10KSB

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-KSB

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

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

For the transition period from _____________ to ____________

Commission File Number 000-25170

CADENCE RESOURCES CORPORATION

(Name of Small Business Issuer in Its Charter)

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

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

(231) 941-0073

(Issuer’s Telephone Number, Including Area Code.)

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

Title of Each Class	Name of Each Exchange on Which 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: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days. Yes x    No o

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

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

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

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

Documents Incorporated by Reference: None

Transitional Small Business Disclosure Format: Yes o No x

TABLE OF CONTENTS

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

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PART I

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

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

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

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

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

·    future prices of natural gas and crude oil;

·    anticipated domestic demand for oil and natural gas; and

·    the adequacy of our capital resources and liquidity.

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

Item 1. Description of Business

The Company

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

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

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

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

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

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

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

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

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

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

Oil and Natural Gas Operations

DeSoto Parish, Louisiana

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

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

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

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

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

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

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Wilbarger County, Texas

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

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

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

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

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

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

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

Matagorda County, Texas

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

Michigan

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

New Mexico

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

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

Tennessee

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

Western Kansas

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

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Antrim Shale Operations

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

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

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

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

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

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

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

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Samson Transaction

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

CDX Transaction

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

Samson Antrim Projects

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Hudson Antrim Project

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

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

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

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

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

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

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

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

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

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

GROSS PROJECT PRODUCTION
Production Month	Hudson 34		# of Wells		Hudson SW		# of Wells		Hudson NE		# of Wells		Total MCF’s		Total Wells
January-05		25,475		17		–		–		–		–		25,475		17
February-05		24,875		17		5,981		2		–		–		30,856		19
March-05		25,343		17		10,345		10		–		–		35,688		27
April-05		24,081		17		16,540		13		6,794		8		47,415		38
May-05		22,265		18		23,854		13		29,796		11		75,915		42
June-05		24,965		21		26,222		13		36,336		11		87,523		45
July-05		27,738		21		34,810		14		41,526		17		104,074		52
August-05		29,549		21		34,119		14		58,591		21		122,259		56
September-05		31,429		21		38,903		14		70,722		21		141,054		56
TOTALS		235,720				190,774				243,765				670,259

NET PROJECT PRODUCTION
Production Month	Hudson 34		# of Net Wells		Hudson SW		# of Net Wells		Hudson NE		# of Net Wells		Total MCF’s		Total Net Wells
January-05		10,164		7		–		–		–		–		10,164		7
February-05		9,396		7		1,826		1		–		–		11,222		8
March-05		9,706		7		3,181		3		–		–		12,887		10
April-05		9,223		7		5,085		4		2,671		3		16,979		14
May-05		8,528		7		9,004		4		11,801		4		29,333		15
June-05		9,562		8		8,062		4		14,391		4		32,014		16
July-05		10,624		8		10,703		4		16,446		7		37,773		19
August-05		11,317		8		10,490		4		23,205		8		45,012		21
September-05		12,037		8		11,961		4		28,009		8		52,008		21
TOTALS		90,557				60,312				96,523				247,392

Other Antrim Projects

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

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

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

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

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

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

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

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

New Albany Shale Operations

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

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

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

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

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

Wiser Oil Transaction

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

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

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

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

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

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

Quicksilver Transactions

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

Indiana Joint Venture

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

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

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

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

El Paso Transactions

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

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

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

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

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

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

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

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CDX Transaction

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

Knox Gas Development Project

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

Other New Albany Shale Projects

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

Crossroads Project

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

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

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

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

The Eastern Group

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

Beregsasi Reef Field

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

Church Lake Field

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

Miscellaneous Well Interests

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

Drilling Funds

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

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

-17-

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

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

Financing Subsidiary

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

Other Subsidiaries and Affiliates

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

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

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

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

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

Oil and Gas Reserves

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

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

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

Cadence Division Revenues

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

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

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

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

AURORA SUBSIDIARY RESERVES AT DECEMBER 31, 2004

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

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

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

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

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

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Production Information

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

Cadence Production

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

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

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

Aurora Production

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

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

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

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

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Oil and Gas Wells

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

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

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

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

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

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

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

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

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

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

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

Oil and Gas Acreage

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

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

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

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

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

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

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

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

Drilling Activities

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

			Gross Wells								Net Wells
Fiscal Year	Type of Well		Total		Productive (2)		Dry(2)		Abandoned(4)		Total		Productive		Dry		Abandoned
2005		Exploratory(1)		2		1		1		0		2		1		1		0
		Development(1)		7		6		1		0		3.45		2.95		0.5		0
2004		Exploratory(1)		3.0		1		1		0		2		2		1.0		0
		Development(1)		11		7		2		2		4.3		2.5		0.9		0.9

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

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

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

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

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

Gross Wells

Net Wells

Fiscal Year

Type of Well

Total

Productive (2)

Dry(3)

Abandoned(4)

Total

Productive(2)

Dry(3)

Abandoned(4)

2004

Exploratory(1)

Michigan

–

–

--

--

–

–

–

–

Indiana

–

–

–

–

–

–

–

–

Total

–

–

–

–

–

–

–

–

Development(1)

Michigan

87

84

3

–

26.24

25.06

1.18

–

Indiana

4

–

–

4

0.20

–

--

0.20

Total

91

84

3

4

26.44

25.06

1.18

0.20

2003

Exploratory(1)

Michigan

–

–

–

–

–

–

–

–

Indiana

–

–

–

–

–

–

–

–

Total

–

–

–

–

–

–

–

–

Development(1)

Michigan

27

27

–

–

5.06

5.06

–

–

Indiana

–

–

–

–

–

–

–

–

Total

27

27

–

–

5.06

5.06

–

–

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

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

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

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

Drilling Techniques and Arrangements

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

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

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

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

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

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

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

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

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

Sale and Production

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

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

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

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

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Unitization of Production

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

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

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

Credit Facilities

TCW

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

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

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

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

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Northwestern Bank Line of Credit

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

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

Mortgage Loan

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

Insurance

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

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

December 31, 2005:

POLICY TYPE	LIMIT
Worker's Compensation & Employment Liability	Worker's Compensation; Statutory 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	$5,000,000 per occurrence and aggregate
Property/Pollution	$1,059,600 (property coverage); $1,000,000 (pollution limit)
Well Control	$2,000,000 limit

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Employees

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

Service Mark

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

Legal Proceedings

There are no currently threatened or pending claims against us.

Risks Related to our Business

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

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

WE CONTINUE TO EXPERIENCE SIGNIFICANT OPERATING LOSSES.

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

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

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

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

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

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

·    the number of wells to be drilled;

·    the location of wells to be drilled;

·    the timing of drilling and recompleting of wells;

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

·    the timing and amounts of production;

·    the approval of other participants in drilling wells;

·    development and operating costs;

·    capital calls on working interest owners; and

·    negative gas balance conditions.

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

WE MAY LOSE KEY MANAGEMENT PERSONNEL.

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

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

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

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

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

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

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

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

OUR DRILLING ACTIVITIES MAY BE UNSUCCESSFUL.

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

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PRODUCTION LEVELS CANNOT BE PREDICTED WITH CERTAINTY.

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

PRODUCTION DELAYS MAY OCCUR.

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

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

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

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

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

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

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

Our revenues, profitability and future growth depend in part on prevailing natural gas and crude oil prices. Prices also affect the amount of cash flow available for capital expenditures and our ability to borrow and raise additional capital. Lower prices may also reduce the amount of natural gas and crude oil that we can economically produce. It is possible that prices will be low at the time periods in which the wells are most productive, thereby damaging overall returns. It is possible that prices will drop so low that production will become uneconomical. Ongoing production costs that will continue include equipment maintenance, compression and pumping costs. If production becomes uneconomical, we may decide to discontinue production until prices improve.

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

·    the level of consumer product demand;

·    weather conditions;

·    domestic and foreign governmental regulations;

·    the price and availability of alternative fuels;

·    political conditions in oil and gas producing regions;

·    the domestic and foreign supply of oil and gas;

·    market uncertainty; and

·    worldwide economic conditions.

PIPELINE CAPACITY MAY BE INADEQUATE.

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

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

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

THERE IS A POTENTIAL FOR INCREASED COSTS.

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

WE MAY INCUR COMPRESSION DIFFICULTIES AND EXPENSE.

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

UNITIZATION PRESENTS SOME RISKS.

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

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

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

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

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

WE MAY HAVE DIFFICULTY FINANCING OUR PLANNED GROWTH.

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

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

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

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

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

OIL AND NATURAL GAS OPERATIONS INVOLVE VARIOUS RISKS.

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

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

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

WE LACK INSURANCE THAT COULD LOWER RISKS TO OUR INVESTORS.

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

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

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

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

·    discharge permits for drilling operations;

·    drilling bonds;

·    reports concerning operations;

·    spacing of wells;

·    unitization and pooling of properties;

·    environmental protection; and

·    taxation.

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

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

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

Risks Related to the Ownership of Our Stock

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

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

·    quarterly variations in operating results;

·    changes in financial estimates by securities analysts;

·    changes in market valuations of other similar companies;

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

·    additions or departures of key personnel;

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

·    future sales of common stock.

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

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

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

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

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

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

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

-36-

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

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

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

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

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

-37-

CADENCE Pro Forma Information

CADENCE RESOURCES CORPORATION

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

SEPTEMBER 30,2005

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

See accompanying notes to unaudited pro forma financial statements.

-38-

CADENCE RESOURCES CORPORATION

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

YEAR ENDED SEPTEMBER 30, 2005

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

See accompanying notes to unaudited pro forma financial statements.

-39-

CADENCE RESOURCES CORPORATION

NOTES TO PRO FORMA FINANCIAL STATEMENTS

NOTE 1 - MERGER AGREEMENT

On January 31, 2005, Cadence Resources Corporation (Cadence) entered into a definitive merger agreement with Aurora Energy, Ltd. (Aurora) whereby Cadence will acquire 100% of the outstanding stock and options of Aurora. Consideration in this transaction will consist of the issuance of two shares of common stock of Cadence for every one share of outstanding stock of Aurora, and the issuance of two options for the purchase of stock in Cadence for each option outstanding of Aurora.

Evaluation of the facts in this transaction indicates that the Aurora stockholder group will receive the largest portion of the voting rights, will have the majority number of members of the board of directors, and will dominate senior management. Accordingly, under FAS 141, Aurora is treated as the acquirer for accounting purposes and, accordingly reverse acquisition accounting has been applied to this business combination. As the registrant, the equity structure of Cadence remains the equity structure of the ongoing entity.

The merger will be accounted for as a reverse acquisition application of the purchase method of accounting by Cadence, with Aurora treated as the accounting acquirer. As such, the purchase price assigned to this transaction is equal to $41,546,351 determined as follows:

Fair value of Cadences’ common stock outstanding at January 1, 2005:	$	33,951,817
Fair value of Cadences’ stock options outstanding at January 1, 2005		536,210
Fair value of Cadence’s warrants outstanding at January 1, 2005		7,058,324
Total purchase price	$	41,546,351

The $33,951,816 is computed as 20,702,327 shares of Cadence multiplied by $1.64 (per share sales price of Cadence common stock as reported on the OTC Bulletin Board as of January 31, 2005).

The accompanying pro forma financial statements contain adjustments to characterize the transactions of Cadence as those of Aurora for the periods presented. Both the Cadence and Aurora pro forma statements of operations are presented for the twelve months ended September 30, 2005.

The pro forma balance sheet is presented at September 30, 2005 for Aurora and Cadence. In compiling this balance sheet, the $41,546,351 purchase price has been allocated between the following categories (1) Unproved oil and gas properties, (2) Other investments (3) Intangible assets and (3) goodwill. This pro forma balance sheet is based on management’s preliminary estimates of acquired fair values as of the date of the merger.

40

CADENCE RESOURCES CORPORATION

NOTES TO PRO FORMA FINANCIAL STATEMENTS

									Cadence
	Balances			FMV		Adjusted			Activity			Balances
Book Value of Cadence Assets	1/31/2005			Adjustments		Balances			2/1-9/30			9/30/05
Current Assets		8,600,202					8,600,202			(6,310,692	)		2,289,510
Oil & Gas Properties, Property & Equip		3,653,613			11,353,113		15,006,726			(570,018	)		14,436,708
Investments		938,955			633,521		1,572,476			(68,644	)		1,503,832
Mineral rights		197,406					197,406			-			197,406
Non Compete					3,265,000		3,265,000						3,265,000
Proprietary Business Relationship					1,340,000		1,340,000						1,340,000
Goodwill					16,277,096		16,277,096						16,277,096
							-						-
Less: Liabilities as of 9/30/05							-						-
Accounts payable and accrued expenses		(400,154	)				(400,154	)		(165,159	)		(565,313	)
Notes Payable-Long Term		(4,252,476	)				(4,252,476	)		4,252,476			-
Other Liabilities		-					-						-
Redeemable Preferred Stock		(59,925	)				(59,925	)					(59,925	)
													-
Other Adjustments:													-
Cadence activity from date of merger													-
through September 30, 2005		-								2,862,037			2,862,037
Total Purchase Price allocated		8,677,621			32,868,730		41,546,351			-			41,546,351

NOTE 2 - SUMMARY OF PRO FORMA ADJUSTMENTS

PRO FORMA ADJUSTMENTS - September 30, 2005

(a) To reclassify the working interest in properties owned by Aurora and purchased by Cadence. Additionally, reclassification of the depletion and/or amortization of the property have been completed to the proper owner.

(b) To increase the outstanding shares of Aurora on a two-for-one basis in accordance with the definitive merger agreement and to adjust par value of the revised outstanding shares of common stock of Aurora to the par value of Cadence.

(c) To eliminate the accumulated deficit of Cadence to additional paid-in capital as part of the value of the acquisition upon merger.

(d) To reflect the fair market value at January 31, 2005, the date of the definitive merger agreement, the shares outstanding in Cadence were multiplied the per share sales price as listed on the OTC Bulletin Board as of January 31, 2005 ($1.64), with the resulting increase in value allocated between oil and gas properties, other investments, goodwill and other intangible assets. Amortization has been computed in the accompanying pro forma as follows; $4,605,000 of estimated intangible assets amortized over 36 months (estimated useful life of the other intangible assets) for a total of $1,023,333 in amortization expense.

(e) To conform the oil and gas properties owned by Cadence to the full cost method as used by Aurora, the accounting acquirer. Note, the oil and gas exploration and intangible drilling expenses of Cadence under the successful efforts method have been adjusted to give pro forma effect to conform to the treatment of these expenditures under the full cost method used by Aurora. The net addition to oil and gas properties in converting from successful efforts to full cost is $724,912 and is recorded on the balance sheet as an addition to the oil and gas properties and adjustment to net deficit.

41

CADENCE RESOURCES CORPORATION

NOTES TO PRO FORMA FINANCIAL STATEMENTS

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

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

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

42

CADENCE RESOURCES CORPORATION

NOTES TO PRO FORMA FINANCIAL STATEMENTS

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

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

43

Item 2.  Description of Properties

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

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

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

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

44

Item 3.  Legal Proceedings

There are no currently threatened or pending claims against Cadence.

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

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

PART II

Item 5.  Market for Common Equity and Related Stockholder Matters

Market for Our Common Stock

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

Quarter Ended	High Bid Quotation		Low Bid Quotation
December 31, 2003	$	3.60	$	2.75
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

Equity Compensation Plan Information

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

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

45

Holders

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

Dividends

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

Recent Sales of Unregistered Equity Securities

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Overview

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

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

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

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

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

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

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

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

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

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

·    The sales prices of natural gas and crude oil.

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

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

·    The level and success of exploitation and development activity.

Results of Operation

Comparison of Fiscal Year Ended September 30, 2005

to Fiscal Year ended September 30, 2004

Revenues

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

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

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

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

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

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

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

Expenses

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

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

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

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

	YEAR ENDED SEPTEMBER 30,
	2005					2004
	2004		% of Total Expenses			2003		% of Total Expenses
Exploration and drilling	$	235,959		6.1	%	$	134,452		3.7	%
Depreciation, depletion and amortization		2,683,279		69.2	%		2,663,695		73.1	%
Oil and gas lease and operating expenses		611,143		15.8	%		565,148		15.5	%
Oil and gas production costs		178,437		4.6	%		174,836		4.8	%
Oil and gas consulting		165,000		4.3	%		105,535		2.9	%
Total Expenses from oil and gas operations	$	3,875,299		100	%	$	3,643,666		100	%

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

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

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

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

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

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Comparison of Fiscal Year Ended September 30, 2004

to Fiscal Year ended September 30, 2003

Revenues

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

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

Expenses

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

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

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

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

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

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

Capital Resources and Liquidity

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

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

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

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

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

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

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

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

Recent Accounting Pronouncements

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

Future Changes in Accounting Principles

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

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

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

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

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

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Item 7.  Financial Statements

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

Item 8. Changes in and Disagreements with Accountants.

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

Item 8A. Controls and Procedures.

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

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

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PART III

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

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

Name	Age	Position(s) with the Company
William W. Deneau	61	Director, President, Chairman of Board of 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 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 Cadence's President and Chairman of the Board of Directors since October 2005. Mr. Deneau became an employee of Aurora at the time he sold his interest in Jet/LaVanway Exploration, L.L.C. to Aurora in exchange for Aurora's stock on April 22, 1997. From April 1997 to October2005, Mr. Deneau was responsible for managing Aurora's affairs and officially became a Director of Aurora on June 25, 1997 and the President of Aurora on July 17, 1997. Since 1987, Mr. Deneau has also been the President, a Director, and the sole owner of White Pine Land Services, Inc. of Traverse City, Michigan. Prior to March 1, 1997, White Pine Land Services, Inc. was a 35-member company engaged in the business of providing real estate services to oil and gas companies. On March 1, 1997, White Pine Land Services, Inc. sold its business to a newly formed corporation, White Pine Land Company. White Pine Land Services, Inc. continues to exist for the purpose of managing its investments. William W. Deneau is the brother of Richard Deneau, one of our directors

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

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

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

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

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

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

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

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

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

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

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

Indemnification

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

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

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Board of Directors' Meetings and Committees

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

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

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

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

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

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

Nominations for Directors

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

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

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

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

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

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

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Audit Committee

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

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

Section 16(a) Beneficial Ownership Reporting Compliance

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

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

Code of Ethics

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

Item 10. Executive Compensation

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

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Summary Compensation Table

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

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

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

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

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

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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR-END

AND FISCAL YEAR-END OPTION VALUES TABLE

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

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

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

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

Compensation of Directors

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

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

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

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

Bonuses and Deferred Compensation

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

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Stock Options

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

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

Employment Contracts, Termination of Employment and Change of Control Arrangements

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

Compensation Committee Report

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

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

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

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

Item 11. Security Ownership of Certain Beneficial Owners and Management

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

65

Item 12. Certain Relationships and Related Transactions

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

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

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

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

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

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

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

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

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

66

Item 13. Exhibits

(a) Exhibits

Exhibit No.	Document Description
3.1(1)	Restated Articles of Incorporation of Cadence Resources Corporation
3.2(2)	Bylaws of Cadence Resources Corporation
4.1(1)	Articles of Amendment to the Articles of Incorporation, relating to the Class A Preferred Stock
4.2(3)	Form of Promissory Note in favor of the investors in the April 2, 2002 private placement 4.3(3) Form of Warrant issued to the investors in the April 2, 2002 private placement 4.4(4) Voting Agreement between Cadence Resources Corporation and its stockholders 5.1 Opinion of Troutman Sanders LLP, as to the validity of the Securities being registered hereunder
9.1	Voting Agreement executed in connection with the merger
10.1(1)	Form of Joint Exploration Agreement with Bridas Energy USA, Inc. dated April 30, 2003
10.2(1)	Lease Acquisition and Participation Agreement with Aurora Energy, Ltd. dated December 8, 2002
10.3(1)	Consulting Agreement with Lucius C. Geer dated August 1, 2003
10.4(1)	Agreement dated effective September 30, 2003 with Nathan A. Low, Sunrise Securities Corporation and Cadence Resources Corporation Limited Partnership
10.5(3)	Securities Purchase Agreement between Cadence Resources Corporation and the investors signatory thereto, dated April 2,2004
10.6(3)	Security Agreement between Cadence Resources Corporation and the investors signatory thereto, dated April 2, 2004
10.7(4)	Agreement and Plan Of Merger dated as of January 31, 2005 between Cadence Resources Corporation, Aurora Acquisition Corp. and Aurora Energy, Ltd.
10.84)	Development Agreement between Aurora Energy, Ltd. and Oil & Gas engineering GmbH, dated March 31, 2004
10.9(4)	Exploration Agreement between Aurora Energy, Ltd. and Samson Resources Company, dated May 14, 2004
10.10	First Amended and Restated Note Purchase Agreement between Aurora Antrim North, LLC, et. al. and TCW Asset Management Company, dated December 8, 2005
10.11(5)	Amendment No.1 to Agreement and Plan of Merger
14(6)	Code of Ethics
21.1	Subsidiaries
23.1	Consent of Ralph E. Davis Associates, Inc.
23.2	Consent of Williams & Webster, P.S.

31.1	Rule 13a-14(a) Certification of Principal Executive Officer.
31.2	Rule 13a-14(a) Certification of Principal Financial and Accounting Officer.
32.1	Section 1350 Certification of Principal Executive Officer.
32.2	Section 1350 Certification of Principal Financial and Accounting Officer.

 

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

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

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

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

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

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

67

Item 14. Principal Accountant Fees And Services

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

Audit Fee

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

Audit Related Fees

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

Tax Fees

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

All Other Fees

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

68

SIGNATURES

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

	CADENCE RESOURCES CORPORATION
Date:  December 28, 2005	By:	/s/ WILLIAM W. 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	December 28, 2005
William W. Deneau	(Principal Executive Officer)
/s/ Lorraine M. King	Chief Financial Officer	December 28, 2005
Lorraine M. King	(Principal Financial Officer)
/s/ Howard M. Crosby	Director	December 28, 2005
Howard M. Crosby
/s/ Kevin D. Stulp	Director	December 28, 2005
Kevin D. Stulp
/s/ Ronald E. Huff	Director	December 28, 2005
Ronald E. Huff
/s/ Richard Deneau	Director	December 28, 2005
Richard Deneau
/s/ Gary J. Myles	Director	December 28, 2005
Gary J. Myles
/s/ Earl V. Young	Director	December 28, 2005
Earl V. Young

69

The Board of Directors

Cadence Resources Corporation

Traverse City, Michigan

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have audited the accompanying balance sheet of Cadence Resources Corporation as of September 30, 2005, 2004 and 2003, and the related statements of operations, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cadence Resources Corporation as of September 30, 2005, 2004 and 2003, and the results of its operations, stockholders equity and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Williams & Webster, P.S. 

Williams & Webster, P.S.

Certified Public Accountants

Spokane, Washington

December 27, 2005

F-1

CADENCE RESOURCES CORPORATION

BALANCE SHEETS

	September 30,
	2005			2004			2003
ASSETS
CURRENT ASSETS
Cash	$	1,694,838		$	1,922,993		$	3,619,345
Oil & gas revenue receivable		491,324			335,407			84,575
Receivable from working interest owners		–			–			12,873
Notes receivable		20,720			8,720			3,720
Prepaid expenses		82,203			39,410			5,925
Other current assets		425			425			425
TOTAL CURRENT ASSETS		2,289,510			2,306,955			3,726,863
OIL AND GAS PROPERTIES, USING
SUCCESSFUL EFFORTS ACCOUNTING
Proved properties		6,865,384			5,731,108			590,747
Unproved properties		661,672			505,501			833,836
Wells and related equipment and facilities		1,090,263			855,562			202,886
Support equipment and facilities		585,602			506,427			151,963
Prepaid oil and gas leases		473,056			456,219			395,973
Less accumulated depreciation, depletion, amortization and impairment		(6,594,549	)		(3,911,939	)		(61,611	)
TOTAL OIL AND GAS PROPERTIES		3,081,428			4,142,878			2,113,794
PROPERTY AND EQUIPMENT
Furniture and equipment		4,785			4,785			1,660
Less accumulated depreciation		(2,618	)		(1,949	)		(1,451	)
TOTAL PROPERTY AND EQUIPMENT		2,167			2,836			209
OTHER ASSETS
Investments		870,311			238,088			394,454
Mineral properties available for sale		197,406			197,406			246,757
TOTAL OTHER ASSETS		1,067,717			435,494			641,211
TOTAL ASSETS	$	6,440,822		$	6,888,163		$	6,482,077

The accompanying notes are an integral part of these financial statements

F-2

CADENCE RESOURCES CORPORATION

BALANCE SHEETS

	September 30,
	2005			2004			2003
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable	$	446,166		$	358,588		$	584,866
Revenue distribution payable		23,410			32,387			68,929
Payable to related party		–			300,000			550,000
Accrued compensation		80,000			–			94,920
Accrued interest - related party		–			3,548			15,752
Accrued Dividends		15,737			–			–
Interest payable - secured notes		–			1,233			–
Notes payable - related party		–			-			460,000
TOTAL CURRENT LIABILITIES		565,313			695,756			1,774,467
LONG-TERM DEBT
Secured notes, net of discount		–			5,071,147			–
COMMITMENTS AND CONTINGENCIES		–			–			–
REDEEMABLE PREFERRED STOCK		59,925			59,925			59,925
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value; 100,000,000
shares authorized,20,991,327, 12,892,327,
and 12,512,827 shares issued and outstanding,
respectively		209,113			128,923			125,128
Additional paid-in capital		24,316,680			18,995,458			18,343,422
Stock options		2,128,330			1,642,614			1,210,704
Stock warrants		4,473,112			794,512			51,375
Accumulated deficit		(24,797,883	)		(20,035,605	)		(14,863,687	)
Accumulated other comprehensive loss		(513,768	)		(464,567	)		(219,257	)
TOTAL STOCKHOLDERS' EQUITY		5,815,584			1,061,335			4,647,685
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY	$	6,440,882		$	6,888,163		$	6,482,077

The accompanying notes are an integral part of these financial statements

F-3

CADENCE RESOURCES CORPORATION

STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

	Years Ended September 30,
	2005			2004			2003
REVENUES
Oil and gas sales	$	2,413,046		$	2,541,447		$	337,355
Sale of drilling and production rights		100,000			–			50,000
Total Revenues		2,513,046			2,541,447			387,355
OPERATING AND ADMINISTRATIVE EXPENSES
Depreciation, depletion and amortization		2,683,279			2,663,695			57,310
Officers' and directors' compensation		1,105,328			725,485			528,727
Consulting		104,595			319,338			531,137
Oil and gas lease and operating expenses		612,624			565,148			321,538
Oil and gas consulting		165,000			105,535			60,000
Exploration and drilling		235,959			134,452			109,968
Oil and gas production costs		178,437			174,836			34,577
Other general and administrative		996,128			1,506,446			386,892
Total Expenses		6,081,350			6,194,935			2,030,149
LOSS FROM OPERATIONS		(3,568,304	)		(3,653,488	)		(1,642,794	)
OTHER INCOME (EXPENSE)
Interest income		10,173			18,874			136
Interest expense and loan fees		(1,138,987	)		(302,955	)		(227,978	)
Partnership income (loss)		–			–			(15,200	)
Gain (loss) on debt forgiveness		–			–			(4,699	)
Gain (loss) on repayment of debt					–			–
Other income		846			11,172			–
Loss on sale of investment		(66,006	)		(9,156	)		–
Loss on disposition and impairment of assets		–			(1,236,365	)		(67,020	)
Total Other Income (Expense)		(1,193,974	)		(1,518,430	)		(314,761	)
LOSS BEFORE TAXES		(4,762,278	)		(5,171,918	)		(1,957,555	)
INCOME TAXES BENEFIT		–			–			–
NET LOSS		(4,762,278	)		(5,171,918	)		(1,957,555	)
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gain (loss) in market value of
investments		(49,201	)		(245,311	)		29,297
COMPREHENSIVE LOSS	$	(4,811,479	)	$	(5,417,229	)	$	(1,928,258	)
LOSS PER COMMON SHARE BASIC AND DILUTED:
NET LOSS PER COMMON SHARE	$	(0.26	)	$	(0.41	)	$	(0.21	)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING,
BASIC AND DILUTED		18,279,285			12,715,619			9,348,374

The accompanying notes are an integral part of these financial statements

F-4

CADENCE RESOURCES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
																	Accumulated
	Common Stock				Additional												Other			Total
	Number				Paid-in			Stock			Stock			Accumulated			Comprehensive			Stockholders'
	of Shares		Amount		Capital			Options			Warrants			Deficit			Loss			Equity
Balance
October 1, 2002		6,866,210	$	68,662	$	13,291,965		$	626,790		$	233,334		$	(12,906,132	)	$	(248,554	)	$	1,066,065
Shares issued for cash with
warrants
attached at an average of $0.52
per unit		212,500		2,125		56,500			-			51,375			-			-			110,000
Shares issued to officers, directors
and others for services at $0.78
to $1.80		496,500		4,965		535,710			-			-			-			-			540,675
Shares issued for loan
consideration
at $1.08 per share		220,000		2,200		204,800			-			-			-			-			207,000
Shares issued for exercise of
options
at $0.75 per share		100,000		1,000		142,100			(68,100	)		-			-			-			75,000
Shares issued from exercise of
warrants		1,956,984		19,569		213,765			-			(233,334	)		-			-			-
Shares issued for cash at $0.80 to $2.50 per share, net of financing
fee of $347,850		2,525,183		25,252		4,216,347			-			-			-			-			4,241,599
Options issued for financing		-		-		(429,671	)		429,671			-			-			-			-
Shares issued for related party
loan
fee at $1.00 per share		120,000		1,200		118,800			-			-			-			-			120,000
Conversion of shares of
Celebration
for shares of Cadence common
stock		14,250		143		(143	)		-			-			-			-			-
Options issued to consultants for
services		-		-		-			222,343			-			-			-			222,343
Miscellaneous adjustment		1,200		12		(12	)		-			-			-			-			-
Dividends paid on preferred stock		-		-		(6,739	)		-			-			-			-			(6,739	)
Net loss for the year ended
September 30, 2003		-		-		-			-			-			(1,957,555	)		-			(1,957,555	)
Unrealized gain on market value
of
investments (unaudited)		-		-		-			-			-			-			29,297			29,297
Balance, September 30, 2003		12,512,827	$	125,128	$	18,343,422		$	1,210,704		$	51,375		$	(14,863,687	)	$	(219,257	)	$	4,647,685

F-5

CADENCE RESOURCES CORPORATION

STATEMENTS OF STOCKHOLDERS' EQUITY

																	Accumulated
	Common Stock				Additional												Other			Total
	Number				Paid-in			Stock			Stock			Accumulated			Comprehensive			Stockholders'
	of Shares		Amount		Capital			Options			Warrants			Deficit			Loss			Equity
Balance
September 30, 2003		12,512,827	$	125,128	$	18,343,422		$	1,210,704		$	51,375		$	(14,863,687	)	$	(219,257	)	$	4,647,685
Issuance of common stock for cash
at $2.50 per share		110,000		1,100		273,900			–			–			–			–			275,000
Shares issued for services at
$0.88 to $2.50 per share		99,500		995		143,960			–			–			–			–			144,955
Shares issued for officer and
director fees at $0.76 to $2.23
per share		120,000		1,200		183,200			–			–			–			–			184,400
Share issued for exercise of
warrants @ $1.35 per share		10,000		100		15,500			–			(2,100	)		–			–			13,500
Shares issued for financing expense
at $0.76 per share		15,000		150		11,475			–			–			–			–			11,625
Shares issued for repayment of
related party loan at $1.00 per
share		25,000		250		24,750			–			–			–			–			25,000
Options issued for financing fees									71,910												71,910
Options issued to officers and
directors for services		–		–		–			360,000												360,000
Dividends paid		–		–		(749	)		–			–			–			–			(749	)
Deferred financing cost		–		–		–			–			745,237			–			–			745,237
Net loss for the year ended
September 30, 2004		–		–		–			–			–			(5,171,918	)		–			(5,171,918	)
Unrealized loss on market value
of investments		–		–		–			–			–			–			(245,310	)		(245,310	)
Balance September 30, 2004		12,892,327		128,923		18,995,458			1,642,614			794,512			(20,035,605	)		(464,567	)		1,061,335
Issuance of common stock and warrants for
cash at $1.25 per unit		7,010,000		70,100		4,300,275			–			3,415,875			–			–			7,786,250
Issuance of common stock and warrants for
payment of note payable at $1.25 per unit,
less expenses of offering of $976,250		800,000		8,000		722,000			–			270,000			–			–			1,000,000
Common stock issued to officers
and directors at an average of $1.47
per share		160,500		1,605		233,985			–			–			–			–			235,590
Shares issued from exercise of
warrants		27,500		275		44,125			–			(7,275	)		–			–			37,125
Shares issued from cashless exercise of options		21,000		210		36,574			(36,784	)		–			–			–			–
Options issued to officers and
directors for services		–		–		–			522,500			–			–			–			522,500
Accrued Dividends		–		–		(15,737	)		–			–			–			–			(15,737	)
Net loss for the year ended
September 30, 2005		–		–		–			–			–			(4,762,278	)		–			(4,762,278	)
Unrealized loss on market value
of investments		–		–		–			–			–			–			(49,201	)		(49,201	)
Balance September 30, 2005		20,911,327	$	209,113	$	24,316,680		$	2,128,330		$	4,473,112		$	(24,797,883	)	$	(513,768	)	$	5,815,584

The accompanying notes are an integral part of these financial statements

F-6

CADENCE RESOURCES CORPORATION

STATEMENTS OF CASH FLOWS

	Year Ended
	September 30,
	2005			2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(4,762,278	)	$	(5,171,918	)	$	(1,957,555	)
Adjustments to reconcile net loss to net cash
used by operating activities:
Loss (gain) on sale of investments		66,006			9,156			67,020
Impairment of long-lived assets		–			1,236,365			–
Partnership loss		–			–			15,200
Gain (loss) on debt forgiveness		–			–			4,699
Depreciation, depletion and amortization		2,683,279			2,663,695			57,310
Issuance of common stock for services		235,590			144,955			540,675
Issuance of common stock for
expenses		–			196,025			–
Amortization of deferred financing fees		928,853			279,919			-
Issuance of common stock for loan
repayment		–			25,000			-
Issuance of common stock for loan
consideration		–			–			327,000
Issuance of stock options for
services		522,500			360,000			222,343
Issuance of stock options for
financing fees		–			71,910			–
Investment given for services		–			–			14,700
Changes in assets and liabilities:
Oil & gas revenue receivable		(155,917	)		(250,832	)		(58,452	)
Receivable from working interest owners		–			12,873			3,164
Notes receivable		–			(5,000	)		6,058
Prepaid expenses		(42,793	)		(33,485	)		21,575
Deposit		–			–			6
Prepaid mineral leases		(16,837	)		–			(218,796	)
Accounts payable		87,578			(226,278	)		1,082
Revenue distribution payable		(8,977	)		(36,542	)		54,094
Deferred working interest		–			–			(22,184	)
Accrued expenses		95,737			(94,920	)		28,659
Interest payable		(3,548	)		(12,204	)		15,752
Interest payable-secured notes		(1,233	)		1,233			–
Payable to related parties		-			(550,000	)		(2,500	)
Net cash provided (used) by operating activities		(372,040	)		(1,380,048	)		(880,150	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments		(749,040	)		(112,360	)		(32,795	)
Purchase and development of proved and
unproved properties		(1,290,447	)		(4,542,760	)		(629,383	)
Purchase of fixed assets		(387,728	)		(981,660	)		(182,587	)
Sale of investments		47,725			14,420			16,614
Net cash provided (used) by investing activities		(2,379,490	)		(5,622,360	)		(828,151	)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock for cash		7,823,375			288,500			4,728,324
Issuance of redeemable preferred stock		–			–			59,925
Issuance of warrants for cash		–			–			46,125
Payments of preferred stock dividends		–			(749	)		(6,739	)
Proceeds from secured notes payable		–			5,920,000			–
Payments of note payable to related party		(300,000	)		–			–
Proceeds from notes payable and loans payable		–			115,000			600,000
Payments of notes payable		(5,000,000	)		(1,016,695	)		(140,000	)
Net cash provided by financing activities		2,523,375			5,306,056			5,287,635
Net increase (decrease) in cash	$	(228,155	)	$	(1,696,352	)	$	3,579,334

The accompanying notes are an integral part of these financial statements

F-7

CADENCE RESOURCES CORPORATION

STATEMENTS OF CASH FLOWS

	Year Ended
	September 30,
	2005			2004			2003
Net increase (decrease) in cash (balance forward)	$	(228,155	)	$	(1,696,352	)	$	3,579,334
Cash, beginning of period		1,922,993			3,619,345			40,011
Cash, end of period	$	1,694,838		$	1,922,993		$	3,619,345
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Income taxes paid	$	–		$	–		$	–
Interest paid	$	–		$	–		$	–
NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Common stock issued for services rendered,
accrued compensation and prepaid expenses	$	235,590		$	144,955		$	540,675
Common stock issued for exchange of debt	$	1,000,000		$	25,000		$	–
Common stock issued in exchange for investments	$	–		$	–		$	–
Common stock issued for reimbursement
of expenses paid	$	–		$	196,025		$	–
Common stock issued for loan consideration	$	–		$	–		$	327,000
Investment given for related party receivable	$	–		$	–		$	–
Investment given for consulting services	$	–		$	–		$	14,700
Stock options issued for services	$	522,500		$	360,000		$	222,343
Stock options issued for financing fees	$	–		$	71,910		$	–
Exchange of unproved property leases for
interest in limited partnership	$	–		$	–		$	–
Stock issued for exercise of warrants	$	37,125		$	–		$	233,334
Issuance of accounts payable to related party
for financing fees	$	–		$	300,000		$	–
Conversion of investment to note receivable	$	12,000		$	–		$	–

The accompanying notes are an integral part of these financial statements

F-8

CADENCE RESOURCES CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

September 30, 2005

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

Cadence Resources Corporation (formerly Royal Silver Mines, Inc.) hereinafter (“Cadence” or “the Company”) was incorporated in April 1969 under the laws of the State of Utah primarily for the purpose of acquiring and developing mineral properties. The Company changed its name from Royal Silver Mines, Inc. to Cadence Resources Corporation on May 2, 2001. On October 31, 2005, the Company acquired Aurora Energy, Ltd (“Aurora) in a transaction that will be accounted for as a reverse merger with Aurora as the acquiring party for accounting purposes (the “Aurora Acquisition”).

