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

                                   FORM 10-KSB

|_|   ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES  EXCHANGE ACT OF
      1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005.

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

For the transition period from October 1, 2005 to December 31, 2005.

Commission File Number: 000-25170

                          CADENCE RESOURCES CORPORATION
                 (Name of Small Business Issuer in Its Charter)

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

4110 Copper Ridge Dr, 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 Registered
--------------------------------------------------------------------------------
         None                                             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 is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. |_|

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 |_|

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

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

State issuer's revenues for its most recent fiscal year: $7,363,482

The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the issuer as of February 22, 2006, was approximately
$324,074,694. 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 February 22, 2006, there were 81,486,517 shares of the common stock, par
value $0.01 per share, of the issuer issued and outstanding.

Documents Incorporated by Reference: None

Transitional Small Business Disclosure Format: Yes |_| No |X|

<PAGE>

                                TABLE OF CONTENTS

PART I  .....................................................................  1
     ITEM 1.   DESCRIPTION OF BUSINESS.......................................  1
     ITEM 2.   DESCRIPTION OF PROPERTIES..................................... 13
     ITEM 3.   LEGAL PROCEEDINGS............................................. 24
     ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 24

PART II  .................................................................... 25
     ITEM 5.   MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS
               AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES...... 25
     ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
               CONDITION AND RESULTS OF OPERATIONS........................... 29
     ITEM 7.   FINANCIAL STATEMENTS.......................................... 40
     ITEM 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
               ACCOUNTING AND FINANCIAL DISCLOSURE........................... 40
     ITEM 8A.  CONTROLS AND PROCEDURES....................................... 40
     ITEM 8B.  OTHER INFORMATION............................................. 41

PART III  ................................................................... 42
     ITEM 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
               PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE
               EXCHANGE ACT.................................................. 42
     ITEM 10.  EXECUTIVE COMPENSATION........................................ 46
     ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
               MANAGEMENT AND RELATED STOCKHOLDER MATTERS.................... 48
     ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 49
     ITEM 13.  EXHIBITS...................................................... 50
     ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES........................ 51

FINANCIAL STATEMENTS........................................................ F-1

                                       ii
<PAGE>

                                     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:

      o     the quality of our properties with regard to, among other things,
            the existence of reserves in economic quantities;
      o     uncertainties about the estimates of reserves;
      o     our ability to increase our production and oil and gas income
            through exploration and development;
      o     the number of well locations to be drilled and the time frame within
            which they will be drilled;
      o     the timing and extent of changes in commodity prices for natural gas
            and crude oil;
      o     domestic demand for oil and natural gas;
      o     drilling and operating risks;
      o     the availability of equipment, such as drilling rigs and
            transportation pipelines; and
      o     the adequacy of our capital resources and liquidity including, but
            not limited to, access to credit.

      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

      We are a Utah corporation incorporated on April 7, 1969 to explore and
mine natural resources under the name Royal Resources, Inc. We changed our
corporate name four times since we were incorporated, most recently on May 2,
2001 when 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 was
accounted for as a reverse merger, with Aurora being the acquiring party for
accounting purposes. The Aurora executive management team also assumed
management control at the time the merger closed, and we moved our corporate
offices to Traverse City, Michigan. The acquisition of Aurora was pursuant to
the Agreement and Plan of Merger dated as of January 31, 2005. In connection
with the acquisition of Aurora, we issued an aggregate of 39,592,510 shares of
our common stock to the former shareholders of Aurora, and 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.

BUSINESS OVERVIEW

      We are involved in the exploration, development and production of natural
gas and oil reserves in North America. Our goal 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. We have a
particular, but not exclusive, focus on the black shales of Michigan and
Indiana. Conventional oil and gas exploration will be given consideration when
opportunities are available which could yield significant upside reserves. Quite
often, there will be prospects generated for conventional reservoirs as a result
of data gained from drilling wells in unconventional reservoirs.

      Our goal is to generate revenues from the sale of oil and gas production
sufficient to support ongoing development of our acreage. 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. Proved developed producing reserves are also generally
more attractive to prospective asset purchasers such as larger oil and gas
companies.

                                       1
<PAGE>

DRILLING TECHNIQUES AND GAS PROCESSING

      For gas wells, we generally use 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, we seek to increase the recoverability of gas production that would
otherwise be held in the reservoir.

      We usually use 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 wells are then
hydraulically fractured with a specifically designed four-stage fracture
procedure. Imaging logs are used to identify which zones are best fractured and
will yield commercial gas production.

      In order to contain costs, we try to keep facilities for gas processing
decentralized. Salt water disposal wells are drilled close to the compression
facilities, near to each field's wells. Skid mounted separators that can be
easily upgraded or 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. We 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 peak revenue
production.

      We use skid mounted compressors in a series to maximize compression
efficiencies from the well to the transportation line. We also seek to maintain
low pressure in the gathering systems. Gas is usually drawn at low wellhead
pressure using a five and one-half inch or seven inch production casing.

      One strategy we use 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. We continue to explore innovations in
technology and methodologies that will reduce production costs and increase
efficiencies. We may use other drilling, completion and operating procedures
than those described above if, in our opinion, alternative procedures will
produce a higher rate of gas.

      Our wells are drilled by outside drilling companies. We believe that there
is currently enough capacity available in the areas in which we are 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.

      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, re-completion,
deepening or sidetracking of existing wells; or the installation of secondary
tertiary or other enhanced recovery methods. We will engage in
production-enhancing operations of this type when needed, even if it results in
a temporary reduction in cash flow.

SALE OF PRODUCTION

      We use different strategies for gas sales depending on the location of the
field and the local markets. In some locations, we may 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 transmission 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.

      We recently entered into a confirmed delivery gas contract to be effective
for the period April 1, 2006 through March 31, 2007. This contract will take up
most of our existing production. As we bring new wells on line and our
production volume increases, we will sell the new production in the spot
markets. We expect that we will usually sell in this fashion, partly through
confirmed gas delivery contracts and partly in the spot markets. The advantage
to selling under a confirmed gas delivery contract is that we can protect
against price fluctuations and falling prices. Because of volatility in gas
prices and our need to be able to service debt, we decided that it would be
advisable to sell at least some of our gas under a confirmed delivery contract.
The disadvantage of selling under a confirmed gas delivery contract is that it
will impair our ability to participate in significant market price increases, if
they occur, until the end of the term of the contract.

                                       2
<PAGE>

      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 prices will be low at
the time periods in which the wells are most productive, thereby reducing
overall returns.

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 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 acreage owned in the unit by each
participant. Thus, working interest percentages will be recalculated each time
new acreage is added to the unit or removed from the unit. All costs are billed
to each participant, including costs for infrastructure development as well as
drilling costs. However, percentage of costs can vary, based upon agreements
among participants.

      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.
Fields are typically unitized prior to drilling wells or filing permit
applications.

INSURANCE

      We currently have the following insurance coverage which is effective
until January 1, 2007:

                POLICY TYPE                              LIMIT
      ----------------------------------  --------------------------------------

      Worker's Compensation & Employment  Worker's Compensation; Statutory
      Liability                           Employer's Liability - $1,000,000

      General 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 -$2,000,000

      Automobile                          $1,000,000 per occurrence

      Excess/Umbrella Liability           $20,000,000 per occurrence and
                                          aggregate

      Property/Pollution                  $3,432,295 (property coverage);
                                          $1,000,000 (pollution limit)

      Well Control                        $2,000,000 limit

      Directors and Officers Liability    $15,000,000 primary
                                          $10,000,000 excess

                                       3
<PAGE>

EMPLOYEES

      As of March 28, 2006, we have 47 full time employees and three part time
employees. 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.

COMPETITION AND MARKETS

      We face competition from other oil and natural gas companies in all
aspects of our business, including acquisition of producing properties and oil
and gas leases, marketing of oil and gas, and obtaining goods, services and
labor. Many of our competitors have substantially larger financial and other
resources. Factors that affect our ability to acquire producing properties
include available funds, available information about prospective properties and
our limited number of employees. Gathering systems are the only practical method
for the intermediate transportation of natural gas. Therefore, competition for
natural gas delivery is presented by other pipelines and gas gathering systems.
Competition is also presented by alternative fuel sources, including heating oil
and other fossil fuels. Renewable energy sources may become more competitive in
the future.

      The availability of a ready market for and the price of any hydrocarbons
produced will depend on many factors beyond our control, including but not
limited to the amount of domestic production and imports of foreign oil and
liquefied natural gas, the marketing of competitive fuels, the proximity and
capacity of natural gas pipelines, the availability of transportation and other
market facilities, the demand for hydrocarbons, the effect of federal and state
regulation of allowable rates of production, taxation, the conduct of drilling
operations and federal regulation of natural gas. In addition, the restructuring
of the natural gas pipeline industry virtually eliminated the gas purchasing
activity of traditional interstate gas transmission pipeline buyers. Producers
of natural gas have therefore been required to develop new markets among gas
marketing companies, end users of natural gas and local distribution companies.
All of these factors, together with economic factors in the marketing arena,
generally may affect the supply of and/or demand for oil and gas and thus the
prices available for sales of oil and gas.

REGULATORY CONSIDERATIONS

      Proposals and proceedings that might affect the oil and gas industry are
periodically presented to Congress, the Federal Energy Regulatory Commission
("FERC"), the Minerals Management Service ("MMS"), state legislatures and
commissions and the courts. We cannot predict when or whether any such proposals
may become effective. In the past, the natural gas industry has been heavily
regulated. There is no assurance that the regulatory approach currently pursued
by various agencies will continue indefinitely. Notwithstanding the foregoing,
we currently do not anticipate that compliance with existing federal, state and
local laws, rules and regulations will have a material or significantly adverse
effect upon our capital expenditures, earnings or competitive position. No
material portion of our business is subject to re-negotiation of profits or
termination of contracts or subcontracts at the election of the federal
government.

      Our operations are subject to various types of regulation at the federal,
state and local levels. This regulation includes requiring permits for drilling
wells, maintaining bonding requirements in order to drill or operate wells and
regulating the location of wells, the method of drilling and casing wells, the
surface use and restoration of properties upon which wells are drilled, the
plugging and abandoning of wells and the disposal of fluids used or generated in
connection with operations. Our operations are also subject to various
conservation laws and regulations. These include the regulation of the size of
drilling and spacing units or proration units and the density of wells which may
be drilled, and the unitization or pooling of oil and gas properties. In
addition, state conservation laws sometimes establish maximum rates of
production from oil and gas wells, generally prohibit the venting or flaring of
gas and impose certain requirements regarding the ratability of production. The
effect of these regulations may limit the amount of oil and gas we can produce
from our wells in a given state and may limit the number of wells or the
locations at which we can drill.

      Currently, there are no federal, state or local laws that regulate the
price for our sales of natural gas, natural gas liquids, crude oil or
condensate. However, the rates charged and terms and conditions for the movement
of gas in interstate commerce through certain intrastate pipelines and
production area hubs are subject to regulation under the Natural Gas Policy Act
of 1978. Pipeline and hub construction activities are, to a limited extent, also
subject to regulations under the Natural Gas Act of 1938. While these controls
do not apply directly to us, their effect on natural gas markets can be
significant in terms of competition and cost of transportation services, which
in turn can have a substantial impact on our profitability and costs of doing
business. Additional proposals and proceedings that might affect the natural gas
and crude oil extraction industry are considered from time to time by Congress,
FERC, state regulatory bodies and the courts. We cannot predict when or if any
such proposals might become effective and their effect, if any, on our
operations. We do not believe that we will be affected by any action taken in
any materially different respect from other crude oil and natural gas producers,
gatherers and marketers with whom we compete.

                                       4
<PAGE>

      State regulation of gathering facilities generally includes various
safety, environmental and, in some circumstances, nondiscriminatory take
requirements. This regulation has not generally been applied against gatherers
of natural gas, although natural gas gathering may receive greater regulatory
scrutiny in the future.

      Our oil and natural gas production and saltwater disposal operations and
our processing, handling and disposal of hazardous materials, such as
hydrocarbons and naturally occurring radioactive materials are subject to
stringent environmental regulation. Compliance with environmental regulations is
generally required as a condition to obtaining drilling permits. State
inspectors generally review compliance. We 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.

      Various federal, state and local laws regulating the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, directly impact oil and gas exploration, development and production
operations, and consequently may impact our operations and costs. These
regulations include, among others, (i) regulations by the Environmental
Protection Agency ("EPA") and various state agencies regarding approved methods
of disposal for certain hazardous and non-hazardous wastes; (ii) the
Comprehensive Environmental Response, Compensation, and Liability Act, Federal
Resource Conservation and Recovery Act and analogous state laws which regulate
the removal or remediation of previously disposed wastes (including wastes
disposed of or released by prior owners or operators), property contamination
(including groundwater contamination), and remedial plugging operations to
prevent future contamination; (iii) the Clean Air Act and comparable state and
local requirements which may result in the gradual imposition of certain
pollution control requirements with respect to air emissions from our
operations; (iv) the Oil Pollution Act of 1990 which contains numerous
requirements relating to the prevention of and response to oil spills into
waters of the United States; (v) the Resource Conservation and Recovery Act
which is the principal federal statute governing the treatment, storage and
disposal of hazardous wastes; and (vi) state regulations and statutes governing
the handling, treatment, storage and disposal of naturally occurring radioactive
material ("NORM").

      A permit from the EPA (Michigan) or a state regulatory agency (Indiana and
Ohio) must be obtained before we may drill a salt water disposal well. The
amount of time required to obtain such a permit varies from state to state, but
can take as much as six or more months in Michigan. Since many gas wells can
only be produced if a salt water disposal well is available, the salt water
disposal well permit requirement may delay the commencement of production.

      In the course of our routine oil and natural gas operations, surface
spills and leaks, including casing leaks of oil or other materials occur, and
we incur costs for waste handling and environmental compliance. It is also
possible that our oil and natural gas operations may require us to manage NORM.
NORM is present in varying concentrations in sub-surface formations, including
hydrocarbon reservoirs, and may become concentrated in scale, film and sludge in
equipment that comes in contact with crude oil and natural gas production and
processing streams. Some states, including Texas, have enacted regulations
governing the handling, treatment, storage and disposal of NORM. Moreover, we
are able to control directly the operations of only those wells for which we act
as the operator. Despite our lack of control over wells owned by us but operated
by others, the failure of the operator to comply with the applicable
environmental regulations may, in certain circumstances, be attributed to us
under applicable state, federal or local laws or regulations.

      We believe that we are in substantial compliance with all currently
applicable environmental laws and regulations. To date, compliance with such
laws and regulations has not required the expenditure of any material amount of
money, and we do not currently anticipate that future compliance will have a
materially adverse effect on our consolidated financial position or results of
operations. Since these laws and regulations are periodically amended, we are
unable to predict the ultimate cost of compliance. To our knowledge, there are
currently no material adverse environmental conditions that exist on any of our
properties and there are no current or threatened actions or claims by any
local, state or federal agency or by any private landowner against us pertaining
to such a condition. Further, we are not aware of any currently existing
condition or circumstance that may give rise to such actions or claims in the
future.

                                       5
<PAGE>

SUBSIDIARIES AND AFFILIATES

      As a result of the merger on October 31, 2005, Aurora, a Nevada
corporation, is now our wholly owned subsidiary. Those assets held
by Aurora before the merger continue to be held by Aurora at this time (other
than those assets that have since been sold). In addition, the new assets
acquired since the merger are being acquired by Aurora or its subsidiaries. Our
presentation of our assets in this document is shown on a consolidated basis.
Aurora has several subsidiaries as described below.

      Aurora Antrim North, L.L.C. ("AAN") is a wholly-owned subsidiary of
Aurora. It is the borrower under the BNP Paribas and TCW Energy, et al. credit
facilities, and holds those assets pledged as collateral under the credit
facilities. 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.

      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. Since February 1, 2006, Aurora owns a 71% membership interest
in AOC.

      Indiana Royalty Trustory, L.L.C. ("IRT") owns overriding royalty interests
in the New Albany Shale in Indiana. Aurora owns a 50% membership interest in
IRT. The balance is owned by LaVanway Capital & Trade Corporation.

      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 90.94% membership interest in this
limited liability company, and has entered into a letter of intent to acquire an
additional 2.5%. After Hudson receives revenues equal to 125% of the amount
spent on construction of the pipeline, AAN's interest will drop by 2.5%.

      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. Aurora owns a 30% interest in
GeoPetra. To date, GeoPetra's operations have not been significant.

RISKS RELATED TO OUR BUSINESS

We Cannot Guarantee Financial Results.

      We 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 and 2005. There is no assurance that we will be able to return
to and maintain profitability.

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 requires an assessment of the 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.

                                       6
<PAGE>

We Do Not Have Complete Management Control Over All Our Properties.

      We conduct much of our oil and gas exploration, development and production
activities in joint ventures with others. In some cases, we act as operator and
retain significant management control. In other cases, we have reserved only an
overriding royalty interest and have surrendered all management rights. In still
other cases, we have reserved the right to participate in management decisions,
but do not have ultimate decision-making authority. As a result of these varying
levels of management control, in a portion of the properties in which we have an
interest, we have no control over:

      o     the number of wells to be drilled;
      o     the location of wells to be drilled;
      o     the timing of drilling and re-completing of wells;
      o     the field company hired to drill and maintain the wells;
      o     the timing and amounts of production;
      o     the approval of other participants in drilling wells;
      o     development and operating costs;
      o     capital calls on working interest owners; and
      o     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 team dies, becomes disabled
or voluntarily terminates employment with us, there is no assurance that a
suitable or comparable substitute will be found.

Much Of Our Proved Reserves Are Not Yet Producing.

      Of our proved natural gas reserves at December 31, 2005 (including the
additional working interest in the Hudson project that we purchased in January
2006), approximately 58% are classified as "proved developed producing",
approximately 19% are classified as "proved developed non-producing" and
approximately 23% 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 Credit Facilities Have Operating Restrictions And Financial Covenants That
Limit Our Flexibility And May Limit Our Borrowing Capacity.

      One of our credit facilities limits the amount of earnings from production
that we have access to for the properties pledged as collateral on the loan. All
of our credit facilities, other than our office mortgage loan, have operational
restrictions and credit ratio compliance requirements that limit our
flexibility. 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 we will be unable to draw more funds to use in
development.

                                       7
<PAGE>

      The value of the assets pledged as collateral for two of our credit
facilities will depend on the then current commodity prices for natural gas. If
prices drop significantly, we may have trouble satisfying the ratio covenants of
these credit facilities. As noted below, oil and gas prices are volatile. The
value of assets pledged on a third credit facility is tied to the price at which
our stock is trading. We will be unable to control this variable.

      If we are unable to make use of our credit facilities, 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 current credit facilities.

Some Of Our Bank Accounts Are Not Fully Insured.

      Some of our bank accounts periodically exceed the $100,000 limit of FDIC
insurance for deposits. In the unlikely event that our bank should fail, it is
possible that we will lose some of our 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 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.

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. Delay in receiving
governmental permits, adverse weather, a shortage of labor or parts, and/or
dewatering time frames may cause delays, as discussed below. These delays will
result in delays 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 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 can 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.

                                       8
<PAGE>

Oil And Gas Prices Are Volatile. A Substantial Decrease In Oil Or 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 reducing
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.

      Prices for natural gas and crude oil fluctuate widely. The prices for oil
and natural gas are subject to a variety of factors beyond our control,
including

            o     the level of consumer product demand;
            o     weather conditions;
            o     domestic and foreign governmental regulations;
            o     the price and availability of alternative fuels;
            o     political conditions in oil and gas producing regions;
            o     the domestic and foreign supply of oil and gas;
            o     market uncertainty; and
            o     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 before new pipelines are built. 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 activities. 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 the 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.

                                       9
<PAGE>

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 exploring for, developing
or acquiring 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 our Michigan Antrim
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 Accounting Standards No. 69
to be used in 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 will require
additional financing, in addition to cash generated from our operations, to fund
our planned growth. 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 is
done at that time and that a drilling title opinion is done prior to the
initiation of drilling, neither of which can substitute for a complete title
investigation. We have followed this custom to date 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.

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 develop and
operate 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.

                                       10
<PAGE>

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.
If so, 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 May Lack Insurance That Could Lower Risks To Our Investors.

      We have procured insurance policies for general liability,
property/pollution, well control, workers' compensation and automobile, as well
as a $20 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.

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

            o     discharge permits for drilling operations;
            o     drilling bonds;
            o     reports concerning operations;
            o     spacing of wells;
            o     unitization and pooling of properties;
            o     environmental protection; and
            o     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.

                                       11
<PAGE>

      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 CADENCE STOCK

We May Experience Volatility In Our Stock Price.

      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:

      o     quarterly variations in operating results;
      o     changes in financial estimates by securities analysts;
      o     changes in market valuations of other similar companies;
      o     announcements by us or our competitors of new products or of
            significant technical innovations, contracts, acquisitions,
            strategic partnerships or joint ventures;
      o     additions or departures of key personnel;
      o     any deviations in net sales or in losses from levels expected by
            securities analysts; and
      o     future sales of our common stock.

      In addition, the stock market from time to time experiences 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.

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.

      In the past our shares have been deemed to be "penny stocks" due to the
price at which the shares traded. The Securities and Exchange Commission has
adopted regulations which generally define a "penny stock" to include any equity
security that has a market price (as defined in the regulations) less than $5.00
per share. Although our stock is currently trading above $5.00 per share, the
price at which it trades could drop, resulting in its re-characterization as
penny stock. If this happens, the penny stock regulations will 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 if our shares were
re-characterized as penny stock. 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.

We Do Not Have Cumulative Voting And A Small Number Of Existing Shareholders
Control Us.

      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.

                                       12
<PAGE>

      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 are initially 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 are initially Howard
Crosby and Kevin Stulp. In addition, these 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. Also in connection with the closing
of the merger, certain of our shareholders executed and delivered irrevocable
proxies naming William W. Deneau and Lorraine King as proxies to vote their
shares through October 31, 2008 in the manner determined by such proxies. An
aggregate of 11,583,012 shares of our common stock held by such shareholders was
subject to these proxies at February 22, 2006. These provisions will limit our
other shareholders' 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 through October 31, 2008.

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.

ITEM 2. DESCRIPTION OF PROPERTIES

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 (10% 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 to over 1,500 feet below the surface. 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 400 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 primarily a 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 oils and
gases stored in the shale.

      The Antrim Shale gas adsorbs to organic material in a manner similar 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 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 our opinion, based upon
performance information from almost 8,000 wells in similar circumstances, areas
with natural fractures in shale have good production potential.

                                       13
<PAGE>

      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. We believe 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 us to change focus. Any one of these variables
could cause actual results to differ materially from our current business plan.

      Our current holdings in the Michigan Antrim shale are outlined in the
chart below.

                                       14
<PAGE>

                              MICHIGAN ANTRIM CHART
                           As of December 31, 2005(1)

