                    to December
                    31, 2003.
                
                
                25,000Howard
                    Crosby (an officer and shareholder of the Company), unsecured,
                    interest at
                    5%, dated January 9, 2003, originally due on February 28, 2003,
                    extended
                    to December 31, 2003.
                
                
                60,000CGT
                    Management Ltd., unsecured, interest at 10%, dated July 16, 2003
                    (paid in
                    full October 2, 2003).
                
                
                300,000Total
                
                $
                460,000
  
 F-21
 **CADENCE
            RESOURCES CORPORATION**
 **NOTES
            TO THE FINANCIAL STATEMENTS**
 **September
            30, 2005**
 
 **NOTE
          12 - LONG-TERM DEBT**
 
 In
          April
          2004, the Company completed a private placement of $6,000,000 of senior
          secured
          notes from a group of institutional and individual lenders. A financing
          fee of
          $380,000  paid in connection with securing of this debt was recorded
          as a
          discount on long-term debt, and will be written off ratably over the life
          of the
          debt. For the period ending September 30, 2004, $70,000 of this financing
          fee
          was written off. The notes accrued interest at the rate of 10% per year,
          were
          originally payable on March 31, 2006 and were secured by all of
          the assets
          of Cadence.
 
 As
          part
          of the private placement, the note holders received warrants to purchase
          a total
          of 765,000 shares of common stock. (See Note 9.) The value of the
          warrants
          upon issuance of $745,237 was recorded as a discount on long-term
          debt, and
          will be written off ratably over the life of the debt. For the period ended
          September 30, 2004, $186,309 of this discount was written off. Additionally,
          a
          related party was granted 76,500 options valued at $71,910 as a finder’s fee
          related to these notes. These notes were paid in full during the year ended
          September 30, 2005. At the time these notes were repaid, there was a balance
          in
          deferred financing fees in the amount of $660,559. This amount is included
          in
          interest expense and loan fees in the accompanying financial statements.
          During
          the year ended September 30, 2005, the Company paid back the notes which
          were
          related to these warrants. As an incentive to the note holders to allow
          the
          Company to redeem the notes prematurely, the Company modified the exercise
          price
          of the warrants to $1.75. Using current Black-Scholes calculations, the
          Company
          incurred no additional charges to its financial statements with this
          modification.
 
 **NOTE
          13- COMMITMENTS AND CONTINGENCIES**
 
 Litigation
  The
          Company was a defendant in a lawsuit alleging that the Company failed to
          transfer common stock in exchange for a mining property interest. In June
          1999,
          Box Elder County Superior Court rejected the plaintiff’s lawsuit and let stand
          the Company’s countersuit alleging fraudulent misrepresentation. Although the
          plaintiff filed an appeal (regarding the originally filed lawsuit), the
          Utah
          Supreme Court rejected the appeal in a judgment rendered on July 31,
          2001.
 
 The
          Company’s countersuit, which sought both full title to the aforementioned
          mineral property and compensatory damages as well as punitive damages,
          was
          rejected in a jury trial in October 2002. Although the Company filed an
          appeal,
          it expects the jury verdict will stand. As a result, the Company has and
          will
          continue to hold an undivided 25% interest in the Vipont Mine. See Note
          3.
 
 Environmental
          Issues
  The
          Company is engaged in oil and gas exploration and may become subject to
          certain
          liabilities as they relate to environmental cleanup of well sites or other
          environmental restoration procedures as they relate to the drilling of
          oil and
          gas wells and the operation thereof. In the Company’s acquisition of existing or
          previously drilled wells, the Company may not be aware of environmental
          safeguards that were taken at the time such wells were drilled or during
          such
          time the wells were operated.
 
 The
          Company could incur significant costs, including cleanup costs resulting
          from a
          release of hazardous material, third-party claims for property damage and
          personal injuries fines and sanctions, as a result of any violations or
          liabilities under environmental or other laws. Changes in or more stringent
          enforcement of environmental laws could also result in additional operating
          costs and capital expenditures. In the course of routine oil and natural
          gas
          operations, surface spills and leaks, including casing leaks, of oil or
          other
          materials do occur, and the Company may incur costs for waste handling
          and
          environmental compliance.
  F-22
  **CADENCE
            RESOURCES CORPORATION**
 **NOTES
            TO THE FINANCIAL STATEMENTS**
 **September
            30, 2005**
 