The Company has elected a September 30 fiscal year-end. Subsequent to the closing of the Aurora Acquisition, the Company’s board of directors has elected to change the fiscal year-end of the Company to December 31, in order to coincide with the fiscal year-end of Aurora.

On July 1, 2001, Cadence developed a plan for acquisition, exploration and development of oil and gas properties and accordingly began a new exploration stage as an energy project development company. Prior to this, Cadence conducted its business as a “junior” mineral resource company, meaning that it intended to receive income from property sales or joint ventures of its mineral projects with larger companies. The Company continues to hold several mineral properties, which are described in Note 3.

The costs of prepaid oil and gas leases ($473,056 and $456,219, respectively) included in the accompanying balance sheets as of September 30, 2005 and 2004 are principally related to natural gas properties. The Company has not determined whether the properties located in New Mexico contain economically recoverable gas reserves. The ultimate realization of the Company’s investment in oil and gas properties in these locations is dependent upon finding and developing economically recoverable reserves, the ability of the Company to obtain financing or make other arrangements for development and upon future profitable production. The ultimate realization of the Company’s investment in these oil and gas properties cannot be determined at this time and, accordingly, no provision for any asset impairment that may result in the event the Company is not successful in developing these properties, has been made in the accompanying financial statements. The Company has completed reserve studies on each of its properties located, except for those located in New Mexico.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of significant accounting policies of Cadence Resources Corporation is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.

Accounting Method

The Company’s financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America.

Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

Derivative Instruments

The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB No. 133”, and SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities” and SFAS No. 149, “Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities.” These standards establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. They require that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value.

F-9

CADENCE RESOURCES CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

September 30, 2005

If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change.

Historically, the Company has not entered into derivatives contracts to hedge existing risks or for speculative purposes.

At September 30, 2005 and for the periods covered in these statements, the Company has not engaged in any transactions that would be considered derivative instruments or hedging activities.

Environmental Remediation and Compliance

Expenditures for ongoing compliance with environmental regulations that relate to current operations are expensed or capitalized as appropriate. Expenditures resulting from the remediation of existing conditions caused by past operations that do not contribute to future revenue generations are expensed. Liabilities are recognized when environmental assessments indicate that remediation efforts are probable and the costs can be reasonably estimated.

Estimates of such liabilities are based upon currently available facts, existing technology and presently enacted laws and regulations taking into consideration the likely effects of inflation and other societal and economic factors, and include estimates of associated legal costs. These amounts also reflect prior experience in remediating contaminated sites, other companies’ clean-up experience and data released by The Environmental Protection Agency or other organizations. Such estimates are by their nature imprecise and can be expected to be revised over time because of changes in government regulations, operations, technology and inflation. Recoveries are evaluated separately from the liability and, when recovery is assured, the Company records and reports an asset separately from the associated liability. At September 30, 2005, the Company had no accrued liabilities for compliance with environmental regulations.

Estimates

The process of preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues, and expenses. Such estimates primarily relate to the valuation assigned to options and warrants utilizing the Black-Scholes calculation, depletion expense utilizing oil and gas reserve studies and unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts.

Fair Value of Financial Instruments

The carrying amounts for cash, receivables, deposits, payables, and advances from related parties approximate their fair value.

Fair Value Standards

The Company has adopted the fair value accounting rules to record all transactions in equity instruments for goods or services.

F-10

Impaired Asset Policy

The Company adopted Statement of Financial Accounting Standards No. 144 titled “Accounting for Impairment of Disposal of Long-Lived Assets.” In complying with this standard, the Company reviews its long-lived assets quarterly to determine if any events or changes in circumstances have transpired which indicate that the carrying value of its assets may not be recoverable. The Company determines impairment by comparing the undiscounted future cash flows estimated to be generated by its assets to their respective carrying amount whenever events or changes in circumstances indicate that an asset may not be recoverable. Due to significant write-downs and write-offs taken in 2004 and in prior years, the Company does not believe any further adjustments are needed to the carrying value of its assets at September 30, 2005. See Note 3.

Investments

Investments, principally consisting of equity securities of private and small public companies, are stated at current market value.

Loss Per Share

Loss per share was computed by dividing the net loss by the weighted average number of shares outstanding during the year. The weighted average number of shares was calculated by taking the number of shares outstanding and weighting them by the amount of time they were outstanding. Outstanding options and warrants were not included in the computation of diluted loss per share because their inclusion would be antidilutive.

Mineral Properties

Costs of acquiring, exploring and developing mineral properties are capitalized by project area. Costs to maintain the mineral rights and leases are expensed as incurred. When a property reaches the production stage, the related capitalized costs will be amortized, using the units of production method on the basis of periodic estimates of ore reserves. At September 30, 2005, 2004, and 2003 the cost of the Company’s mineral properties are included in other assets in the accompanying financial statements, as the Company has changed its focus from minerals exploration to oil and gas.

Mineral properties are periodically assessed for impairment of value and any losses are charged to operations at the time of impairment.

Should a property be abandoned, its capitalized costs are charged to operations. The Company charges to operations the allocable portion of capitalized costs attributable to properties sold. Capitalized costs are allocated to properties sold based on the proportion of claims sold to the claims remaining within the project area.

Oil and Gas Properties

The Company uses the successful efforts method of accounting for oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells that find proved reserves, and to drill and equip development wells are capitalized. Costs to drill exploratory wells that do not find proved reserves, geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed.

Unproved oil and gas properties that are individually significant are periodically assessed for impairment of value, and a loss is recognized at the time of impairment by providing an impairment allowance. Other unproved properties are amortized based on the Company’s experience of successful drilling and average holding period. Capitalized costs of producing oil and gas properties, after considering estimated dismantlement and abandonment costs and estimated salvage values, are depreciated and depleted by the unit-of-production method. Support equipment and other property and equipment are depreciated over their estimated useful lives.

F-11

CADENCE RESOURCES CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

September 30, 2005

On the sale or retirement of a complete unit of a proven property, the cost and related accumulated depreciation, depletion, and amortization are eliminated from the property accounts, and the resultant gain or loss is recognized. On the retirement or sale of a partial unit of proven property, the cost is charged to accumulated depreciation, depletion, and amortization with a resulting gain or loss recognized in income.

On the sale of an entire interest in an unproved property for cash or cash equivalent, gain or loss on the sale is recognized, taking into consideration the amount of any unrecorded impairment if the property had been assessed individually. If a partial interest in an unproved property is sold, the amount received is treated as a reduction of the cost of the interest retained.

Principles of Consolidation

The financial statements include those of the Cadence Resources Corporation and Celebration Mining Company. All significant inter-company accounts and transactions have been eliminated. The financial statements are not considered consolidated statements since Cadence Resources Corporation was the successor by merger to Celebration Mining Company.

Provision For Taxes

Income taxes are provided based upon the liability method of accounting pursuant to Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes” (herein after "SFAS No. 109"). Under this approach, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end. A valuation allowance is recorded against deferred tax assets if management does not believe the Company has met the “more likely than not” standard imposed by SFAS No. 109 to allow recognition of such an asset.

Recent Accounting Pronouncements

In May 2005, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, “Accounting Changes and Error Corrections” (hereinafter "SFAS No. 154")  which replaces Accounting Principles Board Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements -- An Amendment of APB Opinion No. 28.” SFAS No. 154 provides guidance on accounting for and reporting changes in accounting principle and error corrections. SFAS No. 154 requires that changes in accounting principle be applied retrospectively to prior period financial statements and is effective for fiscal years beginning after December 15, 2005. The Company does not expect SFAS No. 154 to have a material impact on our consolidated financial position, results of operations, or cash flows.

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 153. This statement addresses the measurement of exchanges of nonmonetary assets. The guidance in APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that opinion, however, included certain exceptions to that principle. This statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This statement is effective for financial statements for fiscal years beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges incurred during fiscal years beginning after the date of this statement is issued. Management believes the adoption of this statement will have no impact on the financial statements of the Company.

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 152, which amends FASB statement No. 66, “Accounting for Sales of Real Estate,” to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, “Accounting for Real Estate Time-Sharing Transactions.” This statement also amends FASB Statement No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects,” to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2. This statement is effective for financial statements for fiscal years beginning after June 15, 2005. Management believes the adoption of this statement will have no impact on the financial statements of the Company.

F-12

CADENCE RESOURCES CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

September 30, 2005

In December 2004, the Financial Accounting Standards Board issued a revision to Statement of Financial Accounting Standards No. 123R, “Accounting for Stock Based Compensation.” This satement supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance. This statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. This statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. This statement does not change the accounting guidance for share based payment transactions with parties other than employees provided in Statement of Financial Accounting Standards No. 123. This statement does not address the accounting for employee share ownership plans, which are subject to AICPA Statement of Position 93-6, “Employers’ Accounting for Employee Stock Ownership Plans.” The Company believes adoption of this statement will have an immaterial effect on the financial statements of the Company, as the Company currently accounts for stock based compensation under SFAS 123.

In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151, “Inventory Costs— an amendment of ARB No. 43, Chapter 4.” This statement amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that “. . . under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges. . . .” This statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Management does not believe the adoption of this statement will have any immediate material impact on the Company as the Company maintains no inventory.

Reclassifications

Certain amounts from prior periods have been reclassified to conform to the current period presentation. These reclassifications have resulted in no changes to the Company’s accumulated deficit and net losses presented.

Revenue Recognition

Cadence began producing revenues during July 2002. Oil and gas revenues are recorded using the sales method. Under this method, the Company recognizes revenues based on actual volumes of oil and gas sold to purchasers.

NOTE 3 - MINERAL PROPERTIES

Over the last three fiscal years, the Company’s mineral properties have for the most part been disposed of or written off as the Company’s focus and direction has shifted to oil and gas production.

F-13

CADENCE RESOURCES CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

September 30, 2005

Utah Property

The Company has elected to retain its 25% undivided interest in the Vipont Mine located in northwest Utah. This interest was carried on the Company’s books at $246,757 at September 30, 2003 and 2002. During the year ended September 30, 2004, the Company elected to reduce the interest’s carrying value to $197,406 in order to better reflect its market value. This asset is included in “other assets” on the Company’s balance sheet.

Mineral Properties in North Idaho

At September 30, 2005, the Company, directly and through its subsidiary, Celebration Mining Company, held unpatented mining claims in the Coeur d’Alene Mining District in distinct groups called the South Galena Group, Moe Group, Rock Creek Group and Palisades Group. The Company has undertaken only minimal exploration and development work on these properties, such as general geological reconnaissance and claim-staking activities. All of these claims have been written off as permanently impaired.

During fiscal 2005, the Company entered into a mineral lease with Gold Creek Mines, Inc. on the Gold Creek claims consisting of 27 patented and 5 unpatented mining claims. The lease is for an initial term of twenty years and so long thereafter as minerals are produced from the property. The Company is obligated to spend $50,000 during the first two years of the lease on mineral exploration activities. Additionally, during the first two years of the lease, the Company is obligated to pay advance royalty payments of $750 per month, increasing to $1,000 per month during the second two year period, and $1,500 per month thereafter. At the inception of the lease, the Company made a one time advance royalty payment of $53,000 to the lessor.

Other Mineral Property Information

Celebration Mining Company (“Celebration”), a wholly owned subsidiary of Cadence, was incorporated for the purpose of identifying, acquiring, exploring and developing mining properties. Celebration was organized on February 17, 1994 as a Washington corporation. Celebration has not yet realized any revenues from its operations.

On August 8, 1995, Cadence and Celebration completed an agreement and plan of reorganization whereby the Company issued 207,188 shares of its common stock and 72,750 warrants in exchange for all of the outstanding common stock of Celebration. Immediately prior to the agreement and plan of reorganization, the Company had 118,773 common shares issued and outstanding.

The acquisition was accounted for as a purchase by Celebration of Cadence, because the shareholders of Celebration controlled the Company after the acquisition. Therefore, Celebration is treated as the acquiring entity. There was no adjustment to the carrying value of the assets or liabilities of Cadence in the exchange as the market value approximated the net carrying value. Cadence is the acquiring entity for legal purposes and Celebration is the surviving entity for accounting purposes.

As a result of the Company’s entering a new exploration stage on July 1, 2001, the Company elected to dispose of its mineral properties and has accordingly reclassified those remaining properties, which total $197,406 at September 30, 2005, as other assets. The Company has not determined whether these mineral exploration properties contain ore reserves that are economically recoverable, and is in the process of disposing of these properties. The ultimate realization of the Company’s investment in these properties cannot be determined at this time and, accordingly, no provision for any asset impairment that may result in the event the Company is not successful in selling these properties has been made in the accompanying financial statements.

F-14

CADENCE RESOURCES CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

September 30, 2005

NOTE 4 - PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Major additions and improvements are capitalized. Minor replacements, maintenance and repairs that do not increase the useful life of the assets are expensed as incurred. Depreciation of property and equipment is determined using the straight-line method over the expected useful lives of the assets of five to ten years. Depreciation, depletion and amortization expense for the years ended September 30, 2005, 2004, and 2003 was $2,683,279, $2,663,695 and $57,310, respectively.

NOTE 5 - INVESTMENTS

The Company’s investment securities are classified as available for sale securities which are recorded at fair value on the balance sheet as investments. The change in fair value during the period is excluded from earnings and recorded net of tax as a component of other comprehensive income. The Company has no investments which are classified as trading securities.

At September 30, 2005, 2004, and 2003, the market values of stock investments were as follows:

	2005		2004		2003
Elite Logistics, Inc.	$	204	$	204	$	656
Ashington Mining Company		–		5,709		5,709
Enerphaze Corporation		261		655		982
Integrated Pharmaceuticals, Inc.		10,520		27,984		9,406
Metalline Mining Company		–		1,605		925
Nevada-Comstock (formerly Caledonia Silver-Lead Mines, Inc.)		–		12,000		–
Rigid Airship Tech		–		310		310
Trend Mining Company		17,923		27,083		24,483
Western Goldfields, Inc.		16,053		102,148		351,373
TN Oil Co		65,000		50,000		–
White Mtn Titanium		7,350		9,940		–
Aurora Energy		750,000		–		–
Abot Mining		3,000		–		–
Other investments		–		450		610
Total	$	870,311	$	238,088	$	394,454

The carrying value of these shares is reevaluated at each reporting period and adjustments, if appropriate, are made to the carrying value of these securities. Of all the aforementioned investments owned by the Company at September 30, 2005, only Trend Mining Company, Abot Mining, Metalline Mining Company, Western Goldfields, Inc., White Mtn Titanium, and Integrated Pharmaceuticals are public companies with a trading market.

Other information regarding the Company’s investments follows:

Enerphaze Corporation

In October 2001, the Company received 8,000 shares of Enerphaze Corporation common stock in payment of a $15,000 note receivable. In January and February 2002, the Company received 65,000 shares of Enerphaze Corporation common stock in exchange for 400,000 shares of the Company’s common stock. No gain or loss was recognized on these transactions.

F-15

CADENCE RESOURCES CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

September 30, 2005

Nevada-Comstock Mining Company (formerly Caledonia Silver-Lead Mines, Inc.)

The Company on October 31, 2001 received 3,501,980 shares of the $0.10 par value common stock of Caledonia Silver-Lead Mines, Inc. (an affiliated company) in exchange for its Kil Group

and West Mullan Group claims. The stock received was recorded at its par value of $350,198 which, in the opinion of management, approximates its fair value. At September 30, 2003, this investment was written off to reflect the mining company’s dormancy. In the year ended September 30, 2004, the Company’s investment in the mining company increased to $12,000 as funds were advanced to cover annual filing fees on patented mining claims. During the year ended September 30, 2005, this investment was converted to a note receivable, to more accurately reflect the actual character of the payment of the filing fees.

TN Oil Company

In August 2004, the Company acquired a 25% equity ownership in TN Oil Company, which owns oil leases in central and north central Tennessee. Due to additional investments by outside parties, the ownership interest in the TN Oil Company has been reduced to 14% at September 30, 2005.

Western Goldfields, Inc.

In 2002, the Company exchanged fully depreciated mining equipment for shares of a privately held business, Calumet Mining Company, which was eventually acquired by Western Goldfields, Inc. Upon completion of the acquisition, the Company received 160,000 shares of Western’s common stock. During 2003, the Company acquired an additional 21,200 shares of Western stock for $24,730. At September 30, 2005, the fair market value of the Company’s holdings in Western was $16,053.

NOTE 6 - COMMON STOCK

During the year ended September 30, 2005, the Company issued 160,500 shares of its common stock to officers and directors for services valued at $235,590. Additionally, the Company issued 800,000 units consisting of stock and warrants in payment of loans of $1,000,000, and 7,010,000 units consisting of stock and warrants in a private placement for net cash proceeds of $7,786,250. The Company paid a finder’s fee to a related party in the amount of $976,250, for assistance in this private placement. The Company also had 27,500 previously issued warrants exercised at $1.35 per share and issued 21,000 shares of its common stock upon a cashless exercise of warrants.

During the year ended September 30, 2004, the Company issued 219,500 shares of its common stock to officers, directors and consultants for services valued at $329,355, 25,000 shares in repayment of a related party loan of $25,000, 15,000 shares for financing expense valued at $11,625, 110,000 shares for cash proceeds of $275,000. Warrants previously issued were exercised for 10,000 shares at $1.35 per share.

During the year ended September 30, 2003, the Company sold 212,500 units to investors at prices ranging from $0.50 to $0.80 per unit in a private placement. Each unit consists of one share of common stock and one warrant exercisable at $1.35 per common share for three years. Sales of these units generated cash proceeds of $110,000. Warrants previously issued (2,320,175) were exercised for 1,956,984 shares of common stock in “cashless” redemptions. (See Note 9.) During this same period the Company sold 2,625,183 shares of its common stock for $4,316,599 net of expenses of $347,850. The Company also issued 496,500 shares of its common stock to officers, directors and consultants for services valued at $540,675 and 220,000 shares for loan consideration valued at $207,000. In addition, the Company issued to a related party an additional 120,000 shares valued at $120,000 as an inducement for a loan. The value of this inducement was used to reduce the payable to related party.

F-16

CADENCE RESOURCES CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

September 30, 2005

NOTE 7 - REDEEMABLE PREFERRED STOCK

On April 23, 2001, the Company’s board of directors authorized 20,000,000 shares of preferred stock with a par value of $0.01 per share and rights and preferences to be determined. No shares were issued and outstanding as of September 30, 2002. During the year ended September 30, 2003, the Company issued 34,950 shares of its Class A preferred stock to investors at prices ranging from $1.50 to $2.00 per share for aggregate proceeds of $59,925. The shares are convertible to common stock at a price of $1.50 to $2.00 per share under certain terms and conditions. At September 30, 2003, the shares carried a preferred dividend of 15% per annum. During the year ended September 30, 2004, the dividend feature was temporarily suspended because certain conditions, which required the payment of dividends, were considered satisfied. The Class A shares mature seven years from the date of issuance. At maturity, the Class A shares will be redeemed for cash or common stock at Cadence’s option in an amount equal to the amount paid by the investors for the shares plus any accrued and unpaid dividends. If shares of common stock are to be issued at maturity, the conversion price shall be determined by the average closing bid price for the 20 trading days prior to the maturity date.

At September 30, 2005,  the Company owed $15,737 of accrued dividends to preferred shareholders. There were no accrued dividends outstanding at September 30, 2004 and 2003.

NOTE 8 - COMMON STOCK OPTION AND AWARD PLAN

In January 1992, the shareholders of Cadence approved a 1992 Stock Option and Stock Award Plan under which up to ten percent of the issued and outstanding shares of the Company’s common stock could be awarded based on merit or work performed. As of September 30, 2005, the Company had awarded 638 shares of common stock under the Plan.

The Company has a stock-based compensation plan whereby the Company’s board of directors may grant common stock to its employees and directors. Over the years, a total of 72,750 options have been granted under the plan. These options have been forfeited and none have been exercised through the year ending September 30, 2005. The old existing options are attributed to the merger of Celebration Mining Company with Royal in August 1995.

The Company’s board of directors has made option awards to select officers, directors, consultants and shareholder/investors. These common stock options were not awarded pursuant to a qualified plan and carry various terms and conditions. The Company granted a total of 750,000 common stock options at an average exercise price of $1.08 per share during the year ended September 30, 2002 and granted 287,140 common stock options at an average exercise price of $2.23 during the year ended September 30, 2003.

During the year ended September 30, 2005, the Company granted 250,000 options to officers and directors with an exercise price of $1.42. These options were granted as compensation  to said officers and directors.

During the year ended September 30, 2004, the Company issued 400,000 stock options to two directors and one officer with an exercise price of $3.73. These options were granted upon the acceptance by the individual of the position of officer and/or director and the approval of the Company’s qualified stock option plan at its April 2004 annual shareholders meeting. The Company also granted during the year ended September 30, 2004 an option to purchase 76,500 shares of stock to a shareholder valued at $71,910 as a fee for his services in relation to finding investors for the senior secured notes. See Note 9 and Note 12.

All options granted were exercisable immediately. The Company’s board of directors has reserved the right to cancel these awards for non-performance or other reasons. Further, in accordance with the terms of the stock option plan, under most circumstances, officer and director options must be exercised within 90 days of the departure of an officer or director from the Company. As a result, 250,000 of the options granted with an exercise price of $3.73 expired in the year ended September 30, 2005

The following assumptions were made in estimating fair value during the year ended September 30, 2005: risk free interest rate of 4%, volatility of 41%, expected life of 2.33 years and no expected dividends. The value of these options, in the aggregate amount of $522,500 is included in the Company’s statement of operations for 2005. The following assumptions were made in estimating fair value during the year ended September 30, 2004: risk free interest rate of 4%, volatility of 39%, expected life of three years and no expected dividends. The value of these options, in the aggregate amount of $431,910, was included in the Company’s statement of operations for 2004. The following assumptions were made in estimating fair value during the year ended September 30, 2003: risk-free interest rate of 3% to 4%, volatility of 106% to 337%, expected life of 4 to 5 years and no expected dividends. The value of these options in the amount of $222,343 was included in the Company’s statement of operations for 2003. The value of options issued in 2003 for financing fees in the amount of $429,671 was deducted against additional paid-in capital, as a cost of selling common stock.

F-17

CADENCE RESOURCES CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

September 30, 2005

Following is a summary of the stock options during the years ended September 30, 2005, 2004, and 2003:

	Number of Shares Under Options			Weighted Average Exercise Price
Outstanding at 10/1/2002		750,000		$	1.08
Granted		287,140			2.23
Exercised		(100,000	)		(0.68	)
Expired or forfeited		–			–
Outstanding at 9/30/2003		937,140		$	1.47
Options exercisable at 9/30/2003		937,140		$	1.47
Weighted average fair value of options granted during the year ended 9/30/2003	$	2.27
Outstanding at 10/1/2003		937,140		$	1.47
Granted		476,500			3.77
Exercised		–			–
Expired or forfeited		–			–
Outstanding at 9/30/2004		1,413,640		$	2.25
Options exercisable at 9/30/2004		1,413,640		$	2.25
Weighted average fair value of options granted during the year ended 9/30/2004	$	0.91
Outstanding at 10/1/2004		1,413,640		$	2.25
Granted		250,000			1.42
Exercised		–			–
Expired or forfeited		(500,000	)		(2.62	)
Outstanding at 9/30/2005		1,163,640		$	1.91
Options exercisable at 9/30/2005		1,163,640		$	1.91
Weighted average fair value of options granted during the year ended 9/30/2005	$	2.09

F-18

CADENCE RESOURCES CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

September 30, 2005

Exercise Date	Number of Shares Under Options		Weighted Average Price per Share
On or before March 1, 2007		450,000	$	1.74
On or before April 2, 2007		76,500	$	4.00
On or before July 8, 2007		100,000	$	1.35
On or before June 18, 2007		50,000	$	1.70
On or before June 1, 2007		75,000	$	2.00
On or before January 7, 2008		250,000	$	1.42
On or before September 30, 2008		162,140	$	2.50

In July 2003, 100,000 of the outstanding options were exercised for the purchase of 100,000 shares of the Company’s common stock.

The following table gives information about the Company’s common stock that may be issued upon the exercise of options under all of the Company existing stock option plans as of September 30, 2005

					Remaining
Exercise	Number of		Weighted Average		Contractual Life		Number		Weighted Average
Prices	Shares Under Options		Exercise Price		(in years)		Exercisable		Exercise Price
$0.75		300,000	$	0.75		.42		300,000	$	0.75
1.35		100,000		1.35		.75		100,000		1.35
1.42		250,000		1.42		2.33		250,000		1.42
1.70		50,000		1.70		.75		50,000		1.70
2.00		75,000		2.00		1.67		75,000		2.00
2.50		162,140		2.50		3.00		162,140		2.50
3.73-4.00		226,500		3.82		2.50		226,500		3.82
		1,163,640	$	1.91				1,163,640	$	1.91

Stock Award Plan

During the year ended September 30, 2001, the Company’s board of directors approved the issuance of 15,000 shares of the Company’s common stock per quarter to each entitled director as compensation for service to the Company and 5,000 shares of the Company’s common stock per quarter to officers in addition to their salaried compensation for services.

NOTE 9 - COMMON STOCK WARRANTS

During the year ended September 30, 2003, the Company issued 212,500 shares of stock with 212,500 warrants attached, and 25,000 warrants related to a July 2002 purchase. The warrants were valued at $51,375 using the Black-Scholes Option Price Calculation. The following assumptions were made is estimating fair value: risk free interest rate is 5%, volatility is 100%, expected life is 3 years and no expected dividends. These warrants may be used to purchase 237,500 shares of the Company’s common stock at $1.35 per share. The warrants remain exercisable through October 15, 2005. As of the date of these financial statements, 200,000 of these warrants remain outstanding and exercisable.

During the year ended September 30, 2004, the Company issued certain note holders warrants to purchase a total of 765,000 shares of common stock, exercisable at $4.00 per share, expiring in three years. Both the number of warrants and the exercise price are adjustable, dependent upon certain future equity transactions of the Company. The warrants were valued at $745,237 using the Black-Scholes Option Price Calculation. The following assumptions were made in estimating fair value: risk-free interest rate is 5%, volatility is 100%, expected life is three years and no expected dividends. During the year ended September 30, 2005, the Company paid back the notes which were related to these warrants. As an incentive to the note holders to allow the Company to redeem the notes prematurely, the Company modified the exercise price of the warrants to $1.75. Using current Black-Scholes calculations, the Company incurred no additional charges to its financial statements with this modification.

During the year ended September 30, 2005, the Company issued warrants to purchase a total of 14,050,000 shares of stock. These warrants were attached to 7,810,000 shares of stock which were issued for cash and debt. The warrants were valued at $3,685,875 using the Black-Scholes Option Price Calculation. The following assumptions were made in estimating fair value during the year ended September 30, 2005: risk free interest rate of 4%, volatility of 41%, expected life of 3 years and no expected dividends. See Note 6.

F-19

CADENCE RESOURCES CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

September 30, 2005

NOTE 10 - OIL AND GAS PROPERTIES

The Company’s oil and gas producing activities are subject to laws and regulations controlling not only their exploration and development, but also the effect of such activities on the environment. Compliance with such laws and regulations may necessitate additional capital outlays, affect the economics of a project, and cause changes or delays in the Company’s activities. The Company’s oil and gas properties are valued at the lower of cost or net realizable value.

Louisiana

During the fourth quarter of the year ended September 30, 2001, the Company began leasing acreage in a natural gas field in Desoto Parish, Louisiana. As of the date of these financial statements, the Company has leased over 4,250 acres. At September 30, 2005 and September 30, 2004, Louisiana leases of $42,711 and $42,711, respectively, are included in the attached financial statements as part of proved properties. Under the terms of a joint operating agreement with Bridas Energy USA, Bridas commenced drilling wells, 13 of which were completed and of these 9 are producing at September 30, 2005. The Company has various working interests in and net revenue interests in the wells drilled. Bridas is the operator of all of Cadence’s properties in Louisiana.

Texas

During the year ended September 30, 2002, the Company acquired an exploration permit and lease option agreement for an oil well project in Wilbarger County, Texas known as the Waggoner Ranch Project. During the quarter ended March 31, 2002 under the terms of a joint operating agreement with the W.T. Waggoner Estate, Waggoner drilled an initial test well. By September 30, 2005, Waggoner had drilled a total of eight wells in Wilbarger County, of which five were producing oil. The W.T. Waggoner Estate is the operator of all of Cadence’s properties in Wilbarger County and the sole purchaser of all production from these properties.

During the year ended September 30, 2002, the Company sold 40% of the working interest in its initial well in this area (known as the “1A” well) to private investors and two officers of the Company for $210,000. The Company’s initial cost in the portion of the prospect sold totaled $3,200.

During February 2003, the Company completed the West Electra Lake Well on the Waggoner Ranch Project. The Company entered into a 45% working interest joint operating agreement with the Waggoner Ranch for the operations conducted on this acreage. In the quarter ending September 30, 2003, the Company drilled and completed two additional wells on the West Electra Lake joint venture operating area on the Waggoner Ranch. The Company owns a 50% working interest in these last two wells.

At September 30, 2005, 2004 and 2003, prepaid oil and gas leases relating to Texas property of $13,954, $6,500 and $4,500, respectively, are included in the attached financial statements.

Michigan

In December 2002, the Company began participating in a natural gas drilling program in Alpena County, Michigan with Aurora Energy, Ltd. As of September 30, 2005, Cadence had a 22.5% working interest (before payout, 20% after payout), 18% net revenue interest (before payout, 16% after payout), in ten producing wells in Alpena County. Production commenced from this field in June 2003. Aurora is the operator of all of Cadence’s properties in Alpena County. At September 30, 2005, and 2004, Michigan leases totaling $ $96,375 are included in the attached financial statements as unproved property.

F-20

CADENCE RESOURCES CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

September 30, 2005

Kansas

During the year ended September 30, 2003, and 2004, the Company leased over 26,000 acres of land in the Anadarko Basin in west central Kansas. No drilling has commenced on any of this acreage. Cadence holds a 100% working interest and 82% net revenue interest in these leases.

At September 30, 2005, $270,669 of the leases in Kansas are included as proved properties and in 2004, $253,213 of leases in Kansas are included as unproved property in the Company’s financial statements.

New Mexico

At September 30, 2005 and 2004, $9,600 and $57,420, respectively, of leases in New Mexico are included in the attached financial statements as unproved property.

In June 2004, the Company began participating for a 20% working interest and 15% net revenue interest in the Santa Nina Prospect in Eddy County. Earlier in the year, the Company signed an agreement with SDX Resources to participate for up to a 25% working interest and 20% net revenue interest in up to 17 development wells in a project called the Sparkplug Unit.

NOTE 11 - NOTES PAYABLE - RELATED PARTIES

All of the Company’s notes payable are considered short-term. At September 30, 2005 and 2004, the Company had no outstanding notes payable to related parties. At September 30, 2003, the Company owed the following notes:

	2003
Nathan Low Family Trust (a shareholder of the Company), secured by assignment of a prorata interest in gas producing properties located in Alpena County, Michigan, interest at 8%, dated February 24, 2003, originally due on April 4, 2003, extended to December 31, 2003.	$	50,000
Kevin Stulp (a shareholder of the Company),interest at 8%, dated February 24, 2003, originally due on April 5, 2003, extended to December 31, 2003.		25,000
Howard Crosby (an officer and shareholder of the Company), interest at 8%, dated February 24, 2003, originally due on April 5, 2003, extended to December 31, 2003.		25,000
Howard Crosby (an officer and shareholder of the Company), unsecured, interest at 5%, dated January 9, 2003, originally due on February 28, 2003, extended to December 31, 2003.		60,000
CGT Management Ltd., unsecured, interest at 10%, dated July 16, 2003 (paid in full October 2, 2003).		300,000
Total	$	460,000

F-21

CADENCE RESOURCES CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

September 30, 2005

NOTE 12 - LONG-TERM DEBT

In April 2004, the Company completed a private placement of $6,000,000 of senior secured notes from a group of institutional and individual lenders. A financing fee of $380,000  paid in connection with securing of this debt was recorded as a discount on long-term debt, and will be written off ratably over the life of the debt. For the period ending September 30, 2004, $70,000 of this financing fee was written off. The notes accrued interest at the rate of 10% per year, were originally payable on March 31, 2006 and were secured by all of the assets of Cadence.

As part of the private placement, the note holders received warrants to purchase a total of 765,000 shares of common stock. (See Note 9.) The value of the warrants upon issuance of $745,237 was recorded as a discount on long-term debt, and will be written off ratably over the life of the debt. For the period ended September 30, 2004, $186,309 of this discount was written off. Additionally, a related party was granted 76,500 options valued at $71,910 as a finder’s fee related to these notes. These notes were paid in full during the year ended September 30, 2005. At the time these notes were repaid, there was a balance in deferred financing fees in the amount of $660,559. This amount is included in interest expense and loan fees in the accompanying financial statements. During the year ended September 30, 2005, the Company paid back the notes which were related to these warrants. As an incentive to the note holders to allow the Company to redeem the notes prematurely, the Company modified the exercise price of the warrants to $1.75. Using current Black-Scholes calculations, the Company incurred no additional charges to its financial statements with this modification.

NOTE 13- COMMITMENTS AND CONTINGENCIES

Litigation

The Company was a defendant in a lawsuit alleging that the Company failed to transfer common stock in exchange for a mining property interest. In June 1999, Box Elder County Superior Court rejected the plaintiff’s lawsuit and let stand the Company’s countersuit alleging fraudulent misrepresentation. Although the plaintiff filed an appeal (regarding the originally filed lawsuit), the Utah Supreme Court rejected the appeal in a judgment rendered on July 31, 2001.

The Company’s countersuit, which sought both full title to the aforementioned mineral property and compensatory damages as well as punitive damages, was rejected in a jury trial in October 2002. Although the Company filed an appeal, it expects the jury verdict will stand. As a result, the Company has and will continue to hold an undivided 25% interest in the Vipont Mine. See Note 3.

Environmental Issues

The Company is engaged in oil and gas exploration and may become subject to certain liabilities as they relate to environmental cleanup of well sites or other environmental restoration procedures as they relate to the drilling of oil and gas wells and the operation thereof. In the Company’s acquisition of existing or previously drilled wells, the Company may not be aware of environmental safeguards that were taken at the time such wells were drilled or during such time the wells were operated.

The Company could incur significant costs, including cleanup costs resulting from a release of hazardous material, third-party claims for property damage and personal injuries fines and sanctions, as a result of any violations or liabilities under environmental or other laws. Changes in or more stringent enforcement of environmental laws could also result in additional operating costs and capital expenditures. In the course of routine oil and natural gas operations, surface spills and leaks, including casing leaks, of oil or other materials do occur, and the Company may incur costs for waste handling and environmental compliance.

F-22

CADENCE RESOURCES CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

September 30, 2005

The Company was previously engaged in exploration of mineral properties. These properties are classified as assets from discontinued operations or were previously written off as permanently impaired. Although the Company has discontinued the exploration of mineral properties, the possibility exists that environmental cleanup or other environmental restoration procedures could remain to be completed or be mandated by law, causing unpredictable and unexpected liabilities to arise. At the date of this report, the Company is not aware of any environmental issues related to any of its assets from discontinued operations.

Capital Commitments

At September 30, 2005, the Company’s future capital commitments are dependent upon the Company’s decision to proceed with additional well development. See Note 10. No accruals have been made in the accompanying financial statements for these amounts.

Lease Commitments

The Company began leasing office facilities in Walla Walla, Washington commencing in June 2001. After a three-year lease with monthly payments of $400 expired in June 2004, the Company began a month to month tenancy, again paying $400 per month. Total rent paid for this office space during the year ended September 30, 2003 was $4,800. There were no rentals recorded for this space during fiscal year ended September 30, 2005.

The Company began leasing additional office space in Hilton Head Island, South Carolina in August 2003. The one-year lease calls for monthly rental payments of $550. For the year ended September 30, 2004, the Company expended $4,967 for this rental space. There were no rentals recorded for this space during the year ended September 30, 2005. 

Cadence Resources Corporation Limited Partnership

On August 8, 2002, the Company formed a limited partnership in the State of Washington whereby the Company became the managing general partner and an outside individual investor became the initial limited partner. The entity, Cadence Resources Corporation Limited Partnership (“CRCLP” or the “Partnership”) was formed to invest in oil and gas properties in Texas and Louisiana.

In connection with the formation of the Partnership, the Company agreed to contribute $12,500 in cash and its leasehold interest in an oil well (“2B”, which ultimately was a dry hole) in Wilbarger County, Texas and the limited partner contributed $250,000 in cash.

Effective September 30, 2003, Cadence purchased the limited partner’s interest in the Partnership and thereby terminated the limited partner’s security interest in the equipment and fixtures affixed to wells 1A and 1B in Wilbarger County, Texas. In this transaction, Cadence made a cash payment of $250,000 in October 2003 to the limited partner and received, from the limited partner his 5% working interest in the West Electra Lake #1 oil well in Wilbarger, Texas.

In connection with the aforementioned transaction, Cadence also repaid in October 2003 to the limited partner the unsecured sum of $300,000. These funds were previously advanced to the Partnership in June 2003 for the exploration of natural gas interests in the Black Bean Unit in Michigan in return for the limited partner’s receiving 120,000 shares of Cadence stock and a working interest in each well drilled in the unit. Upon repayment of the $300,000 advance, the limited partner’s working interest in each well drilled in the Black Bean Unit was fixed at 2%.

Consulting Commitments

In June 2002, the Company entered into an agreement with Memphis Consulting Group (“Memphis”) for financial consulting and public relations services beginning on August 1, 2002 through August 1, 2003. The agreement called for monthly payments of $3,000, and an initial 50,000 stock options exercisable through August 1, 2005 at $1.50 per share. See Note 8. This agreement was terminated during the quarter ended March 31, 2003.

F-23

CADENCE RESOURCES CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

September 30, 2005

In September 2001, the Company entered into a consulting agreement with American Financial Group for promotion to investors. The agreement called for monthly payments of $2,000 to cover all expenses, 20,000 shares of the Company’s common stock (which were issued in October 2001) and an override of 2.5% of monies raised in private placements from referrals or directed business. The agreement was terminated during the quarter ended March 31, 2003.