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                      Total #
                                                                                        of
                                                     Gross #             Additional   Antici-
                                                      Wells     Gross #     Wells      pated
                       Approx.  Gross #     Date     Drilled/    Wells   Permitted/    Gross                        Working   Joint
Project                 Gross    Wells   Production  Not Yet   Plugged &   Not Yet     Prod.                        Interest Venture
Name        Location    Acres  Producing  Started   Producing  Abandoned   Drilled     Wells  Operator   Pipeline     (4) %  Partner
------------------------------------------------------------------------------------------------------------------------------------
<S>         <C>          <C>       <C>      <C>          <C>        <C>         <C>      <C>   <C>        <C>         <C>    <C>
Treasure    Alpena       2,373     23       10/03        0          2          0        23    Samson(2)   DTE            18%  Samson
Island      County, MI                                                                                    Alpena LP           (2)
                                                                                                          Line
                                                                                                          into
                                                                                                          the
                                                                                                          Alpena-
                                                                                                          Gaylord
                                                                                                          line
------------------------------------------------------------------------------------------------------------------------------------
Black       Alpena       1,891     13        4/03        0          2          2        16    Samson(2)   Thunder      15.5%  Samson
Bean #1     County, MI                                                                                    Bay                 (2)
                                                                                                          Line from
                                                                                                          Paxton
                                                                                                          Quarry
                                                                                                          facility
                                                                                                          into
                                                                                                          Alpena-
                                                                                                          Gaylord
                                                                                                          line
------------------------------------------------------------------------------------------------------------------------------------
Black       Alpena       1,265      2        8/05        0          1          3         6    Samson(2)   Thunder     28.72%  Samson
Bean #2     County, MI                                                                                    Bay                 (2)
                                                                                                          Line from
                                                                                                          Paxton
                                                                                                          Quarry
                                                                                                          facility
                                                                                                          into
                                                                                                          Alpena-
                                                                                                          Gaylord
                                                                                                          line
------------------------------------------------------------------------------------------------------------------------------------
Black       Alpena         455      4        7/05        0          0          1         5    Samson(2)   Thunder Bay  29.22% Samson
Bean #3     County, MI                                                                                    Line from           (2)
                                                                                                          Paxton
                                                                                                          Quarry
                                                                                                          facility
                                                                                                          into
                                                                                                          Alpena-
                                                                                                          Gaylord
                                                                                                          line
------------------------------------------------------------------------------------------------------------------------------------
Black       Alpena         773      0         N/A        0          0          0         7    Samson(2)   Thunder      20.0%  Samson
Bean #4     County, MI                                                                                    Bay                 (2)
                                                                                                          Line from
                                                                                                          Paxton
                                                                                                          Quarry
                                                                                                          facility
                                                                                                          into
                                                                                                          Alpena-
                                                                                                          Gaylord
                                                                                                          line
------------------------------------------------------------------------------------------------------------------------------------
Beyer       Alpena       2,575     17       02/02        0          0          2        19    Samson(2)   Thunder     7.639%  Samson
            County, MI                                                                                    Bay                 (2)
                                                                                                          Line from
                                                                                                          Paxton
                                                                                                          Quarry
                                                                                                          facility
                                                                                                          into
                                                                                                          Alpena-
                                                                                                          Gaylord
                                                                                                          line
------------------------------------------------------------------------------------------------------------------------------------
Paxton      Alpena       2,485     15       10/98        0          2          0        17    Samson(2)   Thunder      19.8%  Samson
Quarry      County, MI                                                                                    Bay Line            (2)
                                                                                                          from
                                                                                                          Paxton
                                                                                                          Quarry
                                                                                                          facility
                                                                                                          into
                                                                                                          Alpena-
                                                                                                          Gaylord
                                                                                                          line
------------------------------------------------------------------------------------------------------------------------------------
Clear       Mont-        4,148      0         N/A       10          0          3        25    Samson(2)   Thunder      20.0%  Samson
Lake        morency                                                                                       Bay into            (2)
            County, MI                                                                                    Alpena-
                                                                                                          Gaylord
                                                                                                          line
------------------------------------------------------------------------------------------------------------------------------------
Discard     Alpena       1,512      1       12/05        4          0          4        12    Samson(2)   Thunder      20.0%  Samson
            County, MI                                                                                    Bay into            (2)
                                                                                                          Alpena-
                                                                                                          Gaylord
                                                                                                          line
------------------------------------------------------------------------------------------------------------------------------------
Gehrke      Alpena       2,698     21        8/05        0          0          2        23    Samson(2)   Thunder      20.0%  Samson
            County, MI                                                                                    Bay into            (2)
                                                                                                          Alpena-
                                                                                                          Gaylord
                                                                                                          line
------------------------------------------------------------------------------------------------------------------------------------
Green       Alpena       1,696      0         N/A        1          0         10        17    Samson(2)   Thunder      20.0%  Samson
Bean #1     County, MI                                                                                    Bay into            (2)
                                                                                                          Alpena-
                                                                                                          Gaylord
                                                                                                          line
------------------------------------------------------------------------------------------------------------------------------------
Green       Alpena         940      0         N/A        3          0          5        16    Samson(2)   Thunder     39.22%  Samson
Bean #2     County, MI                                                                                    Bay into            (2)
                                                                                                          Alpena-
                                                                                                          Gaylord
                                                                                                          line
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       15
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                      Total #
                                                                                        of
                                                     Gross #             Additional   Antici-
                                                      Wells     Gross #     Wells      pated
                       Approx.  Gross #     Date     Drilled/    Wells   Permitted/    Gross                        Working   Joint
Project                 Gross    Wells   Production  Not Yet   Plugged &   Not Yet     Prod.                        Interest Venture
Name        Location    Acres  Producing  Started   Producing  Abandoned   Drilled     Wells  Operator   Pipeline     (4) %  Partner
------------------------------------------------------------------------------------------------------------------------------------
<S>         <C>          <C>       <C>      <C>          <C>        <C>         <C>      <C>   <C>        <C>         <C>    <C>
Leeseberg   Alpena         429      0         N/A        0          0          2         5    Samson(2)   Thunder      20.0%  Samson
#1          County, MI                                                                                    Bay into            (2)
                                                                                                          Alpena-
                                                                                                          Gaylord
                                                                                                          line
------------------------------------------------------------------------------------------------------------------------------------
Leeseberg   Alpena       1,094      0         N/A        0          0          8        12    Samson(2)   Thunder      20.0%  Samson
#2          County, MI                                                                                    Bay into            (2)
                                                                                                          Alpena-
                                                                                                          Gaylord
                                                                                                          line
------------------------------------------------------------------------------------------------------------------------------------
Mackinaw    Alpena       1,670      0         N/A        0          0         11        14    Samson(2)   Thunder      9.75%  Samson
#1          County, MI                                                                                    Bay into            (2)
                                                                                                          Alpena-
                                                                                                          Gaylord
                                                                                                          line
------------------------------------------------------------------------------------------------------------------------------------
Mackinaw    Alpena       2,520      8        9/05        0          1          5        17    Samson(2)   Thunder      20.0%  Samson
#2          County, MI                                                                                    Bay into            (2)
                                                                                                          Alpena-
                                                                                                          Gaylord
                                                                                                          line
------------------------------------------------------------------------------------------------------------------------------------
Mt.         Alcona      15,447      0         N/A        3          0          7       100    Samson(2)   Thunder      20.0%  Samson
Mohican     County, MI                                                                                    Bay into            (2)
                                                                                                          Alpena-
                                                                                                          Gaylord
                                                                                                          line
------------------------------------------------------------------------------------------------------------------------------------
Nicholson   Alpena         569      2        8/05        0          1          1         4    Samson(2)   Thunder      20.0%  Samson
Hill #1     County, MI                                                                                    Bay into            (2)
                                                                                                          Alpena-
                                                                                                          Gaylord
                                                                                                          line
------------------------------------------------------------------------------------------------------------------------------------
Nicholson   Alpena       2,967      0         N/A        1          0          0        17    Samson(2)   Thunder      20.0%  Samson
Hill #2     County, MI                                                                                    Bay into            (2)
                                                                                                          Alpena-
                                                                                                          Gaylord
                                                                                                          line
------------------------------------------------------------------------------------------------------------------------------------
Nicholson   Alpena       1,459      0         N/A        1          0          1        15    Samson(2)   Thunder      20.0%  Samson
Hill #3     County, MI                                                                                    Bay into            (2)
                                                                                                          Alpena-
                                                                                                          Gaylord
                                                                                                          line
------------------------------------------------------------------------------------------------------------------------------------
Northwest   Benzie      23,578      0         N/A        1          0          0         1    Samson(2)   Michigan     20.0%  Samson
Michigan    County, MI                                                                                    Wet           to    (2)
                                                                                                          Header       100%
------------------------------------------------------------------------------------------------------------------------------------
Sequin      Alpena       1,776     17        4/05        0          0          1        19    Samson(2)   DTE          20.0%  Samson
            County, MI                                                                                    Alpena              (2)
                                                                                                          Line
                                                                                                          into the
                                                                                                          Alpena-
                                                                                                          Gaylord
                                                                                                          line
------------------------------------------------------------------------------------------------------------------------------------
Hudson      Charlevoix   2,760     22       11/04        0          1          1        23    Aurora      Aspen          86%    None
#34         County, MI                                                                                    Line to
                                                                                                          Petoskey
                                                                                                          dry line
------------------------------------------------------------------------------------------------------------------------------------
Hudson SW   Charlevoix   2,578     24       12/04        0          1          2        24    Aurora      Aspen          96%    None
            County, MI                                                                                    Line to
                                                                                                          Petoskey
                                                                                                          dry line
------------------------------------------------------------------------------------------------------------------------------------
Hudson NE   Charlevoix   2,400     21        4/05        0          1          1        22    Aurora      Aspen          96%    None
            County, MI                                                                                    Line to
                                                                                                          Petoskey
                                                                                                          dry line
------------------------------------------------------------------------------------------------------------------------------------
Hudson NW   Charlevoix   2,594     14       11/05        5          1          2        25    Aurora      Aspen          96%    None
            County, MI                                                                                    Line to
                                                                                                          Petoskey
                                                                                                          dry line
------------------------------------------------------------------------------------------------------------------------------------
Hudson      Charlevoix     760      0         N/A        6          0          2         8    Aurora      Aspen          46%   DTE
#13         County, MI                                                                                    Line to              and
                                                                                                          Petoskey           Whiting
                                                                                                          dry line             Oil
------------------------------------------------------------------------------------------------------------------------------------
Hudson      Charlevoix     320      3       11/05        0          0          0         3    Aurora      Aspen         100%    None
#19         County, MI                                                                                    Line to
                                                                                                          Petoskey
                                                                                                          dry line
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       16
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                      Total #
                                                                                        of
                                                     Gross #             Additional   Antici-
                                                      Wells     Gross #     Wells      pated
                       Approx.  Gross #     Date     Drilled/    Wells   Permitted/    Gross                        Working   Joint
Project                 Gross    Wells   Production  Not Yet   Plugged &   Not Yet     Prod.                        Interest Venture
Name        Location    Acres  Producing  Started   Producing  Abandoned   Drilled     Wells  Operator   Pipeline     (4) %  Partner
------------------------------------------------------------------------------------------------------------------------------------
<S>         <C>          <C>       <C>      <C>          <C>        <C>         <C>      <C>   <C>        <C>         <C>    <C>
Hudson      Charlevoix   1,415      2       11/05        0          1          1         8    Aurora      Aspen         100%    None
West        County, MI                                                                                    Line to
                                                                                                          Petoskey
                                                                                                          dry line
------------------------------------------------------------------------------------------------------------------------------------
1500        Oscoda      19,152      0         N/A        1          0          2              Aurora      Saginaw     48.33%   Blue-
Antrim      County, MI                                                                                    Bay to               grass
Mio                                                                                                       Alpena-             Energy
                                                                                                          Gaylord
                                                                                                          dry line
------------------------------------------------------------------------------------------------------------------------------------
Blue Chip   Mont-        1,840      0         N/A        2          0          6        12    Aurora      MichCon       100%    None
            morency                                                                                       Wet
            County, MI                                                                                    Header
------------------------------------------------------------------------------------------------------------------------------------
Arrowhead   Mont-        7,083      0         N/A       14          0         14        60    Aurora      MichCon        97%    None
            morency                                                                                       Wet           BPO;
            County, MI                                                                                    Header         77%
                                                                                                                         APO
------------------------------------------------------------------------------------------------------------------------------------
400 Antrim  Cheboygan    1,963      0         N/A        0          0          4        60    Aurora      Aspen         100%    None
            County, MI                                                                                    Line to
                                                                                                          Petoskey
                                                                                                          dry line
------------------------------------------------------------------------------------------------------------------------------------
Black Bear  Cheboygan    2,178      0         N/A       14          0          3        18    Aurora      Aspen         100%    None
Central     County, MI                                                                                    Line to
                                                                                                          Petoskey
                                                                                                          dry line
------------------------------------------------------------------------------------------------------------------------------------
Dover       Otsego         505      2        9/05        0          0          0         2    Savoy       North          20%   Savoy
            County, MI                                                                        Explor-     Charlton            Energy
                                                                                              ation       7 Line
------------------------------------------------------------------------------------------------------------------------------------
Devil       Alcona         N/A     10       11/98        0          0          0        10    PDC(3)      Alpena-      3.68%  PDC(3)
River       County, MI                                                                                    Gaylord
                                                                                                          Line
------------------------------------------------------------------------------------------------------------------------------------
Blue        Alcona         N/A     16       09/97        0          0          0        16    PDC(3)      Alpena-       1.5%  PDC(3)
Spruce      County, MI                                                                                    Gaylord
                                                                                                          Line
------------------------------------------------------------------------------------------------------------------------------------
Timm        Alcona         N/A     21       08/98        0          0          0        21    PDC(3)      Alpena-      3.18%  PDC(3)
            County, MI                                                                                    Gaylord
                                                                                                          Line
------------------------------------------------------------------------------------------------------------------------------------
Warner 36   Otsego         160      2        8/05        0          0          0         2    OIL         Terra          25%   OIL
VII         County, MI                                                                        Energy      Hayes               Energy
------------------------------------------------------------------------------------------------------------------------------------
Un-         Michigan                0         N/A        0          0          0  Undeter-    Undeter-    Undeter-   Varies   Samson
developed   Antrim      61,845                                                    mined       mined       mined      by
acreage                                                                                                              project
(various
projects)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       17
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                      Total #
                                                                                        of
                                                     Gross #             Additional   Antici-
                                                      Wells     Gross #     Wells      pated
                       Approx.  Gross #     Date     Drilled/    Wells   Permitted/    Gross                        Working   Joint
Project                 Gross    Wells   Production  Not Yet   Plugged &   Not Yet     Prod.                        Interest Venture
Name        Location    Acres  Producing  Started   Producing  Abandoned   Drilled     Wells  Operator   Pipeline     (4) %  Partner
------------------------------------------------------------------------------------------------------------------------------------
<S>         <C>          <C>       <C>      <C>          <C>        <C>        <C>      <C>   <C>        <C>         <C>    <C>
Un-        Michigan    27,195      0         N/A        0          0           0  Undeter-    Undeter-    Undeter-   Varies   Savoy
developed  Non-Antrim                                                             mined       mined       mined      by       Exp-
acreage                                                                                                              project  lora-
(various                                                                                                                      tion
projects)
------------------------------------------------------------------------------------------------------------------------------------

(1)   On January 31, 2006, we closed on the purchase of a substantial block of assets in the Michigan Antrim Shale in an area known
      as the Hudson Project. This chart includes these assets, shown as if we had acquired them on or before December 31, 2005.

(2)   Samson Resources Corporation.

(3)   Petroleum Development Corporation of West Virginia.

(4)   "BPO" means before payout. "APO" means after payout.
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       18
<PAGE>

NEW ALBANY SHALE OPERATIONS

      The New Albany Shale is located 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.

      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
partnerships 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.

                                       19
<PAGE>

      Our current holdings in the New Albany Shale are outlined in the chart
below.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                           NEW ALBANY SHALE
                                                       As of December 31, 2005
------------------------------------------------------------------------------------------------------------------------------------
                                                                                    Additional
                                                            Gross #      Gross #      Wells
                         Approx.   Gross #       Date       Drilled/      Wells     Permitted/               Working        Joint
Project                   Gross     Wells     Production    Not Yet     Plugged &    Not Yet                 Interest      Venture
Name        Location      Acres   Producing     Started    Producing    Abandoned    Drilled    Operator        %          Partner
------------------------------------------------------------------------------------------------------------------------------------
<S>         <C>          <C>         <C>         <C>          <C>          <C>          <C>      <C>           <C>        <C>
Pike        Pike          8,578      0           N/A           2           1            0        Forest        Varies     Forest
            County, IN                                                                           Oil           (1)        Oil
------------------------------------------------------------------------------------------------------------------------------------
Wabash      Owen,        91,918      0           N/A           0           0            0        Aurora        17.5%      New
            Greene,                                                                                                       Albany-
            Sullivan                                                                                                      Indiana,
            & Clay                                                                                                        LLC/Rex
            Counties,                                                                                                     Energy
            IN                                                                                                            Opera-
                                                                                                                          ting
                                                                                                                          Corp.
------------------------------------------------------------------------------------------------------------------------------------
El Paso     Dubois,     161,872      4         12/05           3           0            4        El Paso       5%         El Paso
            Knox,                                                                                              carried
            Martin &                                                                                           WI on the
            Daviess                                                                                            first 50
            Counties,                                                                                          wells; 5%
            IN                                                                                                 WI from
                                                                                                               the 51st
                                                                                                               well
                                                                                                               forward
------------------------------------------------------------------------------------------------------------------------------------
Knox Gas    Knox         22,645      0           N/A           1           0            4        Horizontal    75%        Horizontal
Develop-    County,                                                                              Systems                  Systems
ment        IN
------------------------------------------------------------------------------------------------------------------------------------
Misc.       Indiana     177,995      0           N/A           0           0            0        Aurora        Varies     Wabash
holdings                                                                                                       between    Energy
                                                                                                               50%        Partners
                                                                                                               and
                                                                                                               100%

            Kentucky    131,014      0           N/A           0           0            0        Aurora        100%       Samson
------------------------------------------------------------------------------------------------------------------------------------

(1)   Test Wells: 11.25%

      Working interest:

      First 50 Subsequent Wells.

            Before Payout - NRI 87.5% or greater: 29.125% working interest (of
            which 7.875% is carried by Forest Oil to the point of the sales
            meter)

            Before Payout - NRI below 87.5%: 26.125% working interest (of which
            4.875% is carried by Forest Oil 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%.
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       20
<PAGE>

MISCELLANEOUS OTHER GAS HOLDINGS

         We have other miscellaneous holdings in natural gas extraction
projects, as outlined in the chart below.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                     MISCELLANEOUS OTHER GAS WELLS
                                                        As of December 31, 2005
------------------------------------------------------------------------------------------------------------------------------------
                                                                                   Additional
                                                           Gross #      Gross #      Wells
                         Approx.   Gross #      Date       Drilled/      Wells     Permitted/                      Working    Joint
Project                   Gross     Wells    Production    Not Yet    Plugged and    Not Yet                       Interest  Venture
Name        Location      Acres   Producing    Started    Producing    Abandoned     Drilled   Operator  Pipeline     %      Partner
------------------------------------------------------------------------------------------------------------------------------------
<S>         <C>          <C>         <C>        <C>          <C>          <C>          <C>     <C>       <C>       <C>        <C>
Crossroads  Henry        15,538       7         6/99          4            0           0       OGE/      West      7.6% BPO   OGE
            County, OH                                                                         Aurora    Hope      19% APO
------------------------------------------------------------------------------------------------------------------------------------
DeSoto      DeSoto        4,800      11         9/03          3            0           0       Beusa     Sonat     22.5% in   Beusa
Parish      Parish, LA                                                                         Energy    Line &    1 well,    Energy
                                                                                                         Center    25% in 4
                                                                                                         Point     wells;
                                                                                                         Line      33% in 1
                                                                                                                   well,
                                                                                                                   45% in
                                                                                                                   8 wells
------------------------------------------------------------------------------------------------------------------------------------
Markham     Matagorda        58       0          N/A          1            0           0       G. L.    Kinder     80%        Bucca-
Dome        County, TX                                                                         McLeod,  Morgan                neer
                                                                                               Inc.                           Energy
                                                                                                                              (10%)
                                                                                                                              &
                                                                                                                              Lang-
                                                                                                                              ston
                                                                                                                              Family
                                                                                                                              L.P.
                                                                                                                              (10%)
------------------------------------------------------------------------------------------------------------------------------------
Border      Williams        567       0          N/A          0            5           0       Aurora   Not yet    100%        None
            and Fulton                                                                                  deter-
            Counties,                                                                                   mined
            OH
------------------------------------------------------------------------------------------------------------------------------------
Rend Lake   Jefferson     2,483       0          N/A          0            0           0       Aurora   Not yet    100%        None
            County, IL                                                                                  deter-
                                                                                                        mined
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

OIL HOLDINGS

      Our current holdings in oil extraction projects are outlined in the chart
below.

                                       21
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                         OIL WELLS
                                                  As of December 31, 2005
------------------------------------------------------------------------------------------------------------------------------------
                                                                     Gross #    Additional
                                                           Gross #    Wells       Wells     Total # of
                         Approx.   Gross #      Date       Drilled/  Plugged    Permitted/  Anticipated           Working     Joint
Project                   Gross     Wells    Production    Not Yet     and        Not Yet      Gross              Interest   Venture
Name        Location      Acres   Producing    Started    Producing Abandoned     Drilled      Wells    Operator     %       Partner
------------------------------------------------------------------------------------------------------------------------------------
<S>         <C>          <C>         <C>      <C>            <C>        <C>         <C>           <C>   <C>      <C>       <C>
Beregsasi   Sterling         80       1        08/99          0          0           0             1     West Bay 9%        West Bay
Reef        Heights, MI                                                                                  Explor-            Explor-
                                                                                                         ation              ation
------------------------------------------------------------------------------------------------------------------------------------
Church      Oscoda          Not       6         2/01          1          2           0             7     PDC(1)   17.5% in    PDC(1)
Lake        County, MI   Avail-                                                                                   3rd thru
field                      able                                                                                   16th
                                                                                                                  wells;
                                                                                                                  22.5% in an
                                                                                                                  add'l 5
                                                                                                                  wells
------------------------------------------------------------------------------------------------------------------------------------
Virgin      Wilbarger       400       2        01/02          0          2           0             2     W.T.     60% in 1  Waggoner
Reef        County, TX                                                                                   Waggoner well; 100%   Ranch
                                                                                                         Estate   in 1 well
------------------------------------------------------------------------------------------------------------------------------------
West        Wilbarger       532       9         3/03          0          0           0             9     W.T.     45% in 1  Waggoner
Electra     County, TX                                                                                   Waggoner well; 50%    Ranch
Lake                                                                                                     Estate   in 8 wells
------------------------------------------------------------------------------------------------------------------------------------
North       Wilbarger       700       2         6/05          0          1           0             2     W.T.     50%       Waggoner
Electra     County, TX                                                                                   Waggoner              Ranch
Lake                                                                                                     Estate
------------------------------------------------------------------------------------------------------------------------------------
Santa       Eddy             40       1        10/04          0          0           0             1     SDX      20%       SDX
Nina        County, NM                                                                                   Resources
                                                                                                         of ,
                                                                                                         Midland
                                                                                                         TX
------------------------------------------------------------------------------------------------------------------------------------
Kansas      Lane & Ness               1        06/05          0          1           0             2     Sedona   100%      None
            Counties, KS 29,000                                                                          Oil
                                                                                                         & Gas
                                                                                                         Corp.
------------------------------------------------------------------------------------------------------------------------------------

(1)   Petroleum Development Corporation of West Virginia.
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       22
<PAGE>

PRODUCTION

      The following table summarizes sales prices, and production cost
information for our net oil and gas production for the two-year period ended
December 31, 2005. "Net" production is production that is owned by us directly
or indirectly, and is produced to our interest after deducting royalty and other
similar burdens.

            --------------------------------------------------------------------
                                                           12 Months Ended
                                                             December 31,
                                                        -----------------------
                                                           2005        2004
                                                        ----------   ----------
            Average Sales Price
                  Gas (per mcf)                           $ 9.00       $ 4.91
                  Oil (per barrel)                        $52.26       $51.64

            Average Production Cost (per mcf);
              including oil on a
              converted-to-mcf basis                      $ 2.73       $ 3.51
            --------------------------------------------------------------------

NUMBER OF PRODUCTIVE WELLS AND DEVELOPED ACRES

      The following table sets forth the number of gross and net productive
wells and developed acreage that we owned on December 31, 2005.

            --------------------------------------------------------------------
                               Oil          Gas         Total     Developed(3)
                              Wells        Wells        Wells       Acreage
                            ---------    ---------    ---------    ---------
            Gross(1)          23.00       384.00       407.00       70,288
            Net(2)            10.12       172.57       182.69       29,541

            (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. This number includes the additional interests in
                  our Hudson project wells that we acquired on January 31, 2006.

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

UNDEVELOPED ACREAGE

      The following table sets forth the number of acres of undeveloped oil and
gas leases we owned as of December 31, 2005. "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. These are rounded
to whole numbers. If we do not have the acreage available as to any particular
project, we have omitted it from the chart below.

            --------------------------------------------------------------------
                                               Gross                Net
                                         -----------------   ----------------
            Michigan                               161,048             61,999
            Indiana                                461,728            190,448
            Illinois                                 2,483              2,483
            Kentucky                               131,014             81,379
            Ohio                                       567                567
            Texas                                       58                 46
                                         -----------------   ----------------
            TOTAL                                  756,898            336,922
            --------------------------------------------------------------------

DRILLING ACTIVITIES

      The following table sets forth our drilling results for the 12 months
ended December 31, 2005 and December 31, 2004. This table does not include salt
water disposal wells.

                                       23
<PAGE>

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
                                           Gross Wells(4)                             Net Wells(4)
             Type             --------------------------------------    ---------------------------------------
Fiscal     of Well(1)                                      Dry or                                     Dry or
 Year      /Location          Total    Productive(2)    Abandoned(3)    Total     Productive(2)    Abandoned(3)
------    -----------         -----    -------------    ------------    -----     -------------    ------------
<S>       <C>                  <C>          <C>             <C>        <C>           <C>             <C>
2005      Development
          Michigan             146          140             6          106.34        102.74            3.6
          Indiana                3            3             0             .15           .15              0

          Exploratory            0            0             0               0             0              0
          Total                149          143             6          106.49        102.89            3.6

2004      Development
          Michigan              87           84             3           26.24         25.06           1.18
          Indiana                4            0             4            0.20           0.0           0.20

          Exploratory            0            0             0               0             0              0
          Total                 91           84             7           26.44         25.06           1.38
---------------------------------------------------------------------------------------------------------------

(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 a 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 a well that is not a producing well. An abandoned well is a
     well that has either been plugged or has been converted to another use.

(4)  This number includes the additional interests in our Hudson project wells
     that we acquired on January 31, 2006.
---------------------------------------------------------------------------------------------------------------
</TABLE>

      We have entered into an agreement to supply BNP Paribas with 5,000 MMBTU
of natural gas production per day for the period from April 1, 2006 through
March 31, 2007, at a price of $8.59 per MMBTU. Our delivery obligations will
initially be satisfied out of our existing production from the Hudson project,
which currently produces enough volume to cover the entire delivery commitment.
As additional wells go into production, we may use production from these new
wells in lieu of production from our existing wells to meet our delivery
obligations.

      We have not reported our oil or gas reserves to any federal authority or
agency other than the SEC since the beginning of the last fiscal year.

OTHER PROPERTIES

      In addition to the foregoing oil and gas properties described above, we
own certain non-oil and gas properties, as follows.

      On October 4, 2005, we purchased a commercial condominium unit in the
Copper Ridge Professional Center Five, located in Traverse City, Michigan. Our
unit contains approximately 14,645 square feet on the second floor of a three
story building, plus common areas and 15 covered parking spaces. We moved our
corporate offices into this space on December 5, 2005.

      We also own 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.

ITEM 3. LEGAL PROCEEDINGS

      Neither we, nor any of our subsidiaries, are the subject of any threatened
or pending material legal claims or proceedings of a non-routine nature.

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

      There were no matters submitted to a vote of our security holders for the
quarter ended December 31, 2005.

                                       24
<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
        ISSUER PURCHASES OF EQUITY SECURITIES.

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. We believe that over five 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 calendar years, without
retail mark-up, mark-down or commission, and may not necessarily represent
actual transactions.

            --------------------------------------------------------------------
                                                   High Bid          Low Bid
                     Quarter Ended                Quotation         Quotation
            --------------------------------    ---------------   --------------

            March 31, 2004                          $4.60             $3.25
            June 30, 2004                           $3.40             $1.62
            September 30, 2004                      $2.50             $0.88
            December 31, 2004                       $1.65             $0.98

            March 31, 2005                          $1.70             $1.09
            June 30, 2005                           $2.65             $2.11
            September 30, 2005                      $3.35             $1.86
            December 31, 2005                       $4.85             $3.16
            --------------------------------------------------------------------

HOLDERS

      As of February 22, 2006, there were 520 holders of record for 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.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

      In 2004, our Board of Directors adopted a 2004 Equity Incentive Plan. Our
shareholders approved this plan, also in 2004. This plan provides for the grant
of options or restricted share amounts for compensatory purposes for up to
1,000,000 shares of common stock. The number of shares issued or subject to
options issued under this plan totaled 814,706. Although we do not intend to
make any further awards under this plan, this plan currently continues to exist.

      In October 1997, Aurora adopted a 1997 Stock Option Plan pursuant to which
it was authorized to issue compensatory options to purchase up to 1,000,000
shares of common stock. Prior to the merger closing, Aurora had issued options
to purchase a total of 480,000 shares of Aurora's common stock under this plan,
which upon closing the merger, converted into the right to acquire up to 960,000
shares of our common stock. Because of the merger, no further awards can be made
under this plan.

      In 2001,  Aurora's  Board  of  Directors  and  shareholders  approved  the
adoption of an Equity  Compensation Plan for Non-Employee  Directors.  This plan
provided  that each  non-employee  director is  entitled  to receive  options to
purchase  100,000  shares of Aurora's  common  stock,  issuable in increments of
options to purchase  33,333  shares each year over a period of three  years,  so
long as the director  continues in office.  Prior to the merger closing,  Aurora
had issued  options to purchase a total of 299,997 shares of Aurora common stock
under this plan, which upon closing the merger converted to the right to acquire
599,994 shares of our common stock. Because of the merger, no further awards can
be made under this plan.

                                       25
<PAGE>

      We have awarded compensatory options and warrants on an individualized
basis in addition to awards under our 2004 Equity Incentive Plan. Aurora has
also issued compensatory options and warrants on an individualized basis in
addition to its 1997 Stock Option Plan and Equity Compensation Plan for
Non-Employee Directors. The following chart sets forth certain information as of
December 31, 2005 regarding the shares of our common stock (i) issuable upon
exercise of options or warrants granted as compensation for services; and (ii)
available for grant under existing plans.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
                                                                                                  No. of securities remaining
                                                                          Weighted average           available for future
                                             No. of securities to be      exercise price of          issuance under equity
                                             issued upon exercise of        outstanding               compensation plans
                                               outstanding options,       options, warrants       (excluding securities in the
            Plan Category                      warrants and rights           and rights           first column of this table)
------------------------------------------    ----------------------    ---------------------    ------------------------------
<S>                                                 <C>                        <C>                        <C>
Equity compensation plans approved by               1,784,994                  $0.83                      185,294(1)
security holders

Equity compensation plans and awards not            5,355,140(2)               $1.04                           --
approved by security holders

TOTAL                                               7,140,134                  $0.99                      185,294(1)
-------------------------------------------------------------------------------------------------------------------------------

(1)   Although technically still available for issuance at December 31, 2005, we
      do not intend to issue these shares or options to issue these shares.
      Instead, we are in the process of adopting an entirely new plan that will
      include 8,000,000 available shares.

(2)   These options and warrants were issued pursuant to the following plans:

            Warrants and options to purchase 3,138,640 shares (1,204,000 are
            Aurora conversion shares originally issued to purchase 502,000
            shares of Aurora common stock) were issued to Nathan A. Low and his
            designees in compensation for investment banking services rendered.