 The
          Company was previously engaged in exploration of mineral properties. These
          properties are classified as assets from discontinued operations or were
          previously written off as permanently impaired. Although the Company has
          discontinued the exploration of mineral properties, the possibility exists
          that
          environmental cleanup or other environmental restoration procedures could remain
          to
          be completed or be mandated by law, causing unpredictable and unexpected
          liabilities to arise. At the date of this report, the Company is not aware
          of
          any environmental issues related to any of its assets from discontinued
          operations.
  Capital
          Commitments
  At
          September 30, 2005, the Company’s future capital commitments are dependent upon
          the Company’s decision to proceed with additional well development. See Note 10.
          No accruals have been made in the accompanying financial statements for
          these
          amounts.
 
 Lease
          Commitments
  The
          Company began leasing office facilities in Walla Walla, Washington commencing
          in
          June 2001. After a three-year lease with monthly payments of $400 expired
          in
          June 2004, the Company began a month to month tenancy, again paying $400
          per
          month. Total rent paid for this office space during the year ended September
          30,
          2003 was $4,800. There were no rentals recorded for this space during
          fiscal year ended September 30, 2005.
 
 The
          Company began leasing additional office space in Hilton Head Island, South
          Carolina in August 2003. The one-year lease calls for monthly rental payments
          of
          $550. For the year ended September 30, 2004, the Company expended $4,967
          for
          this rental space. There were no rentals recorded for this space during
          the year
          ended September 30, 2005.
 
 Cadence
          Resources Corporation Limited Partnership
  On
          August
          8, 2002, the Company formed a limited partnership in the State of Washington
          whereby the Company became the managing general partner and an outside
          individual investor became the initial limited partner. The entity, Cadence
          Resources Corporation Limited Partnership (“CRCLP” or the “Partnership”) was
          formed to invest in oil and gas properties in Texas and Louisiana.
 
 In
          connection with the formation of the Partnership, the Company agreed to
          contribute $12,500 in cash and its leasehold interest in an oil well (“2B”,
          which ultimately was a dry hole) in Wilbarger County, Texas and the limited
          partner contributed $250,000 in cash.
 
 Effective
          September 30, 2003, Cadence purchased the limited partner’s interest in the
          Partnership and thereby terminated the limited partner’s security interest in
          the equipment and fixtures affixed to wells 1A and 1B in Wilbarger County,
          Texas. In this transaction, Cadence made a cash payment of $250,000 in
          October
          2003 to the limited partner and received, from the limited partner his
          5%
          working interest in the West Electra Lake #1 oil well in Wilbarger,
          Texas.
 
 In
          connection with the aforementioned transaction, Cadence also repaid in
          October
          2003 to the limited partner the unsecured sum of $300,000. These funds
          were
          previously advanced to the Partnership in June 2003 for the exploration
          of
          natural gas interests in the Black Bean Unit in Michigan in return for
          the
          limited partner’s receiving 120,000 shares of Cadence stock and a working
          interest in each well drilled in the unit. Upon repayment of the $300,000
          advance, the limited partner’s working interest in each well drilled in the
          Black Bean Unit was fixed at 2%.
 
 Consulting
          Commitments
  In
          June
          2002, the Company entered into an agreement with Memphis Consulting Group
          (“Memphis”) for financial consulting and public relations services beginning on
          August 1, 2002 through August 1, 2003. The agreement called for monthly
          payments
          of $3,000, and an initial 50,000 stock options exercisable through August
          1,
          2005 at $1.50 per share. See Note 8. This agreement was terminated during
          the
          quarter ended March 31, 2003.
  F-23
  **CADENCE
            RESOURCES CORPORATION**
 **NOTES
            TO THE FINANCIAL STATEMENTS**
 **September
            30, 2005**
  In
          September 2001, the Company entered into a consulting agreement with American
          Financial Group for promotion to investors. The agreement called for monthly
          payments of $2,000 to cover all expenses, 20,000 shares of the Company’s common
          stock (which were issued in October 2001) and an override of 2.5% of monies
          raised in private placements from referrals or directed business. The agreement
          was terminated during the quarter ended March 31, 2003.
 