In June 2003, the Company entered into a corporate advisory agreement with Proteus Capital Corp. calling for a monthly fee of $3,000 in cash and 2,000 restricted shares of the common stock of the Company. Additionally, Proteus received an option for 50,000 shares exercisable at $1.75 for a period of four years, such shares bearing certain registration rights should the Company file a registration statement on behalf of other shareholders. This agreement with Proteus Capital Corp. was terminated during the fiscal year ended September 30, 2005.

Lucius C. Geer, a consultant to the Company who manages its acquisition, exploration and production operations, has entered into several agreements with Cadence and has contractually received a 2% overriding royalty interest in oil, gas and mineral leases in Wilbarger County, Texas and a 1% overriding royalty interest in oil and gas leases in Desoto Parish, Louisiana.

Effective August 1, 2003, Cadence agreed to pay Mr. Geer $7,500 per month plus an overriding royalty interest of 2% of the sales price received for all oil, gas and minerals from leases which Geer acquires for Cadence. Effective August 1, 2004, the agreement with Mr. Geer was changed to increase the monthly fee from $7,500 to $10,000. The agreement with Mr. Geer has been extended through June 30, 2006.

Other Commitments

The Company entered into an exploration agreement with the W.T. Waggoner Estate (Waggoner) and its trustees on August 1, 2002. This agreement calls for exploration of the West Electra Lake Project located in Wilbarger County, Texas. See Note 10.

On August 13, 2002, the Company entered into a public relations retainer agreement for one year whereby the Company agreed to issue 60,000 shares of its common stock during this period for services received. The agreement also calls for reimbursement of expenses incurred pursuant to terms of this agreement. This agreement was terminated in the quarter ending September 30, 2003.

NOTE 14 - RELATED PARTY TRANSACTIONS

At September 30, 2005, 2004 and 2003, the Company had related party accounts payable outstanding in the amounts of $0, $300,000 and $550,000, respectively. At September 30, 2005, 2004 and 2003, the Company had related party notes payable outstanding in the amounts of $0, $0 and $460,000, respectively.

In February 2004, the Company borrowed $250,000 from an officer, a total of $95,000 from two directors, and $50,000 from Dotson Exploration Company, a related entity. All of these borrowings were repaid by Cadence in April 2004.

In January 2004, Cadence hired Mr. Douglas Newby as a vice president; Mr. Newby is the president and owner of Proteus Capital Corp., with whom the Company has a consulting agreement. See Note 13.

During the year ended September 30, 2002, the Company sold several mineral properties located in Shoshone County, Idaho to Caledonia Silver-Lead Mines, Inc., later renamed Nevada-Comstock Mining Company (“NCMC”). Two officers of the Company collectively own 2.4% of this entity and Cadence owns 35%. During 2004, the Company paid $12,000 to cover annual filing fees on patented claims held by NCMC. This amount was converted to a loan during 2005.

F-24

CADENCE RESOURCES CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

September 30, 2005

Two officers of the Company collectively own in excess of 40% of the stock of Dotson Exploration Company and are the sole officers and directors of Dotson. Dotson owns 109,000 shares of the Company’s common stock. During fiscal year 2002 and the first quarter of fiscal year 2003, Cadence repaid Dotson a loan in the amount of $10,000 and made two new loans to Dotson, one for $35,000 and one for $20,000, each at an interest rate of 10% per annum. Dotson transferred to Cadence marketable securities in the form of common stock of two unaffiliated companies, Enerphaze Corporation and The Williams Companies, Inc., valued by Cadence’s board of directors at $33,380, as partial payment of the amount loaned. During the nine months ended June 30, 2003, Dotson repaid the $20,000 loan in cash. At September 30, 2005, 2004 and 2003, Dotson owed Cadence $3,720, which amount is payable on demand and bears interest at 10% per annum. Subsequent to the year ended September 30, 2005, this loan was paid in full.

Because Dotson Exploration Company, Oxford Metallurgical, Inc. and Nevada-Comstock Mining Company are controlled by two officers of Cadence, these transactions cannot be considered to be the product of an arms-length negotiation.

During fiscal 2003, the Company’s president made two loans to Cadence. One loan in December 2002 was in the principal amount of $70,000, bearing interest at 5% and the other loan made in February 2003 was in the principal amount of $50,000 bearing interest at a rate of 8%. Cadence issued 14,000 shares of its common stock valued at $10,920, as an inducement to making the $70,000 loan and 20,000 shares valued at $15,600, as an inducement to making the $50,000 loan. Cadence repaid $60,000 and has agreed to issue 4,000 shares of its common stock in repayment of the remaining $10,000 principal amount outstanding on the $70,000 loan. Cadence repaid $25,000 of the $50,000 loan in cash and issued 25,000 shares of its common stock in the year ending September 30, 2004 to repay the remaining $25,000 principal amount.

In February 2003, a Company director made a bridge loan to Cadence in the principal amount of $50,000, bearing interest of 8% per annum. Cadence issued 20,000 shares of its stock valued at $15,600 as an inducement for the director to make the loan. Cadence repaid $25,000 of the $50,000 loan in 2003 and settled the remaining amount in 2004 with common stock. In July 2003, the director exercised a warrant to purchase 100,000 shares of common stock at $0.75 per share.

On August 8, 2002, the Company formed a limited partnership whereby the Company became the managing general partner and an outside individual investor (a Company shareholder) became the initial limited partner. During the year ended September 30, 2003, the limited partner advanced $300,000 to the limited partnership in exchange for an unsecured note, which was repaid in October 2003.

In October 2002, the Nathan A. Low Roth IRA and various entities controlled by Thomas Kaplan, shareholders of Cadence, exercised warrants in separate cashless transactions whereby each party surrendered a total of 175,676 shares of common stock valued at $325,000 to exercise warrants for the acquisition of 1,083,334 shares of Cadence common stock.

Other related party transactions are disclosed in Notes 3, 5, 6, and 11.

NOTE 15 - INCOME TAXES

At September 30, 2005, the Company had net deferred tax assets calculated at an expected rate of 34% of approximately $6,703,000 as indicated below. As management of the Company cannot determine that it is more likely than not that the Company will realize the benefit of the net deferred tax asset, a valuation allowance equal to the net deferred tax asset has been established at September 30, 2005.

The significant components of the deferred tax asset at September 30, 2005, 2004 and 2003 were as follows:

	2005			2004		2003
Net operating loss carryforwards	$	5,746,000		$	4,317,000	$	2,829,000
Stock options and warrants issued		723,000			623,000		622,000
Section 1231 loss carryforwards		146,000			146,000		151,000
Capital loss carryforwards		88,000			586,000		1,532,000
Total deferred tax asset		6,703,000			5,672,000		5,134,000
Less valuation allowance		(6,703,000	)		5,672,000		5,134,000
Net deferred tax asset	$	–		$	–	$	–

F-25

CADENCE RESOURCES CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

September 30, 2005

At September 30, 2005, the Company has net operating loss carryforwards of approximately $16,900,000, which expire in the years 2009 through 2024. In addition, the Company has net Section 1231 loss carryforwards of approximately $432,000, which expire in 2006, and net capital loss carryforwards of approximately $194,000, which expire in the years 2006 through 2009. The change in the allowance account from September 30, 2004 to September 30, 2005 was $1,031,000, which was primarily due to the Company’s operating losses and the expiration of capital losses.

The Company may have had a control change as defined under the Internal Revenue Code, because of new stock issuances and changes in ownership. The effect of such control changes has not been calculated but may limit the future use of net operating losses.

NOTE 16 - ACQUISITION OF AURORA ENERGY, LTD.

The Company acquired Aurora Energy, Ltd. (hereinafter "Aurora"), a privately held company based in Traverse City, Michigan, on October 31, 2005, through the merger of the Company’s wholly-owned subsidiary with and into Aurora. The acquisition of Aurora was the culmination of a process that officially began November 19, 2004 when the Company and Aurora signed a letter of intent contemplating the acquisitions, followed, on January 31, 2005 by Cadence and Aurora entering into a definitive merger agreement providing for the acquisition of all Aurora’s outstanding capital stock in consideration for which (i) Cadence will issue two shares of its common stock for each share of outstanding Aurora common stock, (ii) each option and warrant to purchase a share of Aurora common stock will become an option or warrant (as applicable) to purchase two shares of Cadence common stock at one-half the previous exercise price, and (iii) Aurora will become a wholly owned subsidiary of Cadence.

On May 13, 2005, the Company filed Form S-4, registering up to 48,297,694 shares of its common stock, 10,205,328 shares of which are issuable upon exercise of options and warrants for issuance to the former shareholders and option holders of Aurora.

As noted below, the acquisition of Aurora will be accounted for as a reverse merger, with Aurora being the acquiring party for accounting purposes. In connection with the acquisition of Aurora, Cadence issued an aggregate of 37,512,366 shares of Cadence common stock to the former shareholders of Aurora, and has reserved and additional 10,497,328 shares of Cadence common stock for issuance upon exercise of options or warrants that had been issued by Aurora prior to the acquisition and that were previously exercisable for shares of common stock of Aurora.

As a result of the acquisition of Aurora, Cadence has relocated its operational headquarters to Aurora’s offices in Traverse City and the board of directors and management of Cadence have been significantly restructured. The merger between Cadence and Aurora was finalized on October 31, 2005.

As a result of the acquisition of Aurora, the Company will revise certain of its accounting principles applicable to its oil and gas properties and change its accounting fiscal year end to December 31, commencing December 31, 2005. See Note 17.

F-26

CADENCE RESOURCES CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

September 30, 2005

NOTE 17 - ACCOUNTING CHANGES IN CONNECTION WITH ACQUISITION OF AURORA ENERGY, LTD

As a result of the acquisition of Aurora Energy, Ltd. (hereinafter "Aurora"), the Company will change certain of its accounting policies as described below. These changes will be reflected in the financial statements for the fiscal year ending December 31, 2005.

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

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

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

Cadence will initially use the intrinsic value method under APB Opinion 25 in accounting for stock based compensations, until adoption of SFAF 123(R). However, stock options outstanding as of the date of the merger will not be accounted for under APB 25, as those options were fully vested, and their fair value included in the cost of the business acquired as discussed above.

NOTE 18 - SUBSEQUENT EVENTS

Subsequent to September 30, 2005, the Company issued an additional 300,000 shares of its common stock for $435,000 upon exercise of options and warrants, and 35,492 shares upon a cashless exercise of options.

F-27

EX-9.1

VOTING AGREEMENT

THIS VOTING AGREEMENT (the “Agreement”) is made and entered into effective as of this ____ day of October 2005, by and among Cadence Resources Corporation, a Utah corporation (the “Company”), and each of the shareholders of the Company that is named on and signing a signature page hereto, together with any transferees who become subject to the provisions of this Agreement pursuant to Section 4.1 (collectively, the “Stockholders”). The Company and the Stockholders are individually referred to in this Agreement as a “Party” and are collectively referred to in this Agreement as the “Parties.”

RECITALS:

A.Concurrently with the execution of this Agreement, Aurora Energy, Ltd., a Nevada corporation (“Aurora”), is merging with Aurora Acquisition Corp, a Nevada corporation and wholly owned subsidiary of the Company (“Acquisition Sub”), pursuant to which Aurora will become a wholly owned subsidiary of the Company (the “Merger”). Aurora shareholders will exchange their Aurora common stock for Cadence common stock as a part of the merger.

B.As a part of the Merger closing, certain key stockholders of the Company are issuing proxies to representatives of Aurora, to facilitate implementation of the agreement of the parties that Aurora’s management team will manage the Company from the effective date of the Merger forward, replacing the Company’s previously existing management. The proxies are to remain in effect for a period of 36 months.

AGREEMENT:

NOW, THEREFORE, in consideration of the foregoing and the mutual promises contained herein, the Parties agree as follows:

1.Voting Agreement.

1.1Board Composition. Each Stockholder agrees to vote all of Stockholder’s shares of voting securities in the Company, whether now owned or hereafter acquired or which Stockholder may be empowered to vote by proxy or otherwise (collectively, the “Shares”), from time to time and at all times, in whatever manner shall be necessary to ensure that at each annual or special meeting of stockholders of the Company at which an election of directors is held or pursuant to any written consent of the stockholders of the Company, the following persons shall be elected to serve on the Company’s Board of Directors:

(a)Five directors designated by William W. Deneau (“W. Deneau”), who shall initially be William W. Deneau, Earl V. Young, Gary J. Myles, Richard Deneau, and Ronald E. Huff; and

(b)Two directors designated by W. Deneau from among the Company’s Board of Directors immediately before closing of the Merger, who shall initially be Howard Crosby and Kevin Stulp.

1.2Size of the Board. Each Stockholder agrees to vote all of Stockholder’s Shares from time to time and at all times, in whatever manner shall be necessary to ensure that the size of the Board shall be set and remain at seven directors.

1.3Removal of Board Members. Each Stockholder also agrees to vote all of the Stockholder’s Shares from time to time and at all times in whatever manner as shall be necessary to ensure that (i) no director elected pursuant to Section 1.1 may be removed from office unless (A) the removal is directed or approved by the affirmative vote of the person or entity entitled under Section 1.1 to designate that director, or (B) the person or entity originally entitled to designate or approve the director pursuant to Section 1.1 is no longer so entitled to designate or approve the director; and (ii) any vacancies created by the resignation, removal or death of a director elected pursuant to Section 1.1 shall be filled pursuant to the provisions of Section 1.1. Each Stockholder agrees to execute any written consents required to effectuate the obligations of this Agreement, and the Company agrees at the request of any Party entitled to designate directors, to call a special meeting of stockholders for the purpose of electing directors or to initiate an election by written consent.

2.Term. This Agreement shall continue in effect until and shall terminate on the earlier of 36 months after its effective date or the date of W. Deneau’s death.

3.Specific Enforcement. Each Party acknowledges and agrees that the other Parties will be irreparably damaged if any of the provisions of this Agreement are not performed by the Parties in accordance with their specific terms or are otherwise breached. Accordingly, it is agreed that each of the Company and the Stockholders are entitled to obtain an injunction to prevent breaches of this Agreement and to specific enforcement of this Agreement and its terms and provisions in any action instituted in any court of the United States or any state having subject matter jurisdiction, in addition to any other remedy to which the Parties may be entitled at law or in equity.

4.Miscellaneous.

4.1Transfers, Successors and Assigns.

(a)The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the Parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the Parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.

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(b)Each transferee or assignee of the Shares subject to this Agreement shall continue to be subject to the terms hereof, and, as a condition to the Company’s recognizing the transfer, each transferee or assignee shall agree in writing to be subject to the terms of this Agreement by executing and delivering an Adoption Agreement substantially in the form attached hereto as Exhibit 1. Upon the execution and delivery of an Adoption Agreement by a transferee, the transferee shall be deemed to be a Party hereto as if the transferee’s signature appeared on the signature pages of this Agreement. By execution of this Agreement or of any Adoption Agreement, each of the Parties appoints the Company as its attorney in fact for the purpose of executing an Adoption Agreement that is required to be delivered under the terms of this Agreement. The Company shall not permit the transfer of the Shares subject to this Agreement on its books or issue a new certificate representing the Shares unless and until the transferee has complied with the terms of this Section 4.1. Each certificate representing the Shares subject to this Agreement if issued after the date of this Agreement shall be endorsed by the Company with the legend set forth in Section 4.10. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the Parties or their respective executors, administrators, heirs, successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.

4.2Governing Law. This Agreement shall be governed by and construed in accordance with the General Corporation Law of the State of Utah as to matters within the scope thereof, and as to all other matters shall be governed by and construed in accordance with the internal laws of the State of Michigan, without regard to its principles of conflicts of laws.

4.3Counterparts; Signatures. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement may also be executed and delivered by facsimile signature which shall be legally binding as if it were an original.

4.4Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.

4.5Notices. All notices and other communications given or made pursuant to this Agreement shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the Party to be notified, (b) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient, and if not so confirmed, then on the next business day, (c) five days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the Parties at their addresses as set forth on the signature page, or to the email address, facsimile number or address as subsequently modified by written notice given in accordance with this Section 4.5.

-3-

4.6Amendment.

(a)This Agreement may be amended or modified and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively)only by a written instrument executed by the Company and the Stockholder against whom such amendment, modification or waiver is to be enforced. Any amendment, modification or waiver so effected shall be binding upon the Company and such Stockholder, and all of their respective successors and permitted assigns whether or not the Party, assignee or other shareholder entered into or approved the amendment or waiver.

(b)The Company shall give prompt written notice of any amendment or termination of this Agreement or waiver hereunder to any Party that did not consent in writing to the amendment, termination or waiver.

4.7Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.

4.8Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to any Party under this Agreement, upon any breach or default of any other party under this Agreement, shall impair any right, power or remedy of the non-breaching or non-defaulting Party, nor shall it be construed to be a waiver of any breach or default, or an acquiescence therein. Nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default. Any waiver, permit, consent or approval of any kind or character on the part of any Party of any breach or default under this Agreement, or any waiver on the part of any Party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in the writing. All remedies, either under this Agreement or by law or otherwise afforded to any Party, shall be cumulative and not alternative.

4.9Entire Agreement. This Agreement constitutes the full and entire understanding and agreement between the Parties with respect to the subject matter of this Agreement, and any other written or oral agreement relating to the subject matter of this Agreement existing between the Parties is expressly canceled.

4.10Legend on Share Certificates. Each certificate representing any Shares if issued after the date of this Agreement shall be endorsed by the Company with a legend reading substantially as follows:

THE SHARES EVIDENCED HEREBY ARE SUBJECT TO A VOTING AGREEMENT (A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY UPON WRITTEN REQUEST), AND BY ACCEPTING ANY INTEREST IN THE SHARES THE PERSON ACCEPTING THE INTEREST SHALL BE DEEMED TO AGREE TO AND SHALL BECOME BOUND BY ALL THE PROVISIONS OF THAT VOTING AGREEMENT, INCLUDING CERTAIN RESTRICTIONS ON TRANSFER AND OWNERSHIP SET FORTH THEREIN.

-4-

4.11Execution by the Company. The Company, by its execution in the space provided below, agrees that it will cause the certificates evidencing the Shares issued after the date of this Agreement to bear the legend required by Section 4.10, and it shall supply, free of charge, a copy of this Agreement to any holder of a certificate evidencing the Shares upon written request from the holder to the Company at its principal office. The Parties to this Agreement agree that the failure to cause the certificates evidencing the Shares issued after the date of this Agreement to bear the legend required by Section 4.10 and the failure of the Company to supply, free of charge, a copy of this Agreement as provided under this Section 4.11 shall not affect the validity or enforcement of this Agreement.

4.12Stock Splits, Stock Dividends, Etc. If the Company issues additional Shares to any of the Stockholders (including, without limitation, in connection with any stock split, stock dividend, recapitalization, reorganization, or the like), the additional Shares shall become subject to this Agreement and shall be endorsed with the legend set forth in Section 4.10.

4.13Covenants of the Company. The Company agrees to use its best efforts to ensure that the rights granted under this Agreement are effective and that the Parties enjoy the benefits of this Agreement. This includes, without limitation, the use of the Company’s best efforts to cause the nomination and election of the directors as provided above. The Company will not, by any voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be performed by the Company under this Agreement, but will at all times in good faith assist in the carrying out of all of the provisions of this Agreement and in the taking of all actions that are necessary, appropriate or reasonably requested by a Stockholder in order to protect the rights of the Stockholders against impairment.

4.14Manner of Voting; Grant of Proxy. The voting of Shares pursuant to this Agreement may be effected in person, by proxy, by written consent or in any other manner permitted by applicable law. Each Party hereby grants to the Secretary of the Company, in the event that the Party fails to vote the Party’s Shares as required by this Agreement, a proxy coupled with an interest in all Shares, whether held by an Investor or a Stockholder, beneficially owned by the Party, which proxy is irrevocable until this Agreement terminates pursuant to its terms or this Section 4.14 is amended in accordance with Section 4.6 to remove the grant of proxy.

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4.15Costs of Enforcement. If any Party to this Agreement seeks to enforce its rights under this Agreement by legal proceedings, the non-prevailing Party shall pay all costs and expenses incurred by the prevailing Party, including, without limitation, all reasonable attorneys’ fees.

4.16Spousal Consent. If a Stockholder who resides in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin, or the Commonwealth of Puerto Rico (a “Community Property State Stockholder”) is married on the date of this Agreement, such Community Property State Stockholder’s spouse shall execute and deliver to the Company a consent of spouse in the form of Exhibit 2 (“Consent of Spouse”), effective on the date of this Agreement. The Consent of Spouse shall not be deemed to confer or convey to the spouse any rights in the Community Property State Stockholder’s shares of capital stock that do not otherwise exist by operation of law or the agreement of the parties. If a Community Property State Stockholder marries or remarries subsequent to the date of this Agreement, such Community Property State Stockholder shall, within 30 days after the marriage, obtain his/her new spouse’s acknowledgement of and consent to the existence and binding effect of all restrictions contained in this Agreement by causing the new spouse to execute and deliver a Consent of Spouse acknowledging the restrictions and obligations contained in this Agreement and agreeing and consenting to them.

IN WITNESS OF THIS VOTING AGREEMENT, the Parties have signed below.

CADENCE RESOURCES CORPORATION
By:
	Name:
	Title:
	Address:    c/o Aurora Energy, Ltd.
	3760 North US 31 South
	P. O. Box 961
	Traverse City, Michigan 49685-0961
	Fax No.:      231-947-7074
	E-mail:         bdeneau@auroraenergy.com

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Counterpart Signature Page to Voting Agreement of

Cadence Resources Corporation

Dated October , 2005

[Name of Stockholder]:
_________________________________________________
By:
	Name:
	Title:

Address:_________________________________________________

________________________________________________________

Fax No.__________________________________________________

E-mail: __________________________________________________

Date: October ___, 2005 

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EXHIBIT 1

ADOPTION AGREEMENT

THIS ADOPTION AGREEMENT (“Adoption Agreement”) is executed by the undersigned (the “Transferee”) pursuant to the terms of that certain Voting Agreement dated as of October ___, 2005 (the “Agreement”) by and among the Company and certain of its Stockholders. Capitalized terms used but not defined in this Adoption Agreement shall have the respective meanings ascribed to them in the Agreement. By the execution of this Adoption Agreement, the Transferee agrees as follows:

1.1Acknowledgement. Transferee acknowledges that Transferee is acquiring certain shares of the capital stock of the Company (the “Shares”), subject to the terms and conditions of the Agreement and that if Transferee does not execute this Adoption Agreement, the Shares will not be transferred to Transferee.

1.2Agreement. Transferee (i) agrees that the Shares acquired by Transferee shall be bound by and subject to the terms of the Agreement, and (ii) hereby adopts the Agreement with the same force and effect as if Transferee were originally a Party thereto.

1.3Notice. Any notice required or permitted by the Agreement shall be given to Transferee at the address listed beside Transferee’s signature below.

EXECUTED AND DATED this ______ day of _______________, 200__.

NAME OF TRANSFEREE:
By:
	Name:
	Title:

Address: _________________________________________________ 

Fax No. __________________________________________________

E-mail: ___________________________________________________

Accepted and Agreed:

CADENCE RESOURCES CORPORATION,

Individually and as Attorney-in-Fact for the Stockholders

By:  _________________________

Name:

Title:

EXHIBIT 2

CONSENT OF SPOUSE

I, ____________, spouse of __________, acknowledge that I have read the Voting Agreement, dated as of October ___, 2005, to which this Consent is attached as Exhibit 2 (the “Agreement”), and that I know the contents of the Agreement. I am aware that the Agreement contains provisions regarding the voting and transfer of shares of capital stock of the Company which my spouse may own, including any interest I might have therein.

I hereby agree that my interest, if any, in any shares of capital stock of the Company subject to the Agreement shall be irrevocably bound by the Agreement and further understand and agree that any community property interest I may have in the shares of capital stock of the Company shall be similarly bound by the Agreement.

I am aware that the legal, financial and related matters contained in the Agreement are complex and that I am free to seek independent professional guidance or counsel with respect to this Consent. I have either sought such guidance or counsel or determined after reviewing the Agreement carefully that I will waive such right.

This Consent of Spouse shall not be deemed to confer or convey to the undersigned any rights in my spouse's shares of capital stock that do not otherwise exist by operation of law or by express written agreement with my spouse.

Dated:October       , 2005

Signature

Print Name of Stockholder’s Spouse

EX-10.10

FINAL

FIRST AMENDED AND RESTATED

NOTE PURCHASE AGREEMENT

by and between

AURORA ANTRIM NORTH, LLC,

as Issuer,

AURORA ENERGY, LTD.

and

TCW ASSET MANAGEMENT COMPANY,

in the capacities described herein,

TCW ENERGY FUND X - NL, L.P.,

TCW ENERGY FUND XB - NL, L.P.,

TCW ENERGY FUND XC - NL, L.P.,

and

TCW ENERGY FUND XD - NL, L.P.

as Purchasers

and

TCW ASSET MANAGEMENT COMPANY,

as Administrative Agent and Collateral Agent

Dated as of December 8, 2005

TABLE OF CONTENTS

Page

SECTION 1 DEFINITIONS AND ACCOUNTING MATTERS	2
Section 1.1   Defined Terms	2
Section 1.2   Accounting Terms and Determinations	21
Section 1.3   Interpretation	21
SECTION 2 PURCHASE AND SALE OF SECURITIES	22
Section 2.1   Note Purchase	22
Section 2.2   The Notes	22
Section 2.3   Request for Advances	23
Section 2.4   Commitment Fee.	23
Section 2.5   Use of Proceeds.	23
Section 2.6   Collateral Account	23
Section 2.7   Overriding Royalty Interest.	25
SECTION 3 TERMS OF THE NOTES	25
Section 3.1   Rate of Interest; Payment of Interest.	25
Section 3.2   Computation of Interest	26
Section 3.3   Payment of Principal	26
Section 3.4   Required Prepayments of the Notes	26
Section 3.5   Optional Prepayments of the Notes	26
Section 3.6   Prepayment	27
Section 3.7   General Payment Provision	28
Section 3.8   Ranking	29
Section 3.9   Taxes, Duties and Fees	29
SECTION 4 REPRESENTATIONS AND WARRANTIES	30
Section 4.1   Representations and Warranties of the Issuer	30
Section 4.2   Representations and Warranties of the Purchasers	37
SECTION 5 COVENANTS OF ISSUER	38
Section 5.1   Affirmative Covenants to Purchasers	38
Section 5.2   Negative Covenants to Purchasers	48
Section 5.3   Coverage Ratios	52
SECTION 6 CONDITIONS TO ADVANCES	53
Section 6.1   Conditions to Initial Advance.	53
Section 6.2   Conditions Precedent to Any Advance	55
Section 6.3   Special Conditions Precedent for an Additional Advance	56
Section 6.4   Conditions to Issuer’s Obligations at Closing	56
SECTION 7 SECURITY	56
Section 7.1   The Security	56
Section 7.2   Agreement to Deliver Collateral Documents	57
Section 7.3   Perfection and Protection of Security Interests and Liens	57
Section 7.4   Appointment of Agent and Collateral Agent	57
SECTION 8 TRANSFERABILITY OF SECURITIES	60
Section 8.1   Restrictive Legend	60

i

SECTION 9 EVENTS OF DEFAULT and REMEDIES	61
Section 9.1   Events of Default	61
Section 9.2   Remedies	63
Section 9.3   Indemnity	64
SECTION 10 MISCELLANEOUS	64
Section 10.1   Waivers and Amendments; Acknowledgment	64
Section 10.2   Survival of Agreements; Cumulative Nature.	67
Section 10.3   Notices.	67
Section 10.4   Governing Law; Submission to Process	68
Section 10.5   Limitation on Interest.	69
Section 10.6   Termination; Limited Survival.	70
Section 10.7   Registration, Transfer, Exchange, Substitution of Notes	70
Section 10.8   Waiver of Jury Trial, Punitive Damages, Etc.	71
Section 10.9   Exhibits and Schedules; Additional Definitions.	72
Section 10.10   Confidentiality of Holders.	72
Section 10.11   Reproduction of Documents.	73
Section 10.12   Successors and Assigns.	73
Section 10.13   Counterparts.	74
Section 10.14   Severability.	74
Section 10.15   Expenses.	74
Section 10.16   Specific Performance.	74
Section 10.17   Joinder by Aurora.	74

ii

FIRST AMENDED AND RESTATED

NOTE PURCHASE AGREEMENT

THIS FIRST AMENDED AND RESTATED NOTE PURCHASE AGREEMENT (this “Agreement”) is dated as of December 8, 2005, and is being entered into by and among Aurora Antrim North, LLC, a Michigan limited liability company (the “Issuer”); Aurora Energy, Ltd., a Nevada corporation (“Aurora”); TCW Energy Fund X - NL, L.P., a California limited partnership (“Fund X - NL”); TCW Energy Fund XB - NL, L.P., a California limited partnership (“Fund XB - NL”); TCW Energy Fund XC - NL, L.P., a California limited partnership (“Fund XC - NL”); TCW Energy Fund XD - NL, L.P., a California limited partnership (“Fund XD - NL”); TCW Asset Management Company (“Tamco”), a California corporation, as Investment Manager under the Amended and Restated Investment Management and Custody Agreement dated as of December 3, 2003 among Ensign Peak Advisors, Inc. and others; Tamco as Investment Manager under the Amended and Restated Investment Management and Custody Agreement dated as of March 18, 2004 among ING Life Insurance and Annuity Company and others; Tamco as Investment Manager under the Amended and Restated Investment Management and Custody Agreement dated as of December 11, 2003, among Harry L. Bradley, Jr. Partition Trust and others; Tamco, as Investment Manager under the Investment Management Agreement dated June 13, 2005 among The Ford Foundation and others (Tamco in the capacities designated above, Fund X - NL, Fund XB - NL, Fund XC - NL and Fund XD - NL are hereinafter collectively referred to as the “Purchasers,” each a “Purchaser”); Tamco as Administrative Agent (together with its successors in such capacity, the “Administrative Agent”); and Tamco as Collateral Agent (together with its successors in such capacity, the “Collateral Agent”).

RECITALS:

A.As of August 12, 2004, the Issuer, certain Purchasers, Administrative Agent and Collateral Agent entered into the Note Purchase Agreement (the “Original Note Purchase Agreement”) pursuant to which the Issuer requested that certain Purchasers purchase Notes in an aggregate principal amount of Thirty Million Dollars ($30,000,000).

B.Certain Purchasers have purchased Notes from the Issuer in an aggregate principal amount equal to Thirty Million Dollars ($30,000,000) upon the terms and conditions of the Original Note Purchase Agreement.

C. The Issuer, Purchasers, Administrative Agent and Collateral Agent desire to amend and restate the Original Note Purchase Agreement in its entirety to become effective as of the date hereof, in order to, among other things, increase the Aggregate Commitment Amount to Fifty Million Dollars ($50,000,000).

NOW THEREFORE, in consideration of the mutual promises, representations, warranties, covenants, conditions and agreements contained herein, and other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound by the terms hereof, hereby agree as follows:

SECTION 1

DEFINITIONS AND ACCOUNTING MATTERS

Section 1.1  Defined Terms. As used in this Agreement, each capitalized term has the meaning ascribed to it in this Section 1.1:

“Account Receivable” means, with respect to any Person, any and all rights of such Person to payment for goods sold and/or services rendered, including accounts, general intangibles and any and all such rights evidenced by chattel paper, instruments or documents, whether due or to become due and whether or not earned by performance, and whether now or hereafter acquired or arising in the future, and any proceeds arising therefrom or relating thereto.

“Additional Amounts” has the meaning ascribed to such term in Section 3.9(b) hereof.

“Administrative Agent” means the Administrative Agent for the Purchasers and Holders approved pursuant to Section 7.4(a) hereof, together with its successors, if any, in such capacity.

“Adjusted Net Cash Flow” (or “ANCF”) means the positive difference of:

(i)Gross Cash Revenues determined on a Consolidated basis during any ANCF Quarter (or other period of calculation, if applicable)

less

(ii)actual payments by Issuer during such ANCF Quarter (or other period of calculation, if applicable) of:

(A)The Overriding Royalty Interest and other existing royalties and burdens on the Qualified Properties, if any, that constitute Permitted Encumbrances (to the extent and only to the extent production receipts relating to the same are included in Gross Cash Revenues);

(B)Direct Taxes on the Qualified Properties;

(C)Approved LOE;

(D)Interest payments on the Notes and accrued Commitment Fees;

(E)Approved Capital Expenditures, not including Capital Expenditures to be paid with the proceeds of Advances under this Agreement, to the extent the same are specifically permitted by Administrative Agent to be deducted from Gross Cash Revenues by means of an Approval Letter; and

(F)Approved G&A.

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“ANCF Quarter” means, with respect to a Quarterly Payment Date and the calculation of ANCF, the three Calendar Month period ending on the last day of the most recent of February, May, August or November immediately preceding the Quarterly Payment Date.

“Additional Advance” has the meaning ascribed to such term in Section 2.1(b).

“Advance” means an Initial Advance, Additional Advance or Subsequent Advance.

“AEL Security Agreement” means the AEL Security Agreement, dated as of August 12, 2004, among Aurora and the Collateral Agent.

“Affiliate” means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified and, in the case of a Person who is an individual, shall include (i) members of such specified Person’s immediate family (as defined in Instruction 2 of Item 404(a) of Regulation S-K under the Securities Act) and (ii) trusts, the trustee and all beneficiaries of which are such specified Person or members of such Person’s immediate family as determined in accordance with the foregoing clause (i). For clarity, Hudson Pipeline shall be considered an Affiliate of Issuer for all purposes of the Note Documents.

“Aggregate Commitment Amount” means $50,000,000.

“Agreement” has the meaning ascribed to such term in the preamble hereto.

“Amendment Closing” has the meaning ascribed to such term in Section 2.1(c) hereof.

“Amendment Closing Date” means the date on which the closing of this Agreement occurs and the conditions set forth in Section 6.2 shall be satisfied or waived by the Administrative Agent.

“Approved Capital Expenditures” means Capital Expenditures made or to be made by Issuer the aggregate amount of which expenditures shall not exceed the total amount set forth on Schedule 1.1(a), including the costs and expenses set forth on Schedule 1.1(a) for the drilling and completion of the wells described in the Development Plan or any costs or expenses for capital improvements in addition to or in substitution for the Capital Expenditures set forth in Schedule 1.1(a), to the extent such costs and expenses for such additional or substitute capital improvements have been approved by Administrative Agent or Collateral Agent at the time in question by means of an Approval Letter.

“Approved G&A” means (a) $0 (zero) at all times the Dedication Rate is equal to 75% and (b) if the Dedication Rate is equal to 100%, such amount of G&A costs as determined by the Requisite Holders in their sole discretion.

“Approved LOE” means leasehold operating expenses and other field level or lease level charges for operations on the Qualified Properties, to the extent that such expenses (i) are attributable to such properties; (ii) are not capitalizable under the provisions of Rule 4-10 of Regulation S-X, 17 C.F.R. § 210.4-10, of the Commission (as such Rule exists as of the date hereof) by a reporting entity that follows the successful-efforts method of accounting for oil and gas producing activities (as such activities are defined in paragraph (a) of said Rule); (iii) do not represent any amortization of Capital Expenditures or any write-offs or impairment of capitalized costs; (iv) are not property acquisition costs, exploration costs or development costs (as defined in paragraph (a) of said Rule); (v) are production costs (as defined in paragraph (a) of the Rule), other than depreciation, general and administrative costs and overhead costs (but including Permitted Fixed Rate Overhead) of Borrower related to production; and (vi) do not exceed the amounts set forth in Schedule 1.1(b) during and after 2004, as the same may be amended from time with Administrative Agent’s express written approval in its sole and absolute discretion.

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“Area of Mutual Interest” means the counties in the Project Area, as well as the counties of Benzie, Manistee, Leelanau, Grand Traverse, Kalkaska, Antrim, Crawford and Oscoda in the state of Michigan.

“Aurora” means Aurora Energy, Ltd., a Nevada corporation, and the sole member of Issuer.

“Availability” means the Initial Availability or such greater amount up to the Aggregate Commitment Amount determined by the Administrative Agent in its sole and absolute discretion from time to time, notice of which is given to Issuer pursuant to Section 10.3.

“Board” has the meaning ascribed to such term in Section 5.1(a) hereof.

“Business Day”means any day that is not a Saturday, Sunday or other day on which commercial banks in Traverse City, Michigan or New York, New York are authorized or required by law to remain closed.

“Capital Expenditures” means, for any period, all expenditures (whether paid in cash or accrued as a liability, including the portion of Capital Lease Obligations originally incurred during such period that are capitalized on the consolidated balance sheet of the Issuer) by the Issuer and its Subsidiaries during such period that, in conformity with GAAP, are included in “capital expenditures,”“additions to property, plant or equipment” or comparable items in the consolidated financial statements of the Issuer, but excluding expenditures for the restoration, repair or replacement of any fixed or capital asset that was destroyed or damaged, in whole or in part, in an amount equal to any insurance proceeds received in connection with such damage or destruction.

“Capital Lease Obligations” of any Person means the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP.

“Capital Stock” means (i) with respect to any Person that is a corporation, any and all shares, interests, participations or other equivalents (however designated and whether or not voting) of corporate stock, and (ii) with respect to any Person that is not a corporation, any and all partnership, membership or other equity interests of such Person.

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“Closing Date” means the Initial Closing Date or the Amendment Closing Date, as appropriate.

“Closing Documents” means the Note Documents and all other material documents, instruments and agreements executed or delivered by the Issuer, or any of its Affiliates in connection with, or otherwise pertaining to, the Closing Transactions.

“Closing Transactions” means the transactions to occur on the Initial Closing Date and the Amendment Closing Date, including, without limitation, the payment of all fees and expenses of the Purchasers in connection with the transactions provided herein.

“Code” means the Internal Revenue Code of 1986, as amended from time to time.

“Collateral” has the meaning ascribed to such term in Section 7.1 hereof.

“Collateral Account” has the meaning ascribed to such term in Section 2.6 hereof.

“Collateral Agent” means the Collateral Agent for the Holders appointed pursuant to Section 7.4(b) hereof, together with its successors, if any, in such capacity.

“Collateral Coverage Ratio”means the quotient of (i) the sum of (a) Issuer’s Total Modified NPV10 and (b) Issuer’s Working Capital (which, if negative, shall be deducted from Total Modified NPV10) divided by (ii) the Total Indebtedness.