            Options to purchase 2,100,000 shares (which includes 1,800,000
            Aurora conversion shares initially issued to purchase 900,000 shares
            of Aurora common stock) were issued in five separate individualized
            compensation arrangements with executive officers and/or directors
            not pursuant to a formal plan.
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

RECENT SALES OF UNREGISTERED EQUITY SECURITIES

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

      Between April and June 2002, we sold an aggregate of 1,932,802 units to
five accredited investors, each unit consisting of one share of common stock and
a warrant to purchase one share of common stock, for aggregate proceeds of
$579,840.60. Each warrant was exercisable at a price of $.15 per share and all
of the warrants have 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, we 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, we issued 141,668 shares of
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, we issued 34,950 shares of Class A
Preferred Stock to eight investors who were not US persons under Regulation S of
the Securities Act for aggregate sales proceeds 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 us. One loan was
made in December 2002 in the principal amount of $70,000, bearing interest at 5%
and the other loan was made in February 2003 in the principal amount of $50,000
bearing interest at a rate of 8%. We issued 14,000 shares of common stock as an
inducement to making the $70,000 loan and 20,000 shares as an inducement to
making the $50,000 loan. We repaid $60,000 of the $70,000 loan in cash and
issued 4,000 shares of common stock in repayment of the remaining $10,000
principal amount outstanding on the $70,000 loan. We repaid $25,000 of the
$50,000 loan in cash and issued 25,000 shares of 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.

                                       26
<PAGE>

      In February 2003, Kevin Stulp, one of our directors, made a bridge loan to
us in the principal amount of $50,000, bearing interest of 8% per annum. We
issued 20,000 shares of common stock to Mr. Stulp as an inducement to making the
loan. On May 28, 2003, we repaid $25,000 of the loan in cash. On September 30,
2004, we issued 25,000 shares of common stock in full payment of the remaining
loan principal of $25,000. In July 2003, we 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, we issued an aggregate of 150,000 shares of common
stock to four of our officers and/or directors in consideration of services
provided. 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, we issued 5,000 shares of common stock to one
sophisticated investor in consideration of certain consulting services provided.
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, we issued 40,000 shares of common stock to an
accredited investor as an inducement for making a loan to us 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, we issued an aggregate of 44,000 shares of
common stock to two sophisticated investors in consideration of certain
consulting services provided. 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, we issued an aggregate of 75,000 shares of common stock to
four of our officers and/or directors in consideration of services provided. 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, we issued 10,000 shares of common stock to one
sophisticated investor in consideration of certain consulting services provided.
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, we sold an aggregate of 730,000 shares of
common stock to 16 accredited investors for aggregate sales proceeds 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, we issued 6,000 shares of 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 we were the sole general partner and Mr. Low was
the sole limited partner. As partial inducement for making this loan, we 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 us $300,000 at 10% interest. As
an inducement for making the loan, we issued 120,000 shares of common stock 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, we issued an aggregate of 95,000 shares of common stock
to four of our officers and/or directors in consideration of services provided.
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, we issued 102,000 shares of common stock to four
sophisticated investors in consideration of certain consulting services
provided. 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.

                                       27
<PAGE>

      On September 15, 2003, we issued an aggregate of 95,000 shares of common
stock to four of our officers and/or directors in consideration of services
provided. 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,  we sold an  aggregate of 1,721,400
shares of common stock to 29 accredited  investors for aggregate  sales proceeds
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  ($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 the finder,  and additional fees totaling
$11,250 to two other finders. All finders are accredited  investors.  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, we issued 5,000 shares of common stock and an option
to purchase 75,000 shares of common stock to each of Glenn DeHekker and Jeffrey
M. Christian in consideration of their becoming directors. 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, we issued an option to purchase 250,000 shares of
common stock to Douglas Newby in consideration of his becoming a Vice President.
The options were issued in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act.

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

      On April 2, 2004, we 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, we 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, we paid off the
notes without a prepayment penalty in exchange for the exercise price of the
warrants being reduced to $1.25. 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, we issued 10,000 shares of common stock each to Glenn
DeHekker, Jeff Christian, and Kevin Stulp for Director services for two
quarters. On the same date, we also issued 5,000 shares of common stock each to
Howard Crosby and John Ryan for Director services for one quarter, and 5,000
shares of common stock 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, 2004, we issued 6,000 shares of common stock to Proteus Capital
Corp. in consideration of services rendered to the Company. On the same date, we
issued 10,000 shares of common stock 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 we issued 25,000 shares of common stock to Howard
Schraub and 17,500 shares of common stock to Lyons Capital LLC for professional
services rendered. On the same date, we issued 5,000 shares of common stock to
Glenn DeHekker, Kevin Stulp and Jeff Christian for quarterly services as
Directors to the Company, and issued 5,000 shares of common stock to Douglas
Newby for quarterly services as an Officer of the Company. Also on the same
date, we issued 15,000 shares of common stock 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, we 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 aggregate sales proceeds of
$9,762,500. Sunrise Securities Corporation, an affiliate of Nathan Low (a
shareholder of Cadence), received a cash commission equal to $976,250 and a
warrant to purchase 1,821,000 shares of common stock at an exercise price of
$1.75 per share for services rendered as the placement agent in the transaction.
The shares were issued in reliance upon the exemption from registration provided
by Section 4(2) of the Securities Act.

      On September 30, 2005, we 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.

                                       28
<PAGE>

      On October 31, 2005, we 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.

      From October through mid December, 2005, we issued 355,000 shares of
common stock upon exercise of outstanding warrants for cash, and 245,068 shares
of common stock upon cashless exercise of outstanding options and warrants held
by previous directors of the Company. All of these shares were issued in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended.

      We issued 21,959,922 shares of our common stock to various holders of our
outstanding warrants and options during the period from late December 2005
through early February 2006. With respect to some of these warrant and option
exercises, we reduced the exercise price for a limited period of time in order
to encourage their early exercise. Each holder who took advantage of the reduced
exercise price was required to execute a six-month lock-up agreement with
respect to the shares issued in the exercise. In connection with certain of
these warrant exercises, we paid a commission to Sunrise Securities Corporation,
an affiliate of Nathan Low (a shareholder of Cadence) in the amount of
$1,534,697. This entire amount was used by Mr. Low to exercise certain of our
outstanding warrants, which are included in the foregoing total of shares issued
in warrant and option exercises. Of the 21,959,922 shares issued, 5,756,149
shares were registered for issuance by the Company in the S-4 Registration
Statement declared effective by the SEC on September 22, 2005, and the remaining
16,203,773 shares were issued pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended.

      We did not repurchase any of our outstanding equity securities during the
quarter ending December 31, 2005. However, in connection with the merger,
300,000 shares of Aurora common stock owned by Cadence were eliminated in
consolidation and returned to treasury.

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

      You should read the following discussion in conjunction with the Cadence
Resources Corporation financial statements, together with the notes to those
statements. 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

      We are an independent oil and gas company engaged in the exploration,
acquisition, development, production and sale of natural gas and crude oil. We
generate most of our revenues from the production and sale of natural gas. Prior
to October 31, 2005, our exploration efforts consisted primarily of non-operated
working interest participation in conventional drilling projects. On October 31,
2005, we consummated a merger with Aurora, a private independent oil and gas
exploration and development company. As a result of the merger, we shifted our
corporate strategy from holding non-operated interests in conventional drilling
to holding predominantly operating interests in unconventional drilling programs
in the Michigan Antrim Shale and the New Albany Shale.

RECENT DEVELOPMENTS

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 and we obtained proved reserves of natural
gas produced from the Michigan Antrim Shale and a significant acreage position
in the New Albany Shale. The addition of these assets resulted in a change in
our corporate focus from conventional drilling to unconventional drilling with a
focus in the Michigan and Indiana plays. As part of the merger, Aurora's
management team replaced our prior management team, and our corporate offices
were moved to Traverse City, Michigan.

                                       29
<PAGE>

      The merger was accounted for as a reverse merger, with Aurora being the
acquiring party for accounting purposes. We also changed our fiscal year to
December 31 commencing December 31, 2005. With Aurora as the acquirer, the
financial statements, accompanying footnotes and this Management's Discussion
and Analysis of Financial Condition and Results of Operations report Aurora's
operating results for the 12-month period ended December 31, 2005 and Cadence
Resources Corporation ("Cadence") operating results for the two-month period
ended December 31, 2005. These operating results are compared to the operating
results of Aurora for the 12-month period ending December 31, 2004.

      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, with
an additional  10,497,328  shares of our common stock reserved 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. We also adopted certain accounting principles of Aurora applicable to
our oil and gas properties as a result of the merger. See SIGNIFICANT ACCOUNTING
PRINCIPLES RELATING TO MERGER WITH AURORA below.

      Total gross revenues of Aurora (for 12 months) and Cadence (for 2 months)
were $7,363,482 for the period ended December 31, 2005, compared with $
2,200,524 gross revenues of Aurora during the 12-month period ended December 31,
2004. Total assets as of December 31, 2005 of Aurora and Cadence combined were
$116,822,145, compared with total assets of $23,445,829 of Aurora as of December
31, 2004. The merger transaction accounted for $41,546,351 of the $93,376,316
increase in assets. As a result of drilling 149 wells in 2005, oil and gas
assets were increased by approximately another $45 million . (All of the wells
drilled by Cadence during the calendar year 2005 were drilled before closing on
the merger with Aurora, and are not reported in this number.)

      We may maintain our interest in certain properties we acquired before the
merger, including producing properties in Wilbarger County, Texas, DeSoto
Parish, Louisiana, Eddy County, New Mexico and Kansas and non-producing leased
interests in western Kansas and southern Texas. Further development of these
properties will be considered if the economics support the activity. We may also
sell some or all of these properties if attractive opportunities present
themselves. We do not currently expect to dedicate significant future resources
to these properties.

Corporate Strategy

      Our corporate strategy is to build reserves primarily through the drilling
and development of unconventional gas resources. Once wells are drilled and in
production, underlying gas reserves are identified and quantified as proved
reserves in one of three categories, proved developed producing (PDP), proved
developed non-producing (PDNP), and proved undeveloped (PUD).

      Our 2005 drilling program resulted in increasing our reserves by nearly
180%. Our December 31, 2005 reserve reports reflected total proved reserves of
approximately 64 Bcfe, an increase of 41 Bcfe from the 23 Bcfe reported at
December 31, 2004. We acquired an additional working interest in our Hudson
project in January 2006 from our joint venture partner, which added an
additional 24 Bcfe in reserves, for a total of 88 Bcfe.

      Additions to proved reserves increases our natural gas production, which
increases our monthly cash flows and our valuation. With increased production
and cash flow we are able to secure additional debt to drill and develop new
wells. Our mezzanine facility was increased from $30 million to $50 million in
December 2005. Based on our acquisition of the additional working interest in
our Hudson project and our updated reserve information from 2005 drilling
activity, in January 2006 we secured a $100 million senior secured credit
facility with an initial borrowing base of $40 million. Our mezzanine facility
remains in place, subordinated to the senior secured credit facility.

      Our drilling and development budget for the year 2006 is approximately $45
million. We plan to continue our Antrim drilling program with a goal of
participating in the drilling of over 150 gross wells, 75 to 100 net wells
(depending on our average working interest) during 2006. We participated in the
drilling of 149 gross wells in the Michigan Antrim during 2005. We also plan to
drill and test the New Albany Shale project in 2006, with a goal of
participating in the drilling of over 50 gross wells, 25 net wells during 2006.

      In addition to our drilling and development program, during 2006 we plan
to continue to secure additional acreage in both the Michigan Antrim Shale and
the New Albany Shale. Our lease acquisition expenditures in 2005 exceeded $15
million. Our budget for lease acquisitions is expected to meet or exceed this
amount in 2006.

                                       30
<PAGE>

      We will fund our lease acquisition and drilling and development plan,
using a combination of debt, existing cash balances, internally generated cash
flows from natural gas production, and possible proceeds from the sale of
equity. In addition to the cash balances reported at December 31, 2005, we
secured an infusion of approximately $18 million in warrant and option exercise
proceeds in the first six weeks of 2006. (Of the $20.6 million in exercise
monies, $2.6 million was received in December 2005.)

      We do not expect the combination of our current capital resources to be
sufficient to fully execute our total 2006 budgeted capital requirements. We are
currently in the process of determining the options available to fund our total
budgeted capital expenditures. The options being evaluated include increased
debt financing and the issuance of equity securities.

      Certain factors such as the increase in production revenues and our
ability to secure equity will impact our ability to complete our 2006 drilling
program. Production revenues are impacted by commodity prices that are subject
to fluctuation. This may impact our ability to both secure additional debt and
to raise capital through the issuance of securities. Natural gas prices were
favorable in 2004 and 2005 and industry analysts expect them to remain strong in
the foreseeable future. If our revenues were to decrease significantly as a
result of unexpected declines in price and/or production volumes, we could be
forced to curtail our drilling and development activities.

2005 Transaction Highlights

      In 2005, we engaged in the following material transactions:

      On January 3, 2005 El Paso Corporation exercised an option to purchase 95%
of Aurora's working interest in certain New Albany Shale acreage in Indiana. As
a result of this transaction we received gross proceeds in the amount of
$7,373,737. After deducting a distribution to subsidiary members of $805,000 and
an additional $1,000,000 set aside for the subsidiary's share of anticipated
future drilling expense, we retained approximately $5,500,000 of net proceeds.

      On January 31, 2005, we entered into a Securities Purchase Agreement (the
"Purchase Agreement") with six accredited investors pursuant to which the
investors purchased 5,020,000 shares of common stock and warrants to purchase
1,900,000 shares of common stock at an exercise price of $2.50 per share for
$12,550,000. Of this amount, 600,000 shares and $1,500,000 had been issued in
December 2004, and were rolled into this financing under the Purchase Agreement.
The issuance of these 600,000 shares was reflected in the December 31, 2004
financial statements. In connection with this financing, for services rendered
as the placement agent, Sunrise Securities Corporation received a commission in
the form of 552,200 shares of Aurora common stock, plus warrants to purchase
502,000 shares of Aurora common stock at an exercise price of $2.50 per share.
The par value of $552 assigned to this transaction was netted against additional
paid in capital. All Aurora stock in this transaction was included in the
exchange of two Cadence shares for one Aurora share in the merger that closed on
October 31, 2005.

      Upon receipt of these sales and equity proceeds, we paid off several of
the liabilities reflected on the December 31, 2004 balance sheet, including the
$350,000 short term bank borrowing and all but one of the related party notes
payable. Additionally, prior to closing the merger, all remaining outstanding
shares of Aurora preferred stock were converted to Aurora common stock, which
were in turn converted into shares of Cadence common stock in the merger.

      On October 4, 2005, we purchased a commercial condominium unit for office
space. The cost of this unit, including estimated costs of completing required
improvements, was approximately $3,165,000, of which approximately $300,000 was
paid in cash prior to December 31, 2005. We executed a promissory note for the
remaining amount. See CAPITAL RESOURCES AND LIQUIDITY below.

      In 2005, we underwent a conversion of our accounting software. We believe
that this conversion has improved our disclosure controls and procedures in a
number of respects, including: creation of an integrated software platform;
improved capability to generate internal reports at a higher level of detail;
improved capability to generate consolidated financial statements from internal
data; improved multi-user capability and volume of processing capability;
refinement of processes; and expanded security features to protect the quality
and integrity of the underlying data.

      As discussed above, Aurora was acquired by Cadence on October 31, 2005
through the merger of Cadence's wholly-owned subsidiary with and into Aurora. As
a result of that merger, Aurora became Cadence's wholly-owned subsidiary. The
acquisition of Aurora was pursuant to the Agreement and Plan of Merger dated as
of January 31, 2005.

                                       31
<PAGE>

2006 Subsequent Event Highlights

      Subsequent to December 31, 2005, we engaged in the following material
transactions:

      On January 31, 2006, we completed the acquisition of additional working
interest in the Hudson project area from our joint venture partner. The total
purchase price of approximately $27,500,000 was financed under a senior credit
facility with BNP Paribas described below at CAPITAL RESOURCES AND LIQUIDITY.
This acquisition increased our working interest in the project area from an
average of 49% to an average of 96% in the project. We also acquired an
additional member interest in Hudson Pipeline and Processing Co., LLC,
increasing our member ownership from 48.75 to 90.94% (dropping by 2.5% after
revenues equal 125% of construction costs). We have entered into a letter of
intent to acquire an additional 2.5% member interest in Hudson Pipeline and
Processing Co., LLC.

      In January 2006, we completed a transaction involving the acquisition of
64,000 acres of New Albany Shale acreage in the Wabash Project. We then sold
half of our interest in our accumulated 95,000 acres in the Wabash project to an
unrelated third party. Our gain was 17,300 net acres in the Wabash Project.

      In February 2006 we announced the receipt of $20.6 million in cash
proceeds from the exercise of certain options and warrants. Approximately $18
million of this cash was received in 2006; and the remaining $2.6 million was
reported in the December 31, 2005 balance sheet. The circumstances surrounding
these exercises are as follows.

      From late December 2005 through early February 2006, we reduced the
exercise price of certain outstanding options and warrants in order to encourage
the early exercise of these securities. Each holder who took advantage of the
reduced exercise price was required to execute a six-month lock up agreement
with respect to the shares issued in the exercise. As a result of the options
and warrants exercised pursuant to this reduced exercise price arrangement, and
pursuant to other exercises of outstanding options, as of February 6, 2006, an
additional 21,959,922 shares were issued. Of the 21,959,922 new shares that were
issued as of February 6, 2006, 18,834,817 shares were issued for cash, with
aggregate proceeds of $20,663,648, and 3,125,105 shares were issued pursuant to
cashless exercises of the applicable warrants or options.

      Of the 21,959,922 shares issued, 5,756,149 shares were registered for
issuance by the Company in the S-4 Registration Statement declared effective by
the SEC on September 22, 2005, and the remaining 16,203,773 shares were issued
pursuant to the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended.

CAPITAL RESOURCES AND LIQUIDITY

      Historically we have funded operations and development principally through
the private sale of equity securities, and borrowings from officers, directors,
shareholders, and third parties.

      From our inception through December 31, 2004, we generated revenue from
three primary sources: (1) Proceeds from the sale to third parties of leasehold
and/or working interests in various oil and gas projects; (2) Producing natural
gas and oil from the economic interests we own; and (3) management fees paid by
certain joint venture partners for lease management services provided within
certain project areas. Through 2004, the allocation between these three
categories was evenly distributed as we worked to secure our acreage position
for drilling and development. In the last quarter of 2004, we began an active
drilling program using the funds from the $30 million mezzanine facility we
established with Trust Company of the West ("TCW").

      In 2005, we experienced increased access to both equity and debt
financing. In January 2005, Aurora received a private equity infusion of $11.5
million. This equity combined with the existing mezzanine facility allowed us to
execute our 2005 drilling program which resulted in increased natural gas
production and increased revenues.

      A summary of our statement of cash flows is as follows:

            --------------------------------------------------------------------
                                                   December 31,     December 31,
                                                     2005               2004
            --------------------------------------------------------------------
            Net cash provided by (used in)
            operating activities                    $(411,196)       $ 218,441
            --------------------------------------------------------------------

      We generated $755,354 in net cash for the year ended December 31, 2005 and
used $(845,316) in net cash from operations for the year ended December 31,
2004. The increase in 2005 from 2004 is the due to increased revenues generated
from increased production. Revenues were also higher due to an increase in gas
prices. A more complete discussion of our operations is described in RESULT OF
OPERATIONS below.

                                       32
<PAGE>

      The changes in operating assets and liabilities of $(1,166,550) and
$1,063,757 for December 31, 2005 and 2004, respectively, are due primarily to
the timing of our operational activity. Specifically in 2005 we reported a
revenue receivable from our joint venture partners of $2,409,675, which was
received early in the first quarter of 2006. These two items combined result in
net cash provided by (used in) operating activities of $(411,196) and $ 218,441
for the years ended December 31, 2005 and 2004 respectively.

      Cash flows provided by investing activities for 2005 and 2004 include
$7,995,109 and $1,902,537 respectively of proceeds received from various sales
of working interest and project interests.

      Cash used in investing activities for the 12 months ended December 31,
2005 and December 31, 2004 was $51,130,829 and $10,619,321, respectively. This
investing activity included the purchase of leasehold and working interests,
drilling and development costs, purchase of office computers and other
equipment, advances on notes receivable, and investments in Hudson Pipeline &
Processing Co., LLC and GeoPetra Partners, LLC. A summary of these expenditures
by category by period is as follows:

            --------------------------------------------------------------------
                                                  December 31,      December 31,
                                                      2005              2004
            --------------------------------------------------------------------
            Purchase of leasehold and working
            interests                             $ 15,593,790      $  3,433,794
            --------------------------------------------------------------------
            Drilling and development costs        $ 30,551,292      $  6,725,869
            --------------------------------------------------------------------
            Other property and equipment          $    429,368      $     74,166
            --------------------------------------------------------------------
            Condominium Purchase -office space    $  3,165,382      $         --
            --------------------------------------------------------------------
            Deposits Made for the Purchase of
            Oil & Gas Properties                  $  3,206,102      $         --
            --------------------------------------------------------------------
            Investment in Hudson Pipeline &
            Processing Co., LLC                   $    928,956      $    230,396
            --------------------------------------------------------------------
            Investment in GeoPetra Partners, LLC  $    485,741                --
            --------------------------------------------------------------------
            Advances on Notes Receivable          $    107,475      $    155,096
            --------------------------------------------------------------------
            TOTAL                                 $ 54,468,106      $ 10,619,321
            --------------------------------------------------------------------

      Capital expenditures for our 2005 development activities were focused in
two areas, with approximately $30 million used for drilling in the Michigan
Antrim Shale, and $15 million used to acquire leases located primarily in
Michigan and Indiana. This activity in 2005 represents a 354% increase in
expenditures from 2004 to 2005. Drilling and development costs incurred in 2005
also increased 354% over amounts spent in 2004.

      In 2005 we invested $3,165,382 to purchase a condominium to increase
office space to accommodate growth in personnel. This resulted in an increase in
property and equipment from 2004 to 2005 with the purchase of additional
computers, office equipment and furniture for the new space and additional
personnel.

      We also made investments of $928,956 and $485,741 in 2005 for our
proportionate share to further the pipeline construction activities in Hudson
Pipeline & Processing Co., Inc. and the prospect generation activities in
GeoPetra Partners, LLC, respectively.

      Cash flows provided by financing activities during the years ended
December 31, 2005 and December 31, 2004 include the following:

            --------------------------------------------------------------------
                                                  December 31,      December 31,
                                                      2005             2004
            --------------------------------------------------------------------
            Advances from short term bank
            borrowings                            $  5,860,000      $    350,000
            --------------------------------------------------------------------
            Advances from Mezzanine financing
            (net of fees)                         $ 29,491,458      $ 10,179,694
            --------------------------------------------------------------------
            Proceeds from issuance of common
            stock                                 $ 14,666,625      $  2,920,000
            --------------------------------------------------------------------
            Advances from building mortgage       $  2,865,477
            --------------------------------------------------------------------
            Proceeds from notes payable                     --      $    154,118
            --------------------------------------------------------------------
            Proceeds from subsidiary disposition            --      $     10,467
            --------------------------------------------------------------------
            Total Cash Flow Provided by
            financing activities                  $ 52,883,560      $ 13,614,279
            --------------------------------------------------------------------

      We covered our 2005 capital budget through the combination of advances
from our mezzanine facility of $29.49 million in 2005 compared to advances of
$10.17 million in 2004, (net of financing fees of $508,544 and $294,545,
respectively) and from proceeds from the sale of equities of $14.6 million in
2005, compared to $2.9 million in 2004. The condominium purchase for office
space in 2005 was financed with a mortgage in the amount of $2.9 million.

                                       33
<PAGE>

      In December 2005 we increased our mezzanine credit facility with TCW from
$30 million to $50 million under an amendment to the original Note Purchase
Agreement. Borrowings under this facility as of December 31, 2005 were $40
million. Terms remain the same as in the original note. The borrower is Aurora
Antrim North, L.L.C., a wholly owned subsidiary of Aurora. TCW now holds a
second lien position in our Michigan Antrim natural gas properties. The interest
rate is fixed at 11.5% per year, calculated and payable in arrears. Additional
consideration includes a 4% overriding royalty interest net to our interest in
all our existing oil and gas leases in Alcona, Alpena, Charlevoix, Cheboygan,
Montmorency and Otsego Counties in the State of Michigan.

      The TCW borrowing base is subject to semi-annual re-determination and
certain other re-determinations based upon several factors. The borrowing base
is impacted by, among other factors, the fair value of our gas reserves that are
pledged to TCW. Changes in the fair value of our oil and gas reserves are caused
by changes in prices for natural gas and crude oil, operating expenses and the
results of drilling activity. A significant decline in the fair value of these
reserves could reduce our borrowing base as we may not be able to meet certain
facility covenants. The TCW loan agreement prohibits the declaration or payment
of dividends and contains certain covenants. As of December 31, 2005 we were in
compliance with all of the applicable covenants.

      Subsequent to December 31, 2005, on January 31, 2006, we entered into a
$100 million senior secured credit facility with BNP Paribas ("BNP"). The
borrower is Aurora Antrim North, L.L.C. The initial borrowing base under this
facility is $40 million. As proved reserves are added, this borrowing base may
increase to $50 million without TCW consent, and $100 million with TCW consent.
A required semi-annual reserve report may result in an increase or decrease in
credit availability. At the closing, we drew $30 million in loan proceeds, most
of which were used to fund the Hudson project increased ownership acquisition.
The security for this facility is a first lien position in certain Michigan
Antrim assets; a guarantee from Aurora; and a guarantee from Cadence secured by
a pledge of its stock in Aurora.

      Our interest rate alternatives on the BNP credit facility are either (i)
prime or (ii) LIBOR plus 1.25-2.0% depending upon how much of the credit
availability has been advanced. Interest payments on prime loans are paid
quarterly in arrears on the last day of March, June, September and December.
Interest payments on LIBOR loans are paid in arrears on the last date of the
term of the LIBOR period selected, but no less frequently than every three
months. Principal is payable at maturity with the maturity date defined as the
earlier of January 31, 2010 or 91 days prior to the maturity of the TCW Second
Lien Notes, which are currently due on September 30, 2009 (assuming the TCW
Second Lien Notes are not prepaid).

      In 2005 we established a $7.5 million revolving line of credit with
Northwestern Bank. On January 31, 2006, the credit availability on this line of
credit was reduced to $5 million to meet the requirements of the BNP facility.
To secure this line of credit, William W. Deneau, pledged some of the shares of
Cadence common stock under his control. Interest is Wall Street Prime (initially
7.250% per year). Interest is payable monthly in arrears. Principal is payable
at maturity, October 15, 2006.

      On October 4, 2005 we secured $2,950,000 for the purchase of an office
condominium. The security for this mortgage is the office condominium real
estate, plus personal guarantees of William W. Deneau, Thomas W. Tucker, and
John V. Miller, Jr. The interest rate is 6.5%. Payments begin February 1, 2006,
with 32 monthly payments of principal and interest in the amount of $21,969. The
maturity date is October 1, 2008.

      Additional cash receipts from investing include $1.5 million in cash
transferred from Cadence's pre-merger account to our post-merger account, and
$.2 million in proceeds due from certain Notes Receivable.

      Cash flows used for financing activities for the years ended December 31,
2005 and December 31, 2004 include the following payments.