 In
          June
          2003, the Company entered into a corporate advisory agreement with Proteus
          Capital Corp. calling for a monthly fee of $3,000 in cash and 2,000 restricted
          shares of the common stock of the Company. Additionally, Proteus received
          an
          option for 50,000 shares exercisable at $1.75 for a period of four years,
          such
          shares bearing certain registration rights should the Company file a
          registration statement on behalf of other shareholders. This agreement
          with
          Proteus Capital Corp. was terminated during the fiscal year ended September
          30,
          2005.
 
 Lucius
          C.
          Geer, a consultant to the Company who manages its acquisition, exploration
          and
          production operations, has entered into several agreements with Cadence
          and has
          contractually received a 2% overriding royalty interest in oil, gas and
          mineral
          leases in Wilbarger County, Texas and a 1% overriding royalty interest
          in oil
          and gas leases in Desoto Parish, Louisiana.
 
 Effective
          August 1, 2003, Cadence agreed to pay Mr. Geer $7,500 per month plus an
          overriding royalty interest of 2% of the sales price received for all oil,
          gas
          and minerals from leases which Geer acquires for Cadence. Effective August
          1,
          2004, the agreement with Mr. Geer was changed to increase the monthly fee
          from
          $7,500 to $10,000. The agreement with Mr. Geer has been extended through
          June
          30, 2006.
 
 Other
          Commitments
  The
          Company entered into an exploration agreement with the W.T. Waggoner Estate
          (Waggoner) and its trustees on August 1, 2002. This agreement calls for
          exploration of the West Electra Lake Project located in Wilbarger County,
          Texas.
          See Note 10.
 
 On
          August
          13, 2002, the Company entered into a public relations retainer agreement
          for one
          year whereby the Company agreed to issue 60,000 shares of its common stock
          during this period for services received. The agreement also calls for
          reimbursement of expenses incurred pursuant to terms of this agreement.
          This
          agreement was terminated in the quarter ending September 30, 2003.
 
 **NOTE
          14 - RELATED PARTY TRANSACTIONS**
 
 At
          September 30, 2005, 2004 and 2003, the Company had related party accounts
          payable outstanding in the amounts of $0, $300,000 and $550,000, respectively.
          At September 30, 2005, 2004 and 2003, the Company had related party notes
          payable outstanding in the amounts of $0, $0 and $460,000,
          respectively.
 
 In
          February 2004, the Company borrowed $250,000 from an officer, a total of
          $95,000
          from two directors, and $50,000 from Dotson Exploration Company, a related
          entity. All of these borrowings were repaid by Cadence in April
          2004.
 
 In
          January 2004, Cadence hired Mr. Douglas Newby as a vice president; Mr.
          Newby is
          the president and owner of Proteus Capital Corp., with whom the Company
          has a
          consulting agreement. See Note 13.
 
 During
          the year ended September 30, 2002, the Company sold several mineral properties
          located in Shoshone County, Idaho to Caledonia Silver-Lead Mines, Inc.,
          later
          renamed Nevada-Comstock Mining Company (“NCMC”). Two officers of the Company
          collectively own 2.4% of this entity and Cadence owns 35%. During 2004,
          the
          Company paid $12,000 to cover annual filing fees on patented claims held
          by
          NCMC. This amount was converted to a loan during 2005.
  F-24
  **CADENCE
            RESOURCES CORPORATION**
 **NOTES
            TO THE FINANCIAL STATEMENTS**
 **September
            30, 2005**
 Two
          officers of the Company collectively own in excess of 40% of the stock
          of Dotson
          Exploration Company and are the sole officers and directors of Dotson.
          Dotson
          owns 109,000 shares of the Company’s common stock. During fiscal year 2002 and
          the first quarter of fiscal year 2003, Cadence repaid Dotson a loan in
          the
          amount of $10,000 and made two new loans to Dotson, one for $35,000 and
          one for
          $20,000, each at an interest rate of 10% per annum. Dotson transferred
          to
          Cadence marketable securities in the form of common stock of two unaffiliated
          companies, Enerphaze Corporation and The Williams Companies, Inc., valued
          by
          Cadence’s board of directors at $33,380, as partial payment of the amount
          loaned. During the nine months ended June 30, 2003, Dotson repaid the $20,000
          loan in cash. At September 30, 2005, 2004 and 2003, Dotson owed Cadence
          $3,720,
          which amount is payable on demand and bears interest at 10% per annum.
          Subsequent to the year ended September 30, 2005, this loan was paid in
          full.
 