“Collateral Documents” means the Mortgages, the Security Agreement, the AEL Security Agreement and all mortgages, security agreements, guarantees, financing statements, instruments and other documents now or hereafter executed by Issuer, any Affiliate of Issuer or any other Person pursuant to this Agreement or any other Note Document to secure the payment or performance of the Note Obligations.

“Commission” means the Securities and Exchange Commission of the United States, or any Governmental Authority succeeding to any or all of the functions of such Commission.

“Commitment Expiry Date” means the earliest to occur of:

(i)the date on which an Event of Default occurs;

(ii)if elected by Requisite Holders, the date on which a Coverage Deficiency occurs; and

(iii)August 12, 2007.

“Commitment Fee” has the meaning ascribed to such term in Section 2.4.

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“Commitment Period” means the period from and including the date hereof until the Commitment Expiry Date.

“Companies” means the Issuer and all of its Affiliates.

“Compliance Certificate” has the meaning ascribed to such term in Section 6.1(a)(vi).

“Confidential Information” has the meaning ascribed to such term in Section10.10(a) hereof.

“Consolidated” refers to the consolidation of any Person, in accordance with GAAP, with its properly consolidated subsidiaries. References herein to a Person’s Consolidated financial statements, financial position, financial condition, liabilities, etc. refer to the consolidated financial statements, financial position, financial condition, liabilities, etc. of such Person and its properly consolidated subsidiaries.

“Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. “Controlling” and “Controlled” have meanings correlative thereto.

“Coupon Rate” has the meaning ascribed to such term in Section 3.1(a).

“Coverage Default” means the Collateral Coverage Ratio is less than 1.20 at any time after February 1, 2005.

“Coverage Deficiency” means, either (i) the Collateral Coverage Ratio is less than 1.50 but equal to or greater than 1.20 or (ii) the PDP Coverage Ratio is less than 1.0.

“Current Ratio” means the ratio of Issuer’s Consolidated current Assets to Issuer’s Consolidated current liabilities as of the end of each calendar quarter.

“Dedication Rate” means 75%, provided that such rate will increase to 100% whenever (a) an Event of Default occurs or is continuing or (b) a Coverage Deficiency occurs and such Coverage Deficiency is not cured within thirty (30) days.

“Default” means any event or condition which constitutes an Event of Default or which upon notice, lapse of time or both would, unless cured or waived, become an Event of Default.

“Default Interest” has the meaning ascribed to such term in Section 3.1(b) hereof.

“Deposit Account Control Agreement” means that certain Deposit Account Control Agreement, dated as of August 12, 2004, by and among Collateral Agent, for the benefit of the Purchasers, Issuer, and Northwestern Bank (“Bank”), as it may be amended, modified or supplemented from time to time.

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“Development Plan” means the Development Plan attached as Schedule 2.5.

“Direct Taxes” means production, severance, ad valorem, excise or other taxes or governmental charges or assessments on (i) the Qualified Properties, (ii) the production therefrom or (iii) the proceeds of such production, but excluding any federal, state or local income or franchise taxes.

“Disclosed Matters” means the actions, suits and proceedings and the environmental matters disclosed in Schedule 4.1(f)(i).

“dollars” or “$” refers to lawful money of the United States of America.

“Engineering Report” means (i) the Initial Engineering Report and (ii) each engineering report to be delivered to Administrative Agent pursuant to Section 5.1(c)(vii).

“Environmental Actions” means any complaint, summons, citation, notice, directive, order, claim, litigation, investigation, judicial or administrative proceeding, judgment, letter or other communication from any Person or Governmental Authority involving violations of Environmental Laws or Releases of Hazardous Materials (i) from any assets, properties or businesses owned or operated by Aurora or any of its Subsidiaries or any predecessor in interest; (ii) from adjoining properties or businesses; or (iii) onto any facilities which received Hazardous Materials generated by the Issuer or any of its Subsidiaries or any predecessor or successor in interest.

“Environmental Laws” means all laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by any Governmental Authority, relating in any way to the environment, preservation or reclamation of natural resources, the management, release or threatened release of any Hazardous Material or to health and safety matters.

“Environmental Liability” means any liability, contingent or otherwise, monetary obligations, Remedial Actions, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including all reasonable fees, disbursements and expenses of counsel, experts and consultants and costs of investigations and feasibility studies), fines, penalties, sanctions or interest incurred as a result of any claim or demand by any Governmental Authority or any third party, of the Issuer or any Subsidiary directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment, onto any property presently or formerly owned by the Issuer or any of its Subsidiaries or any facility which received Hazardous Materials generated, owned, handled, possessed or otherwise connected in any way with the Issuer or any of its Subsidiaries or (e) any written contract, agreement or other written consensual arrangement to which the Issuer or any Subsidiary is a party and pursuant to which liability is assumed or imposed on the Issuer or any Subsidiary with respect to any of the foregoing.

“Environmental Lien” means any Lien in favor of any Governmental Authority for Environmental Liability.

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“Equity” means shares of Capital Stock or partnership, profits, capital or member interest, or options, warrants or any other right to substitute for or otherwise acquire the Capital Stock or a partnership, profits, capital or member interest of the Issuer or any Subsidiary of the Issuer.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time.

“ERISA Affiliate” means any trade or business (whether or not incorporated) that, together with the Issuer, is treated as a single employer under Section 414(b) or (c) of the Code or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code.

“ERISA Event” means (a) any “reportable event”, as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30-day notice period is waived); (b) the existence with respect to any Plan of an “accumulated funding deficiency” (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (c) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by the Issuer or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Plan; (e) the receipt by the Issuer or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (f) the incurrence by the Issuer or any of its ERISA Affiliates of any liability with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan; or (g) the receipt by the Issuer or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from the Issuer or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA.

“Event of Default” has the meaning ascribed to such term in Section 9.1.

“FERC” means the Federal Energy Regulatory Commission, and any successor agency thereto.

“Fiscal Quarter” means a fiscal quarter of the Issuer, ending on the last day of March, June, September or December of each year.

“Fiscal Year” means the fiscal year of the Issuer ending on December 31 of each year.

“Ford Disqualified Persons” means those Persons listed on Schedule 4.1(s).

“Funded Indebtedness” means, as to any Person, without duplication, all Indebtedness for borrowed money, all obligations evidenced by bonds, debentures, notes or similar instruments, all Capital Lease Obligations, and all Guarantees of Funded Indebtedness of other Persons.

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“G&A Costs” means all overhead and administration costs incurred or to be incurred by Issuer.

“GAAP” means generally accepted accounting principles in the United States of America.

“Governmental Authority” means the government of the United States of America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government.

“Governmental Requirement” shall mean any law, statute, code, ordinance, order, determination, rule, regulation, judgment, decree, injunction, franchise, permit, certificate, license, authorization or other directive or requirement (whether or not having the force of law), including, without limitation, Environmental Laws, energy regulations and occupational, safety and health standards or controls, of any Governmental Authority.

“Gross Cash Revenues” means all cash revenues and receipts received by or on behalf of Issuer or any of its Affiliates from or in any way relating to the Collateral or by or on behalf of Issuer or any Subsidiary thereof from any other source, (i) including without limitation receipts generated by the sale of Hydrocarbon production from the Collateral, but (ii) excluding revenues from (A) a sale approved by Requisite Holders of any portion of the Qualified Properties or (B) a refinancing of the Notes.

“Guarantee” of or by any Person (the “guarantor”) means any obligation, contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation of any other Person (the “primary obligor”) in any manner, whether directly or indirectly, and including any obligation of the guarantor, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment thereof, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment thereof, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation or (d) as an account party in respect of any letter of credit, or letter of guaranty issued to support such Indebtedness or obligation; provided, that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business.

“Hazardous Materials” means (a) any element, compound or chemical that is defined, listed or otherwise classified as a contaminant, pollutant, toxic pollutant, toxic or hazardous substance, extremely hazardous substance or chemical, hazardous waste, special waste, or solid waste under Environmental Laws or that is likely to cause immediately, or at some future time, harm to or have an adverse effect on, the environment or risk to human health or safety, including, without limitation, any pollutant, contaminant, waste, hazardous waste, toxic substance or dangerous good which is defined or identified in any Environmental Law and which is present in the environment in such quantity or state that it contravenes any Environmental Law; (b) petroleum and its refined products; (c) polychlorinated biphenyls; (d) any substance exhibiting a hazardous waste characteristic, including, without limitation, corrosiveness, ignitability, toxicity or reactivity as well as any radioactive or explosive materials; and (e) any raw materials, building components (including, without limitation, asbestos-containing materials) and manufactured products containing hazardous substances listed or classified as such under Environmental Laws.

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“Highest Lawful Rate” means the maximum non-usurious rate of interest that the Holders are permitted under applicable law to contract for, take, charge, or receive with respect to the Note Obligation in question.

“Holders” means the holders of the Notes from time to time.

“Hudson Pipeline” means Hudson Pipeline & Processing, LLC, a joint venture between Issuer and Oilfield Investments Ltd., whereby Issuer and Oilfield Investments, Ltd. each own a 50% interest in all equity and debt of Hudson Pipeline & Processing, LLC.

“Hydrocarbons” means and includes any and all crude oil, petroleum, natural gas, condensate, casinghead gas, natural gas liquids and all similar or gaseous hydrocar-bons and other substances produced in association therewith, including helium, hydrogen sulphide, sulphur and other products produced in association therewith or therefrom.

“Indebtedness” of any Person means, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid, (d) all obligations of such Person under conditional sale or other title retention agreements relating to property acquired by such Person, (e) all obligations of such Person in respect of the deferred purchase price of property or services (excluding current accounts payable and accrued expenses incurred in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the Indebtedness secured thereby has been assumed, (g) all Guarantees by such Person of Indebtedness of others, (h) all Capital Lease Obligations of such Person, (i) all obligations, contingent or otherwise, of such Person as an account party in respect of letters of credit and letters of guaranty, (j) all obligations, contingent or otherwise, of such Person in respect of bankers’ acceptances, (k) all obligations under leases commonly known as synthetic leases or leases that require such Person or its Affiliate to make payments over the term of such lease based on the purchase price or appraised value of the asset subject to such lease plus a marginal interest rate, and used primarily as a financing vehicle for, or to monetize, such asset, and (l) any Capital Stock of such Person in which such Person has a mandatory obligation to redeem such stock to the extent such stock is redeemable prior to the Maturity Date. The Indebtedness of any Person shall include the Indebtedness of any other entity (including any partnership in which such Person holds a partnership interest) to the extent such Person is liable therefor as a result of such Person’s ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness provide that such Person is not liable therefor.

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“Indemnified Party” has the meaning ascribed to such term in Section 9.3 hereto.

“Independent Engineer” means Schlumberger Data and Consulting Services or another nationally or regionally recognized independent petroleum engineering company, which may be chosen by Issuer if acceptable to the Requisite Holders in their sole discretion.

“Initial Advance” has the meaning ascribed to such term in Section 2.1(a).

“Initial Advance Date” means the date on which the Purchasers funded the Initial Advance pursuant to the provisions of Section 2.1(a).

“Initial Availability” means that portion of the Aggregate Commitment Amount equal to $40,000,000.

“Initial Closing” means the closing of the Original Note Purchase Agreement on August 12, 2004.

“Initial Closing Date” means August 12, 2004.

“Initial Engineering Report” means the engineering report prepared by the Independent Engineer and effective as of January 1, 2004.

“Initial Environmental Report”means the environmental report relating to the Project Area prepared by Pilko & Associates, Inc., dated as of June 2004.

“Insolvency Proceeding” means any voluntary or involuntary liquidation, dissolution, sale of all or substantially all assets, marshalling of assets or liabilities, receivership. conservatorship, assignment for the benefit of creditors, insolvency, bankruptcy, reorganization, arrangement or composition of Issuer or any Subsidiary of Issuer; provided, that, any merger, consolidation, or liquidation or sale of all or substantially all assets of Issuer or any Subsidiary of Issuer which is permitted under this Agreement shall not constitute an “Insolvency Proceeding.”

“Insurance Advisor” means Aon Risk Services or such other reputable insurance advisor reasonably acceptable to the Requisite Holders.

“Issuer” has the meaning ascribed to such term in the preamble hereto.

“Lands” means collectively, all properties, licenses, leases, wells and other interests (determined in as broad a manner as practicable with reference to lands covered by any of the foregoing and not just with respect to wells, spacing units or well bores).

“Lien” means, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset and (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset.

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“Material Adverse Change” means any circumstance or event that has had a Material Adverse Effect.

“Material Adverse Effect” means any event, change or development, or combination of events, changes or developments, individually or in the aggregate, that has or would reasonably be expected to have a significant material adverse effect on (a) the business, operations, property, prospects or financial condition of the Issuer, or the Issuer and its Subsidiaries as it relates to the Project, (b) the right or ability of the Issuer or its Subsidiaries to fully, completely and timely perform any of their obligations under this Agreement and the other Closing Documents, (c) the validity or enforceability of any Closing Document against the Issuer or any Subsidiary which is a party thereto, (d) the validity, perfection or priority of any Lien intended to be created under or pursuant to any Closing Document to secure the Note Obligations, or (e) the rights of, or benefits available to, the Holders under this Agreement and the other Closing Documents.

“Material Contracts” shall have the meaning ascribed to such term in Section 4.1(m).

“Maturity Date” means the penultimate Business Day in the Fiscal Quarter ending September 30, 2009.

“Modified NPV10” means:

(i)with respect to any Proved Developed Producing Reserves attributable to the Qualified Properties, NPV10 of 95% of such Reserves;

(ii)with respect to any Proved Developed Non-Producing Reserves attributable to the Qualified Properties, NPV10 of 85% of such Reserves; or

(iii)with respect to any Proved Undeveloped Reserves attributable to the Qualified Properties, NPV10 of 75% of such Reserves;

in each case as determined by the Administrative Agent from the applicable Engineering Report, provided, however, that the Modified NPV10 for any particular Proved Developed Non-Producing Reserves or Proved Undeveloped Reserves shall be zero (0) unless capital expenditures for the development of such Reserves, in at least the amounts required pursuant to the most recent Engineering Report, have been scheduled and such capital is reasonably expected to be available from Advances or as a deduction from ANCF as Approved Capital Expenditures.

“Moody’s” means Moody’s Investors Service, Inc., or a successor rating agency.

“Mortgage” means a mortgage, deed of trust or deed to secure debt, in form and substance reasonably satisfactory to the Requisite Holders, made by the Issuer or its Subsidiaries in favor of the Collateral Agent for the benefit of the Holders, securing the Note Obligations and delivered to each Holder pursuant to the terms hereof.

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“Multiemployer Plan” means a multiemployer plan as defined in Section 4001(a)(3) of ERISA.

“Note Documents” means this Agreement, the Original Note Purchase Agreement, the Notes, the ORRI Conveyance, the Collateral Documents, and all other agreements, certificates, documents, instruments and writings at any time delivered by Issuer in connection with the purchase and sale of the Notes (exclusive of the term sheets, commitment letters, correspondence and similar documents used in the negotiation thereof).

“Note Interest Rate” means the rate of interest payable on the Notes from time to time, determined in accordance with Section 3.1(a) and Section 3.1(b).

“Note Obligations” means the sum of all Indebtedness from time to time owing by the Issuer to the Holders under or pursuant to any of the Note Documents.

“Notes” has the meaning ascribed to such term in Section 2.2 hereof.

“NPV10” means with respect to any Proved Reserves expected to be produced from the Qualified Properties, the net present value of the future net revenues expected to accrue to Issuer’s interests in such Reserves during the remaining expected economic lives of such Reserves, discounted at 10% per annum. Each calculation of such expected future net revenues shall be made as of the date when requested in accordance with the then existing standards of the Society of Petroleum Engineers and Society of Petroleum Evaluation Engineers, provided that in any event:

(i)appropriate deductions shall be made for (A) Direct Taxes and existing burdens that are Permitted Encumbrances (excluding, however, the Overriding Royalty Interest), (B) LOE, (C) transportation, gathering and marketing burdens, (D) Capital Expenditures (including plugging and abandonment costs), and (E) COPAS or other overhead costs, all consistent with the most recent Engineering Report; and

(ii)the pricing assumptions and escalations used in determining NPV10 for any particular Proved Reserves shall be:

(A)the contract price, if any, during the term of any written oil and gas sales contract between Issuer and unrelated Persons who are “investment grade” purchasers (it being agreed that any such contract with a duration of more than six (6) months shall be subject to the written approval of Requisite Holders); or

(B)if no sales contract exits:

(I)for volumes of oil and gas swapped or hedged with investment grade counter parties, the hedged price net of any costs, expenses or deductions relating thereto; and

(II)for “naked” or long unhedged volumes, the monthly average NYMEX oil and gas prices for each of the four years immediately following the date of determination and for all years thereafter, the unescalated monthly average NYMEX oil and gas prices for the fourth year after the date of determination, all with adjustment for basis (quality and geographical) differentials.

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“Observer” has the meaning assigned to such term in Section 5.1(a).

“Operating Agreement” means that certain Operating Agreement of Issuer, dated as of January 18, 2001 attached hereto as Schedule 1.1(c).

“Order” means any order, writ, injunction, decree, judgment, award, determination, direction or demand.

“ORRI Conveyance” means the Conveyance of Overriding Royalty Interest substantially in the form of Exhibit C, and all amendments, supplements, modifications or memoranda thereof.

“Overriding Royalty Interest” has the meaning given in Section 2.7.

“ORRI Assignee” means TCW Energy Funds X Holdings, L.P., a California limited partnership.

“ORRI Documents” means the ORRI Conveyance and all other documents required or necessary to transfer the Overriding Royalty Interest to the ORRI Assignee.

“Payment Date” means: (1) any date on which the maturity of any or all of the Notes is accelerated in accordance with Section 9.1(b); (2) any date on which any interest on or principal of or premium on the Notes or any Commitment Fee is required to be prepaid in accordance with Section 2.4, 3.1 , 3.3 or 3.4; and (3) the Maturity Date.

“PBGC” means the Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor entity performing similar functions.

“PDP Coverage Ratio” is equal to (i) the sum of (a) the Modified NPV10 of Issuer’s PDP Reserves and (b) Issuer’s Working Capital (which, if negative, shall be deducted from such Modified NPV10) divided by (ii) Total Indebtedness.

“Permitted Distributions” means distributions from Issuer to Aurora permitted to be made pursuant to Section 5.2(a).

“Permitted Encumbrances” means:

(a)Liens imposed by law for taxes, assessments or other governmental charges or levies that are not at the time delinquent or are being contested in compliance with Section 5.1(i);

(b)carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s and other like Liens imposed by law, arising in the ordinary course of business and securing obligations that are not overdue or are being contested in compliance with Section 5.1(i);

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(c)pledges and deposits made in the ordinary course of business in compliance with workers’ compensation, unemployment insurance and other social security laws or regulations;

(d)deposits to secure the performance of tenders, bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature, in each case in the ordinary course of business;

(e)irregularities in title, boundaries, or other survey defects, easements, leases, restrictions, servitudes, permits, zoning restrictions, rights-of-way, conditions, covenants, and rights of others in any property of the Issuer and its Subsidiaries for streets, roads, bridges, pipes, pipelines, railroads, electric transmission and distribution lines, telegraph and telephone lines, flood control, water rights, rights of others with respect to navigable waters, sewage and drainage rights existing as of the Closing Date or granted by the Issuer or its Subsidiaries in the ordinary course of business and other similar charges or encumbrances which do not secure the payment of money and otherwise do not materially interfere with the occupation, use and enjoyment by the Issuer or its Subsidiaries of any of the Property in the normal course of business or materially impair the value thereof;

(f)licenses granted in the ordinary course of business and leases of Property of the Issuer and its Subsidiaries that is not material to the business and operations of the Issuer and its Subsidiaries;

(g)security interests arising by operation of law solely under Article 2 of the UCC to the extent and so long as the “debtor” with respect to such security interests does not have or does not lawfully obtain possession of the goods subject thereto;

(h)any Lien or privilege vested in any lessor, licensor or permittor for rent to become due or for other obligations or acts to be performed, the payment of which rent or the performance of which other obligations or acts is required under leases, subleases, licenses or permits; and

(i)any obligations or duties affecting any of the Property to any municipality or public authority with respect to any franchise, grant, license or permit which do not materially impair the use of such Property for the purposes for which it is held;

providedthat the term “Permitted Encumbrances” shall not include any Lien securing Funded Indebtedness.

“Permitted Fixed Rate Overhead” means overhead charges based on a fixed amount per month per well incurred at the field or lease level pursuant to existing joint operating agreements in the nature of overhead charges made pursuant to Section III of the COPAS Accounting Exhibit to AAPL JOA Form No. 610, excluding however any such overhead charges payable to Aurora or any Affiliate thereof.

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“Permitted Investments” means:

(a)direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case maturing within one year from the date of acquisition thereof;

(b)investments in commercial paper maturing within 270 days from the date of acquisition thereof and having, at such date of acquisition, a rating of at least A2 from S&P or P2 from Moody’s;

(c)investments in certificates of deposit, banker’s acceptances and time deposits maturing within 180 days from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, any domestic office of any commercial bank organized under the laws of the United States of America or any State thereof which has a combined capital and surplus and undivided profits of not less than $500,000,000, or any domestic office of a foreign commercial bank which has a combined capital and surplus and undivided profits in an amount equivalent to not less than $500,000,000;

(d)fully collateralized repurchase agreements with a term of not more than 30 days for securities described in clause (a) above and entered into with a financial institution satisfying the criteria described in clause (c) above; and

(e)shares of money market or similar funds not less than 95% of the assets of which are comprised of investments of the type specified in clauses (a) through (d) above and as to which withdrawals are permitted at least every 30 days.

“Person” means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity.

“Plan” means any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect of which the Issuer or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an “employer” as defined in Section 3(5) of ERISA.

“Prepayment” has the meaning ascribed to such term in Section 3.6 hereof.

“Prepayment Notice” has the meaning ascribed to such term in Section 3.6 hereof.

“Prohibited Lien” means any Lien not expressly allowed under Section 5.2(g).

“Project Area” means the counties of Alcona, Alpena, Charlevoix, Cheboygan, Montmorency and Otsego in the State of Michigan.

“Project”means all drilling, completion and reserve acquisition activities in or relating to the Project Area.

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“Property” means any interest in any kind of property or asset, whether real, personal or mixed.

“Pro Rata Portion” shall be determined, as of any period, by dividing (i) the aggregate principal amount of the outstanding Notes held by a Holder by (ii) the aggregate original principal amount of the outstanding Notes held by all Holders. The initial Pro Rata Portions of the Holders as of the Closing Date are set forth on Exhibit B-2 hereto.

“Proved Developed Non-Producing Reserves” (or “PDNP Reserves”) are Proved Reserves that include Shut-in and Behind-pipe Reserves. “Shut-in Reserves” are those expected to be recovered from completion intervals open at the time of the estimate, but which had not started producing, or were shut in for market conditions or pipeline connections, or were not capable of production for mechanical reasons (including the requirement for installation or restaging of compression), and the time when sales will start is uncertain. “Behind-pipe Reserves” are those expected to be recovered from zones behind casing in existing wells, which will require additional completion work or a future completion prior to the start of production.

“Proved Developed Producing Reserves” ( or “PDP Reserves”) means Proved Reserves that are expected to be recovered from completion intervals open and producing at the time of the estimate.

“Proved Reserves” means those Reserves which are “proved oil and gas reserves” within the meaning of Rule 4-10 of Regulation S-X, 17 C.F.R. § 210.4-10 of the Commission where the commercial producibility of the reservoir is supported by actual production or formation tests based on the estimated volume of reserves and not just the productivity of the well or reservoir. In certain instances, Proved Reserves may be assigned on the basis of electrical and other well logs or core analysis that indicates the subject reservoir is Hydrocarbon bearing and is analogous to reservoirs in the same area which are producing, or have demonstrated the ability to produce on a formation test. The area of a reservoir considered proved includes (a) the area delineated by drilling and defined by fluid contacts, if any, and (b) the undrilled areas that can be reasonably judged as commercially productive on the basis of available geologic and engineering data. In the absence of data on fluid contacts, the lowest known structural occurrence of Hydrocarbons controls the proved limit unless otherwise indicated by definitive engineering or performance data. In addition, Proved Reserves must have facilities to process and transport those reserves to market which are operational at the time of the estimate, or there is a commitment or reasonable expectation to install such facilities in the future.

“Proved Undeveloped Reserves” means Proved Reserves that are assigned to undrilled locations which satisfy the following conditions: (i) the locations are direct offsets to wells which have indicated commercial production in the objective formation, (ii) it is reasonably certain that the locations are within the known proved productive limits of the objective formation, (iii) the locations conform to existing well spacing regulations, if any, and (iv) it is reasonably certain that the locations will be developed. Reserves for other undrilled locations are classified as Proved Undeveloped Reserves only in those cases where interpretations of data from wells indicate that the objective formation is laterally continuous and contains commercially recoverable hydro-carbons at locations beyond direct offsets.

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“Purchaser(s)” has the meaning ascribed to such term in the preamble hereto.

“Purchaser’s Initial Commitment Amount” means, with respect to each Purchaser, the amount set forth in column titled “Commitment Amount” opposite such Purchaser’s name in Exhibit B-1 hereto.

“Purchaser’s Subsequent Commitment Amount” means, with respect to each Purchaser, the amount set forth in column titled “Commitment Amount” opposite such Purchaser’s name in Exhibit B-2 hereto.

“Quarterly Payment Date” means the penultimate Business Day of each March, June, September and December, commencing on September 29, 2004.

“Qualified Property” means an oil and gas property which at the particular time in question: (i) is owned by Issuer or, if specifically approved in writing by Administrative Agent, by Aurora; (ii) is subject to a recorded ORRI Conveyance and a recorded Mortgage; (iii) is not subject to any Prohibited Liens; (iv) if a Michigan State lease, is the subject of an approval of the assignment to Issuer of such lease, and all related state permissions relating thereto and (v) is the subject of favorable title opinions to Collateral Agent from legal counsel acceptable to Collateral Agent, (A) based upon abstract or record examinations to dates acceptable to Collateral Agent, (B) stating that Issuer has good and marketable title to such property and that it is subject to no Prohibited Liens, and (C) covering such other matters as Administrative Agent may reasonably request.

“Register” has the meaning ascribed to such term in Section 10.7(a) hereof.

“Related Parties” means, with respect to any specified Person, such Person’s Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person’s Affiliates.

“Release” means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, seeping, migrating, dumping or disposing of any Hazardous Material (including the abandonment or discarding of barrels, containers and other closed receptacles containing any Hazardous Material) into the indoor or outdoor environment, including, without limitation, the movement of Hazardous Materials through or in the ambient air, soil, surface or ground water, or property.

“Remedial Action” means all actions taken to (i) clean up, remove, remediate, contain, treat, monitor, assess, evaluate or in any other way address Hazardous Materials in the indoor or outdoor environment; (ii) prevent or minimize a Release or threatened Release of Hazardous Materials so they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment; (iii) perform pre-remedial studies and investigations and post-remedial operation and maintenance activities; or (iv) perform any other actions authorized by 42 U.S.C. § 9601.

“Requisite Holders” means the Holders who hold at least fifty-one percent (51%) of the aggregate principal amount outstanding under the Notes at any time (excluding any Notes held by the Issuer or any Affiliates).

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“Reserves” means estimated volumes of crude oil, condensate, natural gas, natural gas liquids, and associated substances anticipated to be commercially recoverable from known accumulations from a given date forward, under then existing economic conditions, by established operating practices, and under current government regulations. Reserve estimates are based on interpretation of geologic or engineering data available at the time of the estimate. Reserves do not include volumes of crude oil, condensate, natural gas (including storage gas), or natural gas liquids being held in inventory. If required for financial reporting, reserve estimates or other purposes, Reserves may be reduced for on-site or processing losses.

“Responsible Officer” means the president, chief executive officer, chief financial officer, principal accounting officer, treasurer or controller of the Issuer.

“Restricted Payments” means (a) any dividend or other distribution (whether in cash, securities or other property) with respect to any shares or interests of any class of Capital Stock or Equity of the Issuer or any Subsidiary, (b) any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any such shares or interests of Capital Stock or Equity of the Issuer or any option, warrant or other right to acquire any such shares or interests of Capital Stock or Equity of the Issuer, and (c) any payments of any compensation, management fee, consulting fee or similar amount to an Affiliate of the Issuer or any Subsidiary.

“Restricted Notes” has the meaning set forth under Rule 144 promulgated under the Securities Act.

“S&P” means Standard & Poor’s, or a successor entity performing rating services.

“Securities Act” means the Securities Act of 1933, as amended.

“Security Agreement” means that certain Security Agreement, dated as of August 12, 2004, by Issuer in favor of Collateral Agent.

“Solvent” as applied to any Person at any date shall mean that on and as of such date (a) the fair value of the property of such Person is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of such Person, (b) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person’s ability to pay as such debts and liabilities mature and (d) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person’s property would constitute an unreasonably small capital. The amount of contingent liabilities on and as of any date shall be computed as the amount that, in the light of all the facts and circumstances existing on and as of such date, represents the amount that can reasonably be expected to become an actual or matured liability. For purposes of this definition, “Person” shall mean, where so required by the context in which the term “Solvent” appears, such Person and its Affiliates taken as a whole.

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“Stated Maturity” means (i) with respect to any debt security, the date specified in such debt security as the fixed date on which the final installment of principal of such debt security is due and payable and (ii) with respect to any scheduled installment of principal of or interest on any debt security, the date specified in such debt security as the fixed date on which such installment is due and payable.

“Subsequent Advance” has the meaning ascribed to such term in Section 2.1(c).

“Subsequent Advance Notes” has the meaning ascribed to such term in Section 2.1(c).

“subsidiary” means, with respect to any Person (the “parent”) at any date, any corporation, limited liability company, partnership, association or other entity the accounts of which would be consolidated with those of the parent in the parent’s consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date, as well as any other corporation, limited liability company, partnership, association or other entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, controlled or held, or (b) that is, as of such date, otherwise Controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent.

“Subsidiary” means any subsidiary of the Issuer.

“Subsidiary Guarantee” means an unconditional and irrevocable guarantee of payment, and not of collectibility, of the Note Obligations, executed by a Subsidiary pursuant to Section 7.2, in form and substance satisfactory to Holders.

“Supplements to ORRI Conveyance” has the meaning ascribed to such term in Section 5.1(m).

“Tamco Origination Fee” has the meaning ascribed to such term in Section 6.2(a) hereof.

“Taxes” means any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority.

“TCW Governing Documents” has the meaning ascribed to such term in Section 7.4(d)(iii).

“Total Modified NPV10” means the sum of the Modified NPV10’s for all Proved Developed Producing Reserves, Proved Developed Non-Producing Reserves and Proved Undeveloped Reserves as determined by Administrative Agent from the Engineering Report most recently prepared as of such time.

“Trustco” means Trust Company of the West, a California trust company.

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“UCC” means the Uniform Commercial Code as adopted in the States of New York and Michigan, as from time to time amended.

“Unassigned Interests” means collectively, (a) the working and other interests in oil, gas and mineral leases issued by the State of Michigan held by Aurora or any Affiliate thereof on Lands in the Project Area with respect to which the necessary consent to the assignment thereof to Issuer has not been obtained and (b) working and other interests in oil, gas and mineral leases and fee mineral interests on Lands in the Project Area which are acquired by Aurora pending assignment to Issuer and Samson Resources.

“Unused Availability” has the meaning ascribed to such term in Section 2.4.

“Wholly Owned Subsidiary” means, as to any Person, any other Person all of the Equity of which (other than directors’ qualifying shares required by law) is owned by such Person directly and/or through other Wholly Owned Subsidiaries.

“Withdrawal Liability” means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part 1 of Subtitle E of Title IV of ERISA.

“Working Capital” means Issuer’s Consolidated current assets minus Issuer’s Consolidated current liabilities. For purposes of this definition:

(i)current assets will be calculated without including inventory and any accounts receivable or other Debts owed to Issuer or its Subsidiaries by their Related Parties;

(ii)accounts receivable more than 90 days delinquent will be deleted; and

(iii)so long as no Event of Default or Default has occurred, current liabilities will be calculated without including any payments of current maturities of principal on the Notes.

Section 1.2  Accounting Terms and Determinations. Except as otherwise expressly provided for in this Agreement, all accounting terms used in this Agreement shall be interpreted, all determinations with respect to accounting matters hereunder shall be made and all financial statements and certificates and reports as to financial matters required to be delivered to the Holders under this Agreement shall be prepared in accordance with GAAP applied on a basis consistent with those used in the preparation of the latest financial statements furnished to the Purchasers under this Agreement. Issuer will not change the last day of its fiscal year from December 31 of each year.

Section 1.3  Interpretation. In this Agreement, unless otherwise indicated, the singular includes the plural and conversely; words importing one gender include the others; references to statutes or regulations are to be construed as including all statutory or regulatory provisions consolidating, amending or replacing the statute or regulation referred to; references to “writing” include printing, typing, lithography and other means of reproducing words in a tangible visible form; the word “or” shall not be exclusive (i.e., shall be deemed to include “and/or”); the words “including,”“includes” and “include” shall be deemed to be followed by the words “without limitation”; references to articles, sections (or subdivisions of sections), exhibits, annexes or schedules are to such parts of this Agreement; references to agreements and other contractual instruments shall be deemed to include all subsequent amendments, extensions and other modifications to such instruments (without, however, limiting any prohibition on any such amendments, extensions and other modifications by the terms of this Agreement); and references to Persons include their respective permitted successors and assigns and, in the case of any Governmental Authority, Persons succeeding to their respective functions and capacities.

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SECTION 2

PURCHASE AND SALE OF SECURITIES

Section 2.1Note Purchase

.

(a)   At the Initial Closing, Issuer issued to certain Purchasers, and each of such Purchasers purchased from Issuer, a Note or Notes in an aggregate principal amount equal to the such Purchaser’s Initial Commitment Amount on the Initial Advance Date at which time such Purchasers made an initial advance on the Notes in the amount of $5,000,000, with an additional $5,000,000 advanced no later than ten (10) Business Days after the Initial Closing (collectively, the “Initial Advance”).

(b)   Such Purchasers have made additional advances to Issuer on the Notes (the “Additional Advances”) from time to time during the Commitment Period in a total aggregate amount, including the Initial Advance, of $30,000,000;

(c)         Subject to the terms and conditions hereof, including Sections 6.1 and 6.2, at the closing of the transactions described herein (the “Amendment Closing”), the Issuer shall issue to the Purchasers, and each of the Purchasers shall purchase from Issuer, a Note or Notes in an aggregate principal amount equal to the such Purchaser’s Subsequent Commitment Amount (collectively, the “Subsequent Advance Notes”) and Purchasers agree to make additional advances to the Issuer (so long as all conditions precedent required hereby shall have been satisfied) on the Subsequent Advance Notes (the “Subsequent Advances”) from time to time during the Commitment Period in an aggregate principal amount equal to the such Purchaser’s Subsequent Commitment Amount; provided, the aggregate amount of all Advances shall not exceed the Aggregate Commitment Amount.

Section 2.2  The Notes. Issuer’s obligation to repay to the Holders the aggregate amount of Advances made thereto in accordance with Section 3.3 and 3.4, together with interest accruing in connection therewith, shall be evidenced by senior secured amortizing promissory notes (the “Notes”) made by Issuer in the form of Exhibit A with appropriate insertions, each payable to the order of the Note Holders in the stated principal amounts of the Notes set forth on Exhibit B-2 hereof as the same may be updated as amended from time to time. Interest on the Notes shall accrue and be due and payable as provided herein and therein. Amounts borrowed and repaid on the Notes may not be re-borrowed hereunder.

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Section 2.3  Request for Advances. Issuer must give the Purchasers at least ten (10) Business Days’ prior written notice of any requested Subsequent Advance, unless otherwise waived by Administrative Agent. Each such written notice must be made in the form and substance of the “Request for Subsequent Advance” attached as Exhibit G (duly completed).

(a)   All Advances shall be made before the Commitment Expiry Date and shall each be in a minimum amount (with respect to all, as opposed to any, Purchasers) of $2,000,000 and integral multiples of $500,000 in excess of that amount.

(b)   If all conditions precedent to such Advance have been met as provided in Sections 6.1, 6.2 and 6.3, as appropriate, the Purchasers will, on the funding date specified in Issuer’s Request for Subsequent Advance or on the date such conditions precedent have been met, make the proceeds of such Advance available to Issuer in immediately available funds.

Section 2.4  Commitment Fee. Issuer agrees to pay a commitment fee (the “Commitment Fee”) on Unused Availability (as defined below) from time to time. As used herein “Unused Availability”means the difference between (a) the amount of Availability applicable from time to time minus (b) the aggregate amount of all Advances theretofore made. The Commitment Fee will be payable to Administrative Agent quarterly in arrears on each Quarterly Payment Date and will be calculated at 0.5% per annum on the basis of a 360-day year and the actual number of days elapsed and the amount of the Unused Availability as of 5:00 p.m. local Los Angeles time on each day.

Section 2.5  Use of Proceeds. The proceeds from the issuance of the Notes will be used by the Issuer solely (a) to pay Approved Capital Expenditures as described in the Development Plan attached hereto as Schedule 2.5 and (b) to pay the Tamco Origination Fee and all expenses of the Purchasers, the Administrative Agent and the Collateral Agent, including, without limitation, the fees and expenses of their counsel, consultants and other advisors.

Section 2.6  Collateral Account

.

(a)    Establishment of Collateral Accounts; Rules.

(i)    Issuer shall establish and maintain at its expense a collateral account (the “Collateral Account”) pursuant to the Deposit Account Control Agreement.

(ii)    Issuer shall deposit or cause to be deposited into the Collateral Account all Gross Cash Revenues from and after the Initial Advance through the Maturity Date from the Project.

(iii)    On the last Business Day of each month, all amounts in the Collateral Account shall be applied in the following order or priority:

(A)    Direct Taxes and the Overriding Royalty Interest;

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(B)    Approved LOE;

(C)    Fees and expenses under the Note Documents;

(D)    Accrued and unpaid interest on the Notes and accrued unpaid Commitment Fee;

(E)    Approved Capital Expenditures;

(F)    Payments of principal on the Notes; and

(G)    Permitted Distributions.

(iv)    Collateral Agent may instruct the administrator of the Collateral Account to transfer or disburse amounts from it to Administrative Agent only to the extent such amounts are due and payable under the Notes, this Agreement or any other Note Document.