            --------------------------------------------------------------------
                                                   December 31,     December 31,
                                                       2005             2004
            --------------------------------------------------------------------
            Payments for obligations under
            capital lease                          $     10,401     $    128,278
            --------------------------------------------------------------------
            Payments on related party notes
            payable                                $  2,948,698     $    504,546
            --------------------------------------------------------------------
            Other payments on notes payable                  --     $    307,935
            --------------------------------------------------------------------
            Dividends paid on Preferred Stock      $     44,340               --
            --------------------------------------------------------------------
            Distributions to minority members      $    805,000     $     41,347
            --------------------------------------------------------------------
               Total cash used for financing
               activities                          $  3,808,439     $    982,106
            --------------------------------------------------------------------

                                       34
<PAGE>

      In 2005, distributions to minority members represent amounts paid out to
members for their proportionate share of proceeds from the El Paso Sale. A
portion of our proportionate share of these proceeds was used to pay back
certain related party notes payable in early 2005. We also incurred specific
costs of $594,918 related to the merger between Aurora and Cadence.

CAPITALIZATION

      As of December 31, 2005 and December 31, 2004 our total capitalization was
as follows:

<TABLE>
<CAPTION>
        --------------------------------------------------------------------------------
                                             December 31,                   December 31,
                                                 2005                           2004
        --------------------------------------------------------------------------------
        <S>                                  <C>            <C>             <C>
                                             (Historical)   (Pro Forma)*
        Short term bank borrowings           $  6,210,000   $  4,080,000    $    350,000
        --------------------------------------------------------------------------------
        Obligations under capital lease      $     11,085   $     11,085    $     21,486
        --------------------------------------------------------------------------------
        Related party notes payable          $     69,833   $     69,833    $  3,018,531
        --------------------------------------------------------------------------------
        Mortgage payable                     $  2,865,477   $  2,865,477              --
        --------------------------------------------------------------------------------
        Mezzanine financing                  $ 40,000,000   $ 70,000,000    $ 10,000,000
        ================================================================================
        Total Debt                           $ 49,156,395   $ 77,026,395    $ 13,390,017
        --------------------------------------------------------------------------------
        Stockholders' equity                 $ 56,625,927   $ 74,625,927    $  6,246,304
        ================================================================================
        Total Capitalization                 $105,782,322   $151,652,322    $ 19,636,321
        --------------------------------------------------------------------------------
</TABLE>

*Gives pro forma effect to certain significant 2006 subsequent events. See note
26 to consolidated financial statements.

      The 439% increase in our capitalization from 2004 to 2005 was primarily
caused by a combination of an increase in our borrowing capacities and increases
in stockholder equity. The increase in borrowings included $30 million of
additional advances from our mezzanine facility and approximately $9 million in
short term and long term bank borrowings, less $3 million in payment of related
party notes payable. The increase in stockholder equity is due primarily to the
$35.7 million net increase recorded as a result of the merger between Aurora and
Cadence and $14.6 million in proceeds received from the issuance of additional
equity securities.

      We believe that our current capital resources and our ability to secure
additional capital resources will be adequate to meet the requirements of our
existing business model. We anticipate that our 2006 capital budget of
approximately $56 million will be funded by a combination of existing cash
balances, cash flow from operations, credit facility utilization, and possible
funds from the sale of equity securities. In the first quarter of 2006, we
received $18 million in cash proceeds from the exercise of warrants and options,
and added the BNP credit facility. We will continue to explore sources of credit
and equity financing to maximize our ability to fund our drilling programs.

      Our ability to access equity will depend upon the conditions in the
capital markets and other factors including the price of natural gas and
investment climate for energy companies. We may consider from time to time the
issuance of equity and use the proceeds to refinance current indebtedness or
additional acquisitions or investments in assets or businesses that complement
our existing assets and businesses. Acquisitions, if any, may also be financed
through existing cash on hand or bank borrowings.

      There is no assurance that any desired increase in available credit will
be realized, nor is there any assurance that desired sources of equity financing
will be available in 2006. If capital resources are inadequate or unavailable,
we may curtail acquisition, development and other activities or in severe cases,
be forced to sell some of our assets on an untimely or unfavorable basis.

RESULTS OF OPERATION

<TABLE>
<CAPTION>
                             Summary Financial Operating Data
                          Years Ended December 31, 2005 and 2004
-----------------------------------------------------------------------------------------
                                           December 31,     December 31,
                                               2005             2004              %
                                              Amount           Amount          Increase
-----------------------------------------------------------------------------------------
<S>                                        <C>                <C>               <C>
Total production revenues                  $ 6,743,444        $ 960,011           602%
-----------------------------------------------------------------------------------------
Total operating expenses                   $ 2,047,028        $ 614,338           233%
-----------------------------------------------------------------------------------------
Net income from oil & gas properties       $ 4,696,416        $ 345,673         1,259%
-----------------------------------------------------------------------------------------
</TABLE>

                                       35
<PAGE>

Revenues

      We generate revenue primarily from the following sources: the sale of oil
and gas; providing lease project management services; providing administrative
overhead services for certain producing properties; and the sale of certain
leasehold projects.

      A comparative summary of the composition of our revenue by source for the
years ended December 31, 2005 and 2004 is as follows:

<TABLE>
<CAPTION>
      ---------------------------------------------------------------------------------------------
                                              December 31, 2005               December 31, 2004
      ---------------------------------------------------------------------------------------------
                                             Amount     % of Total           Amount      % of Total
      ---------------------------------------------------------------------------------------------
      <S>                                 <C>               <C>           <C>                 <C>
      Oil and gas sales                   $ 6,743,444        92%          $   960,011          44%
      ---------------------------------------------------------------------------------------------
      Other income                        $   452,621         6%          $ 1,192,835          54%
      ---------------------------------------------------------------------------------------------
      Equity income of subsidiary         $   (75,596)       (1%)                  --          --
      ---------------------------------------------------------------------------------------------
      Interest income                     $   243,013         3%          $    47,678           2%
      ---------------------------------------------------------------------------------------------
      Total Revenues                      $ 7,363,482       100%          $ 2,200,524         100%
      ---------------------------------------------------------------------------------------------
</TABLE>

      Total revenues for the years ended December 31, 2005 were $5,162,958
higher than the total revenues for the year ended December 31, 2004, a 235%
increase. Production revenues for the year ended December 31, 2005 increased by
approximately $5,783,433 from the year ended December 31, 2004, a 602% increase.
This increase was due to increased drilling activity in 2005 and late 2004,
which resulted in an increased number of wells generating natural gas production
revenue. Other income for the year ended December 31, 2005 decreased $750,663
from the year ended December 31, 2004, a 63% decrease. This decrease was due
largely to the reduction in management fees we received. The decrease in
management fees is due to our shift from leasehold acquisitions through various
joint ventures to the development of leased properties to produce natural gas.
The increase in interest income of $195,335 was earned on the funds raised in
the private equity transaction.

      In 2005, we reported net revenues of $65,643 from investments in the
Hudson Pipeline and Processing Company, LLC and net loss of $(141,239) in
GeoPetra Partners, LLC for a combined net loss from equity interest in
subsidiaries of $(75,596). Other material sources of income from operations
include: management fees of $347,857 and $883,687 and Operator revenues of
$94,315 and $309,148 as of December 31, 2005 and December 31, 2004,
respectively.

Gas, Oil and Related Product Sales

      Our oil and gas product sales for the years ended December 31, 2005 and
December 31, 2004 were generated primarily from production from Michigan oil and
gas properties. Our production revenue was generated from the sale of 687,271
net Mcf of natural gas at an average price of $9.00 per MCF from wells in the
Michigan Antrim and 11,129 barrels of oil at an average price of $49.91 per
barrel from non-operated working interests in wells located in Michigan, Texas,
Kansas and New Mexico.

      A summary of oil and gas revenue sources by project area for the years
ended December 31, 2005 and 2004 is as follows:

            --------------------------------------------------------------------
                                         December 31,   December 31,  % Increase
                                             2005           2004
            --------------------------------------------------------------------
            Michigan Antrim              $ 6,139,670    $   960,011
            --------------------------------------------------------------------
            New Albany Shale (Indiana)   $    94,620             --
            --------------------------------------------------------------------
            Other TX,LA,KS,OH,NM         $   509,154             --
            --------------------------------------------------------------------
            TOTAL                        $ 6,743,444    $   960,011       602%
            --------------------------------------------------------------------

      For the year ended December 31, 2005, nearly 73% of our revenues was
generated from the Hudson 34, Hudson SW and Hudson NE units of the Hudson
project, which went on line in December 2004, February 2005 and late April 2005,
respectively. The remaining production revenue generated from gas sales came
from our interests in the Beyer, Black Bean, Paxton Quarry, Treasure Island,
Eastern Group, and Church Lake Field projects. There were also minor overriding
royalties and working interest revenues received from certain New Albany Shale
projects.

                                       36
<PAGE>

Other Revenues

      In addition to oil and gas production revenue, we also generate revenue
from two other sources: management fees from the administration of certain lease
projects and overhead fees charged for the administration of certain producing
properties.

      A summary of these other sources of revenue for the years ended December
31, 2005 and December 31, 2004 is as follows:

            --------------------------------------------------------------------
                                                December 31,     December 31,
            Other Income Summary                    2005             2004
            --------------------------------------------------------------------
            Lease Management fees                $  347,857       $  883,687
            --------------------------------------------------------------------
            Administrative fees for
            producing properties                 $   94,315       $  309,148
            --------------------------------------------------------------------
            Miscellaneous income                 $   10,449       $       --
            --------------------------------------------------------------------
            TOTAL                                $  452,621       $1,192,835
            --------------------------------------------------------------------

      The decrease in lease management fees was primarily the result of the
shifting of efforts from joint venture leasing activity, which generated these
fees, to development of our leasehold interests for our own account. In 2005 we
began to replace these lease management fee revenues with gas production revenue
as the drilling projects were completed. The decrease in administrative fees for
producing properties is due to the sale of certain assets to Samson which
resulted in Samson taking over operations of certain producing wells in 2004.
Some of the administrative revenue started to be replaced in late 2005 from new
wells we began to operate in 2005. However, since we intend to maintain as much
working interest as possible in our wells, this revenue source will be minimal.

Expenses

      Our expenses break into five general categories: General and
Administrative; Production and Lease Operating; Depreciation and Amortization;
Interest; and Taxes.

      Our general and administrative expenses include officer and employee
compensation, rent, travel, audit, tax and legal fees, office supplies,
utilities, insurance, other consulting fees and office related expense. Expenses
from oil and gas operations include services related to producing oil and gas,
such as severance taxes, post production costs (including transportation), and
lease operating expenses.

      The following table is a comparison of our general categories of expenses
for the years ended December 31, 2005 and 2004, and the percentages each of
these categories comprise of the total expenses:

<TABLE>
<CAPTION>
       ---------------------------------------------------------------------------------------------
                                                                    Year Ended
                                              ------------------------------------------------------
                                                                % of                          % of
                                              December 31,     Total        December 31,     Total
                                                  2005        Expenses          2004        Expenses
       ---------------------------------------------------------------------------------------------
       <S>                                    <C>               <C>         <C>               <C>
       General and Administrative             $ 3,435,507        43%        $ 2,057,333        62%
       ---------------------------------------------------------------------------------------------
       Production and lease operating         $ 2,047,028        26%        $   614,338        18%
       ---------------------------------------------------------------------------------------------
       Depreciation and amortization          $ 1,155,254        15%        $   203,249         6%
       ---------------------------------------------------------------------------------------------
       Interest                               $ 1,228,274        16%        $   392,402        12%
       ---------------------------------------------------------------------------------------------
       Taxes                                  $    29,651        --         $    75,000         2%
       ---------------------------------------------------------------------------------------------
       Total Expenses                         $ 7,895,714       100%        $ 3,342,322       100%
       ---------------------------------------------------------------------------------------------
</TABLE>

      Our general and administrative expenses for the year ended December 31,
2005 increased $1,378,174, or 67%, from the year ended December 31, 2004 due to
the increase in personnel added to accommodate our continued growth as we hire
additional personnel to oversee the drilling program and additional accounting
staff to meet SEC filing requirements. We also incurred significant professional
fees related to the filing of two registration statements in late December 2005.

      Production and lease operating expenses for the year ended December 31,
2005 increased $1,432,690 compared to the year ended December 31, 2004. This
increase was due to additional producing wells on line during 2005. This
increase of 233% in production costs is offset by the 602% increase in related
production revenue from 2004 to 2005.

                                       37
<PAGE>

      Depreciation and amortization expense for the year ended December 31, 2005
increased $952,005 from the year ended December 31, 2004, or 468%, due to the
increased capitalized costs subject to depletion. There were no drilling or
completion related costs in the early quarters of 2004 that were subject to
amortization.

      Interest expense for the year ended December 31, 2005 increased $835,872,
or 213%, from the year ended December 31, 2005. This increase is due to the
increase in Mezzanine debt, offset by the capitalizing of interest costs in 2005
during the drilling and development phase. Limited drilling activity in the
first three quarters of 2004 resulted in all interest being recorded as an
expense for those quarters.

      Taxes recorded in the years ended December 31, 2005 and 2004 were property
and other miscellaneous taxes and Indiana income taxes respectively.

RECENT ACCOUNTING PRONOUNCEMENTS

      Reference is made to Note 1 to the Financial Statements included elsewhere
in this filing 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.

SIGNIFICANT ACCOUNTING PRINCIPLES RELATING TO MERGER WITH AURORA

      As a result of the reverse merger, we were required to conform certain of
Cadence's accounting principles to the accounting principles used by Aurora
prior to the merger. This was required because Aurora is considered to be the
accounting acquirer. Our financial statements for the fiscal year ending
December 31, 2005 were prepared using these accounting principles. A summary of
these accounting principles is as follows:

      o     Aurora is treated as the acquirer in the merger for accounting
            purposes, and accordingly, reverse acquisition accounting is applied
            to the business combination.

      o     We measured the cost of the business acquired in the merger 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. The fair value was determined to be approximately
            $41,500,000.

      o     We uniformly apply the full cost method to all of our oil and gas
            operations. Accordingly, the financial statements include a net
            upward adjustment to the Cadence assets in the amount of $774,912 to
            capitalized costs previously expensed by Cadence under the
            successful efforts method. This increased capitalized costs was used
            to recalculate depreciation on the new asset base.

      o     For common stock valuation for the period ended December 31, 2005,
            we continued to use the intrinsic value method under APB Opinion 25
            in accounting for stock-based compensation. For the fiscal year
            ending December 31, 2006, we will use FAS No. 123(R). Aurora stock
            options outstanding as of the date of the merger are not accounted
            for under APB Opinion 25 or FAS 123 because these options were fully
            vested at the time of the merger. Their fair value was included in
            the cost of the business acquired, as discussed above.

CRITICAL ACCOUNTING POLICIES

      Our financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. The reported
financial results and disclosures were determined using the significant
accounting policies, practices and estimates described in the notes to the
financial statements. We believe that the reported financial results are
reliable and the ultimate actual results will not differ materially from those
reported. Uncertainties associated with the methods, assumptions and estimates
underlying our critical accounting measurements are discussed below.

                                       38
<PAGE>

Use of 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. These estimates primarily relate to the
valuation of oil and gas reserves, and unsettled transactions and events as of
the date of the financial statements. Accordingly, changes in facts and
circumstances may result in revised estimates and actual results may vary from
estimated amounts.

Oil and Gas Properties

      We employ the full cost method of accounting for our oil and gas
properties. Under the full cost method all costs related to the acquisition,
exploration and development of oil and gas properties, including directly
related overhead costs, are capitalized and accumulated, into a single cost
center referred to as a full cost pool. Gain or loss on the sale or other
disposition of oil and gas properties is applied to adjust the capitalized costs
in the full cost pool with a gain or loss recognized, unless the adjustment
would significantly alter the relationship between capitalized costs and proven
reserves of oil and gas, in which case the gain or loss is recognized in income.

Oil and Gas Reserves

      Proved oil and gas reserves, as defined by SEC Regulation S-X Rule
4-10(a)(2), (3) and (4), are the estimated quantities of crude oil, natural gas
and natural gas liquids that geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions including prices and costs as
of the date the estimate is made. As of December 31, 2005 we did not have any of
our natural gas production hedged. Therefore, the price used in the reserve
report to calculate value was $9.89 per Mcf, the price at which we sold our gas
on December 31, 2005.

      Our estimates of proved reserves are made using available geological and
reservoir data as well as production performance data. These estimates made by
our engineers are reviewed annually and revised, either upward or downward, as
warranted by additional data. Revisions are necessary due to changes in, among
other things reservoir performance, prices, economic conditions and governmental
restrictions. Decreases in prices, for example, may cause a reduction in some
proved reserves due to reaching limits sooner. A material change in the
estimated volumes of reserves could have an impact on the depletion rate
calculation reported in the financial statements.

Ceiling Test

      Companies that use the full cost method of accounting for oil and gas
properties are required to perform the ceiling test each quarter. The ceiling is
an impairment test performed as prescribed by SEC Regulation S-X Rule 4-10. The
test determines a limit, or ceiling, on the book value of oil and gas
properties. That limit is the after-tax value of the future net cash flows from
proved natural gas and crude oil reserves discounted at ten percent per annum.
This ceiling is compared to the net book value of the oil and gas properties and
reduced by the related net deferred income tax liability and asset retirement
obligations. If the net book value reduced by the related net deferred income
tax liability and asset retirement obligations exceeds the ceiling, impairment
or non-cash write down is required. A charge to income for impairment could give
us a significant loss for a particular period. However, future depletion expense
would be reduced.

      The ceiling test is affected by a decrease in net cash flow from reserves
due to higher operating or capital costs or reduction in market prices for
natural gas and crude oil. These changes can reduce the amount of economically
producible reserves. We were not required to record a charge for impairment
during the year ended December 31, 2005.

Income Taxes

      Income taxes are provided for based upon the liability method of
accounting pursuant to Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes." 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
we do not believe that we have met the "more likely than not" standard imposed
by SFAS No. 109 to allow recognition of such an asset.

      At December 31, 2005, we had net deferred tax assets calculated at an
expected rate of 34% of approximately $10,145,800. Because we cannot determine
that it is more likely than not that we will realize the benefit of the net
deferred tax asset, a valuation allowance equal to the net deferred tax asset
has been established at December 31, 2005.

                                       39
<PAGE>

OFF BALANCE SHEET ARRANGEMENTS

      We have no off-balance sheet arrangements, special purpose entities,
financing partnerships or guarantees.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Commodity Price Risk

      Our primary market risk relates to commodity price fluctuations that
affect pricing applicable to the sales of gas production. This risk will become
more significant as more wells are drilled. This risk impacts our earnings as
well as our ability to secure capital and debt for continued drilling and
development. We did not have any gas delivery contracts in place as of December
31, 2005, relying instead on the spot markets. However, a decision was made in
the first quarter 2006 to place 5,000 mcf/day under contract at $8.59 /mcf. The
term of this contract is 12 months.

Interest Rate Risk

      As of December 31, 2005 we had no interest rate derivatives in effect. At
December 31, 2005 our mezzanine debt was at a fixed rate, while our $5 million
line of credit was at prime. If interest rates on this variable interest-rate
debt increase or decrease one percentage point, our annual pretax income will
increase or decrease by $50,000.

      In January 2006 we took down a draw of $30 million from BNP which is also
at a variable rate. If interest rates on this debt increase or decrease one
percentage point, our annual pretax income will increase or decrease by
$300,000.

Credit Risk

      Credit risk is the risk of loss as a result of non-performance by
counterparties of their contractual obligations. We currently sell our natural
gas to large energy marketing companies, refineries and other users of petroleum
products. While we follow credit policies at the time we enter into sales
contracts, the credit worthiness of these parties may change over time.

ITEM 7. FINANCIAL STATEMENTS

      The Financial Statements appear at pages F-1 to F-44.

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

      As reported in our Amended Form 8-K filed on January 20, 2006, because
Aurora was the accounting acquirer in the merger, we retained the services of
Aurora's auditors to continue as our auditor post-merger. While this was
technically a change of auditor, from management's perspective, this was a
continuation of an existing auditor relationship. Our prior auditor's reports on
our financial statements for the past two fiscal years did not contain an
adverse opinion or disclaimer of opinion, nor were they modified as to
uncertainty, audit scope, or accounting principles. We did not have any
disagreement with our prior auditor, whether or not resolved, on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.

ITEM 8A. CONTROLS AND PROCEDURES

      Our Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15 and Rule 15d-15 of the Securities Exchange Act of 1934, as amended) as of
December 31, 2005, and have concluded that these disclosure controls and
procedures are effective to provide reasonable assurance that information
required to be disclosed in our periodic filings under the Securities Exchange
Act of 1934, as amended, is accumulated and communicated to our management to
allow timely decisions regarding required disclosure.

                                       40
<PAGE>

      During the past fiscal year, we underwent a conversion  of our  accounting
software.  We believe that this conversion has improved our disclosure  controls
and  procedures  in a number of respects,  including:  creation of an integrated
software platform;  improved capability to generate internal reports at a higher
level  of  detail;   improved  capability  to  generate  consolidated  financial
statements  from internal  data;  improved  multi-user  capability and volume of
processing capability;  refinement of processes;  and expanded security features
to protect the quality and  integrity of the  underlying  data.  During the last
fiscal quarter,  we have not experienced any change in our internal control over
financial  reporting  that has had, or is reasonably  likely to have, a material
adverse affect on our internal control over financial reporting.

ITEM 8B. OTHER INFORMATION

      None.

                                       41
<PAGE>

                                    PART III

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

      The following table sets forth the name, age (as of December 31, 2005) and
position of each of our executive officers and directors.

             Name               Age            Position(s) with the Company
      -------------------      -----     ---------------------------------------

      William W. Deneau         61       Director, President, Chairman of Board
                                         of Directors
      Howard M. Crosby          53       Director, Vice Chairman of Board of
                                         Directors
      Lorraine M. King          40       Chief Financial Officer
      John V. Miller, Jr.       47       Vice President of Exploration and
                                         Production
      Thomas W. Tucker          63       Vice President of Land and Development
      John P. Ryan              43       Secretary
      Kevin D. Stulp            49       Director
      Ronald E. Huff            50       Director, Treasurer
      Richard M. Deneau         59       Director
      Gary J. Myles             60       Director
      Earl 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 our President and Chairman of the Board of
Directors since November 1, 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 through October
2005, Mr. Deneau was responsible for managing Aurora's affairs. He 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 M. Deneau, one of our directors.

      Howard M. Crosby has served as our Vice Chairman of the Board of Directors
since November 1, 2005 and as a Director since February 1994. From February 1994
through October 2005 Mr. Crosby served as our president, and from January 1998
until October 2005 he served as our 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.

      Lorraine ("Lori") M. King has served as our Chief Financial Officer since
November 1, 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 our Vice President of Exploration and
Production since November 1, 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 through October
2005, he was responsible for overseeing exploration and development activities
for Aurora. From June 1997 through October 2005 he served as a Director of
Aurora and from July 1997 through 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.

                                       42
<PAGE>

      Thomas W. Tucker has served as our Vice President of Land and Development
since November 1, 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 through October 2005 he was
responsible for overseeing land development activities for Aurora. From June
1997 through October 2005 he served as a Director of Aurora and from July 1997
through 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 in 1987, Mr. Tucker founded Jet Exploration, Inc. 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 has served as our Secretary since 1998. From September 1996
through October 2005 he served as our Vice President of Corporate Development,
and from April 1997 through October 2005 he served on our Board of Directors.
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 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, and 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 our Treasurer since November 1, 2005 and
has served as a Director 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 is the
chairperson of our Audit Committee.

      Richard M. Deneau has served as a Director since November 21, 2005. Mr.
Deneau served as a Director and President of Anchor Glass Container corporation
("Anchor") from 1997 until his retirement in 2004. He was also the Chief
Operating Officer of Anchor from 1997 to 2002, and the Chief Executive Officer
of Anchor 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 M.
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 M. 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
M. Deneau is the brother of William W. Deneau our President and Chairman of the
Board of Directors.

                                       43
<PAGE>

      Gary J. Myles has served as a Director since November 21, 2005. From June
1997 through 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. Mr. Myles is the chairperson of our
Nominating and Corporate Governance Committee.

      Earl V. Young has served as a Director since November 21, 2005. From March
2001 through 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. Mr. Young is the chairperson of our
Compensation 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.

BOARD COMMITTEES

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

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

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

      o     Nominating and Corporate Governance Committee: Gary J. Myles, Howard
            M. Crosby and Kevin D. Stulp (Gary J. Myles has been elected
            Chairperson).

      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.

      Each of our audit comittee members is an independent outside director, and
one,  Ronald  E.  Huff,  is a  financial  expert  with  knowledge  of  financial
statements,  generally accepted accounting  principles and accounting procedures
and disclosure rules. His credentials are described in greater detail above.

      Among the responsibilities of our Audit Committee are: (i) to appoint our
independent auditors and monitor the independence of our independent auditors;
(ii) to review our policies and procedures on maintaining accounting records and
the adequacy of internal controls; (iii) to review management's implementation
of recommendations made by the independent auditors and internal auditors; (iv)
to consider and pre-approve the range of audit and non-audit services performed
by independent auditors and fees for such services; and (v) to review our
audited financial statements, Management's Discussion and Analysis of Financial
Conditions and Results of Operations, and disclosures regarding internal
controls before they are filed with the SEC.

                                       44
<PAGE>

NOMINATIONS FOR DIRECTORS

      On February 10, 2006, our Board of Directors adopted a Nominating and
Corporate Governance Committee Charter and a Stockholder Communications With
Directors Policy, copies of which are posted on our website at
www.auroraogc.com. Article VI, Section 2 of our Nominating and Corporate
Governance Committee Charter provides as follows:

      Process for Identifying and Evaluating Candidates for Directors
      Recommended by Stockholders. The Committee will accept recommendations for
      potential nominees for director from stockholders of the Corporation.
      Anyone wishing to recommend an individual for the Board of Directors
      should forward the name, address and biographical information of a
      potential nominee to the Nominating and Corporate Governance Committee of
      the Board of Directors of Cadence Resources Corporation, c/o Cadence
      Resources Corporation, 4110 Copper Ridge Drive, Suite 100, Traverse City,
      Michigan 49684. The stockholder must submit in writing to the Committee
      the recommended candidate's name, a brief resume setting forth the
      recommended candidate's business and educational background and
      qualifications for service, any other information relating to the nominee
      that is required to be disclosed in solicitations of proxies for election
      of directors, or as otherwise required, in each case pursuant to
      Regulation 14A of the Securities Exchange Act of 1934, as amended, and a
      notarized consent signed by the recommended candidate stating the
      recommended candidate's willingness to be nominated and to serve.
      Potential director nominees submitted by stockholders of the Corporation
      will not be considered by the Committee if they are not timely submitted
      in accordance with the Corporation's proxy statements. (These timing
      requirements are not applicable to persons nominated by or at the
      direction of the Board of Directors.) If the Committee chooses to consider
      any nominee recommended by a stockholder, the Committee will evaluate the
      potential nominee by personal interview. The interview will be conducted
      by one or more members of the Committee and/or any other method the
      Committee deems appropriate, which may, but need not, include a
      questionnaire. The Committee may solicit or receive information concerning
      potential nominees from any source it deems appropriate. The Committee
      need not engage in an evaluation process with respect to a proposed
      nominee unless: (i) there is a vacancy on the Board of Directors; (ii) a
      director is not standing for re-election; (iii) the Committee does not
      intend to recommend the nomination of a sitting director for re-election;
      or (iv) there is an increase in the number of directors to be elected.

      In connection with the closing of the merger between Cadence and Aurora,
certain of our shareholders, including certain former Aurora shareholders who
became shareholders of Cadence in connection with the merger, executed and
delivered voting agreements pursuant to which they agreed through October 31,
2008, 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 are initially
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 are
initially Howard M. Crosby and Kevin D. Stulp. In addition, these 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 in seven directors.

      In addition, also in connection with the closing of the merger, certain of
our shareholders executed and delivered irrevocable proxies naming William W.
Deneau and Lorraine King as proxies to vote their shares through October 31,
2008 in the manner determined by such proxies. An aggregate of 11,583,012 shares
of our common stock held by these shareholders was subject to these proxies at
February 22, 2006.