 Because
          Dotson Exploration Company, Oxford Metallurgical, Inc. and Nevada-Comstock
          Mining Company are controlled by two officers of Cadence, these transactions
          cannot be considered to be the product of an arms-length
          negotiation.
 
 During
          fiscal 2003, the Company’s president made two loans to Cadence. One loan in
          December 2002 was in the principal amount of $70,000, bearing interest
          at 5% and
          the other loan made in February 2003 was in the principal amount of $50,000
          bearing interest at a rate of 8%. Cadence issued 14,000 shares of its common
          stock valued at $10,920, as an inducement to making the $70,000 loan and
          20,000
          shares valued at $15,600, as an inducement to making the $50,000 loan.
          Cadence
          repaid $60,000 and has agreed to issue 4,000 shares of its common stock
          in
          repayment of the remaining $10,000 principal amount outstanding on the
          $70,000
          loan. Cadence repaid $25,000 of the $50,000 loan in cash and issued 25,000
          shares of its common stock in the year ending September 30, 2004 to repay
          the
          remaining $25,000 principal amount.
 
 In
          February 2003, a Company director made a bridge loan to Cadence in the
          principal
          amount of $50,000, bearing interest of 8% per annum. Cadence issued 20,000
          shares of its stock valued at $15,600 as an inducement for the director
          to make
          the loan. Cadence repaid $25,000 of the $50,000 loan in 2003 and settled
          the
          remaining amount in 2004 with common stock. In July 2003, the director
          exercised
          a warrant to purchase 100,000 shares of common stock at $0.75 per
          share.
 
 On
          August
          8, 2002, the Company formed a limited partnership whereby the Company became
          the
          managing general partner and an outside individual investor (a Company
          shareholder) became the initial limited partner. During the year ended
          September
          30, 2003, the limited partner advanced $300,000 to the limited partnership
          in
          exchange for an unsecured note, which was repaid in October 2003.
 
 In
          October 2002, the Nathan A. Low Roth IRA and various entities controlled
          by
          Thomas Kaplan, shareholders of Cadence, exercised warrants in separate
          cashless
          transactions whereby each party surrendered a total of 175,676 shares of
          common
          stock valued at $325,000 to exercise warrants for the acquisition of 1,083,334
          shares of Cadence common stock.
 
 Other
          related party transactions are disclosed in Notes 3, 5, 6, and 11.
 
 **NOTE
          15 - INCOME TAXES**
 
 At
          September 30, 2005, the Company had net deferred tax assets calculated
          at an
          expected rate of 34% of approximately $6,703,000 as indicated below. As
          management of the Company cannot determine that it is more likely than
          not that
          the Company will realize the benefit of the net deferred tax asset, a valuation
          allowance equal to the net deferred tax asset has been established at September
          30, 2005.
 
 The
          significant components of the deferred tax asset at September 30, 2005,
          2004 and
          2003 were as follows:
  2005
                
                2004
                
                2003Net
                    operating loss carryforwards****
                
                $
                5,746,000
                
                $
                4,317,000
                
                $
                2,829,000Stock
                    options and warrants issued
                
                
                723,000
                
                
                623,000
                
                
                622,000Section
                    1231 loss carryforwards
                
                
                146,000
                
                
                146,000
                
                
                151,000Capital
                    loss carryforwards
                
                
                88,000
                
                
                586,000
                
                
                1,532,000Total
                    deferred tax asset
                
                
                6,703,000
                
                
                5,672,000
                
                
                5,134,000Less
                    valuation allowance
                
                
                (6,703,000
                )
                
                5,672,000
                
                
                5,134,000Net
                    deferred tax asset
                
                $
                –
                
                $
                –
                
                $
                –
  F-25
 **CADENCE
            RESOURCES CORPORATION**
 **NOTES
            TO THE FINANCIAL STATEMENTS**
 **September
            30, 2005**
 At
          September 30, 2005, the Company has net operating loss carryforwards of
          approximately $16,900,000, which expire in the years 2009 through 2024.
          In
          addition, the Company has net Section 1231 loss carryforwards of approximately
          $432,000, which expire in 2006, and net capital loss carryforwards of
          approximately $194,000, which expire in the years 2006 through 2009. The
          change
          in the allowance account from September 30, 2004 to September 30, 2005
          was
          $1,031,000, which was primarily due to the Company’s operating losses and the
          expiration of capital losses.
 