(v)    After the occurrence of an Event of Default under any Note Document or Issuer’s failure to comply with the terms of this Section 2.6, Collateral Agent may, at its option, apply all sums in the Collateral Account to the reduction of outstanding principal, interest and other sums owed by Issuer on, the Notes or other Note Documents.

(vi)    Upon the satisfaction in full of all amounts owed by Issuer under the Note Documents, Collateral Agent shall have all amounts remaining in the Collateral Account disbursed to Issuer.

(b)    Notice. Not later than five (5) business days after a request by the Administrative Agent, Issuer shall send a notice, substantially in the form of Exhibit J, to all existing and/or new purchasers of Hydrocarbon produced from the Material, directing them to forward all amounts payable to Issuer directly to the Collateral Account at the mailing address of the depositary bank for deposit into the Collateral Account. The failure of such Hydrocarbon purchasers to comply with any such notice shall not constitute a Default hereunder by any Related Party, provided that (i) such Hydrocarbon purchasers’ failure to comply with such notice is not done at the request of Issuer and (ii) Issuer shall forward all amounts received from such Hydrocarbon purchasers to the Collateral Account within one (1) Business Day of Issuer’s or Issuer’s Affiliate’s receipt thereof.

(c)    Acknowledgments. Issuer hereby acknowledges that:

(i)    It has granted and assigned to Collateral Agent a first priority, perfected security interest in the Collateral Account, all funds therein and all proceeds thereof pursuant to the Deposit Account Control Agreement; and

(ii)    Issuer shall not be permitted to withdraw, transfer or disburse any funds from the Collateral Account except in accordance with the terms hereof, the Deposit Account Control Agreement and each other Note Document.

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(d)    Attorney-in-fact. Issuer hereby appoints Collateral Agent its attorney-in-fact, with full power of substitution, to execute and file on behalf of Issuer, any financing statement, continuation statement or instrument of further assurance to more effectively perfect, continue or confirm (i) the provisions of this Section 2.6 and of any agreement entered into by Issuer, Collateral Agent and the depositary bank administering the Collateral Account and (ii) the security interest granted in the Collateral Accounts. This power, being coupled with an interest, shall be irrevocable until all amounts due in connection with the Notes have been paid in full.

Section 2.7  Overriding Royalty Interest.

As additional consideration for the Notes, Issuer and Aurora shall, pursuant to an ORRI Conveyance executed, delivered and recorded concurrently withthe later of the Closing or Issuer’s or Aurora’s acquisition of title, assign to ORRI Assignee an overriding royalty interest (the “Overriding Royalty Interest”) in the Lands covered or included in the Initial Engineering Report or any subsequent Engineering Report and all other properties in the Project Area drilled or otherwise developed by Issuer or Aurora on or before the later of the Maturity Date or the repayment in full of the Notes and the Note Obligations (excluding those Note Obligations arising under the Overriding Royalty Interest). The Overriding Royalty Interest will have a royalty share of four percent (4%) proportionally reduced to Issuer’s or Aurora’s (i) working interest if the burdened interest of Issuer or Aurora shall be a working interest or (ii) overriding royalty or fee interest if the burdened interest of Issuer or Aurora is an overriding royalty or fee interest (as such burdened interest may be adjusted upwards but not downwards by reason of any “back-in,” reversionary, “after-payout” or similar interest or event). The Overriding Royalty Interest shall be senior and superior to the Liens of the Collateral Documents and any other Liens other than Permitted Liens (except as otherwise expressly provided herein).

SECTION 3

TERMS OF THE NOTES

Section 3.1  Rate of Interest; Payment of Interest.

(a)   During the period from the Initial Closing Date to and including the date of their repayment in full, the Notes shall bear and accrue interest on the unpaid principal amount from time to time outstanding at the rate of eleven and one half percent (11 ½%) per annum (the “Coupon Rate”) compounded quarterly on each Quarterly Payment Date to the extent not paid. Interest on the Notes shall be payable in arrears on each Quarterly Payment Date.

(b)   Without limiting the remedies available to the Holders under this Agreement, the other Note Documents or otherwise, to the maximum extent permitted by applicable law, upon the occurrence and during the continuance of an Event of Default under this Agreement, the Administrative Agent or the Requisite Holders may, at their option (except in the case of an Event of Default arising by reason of the commencement of a bankruptcy petition by or against Issuer pursuant to Section 9(a)(vii) or (viii) of this Agreement in which event such imposition shall be automatic), declare the entire outstanding principal amount of the Notes shall accrue interest at the rate of two percent (2%) per annum in addition to the Note Interest rate in effect from time to time (“Default Interest”) until the date of actual payment (after as well as before judgment. In addition and without limiting the foregoing or other remedies available) to Holders, Administrative Agent or Collateral Agent under this Agreement the other Note Documents or otherwise, to the maximum extent permitted by applicable law, without need for any action by Administrative Agent or Requisite Holders, if Issuer fails to make:

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(i)   any payment in respect of the principal or interest due on the Notes on any Payment Date; or

(ii)   any other payment provided for in this Agreement or in any other Note Document, on or before its due date as specified in this Agreement or the other Note Documents (whether at Stated Maturity or otherwise) or, if not so specified, as notified by the Holder to the Issuer,

the Issuer shall pay Default Interest in respect of the amount of such payment due and unpaid from the date any such payment became due until the date of actual payment (as well after as before judgment). Default Interest shall be payable on demand, or if not demanded, on each Quarterly Payment Date after such failure.

Section 3.2  Computation of Interest. Interest shall be computed on the Notes on the basis of a 360-day year and the actual number of days elapsed. Interest on the Notes shall be computed as the sum of the daily interest for the period prior to each Payment Date, taking into account the outstanding principal balance of the Notes on each day of the period (where such balance on any given day shall reflect any payment of principal credited on such date pursuant to Section 3.4 and 3.6 hereof).

Section 3.3  Payment of Principal. The outstanding principal balance of the Notes shall be due and payable in full on the Maturity Date to the extent not prepaid pursuant to Section 3.4, 3.5 or 8.1(b) prior thereto.

Section 3.4  Required Prepayments of the Notes.

(a)   On each Quarterly Payment Date beginning with September 28, 2006 and on each Quarterly Payment Date thereafter, to and including the Quarterly Payment Date immediately preceding the Maturity Date, the Issuer shall make a principal payment in respect of the Notes in an aggregate amount equal to (x) the Dedication Rate multiplied by (y) the Adjusted Net Cash Flow of the ANCF Quarter applicable thereto, in immediately available funds for the account of Holders. If any principal or interest amount payable under the Notes remains outstanding at the Maturity Date, such amount must be paid in full by the Issuer to the Holders in immediately available funds on such Maturity Date.

(b)   If the Requisite Holders shall, in their sole discretion approve the sale of any Collateral, Issuer shall make a principal payment in respect of the Notes in an aggregate amount equal to the sales proceeds received by Issuer net only of reasonable out-of-pocket costs of such sale paid to non-Affiliates of Issuer.

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Section 3.5  Optional Prepayments of the Notes.

(a)   Except as required under Section 3.4 or as permitted under Section 3.5(b), the Issuer may not prepay (a) any principal on the Notes prior to August 15, 2006 and (b) principal on the Notes in excess of $30,000,000 prior to the second anniversary of the Amendment Closing Date. Thereafter, the Issuer may prepay the Notes, at its option, in accordance with the procedures set forth in Section 3.6, in whole or in part so long as such prepayment is accompanied by the payment of, and there shall be due and payable upon any prepayment in full of principal during such period whether by optional prepayment or mandatory prepayment pursuant to Section 3.4(b), a prepayment premium (the “Prepayment Premium”) equal to the product of the applicable “Prepayment Premium Percentage” set forth below opposite the time period in which the date of prepayment occurs multiplied by the principal amount prepaid:

Date of Prepayment of First $30 million of Principal	Prepayment Premium Percentage
Prior to August 15, 2007	5%
August 15, 2007 to August 14, 2008	2.5%
On and after August 15, 2008	0%

Date of Prepayment of any Principal in excess of $30 million	Prepayment Premium Percentage
Prior to December 9, 2008	5%
December 9, 2008 to December 9, 2009	2.5%
On and after December 10, 2009	0%

Notwithstanding the foregoing and for the avoidance of doubt, any scheduled principal payment under Section 3.4(a) hereof or principal prepayment made with Collateral insurance proceeds pursuant to any mandatory prepayment provision of any Collateral Document (but excluding any mandatory prepayment under Section 3.4(b) or after the occurrence of an Event of Default) shall be at par without payment of a Prepayment Premium.

(b)   In addition to the prepayments required under Section 3.4 or permitted under Section 3.5(a) above, the Issuer may prepay the Notes in part in accordance with the procedures set forth in Section 3.6 in order to and to the extent necessary to cure a Coverage Deficiency without payment of a Prepayment Premium.

Section 3.6  Prepayment.

(a)   The Issuer shall have the right, subject to Section 3.5, but not the obligation, to prepay all or any portion of the Notes pursuant to Section 3.5 (the “Prepayment”), provided that:

(i)   the Issuer shall deliver to the Holders a prepayment notice in writing (the “Prepayment Notice”) substantially in the form of Exhibit H to this Agreement not less than thirty (30) Business Days prior to the date of the proposed Prepayment, setting forth the date and amount of such proposed Prepayment;

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(ii)   the Prepayment shall be effective as of the subsequent Quarterly Payment Date;

(iii)   any Prepayment Notice delivered shall be irrevocable;

(iv)   the Issuer shall, at the time of such Prepayment, pay all accrued and unpaid interest with respect to the portion of the Notes being prepaid;

(v)   the Issuer shall deliver to the Holders, prior to the date of Prepayment, evidence satisfactory to the Holders that all approvals necessary in respect of the Prepayment have been obtained from all Governmental Authorities and all other Persons;

(vi)   such Prepayment shall be in an amount not less than Five Million Dollars ($5,000,000) in the aggregate with respect to all Notes, except if the principal amount outstanding under the Notes is less than $5,000,000, in which case the Prepayment shall be equal to such remaining principal amount; and

(vii)   in the case of a Prepayment of less than the entire principal amount of the Notes then outstanding, the amount of any Prepayment shall be made ratably as to all outstanding Notes based on the Pro Rata Portion of the aggregate amount of such Prepayment and shall be applied to scheduled principal payments due on the Notes under Section 3.4(a) in reverse order of maturity.

(b)   Any principal prepaid pursuant to Section 3.5 hereof shall be in addition to, and not in lieu of, all payments otherwise required to be paid under the Note Documents at the time of such prepayment. Any prepayments pursuant to Section 3.5 hereof shall be applied first, to any prepayment premium payable under Section 3.5 hereof, second, to accrued but unpaid interest on the Notes and third, to outstanding principal on the Notes until paid in full.

Section 3.7  General Payment Provision.

(a)   Except as may be agreed by Holders, Issuer shall make each payment which Issuer owes under this Agreement and any of the other Note Documents not later than 10:00 a.m., New York, New York time, on the date such payment becomes due and payable, without set-off, deduction or counterclaim, in lawful money of the United States of America, in immediately available funds sent by wire transfer to the bank accounts specified with respect to each Holder on Exhibit D attached hereto (or to such other bank and accounts and pursuant to such other directions as the Holders may from time to time specify). Any payment received by the Holders after such time shall be deemed to have been made on the next following Business Day. Should any such payment become due and payable on a day other than a Business Day, the maturity of such payment shall be the succeeding Business Day. Each payment under a Note Document shall be due and payable at the place provided therein and, if no specific place of payment is provided, shall be due and payable at the place of payment of the Notes. When the Holders collect or receive money on account of the Note Obligations which is insufficient to pay all Note Obligations then due and payable, the Holders shall apply such money pursuant to Subsection 3.7(b) below.

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(b)   Payments or prepayments of principal on the Notes shall be applied ratably to such Notes based on their respective Pro Rata Portions. Payments of interest or premium on the Notes shall be applied ratably to such Notes based on the respective amounts then owed on the respective Notes. Except for prepayments pursuant to Section 3.4 or Section 3.5 (which shall be applied as provided in Section 3.6(b)), any amount received by any Holder, whether as an interest payment or principal payment from or on behalf of Issuer, shall be applied as follows in descending order of priority:

(i)   to all costs and expenses (including reasonable attorneys’ fees) payable pursuant to Section 10.15 hereof or in enforcing any Note Obligations of, or in collecting any payments from, any obligor hereunder or under the other Note Documents;

(ii)   to Note Obligations (other than principal or interest) then due and owing to Holders under any of the Note Documents;

(iii)   to interest which has accrued on any amounts hereunder, including, without limitation, on the Notes pursuant to Section 3.1;

(iv)   to payment of principal on the Notes until paid in full; and

(v)   if all Note Obligations under the Note Documents have been paid in full, to the Issuer.

Section 3.8  Ranking. The Notes are senior secured obligations of the Issuer. The Notes shall be senior in all respects to any other Indebtedness of Issuer, other than Indebtedness permitted under Section 5.2(f) (which may rank pari passu to the Notes in right of payment, but shall be structurally subordinated to the Notes).

Section 3.9  Taxes, Duties and Fees

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(a)   Except where Issuer is contesting in good faith and has established adequate reserves, Issuer shall pay or cause to be paid all present and future Taxes, duties, fees and other charges of whatsoever nature, if any, now or at any time hereafter levied or imposed by any Governmental Authority, by any department, agency, political subdivision or taxing or other authority thereof or therein, or by any jurisdiction through which Issuer makes payments hereunder, on or in connection with the payment of any and all amounts due under this Agreement and the other Closing Documents, and all payments of principal, interest and other amounts due under this Agreement and the other Closing Documents shall be made without deduction for or on account of any such Taxes, duties, fees and other charges.

(b)   In the event Issuer is required to withhold any such amount or is prevented by operation of law or otherwise from paying or causing to be paid such Taxes, duties, fees or other charges as aforesaid, the principal, interest or other amounts due under this Agreement and the other Closing Documents (as the case may be) shall be increased to such amount as shall be necessary to yield and remit to the payees the full amount such payees would have received (taking into account any such Taxes, duties, fees or other charges payable on amounts payable by the Issuer under this Section 3.9(b) had such payment been made without deduction of such Taxes, duties, fees or other charges (all and any of such additional amounts, herein referred to as the “Additional Amounts”).

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(c)   If Section 3.9(b) above applies and any Holder so requires, Issuer shall deliver to such Holder official tax receipts evidencing payment (or certified copies of them) of such Additional Amounts within thirty (30) days of the date of payment.

(d)   Issuer shall pay all Taxes (including, without limitation, stamp taxes), duties, fees or other charges payable on or in connection with the execution, issue, delivery, registration, notarization or enforcement of this Agreement (including translation costs) and the other Closing Documents and shall, upon notice from any Holder, reimburse such Holder for any such Taxes, duties, fees or other charges paid by the Holder thereon.

SECTION 4

REPRESENTATIONS AND WARRANTIES

Section 4.1  Representations and Warranties of the Issuer. The Issuer hereby represents, warrants and covenants to the Purchasers that, as of the date hereof and as of the Closing Date, each of the following representations and warranties set forth below in this Section 4.1 is true and correct:

(a)   Organization; Powers. Each of the Issuer, Aurora and its Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to carry on its business as now conducted and, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Change, is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required.

(b)   Authorization; Enforceability. The Closing Transactions are within the Issuer’s and Aurora’s corporate powers and have been duly authorized by all necessary corporate and, if required, stockholder action. This Agreement has been duly executed and delivered by the Issuer and constitutes a legal, valid and binding obligation of the Issuer, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors’ rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law.

(c)   Consents and Approvals; No Conflicts. The Closing Transactions (i) do not require any consent or approval of, registration or filing with, or any other action by, any Governmental Authority or any other Person, except (x) such as have been obtained or made and are in full force and effect or where failure to obtain such consent or approval will not have a Material Adverse Effect and (y) filings and recordings required to perfect and assign the Liens created under the Collateral Documents and the Overriding Royalty Interest under the ORRI Conveyance, (ii) will not violate any applicable law or regulation or the charter, by-laws or other organizational documents of the Issuer, Aurora or any of its Subsidiaries or any order of any Governmental Authority, (iii) will not violate or result in a default under any material indenture, agreement or other instrument binding upon the Issuer, Aurora or any of its Affiliates or its assets, or give rise to a right thereunder to require any payment to be made by the Issuer, Aurora or any of its Affiliates, and (iv) will not result in the creation or imposition of any Lien on any asset of the Issuer, Aurora or any of its Subsidiaries except as contemplated as part of the Closing Transactions.

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(d)   Financial Condition; No Material Adverse Change.

(i)   Each of Aurora and the Issuer has heretofore furnished to the Purchasers the financial statements (including profit and loss statements and statistical data) of Aurora for the years ended December 31, 2001, December 31, 2002 and December, 2003 and tax returns for the calendar years 1998, 1999, 2000, 2001, 2002 and 2003 and the balance sheet of Issuer as of June 30, 2004, attached hereto as Schedule 4.1(d)(i). Such financial and other information is accurate in all material respects as of the dates and for such periods set forth therein and presents fairly, in all material respects, the financial condition and results of operations of the Persons reflected therein on a consolidated basis as of such dates and for such periods.

(ii)   Since the formation of Aurora or the Issuer, as applicable (a) there has been no material adverse change in the business, property, operations, prospects or financial condition of Aurora, the Issuer, or the Issuer and its Subsidiaries, taken as a whole, as applicable and (b) no Restricted Payment or investment (other than a Permitted Investment) has been, directly or indirectly, declared, ordered, paid or made. Each of the Issuer, Aurora and its Subsidiaries is Solvent.

(iii)   Each of the Issuer and Aurora has heretofore furnished to the Purchasers the projections referred to on Schedule 4.1(d)(iii) hereto, which projections were prepared in good faith, are based upon assumptions that the Issuer and Aurora believe are reasonable and, to the best of the Issuer’s and Aurora’s knowledge, take into account all material information regarding the matters set forth therein, but excluding items which affect the economy generally.

(iv)   Except as set forth in the financial and other information referenced in this Section 4.1(d), none of the Issuer, Aurora or any Subsidiaries has any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) required by GAAP to be set forth on a consolidated balance sheet of Issuer, Aurora or any of its Subsidiaries or in the notes thereto or which, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Change.

(e)   Properties.

(i)Title; Collateral Documents; Interests Issuer Collateral. Subject to this paragraph, Issuer (or, with respect to Collateral owned by Aurora, Aurora) owns and has good, legal and marketable title (with respect to personality) and good, legal and indefeasible title (with respect to real property) to the Collateral purported to be so owned and covered by the Collateral Documents to which it is a party free and clear of all Liens other than Permitted Encumbrances. Issuer’s (or, as applicable, Aurora’s) ownership of the interest in Qualified Properties has not been forfeited and there is no basis for a claim of forfeiture under any documents relating thereto. Issuer (or, as applicable, Aurora) is entitled to receive (net of all Permitted Encumbrances) the share of the oil, gas and other minerals produced from or allocated to the wells, leases and lands listed or described in Schedule 4.1(e) hereto or in any Security Document (the “Collateral Properties”) specified as fractional, percentage or decimal interests in such Schedule 4.1(e) hereto or Security Document under the heading “NRI”. Such shares of production which Issuer (or, as applicable, Aurora) is entitled to receive (and Issuer’s (or, as applicable, Aurora’s) share of expenses relating to the Collateral Properties with respect to each lease and lands affected thereby and also specified in Schedule 4.1(e) or Security Document under the heading “WI”) are not subject to change except, and only to the extent that, such changes are reflected in Schedule 4.1(e); and such shares of production and the oil and gas interests to which some of them relate are (and, unless and until released by Collateral Agent, shall remain) encumbered by the Collateral Documents. There is no financing statement, mortgage or similar document covering any Collateral on file in any public office naming any party other than Collateral Agent as mortgagee or secured party other than financing statements, mortgage or similar documents which have heretofore expired or been terminated.

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(ii)Status of Leases, etc. The leases and other contracts and agreements, permits and approvals forming a part of the Collateral Properties, which are material to the operation or value of any Properties, when taken as a whole, are in full force and effect. All rents, royalties and other payments due and payable under such leases and other contracts and agreements, forming a part of the Collateral Properties, or under the Permitted Encumbrances, have been properly and timely paid in accordance with prudent industry practices, but in no event later than ninety (90) days past due. Issuer is not in default with respect to its obligations under such leases and other contracts or agreements, or under Permitted Encumbrances, or otherwise attendant to the ownership or operation of the Collateral Properties, where such default could have a Material Adverse Effect.

(iii)Production Sales, etc. Except as set forth in the Disclosure Matters, neither Issuer (or, as applicable, Aurora) or Issuer’s (or, as applicable, Aurora’s) predecessors-in-title, including without limitation Aurora, have received prepayments (including, but not limited to, payments for gas not taken pursuant to “take or pay” arrangements) for any oil or gas to be produced from the Collateral Properties after the Closing, no Collateral Property is subject to any contractual or other arrangement whereby payment for production from such Collateral Property is to be deferred for a substantial period after the end of the calendar month in which such production is delivered in the case of oil, not in excess of thirty (30) days, and in the case of gas, not in excess of sixty (60) days. Except for Disclosed Matters, no Collateral Property is subject to any contractual or other arrangement for the sale of hydrocarbons which cannot be canceled on ninety (90) days’ or less notice. No Collateral Property is subject at the present time to any regulation refund obligation, and to the best of Issuer’s and Aurora’s knowledge and belief, no situation exists where the same might be imposed. Except for Disclosed Matters, no Collateral Property is subject to a gas balancing arrangement under which an imbalance exists, with respect to which imbalance Issuer (or, as applicable, Aurora) is in an overproducing or overproduced status and is required to (i) permit one or more third parties to take a portion of the production attributable to such Collateral without payment (or without full payment) therefor and/or (ii) make payment in cash, in order to correct such imbalance.

(iv)Operation of Collateral Properties. The Collateral Properties have been and are being operated in a good and workmanlike manner in compliance with applicable joint operating agreements, laws, rules and regulations. Neither Issuer nor Aurora is aware of any fact or condition that would cause a material risk that (1) the Collateral Properties will not continue to produce Hydrocarbons as projected in the Initial Engineering Report, (2) either the Hydrocarbons produced from the Collateral Properties will not be sold or Issuer’s share of sales proceeds will not be remitted at its direction, in each case as consistent with prior practice, and (3) once funded as contemplated hereby, the Approved Development Plan will not be conducted as contemplated therein.

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(f)   Litigation; Commercial Tort Claims; Environmental Matters.

(i)   After giving effect to the Closing Transactions, and except for the Disclosed Matters set forth on Schedule 4.1(f)(i), there are no judgments, decrees or orders in effect and binding on the Issuer, Aurora, any of its Subsidiaries or any of their respective assets and no actions, suits, or proceedings (or facts that would reasonably be expected to give rise to an action, suit, or proceeding) by or before any arbitrator or Governmental Authority pending against or, to the knowledge of the Issuer or Aurora, threatened against the Issuer, Aurora or any of its Subsidiaries or any of their respective assets.

(ii)   After giving effect to the Closing Transactions, and except for the Disclosed Matters set forth on Schedule 4.1(f)(i), as of the Closing Date, the Issuer does not hold any commercial tort claims in respect of which a claim has been filed in a court of law or a written notice by an attorney has been given to a potential defendant.

(iii)   After giving effect to the Closing Transactions, and except for the Disclosed Matters, neither the Issuer, Aurora nor any of its Subsidiaries (w) has failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any Environmental Law, (x) has become subject to any Environmental Liability, (y) has received written notice of any claim with respect to any Environmental Liability or (z) has a reasonable basis to know of any basis for any Environmental Liability, except to the extent any such event, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Change.

(g)   Compliance with Laws and Agreements. Each of the Issuer and its Subsidiaries is in compliance with all Governmental Requirements applicable to it or its property, including, without limitation, all FERC regulations, and all indentures, agreements and other instruments binding upon it or its property, except to the extent any noncompliance, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Change. None of the Issuer, Aurora or any of its Subsidiaries or any holder of more than ten percent (10%) of the Capital Stock of Aurora, is a Person described by section 1 of Executive Order 13224 of September 24, 2001 entitled Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit or Support Terrorism, 66 Fed. Reg. 49,079 (2001), and none of the Issuer, Aurora or any of its Subsidiaries or any holder of more than ten percent (10%) of the Capital Stock of Aurora engages in any transactions or dealings, or is otherwise associated with any such Persons. Neither the Issuer, Aurora nor any of its Subsidiaries is in violation of the USA Patriot Act, as amended. Neither the Issuer, Aurora nor any of its Subsidiaries is bound by any agreement, document, instrument, judgment, decree, order, statute, law, rule or regulation that limits or could reasonably be expected to limit its performance under any Closing Document.

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(h)   Investment and Holding Company Status. Neither the Issuer, Aurora nor any of its Subsidiaries is (i) an “investment company” as defined in, or subject to regulation under, the Investment Company Act of 1940 or (ii) a “holding company” as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935.

(i)   Taxes. Aurora and each Subsidiary thereof has timely filed or caused to be filed all Tax returns and reports required to have been filed and has paid or caused to be paid all Taxes required to have been paid by it, except Taxes that are being contested in good faith by appropriate proceedings and for which Aurora, and such Subsidiary or Subsidiaries of Aurora, as applicable, has set aside on its books adequate reserves. None of the Issuer, any Subsidiaries of the Issuer or Aurora has executed any waiver or waivers that would have the effect of extending the applicable statute of limitations or period in respect of any tax liabilities. The charges, accruals and reserves in the financial statements referred to in Section 5.1(c) in respect of taxes for all fiscal periods are adequate, and there are no known material unpaid assessments for additional taxes for any fiscal period or of any basis therefor.

(j)   ERISA. Neither the Issuer, Aurora nor or any ERISA Affiliate has at any time within six years prior to the Closing Date sponsored, maintained or contributed to (and has not been required to do the same) any Plan or any Multiemployer Plan, and no act, omission or transaction has occurred which could result in an imposition on the Issuer, Aurora or any ERISA Affiliate (whether directly or indirectly) of (A) liability under Section 502 of ERISA or a tax or penalty imposed pursuant to Subsections (c), (i) or (l) of Section 502 of ERISA or a tax imposed pursuant to Chapter 43 of Subtitle D of the Code or (B) breach of fiduciary duty liability damages under Section 409 of ERISA which could reasonably be expected to have a Material Adverse Effect.

(k)   Disclosure. The Issuer and/or Aurora has disclosed to the Purchasers all agreements, instruments and corporate or other restrictions to which it or any of its Subsidiaries is subject, and all other matters known to it, that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Change. The Closing Documents and the other reports, financial statements, certificates or other information furnished by or on behalf of the Issuer to any Purchaser in connection with the negotiation of the Closing Documents or delivered hereunder (as modified or supplemented by other information so furnished), do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, that, with respect to projected financial information, the Issuer represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time.

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(l)   Capital Structure. Schedule 4.1(l) hereto accurately reflects, as of the Closing Date (and after giving effect to the Closing Transactions), (i) the exact legal name of the each of Issuer Aurora and each of its Subsidiaries, (ii) the jurisdiction of incorporation or organization of the Issuer, Aurora and its Subsidiaries, (iii) the jurisdiction in which each of the Issuer, Aurora and its Subsidiaries is qualified to transact business as a foreign corporation, foreign partnership or foreign limited liability company, (iv) the organizational identification number of the Issuer, Aurora and each of its Subsidiaries (or indicates that such entity has no organizational identification number), (v) the chief executive office of the Issuer, Aurora and each of its Subsidiaries, (vi) the federal employer identification number of the Issuer, Aurora and each of its Subsidiaries, (vii) the authorized, issued and outstanding Equity interests of the Issuer, Aurora and its Subsidiaries, including the names of (and number of shares or other Equity securities held by) the record and beneficial owners of such securities, and (viii) all outstanding warrants, options (including option plans), subscription rights, convertible securities or other rights to purchase Capital Stock, partnership or limited liability company interests of the Issuer, Aurora and any of its Subsidiaries. All of the outstanding Equity securities of the Issuer, Aurora and each of its Subsidiaries are and will be, duly authorized, validly issued, fully paid and non-assessable free and clear of any preemptive or similar right. Subject to the accuracy of the representations and warranties set forth in Section 4.2, all such securities have been offered and sold in compliance with applicable securities laws. Except as set forth on Schedule 4.1(l) hereto or in the Closing Documents, there are no outstanding shareholders agreements, voting agreements or other agreements of any nature which in any way restrict or effect the transfer, pledge or voting of any of the Equity securities of the Issuer, Aurora or any of its Subsidiaries or subject any of such securities to any put, call, redemption obligation or similar right or obligation of any nature, or require the Issuer, Aurora or any of its Subsidiaries to declare or pay any dividends or distributions or register securities under applicable securities laws. Neither the Issuer, Aurora nor any of its Subsidiaries is obligated to issue or sell any of its Equity securities to any Person, except as set forth on Schedule 4.1(l) hereto or pursuant to the Closing Documents. None of the provisions of the charter or by-laws of the Issuer or any other agreement, document or instrument binding on or applicable to the Issuer contains any provision requiring a higher voting requirement with respect to action taken (and/or to be taken) by the board of directors or the holders of shares of stock of the Issuer than that which would apply in the absence of such provision.

(m)   Material Contracts. The agreements, leases, indentures, purchase agreements, obligations in respect of letters of credit, guarantees, joint venture agreements, and other instruments set forth on Schedule 4.1(m) include all material contracts and agreements (including, without limitation, any contract, lease, agreement, or commitment, written or oral, providing for receipt or payment, contingent or otherwise, of (i) $100,000 or more, or (ii) which may not be terminated without payment or penalty with notice of ninety (90) days or less) of the Issuer, Aurora and its Subsidiaries as of the Closing Date (and after giving effect to the Closing Transactions) relating to the ownership and operation of the assets of the Issuer and its Subsidiaries or any Collateral owned by Aurora (collectively, the “Material Contracts”). Except as set forth on Schedule 4.1(m), as of the Closing Date (and after giving effect to the Closing Transactions), each Material Contract is in full force and effect, except for such matters in respect of all Material Contracts that individually, or in the aggregate, are not reasonably likely to have a Material Adverse Effect. The Issuer, Aurora and its Subsidiaries (or their predecessors in interest) have in all respects performed all obligations required to be performed by them as of the Closing Date under the Material Contracts, and are not in default under any obligation of any Material Contract, and as of the Closing Date, to the knowledge of the Issuer, no other party to any Material Contract is in default thereunder, except to the extent any such defaults, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Change. As of the Closing Date, the Issuer, Aurora and its Subsidiaries have not assigned to any Person any of their rights under the Material Contracts other than assignments from Aurora to Issuer. As of the Closing Date, the Issuer, Aurora and its Subsidiaries have not waived any of their rights of material value under the Material Contracts. Schedule 4.1(m) also sets forth all transactions between the Issuer and its Subsidiaries or Affiliates within the past 12 months in excess of $500,000, or contemplated to be entered into after the date hereof.

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(n)   Defaults. No Default hereunder has occurred and is continuing.

(o)   Insurance. Schedule 4.1(o) attached hereto contains an accurate and complete description, as of the Closing Date (and after giving effect to the Closing Transactions), of all material policies of fire, liability, workmen’s compensation and other forms of insurance owned or held by the Issuer and each Subsidiary. Such policies constitute all policies of insurance required to be maintained under Section 5.1(g) hereof. All such policies are in full force and effect, all premiums due with respect thereto have been paid, and no notice of cancellation or termination in all material respects has been received with respect to any such policy. Such policies are sufficient for compliance in all material respects with all requirements of law and of all agreements to which the Issuer or any Affiliate is a party; are valid, outstanding and enforceable policies; provide adequate insurance coverage in at least such amounts and against at least such risks (but including in any event public liability) as are usually insured against in the same general area by companies engaged in the same or a similar business for the assets and operations of the Issuer and each Affiliate; will remain in full force and effect through the respective dates set forth in Schedule 4.1(o) without the payment of additional premiums; and will not in any way be affected by, or terminate or lapse by reason of, the transactions contemplated by this Agreement and the Note Documents and Closing Documents.

(p)   Closing Documents. The Issuer has provided to the Purchasers a true, correct and complete copy of each Closing Document, and all other material documents, instruments and agreements entered into by and between or among the Issuer, any of its Subsidiaries, including all amendments and modifications thereto (whether characterized as an amendment, modification, waiver, consent or similar document) relating to the Closing Transactions. No material rights or obligations of any party to any of the Closing Documents have been waived and neither the Issuer, Aurora nor any of its Subsidiaries, and to the knowledge of the Issuer, no other party to any of the Closing Documents, is in default of its obligations or in breach of any representations or warranties made thereunder. Each of the Closing Documents to which Issuer, Aurora or any Affiliate thereof is a party is a valid, binding and enforceable obligation of the Issuer, Aurora and/or any such Affiliate (as applicable) in accordance with their terms and in full force and effect.

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(q)   Intellectual Property. Except as set forth in Schedule 4.1(q), each of the Issuer and its Subsidiaries owns or licenses or otherwise has the right to use all licenses, permits, patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, copyright applications, franchises, authorizations, non-governmental licenses and permits and other intellectual property rights that are necessary for the operation of its business, without infringement upon or conflict with the rights of any other Person with respect thereto, except for such infringements and conflicts which, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Change. Set forth in Schedule 4.1(q) is a complete and accurate list as of the Closing Date of all such material licenses, permits, patents, patent applications, trademarks, trademark applications, service marks, tradenames, copyrights, copyright applications, franchises, authorizations, non-governmental licenses and permits and other intellectual property rights of the Issuer and its Subsidiaries. No slogan or other advertising device, product, process, method, substance, part or other material now employed, or now contemplated to be employed, by the Issuer or its Subsidiaries infringes upon or conflicts with any rights owned by any other Person, and no claim or litigation regarding any of the foregoing is pending or threatened, except for such infringements and conflicts which could not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Change. To the best knowledge of the Issuer and its Subsidiaries, no patent, invention, device, application, principle or any statute, law, rule, regulation, standard or code is pending or proposed, which, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Change.

(r)   Location of Bank Accounts. Schedule 4.1(r) sets forth a complete and accurate list as of the Closing Date of all deposit, checking and other bank accounts, all securities and other accounts maintained with any broker dealer and all other similar accounts maintained by the Issuer, together with a description thereof (i.e., the bank or broker dealer at which such deposit or other account is maintained and the account number and the purpose thereof).

(s)   Ford Disqualified Persons. Ford Disqualified Persons do not individually or in the aggregate own more than 35% of the Equity of Issuer or Aurora, or any direct or indirect owner of more than 35% of the Equity of Issuer or Aurora.

Section 4.2  Representations and Warranties of the Purchasers. Each of the Purchasers hereby, represents, warrants and covenants to Issuer as follows:

(a)   Organization of Purchasers. Each of the Purchasers has been duly formed and is validly existing as a corporation or other legal entity in good standing under the laws of its jurisdiction of organization. Each of the Purchasers has full power and authority to execute and deliver this Agreement and to perform its obligations hereunder and to consummate the transactions contemplated hereby.

(b)   Authority of Purchasers. The execution and delivery by each of the Purchasers of this Agreement, and the performance of its obligations hereunder, have been duly and validly authorized by all necessary actions of such Purchaser. This Agreement and all other Closing Documents executed by each of the Purchasers have been duly and validly executed and delivered by such Purchaser and constitute the legal, valid and binding obligations of such Purchaser, enforceable against such Purchaser, in accordance with their terms, except to the extent such enforceability (a) may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to creditors’ rights generally and (b) is subject to general principles of equity.

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(c)   Compliance with Laws and Other Instruments. The consummation of the transactions contemplated by this Agreement and the execution, delivery and performance of the terms and provisions of the Closing Documents to which each of the Purchasers is a party will not (i) contravene, result in any breach of, or constitute a default under, any charter or bylaws or other organizational documents of such Purchaser, or material agreement or instrument to which such Purchaser is a party, (ii) conflict with or result in a breach of any of the terms, conditions or provisions of any Order of any court, arbitrator or Governmental Authority applicable to such Purchaser, or (iii) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to such Purchaser.

(d)   Acquisition for Purchaser’s Account. Each of the Purchasers is acquiring and will acquire the Notes for its own account, with no present intention of distributing or reselling such Notes or any part thereof in violation of applicable securities laws.

(e)   Notes not Registered. Each of the Purchasers acknowledges that its Notes have not been, and when issued will not be, registered under the Securities Act or the securities laws of any state in the United States or any other jurisdiction and may not be offered or sold by such Purchaser unless subsequently registered under the Securities Act (if applicable to the transaction) and any other securities laws or unless exemptions from the registration or other requirements of the Securities Act and any other securities laws are available for the transaction.

(f)   Accredited Investor. Each of the Purchasers represents that it is an “accredited investor” within the meaning of Rule 501 of Regulation D promulgated under the Securities Act, as presently in effect.

SECTION 5

COVENANTS OF ISSUER

Section 5.1  Affirmative Covenants to Purchasers. To conform with the terms and conditions under which the Purchasers are willing to have credit outstanding to Issuer, and to induce the Purchasers to enter into this Agreement and to purchase the Notes, the Issuer (and, where indicated, Aurora) hereby warrants, covenants and agrees as follows until such time as the Note Obligations have been paid in full and, in the case of Sections 5.1(d), (e), (f), (g), (h), (i), (j), (k), and (l) hereof, the Closing Documents have been terminated, unless the Holders otherwise approve in writing:

(a)   Board Observation Rights. Each of Fund X-NL and Fund XB-NL (or if both such entities shall no longer be Holders, the Administrative Agent on behalf of the Holders) shall be entitled to appoint one observer (an “Observer”) to the Board of Directors or board of managers (or any similar group performing an executive oversight or similar function) of the Issuer and each Subsidiary and each committee thereof (collectively, the “Board”). Each Observer shall have the right to attend and receive all materials distributed for or at all meetings (telephonic or otherwise) of the Board, except that such Observer shall not be entitled to vote on matters presented to or discussed by the Board nor participate in attorney-client privileged discussions or receive or review any documents subject to an attorney-client or attorney work product privilege. The Administrative Agent and each Observer shall be notified of all meetings and all proposed actions (including not less than two (2) Business Days prior notice of any proposed action to be taken without a meeting) by the Board as if such Administrative Agent or Observer were a member of the Board. Each Observer shall be entitled to be reimbursed by the Issuer for all reasonable and documented out-of-pocket costs and expenses it incurred in connection with its participation in meetings or other activities of the Board.

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(b)   Separateness Covenants.