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.

                                       45
<PAGE>

      To the Company's knowledge, based solely on a review of the copies of
Forms 3, 4 and 5 furnished to the Company between January 1, 2005 and December
31, 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 and one transaction that occurred on October 31, 2005; Jeffrey
M. Christian filed a late Form 4 for the two transactions that occurred on
January 7, 2005 and three transactions that occurred on October 31, 2005; Glenn
DeHekker filed a late Form 4 for two transactions that occurred on January 7,
2005, one transaction that occurred on January 17, 2005, one transaction that
occurred on October 17, 2005, and three transactions that occurred on October
31, 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 January 17, 2005 and one transaction that occurred
on October 31, 2005; and Howard Crosby filed a late Form 4 for two transactions
that occurred on October 31, 2005 and one transaction that occurred on December
22, 2005.

CODE OF ETHICS

      We have adopted a Code of Conduct and Ethics that applies to all of our
directors, executive officers and employees. Please see Item 13, Exhibit 14.1.

ITEM 10. EXECUTIVE COMPENSATION

      On November 1, 2005, our prior  management team was replaced by the Aurora
management team. Our financial  results being reported in this filing include 12
months of Aurora  operations,  and two months  (November and December,  2005) of
Cadence operations. We are disclosing executive compensation in the same fashion
below. The information below shows compensation paid by Aurora to the executives
listed  in  Item  9  above  for  the 12  months  ended  December  31,  2005  and
compensation paid by Cadence for the months of November and December 2005. For a
history of executive compensation paid by Cadence prior to this time, please see
our Form 10-KSB for the fiscal year ended  September  30,  2005,  as amended and
filed with the SEC on February 7, 2006.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
                                                 SUMMARY COMPENSATION TABLE
--------------------------------------------------------------------------------------------------------------------------
                                                                                             Long Term Compensation
                                                                                     -------------------------------------
                                                        Annual Compensation                          Awards
                                                   -----------------------------     -------------------------------------
                                                                                         Value of          # of Securities
                                                                                     Restricted Stock        Underlying
      Name and Principal Position                  Year                Salary(1)         Awards(2)             Options
      ---------------------------                  ----                ---------     ----------------      ---------------
<S>                                                <C>                 <C>              <C>                <C>
William W. Deneau                                  2005                $140,000               --                      --
President, Chief Executive Officer
--------------------------------------------------------------------------------------------------------------------------
John V. Miller, Jr.                                2005                $125,000               --                      --
Vice President of Exploration and Production
--------------------------------------------------------------------------------------------------------------------------
Thomas W. Tucker,                                  2005                $125,000               --                      --
Vice President of Land and Development
--------------------------------------------------------------------------------------------------------------------------
Lorraine M. King,                                  2005                $125,000         $116,400(3)       20,000 shares(4)
Chief Financial Officer
--------------------------------------------------------------------------------------------------------------------------

(1)   The executive officers received additional cash compensation during 2005,
      but this was payment of deferred salaries for the years 2000 and 2001 that
      had been booked, but not paid. This includes an additional cash payment of
      $47,244 for Mr. Deneau, $26,667 for Mr. Miller and $50,000 for Mr. Tucker.

(2)   Because all of the shares we issued in exchange for Aurora stock in the
      merger were registered under the Form S-4 registration statement, none of
      the named executive officers held restricted stock at December 31, 2005.

(3)   Ms. King was awarded 30,000 shares of common stock by the Board of
      Directors on December 8, 2005. The closing price at which our stock traded
      on that date was $3.88 per share. Issuance of these shares has been
      deferred until a Form S-8 registration statement is filed with the SEC,
      but the compensation related to this award was recorded as an expense in
      the 2005 financial statements.

(4)   Option to purchase 10,000 shares of Aurora common stock at an exercise
      price of $3.50 per share; converted in the merger into the right to
      purchase 20,000 shares of our common stock at an exercise price of $1.75
      per share.
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       46
<PAGE>

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
                                              OPTION GRANTS IN 2005
                                                     Individual
---------------------------------------------------------------------------------------------------------
                              # of Securities       % of Total Options       Exercise
                            Underlying Options    Granted to Employees in    Price Per      Expiration
            Name                  Granted               Fiscal Year          Share(1)         Date
---------------------------------------------------------------------------------------------------------
<S>                              <C>                        <C>              <C>            <C>
Lorraine M. King                 20,000(2)                  7%               $1.75(2)       10/18/15
---------------------------------------------------------------------------------------------------------

(1)   At the date of grant, Aurora had not yet merged with Cadence, and Aurora
      was not publicly traded. Accordingly, there was no market price at the
      date of grant.

(2)   This award was initially for 10,000 shares of Aurora's common stock with
      an exercise price of $3.50 per share, and was converted in the merger as
      described in the chart.
---------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
                                      AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                                             AND FISCAL YEAR-END OPTION VALUES
---------------------------------------------------------------------------------------------------------------------------
                                                           # of Securities Underlying             Value of Unexercised
                                                             Unexercised Options at             in-the-Money Options at
                               Shares                               12/31/05                          12/31/05(1)
                              Acquired       Value       ------------------------------      ------------------------------
      Name                  on Exercise     Realized     Exercisable      Unexercisable      Exercisable      Unexercisable
-------------------        ------------     --------     -----------      -------------      -----------      -------------
<S>                               <C>           <C>           <C>               <C>           <C>                  <C>
William W. Deneau                 0             0             600,000           0             $1,647,000           --
---------------------------------------------------------------------------------------------------------------------------
John V. Miller, Jr.               0             0             600,000           0             $1,647,000           --
---------------------------------------------------------------------------------------------------------------------------
Thomas W. Tucker                  0             0             600,000           0             $1,647,000           --
---------------------------------------------------------------------------------------------------------------------------
Lorraine M. King                  0             0             160,000           0             $  418,100           --
---------------------------------------------------------------------------------------------------------------------------

(1)   Options are "in-the-money" if the market price of a share of common stock
      exceeds the exercise price of the option.
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

      We do not currently have any long term incentive compensation plans in
place.

      Compensation paid to our directors prior to the merger between Cadence and
Aurora is reported in our Form 10-KSB, as amended, for the fiscal year ended
September 30, 2005, filed with the SEC on February 7, 2006.

      As compensation for their services as directors of Aurora during 2005 and
prior to the merger, on December 8, 2005, our Board voted to award Earl V. Young
and Gary J. Myles each 30,000 shares of common stock, to be issued in 2006 after
the shares are registered on a Form S-8 registration statement. These shares
were awarded in lieu of awarding stock options that would otherwise have been
issued, but were deferred due to the ongoing work on the merger, which extended
through most of 2005.

      At a December 8, 2005 Board meeting, as revised at a February 10, 2006
Board meeting, our Board of Directors adopted the following standard
compensation arrangements for service as a director:

            Option to purchase 200,000 shares of our common stock; vesting
            60,000 shares on December 31, 2006, 70,000 shares on December 31,
            2007, and 70,000 shares on December 31, 2008.

            Cash fee of $1,000 per Board meeting attended in person, with
            additional payments of $1,000 per day for each travel day from the
            director's place of residence to the location of the Board meeting,
            up to a total of two additional days in addition to the date of the
            meeting.

            Cash fee of $500 for participation in each telephonic Board meeting.

                                       47
<PAGE>

            Cash fee of $1,000 for each committee meeting attended in person.

            Cash fee of $500 for participating in each telephonic committee
            meeting.

            Annual retainer of $10,000 for the Audit Committee chairperson.

      We do not have any other contractual arrangements with any of our
directors. We do not have any written employment contracts with our executive
officers, nor do we have any compensatory arrangements with our executive
officers other than as described above. We have not agreed to make any payments
to our named executive officers because of resignation, retirement or any other
termination of employment with us or our subsidiaries, or from a change in
control of us, or a change in the executive's responsibilities following a
change in control.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS

      The following table sets forth, as of February 22, 2006, certain
information regarding the ownership of our voting securities 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.

      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.

<TABLE>
<CAPTION>
      ---------------------------------------------------------------------------------------------------
                  Name and Address of                   Amount and Nature of       Percent of Outstanding
                  Beneficial Owner(1)                 Beneficial Ownership(2)             Shares(2)
      --------------------------------------------    -------------------------    ----------------------
<S>                                                         <C>                            <C>
      Howard M. Crosby                                      1,243,840(3)                    1.53%
      John P. Ryan                                            978,046(4)                    1.20%
      Kevin D. Stulp                                          507,500(5)                    0.62%
      Nathan A. Low Roth IRA and affiliates
          641 Lexington Avenue
          New York, New York 10022                          7,657,766(6)                    9.40%
      Rubicon Master Fund(7)
          c/o Rubicon Fund Management LLP
          P103 Mount Street
          London W1K 2TJ, UK                               16,000,000                      19.64%
      Crestview Capital Master, LLC
          95 Revere Drive, Suite A
          Northbrook, Illinois, 60062                       6,616,000                       8.12%
      William W. Deneau                                     4,232,500(8)                    5.19%
      Gary J. Myles                                           259,998(9)                    0.32%
      Earl V. Young                                           386,204(10)                   0.47%
      Richard M. Deneau                                            --                         --
      Ronald E. Huff                                               --                         --
      John V. Miller, Jr.                                   3,289,762(11)                   4.04%
      Thomas W. Tucker                                      3,848,194(12)                   4.72%
       Lorraine M. King                                       360,000(13)                   0.44%
      All executive officers and directors as a
          group (11 persons)                               15,106,044(14)                  18.54%
      ---------------------------------------------------------------------------------------------------
</TABLE>

(1)   Addresses are only given for holders of more than 5% of the outstanding
      common stock of Cadence who are not executive officers or directors.
(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.

                                       48
<PAGE>

(3)   Includes 270,000 shares of common stock held by Crosby Enterprises, Inc.,
      40,000 shares of common stock owned by the Crosby Family Living Trust,
      80,000 shares of common stock owned by CORK Investments, Inc. and options
      to purchase 50,000 shares of common stock.
(4)   Includes 358,625 shares of common stock owned by Nancy Martin-Ryan, 45,000
      shares of common  stock  owned by John Ryan as  custodian  for Karen Ryan,
      45,000  shares of common stock owned by John Ryan as custodian for Patrick
      Ryan,  and  87,500  shares  of  common  stock  owned  by  Andover  Capital
      Corporation.
(5)   Includes options currently exercisable for 50,000 shares of common stock
      and warrants currently exercisable for 100,000 shares of common stock,
      2,750 shares of common stock owned by the Kevin Dale Stulp IRA and 1,750
      shares of 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 February 27, 2006, 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. Although Nathan A. Low has no direct voting or dispositive
      power over the 828,643 shares of common stock held by the Nathan A. Low
      Family Trust or the 100,000 shares of common stock held in individual
      trusts for the Neufeld 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. Therefore, Nathan A. Low
      reports shared voting and dispositive power over 928,643 shares of common
      stock.
(7)   Based on Schedule 13G and Form 4 filed with the SEC on February 10, 2006,
      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, 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, 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,
      and Mr. Leitch disclaim beneficial ownership of these securities.
(8)   Includes 3,272,000 shares of common stock held by the Patricia A. Deneau
      Trust, 340,500 shares of common stock owned by the Denthorn Trust and
      20,000 shares of common stock held by White Pine Land Services.
(9)   Includes options currently exercisable for 199,998 shares of common stock.
(10)  Includes options currently exercisable for 199,998 shares of common stock.
(11)  Includes 1,000,000 shares of common stock held by Miller Resources, Inc.
      and 1,689,762 shares of common stock owned by Circle M, LLC.
(12)  Includes 1,607,574 shares of common stock held by the Sandra L. Tucker
      Trust, 24,646 shares of common stock owned by Jet Exploration, Inc. and
      1,615,974 shares of common stock owned by the Thomas W. Tucker Trust.
(13)  Includes options currently exercisable for 160,000 shares of common stock.
(14)  Includes options and warrants currently exercisable for an aggregate of
      759,996 shares of common stock.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      On January 31, 2005, we entered into a purchase agreement (the "Purchase
Agreement") with 22 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 aggregate
sales proceeds of $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, who was at that time a greater than 10% holder of our
common stock, invested in us 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 1,821,000 shares of our common stock for
services rendered as the placement agent in the transaction.

      On January 31, 2005, we entered into an agreement with the seven
accredited investors in our April 2004 private placement pursuant to which we
were 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 pursuant to the Purchase Agreement. Nathan Low, who at
that time was 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, was also reduced to $1.25 per share.

                                       49
<PAGE>

      At the time of the merger, Aurora had 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. Rent was paid through December 31, 2005 on a lease extending
through March 31, 2007. After we moved our corporate offices in early December
2005, we no longer had a need for the space in the South 31, L.L.C. property. We
have since entered into a Settlement Agreement and Mutual Release with South 31,
L.L.C. pursuant to which we made a payment to South 31, L.L.C. in the amount of
$65,250 and South 31, L.L.C. released us from any further obligation on the
lease.

      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.

      In connection with the December 2005 through February 2006 exercise of
certain warrants that had previously been issued by Cadence and Aurora in
January 31, 2005 transactions, we paid a commission to Sunrise Securities
Corporation, an affiliate of Nathan A. Low, who is a greater than 5% holder of
our common stock, in the amount of $1,534,697. This entire amount was used by
Mr. Low to exercise certain outstanding warrants to purchase 1,469,860 shares of
our common stock.

ITEM 13. EXHIBITS

INDEX OF EXHIBITS

3.1         Restated Articles of Incorporation of Cadence Resources Corporation.
3.2(1)      Bylaws of Cadence Resources Corporation.
4.1(2)      Articles of Amendment to the Articles of Incorporation, relating to
            the Class A Preferred Stock.
9.1(3)      Voting Agreement executed in connection with the merger.
10.1(4)     Securities Purchase Agreement between Cadence Resources Corporation
            and the investors signatory thereto, dated April 2, 2004.
10.2(5)     Agreement and Plan of Merger dated as of January 31, 2005 between
            Cadence Resources Corporation, Aurora Acquisition Corp. and Aurora
            Energy, Ltd.
10.3        Asset Purchase Agreement with Nor Am Energy, L.L.C., Provins Family,
            L.L.C. and O.I.L. Energy Corp. dated January 10, 2006.
10.4        First Amendment to First Amended and Restated Note Purchase
            Agreement between Aurora Antrim North, L.L.C., et al., and TCW Asset
            Management Company, dated January 31, 2006.
10.5        Credit Agreement among Aurora Antrim North, L.L.C. et al. and BNP
            Paribas, et al., dated January 31, 2006.
10.6        Intercreditor and Subordination Agreement among BNP Paribas, et.
            al., TCW Asset Management Company and Aurora Antrim North, L.L.C.
            dated January 31, 2006.

                                       50
<PAGE>

10.7        Promissory Note from Aurora Energy, Ltd. to Northwestern Bank dated
            January 31, 2006.
10.8        Confirmation from BNP Paribas to Aurora Antrim North, LLC dated
            February 22, 2006 relating to gas sale commitment.
14.1(6)     Code of Conduct and Ethics
16.1(7)     Letter on Change in Certifying Accountant.
21.1(3)     List of Subsidiaries.
23.1        Consent of Ralph E. Davis Associates, Inc.
23.2        Consent of Schlumberger Technology Corporation.
23.3        Consent of Netherland, Sewell & Associates, Inc.
23.4        Consent of Rachlin Cohen & Holtz, LLP.
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 our Current Report on Form 8-K, filed
                  with the SEC on December 9, 2005.
            (2)   Filed as an exhibit to our 10-KSB for the fiscal year ended
                  September 30, 2003, filed with the SEC on January 13, 2004.
            (3)   Filed as an exhibit to our 10-KSB for the fiscal year ended
                  September 30, 2005, filed with the SEC on December 29, 2005.
            (4)   Filed as an exhibit to our Current Report on Form 8-K filed
                  with the SEC on April 5, 2004.
            (5)   Filed as an exhibit to our Form S-4 Registration Statement
                  filed with the SEC on May 13, 2005.
            (6)   Filed as an exhibit to our Current Report on Form 8-K filed
                  with the SEC on February 15, 2006.
            (7)   Filed as an exhibit to our Amended Current Report on Form
                  8-K/A filed with the SEC on January 20, 2006.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

AUDIT FEES

      The aggregate fees billed by Rachlin Cohen & Holtz, LP for professional
services rendered for the audit of Aurora's 2004 financial statement and the
2005 financial statement reflecting 12 months of Aurora results and two months
of Cadence results, and the review of Aurora's quarterly financial statements
for fiscal year 2005 included in a Form S-4 registration statement, two Form
SB-2 registration statements, and one post-effective amendment of a third Form
SB-2 registration statement were $-0- with respect to 2004 and $254,163 with
respect to 2005. Due to the reverse acquisition treatment of the merger, Rachlin
Cohen & Holtz, LP was not engaged as the principal auditor of Cadence for its
fiscal years ending September 30, 2004 and 2005. As reported in our Form
10-KSB/A for the fiscal year ended September 30, 2005 filed with the SEC on
February 7, 2005, our then principal auditors, Williams & Webster, P.S., billed
$107,000 and $130,000 respectively in these periods for audit and review
services.

AUDIT RELATED FEES

      There were no other fees billed by Rachlin Cohen & Holtz, LP during the
last two fiscal years for assurance and related services that were reasonably
related to the performance of the auditor review of our financial statements and
not reported under "Audit Fees" above.

TAX FEES

      There were no fees billed by Rachlin Cohen & Holtz, LP during the last two
fiscal years for professional services rendered for tax compliance, tax advice,
and tax planning.

ALL OTHER FEES

      There were no other fees billed by Rachlin Cohen & Holtz, LP during the
last two fiscal years.

                                       51
<PAGE>

AUDIT COMMITTEE PROCESS

      Our Audit Committee Charter requires our Audit Committee to pre-approve
all audit services provided by our independent auditors and all non-audit
services provided by our independent auditors that are not eligible for the di
minimous exception contained in Section 10A of the Securities Exchange Act of
1934, as amended. Our engagement of Rachlin Cohen & Holtz, LP to perform our
audit for the fiscal year ending December 31, 2005 was pre-approved by our Audit
Committee consistent with the requirements of the Charter.

                                   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: March 31, 2006                    By: /s/ William W. Deneau
                                            ------------------------------------
                                            Name:  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              March 31, 2006
----------------------------  (Principal Executive Officer)
William W. Deneau

/s/ Lorraine M. King          Chief Financial Officer             March 31, 2006
----------------------------  (Principal Financial Officer and
Lorraine M. King              Principal Accounting Officer)

/s/ Howard M. Crosby          Director                            March 31, 2006
----------------------------
Howard M. Crosby

/s/ Kevin D. Stulp            Director                            March 31, 2006
----------------------------
Kevin D. Stulp

/s/ Ronald E. Huff            Director                            March 31, 2006
----------------------------
Ronald E. Huff

/s/ Richard M. Deneau         Director                            March 31, 2006
----------------------------
Richard M. Deneau

/s/ Gary J. Myles             Director                            March 31, 2006
----------------------------
Gary J. Myles

/s/ Earl V. Young             Director                            March 31, 2006
----------------------------
Earl V. Young

                                       52
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                          INDEX TO FINANCIAL STATEMENTS

                                                                         PAGE
                                                                         ----

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                  F-1

CONSOLIDATED FINANCIAL STATEMENTS

   Balance Sheets                                                     F-2 - F-3

   Statements of Operations                                              F-4

   Statements of Shareholders' Equity                                    F-5

   Statements of Cash Flows                                              F-6

   Notes to Financial Statements                                      F-7 - F-40

SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)                     F-41 - F-44
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and Board of Directors
Cadence Resources Corporation and Subsidiaries
Traverse City, Michigan

We have audited the accompanying consolidated balance sheet of Cadence Resources
Corporation and Subsidiaries as of December 31, 2005 and 2004 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cadence Resources
Corporation and Subsidiaries as of December 31, 2005 and 2004 and the results of
their operations and their cash flows for each of the years then ended, in
conformity with U.S. generally accepted accounting principles.

                            RACHLIN COHEN & HOLTZ LLP

Miami, Florida
February 24, 2006

                                      F-1
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                               December 31,
                                                      -------------------------------
                                                           2005             2004
                                                      --------------   --------------
<S>                                                   <C>              <C>
                                     ASSETS
Current assets:
Cash and cash equivalents                             $   11,980,638   $    5,179,582
Accounts receivable:
   Oil and gas sales                                       2,409,675        1,893,051
   Joint interest owners                                   4,380,606          376,856
   Related parties                                                --          129,960
Notes receivable:
   Related parties                                            15,000          135,096
   Other                                                     229,346          101,151
Prepaid expenses and other current assets                    240,242               --
                                                      --------------   --------------
      Total current assets                                19,255,507        7,815,696
                                                      --------------   --------------

Oil and gas properties, using full cost accounting:
   Proved properties                                      39,643,003        7,585,807
   Unproved properties                                    37,279,889        7,981,727
                                                      --------------   --------------
      Total oil and gas properties                        76,922,892       15,567,534
   Less accumulated amortization                           7,962,138          600,077
                                                      --------------   --------------
      Oil and gas properties, net                         68,960,754       14,967,457
                                                      --------------   --------------

Other assets:
   Deposit on purchase of oil and gas properties           3,206,102               --
   Property and equipment, net                             3,610,138          115,283
   Goodwill                                               15,973,346               --
   Intangibles, net                                        3,197,917               --
   Other investments                                       1,855,977          230,396
   Other assets                                              762,404          316,997
                                                      --------------   --------------
      Total assets                                        28,605,884          662,676
                                                      --------------   --------------
                                                      $  116,822,145   $   23,445,829
                                                      ==============   ==============
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                      F-2
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                                   (Continued)

<TABLE>
<CAPTION>
                                                                              December 31,
                                                                     --------------------------------
                                                                          2005               2004
                                                                     --------------    --------------
<S>                                                                  <C>               <C>
                      LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                  $    7,053,288    $    3,221,533
   Accrued expenses                                                         417,291           200,800
   Drilling advances                                                             --           387,175
   Short-term bank borrowings                                             6,210,000           350,000
   Current portion of obligations under capital leases                        8,823             8,823
   Current portion of note payable - related party                           69,833         1,940,825
   Current portion of mortgage payable                                       72,877                --
                                                                     --------------    --------------
      Total current liabilities                                          13,832,112         6,109,156
                                                                     --------------    --------------

Deposit on sale of oil and gas properties                                 3,509,319                --
                                                                     --------------    --------------

Long-term debt:
   Obligations under capital leases, net of current portion                   2,262            12,663
   Notes payable - related parties                                               --         1,077,706
   Mortgage payable                                                       2,792,600                --
   Mezzanine financing                                                   40,000,000        10,000,000
                                                                     --------------    --------------
      Total long-term debt                                               42,794,862        11,090,369
                                                                     --------------    --------------
      Total liabilities                                                  60,136,293        17,199,525
                                                                     --------------    --------------

Redeemable convertible preferred stock                                       59,925                --
                                                                     --------------    --------------

Commitments, contingencies and subsequent events                                --                 --

Shareholders' equity:
   Preferred stock, $1.50 par value; authorized 500,000 shares;
     issued and outstanding none in 2005 and 99,350 shares in 2004               --           149,025
   Common stock, $.01 par value; authorized 100,000,000 shares;
     issued and outstanding 61,536,261 shares in 2005 and
     13,775,933 shares in 2004                                              615,363            13,776
   Additional paid-in capital                                            58,670,698         8,183,025
   Accumulated deficit                                                   (2,660,134)       (2,099,522)
                                                                     --------------    --------------
      Total shareholders' equity                                         56,625,927         6,246,304
                                                                     --------------    --------------
      Total liabilities and shareholders' equity                     $  116,822,145    $   23,445,829
                                                                     ==============    ==============
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                      F-3
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                            Year Ended
                                                                           December 31,
                                                                 --------------------------------
                                                                      2005              2004
                                                                 --------------    --------------
<S>                                                              <C>               <C>
Revenues:
   Oil and gas sales                                             $    6,743,444    $      960,011
   Interest income                                                      243,013            47,678
   Equity in loss of unconsolidated subsidiaries                        (75,596)               --
   Other income                                                         452,621         1,192,835
                                                                 --------------    --------------
      Total revenues                                                  7,363,482         2,200,524
                                                                 --------------    --------------

Costs and expenses:
   General and administrative                                         3,435,507         2,057,333
   Production and lease operating                                     2,047,028           614,338
   Depreciation and amortization                                      1,155,254           203,249
   Interest                                                           1,228,274           392,402
   Taxes                                                                 29,651            75,000
                                                                 --------------    --------------
      Total costs and expenses                                        7,895,714         3,342,322
                                                                 --------------    --------------

Loss before minority interest                                          (532,232)       (1,141,798)

Minority interest in loss of subsidiaries                                15,960            38,087
                                                                 --------------    --------------

Net loss                                                               (516,272)       (1,103,711)

Less dividends on preferred stock                                            --           (30,268)
                                                                 --------------    --------------

Loss attributable to common shareholders                         $     (516,272)   $   (1,133,979)
                                                                 ==============    ==============

Net loss per common share - basic and diluted                    $        (0.01)   $        (0.05)
                                                                 ==============    ==============

Weighted average common shares outstanding - basic and diluted       40,622,000        23,636,000
                                                                 ==============    ==============
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                      F-4
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                  Preferred Stock                 Common Stock            Additional                      Total
                             ---------------------------   ---------------------------     Paid-In      Accumulated    Shareholders'
                                Shares         Amount          Shares        Amount        Capital         Deficit        Equity
                             ------------   ------------   ------------   ------------   ------------   ------------   ------------
<S>                          <C>            <C>            <C>            <C>            <C>            <C>            <C>
Balances at
  January 1, 2004                 410,461   $    615,692     11,432,824   $     11,433   $  4,745,222   $   (868,699)  $  4,503,648
Issuance of common stock
  for consulting services              --             --         54,776             55         53,424             --         53,479
Sale of common stock:
  Issued in private placement          --             --        600,000            600      1,499,400             --      1,500,000
  Issued to Cadence Resource
  Corporation                          --             --        300,000            300        749,700             --        750,000
  Issued to others                     --             --        145,000            145        362,355             --        362,500
Exercise of common stock
  options                              --             --        310,000            310        307,190             --        307,500
Conversion of preferred
  stock to common stock          (311,111)      (466,667)       933,333            933        465,734             --             --
Dividends paid on preferred
  stock                                --             --             --             --             --       (127,112)      (127,112)
Net loss                               --             --             --             --             --     (1,103,711)    (1,103,711)
                             ------------   ------------   ------------   ------------   ------------   ------------   ------------

Balances at
  December 31, 2004                99,350        149,025     13,775,933         13,776      8,183,025     (2,099,522)     6,246,304

Conversion of preferred
  stock to common stock           (99,350)      (149,025)       298,050            298        148,727             --             --
Dividends paid on preferred
  stock                                --             --             --             --             --        (44,340)       (44,340)
Sale of common stock, net of
  commissions and fees                 --             --      4,972,200          4,972     11,020,028             --     11,025,000
Exercise of options prior to
  merger                               --             --         10,000             10          7,490             --          7,500
Merger between Cadence and
  Aurora                               --             --     39,592,510        567,431     35,706,179             --     36,273,610
Cashless exercise of options
  and warrants                         --             --        245,068          2,451         (2,451)            --             --
Exercise of common stock
  options and warrants                 --             --      2,642,500         26,425      3,607,700             --      3,634,125
Net loss                               --             --             --             --             --       (516,272)      (516,272)
                             ------------   ------------   ------------   ------------   ------------   ------------   ------------

Balances at
  December 31, 2005                    --   $         --     61,536,261   $    615,363   $ 58,670,698   $ (2,660,134)  $ 56,625,927
                             ============   ============   ============   ============   ============   ============   ============
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                      F-5
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                         Year Ended
                                                                                        December 31,
                                                                              --------------------------------
                                                                                   2005              2004
                                                                              --------------    --------------
<S>                                                                           <C>               <C>
Cash flows from operating activities:
   Net loss                                                                   $     (516,272)   $   (1,103,711)
   Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities:
      Depreciation and amortization                                                1,155,254           203,249
      Equity in loss of non-consolidated investees                                    75,596                --
      Unrealized loss on investments                                                  31,237                --
      Loss on disposal of property and equipment                                      25,499                --
      Services received in settlement of note receivable                                  --            39,754
      Common stock issued for services                                                    --            53,479
      Minority interest in loss of subsidiaries                                      (15,960)          (38,087)
      Changes in operating assets and liabilities, net of effect of merger:
         Accounts receivable                                                      (3,957,497)       (1,365,271)
         Accounts receivable - related parties                                       129,960            7,854
         Prepaid expenses                                                             41,634            76,110
         Accounts payable                                                          2,790,037         1,939,965
         Drilling advances                                                          (387,175)          352,320
         Accrued expenses                                                            216,491            52,779
                                                                              --------------    --------------
         Net cash (used in) provided by operating activities                        (411,196)          218,441
                                                                              --------------    --------------

Cash flows from investing activities:
   Proceeds from sale of oil and gas properties                                    7,995,109         1,902,537
   Proceeds from sale of property and equipment                                       23,693                --
   Capital expenditures for oil and gas development                              (46,145,082)      (10,159,663)
   Capital expenditures for property and equipment                                (3,594,750)          (74,166)
   Advances of notes receivable                                                     (107,475)         (155,096)
   Payments on notes receivable, related parties                                     120,096                --
   Deposits made for the purchase of oil and gas properties                       (3,206,102)               --
   Deposits received for the sale of oil and gas properties                        3,509,319                --
   Investment in Hudson Pipeline                                                    (928,956)         (230,396)
   Investment in GeoPetra                                                           (485,741)               --
   Net cash acquired in merger                                                       957,020                --
                                                                              --------------    --------------
         Net cash used in investing activities                                   (41,862,869)       (8,716,784)
                                                                              --------------    --------------

Cash flows from financing activities:
   Net short-term bank borrowings                                                  5,860,000           350,000
   Advances from mezzanine financing, net of financing
    costs of approximately $500,000 in 2005                                       29,491,458        10,179,694
   Mortgage financing advances                                                     2,865,477                --
   Payments on capital lease obligations                                             (10,401)         (128,278)
   Distributions to minority interest members                                       (805,000)          (41,347)
   Net proceeds from sales of common stock                                        14,666,625         2,920,000
   Dividends paid                                                                    (44,340)               --
   Net proceeds from subsidiary disposition                                               --            10,467
   Repayment of debt to related parties                                           (2,948,698)         (504,546)
   Payments on notes payable - other                                                      --          (307,935)
   Advances from related parties                                                          --           154,118
                                                                              --------------    --------------
         Net cash provided by financing activities                                49,075,121        12,632,173
                                                                              --------------    --------------

Net increase in cash and cash equivalents                                          6,801,056         4,133,830
Cash and cash equivalents, beginning of year                                       5,179,582         1,045,752
                                                                              --------------    --------------

Cash and cash equivalents, end of year                                        $   11,980,638    $    5,179,582
                                                                              ==============    ==============
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                      F-6
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED DECEMBER 31, 2005 AND 2004

NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Nature of Business

            Cadence Resources Corporation is an independent oil and gas
            exploration company engaged in the exploration, acquisition,
            development, production and sale of natural gas. We generate most of
            our revenues from the production and sale of natural gas. While we
            do have some non-operated interest in oil wells, nearly 100% of our
            proved reserves consist of natural gas from our position in the
            Antrim Shale in Michigan. Additionally, we have a substantial
            leasehold position in the New Albany Shale in Indiana.