 The
          Company may have had a control change as defined under the Internal Revenue
          Code, because of new stock issuances and changes in ownership. The effect
          of
          such control changes has not been calculated but may limit the future use
          of net
          operating losses.
  **NOTE
          16 - ACQUISITION OF AURORA ENERGY, LTD.**
 
 The
          Company acquired Aurora Energy, Ltd. (hereinafter "Aurora"), a privately
          held
          company based in Traverse City, Michigan, on October 31, 2005, through
          the
          merger of the Company’s wholly-owned subsidiary with and into Aurora. The
          acquisition of Aurora was the culmination of a process that officially
          began
          November 19, 2004 when the Company and Aurora signed a letter of intent
          contemplating the acquisitions, followed, on January 31, 2005 by Cadence
          and
          Aurora entering into a definitive merger agreement providing for the acquisition
          of all Aurora’s outstanding capital stock in consideration for which (i) Cadence
          will issue two shares of its common stock for each share of outstanding
          Aurora
          common stock, (ii) each option and warrant to purchase a share of Aurora
          common
          stock will become an option or warrant (as applicable) to purchase two
          shares of
          Cadence common stock at one-half the previous exercise price, and (iii)
          Aurora
          will become a wholly owned subsidiary of Cadence.
 
 On
          May
          13, 2005, the Company filed Form S-4, registering up to 48,297,694 shares
          of its
          common stock, 10,205,328 shares of which are issuable upon exercise of
          options
          and warrants for issuance to the former shareholders and option holders
          of
          Aurora.
 
 As
          noted
          below, the acquisition of Aurora will be accounted for as a reverse merger,
          with
          Aurora being the acquiring party for accounting purposes. In connection
          with the
          acquisition of Aurora, Cadence issued an aggregate of 37,512,366 shares
          of
          Cadence common stock to the former shareholders of Aurora, and has reserved
          and
          additional 10,497,328 shares of Cadence common stock for issuance upon
          exercise
          of options or warrants that had been issued by Aurora prior to the acquisition
          and that were previously exercisable for shares of common stock of
          Aurora.
 
 As
          a
          result of the acquisition of Aurora, Cadence has relocated its operational
          headquarters to Aurora’s offices in Traverse City and the board of directors and
          management of Cadence have been significantly restructured. The merger
          between
          Cadence and Aurora was finalized on October 31, 2005.
 
 As
          a
          result of the acquisition of Aurora, the Company will revise certain of
          its
          accounting principles applicable to its oil and gas properties and change
          its
          accounting fiscal year end to December 31, commencing December 31, 2005.
          See
          Note 17.
  F-26
 
 **CADENCE
            RESOURCES CORPORATION**
 **NOTES
            TO THE FINANCIAL STATEMENTS**
 **September
            30, 2005**
 **NOTE
          17 - ACCOUNTING CHANGES IN CONNECTION WITH ACQUISITION OF AURORA ENERGY,
          LTD**
 
 As
          a
          result of the acquisition of Aurora Energy, Ltd. (hereinafter "Aurora"),
          the
          Company will change certain of its accounting policies as described below.
          These
          changes will be reflected in the financial statements for the fiscal year
          ending
          December 31, 2005.
 
 Aurora
          will be treated as the acquirer for accounting purposes, and accordingly,
          reverse acquisition accounting will be applied to the business
          combination.
 
 The
          Company will measure the cost of the business acquired by reference to
          the fair
          value of the Company’s securities (i.e. shares of Cadence common stock including
          outstanding options and warrants to purchase such shares) at the date of
          the
          merger agreement, January 31, 2005, or approximately, $41,500,000.
 
 Cadence
          will uniformly apply the full cost method to all of its oil and gas operations
          in both its divisions. Accordingly, the successful efforts method, which
          had
          previously been used by the Cadence division, will be changed to the full
          cost
          method.
 
 Cadence
          will initially use the intrinsic value method under APB Opinion 25 in accounting
          for stock based compensations, until adoption of SFAF 123(R). However,
          stock
          options outstanding as of the date of the merger will not be accounted
          for under
          APB 25, as those options were fully vested, and their fair value included
          in the
          cost of the business acquired as discussed above.
 
 **NOTE
          18 - SUBSEQUENT EVENTS**
 
 Subsequent
          to September 30, 2005, the Company issued an additional 300,000 shares
          of its
          common stock for $435,000 upon exercise of options and warrants, and 35,492
          shares upon a cashless exercise of options.
  F-27