(i)   The Issuer will not commingle its assets with those of any other Person.

(ii)   The Issuer will conduct its business separately from any direct or ultimate parent of the Issuer.

(iii)   The Issuer will maintain separate financial statements from those of any other Person.

(iv)   The Issuer will maintain an “arm’s-length” relationship with its Affiliates.

(v)   The Issuer will not guarantee or become obligated for the debts of any other Person and will not hold out its credit as being available to satisfy the obligations of others.

(vi)   The Issuer will use separate stationery, invoices and checks and will hold itself out as a separate and distinct entity from any other Person.

(vii)   The Issuer will observe all corporate formalities.

(viii)   The Issuer will allocate fairly and reasonably overhead for shared office space, if any.

(ix)   Except as expressly permitted under this Agreement, the Issuer will not pledge its assets for the benefit of any other Person or make any loans or advances to any Person.

(x)   The Issuer will correct any known misunderstanding regarding its separate identity.

(xi)   The Issuer will maintain adequate capital in light of its contemplated business operations.

(xii)   The Issuer will maintain a sufficient number of employees in light of the contemplated business operations.

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(xiii)   The Issuer will maintain books and records separately from any other Person.

(xiv)   The Issuer will maintain accounts separately from any other Person.

(xv)   The Issuer will conduct its business in its own name.

(c)   Financial Statements and Other Information. The Issuer and Aurora, as applicable, will furnish to each Holder and, if applicable, the Collateral Agent:

(i)   within 90 days after the end of each Fiscal Year, Aurora’s and the Issuer’s audited consolidated and consolidating balance sheet and related statements of operations, stockholders’ equity and cash flows as of the end of and for such year, setting forth in each case in comparative form the figures for the previous Fiscal Year, all certified by one of its Responsible Officers and reported on by independent public accountants of recognized national standing (without a “going concern” or like qualification or exception and without any qualification or exception as to the scope of such audit) to the effect that such consolidated and consolidating financial statements present fairly in all material respects the financial condition and results of operations of Aurora or the Issuer and its Subsidiaries, as applicable, on a consolidated basis in accordance with GAAP consistently applied;

(ii)   within 45 days after the end of each Fiscal Quarter, Aurora’s and the Issuer’s consolidated and consolidating balance sheet and related statements of operations as of the end of and for such Fiscal Quarter and the then elapsed portion of the Fiscal Year and the related statements of cash flows and stockholders’ equity for the then elapsed portion of the Fiscal Year, setting forth in each case in comparative form the figures for the corresponding period or periods of (or, in the case of the balance sheet, as of the end of) the previous Fiscal Year, all certified by one of its Responsible Officers as presenting fairly in all material respects the financial condition and results of operations of Aurora or the Issuer and its Subsidiaries, as applicable, on a consolidated basis in accordance with GAAP consistently applied;

(iii)   concurrently with any delivery of the financial statements under Section 5.1(c)(i) or Section 5.1(c)(ii) above, (1) in reasonable detail, management’s discussion and analysis of the results of operations and financial condition of the Issuer, Aurora and its Subsidiaries for such period and (2) a certificate of a Responsible Officer of the Issuer (w) certifying as to whether a Default or Event of Default has occurred and, if a Default or Event of Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto, (x) setting forth reasonably detailed calculations demonstrating compliance with Section 5.2(f) and Section 5.2(g), (y) setting forth a calculation of the Collateral Coverage Ratio and (z) stating whether any change in GAAP or in the application thereof has occurred since the date of the audited financial statements referred to in Section 4.1(d)(i) and, if any such change has occurred, specifying the effect of such change on the financial statements accompanying such certificate;

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(iv)   concurrently with any delivery of Aurora’s or the Issuer’s financial statements under Section 5.1(c)(i) above, a certificate of the accounting firm that reported on Aurora’s or the Issuer’s financial statements stating whether they obtained knowledge during the course of their examination of such financial statements of any breach or any Default or Event of Default;

(v)   promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials, if any, filed by the Issuer or any Affiliate with the Commission or with any national securities exchange;

(vi)   as soon as available and in any event no later than the 25^th day of the following month, monthly operating reports of the Issuer and Aurora which shall include a description by field and well of the gross quantities of Hydrocarbons and water produced from the Qualified Properties during such period;

(vii)   On each Quarterly Payment Date, a consolidated report in detail acceptable to Administrative Agent containing

(A)   a detailed calculation of ANCF for the preceding ANCF Quarter including a detailed aging of Issuer’s accounts receivable and payable;

(B)   regardless of whether the same are included in such calculation of ANCF, a detailed calculation of any LOE, G&A Costs, Capital Expenditures, and other direct charges or overhead costs with respect to the Qualified Properties specifying any material differences from those Approved and those actually incurred;

(C)   a summary of wells drilled, completed or worked over during the reporting period showing the total depth drilled or tested, the depth at which production casing was set, and the existing or anticipated perforated interval and upon request copies of any well logs across the pay sectors;

(D)   a discussion of any current operating problems with any wells and any proposed solutions;

(E)   any technical studies conducted during the reporting period of performance; and

(F)   a projection of Capital Expenditures for the next Calendar Quarter and if any of such Capital Expenditures are not Approved Capital Expenditures the sources of capital for the payment thereof, together with accompanying authority for expenditures if requested by Administrative Agent or Purchasers.

(viii)   during the Commitment Period, (a) a semi-annual Engineering Report, to be effective as of each January 1 and each July 1 and to be delivered to Administrative Agent prior to February 1 and August 1 and for each respective period (or, in the case of 2004, by the date hereof) and (b) thereafter, an annual Engineering Report to be effective as of January 1 of each year and to be delivered prior to February 1 of each year. Each Engineering Report shall:

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(A)   be prepared by the Independent Engineer, concerning all of the oil and gas properties of Issuer (or Aurora, as applicable) including without limitation the Qualified Properties, prepared at Issuer ‘s expense;

(B)   separately report on Proved Developed Producing Reserves, Proved Developed Non-Producing Reserves and Proved Undeveloped Reserves of the Qualified Properties, and separately calculate the NPV10 of each such category of Reserves;

(C)   use pricing specified in the definition of NPV10;

(D)   take into account Issuer ‘s and Aurora’s actual experiences with leasehold operating expenses and other costs in determining projected leasehold operating expenses and other costs;

(E)   take into account any “over-produced” status under gas balancing arrangements;

(F)   contain information and analysis comparable in scope to that contained in the Initial Engineering Report; and

(G)   otherwise be in form and substance satisfactory to Administrative Agent.

In the event that Issuer and Administrative Agent disagree over whether or not any workovers or other remedial Capital Expenditures should be included in an Engineering Report for the purposes of calculating NPV10, the engineers preparing the report shall resolve such disagreement by determining whether such expenditures are likely to be required in accordance with prudent industry practice and shall include or exclude such expenditures based upon such determination.

(ix)   After the Commitment Period, a semi-annual engineering report, which shall be generated internally by Issuer. Such interim engineering reports shall include, but not be limited to, calculations of NPV10 on the Qualified Properties, and shall use prices supplied by Administrative Agent except as modified by prices actually received by Issuer pursuant to oil and gas sales contracts between Issuer (as seller) and third parties (as buyers); and

(x)   as soon as available and in any event not later than November 30 of each Fiscal Year, commencing November 30, 2004, an annual budget of the Issuer and its Subsidiaries reviewed by the board of directors of the Issuer, setting forth in reasonable detail, the projected revenues and expenses for the Issuer and its Subsidiaries for the next succeeding Fiscal Year.

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(d)   Notices of Certain Events. Promptly after the Issuer or Aurora learns of the receipt or occurrence of any of the following, the Issuer will furnish to each Holder and, if applicable, to the Collateral Agent, a certificate of the Issuer, signed by a Responsible Officer, specifying (1) any official notice of any violation, possible violation, non-compliance or possible non-compliance, or claim made by any Governmental Authority pertaining to all or any part of the properties or assets of the Issuer or any of its Subsidiaries which could reasonably be expected to have a Material Adverse Effect; (2) any event which constitutes a Default or Event of Default, together with a detailed statement specifying the nature thereof and the steps being taken to cure such Default or Event of Default; (3) the receipt of any notice from, or the taking of any other action by, the holder of any Indebtedness in excess of $500,000 of the Issuer or Aurora or any of its Subsidiaries with respect to a claimed default, together with a detailed statement specifying the notice given or other action taken by such Holder and the nature of the claimed default and what action the Issuer is taking or proposes to take with respect thereto; (4) any event or condition not previously disclosed to the Holders which violates any Environmental Law and which could reasonably be expected to have a Material Adverse Effect; (5) any event or condition which could reasonably be expected to have a Material Adverse Effect; (6) any notice of the institution of, or any material adverse development in, any action, suit or proceeding or any governmental investigation or any arbitration, before any court or arbitrator or any governmental or administrative body, agency or official, against the Issuer or any of its Subsidiaries or any material property or asset of any thereof, in which the amount involved is material and is not covered by insurance or which, if adversely determined, would have a Material Adverse Effect; or (7) the occurrence of an ERISA Event or a “prohibited transaction,” as such term is defined in Section 406 of ERISA or Section 4975 of the Code, with respect to any Plan has occurred, which such notice shall specify the nature thereof, the Issuer’s proposed response thereto (and, if applicable, the proposed response thereto of any Subsidiary of the Issuer and of any ERISA Affiliate) and, where known, any action taken or proposed by the Internal Revenue Service, the Department of Labor or the PBGC with respect thereto.

(e)   Existence; Conduct of Business. The Issuer and Aurora will, and will cause each of its Subsidiaries to, do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence and the rights, licenses, permits, privileges and franchises material to the conduct of its business.

(f)   Payment of Obligations. The Issuer and Aurora will, and will cause each of its Subsidiaries to, pay its obligations, including the obligation to pay Taxes and Additional Amounts, before the same shall become delinquent or in default, except where (i) the validity or amount thereof is being contested in good faith by appropriate proceedings, (ii) such entity has set aside on its books adequate reserves with respect thereto in accordance with GAAP and (iii) the failure to make payment pending such contest could not reasonably be expected to result in a Material Adverse Change.

(g)   Maintenance of Properties; Insurance.The Issuer and Aurora will, and will cause each of its Subsidiaries to, (i) keep and maintain all of its Property in good working order and condition, ordinary wear and tear excepted, and (ii) maintain, and cause each of its Subsidiaries to maintain insurance coverage as provided in Annex A hereto and (iii) obtain and maintain in effect at all times all material franchises, governmental authorizations, intellectual property rights, licenses and permits, which are necessary for it to own its Property or conduct its business as conducted on the Closing Date. All policies covering the Collateral are to be made payable to the Collateral Agent for the benefit of the Holders, as their interests may appear, in case of loss, under a standard non-contributory “issuer” or “secured party” clause and are to contain such other provisions as the Collateral Agent, the Purchasers or the Requisite Holders may require to fully protect the Holders’ interest in the Collateral and any payments to be made under such policies. All certificates of insurance are to be delivered to the Collateral Agent and each Holder and the policies are to be premium prepaid or paid in installments in accordance with the prior practice of the Issuer (provided, that at the request of the Collateral Agent, the Purchasers or the Requisite Holders, as the case may be, all such premiums shall be prepaid), with the loss payable and additional insured endorsement in favor of the Collateral Agent and such other Persons as the Collateral Agent, the Purchasers or the Requisite Holders may designate from time to time, and shall provide for not less than thirty (30) days’ prior written notice to the Collateral Agent and the Holders of the exercise of any right of cancellation. If the Issuer or any of its Subsidiaries fails to maintain such insurance, the Collateral Agent or any Holder may arrange for such insurance, but at the Issuer’s expense and without any responsibility on the part of the Collateral Agent or any Holder for obtaining the insurance, the solvency of the insurance companies, the adequacy of the coverage, or the collection of claims. Upon the occurrence and during the continuance of an Event of Default, the Collateral Agent shall have the sole right, in the name of the Holders, the Issuer and its Subsidiaries, to file claims under any insurance policies, to receive, receipt and give acquittance for any payments that may be payable thereunder, and to execute any and all endorsements, receipts, releases, assignments, reassignments or other documents that may be necessary to effect the collection, compromise or settlement of any claims under any such insurance policies. If requested by any Holder or, if applicable, any Collateral Agent, the Issuer will furnish or cause to be furnished to the Holders and, if applicable, to the Collateral Agent, a certificate of insurance coverage from the insurer in form and substance satisfactory to the Holders and demonstrating compliance with this Section 5.1(g).

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(h)   Books and Records; Inspection Rights. The Issuer and Aurora will, and will cause each of its Subsidiaries to, furnish to Administrative Agent, Collateral Agent and any Holder any information which Administrative Agent, Collateral Agent or any Holder may from time to time reasonably request concerning any covenant, provision or condition of the Note Documents or any matter in connection with the Collateral or Issuer’s or Aurora’s, or the Subsidiaries’ of Issuer or Aurora, businesses and operations. The Issuer and Aurora will, and will cause each of its Subsidiaries to, keep proper books of record and account in which full, true and correct entries are made of all dealings and transactions in relation to its business and activities. The Issuer and Aurora will, and will cause each of its Subsidiaries to, permit any representatives designated by Administrative Agent, Collateral Agent or any Holder, upon reasonable prior notice, to visit and inspect its properties, to examine and make extracts from its books and records, and to consult with and advise its senior management, officers and independent accountants with respect to its affairs, finances, accounts and condition and any other matters relating to the operation of Issuer or any of its Subsidiaries all at such reasonable times and as often as reasonably requested. In addition, upon the written request of the Administrative Agent, Collateral Agent or any Holder, the Issuer and Aurora shall furnish to the requesting party any document, report, financial data or other information with respect to the operation of Issuer or any of its Subsidiaries so requested by such requesting party.

(i)   Compliance with Laws. The Issuer and Aurora will, and will cause each of its Subsidiaries to, comply with all laws, rules, regulations and orders of any Governmental Authority applicable to it or its property except to the extent any noncompliance, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Change.

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(j)   Further Assurances. At any time or from time to time after the Closing, each of the parties hereto shall execute and deliver to the other parties hereto such other documents and instruments, provide such materials and information and take such other actions as such other parties may reasonably request to consummate the transactions contemplated hereby. The Issuer will, and will cause each Subsidiary to, cure promptly any defects in the creation and issuance of the Notes and the execution and delivery of the Closing Documents and this Agreement. The Issuer and Aurora will, and will cause each Subsidiary to, promptly deliver to any Holder, upon request, such information about the business and affairs and financial condition of the Issuer and its Subsidiaries as any such Holder or, if applicable, Collateral Agent shall reasonably request. Without limiting the foregoing, the Issuer and Aurora, at its expense, will, and will cause each Subsidiary to, promptly execute and deliver to the such holders, upon receipt, all such other documents, agreements and instruments to comply with or accomplish the covenants and agreements of the Issuer, Aurora or any Subsidiary, as the case may be, in the Closing Documents and this Agreement, or to further evidence and more fully describe the collateral intended as security for the Note Obligations, or to correct any omissions in the Security Agreement, or to state more fully the security obligations set out herein or in any of the Collateral Documents or the Security Agreement, or to perfect, protect or preserve any Liens created pursuant to any of the Collateral Documents or the Security Agreement, or to make any recordings, to file any notices or obtain any consents, all as may be necessary or appropriate in connection therewith. The Issuer and Aurora hereby authorize the Holders, and their respective agents, successors and assigns, to file any and all necessary financing statements under the UCC, assignments or continuation statements as necessary from time to time (in the Holders’ discretion) to perfect (or continue perfection of) the Liens granted pursuant to the Note Documents.

(k)   Environmental Matters.

(i)   The Issuer and Aurora will, and will cause each Subsidiary to, establish and implement such policies and procedures as are reasonably calculated to assure on an on-going basis the following: (x) all assets of the Issuer, Aurora and its Subsidiaries and the operations conducted therewith and other activities of the Issuer, Aurora and its Subsidiaries are in compliance with and do not violate the requirements of any Environmental Laws and any documentation of such compliance with Environmental Laws which any Holder may reasonably request shall be provided as promptly as practicable and (y) no oil, hazardous substances or solid wastes are disposed of or otherwise released on or to any Properties owned by any such party in violation of any Environmental Laws.

(ii)   The Issuer and Aurora will promptly notify the Holders and, if applicable, the Collateral Agent in writing of any threatened action, investigation or inquiry by any Governmental Authority of which the Issuer or Aurora has knowledge in connection with any violation of or liability under Environmental Laws.

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(iii)   The Issuer and Aurora will, and will cause each Subsidiary to, conduct environmental due diligence reviews as reasonably requested by the Holders in connection with any future material acquisitions or construction.

(iv)   The Issuer and Aurora will keep any property either owned or operated by it or any of its Subsidiaries free of any Environmental Liens.

(v)   The Issuer and Aurora will provide each Holder with written notice within five (5) days of obtaining knowledge of any Release of a Hazardous Material in excess of any reportable quantity from or onto property at any time owned or operated by it or any of its Subsidiaries and take any Remedial Actions required under Environmental Laws to abate said Release.

(vi)   The Issuer and Aurora will provide the Collateral Agent and each Holder with written notice within ten (10) days of the receipt of any of the following: (A) notice that an Environmental Lien has been filed against any property of the Issuer or any of its Subsidiaries; (B) commencement of any Environmental Action or notice that an Environmental Action will be filed against the Issuer or any of its Subsidiaries; and (C) notice of a violation, citation or other administrative order which could have a Material Adverse Effect.

(l)   Change in Collateral; Collateral Records. The Issuer will, and will cause each of its Subsidiaries to (i) give the Collateral Agent and each Holder not less than thirty (30) days’ prior written notice of any change in the location of any Collateral, other than to locations set forth on Schedule 5.1(l), (ii) advise the Collateral Agent and each Holder promptly, in sufficient detail, of any material adverse change relating to the type, quantity or quality of the Collateral or the Lien granted thereon and (iii) execute and deliver, and cause each of its Subsidiaries to execute and deliver, to the Collateral Agent and each Holder for the benefit of the Holders from time to time, solely for the Collateral Agent’s convenience in maintaining a record of Collateral, such written statements and schedules as the Collateral Agent, the Purchasers or the Requisite Holders may reasonably require, designating, identifying or describing the Collateral.

(m)   Execution of Supplements to ORRI Conveyance. Issuer and, as applicable, Aurora shall execute and deliver to ORRI Assignee from time to time, upon request of ORRI Assignee, Supplements to the ORRI Conveyance conveying to ORRI Assignee overriding royalties in the form and substance acceptable to ORRI Assignee (collectively, the “Supplements to ORRI Conveyance”) with respect to all Lands beneficially owned or in which interests are owned or held by Issuer, Aurora or any Subsidiary, whether now or hereafter acquired, at any time after the Closing Date through and including the later of (i) the Maturity Date or (ii) the date of the payment in full of the Notes, which Lands comprise a portion of the Project and which are either (1) included in or covered by the Initial Engineering Report or (2) drilled, acquired, or otherwise developed in the Project Area, and funded by the proceeds of an Advance or Approved Capital Expenditures; provided, however, that Issuer shall not be obligated to convey an overriding royalty on, or include in a Supplement to ORRI Conveyance, the working interests acquired by Issuer from OIL Energy Corp., Oilfield Investments Ltd., O.I.L. Energy, Corp., NorAm Energy, LLC, NorAm Energy Services, LLC, T.D. Provins Family Trust, LLC, Provins Family, LLC and/or their affiliates or subsidiaries (collectively “OIL”) after the Amendment Closing Date in producing horizons (i.e. a geologic interval to which PDP Reserves are attributable on the date of acquisition) of well bores of wells acquired from OIL. For purposes of clarity, Issuer and, as applicable, Aurora, shall convey an overriding royalty on, and include in a Supplement to ORRI Conveyance, the working interests and other interests acquired by Issuer or Aurora from OIL in the Project Area excepting and excluding therefrom only the producing horizons of well bores of wells producing on the date of acquisition from OIL.

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(n)   Commodity Hedging Agreements. At any time that the Note Obligations (other than the obligations under the ORRI Documents) remain outstanding, the Requisite Holders (or administrative agent acting on their behalf) may give notice to the Issuer, in their sole and absolute discretion, that Issuer shall enter into a commodity hedging agreements in form and substance satisfactory to Administrative Agent, with respect to volumes of Hydrocarbons (up to 75% of the projected production of Issuer’s PDP Reserves during the three years after the date of such notice). Issuer shall enter into such commodity hedging agreement with respect to the specified volumes no later than thirty (30) days after the date of such notice.

(o)   Development Plan; Project Area. Issuer and Aurora shall cause the Development Plan to be performed substantially in accordance with the terms thereof. All interests in the Project Area owned by Aurora or any Affiliate of Aurora other than the Unassigned Interests shall be owned by Issuer and no Affiliate of Issuer shall own or acquire any interest in the Project Area other than the Unassigned Interests. Aurora shall cause all interests in the Project Area heretofore acquired by Aurora or any Affiliate thereof other than Unassigned Interests to be assigned to Issuer no later than the Closing Date. From and after the Closing, Aurora shall cause all Unassigned Interests to be assigned to Issuer without reservation and by warranty assignment no later than thirty (30) days after the date of acquisition by Aurora or any Affiliate thereof. Aurora shall cause all interests in Michigan State leases to be assigned to Issuer by the applicable form of Assignment of Oil and Gas Leases of the Michigan Department of Natural Resources, Forest, Mineral and Fire Management (“MDNR”), subject to consent, by the Closing Date and thereafter diligently prosecute to completion any filings and take such other actions necessary to obtain any necessary approval of the assignment to Issuer. From and after the Closing, Aurora shall cause all of its interests in Michigan State leases in the Project Area to be assigned to Issuer by the applicable form of assignment of the MDNR (subject to consent) within thirty (30) days after the date of execution of any such Michigan State lease and thereafter diligently prosecute to completion any filings and take such other actions necessary to obtain any necessary approval of the assignment to Issuer.

(p)   Resignation as Operator. Issuer, Aurora and any Subsidiary thereof shall, within fifteen (15) days after request from Administrative Agent, Collateral Agent or Requisite Holders after the occurrence of an Event of Default, resign as operator of any Collateral and designate and vote for, as successor operator, the party designated by Administrative Agent, Collateral Agent, Requisite Holders or any receiver or purchaser in foreclosure of such Collateral.

(q)   Wholly Owned Subsidiary; Negative Pledge.Aurora and Issuer will cause Aurora to at all times be the holder of 100% of all classes of the membership interests of Issuer and of any options, warrants or other rights with respect to any of such membership interests. Aurora shall grant a security interest in its membership interest in Issuer to Collateral Agent to secure the Note Obligations but shall not otherwise pledge, encumber or assign any such membership interest or any option, warranty or other right with respect to any such membership interest.

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(r)   Michigan State Lease Approvals. Aurora shall promptly deliver notice to the Purchasers upon receipt of an approval from the MDNR with regard to the assignment of a Michigan State lease to Issuer.

Section 5.2  Negative Covenants to Purchasers. To conform with the terms and conditions under which the Purchasers are willing to have credit outstanding to Issuer, and to induce the Purchasers to enter into this Agreement and purchase the Notes, the Issuer hereby warrants, covenants and agrees as follows until such time as the Note Obligations have been paid in full and this Agreement has been terminated, unless the Holders otherwise approve in writing:

(a)   Restricted Payments. The Issuer will not, and will not permit any of its Subsidiaries to, declare or make, or agree to pay or make, directly or indirectly, any Restricted Payment, except that Issuer may, on any Quarterly Payment Date after all Note Obligations then due have been paid in full pay to Aurora an amount equal to the lesser of (i) 25% of Issuer’s Adjusted Net Cash Flow during the preceding ANCF Quarter and (ii) $300,000 solely to fund general and administrative expenses of Aurora so long as (a) no Coverage Deficiency or Event of Default or payment Default exists and (b) Issuer is, and after taking such payment or distribution into effect, will be, in compliance with Sections 5.3(a), (b) and (c).

(b)   Investments, Loans, Advances, Guarantees and Acquisitions. The Issuer will not, and will not permit any of its Subsidiaries to, purchase, hold or acquire (including pursuant to any merger with any Person that was not a Wholly Owned Subsidiary prior to such merger) any Capital Stock, evidences of indebtedness or other securities (including any option, warrant or other right to acquire any of the foregoing) of, make or permit to exist any loans or advances to, Guarantee any obligations of, or make or permit to exist any investment or any other interest in, any other Person, or purchase or otherwise acquire (in one transaction or a series of transactions) any assets of any other Person constituting a business unit, or agree to do any of the foregoing, except:

(i)   Permitted Investments;

(ii)   investments by the Issuer or any of its Subsidiaries in any other Wholly Owned Subsidiary of the Issuer approved by Requisite Holders;

(iii)   Guarantees constituting Indebtedness permitted by Section 5.2(f);

(iv)   trade accounts receivable for goods or services furnished in the ordinary course of business; and

(v)   routine employee advances in the ordinary course of business, but not to exceed an outstanding amount, at any time, of $50,000.

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(c)   Transactions with Affiliates.

(i) The Issuer will not, and will not permit any of its Subsidiaries to, sell, lease or otherwise transfer any property or assets to, or purchase, lease or otherwise acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates, except (i) in the ordinary course of business at prices and on terms and conditions not less favorable to the Issuer or such Subsidiary than could be obtained on an arm’s-length basis from unrelated third parties provided, however, that any transactions with Affiliates having a value in excess of $25,000 in the aggregate during a Fiscal Quarter shall require the prior written approval of Requisite Holders; provided further, that transactions between Issuer and Hudson Pipeline shall not require prior written approval of Requisite Holders so long as such transactions are on terms no less favorable to Issuer than would be obtained in an arms-length transaction and so long as such transactions are on terms consistent with those obtained in transactions with third parties in the Project Area and (ii) transactions between or among the Issuer and its Wholly Owned Subsidiaries not involving any other Affiliate.

(ii) Aurora will not, and will not permit any of its Subsidiaries to, sell, lease or otherwise transfer any property or assets that are part of the Collateral to, or purchase, lease or otherwise acquire any property or assets that are part of the Collateral from, or otherwise engage in any other transactions with, any of its Affiliates, except (i) in the ordinary course of business at prices and on terms and conditions not less favorable to Aurora or such Subsidiary than could be obtained on an arm’s-length basis from unrelated third parties provided, however, that any transactions with Affiliates having a value in excess of $25,000 in the aggregate during a Fiscal Quarter shall require the prior written approval of Requisite Holders and (ii) transactions between or among Issuer and its Wholly Owned Subsidiaries not involving any other Affiliate.

(d)   Proceeds of Notes. The Issuer will not use the proceeds of the issuance of the Notes other than exclusively to pay the Tamco Origination Fee and all reasonable expenses of the Purchasers, including, without limitation, the fees and expenses of its counsel, consultants and other advisors in accordance with Section 10.15 hereof, and fund future Capital Expenditures. In no event shall any proceeds from the sale of the Notes be used directly or indirectly by any Person for personal, family, household or agricultural purposes or for the purpose, whether immediate, incidental or ultimate, of purchasing, acquiring or carrying any “margin stock” or any “margin securities” (as such terms are defined respectively in Regulations T, U and X promulgated by the Board of Governors of the Federal Reserve System) or to extend credit to others directly or indirectly for the purpose of purchasing or carrying any such margin stock or margin securities. Issuer represents and warrants to the Purchasers that Issuer is not engaged principally, or as one of Issuer’s important activities, in the business of extending credit to others for the purpose of purchasing or carrying such margin stock or margin securities. The Issuer will not take, or permit any Person acting on behalf of the Issuer to take, any action which might cause any of the Note Documents to violate Regulations U or X or any other regulation of the Board of Governors of the Federal Reserve System or to violate Section 7 of the Securities Exchange Act of 1934, as amended, or any rule or regulation thereunder, in each case as now in effect or as the same may hereinafter be in effect.

(e)   Additional Subsidiaries. The Issuer will not, and will not permit any Subsidiary to, (i) create any additional Subsidiaries except in compliance with Section 5.2(b) and approved in advance by Requisite Holders, or (ii) sell or issue any stock or ownership interest of a Subsidiary, except to the Issuer or any Wholly Owned Subsidiary and except in compliance with Section 5.2(b).

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(f)   Indebtedness. The Issuer will not, and will not permit any Subsidiary to, create, incur, assume or permit to exist any Indebtedness, except:

(i)   Indebtedness existing on the date hereof and set forth in Schedule 5.2(f) of this Agreement and extensions, renewals and replacements of any such Indebtedness that do not increase the outstanding principal amount thereof or change any material term thereof;

(ii)   the Note Obligations;

(iii)   trade debt arising in the ordinary course of business for goods or services;

(iv)   endorsements of checks or drafts in the ordinary course of business; and

(v)   accrued obligations related to employee benefit plans.

(g)   Liens. The Issuer and Aurora will not, and will not permit any Subsidiary to, create, incur, assume or permit to exist any Lien on any Collateral or any property or asset now owned or hereafter acquired by Issuer, or assign or sell any income or revenues (including accounts receivable) or rights in respect of any thereof, except:

(i)   Permitted Encumbrances;

(ii)   any Lien on any property or asset of the Issuer or any Subsidiary existing on the date hereof and set forth in Schedule 5.2(g); provided that (x) such Lien shall not apply to any other property or asset of the Issuer or any Subsidiary, (y) such Lien shall secure only those obligations which it secures on the date hereof and extensions, renewals and replacements thereof that do not increase the outstanding principal amount thereof and (z) those Liens designated on Schedule 5.2(g) as having to be released as of the date and time of the Initial Advance shall be released as of such date and time; and

(iii)   Liens in favor of the Holders or the Collateral Agent securing the payment of the Note Obligations.

(h)   Fundamental Changes.

(i)   The Issuer and Aurora will not, and will not permit any Subsidiary to, merge into or consolidate with any other Person, or permit any other Person to merge into or consolidate with it, or sell, transfer, lease or otherwise dispose of (in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired), or liquidate or dissolve, except that, if at the time thereof and immediately after giving effect thereto no Default or Event of Default shall have occurred and be continuing and the prior written approval of the Requisite Holders is obtained (w) any Subsidiary may merge into the Issuer in a transaction in which the Issuer is the surviving corporation, (x) any Subsidiary may merge into any Wholly Owned Subsidiary in a transaction in which the surviving entity is a Wholly Owned Subsidiary, (y) any Wholly Owned Subsidiary may sell, transfer, lease or otherwise dispose of its assets to the Issuer or to another Wholly Owned Subsidiary and (z) any Subsidiary may liquidate or dissolve if the Issuer determines in good faith that such liquidation or dissolution is in the best interests of the Issuer and is not materially disadvantageous to the Holders; providedthat any such merger involving a Person that is not a Wholly Owned Subsidiary immediately prior to such merger shall not be permitted unless also permitted by Section 5.2(b).

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(ii)   The Issuer will not, and will not permit any of its Subsidiaries to, engage in any business other than businesses of the type conducted by the Issuer and its Subsidiaries on the date of execution of this Agreement and businesses reasonably related thereto.

(i)   Sale and Leaseback Arrangements. The Issuer will not, and will not permit any of its Subsidiaries to, enter into any arrangement, directly or indirectly, with any Person whereby the Issuer or its Subsidiaries shall sell or transfer any asset, whether now owned or hereafter acquired, and whereby the Issuer or its Subsidiaries shall then or thereafter rent or lease as lessee such asset or any part thereof or other asset which the Issuer or its Subsidiaries intends to use for substantially the same purpose or purposes as the asset sold or transferred.

(j)   ERISA Compliance.

(i)   The Issuer will not engage in, or permit any Subsidiary or ERISA Affiliate to engage in, any transaction in connection with which the Issuer, its Subsidiaries or any ERISA Affiliate could reasonably be expected to be subjected to either a civil penalty assessed pursuant to Sections 502(c) or 502(i) of ERISA or a tax imposed by Section 4975 of the Code;

(ii)   The Issuer will not contribute to or assume an obligation to contribute to, or permit any Subsidiary or ERISA Affiliate to contribute to or assume an obligation to contribute to, any Plan or Multiemployer Plan;

(iii)   The Issuer will not acquire, or permit any Subsidiary or ERISA Affiliate to acquire, an interest in any Person that causes such Person to become an ERISA Affiliate with respect to the Issuer, any Subsidiary or any ERISA Affiliate if such Person sponsors, maintains or contributes to, or at any time in the six-year period preceding such acquisition has sponsored, maintained, or contributed to, (i) any Multiemployer Plan, or (ii) any other Plan that is subject to Title IV of ERISA; and

(iv)   The Issuer will not contribute to or assume an obligation to contribute to, or permit any Subsidiary or ERISA Affiliate to contribute to or assume an obligation to contribute to, any employee welfare benefit plan, as defined in Section 3(1) of ERISA, including, without limitation, any such plan maintained to provide benefits to former employees of such entities, that may not be terminated by such entities in their sole discretion at any time without any material liability except in those circumstances required to comply with Section 4980B of the Code.

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(k)   Sale or Discount of Receivables. The Issuer will not, and will not permit any of its Subsidiaries to, discount or sell (with or without recourse) any of its or its Subsidiaries notes receivable or accounts receivable other than sales of overdue receivables made in the ordinary course of business in connection with the collection or compromise thereof.

(l)   Current Ratio. The Current Ratio of the Issuer shall be calculated on every Quarterly Payment Date. The Issuer shall not permit the Current Ratio for any applicable period ending on the then most recent Quarterly Payment Date to be less than 1.00.

(m)   Amendments to Organizational Documents; Other Material Agreements. The Issuer will not, and will not permit any of its Subsidiaries to, enter into or permit any modification of, or waive any material right or obligation of any Person under its, as the case may be, Operating Agreement, certificate or articles of incorporation, articles of organization, bylaws, regulations or other organizational documents other than amendments, modifications and waivers which will not, individually or in the aggregate, have a Material Adverse Effect.

(n)   Liens on Equity. The Issuer will not, and will not permit any of its Subsidiaries to, directly or indirectly, incur or permit to exist, or enter into an agreement to permit to exist, any Lien on any Equity of the Issuer or its Subsidiaries, other than the Liens in favor of the Collateral Agent.

(o)   Limitation on Financing Sources. Prior to the Commitment Expiry Date, neither Issuer, Aurora nor any Affiliate of Issuer or Aurora shall obtain any financing to fund any development or acquisition in the Area of Mutual Interest from any source other than TCW or an Affiliate of TCW.

Section 5.3  Coverage Ratios

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(a)   Collateral Coverage Ratio. The Collateral Coverage Ratio of the Issuer shall be calculated (i) twice every year for 2005 and 2006 and once a year thereafter, as of the date of delivery of the current Engineering Report (it being understood that the Collateral Coverage Ratio for the period from the date hereof to February 1, 2004 shall be calculated in reliance on the Initial Engineering Report, unless an Engineering Report has subsequently been prepared, in which case such later Engineering Report shall be relied upon), (ii) upon the receipt by Purchasers of a Request for Additional Advance using the most recently prepared Engineering Report, and (iii) at such other times as Administrative Agent or Requisite Holders shall elect in their sole discretion. The Issuer shall not permit the Collateral Coverage Ratio for any applicable period ending on the then most recent Quarterly Payment Date to be less than 1.20.

(b)   PDP Coverage Ratio. The PDP Coverage Ratio of the Issuer shall be calculated (i) twice every year for 2005 and 2006 and once a year thereafter, as of the date of delivery of the current Engineering Report (it being understood that the PDP Coverage Ratio for the period from the date hereof to February 1, 2004 shall be calculated in reliance on the Initial Engineering Report, unless an Engineering Report has subsequently been prepared, in which case such later Engineering Report shall be relied upon), (ii) upon the receipt by Purchasers of a Request for Additional Advance using the most recently prepared Engineering Report, and (iii) at such other times as Administrative Agent or Requisite Holders shall elect in their sole discretion.

(c)   If any Coverage Deficiency exists, Issuer shall as soon as reasonably commercially practicable after obtaining knowledge thereof give notice thereof to Administrative Agent and may cure such Coverage Deficiency, either by furnishing and mortgaging additional engineered producing oil and gas wells satisfactory to Requisite Holders in order to increase Modified NPV10 or by making payments in order to reduce the Total Indebtedness. If any Coverage Default exists, Issuer shall within thirty (30) days after obtaining knowledge thereof cure such Coverage Default, either by furnishing and mortgaging additional engineered producing oil and gas wells satisfactory to Requisite Holders in order to increase Modified NPV10 or by making payments in order to reduce the Total Indebtedness.

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SECTION 6

CONDITIONS TO ADVANCES

Section 6.1    Closings.  The Initial Closing occurred on August 12, 2004. The Amendment Closing shall be deemed to occur upon the satisfaction (or waiver in writing by the Administrative Agent in its sole and absolute discretion) of the conditions set forth in Section 6.2.

Section 6.2  Conditions to Amendment Closing.  The effectiveness of this Agreement and the obligations of Purchasers to make any Subsequent Advance hereunder are subject to the condition precedent that each of the following events shall have occurred:

(a)   Purchasers shall have received all of the following, duly executed and delivered and in form, substance and date satisfactory to the Purchasers:

(i)   the Subsequent Advance Notes;

(ii)   Amendments to the Mortgages and other Collateral Documents hereto delivered by the Issuer and Aurora in form acceptable to Administrative Agent reflecting, inter alia, the increase in the Total Commitment Amount and any otherClosing Documents requested by Administrative Agent;

(iii)   an opinion of Leibenguth & Boos & Associates PC to the Purchasers, in form and substance attached hereto as Exhibit E and reasonably satisfactory to the Purchasers;

(iv)   a “Compliance Certificate,” substantially in the form attached hereto as Exhibit I, of a director of Issuer of even date with such Subseqent Advance, in which the Issuer shall have certified (x) to the satisfaction of the conditions in this Section 6.1, and (y) to the truth and accuracy in all material respects of all representations and warranties made by Issuer or Aurora in any of the Note Documents;

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(v)   an “Omnibus Certificate” of the Secretary or the Board of Directors of each of Issuer and Aurora which shall contain the names and signatures of its officers authorized to execute the Note Documents to which it is a part and which shall certify to the truth, correctness and completeness of the following exhibits attached to the certificate: (i) a copy of resolutions of its board of directors in full force and effect at the time this Agreement is entered into, authorizing the execution of the Note Documents delivered or to be delivered by it in connection herewith and the consummation of the transactions contemplated in the Note Documents; (ii) a copy of its articles of incorporation and all amendments thereto, certified by its company secretary; and (iii) a copy of the appointment or all legal representatives and legal advisors in fact of Issuer duly registered; and

(vi)   such other information as the Purchasers may have reasonably required, including evidence satisfactory to the Purchasers that all conditions precedent to any Advance under the Original Note Purchase Agreement shall have been satisfied.