            Our current operations consist primarily of the drilling for and
            production of natural gas. The results of operations are determined
            by the difference between the natural gas price received for the gas
            produced, less the cost to drill, develop and produce the gas.
            Natural gas prices are subject to fluctuations in response to many
            factors such as quantities in gas storage, level of consumer demand
            and the worldwide political climate as well as the impact of certain
            weather related disasters.

      Principles of Consolidation

            The accompanying consolidated financial statements include the
            accounts of Cadence Resources Corporation and the entities
            identified below under the heading Organization and Nature of
            Operations, hereinafter referred to as "the Company" or "Cadence".

            All significant intercompany accounts and transactions have been
            eliminated in consolidation.

            As further described in Note 2, on October 31, 2005, Cadence
            acquired Aurora Energy, Ltd. ("Aurora") through the merger of a
            wholly-owned subsidiary with and into Aurora. As a result of the
            merger, Aurora became a wholly-owned subsidiary.

            While Cadence was the legal acquirer, the merger was accounted for
            as a reverse acquisition, whereby Aurora was deemed to have acquired
            Cadence for financial reporting purposes. This determination was
            based on factors including relative stock ownership and voting
            rights, board control, and senior management composition. Consistent
            with the reverse acquisition accounting treatment, the historical
            financial statements presented for periods prior to the acquisition
            date are the financial statements of Aurora. The operations of the
            former Cadence businesses have been included in the financial
            statements from the date of acquisition.

            The common stock per share information in the consolidated
            financial statements and related notes have been retroactively
            adjusted to give effect to the reverse acquisition on October 31,
            2005 for all periods presented.

      Organization and Nature of Operations

            The nature and composition of the Company's operations are as
            follows:

                                      F-7
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      Organization and Nature of Operations (Continued)

            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.

            Previously, the Company had presented its financial statements on a
            September 30 fiscal year-end. Subsequent to the closing of the
            merger with Aurora, the Company changed its fiscal year-end to
            December 31, in order to conform with the fiscal year-end of Aurora.

            Cadence Resource Corporation's subsidiaries operations as a result
            of its merger with Aurora are as follows:

                  Aurora Energy, Ltd. ("Aurora") is a Nevada corporation,
                  engaged primarily in the acquisition, development, production,
                  exploration and sale of oil, gas and natural gas liquids.
                  Aurora sells its oil and gas products primarily to domestic
                  pipelines and refineries.

                  Aurora Operating, LLC ("Operating") is a limited liability
                  company, engaged primarily in oil and gas operations and
                  development. Operating was formed on January 1, 2000 and its
                  term of existence extends through January 1, 2020. Operating
                  holds certain oil and gas properties in the New Albany Shale
                  Project. Aurora owned a 71% member interest in this entity. In
                  December 2003, Aurora entered into an agreement to sell 20% of
                  its member interest in Operating to an unrelated third party.
                  This sale changed Aurora's ownership in Operating from 71% to
                  51%.

                  Restrictions related to this sale specify that the purchaser
                  is not entitled to receive any cash distributions nor are they
                  required to make any capital contributions within two years
                  from the closing date (December 9, 2003). The agreement also
                  includes put and call options at the same price that the 20%
                  was initially sold for. The call option allows Aurora to
                  purchase this interest back between December 10, 2005 and
                  December 9, 2008. The put option allows the purchaser to sell
                  their interest back to Aurora during the same time frame. The
                  Company has subsequently purchased this interest back on
                  January 31, 2006. See Subsequent Events, Note 26.

                  Aurora Antrim North, LLC ("North") is a limited liability
                  company engaged primarily in any activity with the purpose for
                  which the LLC may be formed. North was formed on January 18,
                  2001 and its term of existence extends through January 18,
                  2021. Aurora holds a 100% interest in North. In 2003, certain
                  oil and gas properties were conveyed from Aurora to North in
                  connection with mezzanine financing with Wells Fargo. This
                  financing facility was paid in full and terminated during
                  2004, and Aurora entered into a new mezzanine financing
                  arrangement, which is more fully described in Note 12.

                                      F-8
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      Organization and Nature of Operations (Continued)

                  Aurora Holdings, LLC ("Holdings") is a limited liability
                  company engaged primarily in any activity with the purpose for
                  which the LLC may be formed. Holdings was formed on January
                  10, 2001 and its term of existence extends through January 10,
                  2021. Aurora holds a 100% interest in Holdings. Operations for
                  Holdings for the period from inception to December 31, 2005
                  were insignificant.

                  Indiana Royalty Trustory, LLC ("IRT") is a limited liability
                  company engaged primarily in investments in royalties and
                  other financial instruments. IRT was formed on January 1, 2001
                  and its term of existence extends through January 1, 2021. The
                  Company holds a 51% interest in IRT. Operations for IRT during
                  2005 and 2004 were insignificant.

                  Aurora Investments, LLC ("AIL") is a limited liability company
                  formed in October 2001 to raise funds specifically earmarked
                  for drilling of certain defined oil and gas prospects. Under
                  the terms outlined in the private placement memorandum dated
                  October 1, 2001, third party investors contributed 95% of the
                  funds needed to drill a specific project and Aurora
                  contributed 5% in the form of oil and gas properties. As
                  manager of AIL, Aurora made key decisions relating to AIL's
                  operations and was conveyed an additional 12.5% interest in
                  AIL for a total membership interest of 17.5%. Once all third
                  party investor members received 100% of their initial
                  investment back, Aurora is to receive an additional 12.5%
                  interest for a total member interest of 30%. AIL was
                  consolidated into Aurora due to the control that Aurora
                  exercised over the operations of AIL. During 2004, Aurora
                  exchanged its 17.5% membership interests in AIL in exchange
                  for certain working interests, which resulted in the removal
                  of AIL from the consolidated financial statements as of
                  December 31, 2004. While the agreement covering a potential
                  12.5% additional interest is still in effect, management
                  believes the likelihood of receiving this additional interest
                  is remote.

                  Beyer Antrim Company, LLC ("BAC") is a limited liability
                  company formed in May 2002 to raise funds specifically
                  earmarked for drilling of certain defined oil and gas
                  prospects. Under the terms outlined in the private placement
                  memorandum dated April 20, 2002, third party investors
                  contributed 95% of the funds needed to drill a specific
                  project and Aurora contributed 5% in the form of oil and gas
                  properties.

                  As manager of BAC, Aurora makes key decisions relating to
                  BAC's operations and was conveyed an additional 12.5% interest
                  in BAC for a total membership interest of 17.5%. Once all
                  third party investor members received 100% of their initial
                  investment back, Aurora is to receive an additional 12.5%
                  interest for a total member interest of 30%. BAC was
                  consolidated into Aurora due to the control that Aurora
                  exercised over the operations of BAC. During 2004, Aurora
                  exchanged its 17.5% membership interests in BAC in exchange
                  for certain working interests, which resulted in the removal
                  of BAC from the consolidated financial statements as of
                  December 31, 2004. While the agreement covering a potential
                  12.5% additional interest is still in effect, management
                  believes the likelihood of receiving this additional interest
                  is remote.

                                      F-9
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      Organization and Nature of Operations (Continued)

                  Aurora Natural Gas Production, LLC ("ANG") is a limited
                  liability company formed in June 2002 to raise funds
                  specifically earmarked for drilling of certain defined oil and
                  gas prospects. Under the terms outlined in the private
                  placement memorandum dated May 15, 2002, third party investors
                  contributed 95% of the funds needed to drill a specific
                  project and Aurora contributed 5% in the form of oil and gas
                  properties. As manager of ANG, Aurora made key decisions
                  relating to ANG's operations and was conveyed an additional
                  12.5% interest in ANG for a total membership interest of
                  17.5%. Once all third party investor members received 100% of
                  their initial investment back, Aurora is to receive an
                  additional 12.5% interest for a total member interest of 30%.
                  ANG was consolidated into Aurora due to the control that
                  Aurora exercised over the operations of ANG. During 2004,
                  Aurora exchanged its 17.5% membership interests in ANG in
                  exchange for certain working interests, which resulted in the
                  removal of ANG from the consolidated financial statements as
                  of December 31, 2004. While the agreement covering a potential
                  12.5% additional interest is still in effect, management
                  believes the likelihood of receiving this additional interest
                  is remote.

                  BFG Holdings, LLC ("BFG") is a limited liability company
                  engaged primarily in any activity with the purpose for which
                  the LLC may be formed. BFG was formed on September 18, 2002
                  and Aurora holds a 100% interest in BFG. In 2003, certain oil
                  and gas properties were conveyed from Aurora to BFG in
                  connection with the reserve base financing with Texas Capital
                  Bank, N.A. This financing vehicle has been paid in full and
                  terminated during 2004. These properties were transferred to
                  BFG at their net book value on the date of transfer. During
                  2004, BFG was closed and transferred all oil and gas
                  properties to North at their net book value. All operations of
                  BFG have ceased as of December 31, 2004.

                  Consolidated Exploration, LLC ("Conexco") is a limited
                  liability company engaged primarily in the acquisition,
                  development and sale of oil and gas leasehold interests.
                  Conexco owns certain leasehold interests in Indiana's New
                  Albany Shale area, including an overriding royalty in the
                  producing Corydon fields.

                  Conexco was formed on April 4, 1994 and its term of existence
                  extends through April 4, 2014. On January 1, 1999, Aurora
                  purchased a 100% interest in Conexco and this entity became a
                  wholly-owned subsidiary.

                  Indigas Energy, LLC ("Indigas") is a limited liability company
                  engaged primarily in the acquisition, development, production
                  and sale of oil and gas leasehold interests. Indigas owns
                  certain leasehold interests in Indiana and Kentucky's New
                  Albany Shale area. Indigas was formed on January 1, 1996 and
                  its term of existence extends through January 1, 2016. On
                  January 1, 1999, Aurora purchased a 100% interest in Indigas
                  and this entity became a wholly-owned subsidiary.

                                      F-10
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      Organization and Nature of Operations (Continued)

                  Both Conexco and Indigas received certain proceeds from the
                  signing of an option agreement (the "Option") related to their
                  leasehold interests. These proceeds were used to return to
                  investors their original investment plus the agreed-upon
                  return percentage. With all of the lease investors monies
                  returned, operations of both entities ceased as of December
                  31, 2003. These entities continue to hold certain overriding
                  royalty interests in the undeveloped leases sold under the
                  agreement described above. Any future revenues that may result
                  from drilling on these leases from these overriding royalty
                  interests will be assigned directly to Aurora Energy, Ltd.

      Use of Estimates

            The preparation of consolidated financial statements in conformity
            with generally accepted accounting principles requires management to
            make estimates and assumptions that affect the reported amounts of
            assets and liabilities and disclosure of contingent assets and
            liabilities at the date of the consolidated financial statements and
            the reported amounts of revenues and expenses during the reporting
            period. We believe our estimates and assumptions are reasonable;
            however, such estimates and assumptions are subject to a number of
            risks and uncertainties that may cause actual results to differ
            materially from such estimates. Significant estimates underlying
            these financial statements include:

            o     estimated quantities of proved oil and natural gas reserves
                  used to compute depletion of oil and natural gas properties
                  and to evaluate the full cost pool in the ceiling test
                  analysis,
            o     accruals related to oil and gas revenues and lease operating
                  expenses, and
            o     estimates used in computation of our federal and state income
                  tax liabilities.

            While we are not aware of any material revision to any of our
            estimates, there will likely be future revisions to our estimates as
            a result of changes in our joint venture agreements, working
            interest ownership, payouts, and reallocations by purchasers. These
            types of adjustments are not currently predictable and will be
            recorded in the period they occur.

      Oil and Gas Properties

            Aurora uses the full cost method of accounting for oil and gas
            properties. Prior to the merger, Cadence used the successful efforts
            method of accounting; however, in connection with the merger,
            Cadence adopted the full cost method in order to conform with
            Aurora's accounting principles. The adoption of the full cost method
            by Cadence resulted in a net increase to oil and gas properties of
            $774,912.

            Under the full cost method, all costs associated with acquisition,
            exploration and development of oil and gas reserves, including
            directly related overhead costs, are capitalized. Costs associated
            with production and general corporate activities are expensed in the
            period incurred.

                                      F-11
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      Oil and Gas Properties (Continued)

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

            Capitalized costs of oil and gas properties, net of accumulated
            amortization, are limited to the aggregate of estimated future net
            revenues from proven reserves, discounted at ten percent, based on
            current economic and operating conditions, plus the lower of cost or
            fair value of unproven properties. Sales of proven and unproven
            properties are applied to reduce the capitalized costs with no gain
            or loss recognized, unless such adjustments would significantly
            alter the relationship between capitalized costs and proven reserves
            of oil and gas, in which case the gain or loss is recognized in
            income. Abandonment of properties is accounted for as adjustments of
            capitalized costs with no loss recognized.

      Full Cost Ceiling Test

            At the end of each reporting period, the unamortized cost of oil and
            gas properties is limited to the sum of the estimated future net
            revenues from proved properties (including future development and
            abandonment costs of wells to be drilled, using period-end prices,
            discounted at 10%, and the lower of cost or fair value of unproved
            properties) adjusted for related income tax effects ("Ceiling
            Test").

            The calculation of the Ceiling Test and provision for depreciation
            and amortization is based on estimates of proved reserves. There are
            numerous uncertainties inherent in estimating quantities of proved
            reserves and in projecting the future rates of production, timing,
            and plan of development. The accuracy of any reserves estimate is a
            function of the quality of available data and of engineering and
            geological interpretation and judgment. Results of drilling,
            testing, and production subsequent to the date of the estimate may
            justify revision of such estimates. Accordingly, reserves estimates
            are often different from the quantities of oil and gas that are
            ultimately recovered. Our reserves estimates are prepared in
            accordance with Securities and Exchange Commission guidelines and,
            are reviewed on an annual basis at year-end by a firm of independent
            petroleum engineers in accordance with standards approved by the
            Board of Directors of the Society of Petroleum Engineers.

            Given the volatility of oil and gas prices, it is reasonably
            possible that our estimate of discounted future net cash flows from
            proved oil and gas reserves could change in the near term. If oil
            and gas prices decline from our period-end prices used in the
            Ceiling Test, even if only for a short period, it is possible that
            non-cash write-downs of oil and gas properties could occur in the
            future.

                                      F-12
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      Capitalized Interest

            The Company capitalizes interest on debt related to expenditures
            made in connection with exploration and development projects that
            are not subject to current amortization. Interest is capitalized
            only for the period that activities are in progress to bring these
            projects to their intended use. Interest capitalized amounted to
            $1,146,084 and $329,028 during 2005 and 2004, respectively.

      Other 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. The cost of the Company's mineral
            properties are included in other investments in the accompanying
            financial statements, as the Company has changed its focus from
            minerals exploration to oil and gas exploration.

      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. 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 December 31, 2005 and for the periods covered in the accompanying
            financial statements, the Company has not engaged in any
            transactions that would be considered derivative instruments or
            hedging activities.

                                      F-13
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      Cash and Cash Equivalents

            The Company considers all highly liquid investments with an initial
            maturity of three months or less to be cash equivalents.

      Deferred Loan Origination Costs

            Loan origination costs related to mezzanine financing obtained in
            late 2004 and also in 2005, as more fully described in Note 12, are
            deferred and are included in other assets. These costs are being
            amortized using the interest method over the term of the related
            loan. Annual amortization expense during 2006 to 2009 will be
            approximately $160,000.

      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
            December 31, 2005 and 2004,  the Company had no accrued  liabilities
            for compliance with environmental regulations.

      Investments in Unconsolidated Subsidiaries

            The Company uses the equity method of accounting for investments in
            entities in which the Company has an ownership interest between 20%
            and 50% and exercises significant influence. Under the equity method
            of accounting, the Company's proportionate share of the investees'
            net income or loss is included in the results of operations as
            equity in income or loss of unconsolidated subsidiaries.

      Revenue Recognition

            Oil and gas sales are generally recognized at the time of extraction
            of product or performance of services. Revenues from service
            contracts are recognized ratably over the term of the contract.

                                      F-14
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      Accounts Receivable

            Accounts receivable generally consist of amounts due from the sale
            of oil and gas products and from working interest partners for their
            proportionate share of expenses related to certain oil and gas
            projects. Accounts receivable may also include certain costs that
            are incurred on behalf of joint partners which are billed subsequent
            to the end of the reporting period.

            The Company assesses the collectibility of accounts receivable and,
            based on management's assessment of the current status of individual
            accounts, the Company accrues a reserve when it is believed that a
            receivable may not be collected. Losses on collection of accounts
            receivable have not been material and, accordingly, no allowance for
            doubtful accounts was considered necessary in the accompanying
            financial statements.

      Fair Value of Financial Instruments

            The Company's financial instruments consist primarily of cash,
            accounts receivable, loans receivable, accounts payable and accrued
            expenses and debt. The carrying amounts of such financial
            instruments approximate their respective estimated fair value due to
            the short-term maturities and approximate market interest rates of
            these instruments. The estimated fair value is not necessarily
            indicative of the amounts the Company would realize in a current
            market exchange or from future earnings or cash flows.

      Property and Equipment

            Property and equipment are stated at cost. Major improvements and
            renewals are capitalized while ordinary maintenance and repairs are
            expensed. Management annually reviews these assets to determine
            whether carrying values have been impaired.

            Depreciation, which includes amortization of assets recorded as
            capital leases, is computed using the straight-line method over the
            estimated useful lives of the related assets, which range from 5 to
            20 years or lease term, if shorter.

      Goodwill

            Goodwill represents the excess of the purchase price over the fair
            value of net assets acquired. The Company follows SFAS No. 142,
            "Goodwill and Other Intangible Assets" which requires that goodwill
            and intangible assets with indefinite useful lives not to be
            amortized, but written down, as needed, based on an impairment test
            that must occur at least annually, or sooner if an event occurs or
            circumstances change that would more likely than not result in an
            impairment loss. The amount of goodwill impairment, if any, is
            measured on projected discounted future operating cash flows using a
            discount rate reflecting the Company's average cost of funds. Future
            impairment of goodwill could result if the Company's estimated
            future operating cash flows are not achieved. The carrying value of
            goodwill at December 31, 2005 was approximately $15,973,000. No
            impairment loss was recorded for the year ended December 31, 2005.

                                      F-15
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      Intangible Assets

            Acquired intangible assets, which consist of non-compete  agreements
            and proprietary business relationships,  are recorded at fair value.
            These intangible assets are amortized on a straight-line  basis over
            a  three  year  period.  Amortization  expense  is  estimated  to be
            approximately $1,535,000 per year through 2007.

      Income 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" ("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.

            Deferred income tax assets and liabilities are computed annually for
            differences between the consolidated financial statements and
            federal income tax bases of assets and liabilities that will result
            in taxable or deductible amounts in the future, based on enacted tax
            laws and rates applicable to the periods in which the differences
            are expected to affect taxable income. Deferred income taxes arise
            from temporary basis differences principally related to intangible
            drilling costs incurred in connection with the development of oil
            and gas properties, depreciation and net operating losses.

            Valuation allowances are established when necessary to reduce
            deferred tax assets to the amount expected to be realized. Income
            tax expense is the tax payable or refundable for the year plus or
            minus the change during the year in deferred tax assets and
            liabilities.

      Concentrations of Credit Risk

            Financial instruments that potentially subject the Company to
            concentrations of credit risk are cash and cash equivalents and
            accounts receivable.

            Cash and Cash Equivalents

                  The Company's bank accounts periodically exceed federally
                  insured limits. As of December 31, 2005 and 2004, cash in
                  excess of FDIC limits amounted to approximately $12,310,000
                  and $1,055,000 respectively. The Company maintains its
                  deposits with high quality financial institutions and,
                  accordingly, believes that the Company is not exposed to any
                  significant credit risk on its cash deposits.

                                      F-16
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      Concentrations of Credit Risk (Continued)

            Accounts Receivable

                  We extend credit, primarily in the form of uncollateralized
                  oil and gas sales and joint interest owner's receivables, to
                  various companies in the oil and gas industry, which results
                  in a concentration of credit risk. The concentration of credit
                  risk may be affected by changes in economic or other
                  conditions within our industry and may accordingly impact our
                  overall credit risk. However, we believe that the risk of
                  these unsecured receivables is mitigated by the size,
                  reputation, and nature of the companies to which we extend
                  credit. During 2005, oil and gas sales to one customer, CIMA
                  Energy, Ltd., were approximately 63% of total oil and gas
                  sales.

      Minority Interest

            The minority interest at December 31, 2005 and 2004 is insignificant
            and is included in other asset in the accompanying consolidated
            balance sheets. The balance represents the minority members' share
            of contributed capital, income or loss and distributions.

      Reclassifications

            Certain amounts in the prior year financial statements have been
            reclassified to conform to current year presentations.

      Recent Accounting Pronouncements

            In November 2005, the FASB issued Staff Position No. FAS 115-1, The
            Meaning of Other-Than-Temporary Impairment and its Application to
            Certain Investments ("FSP 115-1"). FSP 115-1 provides accounting
            guidance for determining and measuring other-than-temporary
            impairments of debt and equity securities, and confirms the
            disclosure requirements for investments in unrealized loss positions
            as outlined in EITF issue 03-01, The Meaning of Other-Than-Temporary
            Impairments and its Application to Certain Investments. The
            accounting requirements of FSP 115-1 are effective for us on January
            1, 2006 and will not have a material impact on our consolidated
            financial position, results of operations or cash flows.

            In May 2005, the FASB issued SFAS No. 154, "Accounting for Changes
            and Error Corrections, a Replacement of APB Opinion No. 20 and FASB
            Statement No. 3" SFAS 154 applies to all voluntary changes in
            accounting principle and requires retrospective application to prior
            periods' financial statements of changes in accounting principle.
            This statement also requires that a change in depreciation,
            amortization, or depletion method for long-lived, non-financial
            assets be accounted for as a change in accounting estimate affected
            by a change in accounting principle. SFAS 154 carries forward
            without change the guidance contained in Opinion No. 20 for
            reporting the correction of an error in previously issued financial
            statements and a change in accounting estimate. This statement is
            effective for accounting changes and corrections of errors made in
            fiscal years beginning after December 15, 2005. The Company does not
            expect the adoption of this standard to have a material impact on
            its financial condition, results of operations, or liquidity.

                                      F-17
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      Recent Accounting Pronouncements (Continued)

            In March 2005, the Financial Accounting Standards Board issued FASB
            Interpretation No. 47, "Accounting for Conditional Asset Retirement
            Obligations, an Interpretation of FASB Statement No. 143." This
            Interpretation clarifies that the term conditional asset retirement
            obligation refers to a legal obligation to perform an asset
            retirement activity in which the timing and (or) method of
            settlement are conditional on a future event that may or may not be
            within the control of the entity. Accordingly, an entity is required
            to recognize a liability for the fair value of a conditional asset
            retirement obligation if the fair value can be reasonably estimated.
            This Interpretation is effective no later than the end of fiscal
            years ending after December 15, 2005. The Company does not expect
            the adoption of this standard to have a material impact on its
            financial condition, results of operations, or liquidity.

            In December 2004, the FASB issued SFAS No. 153, "Exchanges of
            Non-monetary Assets, an Amendment of APB Opinion No. 29." SFAS No.
            153 requires exchanges of productive assets to be accounted for at
            fair value, rather than at carryover basis, unless (1) neither the
            asset received nor the asset surrendered has a fair value that is
            determinable within reasonable limits or (2) the transactions lack
            commercial substance. This Statement is effective for non-monetary
            asset exchanges occurring in fiscal periods beginning after June 15,
            2005. The Company does not expect the adoption of this standard to
            have a material impact on its financial condition, results of
            operations, or liquidity.