(b)   The Investment Committee of TCW shall have approved the amendments reflected in this Agreement.

(c)   Issuer and Aurora shall have obtained the Licenses and all other Governmental Approvals necessary under Governmental Rules in the ordinary course as well as for the consummation of the transactions contemplated in the Note Documents and for the granting of the security interests contemplated under the Collateral Documents necessary for the ownership and operation of the wells on which drilling has been commenced or on which PDP Reserves have been identified, except for those Governmental Approvals which were not then required, and each of the foregoing shall have been in full force and effect and in form and substance reasonably satisfactory to the Purchasers.

(d)   The organizational structure and capital structure of Issuer and Aurora shall have been as set forth in Schedule 4.1(l), which Schedule shall have been in form and substance satisfactory to Purchaser in its sole and absolute discretion.

(e)   The Purchasers shall have received and approved a revised Operating Budget developed in connection with Project and the Operating Agreement.

(f)   The Purchasers shall have received and approved a report of the Insurance Advisor pertaining to the insurance program and a certificate of insurance coverage of the Issuer evidencing that the Issuer is carrying insurance in accordance with Section 5.1(g).

(g)   No material litigation, investigation or proceeding shall have been commenced or threatened against the Issuer or Aurora or so far as they are aware, against the Collateral Properties or the transactions contemplated hereby or thereby.

(h)   No event or circumstance shall have existed giving rise to, or reasonably likely to give rise to, any Material Adverse Effect.

(i)   Perfection of Liens. The Purchasers shall have received evidence, in form and substance satisfactory to it in its sole and absolute discretion, that all documentation, actions, consents and approvals required in connection with the granting of Liens and perfection of security interests in the Collateral as contemplated by Section 5.2(g) hereof and by the Collateral Documents have been executed, delivered and filed as of the Closing Date and that the Liens of the Collateral Documents constitute first Liens.

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(j)   Organizational Documents. The Purchasers shall have received such documents and certificates as it or its counsel may reasonably request relating to the organization, existence and good standing of the Issuer and its Subsidiaries, the authorization of the Closing Transactions and any other legal matters relating to the Issuer, this Agreement, the Closing Documents, all in form and substance satisfactory to Purchasers and their counsel.

(k)   Payment of Expenses. The Purchasers and their counsel shall have received all fees and other amounts due and payable on or prior to the Amendment Closing Date with respect to this Agreement, including, without limitation, fees and reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid by the Issuer hereunder or under the Original Note Purchase Agreement.

(l)   Financial Statements. The Purchasers shall have received, in form and substance satisfactory to them and attached as Schedule 6.1(l), projections of the Issuer prepared through the Maturity Date demonstrating the ability of Issuer to (i) repay its debts, including the Note Obligations, and satisfy its other obligations when due and (ii) comply with the covenants contained in Section Five hereof.

Section 6.3  Conditions Precedent to Any Advance.  The Purchasers shall have no obligation to make any Advance (including the Initial Advance) unless all of the following conditions precedent have been satisfied, to the satisfaction of the Requisite Holders and the Administrative Agent and in their reasonable discretion (in which event the Advance shall be made):

(a)   Tamco Origination Fee. Issuer shall pay to Tamco an origination fee (the “Tamco Origination Fee”) equal to 1.5% of any Advance prior to or concurrently with the disbursement of such Advance. Payment of the Tamco Origination Fee shall be by wire transfer of immediately available funds or upon the instruction of Issuer, by deduction from the purchase price of the Notes.

(b)   All representations and warranties made by Issuer and Aurora in any Note Document shall be true in all material respects on and as of the date of such Advance as if such representations and warranties had been made as of the date of such Advance;

(c)   No Default shall exist as of the date of such Advance, taking into account the making of such Advance;

(d)   No Material Adverse Effect shall have occurred since, with respect to the Initial Advance, December 31, 2003; and with respect to any other Advance, the date of the Initial Advance or the most recent Advance, as applicable;

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(e)   Issuer and Aurora shall have performed and complied in all material respects with all agreements and conditions required in the Note Documents to be performed or complied with by it on or prior to the date of such Advance;

(f)   The making of such Advance shall not be prohibited by any law or any regulation or order of any court or governmental agency or authority and shall not subject the Note Holders or Collateral Agent to any penalty or other onerous condition which would impose on any Note Holder a material additional cost in making a funding under or pursuant to any such law, regulation or order;

(g)   The Note Holders shall have reviewed the financial condition of the Issuer and Aurora as disclosed in the Disclosure Schedule and found the same to be satisfactory;

(h)   Issuer shall have procured and maintained the insurance required hereunder or under any other Note Document; and

Section 6.4  Special Conditions Precedent for a Subsequent Advance.   After the Initial Advance, the Purchasers shall be obligated to make Subsequent Advances only:

(a)   before the Commitment Expiry Date;

(b)   in the amount requested by Issuer in the Request for Subsequent Advance, in the form attached as Exhibit G, not to have exceeded the Aggregate Commitment Amount in the aggregate for all Advances;

(c)   if no Coverage Deficiency shall have existed as of the date of such Advance, taking into account the making of such Advance in the amount of Total Indebtedness;

(d)   upon the Purchasers’ receipt of a timely Request for Subsequent Advance and all documents and instruments which the Purchasers have then requested in addition to those described in Section 6.1 (including opinions of legal counsel, corporate documents and records, documents evidencing Governmental Approvals and exemptions, and certificates of Governmental Persons and of officers and representatives of Issuer and other parties), as to (i) the accuracy and validity of or compliance with, in all material respects, all representations, warranties and covenants made in the Note Documents, (ii) the satisfaction of all conditions contained therein, and (iii) all other matters pertaining thereto. All such additional documents and instruments shall have been satisfactory to the Purchasers in form, substance and date; and

(e)   upon receipt by the Note Holders of evidence that no Lien or other interest had been filed against Issuer or any Collateral other than Permitted Liens.

Section 6.5  (a)   [Intentionally deleted.]

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SECTION 7

SECURITY

Section 7.1  The Security.  The Note Obligations will be secured by perfected first-priority liens (subject only to Liens permitted under Section 5.2(g) if expressly permitted to be senior to the Liens securing the Note Obligations) in any real or personal property of Issuer or its Subsidiaries (including accounts, material leases and rental agreements, hedge agreements, as well as insurance policies and proceeds), together with all Property of any kind which is subject to a Lien in favor of the Holders or the Collateral Agent or which, under the terms of any Collateral Document or this Agreement (including security interests in the membership interests of Issuer and all Unassigned Interests and interests of Aurora in the Project Area), is purported or intended to be subject to such a Lien or for which a Lien is granted in any additional Collateral Documents hereafter delivered by any Related Party and accepted by Agent or Collateral Agent (the “Collateral”).

Section 7.2  Agreement to Deliver Collateral Documents.  Issuer and Aurora agree to deliver or cause to be delivered, to further secure the Note Obligations, mortgages, chattel mortgages, security agreements, financing statements and other Collateral Documents in form and substance satisfactory to Collateral Agent for the purpose of granting, confirming, and perfecting first and prior liens or security interests in any real or personal property of Issuer and any Collateral of Aurora on the earlier of (i) each quarter after Issuer or Aurora acquires additional leasehold, (ii) prior to drilling being commenced on a well, (iii) with respect to the Hudson Pipeline interest, ten (10) days after the earlier of (A) the formation of Hudson Pipeline or (B) the acquisition of the interest in Hudson Pipeline by Issuer or (iv) whenever requested by Agent or Collateral Agent in its sole and absolute discretion. In addition, Issuer agrees to cause each and every Subsidiary of Issuer to execute and deliver a counterpart of, as the circumstances shall require, a Subsidiary Guarantee by the date hereof or ten (10) days after such Subsidiary becomes a Subsidiary of Issuer as the case may be. Issuer and Aurora also agree to deliver, whenever requested by Requisite Holders or the Collateral Agent, in their sole and absolute discretion, assurances of title reasonably acceptable to Requisite Holders and the Collateral Agent (a) stating that Issuer, Aurora or any Subsidiary, as the case may be, has good and defeasible title thereto, free and clear of all Liens (other than Liens permitted under Section 5.2(g)), (b) confirming that such properties and interests are subject to Collateral Documents securing the Note Obligations that constitute and create legal, valid and duly perfected Liens in such properties and interests and in the proceeds thereof having the priority specified in this Agreement, and (c) covering such other matters as the Collateral Agent, acting at the written direction of the Requisite Holders in their sole and absolute discretion, may request.

Section 7.3  Perfection and Protection of Security Interests and Liens.  Issuer and Aurora will from time to time deliver to Collateral Agent any financing statements, continuation statements, extension agree-ments and other documents properly completed and executed (and acknowledged when required) by any Related Party in form and substance satisfactory to Collateral Agent, which Agent or Collateral Agent requests for the purpose of perfecting, confirming, or protecting any Liens or other rights in Collateral securing any Note Obligations.

Section 7.4  Appointment of Agent and Collateral Agent

(a)   Purchasers, for themselves in the capacity in which they are acting herein, and each other Holder hereby appoints TAMCO as agent (together with its successors in such capacity herein called “Agent”) to act for and on behalf of the Purchasers and each other Holder under or pursuant to this Agreement and the other Note Documents, and TAMCO hereby accepts such appointment. Agent is authorized to act on behalf of the Lenders and each other Holder in (i) exercising rights and remedies with respect to Collateral (which may be delegated to Collateral Agent) or with respect to any other matter under any of the Note Documents, (ii) giving notices or instructions to Issuer, (iii) receiving information from or notices by Issuer, and (iv) communicating to Issuer determinations required or permitted to be made under this Agreement or any other Note Document. Agent may, on behalf of the Purchasers and any other Holder, take any other action which any Purchaser or such Holder is entitled to take hereunder or under any of the Note Documents. Such appointment of TAMCO as Agent shall not, however, impair or modify any rights, obligations or duties which TAMCO or any Affiliate of TAMCO otherwise has with respect to any Purchaser or any other Holder. In its administration of this Agreement and the other Note Documents, except to the extent to which another standard applies to TAMCO by reason of any other document between TAMCO and the Lenders or other Holder, Agent will exercise the same care that it exercises in the administration or handling of transactions for its own account, subject, however, to subsection (h) below.

(b)   Collateral Agent. The Purchasers, for themselves in each capacity in which they are acting herein, and each other Holder hereby appoints TAMCO as Collateral Agent (herein, together with its successors and assigns in such capacity, “Collateral Agent”) under the Note Documents, to exercise such powers under the Note Documents as are delegated to Collateral Agent by the terms thereof, together with all such powers as are reasonably incidental thereto, including taking, holding and disposing of the Collateral. TAMCO hereby accepts such appointment. Collateral Agent shall act for and on behalf of the Purchasers and the Holders in connection with all Collateral and Collateral Documents. In its administration of this Agreement and the other Note Documents, except to the extent to which another standard applies to TAMCO by reason of any other document between TAMCO and the Purchasers and any other Holder, Collateral Agent will exercise the same care that it exercises in the administration or handling of transactions for its own account, subject, however, to subsection (h) below.

(c)   Requisite Holders. Except with respect to any matters expressly provided for by this Agreement, the Notes, the Collateral Documents, any other Note Documents or the TCW Governing Documents (as defined in subsection (d)(iii) below), each Holder agrees that neither Agent nor Collateral Agent shall be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and each Holder agrees that Agent and Collateral Agent shall be fully protected in so acting or refraining from acting) upon the written instructions of the Requisite Holders. The Requisite Holders may, in their reasonable discretion, remove TAMCO from its respective appointments as Agent and Collateral Agent and then select a new party to fulfill, in accordance with the terms hereof, such positions. All powers of Agent and Collateral Agent shall be exercised for the benefit of all Holders and in accordance with the directions of the Requisite Holders. Agent and Collateral Agent shall take every reasonable action to implement the Requisite Holders’ directions. If (i) any Note is ever held by any Person other than the original Holders in accordance herewith or (ii) TAMCO resigns as Agent and Collateral Agent, Issuer and all holders of Notes shall execute an agency agreement, in form satisfactory to Agent and Collateral Agent and providing for satisfactory indemnification, before carrying out any further actions under the Note Documents. Issuer shall pay all customary fees and costs in connection with the drafting and execution of such agency agreement. Until any such agency agreement is executed: (i) Agent and Collateral Agent shall be fully protected in acting on the instructions of Requisite Holders; (ii) TAMCO shall have the right to withdraw as Agent and Collateral Agent, respectively, subject, however, to its rights an duties under any other agreements with the Purchasers or any other Holder; and (iii) any action of Collateral Agent under any Security Document shall be binding on the Purchasers and Holders.

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(d)   Limitation of Duties and Fiduciary Relationship. Neither Agent nor Collateral Agent shall have any duties or responsibilities, except those expressly set forth in:

(i)   this Agreement;

(ii)   the Collateral Documents; and

(iii)   the other documents entered into between Trustco and TAMCO described in the definitions of “Purchasers” and “Holders” (such other documents, collectively the “TCW Governing Documents”),

nor shall Agent or Collateral Agent have any additional fiduciary relationship with any Holder arising under this Section 7.4 and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or the other Note Documents against Agent or Collateral Agent.

(e)   Distribution of Proceeds. The Holders shall share in the proceeds obtained by Agent and in any other benefit either arising under the Notes and the Collateral Documents or obtained by Agent or Collateral Agent in connection therewith, in the relative proportions which the amounts then owed by Issuer to each of the Holders bear to the total amount then owed by Issuer to all of the Holders; provided that Agent and Collateral Agent shall be the first to be reimbursed for all costs and expenses incurred on behalf of all parties in their respective capacities as Agent and Collateral Agent to the extent permitted by the TCW Governing Documents. The duties undertaken by Agent and Collateral Agent have been undertaken as an accommodation to the Holders and, accordingly, Agent and Collateral Agent shall not be compensated for their services hereunder except as provided in the TCW Governing Documents.

(f)   Written Directions. Agent or Collateral Agent may at any time request written directions from all the Holders with respect to (i) any interpretation of this Agreement, the Notes and the Collateral Documents, or (ii) any action to be taken or not to be taken hereunder or thereunder and may withhold any action until such directions have been received from the Requisite Holders. Agent and Collateral Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement in accordance with a direction of the Requisite Holders under the terms of this Agreement and such request and any action taken or withheld pursuant to such direction shall be binding upon all the Holders.

(g)   Agents and Attorneys. Agent or Collateral Agent may execute any of its respective duties under this Agreement, the Notes and the Collateral Documents by or through agents or attorneys selected by Agent or Collateral Agent, respectively, using reasonable care. Neither Agent nor Collateral Agent shall be responsible for the negligence or misconduct of any agents or attorneys so selected. Agent and Collateral Agent shall be entitled to the advice of counsel concerning all matters pertaining to their respective duties hereunder.

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(h)   Limitation of Liability. Agent, Collateral Agent, and their respective officers, directors, employees, agents, attorneys-in-fact and affiliates shall not:

(i)   be liable for any action taken or omitted to be taken by any of such Persons or for any error in judgment under or in connection with this Agreement, the Notes and the Collateral Documents, except for any such Person’s gross negligence or willful misconduct; or

(ii)   be responsible in any manner to any Holder or any other Person for any failure of any other party to perform its obligations under this Agreement, the Notes and the Collateral Documents.

Nothing in this subsection, however, shall be deemed to limit or restrict any liability, fiduciary duty or responsibility of TAMCO in any capacity other than as Agent or Collateral Agent, including any liability, fiduciary duty or responsibility under the TCW Governing Documents.

(i)   Reliance upon Documentation. Agent or Collateral Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or any telephone conversation believed, respectively, by Agent or Collateral Agent to be genuine and correct and to have been signed, sent, made or spoken by the proper person or persons, and upon the advice and statements of legal counsel, independent accountants and other experts selected, respectively, by Agent or Collateral Agent.

(j)   Reliance by Issuer. Each of the Purchasers and each Holder agree that, prior to the delivery to Issuer of a notice of the removal or termination of TAMCO as Agent as set forth below, Issuer shall be entitled to rely on TAMCO’s or any subsequent Agent’s authority to act on behalf of each of the Purchasers and each Holder in all dealings with TAMCO (or any such subsequent Agent) with respect to the Notes and the Note Documents; Issuer shall be protected in relying on actions, communications, notices and terminations relating thereto or required or permitted thereunder by Agent; and Issuer shall discharge their obligations under this Agreement and the Note Documents by delivering payments, notices and other information to Agent. In the event of the removal of Agent and the appointment of a successor Agent by Holders, Issuer shall not be required to recognize any such removal or appointment unless and until Issuer shall have received a writing setting forth such removal and appointment executed by the Requisite Holders, and Issuer shall be entitled to rely on such writing as being genuine and what it purports to be without any necessity of any investigation whatsoever. Issuer shall be entitled to rely upon the actions, communications and notices of TAMCO with respect to the Collateral until Issuer receives notice in writing from Agent that TAMCO has resigned or been replaced as Collateral Agent.

SECTION 8

TRANSFERABILITY OF SECURITIES

Section 8.1   Restrictive Legend.  Each note, certificate or other instrument evidencing the Notes issued by Issuer shall be stamped or otherwise imprinted with a legend in substantially the following forms:

“THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION.

THE SECURITIES EVIDENCED BY THIS INSTRUMENT ARE SUBJECT TO THE TERMS OF A CERTAIN NOTE PURCHASE AGREEMENT DATED AS OF AUGUST __, 2004 BETWEEN AURORA ANTRIM NORTH, LLC, THE PURCHASERS, THE COLLATERAL AGENT AND THE ADMINISTRATIVE AGENT (EACH AS DEFINED THEREIN), A COPY OF WHICH IS ON FILE AT THE OFFICES OF AURORA ANTRIM NORTH, LLC AND WILL BE FURNISHED BY AURORA ANTRIM NORTH, LLC TO THE HOLDER HEREOF UPON REQUEST.”

Notwithstanding the foregoing, the restrictive legend set forth above shall not be required after the date on which the securities evidenced by such note, certificate or other instrument bearing such restrictive legend no longer constitute Restricted Notes, and upon the request of the Holder of such Notes, Issuer, without expense to the Holder, shall issue a new note, certificate or other instrument as applicable not bearing the restrictive legend otherwise required to be borne thereby.

SECTION 9

EVENTS OF DEFAULT AND REMEDIES

Section 9.1  Events of Default.

(a)   “Event of Default,” wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be caused voluntarily or involuntarily or effected, without limitation, by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body):

(i)   default in the payment of principal of (or premium, if any, on) any Note when the same becomes due and payable, whether on the Maturity Date or other due date thereof or at a date fixed for prepayment thereof or, upon acceleration, redemption or otherwise, which default continues for a period of two (2) Business Days;

(ii)   default in the payment of interest on any Note or any fee or any other amount constituting a Note Obligation payable under this Agreement or any other Note Document when the same becomes due and payable, which default continues for a period of five (5) Business Days;

(iii)   Issuer or any Affiliate defaults in the performance of or breaches any covenant, condition or agreement contained in Section 5.2 of this Agreement or contained in Sections 5.1(a), (b), (c), (d), (g)(ii), (m), (p) and (q) of this Agreement;

(iv)   Issuer or any Affiliate defaults in the performance of or breaches any other covenant or condition contained in this Agreement or any other Closing Document, which default or breach continues for a period of thirty (30) days;

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(v)   a material breach of any representations and warranties made by the Issuer pursuant to Section 4.1 or in any other Closing Document;

(vi)   there occurs with respect to any Indebtedness of Issuer or any Affiliate having an outstanding amount of $100,000 or more in the aggregate for all such issues of all such Persons, whether such Indebtedness now exists or shall hereafter be created, the failure to make a principal or interest payment and such defaulted payment shall not have been made, waived or extended within the applicable cure period thereof or any other “event of default” occurs thereunder;

(vii)   a decree, judgment, or order by a court of competent jurisdiction shall have been entered adjudging the Issuer, Aurora or any Subsidiary of Issuer as bankrupt or insolvent, or ordering relief against the Issuer, Aurora or any Subsidiary of Issuer in response to the commencement of an involuntary bankruptcy case, or approving as properly filed a petition seeking reorganization or liquidation of the Issuer, Aurora or any Subsidiary of Issuer under any bankruptcy or similar law, and such decree, judgment or order shall have continued undischarged and unstayed for a period of sixty (60) days; or a decree, judgment or order of a court of competent jurisdiction over the appointment of a receiver, liquidator, trustee, or assignee in bankruptcy or insolvency of the Issuer, Aurora or any Subsidiary of Issuer, or of the Property of any such Person, or for the winding up or liquidation of the affairs of any such Person, shall have been entered, which decree, judgment, or order shall have remained in force undischarged and unstayed for a period of sixty (60) days;

(viii)   the Issuer, Aurora or any Subsidiary of Issuer shall institute voluntary bankruptcy proceedings, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking reorganization or liquidation under any bankruptcy or similar law or similar statute, or shall consent to the filing of any such petition, or shall consent to the appointment of a custodian, receiver, liquidator, trustee, or assignee in bankruptcy or insolvency of it or any of its assets or Property, or shall make a general assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due, or shall, within the meaning of any Bankruptcy Law, become insolvent, fail generally to pay its debts as they become due, or take any limited liability action in furtherance of or to facilitate, conditionally or otherwise, any of the foregoing;

(ix)   one or more final judgments not covered by insurance for the payment of money, or the issuance of any writ or warrant of attachment against any portion of the Property or assets of the Issuer, Aurora or any Subsidiary of Issuer or Aurora, which, in the aggregate, exceed $250,000 at any one time shall be entered against the Issuer, Aurora or any Subsidiary of Issuer of Aurora by a court of competent jurisdiction and not be stayed, bonded or discharged for a period (during which execution shall not be effectively stayed) of sixty (60) days (or, in the case of any such final judgment which provides for payment over time, which shall so remain unstayed, unbonded or undischarged beyond any applicable payment date provided therein);

(x)   a Material Adverse Change has occurred;

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(xi)   a Coverage Default has occurred; and

(xii)   failure of Issuer or its Subsidiaries to maintain perfected Liens as required pursuant to Section 7.1 hereof.

(b)   Upon the occurrence of an Event of Default described in clauses (viii) or (ix) above, the entire unpaid balance of the Notes (together with all accrued and unpaid interest) shall automatically become and be immediately due and payable on all outstanding Notes without any declaration or other act on the part of the Holders. Upon the occurrence and continuation of an Event of Default described in clauses (i), (ii) or (x) above, the entire unpaid balance of the Notes (together with all accrued and unpaid interest) held by a Holder shall, at the option of such Holder, become immediately due and payable without demand, presentment, notice of demand or of dishonor and nonpayment, protest, notice of protest, notice of intention to accelerate, declaration or notice of acceleration, or any other notice or declaration of any kind, all of which are hereby expressly waived by Issuer. Upon the occurrence and continuation of an Event of Default described in clauses (iii), (iv), (v), (vi), (vii) or (xi) above, the holders of a majority of the outstanding principal amount of the Notes, respectively, at any time and from time to time may declare the entire unpaid balance of the Notes of such series (together with all accrued and unpaid interest) immediately due and payable without demand, presentment, notice of demand or of dishonor and nonpayment, protest, notice of protest, notice of intention to accelerate, declaration or notice of acceleration, or any other notice or declaration of any kind, all of which are hereby expressly waived by Issuer. Upon the acceleration of the entire unpaid balance of any Note pursuant to this Section 9.1, the Holder thereof shall be entitled to any prepayment premium on such Note (calculated in accordance with Sections 3.5 in addition to all other amounts due and payable in respect of such Note and any other Note Obligation.

Section 9.2  Remedies.  If any Event of Default shall occur, the holder or holders of Notes entitled to accelerate and declare the unpaid balance of a Note or Notes due and payable pursuant to Section 9.1 above may protect and enforce their rights under the Note Documents by any appropriate proceedings, including proceedings for specific performance of any covenant or agreement contained in any Note Document, and such holder or holders may enforce the payment of any Note Obligations due or enforce any other legal or equitable right.

In addition to any and all other rights and remedies that the Holders shall have, the Holders shall have the option to either:

(i)   Maintain this Agreement in full force and effect and sue for the principal payments and interest as they become due and payable;

(ii)   Accelerate all amounts due under the Notes and sue for the principal payment and interest as they become due and payable; or

(iii)   Accelerate all amounts due under the Notes, and to collect in addition to the amount of outstanding principal, accrued interest and other amounts owing with respect to the Obligations, all costs and expenses of the Holders in enforcing these provisions, including without limitation attorneys’ fees and costs; and the Prepayment Premium.

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Section 9.3  Indemnity.  Each of Aurora and Issuer agrees, and agrees to cause each of its Subsidiaries, (i) to indemnify each Indemnified Party (as hereinafter defined), upon demand, from and against any and all liabilities, obligations, claims, losses, damages, penalties, fines, actions, judgments, suits, settlements, costs, expenses or disbursements (including reasonable fees of attorneys, accountants, experts and advisors) of any kind or nature whatsoever (in this section collectively called “liabilities and costs”) which to any extent (in whole or in part) may be imposed on, incurred by, or asserted against such Indemnified Party arising out of or resulting from or in any other way associated with (x) any of the Closing Documents or any transaction contemplated thereby or (y) this Agreement or any of the transactions and events (including the enforcement or defense thereof) at any time associated herewith or contemplated herein (including, but not limited to, any violation or noncompliance with any Environmental Laws by any Related Party thereof or any liabilities or duties of any Related Party thereof or of any Indemnified Party with respect to Hazardous Materials found in or released into the environment); and (ii) to reimburse each Indemnified Party, upon demand, for its legal and other expenses as they are incurred in connection with the foregoing.

THE FOREGOING INDEMNIFICATION AND REIMBURSEMENT SHALL APPLY WHETHER OR NOT SUCH LIABILITIES AND COSTS ARE IN ANY WAY OR TO ANY EXTENT OWED, IN WHOLE OR IN PART, UNDER ANY CLAIM OR THEORY OF STRICT LIABILITY OR ARE IN ANY EXTENT CAUSED, IN WHOLE OR IN PART, BY ANY NEGLIGENT ACT OR OMISSION OF ANY KIND BY ANY INDEMNIFIED PARTY, provided only that no Indemnified Party shall be entitled under this section to receive indemnification or reimbursement for that portion, if any, of any liabilities and costs which is proximately caused by its own individual gross negligence or willful misconduct, as determined in a final judgment. As used in this section, the term “Indemnified Party” refers to each Purchaser (including any of their officers, directors, employees, agents or any of their respective Affiliates, or Purchasers’ successors and assigns and subsequent Holders) and Collateral Agent, any of its officers, directors, employees, agents and any of their respective Affiliates acting in such capacity.

SECTION 10

MISCELLANEOUS

Section 10.1  Waivers and Amendments; Acknowledgment.

(a)   Waivers and Amendments.

(i)   No failure or delay (whether by course of conduct or otherwise) by the Holders in exercising any right, power or remedy which either may have under any of the Closing Documents shall operate as a waiver thereof or of any other right, power or remedy, nor shall any single or partial exercise by the Holders of any such right, power or remedy preclude any other or further exercise thereof or of any other right, power or remedy. No waiver of any provision of any Note Document and no consent to any departure therefrom shall ever be effective unless it is in writing and signed by the Requisite Holders, and may be given or withheld in their sole and absolute discretion, and then such waiver or consent shall be effective only in the specific instances and for the purposes for which given and to the extent specified in such writing; provided, however, that no waiver of any

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 provision in Section 5.2 (or any definition utilized therein), Section 9.1,Section 9.2 or this Section 10.1(a) shall be effective unless it is approved in writing by holders of more than 50% of the Notes;provided, further, that no waiver of any Note Interest Rate, required principal or other payments, fees, interest coupon payments, payment terms, prepayment premiums or the Maturity Date of the Notes shall be effective without the consent of holders of 100% of the outstanding Notes. This Agreement and the other Note Documents set forth the entire understanding and agreement of the parties hereto and thereto with respect to the transactions contemplated herein and therein and supersede all prior discussions and understandings with respect to the subject matter hereof and thereof, and no modification or amendment of or supplement to this Agreement or the other Note Documents shall be valid or effective unless the same is in writing and signed by the party against whom it is sought to be enforced. THIS WRITTEN AGREEMENT AND THE OTHER NOTE DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. This Agreement may be amended, but only with the written consent of each of the Issuer and the Requisite Holders; provided, however, that Section 5.2 (or any definition utilized therein), Section 9.1, Section 9.2 or this Section 10.1(a) shall not be amended or supplemented in any manner without the written consent of holders of more than 50% of the Notes; provided, further, that no amendment, supplement or change of any Note Interest Rate, required principal or other payments, fees, interest coupon payments, payment terms, prepayment premiums or the Maturity Date of the Notes shall be effective without the consent of holders of 100% of the outstanding Notes. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to the Holders at law or in equity or otherwise.

(ii)   The Issuer will not, and will not permit any of its Subsidiaries to, directly or indirectly, offer to purchase or otherwise acquire any outstanding Notes, except for an offer to purchase the Notes that (A) is made in writing and is pro rata to all of the Holders on identical terms and (B) remains open for a period of at least 15 Business Days. In addition, if Holders holding more than 10% of the outstanding principal amount of all of the Notes accepts any such offer within such 15 Business Day period, then the Issuer shall be required to notify the other Holders of such acceptance(s), and shall be required to remake such offer and leave it open for an additional 10 Business Days. All acquisitions of Notes pursuant to the foregoing offers shall be closed concurrently on a pro rata basis with all Holders who accept such offers.

(iii)   None of the Issuer or any of its Affiliates or any other party to any Closing Documents will, directly or indirectly, request or negotiate for, or offer or pay any remuneration or grant any security as an inducement for, any proposed amendment or waiver of any of the provisions of this Agreement or any of the other Closing Documents unless each Holder of the Notes (irrespective of the kind and amount of Notes then owned by it) shall be informed thereof by the Issuer and, if such Holder is entitled to the benefit of any such provision proposed to be amended or waived, shall be afforded the opportunity of considering the same, shall be supplied by the Issuer and any other party hereto with sufficient information to enable it to make an informed decision with respect thereto and shall be offered and paid such remuneration and granted such security on the same terms.

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(iv)   In determining whether the requisite Holders of Notes have given any authorization, consent or waiver under any Closing Document, any Notes owned by Issuer or any of its Affiliates shall be disregarded and deemed not to be outstanding.

(v)   Any amendment or waiver made pursuant to this Section by a Holder that has transferred or has agreed to transfer its Notes to the Issuer or any of its respective Affiliates and has provided or has agreed to provide such amendment or waiver as a condition to such transfer shall be void and of no force and effect except solely as to such Holder, and any amendments effected or waivers granted that would not have been or would not be so effected or granted but for such amendment or waiver (and the amendments or waivers of all other Holders that were acquired under the same or similar conditions) shall be void and of no force and effect, retroactive to the date such amendment or waiver initially took or takes effect, except solely as to such Holder.

(b)   Acknowledgments and Admissions. Each of Issuer and Aurora hereby represents, warrants, acknowledges and admits that:

(i)   it has been advised by counsel in the negotiation, execution and delivery of the Note Documents to which it is a party;

(ii)   it has made an independent decision to enter into this Agreement and the other Note Documents to which it is a party, without reliance on any representation, warranty, covenant or undertaking by any Purchaser, whether written, oral or implicit, other than as expressly set out in this Agreement or in any other Note Documents delivered on or after the date hereof,

(iii)   there are no representations, warranties, covenants, undertakings or agreements by the Purchasers as to the Note Documents except as expressly set out in this Agreement or in another Note Document delivered on or after the date hereof,

(iv)   none of the Purchasers, in its capacity as Purchaser or Holder, owes any fiduciary duty to Issuer or any other Purchaser with respect to any Note Document or the transactions contemplated thereby;

(v)   no partnership or joint venture exists with respect to the Note Documents between the Companies and any of the Purchasers;

(vi)   should an Event of Default or Default or breach occur or exist, the Purchasers will determine in their sole discretion and for their own reasons what remedies and actions they will or will not exercise or take at that time;

(vii)   without limiting any of the foregoing, Issuer is not relying upon any representation or covenant by Purchaser, or any representative thereof, and no such representation or covenant has been made, that such Purchaser will, at the time of an Event of Default or Default or breach, or at any other time, waive, negotiate, discuss, or take or refrain from taking any action permitted under the Closing Documents with respect to any such Event of Default or Default or breach or any other provision of the Closing Documents; and

(viii)   the obligations of the Holders are several, not joint and several, and no Holder shall be liable for any act or omission by another Holder;

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(ix)   each of the Purchasers has relied upon the truthfulness of the acknowledgments in this Section in deciding to execute and deliver this Agreement and the other Closing Documents and to purchase the Notes.

Section 10.2  Survival of Agreements; Cumulative Nature.All of the Issuer’s and Aurora’s various representations, warranties, covenants and agreements in the Agreement, the Note Documents shall survive the execution and delivery of this Agreement, the other Note Documents and the performance hereof and thereof, including the purchase of the Notes and the delivery of the Notes and the Note Documents. Except as expressly provided herein, the representations, warranties, and covenants made by the Issuer in the Closing Documents, and the rights, powers and privileges granted to the Holders in the Closing Documents, are cumulative, and, except for expressly specified waivers and consents, no Closing Document shall be construed in the context of another to diminish, nullify, or otherwise reduce the benefit to the Holders of any such representation, warranty, covenant, right, power or privilege. In particular and without limitation, no exception set out in this Agreement to any representation, warranty or covenant herein contained shall apply to any similar representation, warranty or covenant contained in any other Closing Document, and each such similar representation, warranty or covenant shall be subject only to those exceptions which are expressly made applicable to it by the terms of the various Closing Documents.

Section 10.3  Notices.All notices, requests, consents, demands and other communications required or permitted under any Note Document shall be in writing, unless otherwise specifically provided in such Note Document, shall be effective only upon receipt and shall be given or furnished upon delivery, when delivered by personal delivery, by telecopy, by delivery service with proof of delivery, or by United States mail as registered, certified or first class United States mail, postage prepaid, to the Issuer or the Purchasers at the addresses set forth on the signature pages hereto (unless changed by similar notice in writing given by the particular Person whose address is to be changed):

If to Issuer

or Aurora:              Aurora Antrim North, LLC

4110 Copper Ridge, Suite 110

Traverse City, MI 49684

Attention: William W. Deneau

Telephone: (231) 941-0073

Facsimile: (231) 933-0757

With copies to:     Leibenguth & Boos & Associates PC

3220 Racquet Club Drive

Traverse City, Michigan 49684

Attention: Jim Leibenguth

Telephone: (231) 947-0777

Facsimile: (231) 947-2930

If to Purchasers:   TCW Asset Management Company

333 Clay Street, Suite 4150

Houston, TX 77002

Attention: Patrick Hickey

Telephone: (713) 615-7413

Facsimile: (713) 615-7460

With copies to:    TCW Asset Management Company

865 South Figueroa Street, Suite 1800

Los Angeles, CA 90017

Attention: Thomas F. Mehlberg

Telephone: (213) 244-0702

Facsimile: (213) 244-0604

TCW Asset Management Company

8010 Towers Crescent Drive, Suite 410

Vienna, VA 22182

Attention: R. Blair Thomas

Telephone: (703) 506-0498

Facsimile: (703) 506-0741

and

Milbank Tweed Hadley & McCloy LLP

601 South Figueroa Street, 30^th Floor

Los Angeles, CA 90017

Attention: David A. Lamb

Telephone: (213) 892-4434

Facsimile: (213) 629-5063

Section 10.4  Governing Law; Submission to Process.  EXCEPT TO THE EXTENT THAT THE LAW OF ANOTHER JURISDICTION IS EXPRESSLY ELECTED IN A NOTE DOCUMENT, THE NOTE DOCUMENTS, INCLUDING THIS AGREEMENT, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. EACH OF THE COMPANIES HEREBY IRREVOCABLY SUBMITS ITSELF AND EACH OTHER RELATED PARTY TO THE NON-EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL

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COURTS SITTING IN THE STATE OF NEW YORK AND THE COUNTY OF NEW YORK AND AGREES AND CONSENTS THAT SERVICE OF PROCESS MAY BE MADE UPON IT OR ANY OF ITS SUBSIDIARIES IN ANY LEGAL PROCEEDING RELATING TO THE NOTE DOCUMENTS OR THE NOTE OBLIGATIONS BY ANY MEANS ALLOWED UNDER NEW YORK OR FEDERAL LAW. EACH OF THE COMPANIES IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

Section 10.5  Limitation on Interest.

(a)   The Holders, Issuer and any other parties to the Note Documents intend to contract in strict compliance with applicable usury law from time to time in effect. In furtherance thereof such Persons stipulate and agree that none of the terms and provisions contained in the Note Documents shall ever be construed to create a contract to pay, for the use, forbearance or detention of money, interest in excess of the maximum amount of interest permitted to be charged by applicable law from time to time in effect. Neither of the Companies nor any present or future guarantors, endorsers, or other Persons hereafter becoming liable for payment of any Note Obligation shall ever be liable for unearned interest thereon or shall ever be required to pay interest thereon in excess of the maximum amount that may be lawfully charged under applicable law from time to time in effect, and the provisions of this Section shall control over all other provisions of the Note Documents which may be in conflict or apparent conflict herewith.

(b)   The Holders expressly disavow any intention to contract for, charge or collect unearned interest or finance charges in the event the maturity of any Note Obligation is accelerated. If (i) the maturity of any Note Obligation is accelerated for any reason, (ii) any Note Obligation is prepaid and as a result any amounts held to constitute interest are determined to be in excess of the legal maximum, or (iii) the Holders or any other holder of any or all of the Note Obligations shall otherwise collect moneys which are determined to constitute interest which would otherwise increase the interest on any or all of the obligations to an amount in excess of that permitted to be charged by applicable law then in effect, then all such sums determined to constitute interest in excess of such legal limit shall, without penalty, be promptly applied to reduce the then-outstanding principal of the related Note Obligations or, at the Holders’ option, promptly returned to Issuer or the other payor thereof upon such determination.

(c)   In determining whether or not the interest paid or payable under any specific circumstances exceeds the maximum amount permitted under applicable law, the Holders and the Related Parties thereof (and any other payors thereof) shall, to the greatest extent permitted under applicable law, (i) characterize any non-principal payment as an expense, fee or premium rather than as interest, (ii) exclude voluntary prepayments and the effects thereof, and (iii) amortize, prorate, allocate, and spread the total amount of interest throughout the entire contemplated term of the instruments evidencing the Note Obligations in accordance with the amounts outstanding from time to time thereunder and the Highest Lawful Rate from time to time in effect under applicable law in order to lawfully charge the maximum amount of interest permitted under applicable law.

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Section 10.6  Termination; Limited Survival.Issuer may, in its sole and absolute discretion at any time that no Note Obligation is owing under the Note Documents, elect in a notice delivered to the Holders to terminate this Agreement. Upon receipt by the Holders of such a notice, if no such Note Obligation is then owing, then this Agreement and all other Note Documents shall thereupon be terminated, and the parties thereto released from all prospective obligations thereunder; provided further, that any obligations hereunder in favor of the Holders of any Notes (other than the Notes) shall survive such termination. Notwithstanding the foregoing or anything herein to the contrary, any representation or warranty made by the Companies to Purchaser herein, any waivers or admissions made by Issuer in any Note Document and any obligations which any Person may have to indemnify or compensate the Holders shall survive any termination of this Agreement or any other Closing Document. At Issuer’s request and expense, the Holders shall prepare and execute all necessary instruments to reflect and effect such termination of the Note Documents. All representations and warranties and covenants made herein by the Issuer or in any certificate or other instrument delivered by it or on its behalf under this Agreement shall be considered to have been relied upon by Purchasers and shall survive the issuance of the Notes regardless of any investigation made by or on behalf of Purchasers.

Section 10.7  Registration, Transfer, Exchange, Substitution of Notes.

(a)   Registration of Notes. Issuer shall keep at its principal executive office a register for the registration and registration of transfers of the Notes (the “Register”). The name and address of each Holder, each transfer thereof and the name and address of each transferee of one or more Notes shall be registered in such Register. Prior to due presentment for registration of transfer, the Person in whose name any Security shall be registered shall be deemed and treated as the owner and Holder thereof for all purposes hereof, and Issuer shall not be affected by any notice or knowledge to the contrary. Issuer shall give to any Holder, promptly upon request therefor, a complete and correct copy of the names and addresses of all registered Holders of Notes.

(b)   Transfer and Exchange of Notes. Upon surrender of any Security at the principal executive office of Issuer for registration of transfer or exchange (and in the case of a surrender for registration of transfer, duly endorsed or accompanied by a written instrument of transfer duly executed by the registered Holder or its attorney duly authorized in writing and accompanied by the address for notices of each transferee of such Security or part thereof), Issuer shall execute and deliver, at Issuer’s expense, one or more new Notes (as requested by the Holder thereof) of the same series in exchange therefore and, in the case of any Note, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Security; provided, however, that no transfer of any Security may be made (i) to a transferee who is not an “accredited investor” within the meaning of Rule 501 of Regulation D promulgated under the Securities Act or a Qualified Institutional Buyer (as defined in Rule 144A promulgated under the Securities Act) and (ii) unless such transfer is made pursuant to an exemption from registration under the securities laws of the United States including, without limitation, any resale of any Security under Rule 144A of the Securities Act. Any purported transfer of a Security or an interest therein which is prohibited hereby shall be null

67

and void ab initio and of no force or effect whatever. In the case of a transfer of Notes, each such new Note and shall be payable to such Person as such holder may request and shall be substantially in the form of Exhibit A. Each such new Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Note or dated the date of the surrendered Note if no interest shall have been paid thereon. Notes shall not be transferred in denominations of less than $1,000,000, provided, that if necessary to enable the registration of transfer by a Holder of its entire holding of Notes, one Note may be in a denomination of less than $1,000,000; provided, further, that transfers by a Holder and its Affiliates shall be aggregated for purposes of determining whether or not such $1,000,000 threshold has been reached. If any Purchaser shall request that the restrictive legend on a Security be removed, such Purchaser, if requested by Issuer, will have the obligation in connection with such request, as applicable, at such Purchaser’s expense, of delivering an opinion of counsel in form and substance reasonably satisfactory to Issuer, in connection with such request to the effect that the removal of such restrictive legend would not be in violation of the Securities Act or any applicable state securities laws.

(c)   Replacement of Notes. Upon receipt by Issuer of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Security, and (i) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided that if the Holder of such Security is, or is a nominee for, a Purchaser or another Holder with a minimum net worth of at least $5,000,000, such Person’s own unsecured agreement of indemnity shall be deemed to be satisfactory), or (ii) in the case of mutilation, upon surrender and cancellation thereof, Issuer at its own expense shall execute and deliver, in lieu thereof, a new Security of the same series, dated and, in the case of a Note, bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated

Section 10.8  Waiver of Jury Trial, Punitive Damages, Etc.ISSUER, FOR ITSELF AND EACH OF ITS AFFILIATES, AURORA, AND THE HOLDERS HEREBY:

(a)   KNOWINGLY, VOLUNTARILY, INTENTIONALLY, AND IRREVOCABLY WAIVE, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR DIRECTLY OR INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER OR IN CONNECTION WITH THE NOTE DOCUMENTS OR THE PURCHASE AND SALE OF ANY SECURITIES CONTEMPLATED THEREBY OR ASSOCIATED THEREWITH, BEFORE OR AFTER MATURITY;

(b)   IRREVOCABLY WAIVE, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES, OR DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES;

(c)   CERTIFY THAT NO PARTY HERETO NOR ANY REPRESENTATIVE OR AGENT OR COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS; AND

68

(d)   ACKNOWLEDGE THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE OTHER NOTE DOCUMENTS AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION.

Section 10.9  Exhibits and Schedules; Additional Definitions.  All Exhibits and Schedules to this Agreement are a part hereof for all purposes.

Section 10.10      Confidentiality of Holders.

(a)   Notwithstanding the termination of this Agreement and except as otherwise provided herein or in this subsection (a) or subsection (c) below, Issuer shall, and shall cause its Subsidiaries and Affiliates to, maintain the confidentiality of the identities of (i) any Holder or any holder of any Note Obligation other than the Notes; and (ii) any owner of a beneficial interest in the Notes (collectively, “Confidential Information”) and shall not, without the prior written consent of the Requisite Holders, as applicable, disclose any such information to another Person or use such information for purposes other than those contemplated herein.

(b)   Notwithstanding the termination of this Agreement and except as otherwise provided herein or in this subsection (b) or subsection (c) below, each Holder shall maintain the confidentiality of any information delivered to a Holder by or on behalf of the Issuer or any Subsidiary in connection with the transactions contemplated by or otherwise pursuant to the Closing Documents that is (a) proprietary or confidential in nature and (b) is clearly marked “Confidential - Subject to Confidentiality and Disclosure Restrictions” (collectively, the “Issuer Confidential Information”) and shall not, without the prior written consent of the Issuer, disclose any such information to another Person or use such information for purposes other than those contemplated herein.

(c)   Subject to Section 10.10(d), the Issuer may disclose Confidential Information, and subject to Section 10.10(d), each of the Holders may disclose Issuer Confidential Information, to its respective directors, officers, members, partners, employees, and agents (including attorneys, accountants, and consultants) to whom such disclosure is reasonably necessary for the execution or effectuation hereof, provided the Issuer or Holder notifies all such Persons that the Confidential Information or Issuer Confidential Information disclosed to them is subject to this section and requires them not to disclose or use such information in breach of this Section. The Issuer may also disclose Confidential Information (i) in filings with the Commission to the extent required to be disclosed therein, or (ii) any Person which offers to purchase any security of the Issuer (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 10.10). Subject to Section 10.10(d), each Holder may also disclose Issuer Confidential Information to (i) any other Holder of any Notes,

69

(ii) any partner, beneficial holder or similar party (and each of their attorneys, accountants and consultants), (iii) any Person to which it sells or offers to sell such Notes or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Issuer Confidential Information to be bound by the provisions of this Section 10.10), (iv) any federal or state regulatory authority having jurisdiction over it and (v) the National Association of Insurance Commissioners, the National Association of Securities Dealers or any similar organization, or any nationally recognized rating agency that requires access to information about its investment portfolio or (w) to effect compliance with any law, rule, regulation or order applicable to it, (x) in response to any subpoena or other legal process, (y) in connection with any litigation to which it is a party or (z) if an Event of Default has occurred and is continuing, to the extent it may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under the Note Documents.

(d)   If Administrative Agent is notified that any Holder is requested or required by legal process (including law or regulation, oral questions, interrogatories, request for information or documents, subpoena, and civil investigative demand) to disclose any Confidential Information or Issuer Confidential Information, if and to the extent legally permitted to do so, the Administrative Agent, on behalf of any such Holder, shall promptly notify the Holder or Holders, as applicable, of such request prior to complying with such process so that the Holder or Holders may seek an appropriate protective order or waive the respondent’s compliance with this Section. If, after such notice and after providing the Holder or Holders a reasonable opportunity to obtain a protective order or to grant such waiver (so long as the granting of such time does not put such Holder or Holders in breach of its obligations to disclose), such Holder or Holders is nonetheless legally compelled to disclose such information, such Holder or Holders may do so without liability under this Section.

(e)   Any Confidential Information or Issuer Confidential Information which becomes publicly available through no breach by the relevant party hereunder or a breach by a third party of a confidential obligation to the relevant party hereunder shall no longer be deemed to be Confidential Information or Issuer Confidential Information.

Section 10.11  Reproduction of Documents.This Agreement and all documents relating hereto may be reproduced by a Holder and by any photographic, photostatic, microfilm, microcard, miniature photographic or other similar process and you may destroy any original documents so produced. Each of the parties hereto agrees and stipulates that, to the extent permitted by applicable law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by you in the regular course of business) and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence.

Section 10.12  Successors and Assigns.  Except as otherwise expressly provided herein, this Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties (including any Purchaser or subsequent Holder) whether so expressed or not.

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Section 10.13  Counterparts.  Two or more duplicate originals of this Agreement may be signed by the parties, each of which shall be an original but all of which together shall constitute one and the same instrument.

Section 10.14  Severability.  In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby.

Section 10.15  Expenses.  Issuer shall pay all reasonable costs and expenses incurred by the Holders (a) relating to the negotiation, preparation, execution and delivery of this Agreement and the other Note Documents and the issuance of the Notes (including, without limitation, reasonable fees, office charges and expenses of counsel to (1) Purchaser, Milbank, Tweed, Hadley & McCloy LLP and (2) any other consultants or advisors retained in connection with the Closing Transactions), (b) relating to printing the instruments evidencing the Notes, (c) relating to any amendments, waivers or consents (whether or not executed) under this Agreement to the same extent as set forth in clause (a) and (b) above, (d) in connection with the participation of any Observer in meetings or other activities pursuant to Section 5.1(a) hereof including, without limitation, travel expenses associated with such meetings or other activities, (e) relating to the filing, recording, refiling and re-recording of any Note Document and any other documents or instruments or further assurances required to be filed or recorded or refiled or re-recorded by the terms of any Note Document, or any other event with respect to which Issuer shall have the right to recover from any party expenses or costs paid or reimbursed to Holders, (f) incident to the enforcement by the Holders of, or the protection or preservation of any right or remedy of the Holders under, this Agreement, the other Note Documents or any other document or agreement furnished pursuant hereto or thereto or in connection herewith or therewith (including, without limitation, reasonable fees and expenses of counsel) and (g) relating to any bankruptcy, insolvency or other similar action or proceeding in any jurisdiction involving the Issuer. The Issuer shall pay such costs and expenses, to the extent then payable, on the date of issuance of the Notes or, with respect to those matters described in clauses (b) through (g) above, or from time to time upon demand by Purchasers or Holders upon presentation, in each such case, of a reasonably detailed statement thereof. The Issuer’s obligations under this Section 10.15 shall survive the payment of the Notes.

Section 10.16  Specific Performance.  Each of Issuer and Aurora recognizes that money damages may be inadequate to compensate the Holders for a breach by the Issuer or Aurora of its obligations hereunder, and each of the Issuer and Aurora irrevocably agrees that the Holders shall be entitled to the remedy of specific performance or the granting of such other equitable remedies as may be awarded by a court of competent jurisdiction in order to afford the Purchasers the benefits of this Agreement and that Issuer shall not object and hereby waive any right to object to such remedy or such granting of other equitable remedies on the grounds that money damages will be sufficient to compensate the Holders.

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Section 10.17  Joinder by Aurora.  Aurora joins in the execution and delivery of this Agreement for the purpose of expressly agreeing to, representing, warranting and covenanting as set forth in, the provisions of Sections 2.7, 4.1, 5.1(c), (d), (e), (f), (g), (h), (i), (j), (k), (m), (o), (p), 5.2(a), (c), (g), 7.2, 7.3 and 9.3 and Article 10 hereof.

[SIGNATURE PAGES FOLLOW]

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IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the date first written above.

ISSUER:

AURORA ANTRIM NORTH, LLC,

a Michigan limited liability company

By: Aurora Energy, Ltd., its Manager

By:_________________________________

Name: William W. Deneau

Title: President

AURORA:

AURORA ENERGY, LTD.,

a Nevada corporation

By:__________________________________

Name: William W. Deneau

Title: President

Signature Page to

Note Purchase Agreement

PURCHASERS:

TCW ENERGY FUND X - NL, L.P.,

a California limited partnership

By TCW (ENERGY X) LLC,

its General Partner:

By: TCW Asset Management Company,

its Managing Member

By:__________________________________

Name: Thomas F. Mehlberg

Title: Managing Director

By:__________________________________

Name: Patrick Hickey

Title: Senior Vice President

TCW ENERGY FUND XB - NL, L.P., a California limited partnership

By TCW (ENERGY X) LLC,

its General Partner:

By: TCW Asset Management Company, its Managing Member

By:__________________________________

Name: Thomas F. Mehlberg

Title: Managing Director

By:__________________________________

Name: Patrick Hickey

Title: Senior Vice President

Signature Page to

Note Purchase Agreement

TCW ENERGY FUND XC - NL, L.P., a California limited partnership

By TCW (ENERGY X) LLC,

its General Partner:

By: TCW Asset Management Company, its Managing Member

By:__________________________________

Name: Thomas F. Mehlberg

Title: Managing Director

By:__________________________________

Name: Patrick Hickey

Title: Senior Vice President

TCW ENERGY FUND XD - NL, L.P., a California limited partnership

By TCW (ENERGY X) LLC,

its General Partner:

By: TCW Asset Management Company, its Managing Member

By:__________________________________

Name: Thomas F. Mehlberg

Title: Managing Director

By:__________________________________

Name: Patrick Hickey

Title: Senior Vice President

Signature Page to

Note Purchase Agreement

TCW ASSET MANAGEMENT COMPANY, a California corporation, as Investment Manager under the Amended and Restated Investment Management and Custody Agreement dated as of December 3, 2003 among Ensign Peak Advisors, Inc. and others

By:__________________________________

Name: Thomas F. Mehlberg

Title: Managing Director

By:__________________________________

Name: Patrick Hickey

Title: Senior Vice President

TCW ASSET MANAGEMENT COMPANY, a California corporation, as Investment Manager under the Amended and Restated Investment Management and Custody Agreement dated as of March 18, 2004 among ING Life Insurance and Annuity Company and others

By:__________________________________

Name: Thomas F. Mehlberg

Title: Managing Director

By:__________________________________

Name: Patrick Hickey

Title: Senior Vice President

Signature Page to

Note Purchase Agreement

TCW Asset Management Company, a California corporation, as Investment Manager under the Amended and Restated Investment Management and Custody Agreement dated as of December 11, 2003, among Harry L. Bradley, Jr. Partition Trust and others

By:__________________________________

Name: Thomas F. Mehlberg

Title: Managing Director

By:__________________________________

Name: Patrick Hickey

Title: Senior Vice President

TCW Asset Management Company, a California corporation, as Investment Manager under the Investment Management Agreement dated June 13, 2005 among The Ford Foundation and others

By:__________________________________

Name: Thomas F. Mehlberg

Title: Managing Director

By:__________________________________

Name: Patrick Hickey

Title: Senior Vice President

TCW ASSET MANAGEMENT COMPANY, a California corporation, as Administrative Agent

By:__________________________________

Name: Thomas F. Mehlberg

Title: Managing Director

By:__________________________________

Name: Patrick Hickey

Title: Senior Vice President

Signature Page to

Note Purchase Agreement

TCW ASSET MANAGEMENT COMPANY, a California corporation, as Collateral Agent

By:__________________________________

Name: Thomas F. Mehlberg

Title: Managing Director

By:__________________________________

Name: Patrick Hickey

Title: Senior Vice President

Signature Page to

Note Purchase Agreement

Exhibits and Schedules:

Annex A	Insurance Coverage
Exhibit A	Form of Senior Note
Exhibit B-1	Purchaser’s Initial Commitment Amount
Exhibit B-2	Purchaser’s Subsequent Commitment Amount
Exhibit C	Form of Overriding Royalty Conveyance
Exhibit D	Wire Transfer Instructions
Exhibit E	Form of Opinion of Leibenguth, Boos & Associates, PC addressed to Purchasers
Exhibit F	Intentionally Deleted
Exhibit G	Form of Request for Subsequent Advance
Exhibit H	Form of Prepayment Notice
Exhibit I	Form of Compliance Certificate
Exhibit J	Form of Notice to Hydrocarbon Purchasers
Schedule 1.1(a)	Description of Use of Funds - Approved Capital Expenditures
Schedule 1.1(b)	Approved LOE
Schedule 1.1(c)	Operating Agreement of Issuer
Schedule 2.5	Development Plan
Schedule 4.1(d)(i)	Audited Financial Statements and Balance Sheet
Schedule 4.1d(iii)	Projections
Schedule 4.1(e)	Collateral Properties
Schedule 4.1(f)(i)	Disclosed Matters
Schedule 4.1(l)	Capital Structure
Schedule 4.1(m)	List of Material Contracts
Schedule 4.1(o)	Insurance
Schedule 4.1(q)	Intellectual Property
Schedule 4.1(r)	List of Accounts
Schedule 4.1(s)	Ford Disqualified Persons
Schedule 5.1(l)	Location of Collateral
Schedule 5.2 (f)	Indebtedness
Schedule 5.2(g)	Disclosed Encumbrances
Schedule 6.1(l)	Pro Forma Unaudited Balance Sheet

ANNEX A

See Original Note Purchase Agreement Annex A which is hereby incorporated herein by this reference

EXHIBIT A

See Original Note Purchase Agreement Exhibit A which is hereby incorporated herein by this reference

Exhibit B-1

Denominations and Holders of Notes Evidencing Initial Advances

Holder	Note and Commitment Amount
TCW Energy Fund X-NL, L.P., a California limited partnership	$6,911,617
TCW Energy Fund XB-NL, L.P., a California limited partnership	$8,587,602
TCW Energy Fund XC-NL, L.P., a California limited partnership	$2,846,177
TCW Energy Fund XD-NL, L.P., a California limited partnership	$6,338,469
Trust Company of the West as Sub-Custodian under the Amended and Restated Investment Management and Custody Agreement dated as of December 3, 2003 among Ensign Peak Advisors, Inc., TCW Asset Management Company and Trust Company of the West	$2,044,668
Trust Company of the West as Sub-Custodian under the Amended and Restated Investment Management and Custody Agreement dated as of December 11, 2003 among Harry L. Bradley, Jr. Partition Trust, Harry L. Bradley, Jr. Trust, Jane Bradley Uihlien Pettit Partition Trust, Jane Bradley Uihlien Trust, TCW Asset Management Company and Trust Company of the West	$1,226,799
ING Life Insurance and Annuity Company	$2,044,668
Total	$30,000,000

Exhibit B-2

Denominations and Holders of Notes Evidencing Subsequent Advances

Holder	Note and Commitment Amount
TCW Energy Fund X-NL, L.P., a California limited partnership	$3,455,807
TCW Energy Fund XB-NL, L.P., a California limited partnership	$4,293,801
TCW Energy Fund XC-NL, L.P., a California limited partnership	$1,423,086
TCW Energy Fund XD-NL, L.P., a California limited partnership	$3,169,235
Trust Company of the West as Sub-Custodian under the Amended and Restated Investment Management and Custody Agreement dated as of December 3, 2003 among Ensign Peak Advisors, Inc., TCW Asset Management Company and Trust Company of the West	$1,022,334
Trust Company of the West as Sub-Custodian under the Amended and Restated Investment Management and Custody Agreement dated as of December 11, 2003 among Harry L. Bradley, Jr. Partition Trust, Harry L. Bradley, Jr. Trust, Jane Bradley Uihlien Pettit Partition Trust, Jane Bradley Uihlien Trust, TCW Asset Management Company and Trust Company of the West	$613,403
ING Life Insurance and Annuity Company	$1,022,334
Trust Company of the West as Sub-Custodian under the Investment Management Agreement dated June 13, 2005 among The Ford Foundation, TCW Asset Management Company and Trust Company of the West	$5,000,000
Total	$20,000,000

EXHIBIT C

See Original Note Purchase Agreement Exhibit C which is hereby incorporated herein by this reference

EXHIBIT D

WIRE TRANSFER INSTRUCTIONS

Payments of principal, interest and other amounts (excluding royalty payments):

A) As to Ford:

Designated Bank:	Mellon Trust of New England
Address:	One Boston Place, Boston, MA 02108
ABA No.:	011-001-234
Demand Deposit A/C No.:	169064
For Further Credit:	Account #TCNFFORD002
Account Name:	The Ford Foundation
Contact Person:	Amy Momeyer
Telephone:	(412) 236-2031

B) As to others:

Designated Bank:	Mellon Trust of New England
Address:	One Boston Place, Boston, MA 02108
ABA No.:	011-001-234
Demand Deposit A/C No.:	169064
For Further Credit:	Account #TCNFENRGX02
Account Name:	TCW Energy Fund X
Contact Person:	Amy Momeyer
Telephone:	(412) 236-2031

Royalty Payments:

A) Ford as to 10% of the royalty payments:

Designated Bank:	Mellon Trust of New England
Address:	One Boston Place, Boston, MA 02108
ABA No.:	011-001-234
Demand Deposit A/C No.:	169064
For Further Credit:	Account #TCNFFORD002
Account Name:	The Ford Foundation
Contact Person:	Amy Momeyer
Telephone:	(412) 236-2031

B) Others as to 90% of the royalty payments:

Designated Bank:	Mellon Trust of New England
Address:	One Boston Place, Boston, MA 02108
ABA No.:	011-001-234
Demand Deposit A/C No.:	169064
For Further Credit:	Account #TCNFENRGX02
Account Name:	TCW Energy Fund X
Contact Person:	Amy Momeyer
Telephone:	(412) 236-2031

EXHIBIT E

See Attached

EXHIBIT F

See Original Note Purchase Agreement Exhibit G which is hereby incorporated herein by this reference

EXHIBIT G

FORM OF

REQUEST FOR SUBSEQUENT ADVANCE

Reference is made to that certain First Amended and Restated Note Purchase Agreement dated as of ________ __, 2005 (as from time to time amended, supplemented, modified or extended the "Note Purchase Agreement") by and among Aurora Antrim North, LLC, a Michigan limited liability company (the “Issuer”); Aurora Energy, Ltd., a Nevada corporation (“Aurora”); TCW Energy Fund X - NL, L.P., a California limited partnership (“Fund X - NL”); TCW Energy Fund XB - NL, L.P., a California limited partnership (“Fund XB - NL”); TCW Energy Fund XC - NL, L.P., a California limited partnership (“Fund XC - NL”); TCW Energy Fund XD - NL, L.P., a California limited partnership (“Fund XD - NL”); TCW Asset Management Company (“Tamco”), a California corporation, as Investment Manager under the Amended and Restated Investment Management and Custody Agreement dated as of December 3, 2003 among Ensign Peak Advisors, Inc. and others; Tamco as Investment Manager under the Amended and Restated Investment Management and Custody Agreement dated as of March 18, 2004 among ING Life Insurance and Annuity Company and others; Tamco as Investment Manager under the Amended and Restated Investment Management and Custody Agreement dated as of December 11, 2003, among Harry L. Bradley, Jr. Partition Trust and others; Tamco, as Investment Manager under the Investment Management Agreement dated June 13, 2005 among The Ford Foundation and others (Tamco in the capacities designated above, Fund X - NL, Fund XB - NL, Fund XC - NL and Fund XD - NL are hereinafter collectively referred to as the “Purchasers,” each a “Purchaser”); Tamco as Administrative Agent (together with its successors in such capacity, the “Administrative Agent”); and Tamco as Collateral Agent (together with its successors in such capacity, the “Collateral Agent”). Undefined capitalized terms are used herein with the meanings set forth in the Note Purchase Agreement.

Pursuant to the terms of the Note Purchase Agreement, Issuer hereby requests that Purchasers make an Advance to Issuer in the principal amount of $________ and specifies ________ __, 200_, as the date on which Issuer desires that Purchasers make such Advance and to deliver to Issuer the proceeds thereof in the manner set forth on Schedule 1 attached hereto.

To induce Purchasers to make such Advance, Issuer hereby represents, warrants, acknowledges, and agrees that:

(a)    The person signing this instrument on behalf of Issuer is _____ of Issuer, having all necessary authority to act for Issuer in making the request herein contained.

(b)    The representations and warranties of Issuer set forth in the Note Purchase Agreement and the other Note Documents are true and correct in all material respects on and as of the date hereof, with the same effect as though such representations and warranties had been made on and as of the date hereof.

(c)    The amount of the Advance hereby requested does not exceed the amount available for such Advance pursuant to the Note Purchase Agreement.

(d)    There does not exist on the date hereof any condition or event which constitutes a Default or Coverage Deficiency which has not been waived in writing as provided in Section 10.1(a) of the Note Purchase Agreement; nor will any such Default or Coverage Deficiency exist upon Issuer's receipt and application of the Advance requested hereby. Issuer will use the Advance hereby requested for the purposes set forth in Schedule 1 attached hereto and in compliance with Section 2.5 of the Note Purchase Agreement.

(e)    Except to the extent waived in writing as provided in Section 10.1(a) of the Note Purchase Agreement, Issuer has performed and complied in all material respects with all agreements and conditions in the Note Purchase Agreement required to be performed or complied with by Issuer on or prior to the date hereof, and each of the conditions precedent to Advances contained in the Note Purchase Agreement remains satisfied.

(f)    The Loan Documents have not been modified, amended or supplemented by any unwritten representations or promises, by any course of dealing, or by any other means not provided for in Section 10.1(a) of the Note Purchase Agreement. The Note Purchase Agreement and the other Note Documents are hereby ratified, approved, and confirmed in all respects.

The person signing this instrument hereby certifies that, to the best of his knowledge after due inquiry, the above representations, warranties, acknowledgments, and agreements of Issuer are true, correct and complete.

IN WITNESS WHEREOF, this instrument is executed as of _____ ___, 20__.

AURORA ANTRIM NORTH, LLC,

a Michigan limited liability company

By: Aurora Energy, Ltd., its Manager

By:_________________________________

Name:

Title:

Schedule 1

Issuer hereby requests that Purchasers disburse by wire transfer in immediately available funds the proceeds of the Advance as follows:

[LIST AMOUNT, BANK, ABA NOS., PAYEES, BANK ACCOUNTS NOS., AND OTHER INSTRUCTIONS]

EXHIBIT H

See Original Note Purchase Agreement Exhibit M which is hereby incorporated herein by this reference

EXHIBIT I

See Original Note Purchase Agreement Exhibit N which is hereby incorporated herein by this reference

EXHIBIT J

See Original Note Purchase Agreement Exhibit O which is hereby incorporated herein by this reference

EXHIBIT K

See Original Note Purchase Agreement Exhibit P which is hereby incorporated herein by this reference

EXHIBIT L

See Original Note Purchase Agreement Exhibit Q which is hereby incorporated herein by this reference

Schedule 1.1(a)

See Original Note Purchase Agreement Schedule 1.1(a) which is hereby incorporated herein by this reference

Schedule 1.1(b)

OPERATING COSTS

Group Name

Unit Name

Year 1$919/well/month Year 2$864/well/month Year 3$809/well/month Year 4$773/well/month Year 5$755/well/month Year 6$736/well/month Year 7$572/well/month Year 8+$414/well/month

$1,564.29/well/month

$0.210/Mcf

$0.375/Mcf

$0.484/Mcf

$0.734/Mcf

$0.858/Mcf

$0.878/Mcf

$1.118/Mcf

$1.138/Mcf

$1.152/Mcf

400 Antrim

Iron

X

X

400 Antrim

LeBlanc

X

X

400 Antrim

Zink

X

X

Alpena

Beyer

X

X

Alpena

Black Bean #1

X

X

Alpena

Black Bean #2

X

X

Alpena

Black Bean #3

X

X

Alpena

Black Bean #4

X

X

Alpena

Discard

X

X

Alpena

El Dorado

X

X

Alpena

Gehrke

X

X

Alpena

Green Bean #1

X

X

Alpena

Green Bean #2

X

X

Alpena

Leeseberg #1

X

X

Alpena

Leeseberg #2

X

X

Alpena

Mackinaw #1

X

X

Alpena

Mackinaw #2

X

X

Alpena

Nicholson Hill #1

X

X

Alpena

Nicholson Hill #2

X

X

Alpena

Nicholson Hill #3

X

X

Alpena

Paxton Quarry

X

X

Alpena

Sanborn #1

X

X

Alpena

Sanborn #2

X

X

Alpena

Seguin

X

X

Alpena

Treasure Island

X

X

Arrowhead

Arrowhead

X

X

Arrowhead

Blue Chip

X

X

Black Bear

Black Bear Central

X

X

Black Bear

Black Bear Jewell

X

X

Black Bear

Black Bear West

X

X

Clear Lake

Clear Lake

X

X

Hudson

Boyne Valley

X

X

Hudson

Chandler

X

X

Hudson

Corwith

X

X

Hudson

Hudson 13

X

X

Hudson

Hudson 19

X

X

Hudson

Hudson 34

X

X

Hudson

Hudson NE

X

X

Hudson

Hudson NW

X

X

Hudson

Hudson SW

X

X

Hudson

Hudson West

X

X

Mt. Mohican

Mt. Mohican

X

X

Schedule 1.1(c)

See Original Note Purchase Agreement Schedule 1.1(c) which is hereby incorporated herein by this reference

Schedule 2.5

See Original Note Purchase Agreement Schedule 2.5 which is hereby incorporated herein by this reference

Schedule 4.1(d)(iii)

See Original Note Purchase Agreement Schedule 4.1(iii) which is hereby incorporated herein by this reference

Schedule 4.1(e)

See Attached

Schedule 4.1(f)(i)

See Attached

Schedule 4.1(l)

Capital Structure as of the Amendment Closing Date

Cadence Resources (post-merger with Aurora Energy, Ltd)

As of November 1, 2005

PRINCIPAL SHAREHOLDERS

The following table sets forth, as of November 1, 2005, certain

information regarding the ownership of voting securities of Cadence by each stockholder known to our management to be (i) the beneficial owner of more than5% 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, 3760 North US 31 South, P.O. Box 961, Traverse City, Michigan, 49685-0961.

Name and Address of Beneficial Owner (1)	Amount and Nature of Beneficial Ownership	Percent of Outstanding Shares
Howard M. Crosby	1,477,808 (2)	2.49%
John P. Ryan	1,006,124 (3)	1.69%
Kevin D. Stulp	527,500 (4)	0.89%
Nathan A. Low Roth IRA and affiliates	5,052,142 (5)	8.47%
641 Lexington Avenue
New York, New York 10022
Thomas Kaplan	3,090,992 (6)	5.14%
154 West 18th Street
New York, New York 10011
Rubicon Master Fund (7)	8,000,000 (8)	13.47%
c/o Rubicon Fund Management LLP
P103 Mount Street
London W1K 2TJ, UK
Crestview Capital Master, LLC	4,000,000(9)	6.50%
95 Revere Drive, Suite A
Northbrook, Illinois, 60062
William W. Deneau	4,212,500 (10)	7.02%
Gary J. Myles	259,998 (11)	0.44%
Earl V. Young	386,204 (12)	0.65%
Richard Deneau	--	--
Ronald E. Huff	--	--
John V. Miller, Jr.	3,289,762 (13)	5.49%
Thomas W. Tucker	2,240,620 (14)	3.74%
Lorraine M. King	360,000 (15)	0.60%
All executive officers and directors as a group (11 persons)	3,754,816 (16)	23.00%

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

(2)  Includes 270,000 shares of our common stock held by Crosby Enterprises, Inc., 40,000 shares of our common stock owned by the Crosby Family Living Trust, 130,000 shares of our common stock owned by CORK Investments, Inc.and options to purchase 50,000 shares of our common stock.

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

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

(5)  Based on information included in an amendment to Schedule 13D/A filed with the SEC on November 10, 2005, Nathan A. Low has the sole power to vote or direct the vote of, and the sole power to direct the disposition of, the shares held by the Nathan A. Low Roth IRAs and the shares held by him individually, which total 4,034,767 shares of our common stock, which includes 108,375 shares of our common stock issuable upon exercise of warrants. Although Nathan A. Low has no direct voting or dispositive power over an aggregate 1,017,375 shares of our common stock held by Lisa Low as trustee for the Nathan A. Low Family Trust and as custodian for the Neufeld minor children, he may be deemed to beneficially own those shares because his wife, Lisa Low, is the trustee of the Family Trust and custodian for the Neufeld children. Similarly, Nathan A. Low may be deemed to beneficially own those shares of our common stock underlying options and warrants (a total of 157,375 shares of our common stock) held for the benefit of his children, because his wife has sole voting and dispositive power over such shares. Therefore, Nathan A. Low reports shared voting and dispositive power over 5,052,142 shares of our common stock. . Does not include warrants to purchase 1,714,000 shares of our common stock, which warrants were acquired January 31, 2005

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

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

(8)  Based on Form 3 - Initial Statement of Beneficial Ownership of Securities filed with the SEC by Rubicon Master Fund on April 13, 2005. Does not include warrants to purchase 8,000,000 shares of our common stock, which warrants were acquired January 31, 2005.

(9)  Does not include warrants to purchase 2,160,000 shares of our common stock, which warrants were acquired January 31, 2005.

(10)  Includes options currently exercisable for 600,000 shares of our common stock.

(11) Includes options currently exercisable for 199,998 shares of our common stock.

(12) Includes options currently exercisable for 199,998 shares of our common stock.

(13) Includes options currently exercisable for 600,000 shares of our common stock.

(14) Includes options currently exercisable for 600,000 shares of our common stock.

(15) Includes options currently exercisable for 160,000 shares of our common stock.

(16) Includes options and warrants currently exercisable for an aggregate of 2,597,497 shares of our common stock.

Schedule 4.1(m)

See Original Note Purchase Agreement Schedule 4.1(m) which is hereby incorporated herein by this reference

Schedule 4.1(o)

See Original Note Purchase Agreement Schedule 4.1(o) which is hereby incorporated herein by this reference

Schedule 4.1(q)

See Original Note Purchase Agreement Schedule 4.1(q) which is hereby incorporated herein by this reference

Schedule 4.1(r)

See Original Note Purchase Agreement Schedule 4.1(r) which is hereby incorporated herein by this reference

Schedule 4.1(s)

See Attached

Schedule 5.1(l)

See Original Note Purchase Agreement Schedule 5.2(l) which is hereby incorporated herein by this reference

Schedule 5.2(f)

See Attached

Schedule 5.2(g)

See Attached

Schedule 6.1(l)

See Original Note Purchase Agreement Schedule 6.1(l) which is hereby incorporated herein by this reference

EX-23.1

EX-23.2

Board of Directors

Cadence Resources Corporation

Traverse City, Michigan

CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS

We consent to the use of our audit report dated December 27, 2005, on the financial statements of Cadence Resources Corporation, for the filing with and attachment to the Form 10-KSB for the year ending September 30, 2005.

Williams & Webster, P.S.

Certified Public Accountants

Spokane, Washington

December 28, 2005

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, William W. Deneau, President (Principal Executive Officer) of Cadence Resources Corporation, certify that:

1. I have reviewed this report on Form 10-KSB of Cadence Resources Corporation;

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

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

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

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

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

c. disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting;

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

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

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

December 28, 2005	By:	/s/ WILLIAM W. DENEAU
		Name:   William W. Deneau Title:     President (Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Lorraine M. King, Chief Financial Officer (Principal Financial and Accounting Officer) of Cadence Resources Corporation, certify that:

1. I have reviewed this report on Form 10-KSB of Cadence Resources Corporation;

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

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

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

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

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

c. disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting;

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

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

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

December 28, 2005	By:	/s/ LORRAINE M. KING
		Name:   Lorraine M. King Title:     Chief Financial Officer              (Principal Financial and Accounting Officer)

EX-32.1

EXHIBIT 32.1

Certificate of Chief Executive Officer as required by 18 U.S.C. Section 1350

In connection with the accompanying Annual Report on Form 10-KSB for the fiscal year ended September 30, 2005 (the "Report") of Cadence Resources Corporation ("Cadence") as filed with the Securities and Exchange Commission on December 28, 2005, I, William W. Deneau, President (Principal Executive Officer) of Cadence, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Cadence.

Dated:  December 28, 2005	By:	/s/ WILLIAM W. DENEAU
		Name:   William W. Deneau Title:      President (Principal Executive Officer)

A signed original of this written statement required by 18 U.S.C. Section 1350 has been provided to Cadence Resources Corporation and will be retained by Cadence Resources Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

EXHIBIT 32.2

Certificate of Principal Accounting Officer as required by 18 U.S.C. Section 1350

In connection with the accompanying Annual Report on Form 10-KSB for the fiscal year ended September 30, 2005 (the "Report") of Cadence Resources Corporation ("Cadence") as filed with the Securities and Exchange Commission on December 28, 2005, I, Lorraine M. King, Chief Financial Officer (Principal Financial and Accounting Officer) of Cadence, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Cadence.

Dated:  December 28, 2005	By:	/s/ LORRAINE M. KING
		Name:   Lorraine M. King Title:     Chief Financial Officer              (Principal Financial and Accounting Officer)

A signed original of this written statement required by 18 U.S.C. Section 1350 has been provided to Cadence Resources Corporation and will be retained by Cadence Resources Corporation and furnished to the Securities and Exchange Commission or its staff upon request.