            In December 2004, the FASB issued SFAS No. 123 (revised 2004),
            "Share-Based Payment." SFAS No. 123(R) is a revision of SFAS No.
            123, "Accounting for Stock-Based Compensation," and supersedes APB
            Opinion No. 25, "Accounting for Stock Issued to Employees."
            Statement No. 123(R) will require the fair value of all stock based
            awards issued to employees to be recorded as an expense over the
            related vesting period. The statement also requires the recognition
            of compensation expense for the fair value of any unvested stock
            based awards outstanding at the date of adoption. This statement
            becomes effective the beginning of the first interim or annual
            reporting period that begins after December 15, 2005. The Company is
            currently evaluating the impact on its results from adopting SFAS
            No. 123(R).

            In December 2004, the FASB issued SFAS No. 153, "Exchanges of
            Non-monetary Assets, an Amendment of APB Opinion No. 29." SFAS No.
            153 requires exchanges of productive assets to be accounted for at
            fair value, rather than at carryover basis, unless (1) neither the
            asset received nor the asset surrendered has a fair value that is
            determinable within reasonable limits or (2) the transactions lack
            commercial substance. This Statement is effective for non-monetary
            asset exchanges occurring in fiscal periods beginning after June 15,
            2005. The Company does not expect the adoption of this standard to
            have a material impact on its financial condition, results of
            operations, or liquidity.

                                      F-18
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 2. MERGER WITH AURORA ENERGY, LTD.

      On October 31, 2005, Cadence Resources Corporation ("Cadence") acquired
      Aurora Energy, Ltd. ("Aurora") through the merger of a wholly-owned
      subsidiary with and into Aurora. As a result of the merger, Aurora became
      a wholly-owned subsidiary.

      The merger has been accounted for as a reverse acquisition using the
      purchase method of accounting. Although the merger was structured such
      that Aurora became a wholly-owned subsidiary of Cadence, Aurora has been
      treated as the acquiring company for accounting purposes under Statement
      of Financial Accounting Standards ("SFAS") No. 141, "Business
      Combinations", due to the following factors: (1) Aurora's stockholders
      received the larger share of the voting rights in the merger; (2) Aurora
      received the majority of the members of the board of directors; and (3)
      Aurora's senior management prior to the merger dominated the senior
      management of the combined company. As a result of the reverse
      acquisition, the statements of operations presented herein include the
      results of Aurora for the year ended December 31, 2005 and include the
      results of Cadence for the period from date of acquisition (November 1,
      2005 through December 31, 2005). The financial information reflected in
      the financial statements for 2004 are comprised of the accounts and
      activities of Aurora.

      The definitive merger agreement was executed on January 31, 2005, whereby
      Cadence agreed to acquire 100% of the outstanding stock and options of
      Aurora. Consideration in this transaction consisted 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. The purchase price assigned
      to this transaction is equal to $41,546,351 determined as follows:

      Fair value of Cadence's common stock
        outstanding at January 31, 2005                             $ 33,951,817
      Fair value of Cadence's stock options
        outstanding at January 31, 2005                                  536,210
      Fair value of Cadence's warrants
        outstanding at January 31, 2005                                7,058,324
                                                                    ------------
          Total purchase price                                      $ 41,546,351
                                                                    ============

      The $33,951,817 was computed as 20,702,327 shares of Cadence common stock
      multiplied by $1.64, the market price of Cadence common stock as of
      January 31, 2005, the date of the definitive merger agreement.

      In recording the acquisition of Cadence, the historical balance sheet of
      Cadence was adjusted to the purchase price of $41,546,351 with amounts in
      excess of historical book value allocated among the following categories:
      (1) unproved oil and gas properties and property and equipment, (2) other
      investments, (3) intangible assets and (4) goodwill.

                                      F-19
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 2. MERGER WITH AURORA ENERGY, LTD. (Continued)

      The following table summarizes the estimated fair value of the assets
      acquired and the liabilities assumed at the date of acquisition. The
      Company has obtained third party valuations of certain tangible and
      intangible assets acquired from Cadence.

      Net working capital, adjusted for Cadence operating
        activity from date of definitive merger agreement
        to October 31, 2005                                         $ 4,679,078
      Oil and gas properties and property and equipment              14,647,614
      Investments                                                     1,503,832
      Other Mineral properties                                          197,406
      Non-compete agreements                                          3,265,000
      Proprietary business relationships                              1,340,000
      Goodwill                                                       15,973,346
      Redeemable convertible preferred stock                            (59,925)
                                                                    -----------
                                                                    $41,546,351
                                                                    ===========

      The Company has followed the guidance of SFAS No. 141 to record this
      purchase. SFAS No. 141 requires that the purchase method of accounting be
      used for all business combinations initiated after June 1, 2001 and that
      goodwill, as well as any intangible assets believed to have an indefinite
      life, shall not be amortized for financial accounting purposes. The
      Company has recognized goodwill in the amount of $15,973,346 in connection
      with this acquisition. In accordance with SFAS No. 142, "Goodwill and
      Other Intangible Assets", the goodwill will be reviewed periodically to
      determine if there has been any impairment to its value. The Company will
      perform an impairment test as of December 31, 2006, unless circumstances
      or events indicate that an impairment test should be performed sooner.

      The following unaudited condensed pro forma results of operations reflect
      the pro forma combination of Aurora and Cadence as if the combination had
      occurred at the beginning of the periods presented, compared with the
      historical results of operations of Aurora for the same periods.

<TABLE>
<CAPTION>
                                                       2005                            2004
                                           ----------------------------    ----------------------------
                                            Historical      Pro Forma       Historical      Pro Forma*
                                           ------------    ------------    ------------    ------------
<S>                                        <C>             <C>             <C>             <C>
Oil and gas revenues                       $  6,743,444    $  8,821,869    $    960,011    $  3,501,458
Production expenses                          (2,047,028)     (2,799,504)       (614,338)       (789,174)
Net operating revenues                        4,696,416       6,022,365         345,673       2,712,284
Net loss                                       (516,272)     (4,293,053)     (1,103,711)     (7,989,175)

Net loss per common share -
basic and diluted                                 (0.01)          (0.07)          (0.05)          (0.22)

Weighted average number of common
  shares outstanding - basic and diluted     40,622,000      58,108,000      23,636,000      36,351,000
</TABLE>

* Includes operations of Cadence for the year ended September 30, 2004

                                      F-20
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 3. ACCOUNTS RECEIVABLE (INCLUDING RELATED PARTIES)

      Accounts receivable generally consist of amounts due from the sale of oil
      and gas products and from joint interest billings to investors who have
      invested with the Company on specific oil and gas projects. Accounts
      receivable may be offset by royalty payments and are typically
      collateralized by the owner's interest in a specific oil and gas project.
      Potential credit losses, in the aggregate, have not been significant and
      have not exceeded management's expectations.

      Receivables due from related parties at December 31, 2004 amounted to
      $129,960, and consisted of amounts due from affiliates with common
      ownership for joint billings on projects which they are involved in with
      the Company.The amounts at December 31, 2005 were not material.

NOTE 4. NOTES RECEIVABLE (INCLUDING RELATED PARTIES)

      Notes receivable consist of the following amounts as of December 31:

                                                               2005       2004
                                                             --------   --------
Related parties:
  Unsecured notes receivable from shareholder;
  due upon demand; interest at 4.5%                          $ 15,000   $100,000

  Unsecured note receivable from a party related by
  common ownership, including interest at 6.0%
  This note was collected in full in March 2005                    --     35,096
                                                             --------   --------
                                                               15,000    135,096
                                                             --------   --------

Other:
  Secured note receivable; interest rate of 6%;
  collateralized by an assignable interest in cellular
  Tower Sites.  Payments of $35,000 are required when
  Assignor completes a sale of any tower site                 105,000         --

  Unsecured note receivable; arising from an agreement
  to provide funds to secure certain contract services
  over a two year period.  The agreement requires
  payments to be made as the party renders services to
  the Company, including interest at 6%                        83,626     81,151

Other unsecured notes; due on demand                           40,720     20,000
                                                             --------   --------
                                                              229,346    101,151
                                                             --------   --------

Total notes receivable                                       $244,346   $236,247
                                                             ========   ========

                                      F-21
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 5. DEPOSIT ON PURCHASE OF OIL AND GAS PROPERTIES

      On November 30, 2005, the Company entered into a Purchase and Sale
      Agreement with respect to certain New Albany Shale acreage located in
      Indiana, commonly called the Wabash project. Pursuant to the terms of this
      agreement, the Company was required to deposit into escrow for the seller
      $3,200,000. Interest earned from November 30, 2005 through December 31,
      2005 was $6,102. The total $3,206,102 is reflected in the accompanying
      financial statements as deposit on purchase of oil and gas properties.

      This  Purchase  and Sale  Agreement  closed on  February  1, 2006.  At the
      closing,  Aurora  acquired  64,000 acres of oil and gas leases from Wabash
      Energy Partners,  L.P. and this deposit was added to the cost pool as part
      of the purchase price of these leasehold  assets.  See Subsequent  Events,
      Note 26.

NOTE 6. SALE OF INTERESTS IN OIL AND GAS PROPERTIES

      The Company had the following transactions related to the sale of oil and
      gas properties, all of which were applied to reduce the full cost pool:

<TABLE>
<CAPTION>
                                                             Interest    Gross
      Year     Type of Property          Description           Sold     Proceeds
      -----  -------------------  -------------------------  --------  -----------
      <S>    <C>                  <C>                        <C>       <C>
      2005         Unproven       Various Indiana Leasehold    95%     $ 7,373,737
      2005         Unproven           Corner #1 Project        50%         344,114
      2005         Unproved        Eastview & Gaston Lshld   25-100%       259,258
      2005          Proven                 Various             <5%          18,000
                                                                       -----------
      Total                                                            $ 7,995,109
                                                                       ===========

      2004   Unproven and Proven       Antrim leasehold        80%     $ 6,433,890
      2004          Proven            Crossroads project       90%         292,132
      2004         Unproven            New Albany Shale        95%         349,829
                                                                       -----------
      Total                                                            $ 7,075,851
                                                                       ===========
</TABLE>

      During 2004, Aurora entered into a sale agreement with an unrelated third
      party for $6,433,890. As part of this agreement, the third party assumed
      capital leases in the amount of $847,025. Further, Aurora received
      $1,260,576 in proceeds net of the payoff of the mezzanine facility
      obligation in the amount of $4,674,639 and reserve base lending obligation
      in the amount of $498,675 for the sale of an 80% interest in Aurora's
      Antrim leasehold units located in Northeast Michigan. Proceeds, net of
      historical cost in the amount of $7,211,916, were recorded as a reduction
      to the full cost pool as the reduction of capitalized costs to the oil and
      gas reserve were not significantly altered.

                                      F-22
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 7. OIL AND GAS PROPERTIES NOT SUBJECT TO AMORTIZATION

      The Company is currently participating in oil and gas exploration and
      development activities on blocks of acreage in the states of Indiana,
      Michigan, Ohio, and Kentucky. A determination cannot be made about the
      extent, if any, of additional oil and gas reserves that should be
      classified as proven reserves in connection with these projects.
      Consequently, the associated property and exploration costs have been
      excluded in computing amortization of the full cost pool.

NOTE 8. INTANGIBLE ASSETS

      Intangible assets consist of the following as of December 31, 2005:

      Non-compete agreements                                        $  3,265,000
      Proprietary business relationships                               1,340,000
                                                                    ------------
      Total                                                            4,605,000
      Less accumulated amortization                                    1,407,083
                                                                    ------------
      Intangibles, net                                              $  3,197,917
                                                                    ============

      The intangible assets are being amortized over three years, and the future
      annual amortization expense is estimated to be approximately $1,535,000
      through 2007.

NOTE 9. OTHER INVESTMENTS

      Other investments consist of the following at December 31:

                                                          2005           2004
                                                       ----------     ----------
      Investments in unconsolidated subsidiaries:
        Hudson Pipeline & Processing Co., LLC          $1,224,995     $  230,396
        GeoPetra Partners, LLC                            344,502             --
      Mineral properties                                  197,406             --
      Other                                                89,074             --
                                                       ----------     ----------
                                                       $1,855,977     $  230,396
                                                       ==========     ==========

      Hudson Pipeline & Processing Co., LLC ("Hudson")

            Hudson is a limited liability company that owns a facility plant,
            pipeline, rights-of-way and meter used by nearby Antrim wells, and
            processes the gas produced from those wells. North owns a 48.75%
            membership interest in this limited liability company until the
            revenues received from the pipeline facility equal 125% of the
            amount spent on construction of the pipeline, after which North's
            membership interest will be 47.5%. As of January 31, 2006, North
            increased its membership interest to approximately 91% pursuant to a
            Purchase and Sales Agreement with O.I.L. Energy Corp. See Subsequent
            Events, Note 26.

                                      F-23
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 9.  OTHER INVESTMENTS (Continued)

      Hudson Pipeline & Processing Co., LLC ("Hudson") (Continued)

            Ownership for this investment is accounted for using the equity
            method, whereby the investment is stated at cost and adjusted for
            the Company's equity in undistributed earnings and loss since
            acquisition. The construction of the pipeline began in late 2004.
            Operations for Hudson for the period ended December 31, 2004 were
            insignificant; for 2005, the Company's allocable share of net income
            was $65,643.

            The following is condensed financial information concerning Hudson:

                                 Balance Sheets
                                   (Unaudited)
                                                             December 31,
                                                      --------------------------
                                                         2005            2004
                                                      ----------      ----------
      Current assets                                  $  475,906      $   43,839
      Construction projects in progress, net           2,201,946         749,223
      Other assets                                        15,592              --
                                                      ----------      ----------
        Total assets                                  $2,693,444      $  793,062
                                                      ==========      ==========

      Current liabilities                             $  240,086      $  563,009
      Member's equity                                  2,453,358         230,053
                                                      ----------      ----------
        Total liabilities and member's equity         $2,693,444      $  793,062
                                                      ==========      ==========

                            Statements of Operations
                                   (Unaudited)
                                                              Year Ended
                                                              December 31,
                                                        ------------------------
                                                           2005          2004
                                                        ----------    ----------
      Revenues                                          $  653,362    $   24,964
      Costs and expenses                                   518,989        22,565
                                                        ----------    ----------
      Operating income                                     134,373         2,399
      General and administrative                             4,279            --
                                                        ----------    ----------
      Net income before other                              130,094         2,399
      Interest income                                        2,161            --
                                                        ----------    ----------
      Net income                                        $  132,255    $    2,399
                                                        ==========    ==========

                                      F-24
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 9. OTHER INVESTMENTS (Continued)

      GeoPetra Partners, LLC ("GeoPetra")

            In June 2005, the Company acquired a 30% interest in GeoPetra.
            GeoPetra is a limited liability company engaged primarily in the
            following activities (i) identification and evaluation for
            acquisition of oil and gas properties and interest and entities
            which hold such properties and interests, (ii) areas to be explored
            and developed for the production of oil and gas and (iii) providing
            consultation, advice, and recommendations to the members of GeoPetra
            in connection with other oil and gas properties and interests,
            operations and activities. GeoPetra was formed April 1, 2005.

            The Company invested a total of $485,741 in GeoPetra in 2005, and
            its allocable share of net loss for 2005 was ($141,239). The
            following is condensed financial information concerning GeoPetra:

                                  Balance Sheet
                                   (Unaudited)

      Current assets                                                  $  201,943
      Prepaid expenses                                                    48,000
      Oil and gas properties, net                                      1,186,218
      Property and equipment, net                                         48,992
                                                                      ----------
        Total assets                                                  $1,485,153
                                                                      ==========

      Current liabilities                                             $  289,130
      Members' equity                                                  1,196,023
                                                                      ----------
        Total liabilities and members' equity                         $1,485,153
                                                                      ==========

                             Statement of Operations
                         Period Ended December 31, 2005

      Operating revenues                                             $       --
      Operating costs and expenses                                      418,530
      Other expense                                                       5,187
                                                                     ----------
      Net loss                                                       $ (423,717)
                                                                     ==========

      Other Mineral Properties

            Utah Property

                  The Company has retained a 25% undivided interest in the
                  Vipont Mine located in Northwest Utah. The Company has
                  recorded its undivided interest at $197,406, the carrying
                  value previously reflected by Cadence, which is considered to
                  be equivalent to its estimated fair value.

                                      F-25
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 9. OTHER INVESTMENTS (Continued)

      Other Mineral Properties (Continued)

            Mineral Properties in North Idaho

                  At December 31, 2005, the 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 previously been written
                  off by Cadence as permanently impaired.

                  During 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, which was charged to expense.

NOTE 10. PROPERTY AND EQUIPMENT

      Property and equipment consist of the following at December 31:

                                                       2005              2004
                                                    ----------        ----------
      Office condominium building                   $3,165,382        $       --
      Furniture and fixtures                           265,115           108,047
      Office equipment                                  39,579                --
      Computer equipment                               148,601            77,509
      Software                                          85,070            11,325
      Leasehold improvements                                --            19,042
      Vehicles and other equipment                      20,171             7,050
                                                    ----------        ----------
      Total property and equipment                   3,723,918           222,973
      Less accumulated depreciation                    113,780           107,690
                                                    ----------        ----------
      Property and equipment, net                   $3,610,138        $  115,283
                                                    ==========        ==========

      On April 26, 2005, the Company entered into a Condominium Purchase
      agreement to purchase the entire second floor of a commercial condominium
      project. On October 4, 2005, the Company closed on the purchase of the
      office condominium property, and executed a mortgage payable in the
      original amount of $2,925,000 (see Note 12).

      Depreciation expense amounted to $52,703 and $28,249 during 2005 and 2004,
      respectively.

                                      F-26
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 11. LEASES (INCLUDING RELATED PARTIES)

      Oil and gas equipment which qualify as a capital lease with an original
      cost of $42,400 in 2004 are capitalized into the oil and gas cost pool and
      are amortized as part of the entire full cost pool.

      The following is a schedule of annual future minimum lease payments
      required under capitalized lease obligations as of December 31, 2005:

      2006                                                             $   9,960
      2007                                                                 3,292
                                                                       ---------
      Total minimum payments due                                          13,252
      Less amounts representing interest, imputed at 6.5%                  2,167
                                                                       ---------
      Present value of net minimum lease payments                         11,085
      Current portion                                                      8,823
                                                                       ---------
      Obligations under capital leases, net of current portion         $   2,262
                                                                       =========

      During 2003, the Company entered into a lease for office space under an
      operating lease on a month-to-month basis. The leased office space was
      owned by an entity which was owned one-third by one of the Company's
      principal shareholders and one-third by a trust in the name of another of
      the Company's principal shareholders. In 2004, the Company extended this
      lease for a 3-year term requiring monthly payments of $8,700 expiring in
      March 2007. Rent charged to expense during 2005 and 2004 was $95,700 and
      $106,800, respectively.

      The Company purchased on a commercial condominium space on October 4,
      2005, as more fully described in Note 10. A settlement payment of $62,250
      made in 2006 released the Company from future lease payments under the
      lease extension agreement.

NOTE 12. DEBT (INCLUDING RELATED PARTIES)

      Short-Term Bank Borrowings

            On October 12, 2005, the Company entered into a revolving
            line-of-credit agreement with a bank. Under the terms of this
            agreement, the Company can borrow up to a maximum of $7,500,000.
            Interest payments are due monthly at a rate of 6.75%. The
            line-of-credit agreement expires on October 15, 2006. At December
            31, 2005, a balance of $6,210,000 was outstanding on the line. A
            payment of $2,130,000 on January 31, 2006 reduced the line of credit
            and the agreement was amended to a maximum line of $5,000,000. See
            Subsequent Events, Note 26.

            During 2004, the Company entered into an unsecured revolving
            line-of-credit agreement with a bank. Under the terms of this
            agreement, the Company was able to borrow up to a maximum of
            $350,000, with monthly interest payments at prime plus 1% (effective
            rate at December 31, 2004 of 6.0%). Subsequent to December 31, 2004,
            short-term borrowings in the amount of $350,000 were paid in full.
            The line-of-credit agreement expired on April 1, 2005.

                                      F-27
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 12. DEBT (INCLUDING RELATED PARTIES) (Continued)

      Long-Term Debt

            Notes Payable - Related Parties

            A summary of notes payable to related parties is as follows at
            December 31:

<TABLE>
<CAPTION>
           Related Party                Rate              Due Date                2005         2004
      ----------------------        -----------   ------------------------       -------   -----------
      <S>                           <C>           <C>                            <C>       <C>
      Affiliated entity       (1)      Prime              5/31/2005         **   $    --   $ 1,700,000
      Affiliated entity        *       6.00%              3/15/2005         **        --        86,650
      Affiliated entity        *      10.50%              5/1/2006                69,833        69,833
      Shareholder/director    (2)      9.50%              See below         **        --       400,000
      Shareholder/director    (3)      4.68%              1/1/2006          **        --        50,000
      Shareholders/directors        5.12% to 8%   From 3/15/2005 to 6/1/06  **        --       555,355
      Accrued interest                                                      **        --       156,693
                                                                                 -------   -----------

      Total notes payable - related parties                                       69,833     3,018,531
      Current portion of notes payable - related parties                          69,833     1,940,825
                                                                                 -------   -----------

      Notes payable - related parties, net of current portion                    $    --   $ 1,077,706
                                                                                 =======   ===========
</TABLE>

            (1)   This note required payments of interest monthly and also
                  required additional payments based upon the quantity of gas
                  extracted from certain oil and gas properties. Interest
                  expense related to this note amounted to $93,618 in 2004.

            (2)   Monthly payments were required on this note with the principal
                  and interest determined based upon the quantity of oil and gas
                  extracted from certain oil and gas properties. Interest
                  expense amounted to $45,704 in 2004.

            (3)   This interest rate adjusted annually based on the highest
                  applicable federal rate (4.68% at December 31, 2004).

            *These entities are affiliated through common ownership and ultimate
            management control.

            **These notes were paid in full during March 2005.

                                      F-28
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 12. DEBT (INCLUDING RELATED PARTIES) (Continued)

      Long-Term Debt (Continued)

            Mortgage Payable

                  On October 4, 2005, the Company closed a mortgage loan from
                  Northwestern Bank in the amount of $2,925,000. 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. Loan proceeds were used
                  to purchase the condominium and to pay for interior
                  improvements to the premises.

                  The mortgage loan is secured by the personal guaranties of
                  three of the Company's directors. The mortgage had an
                  outstanding balance of $2,865,477 at December 31, 2005.

            Mezzanine Financing

                  In August 2004, North entered into a $30,000,000 mezzanine
                  credit facility to enable the Company to fund its 20%-50%
                  share of the Michigan Antrim drilling program. On December 8,
                  2005, North entered into an Amended Note Purchase Agreement,
                  increasing the borrowing base under the existing credit
                  facility to $50 million, representing an additional $20
                  million available for development. The additional commitment
                  in the five-year revolving credit facility was provided by the
                  existing mezzanine lender, Trust Company of the West ("TCW").
                  The terms of this financing are as follows:

                  Facility Amount: Initially up to $30,000,000 ($50,000,000 as
                                   of December 2005) secured advancing
                                   line-of-credit with overriding royalty
                                   provisions. Initial borrowing base of
                                   $10,000,000 ($40,000,000 as of December 2005)
                                   redetermined as reserves are established
                                   accordingly.

                  Interest Rate:   11.5%

                  Maturity:        September 30, 2009

                  Use of Proceeds: To fund drilling, completion, gathering
                                   lines, and gas processing facility for
                                   certain Michigan Antrim wells.

                  Security:        100% working interest in all wells completed.

                  Payments:        Beginning September 28, 2006 and quarterly
                                   thereafter. The required payment is 75% (100%
                                   if coverage deficiency or default occurs) of
                                   Adjusted Net Cash Flow ("ANCF") determined by
                                   deducting applicable operating expenses from
                                   gross revenue.

                  On January 31, 2006, the Company entered into a new senior
                  secured revolving credit facility of up to $100 million with a
                  new lender (see Subsequent Events, Note 26). In this
                  connection, the TCW facility was subordinated to the new
                  senior credit facility.

                                      F-29
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 12. DEBT (INCLUDING RELATED PARTIES) (Continued)

      Long-Term Debt (Continued)

            Mezzanine Financing (Continued)

                  Interest expense related to this debt amounted to $329,028 in
                  2004, all of which was capitalized. Interest expense in 2005
                  related to this debt amounted to $2,171,389, of which
                  $1,146,084 was capitalized.

                  The loan agreement contains, among other things, certain
                  covenants relating to restricted payments (as defined), loans
                  or advances to others, additional indebtedness, and incurrence
                  of liens; and provides for the maintenance of certain
                  financial and operating ratios, including current ratio and
                  specified coverage ratios (collateral coverage and proved
                  developed producing reserves coverage ratios).

            Maturities of Long-Term Debt

                  Aggregate maturities of long-term debt at December 31, 2005
                  are as follows:

      2006                                                           $   151,533
      2007                                                                86,862
      2008                                                             2,708,000
      2009                                                            40,000,000
                                                                     -----------
        Total                                                        $42,946,395
                                                                     ===========

                  The Company estimates that no principal payments on the
                  mezzanine financing will be required until maturity because of
                  the level of anticipated capital expenditures and the senior
                  lending credit facility entered into on January 31, 2006 (see
                  Subsequent Events, Note 26).

NOTE 13. DEPOSIT ON SALE OF OIL AND GAS PROPERTIES

      On November 30, 2005, after the execution of the agreement to purchase
      64,000 acres of leasehold interests in the Wabash Project discussed in
      Note 5, the Company entered into a second Purchase and Sale Agreement with
      respect to this New Albany Shale acreage whereby the Company sold half of
      its interest in a combined 95,000 acre lease to New Albany-Indiana, LLC,
      an affiliate of Rex Energy Operating Corporation. Of these 95,000 acres,
      64,000 acres were the interests acquired from Wabash Energy Partners,
      L.P., and 31,000 acres were acquired by Aurora in other transactions.

      Pursuant to the terms of this sales agreement, $3,500,000 was placed in
      escrow by the purchaser on behalf of the Company as a deposit until the
      closing in February 2006. Interest earned from November 30, 2005 through
      December 31, 2005 was $ 9,319. The total $3,509,319 is reflected in the
      accompanying financial statements as a deposit on sale of oil and gas
      properties.

                                      F-30
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 14. REDEEMABLE CONVERTIBLE 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. During 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. The shares carried a preferred dividend of
      15% per annum. 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.

      In February 2006, a total of 23,334 shares of redeemable convertible
      preferred stock was converted into common stock.

NOTE 15. INCOME TAXES

      A reconciliation of the provision for income taxes and the amount computed
      by applying the statutory Federal income tax rate to net income (loss) is
      as follows for the year ended December 31:

                                                            2005       2004
                                                         ---------    ---------
      Income tax (benefit) provision
        at the statutory rate                            $(175,500)   $(375,300)
      Increase (decrease) in allowance
        against net operating loss                         173,500      335,500
      Permanent differences/other                            2,000       39,800
                                                         ---------    ---------
          Income tax provision                           $      --    $      --
                                                         =========    =========

      The Company's total deferred tax liabilities, deferred tax assets and
      deferred tax asset valuation allowances as of December 31 are as follows:

                                                        2005           2004
                                                    ------------   ------------
      Total deferred tax assets:
        Net operating loss carryover                $ 12,324,600   $  1,441,300
        Section 1231 carryover                           146,900             --
        Capital loss carryover                            66,000             --
        Less valuation allowance                      (2,391,700)      (635,400)
                                                    ------------   ------------
          Deferred tax assets, net                    10,145,800        805,900
      Total deferred tax liabilities:
        Excess assigned acquisition value             (4,339,000)            --
        Intangible drilling costs and other           (5,806,800)      (805,900)
                                                    ------------   ------------
          Net deferred tax assets (liabilities)     $         --   $         --
                                                    ============   ============

                                      F-31
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 15. INCOME TAXES (Continued)

      Management  determined  that the  deferred  tax assets do not  satisfy the
      recognition  criteria of SFAS No. 109 and,  accordingly,  a full valuation
      allowance has been recorded for this amount.

      The Company has net operating loss carryforwards available to offset
      future Federal taxable income of approximately $36,249,000, which expire
      from 2009 through 2025. Included in this amount is a pre-merger net
      operating loss carryforward incurred by Cadence of approximately
      $16,900,000. In addition, Cadence had pre-merger 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 Tax Reform Act of 1986 imposed substantial restrictions on the
      utilization of net operating losses and tax credits in the event of an
      "ownership change", as defined by the Internal Revenue Code. Federal and
      State net operating losses are subject to limitations as a result of these
      restrictions. Under such circumstances, the Company's ability to utilize
      its net operating losses against future income may be reduced.

NOTE 16. COMMON STOCK

      2005

      The Company sold 4,972,200 shares of common stock to unrelated third
      parties at $2.50 per share, in the first quarter of 2005. Total net
      proceeds from the sale of these shares after commissions and fees amounted
      to $11,025,000. In connection with the sale of these shares, together with
      the sale of certain common stock by Cadence at that same time, an
      affiliate of one of the Company's major shareholders was paid a commission
      of approximately $976,000 and was issued a warrant to purchase 1,821,000
      shares of common stock for services rendered as the placement agent in the
      transaction. Included in accounts payable at December 31, 2005 is a
      balance of $50,000 due to this affiliate.

      The Company issued 10,000 shares of common stock to a director upon the
      exercise of options at a price of $.75 per share.

      As a result of the reverse merger, Aurora's stockholder's equity reflects
      the following transactions:

            Cadence returned 600,000 shares to treasury stock for 300,000 shares
            it held in Aurora at the time of merger which became 600,000 shares
            in the 2 for 1 exchange. This is reflected as a reduction to
            Aurora's equity.

            The total outstanding Cadence shares, at the effective date of the
            merger, of 21,136,327 were added to Aurora's equity.

            The company issued 2,642,500 shares of common stock upon the
            exercise of certain options and warrants at prices ranging from
            $1.25 - $1.75 per share.

            During the last quarter of 2005, certain option and warrant holders
            exercised their options and warrants under the cashless exercise
            provision within their options and warrants. This resulted in the
            issuance of 245,068 shares of the Company's stock.

                                      F-32
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 16. COMMON STOCK (Continued)

      2004

      The Company issued 49,976 shares of common stock in exchange for
      consulting services provided to the Company during the previous three
      years. The value assigned per share was contractual and was agreed to by
      the Company and the vendor in June, 2001. The amount expensed as a result
      of this exchange amounted to $41,479.

      The Company sold 1,045,000 shares of common stock to unrelated third
      parties at $2.50 per share, primarily in the fourth quarter of 2004. Total
      proceeds from the sale of these shares amounted to $2,612,500.

      The Company issued 4,800 shares of common stock as payment for consulting
      on the sale of the Company's common stock. The price per share used for
      this exchange of $2.50 was based upon comparable sales of the Company's
      common stock and amounted to $12,000.

      The Company issued 310,000 shares of common stock to a director upon the
      exercise of options at prices ranging from $.75 to $1.00 per share.

NOTE 17. PREFERRED STOCK

      During 2000, Aurora authorized 500,000 shares of Series A preferred stock
      with the terms and amounts set at the Board of Directors discretion.
      Preferred stock has liquidation preference over common stock equal to the
      original issue value, plus any accrued or arreared dividends.

      Each share of Series A preferred stock is voting and is convertible into
      three shares of common stock. During 2004, 311,111 shares of preferred
      stock were exchanged for 933,333 shares of the Company's common stock. The
      preferred shares require dividends of 6% on a cumulative basis commencing
      in 2001. Dividends were required to be accrued on January 1 of each year.
      Dividends in the amount of $127,112 were satisfied through issuance of a
      note payable. In early 2005, the remaining 99,350 shares of preferred
      stock were converted to 298,050 shares of common stock and all dividends
      associated with these shares were paid in full.

NOTE 18. COMMON STOCK OPTIONS

      Both Cadence and Aurora awarded stock options under plans and other
      arrangements in place prior to the merger. The following describes the
      plans that remain in place as of December 31, 2005.

      On October 1, 1997, Aurora adopted an incentive qualified stock option
      plan which authorized the issuance of up to 1,000,000 shares of Aurora's
      common stock at an option price which may not be less than 100% of the
      estimated fair value on the date of grant (25% effective with a January 1,
      2004 amendment to the plan). The maximum term of options granted is ten
      years. The plan was created in an effort to retain key employees, attract
      new employees, obtain the services of consultants, encourage the sense of
      proprietorship of such persons and to stimulate the active interest of
      such persons in the development and financial success of the Company.

                                      F-33
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 18. COMMON STOCK OPTIONS (Continued)

      In April 2004, Cadence adopted an incentive stock option plan as part of a
      larger equity incentive plan that includes non-statutory stock options,
      stock bonuses and restricted stock awards. The equity incentive plan
      provides that no more than 5,000,000 shares of stock may issued pursuant
      to the equity awards and option prices may not be less than 100% of the
      estimated fair value on the date of grant. The maximum term of options
      granted is ten years. The purpose of the plan is to attract and retain the
      services of employees, directors and consultants and promote the interests
      of Cadence by aligning the interests of selected eligible persons under
      the plan with the interests of the stockholders of the Cadence and by
      providing to such persons an opportunity to obtain the benefits from
      ownership of Cadence stock.

      Activity related to the two incentive stock option plans was as follows
      for the years ended December 31, 2005 and 2004:

                                                            2005         2004
                                                         ----------   ----------
      Options outstanding at beginning of year              344,000      250,000
      Granted during the year                               146,000       94,000
      Assumed upon merger:
        2 for 1 exchange of Aurora options                  490,000           --
        Cadence options                                     400,000           --
      Options exercised                                    (175,000)          --
                                                         ----------   ----------
      Options outstanding at end of year                  1,205,000      344,000
                                                         ==========   ==========

      A majority of the Company's outstanding stock options have been issued
      outside of the incentive stock option plans. These include options for the
      purchase of 99,999 shares which were issued to certain directors in 2004,
      as compensation in exchange for serving on Aurora's board of directors.

      Activity with respect to all stock options (including options granted
      under the incentive stock option plans) is presented below for the years
      ended December 31, 2005 and 2004:

<TABLE>
<CAPTION>
                                                           2005                       2004
                                                 ------------------------   ------------------------
                                                                Weighted                   Weighted
                                                                 Average                    Average
                                                                Exercise                   Exercise
                                                   Shares        Price        Shares        Price
                                                 ----------    ----------   ----------    ----------
      <S>                                        <C>           <C>           <C>          <C>
      Options outstanding at beginning of year    2,700,664    $     0.99    2,816,665    $     1.01
      Granted during the year                       156,000          3.32      193,999          0.75
      Assumed upon merger:
        2 for 1 exchange of Aurora options        2,856,664            --           --            --
        Cadence options                           1,124,349          1.79           --            --
      Options exercised                            (357,500)         1.20     (310,000)         0.99
      Forfeitures and other adjustments             (31,709)         0.43           --            --
                                                 ----------    ----------   ----------    ----------
      Options outstanding at end of year          6,448,468          0.72    2,700,664          0.99
                                                 ==========    ==========   ==========    ==========
</TABLE>

                                      F-34
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 18. COMMON STOCK OPTIONS (Continued)

      All of the above options are considered eligible for exercise as such
      options vest immediately upon their grant. The weighted average remaining
      life by exercise price as of December 31, 2005 is summarized below:

                                                          Weighted
                                             Shares        Average
                                          Outstanding    Remaining
                                              and       Contractual
      Range of Exercise Prices            Exercisable       Life
      -----------------------             -----------   -----------
      $0.25 - $0.38                        1,187,994        5.9
      $0.42 - $0.50                        1,880,000        1.3
      $0.63                                2,333,334        0.8
      $1.25 - $1.75                          718,500        5.0
      $2.00 - $2.50                          253,640        2.4
      $3.73                                   75,000        0.1
                                           ---------
                                           6,448,468
                                           =========

      The Company follows only the disclosure aspects of Statement of Financial
      Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
      Compensation". The Company continues to apply Accounting Principles Board
      Opinion No. 25, "Accounting for Stock Issued to Employees," and related
      interpretations in accounting for its plans. Under APB 25, the exercise
      price of the stock options was more than the market value of the shares at
      the date of grant and, accordingly, no compensation cost has been
      recognized in the consolidated financial statements for the outstanding
      stock options.

      The following table illustrates the effect on net loss and loss per share
      as if the Company had applied the fair value recognition provisions of
      SFAS 123 during the years ended December 31, 2005 and 2004:

                                                      2005             2004
                                                   -----------      -----------
      Net loss available to common shareholders    $  (516,272)     $(1,133,979)

      Deduct total stock-based compensation
        expense determined under fair value
        based method for all awards, net of
        related tax effects                           (298,745)         (36,746)
                                                   -----------      -----------

      Pro forma net loss                           $  (815,017)     $(1,170,725)
                                                   ===========      ===========

                                                      2005             2004
                                                   -----------      -----------
      Loss per share - basic and diluted
          As reported                              $     (0.01)     $     (0.05)
          Pro forma                                $     (0.02)     $     (0.05)

                                      F-35
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 18. COMMON STOCK OPTIONS (Continued)

      The weighted average assumptions used in the Black-Scholes option-pricing
      model used to determine fair value were as follows:

                                                              2005     2004
                                                             ------   -------
      Risk-free interest rate                                   4%         3%
      Expected years until exercise                            10     5 - 10
      Expected stock volatility                                41%         0%
      Dividend yield                                            0%         0%

NOTE 19. COMMON STOCK WARRANTS

      During 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 in estimating fair value:
      risk free interest rate 5%, volatility 100%, expected life 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 remained
      exercisable through October 15, 2005.

      During 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 5%, volatility 100%,
      expected life 3 three years and no expected dividends. During 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 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 2005: risk free
      interest rate 4%, volatility 41%, expected life 3 years and no expected
      dividends.

      Also during 2005, Aurora issued warrants to purchase 1,900,000 shares of
      stock. These warrants were attached to 4,972,200 shares which were issued
      for cash.

                                      F-36
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 20. OTHER INCOME

      Components of other income presented in the accompanying consolidated
      statements of operations are summarized as follows for the year ended
      December 31:

                                                        2005             2004
                                                     ----------       ----------
      Project management fees                        $  347,857       $  883,687
      Administrative fees for
      producing properties                               94,315          309,148
      Miscellaneous income                               10,449               --
                                                     ----------       ----------
         Total other income                          $  452,621       $1,192,835
                                                     ==========       ==========

NOTE 21. RETIREMENT PLAN

      The Company maintains a SIMPLE 401(k) plan for substantially all of its
      employees. Under this SIMPLE plan, eligible employees are permitted to
      contribute up to 15% of gross compensation into the retirement plan. The
      Company makes no matching contribution; however, the Company can make a
      discretionary contribution to the plan. There were no contributions to
      this plan in 2005 and 2004.

NOTE 22. CONTINGENCIES

      The Company is occasionally subject to various lawsuits arising in the
      normal course of business. In the opinion of management, the ultimate
      liability, if any, resulting from such matters will not have a significant
      effect on the Company's results of operations, liquidity, or financial
      position.

NOTE 23. EARNINGS (LOSS) PER SHARE

      Basic earnings (loss) per share are computed by dividing net income (loss)
      available to common shareholders by the weighted average number of common
      shares outstanding for the period. The computation of diluted net income
      (loss) per share reflects the potential dilution that could occur if
      securities or other instruments to issue common stock were exercised or
      converted into common stock or resulted in the issuance of common stock
      that would then share in the earnings of the Company.

                                                      Year Ended December 31,
                                                   -----------------------------
                                                       2005            2004
                                                   ------------    ------------
      Basic and diluted earning (loss)per share
        Loss available to common shareholders      $   (516,272)   $ (1,133,979)
        Weighted average common shares
          outstanding                                40,622,000      23,636,000

      Basic loss per share                         $      (0.01)   $      (0.05)
                                                   ============    ============

                                      F-37
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 23. EARNINGS (LOSS) PER SHARE (Continued)

      The common stock and per share information have been retroactively
      adjusted to give effect to the two-for-one exchange ratio in the reverse
      acquisition of and merger with Cadence on October 31, 2005.

      During 2005 and 2004, stock options and warrants and convertible preferred
      stock were excluded in the computation of diluted loss per share because
      their effect was anti-dilutive.

NOTE 24. MINORITY INTEREST IN NET ASSETS OF SUBSIDIARIES

      The following is an analysis of changes in minority interest in net assets
      of subsidiaries for the year ended December 31, 2004:

      Balance at December 31, 2003                                  $ 1,685,063
      Distributions to minority members                                 (41,347)
      Income allocated to minority interest owners
        prior to disposal                                                41,243
      Disposition of subsidiary and elimination of
        minority member interest                                        (90,518)
      Transfer of member interest in subsidiary in
        exchange for working interest                                (1,578,806)
      Minority interest reclassified as other
        receivable                                                       22,452
      Net loss                                                          (38,087)
                                                                    -----------
      Balance at December 31, 2004                                  $        --
                                                                    ===========

NOTE 25. SUPPLEMENTAL CASH FLOWS INFORMATION

      Non-Cash Financing and Investing Activities

      2005

      None.

      2004

      During 2004, Aurora conveyed its entire interest totaling $338,177 in AIL,
      BAC and ANG back to the respective consolidated subsidiaries in exchange
      for oil and gas reserves in the same amount. As a result of this
      conveyance, Aurora no longer maintained a controlling interest in these
      subsidiaries. Minority interests and oil and gas properties related to
      this conveyance, in the amount $1,992,361, has been eliminated from these
      consolidated financial statements.

      Pursuant to the purchase and sale agreement with an unrelated third party
      more fully described in Note 6, Aurora repaid in full the mezzanine
      facility obligation in the amount of $4,674,639, reserve base lending
      obligation in the amount of $498,675 and transferred certain lease
      obligations in the amount of $847,025.

                                      F-38
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 25. SUPPLEMENTAL CASH FLOWS INFORMATION (Continued)

      Non-Cash Financing and Investing Activities (Continued)

            During 2004, $127,112 of cumulative dividends on convertible
            preferred stock were satisfied by issuance of a note payable.

      Other Cash Flows Information

            Cash paid for interest amounted to $2,258,691 and $681,025 in 2005
            and 2004, respectively.

NOTE 26. SUBSEQUENT EVENTS

      Senior Secured Credit Facility

            On January 31, 2006, the Company entered into a Credit Agreement
            with BNP Paribas. The new facility consists of a senior secured
            revolving credit facility in an amount of up to $100 million, having
            an initial borrowing base without hedges of $40 million. The ability
            to increase the borrowing base beyond $50 million is subject to
            certain conditions in the Second Lien Notes held by TCW (see Note
            12). The proceeds from this facility are intended to be used for
            drilling, development, and acquisitions as well as other general
            corporate purposes. This facility matures the earlier of January 31,
            2010 or 91 days prior to the maturity of the Second Lien Notes
            currently due September 2009. This facility provides for borrowings
            tied to prime rate or LIBOR plus 1.25 to 2.0% depending on the
            borrowing base utilization, as selected by the Company.

      O.I.L. Acquisition

            On January 31, 2006, the Company completed the acquisition of
            additional working interests in the Hudson project area (see Note
            9). The total purchase price of approximately $27,500,000 was
            financed under the senior secured credit facility with BNP. This
            acquisition increased the Company's working interest in the project
            area from an average of approximately 49% to 96% in the project.
            Additionally, pursuant to this acquisition was the purchase of
            48.75% member interest in Hudson, which pipeline and production
            facilities related to the Hudson project. This increased the
            Company's member ownership from 48.75 to 97%.

      Rex/Wabash Transaction

            On February 1, 2006, the Company completed a transaction involving
            the acquisition of 64,000 acres of New Albany Shale acreage in the
            Wabash Project (see Note 5). The Company then sold half interest in
            its accumulated 95,000 acres to an unrelated third party, resulting
            in a net acreage gain to the Company.

                                      F-39
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

NOTE 26. SUBSEQUENT EVENTS (Continued)

      Stock Option and Warrant Exercise

            In February 2006, the Company reported the receipt of a total of
            approximately $20.6 million in cash proceeds from the exercise of
            certain options and warrants. Approximately $18 million of this cash
            was received in 2006; the balance of approximately $2.6 million was
            received in 2005.

      Pro Forma Presentation

            The pro forma effect of these 2006 subsequent events on the
            Company's financial position, assuming that they had occurred as of
            December 31, 2005, is as follows:

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 2005
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                            2006
                                                                         Subsequent
                                                           Historical      Events       Pro Forma
                                                          ------------  ------------   ------------
      <S>                                                 <C>           <C>            <C>
      Current assets                                      $ 19,256,000  $ 15,870,000   $ 35,126,000
      Oil and gas properties, using full cost accounting    68,961,000    27,197,000     96,158,000
      Property and equipment, net                            3,610,000            --      3,610,000
      Other Investments                                      1,856,000            --      1,856,000
      Other Assets                                             762,000     2,500,000      3,262,000
      Deposit on purchase of oil and gas properties          3,206,000    (3,206,000)            --
      Goodwill and other intangibles                        19,171,000            --     19,171,000
                                                          ------------  ------------   ------------
          Total assets                                    $116,822,000  $ 42,361,000   $159,183,000
                                                          ============  ============   ============

      Current liabilities                                 $ 13,832,000  $ (2,130,000)  $ 11,702,000
      Deposit on sale of oil and gas properties              3,509,000    (3,509,000)            --
      Long-term debt                                        42,795,000    30,000,000     72,795,000
                                                          ------------  ------------   ------------
          Total liabilities                                 60,136,000    24,361,000     84,497,000

      Redeemable preferred stock                                60,000            --         60,000
      Shareholders' equity                                  56,626,000    18,000,000     74,626,000
                                                          ------------  ------------   ------------
          Total liabilities and equity                    $116,822,000  $ 42,361,000   $159,183,000
                                                          ============  ============   ============
</TABLE>

                                      F-40
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                      SUPPLEMENTAL OIL AND GAS INFORMATION
                                   (UNAUDITED)
                                   (Continued)

SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION, DEVELOPMENT AND PRODUCTION
ACTIVITIES (Unaudited)
--------------------------------------------------------------------------------

Supplemental Reserve Information. The following information presents estimates
of our proved oil and gas reserves. The Company retained the services of an
independent petroleum consultant (Data & Consulting Services, Division of
Schlumberger Technology Corporation) to estimate its proved natural gas reserves
at December 31, 2005 and 2004. Included in the tables that follow are proved oil
and natural gas reserves located in Michigan that were acquired as a separate
property acquisition near the end of the year and proved oil and gas reserves
acquired in conjunction with the reverse merger with Cadence Resources
Corporation effective October 31, 2005. These acquired proved reserves were
estimated by Netherland, Sewell & Associates, Inc. and Ralph E. Davis
Associates, Inc., respectively. Crude oil and natural gas reserves at December
31, 2005 were estimated under the Securities and Exchange Commission ("SEC")
reporting standards. Natural gas reserves at December 31, 2004 were estimated
under the SEC reporting standards with the exception of operating costs
assumptions. Operating costs were calculated as a monthly amount for each
individual unit which amounts decline over the first eight years and remain
constant thereafter.

                                                                        Natural
                                                           Oil           Gas
      Estimates of Proved Reserves                        (MBbl)        (Mmef)
      ----------------------------                        -------       -------

      Proved reserves as of December 31, 2003                  --        16,660
        Revisions of previous estimates                        --            --
        Purchases of minerals in place                         --            --
        Extensions and discoveries                             --        18,440
        Production                                             --          (151)
                                                          -------       -------
      Proved reserves as of December 31, 2004                  --        34,949
        Revisions of previous estimates                         6         5,381
        Purchases of minerals in place                        103         1,572
        Extensions and discoveries                             --        22,107
        Production                                            (10)         (688)
                                                          -------       -------
      Proved reserves as of December 31, 2005                  99        63,321
                                                          =======       =======

      Proved developed reserves:
        December 31, 2004                                      --        12,520
        December 31, 2005                                      70        45,205

The following table summarizes the weighted average year-end prices (net of
basis adjustments) used to estimate reserves in accordance with SEC guidelines.

                                                              2005        2004
                                                            --------    --------
      Natural gas (per mcf)                                 $   9.89    $  6.195
      Oil (per barrel)                                      $  56.41         n/a

                                      F-41
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                      SUPPLEMENTAL OIL AND GAS INFORMATION
                                   (UNAUDITED)
                                   (Continued)

Standardized Measure of Discounted Future Net Cash Flow Relating to Proved Oil
and Gas Reserves

The following information has been developed utilizing procedures prescribed by
SFAS No. 69 and based on crude oil and natural gas reserve and production
volumes estimated by the Company's independent reserve engineers. It may be
useful for certain comparison purposes, but should not be solely relied upon in
evaluating the Company or its performance. Further, information contained in the
following table should not be considered as representative of realistic
assessments of future cash flows, nor should the Standardized Measure of
Discounted Future Net Cash Flows be viewed as representative of the current
value of the Company.

The future cash flows presented below are computed by applying year-end prices
to year-end quantities of proved crude oil and natural gas reserves. Future
production and development costs are computed by estimating the expenditures to
be incurred in developing and producing the Company's proved reserves based on
year-end costs and assuming continuation of existing economic conditions. It is
expected that material revisions to some estimates of crude oil and natural gas
reserves may occur in the future, development and production of the reserves may
occur in periods other than those assumed and actual prices realized and costs
incurred may vary significantly from those used.

Management does not rely upon the following information in making investment and
operating decisions. Such decision are based upon a wide range of factors,
including estimates of probable as well as proved reserves, and varying price
and cost assumptions considered more representative of a range of possible
economic conditions that may be anticipated.

The following table sets forth the Standardized Measure of Discounted Future Net
Cash Flows from projected production of the Company's crude oil and natural gas
reserves for the years ended December 31, 2005 and 2004.

                                                       2005            2004
                                                  -------------   -------------
      Future gross revenues (1)                   $ 632,058,720   $ 216,162,240
      Future production costs (2)                  (182,710,406)    (74,240,020)
      Future development costs (2)                  (15,073,590)    (13,659,320)
                                                  -------------   -------------
      Future net cash flows before income taxes     434,274,724     128,262,900
      Future income tax expense (3)                (101,521,160)    (42,167,000)
                                                  -------------   -------------
      Future net cash flows after income taxes      332,753,564      86,095,900
      Discount at 10% per annum                    (179,885,324)    (53,936,190)
                                                  -------------   -------------
      Standardized measure of discounted
        future net cash flows relating to
        proved oil and gas reserves               $ 152,868,240   $  32,159,710
                                                  =============   =============

(1)   Crude oil and natural gas revenues are based on year-end prices with
      adjustments for changes reflected in existing contracts. There is no
      consideration for future discoveries or risks associated with future
      production of proved reserves.

(2)   Based on economic conditions at year-end. Does not include administrative,
      general or financing costs.

(3)   Future income taxes are computed by applying the statutory tax rate to
      future net cash flows reduced by the tax basis of the properties, the
      estimated permanent differences applicable to future oil and gas producing
      activities and tax carry forwards.

                                      F-42
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                      SUPPLEMENTAL OIL AND GAS INFORMATION
                                   (UNAUDITED)
                                   (Continued)

Changes in Standardized Measure of Discounted Future Cash Flows

The following table sets forth the changes in Standardized Measure of Discounted
Future Net Cash Flows for the years ended December 31, 2005 and 2004.

<TABLE>
<CAPTION>
                                                                   2005            2004
                                                              -------------   -------------
      <S>                                                     <C>             <C>
      Beginning balance                                       $  32,159,710   $  15,708,150
                                                              -------------   -------------

      Revisions to reserves proved in prior years:
        Net change in prices and production costs                85,425,515              --
        Net changes in future development costs                   6,299,524              --
        Net changes due to revisions in quantity estimates       33,335,739              --
        Net change in accretion of discount                     (66,761,600)             --
        Other                                                    38,137,602      (6,025,690)
                                                              -------------   -------------
      Total revisions to reserves provided in prior years        96,436,780      (6,025,690)

      New discoveries and extensions, net of future
      development and production costs                           76,487,826      12,272,113
      Purchases of minerals in place                             11,834,500              --
      Sales of oil and gas produced, net of production costs     (4,696,416)       (345,673)
      Previously estimated development costs incurred                    --      10,550,810
      Net change in income taxes                                (59,354,160)             --
                                                              -------------   -------------

      Net change in standardized measure of
      discounted cash flows                                     120,708,530      16,451,560
                                                              -------------   -------------

      Ending balance                                          $ 152,868,240   $  32,159,710
                                                              =============   =============
</TABLE>

Capitalized Costs Related to Oil and Gas Producing Activities

The following table sets forth the capitalized costs relating to the Company's
natural gas and crude oil producing activities at December 31, 2005 and 2004.

                                                         2005            2004
                                                     -----------     -----------
      Proved properties                              $39,643,003     $ 7,585,807
      Unproved properties                             37,279,889       7,981,727
                                                     -----------     -----------
            Total oil and gas properties              76,922,892      15,567,534
      Less accumulated depreciation,
        depletion and amortization                     7,962,138         600,077
                                                     -----------     -----------
      Oil and gas properties - net                   $68,960,754     $14,967,457
                                                     ===========     ===========

      Cadence's share of equity method
        investees' net capitalized cost              $   355,865     $        --
                                                     ===========     ===========

                                      F-43
<PAGE>

                 CADENCE RESOURCES CORPORATION AND SUBSIDIARIES

                      SUPPLEMENTAL OIL AND GAS INFORMATION
                                   (UNAUDITED)
                                   (Continued)

Costs Incurred in Oil and Gas Producing Activities

The acquisition, exploration and development costs disclosed in the following
table are in accordance with definitions in SFAS No. 19, "Financial Accounting
and Reporting by Oil and Gas Producing Companies." Acquisition costs include
costs incurred to purchase, lease or otherwise acquire property. Exploration
costs include exploration expenses, additions to exploration wells in progress
and depreciation of support equipment used in exploration activities.
Development costs include additions to production facilities and equipment,
additions to development wells in progress and related facilities and
depreciation of support equipment and related facilities used in development
activities.

The following table sets forth costs incurred related to the Company's oil and
gas activities for the years ended December 31, 2005 and 2004.

                                                        2005             2004
                                                    -----------      -----------
      Property acquisition costs:
       Proved                                       $22,763,734      $ 1,932,442
       Unproved                                      16,400,997        6,836,229
      Exploration                                       781,586               --
      Development                                    29,927,619        1,782,139
                                                    -----------      -----------
          Total costs incurred                      $69,873,936      $10,550,810
                                                    ===========      ===========

      Cadence's share of equity method
        investees' costs of property
        acquisition, exploration and
        development                                 $   355,865      $        --
                                                    ===========      ===========

Results of Operations

The following table sets forth the results of operations related to natural gas
activities for the Company for the years ended December 31, 2005 and 2004.

                                                       2005             2004
                                                   -----------      -----------
      Oil and gas sales                            $ 6,743,444      $   960,011
      Production and lease operating costs          (2,047,028)        (614,338)
      Depreciation and depletion                    (1,155,254)        (203,249)
                                                   -----------      -----------
      Results of producing activities              $ 3,541,162      $   142,424
                                                   ===========      ===========

These results of operations do not include a provision for income taxes due to
the net operating loss carry forward available to offset taxable income during
both 2005 and 2004.

                                      F-44