UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION

FORM 20-F/A(Amendment No. 2)

|£REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
    (g) OF THE SECURITIES EXCHANGE ACT OF 1934
|---------------------------------------------------------------------------------------------------
|OR                                                                                                 
|QANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934          
|For the fiscal year
    ended December 31, 2006                                                    
|OR                                                                                                 
|£TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934      
|OR                                                                                                 
|£SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934   
|Date of event
    requiring this shell company report______________                                
|                                                                                                   
|For the transition
    period from ___________________________ to _______________________          

Commission file number 001-32475

BIRCH MOUNTAIN RESOURCES LTD.

Not Applicable(Translation of Registrants name into English)

Alberta, Canada (Jurisdiction of incorporation or organization)

Suite 300, 250 - 6th Avenue S.W. 
Calgary, Alberta, Canada 
T2P 3H7 (Address of principal executive offices)

Securities registered or to be registered pursuant to Section
12(b) of the Act: None

Securities registered or to be registered pursuant to Section
12(g) of the Act: Common shares, without par value and Shareholders Rights(Title of Class)

Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the
issuers classes of capital stock as of the close of the period covered by the
annual report. 81,278,487 Common Shares

Indicate by check mark if the registrant is a well-seasoned
issuer, as defined in Rule 405 of the Securities Act.

| | Yes
    £ | No
    Q | 
| | --------- | -------- | 

If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934.

| | Yes
    £ | No
    Q | 
| | --------- | -------- | 

Note  Checking the box above will not relieve any registrant
required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 from their obligations under those sections.

Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such report), and (2) has been subject
to such filing requirements for the past 90 days.

| | Yes
    Q | No
    £ | 
| | --------- | -------- | 

Indicate by check mark whether the registrant is a large
accelerated filer. An accelerated filer, or a non-accelerated filer. See
definition of accelerated filer and large accredited filer in Rule 12b-2 of
the Exchange Act (Check one):

|Large accelerated
    filer   £ | Accelerated
    filerQ | Non-accelerated
    filer   £
|------------------------------- | ---------------------- | -----------------------------

Indicated by check mark which financial statement item the
registrant has elected to follow.

| | Item 17Q | Item 18
    £ | 
| | -------- | ------------- | 

If this is an annual report, indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).

| | Yes
    £ | No
    Q | 
| | --------- | -------- | 
| |           |          | 

---



EXPLANATORY NOTE



This amendment no.2 to our annual report
on Form 20-F for the fiscal year ended December 31, 2006 is being filed to
respond to comments received from the Securities and Exchange Commission and
from Canadian Securities Regulators.



This amendment does not reflect events
occurring after the filing of the Initial Form 20-F and should not be viewed as
updating any information contained therein. Except as described above, no change
has been made to the Initial Form 20-F.





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TABLE OF CONTENTS

|TABLE OF
    CONTENTS                                 | 2                                                        
|----------------------------------------------------- | ---------------------------------------------------------
|GLOSSARY &
    ABBREVIATIONS                          | 4                                                        
|SPECIAL
    NOTE REGARDING FORWARD LOOKING STATEMENTS | 6                                                        
|REPORTING
    CURRENCY AND FINANCIAL INFORMATION      | 6                                                        
|ITEM 1                                                | IDENTITY
    OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
|ITEM 2                                                | OFFER
    STATISTICS AND EXPECTED TIMETABLE              
|ITEM 3                                                | KEY
    INFORMATION                                      
|                                                      | A.                                                       
|                                                      | B.                                                       
|                                                      | C.                                                       
|                                                      | D.                                                       
|ITEM 4                                                | INFORMATION ON BIRCH                                     
|                                                      | A.                                                       
|                                                      | B.                                                       
|                                                      | C.                                                       
|                                                      | D.                                                       
|ITEM 4A                                               |                                                          
|ITEM 5                                                | OPERATING
    AND FINANCIAL REVIEW AND PROSPECTS         
|                                                      | A.                                                       
|                                                      | B.                                                       
|                                                      | C.                                                       
|                                                      | D.                                                       
|                                                      | E.                                                       
|                                                      | F.                                                       
|ITEM 6                                                | DIRECTORS,
    SENIOR MANAGEMENT AND EMPLOYEES           
|                                                      | A.                                                       
|                                                      | B.                                                       
|                                                      | C.                                                       
|                                                      | D.                                                       
|                                                      | E.                                                       
|ITEM 7                                                | MAJOR
    SHAREHOLDERS AND RELATED PARTY TRANSACTIONS    
|                                                      | A.                                                       
|                                                      | B.                                                       
|                                                      | C.                                                       
|ITEM 8                                                | FINANCIAL
    INFORMATION                                
|                                                      | A.                                                       
|                                                      | B.                                                       
|ITEM 9                                                | THE OFFER
    AND LISTING                                
|                                                      | A.                                                       
|                                                      | B.                                                       
|                                                      | C.                                                       
|                                                      | D.                                                       
|                                                      | E.                                                       
|                                                      | F.                                                       
|ITEM 10                                               | ADDITIONAL
    INFORMATION                               
|                                                      | A.                                                       
|                                                      | B.                                                       
|                                                      | C.                                                       

2

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|         | D.                                                                              | Exchange Controls           | 47
|-------- | ------------------------------------------------------------------------------- | --------------------------- | --
|         | E.                                                                              | Taxation                    | 49
|         | F.                                                                              | Dividends and Paying Agents | 53
|         | G.                                                                              | Statement by Experts        | 54
|         | H.                                                                              | Documents on Display        | 54
|         | I.                                                                              | Subsidiary Information      | 55
|ITEM 11  | QUANTITATIVE AND QUALITATIVE
    DISCLOSURES ABOUT MARKET RISK                  | 55                         
|ITEM 12  | DESCRIPTION OF SECURITIES OTHER
    THAN EQUITY SECURITIES                      | 55                         
|ITEM 13  | DEFAULTS, DIVIDEND ARREARAGES AND
    DELINQUENCIES                             | 55                         
|ITEM 14  | MATERIAL MODIFICATIONS TO THE
    RIGHTS OF SECURITYHOLDERS AND USE OF PROCEEDS
|ITEM 15  | CONTROLS AND PROCEDURES                                                         | 55                         
|ITEM 16  | RESERVED BY THE SEC                                                             | 57                         
|ITEM 16A | AUDIT COMMITTEE FINANCIAL EXPERT                                                | 57                         
|ITEM 16B | CODE OF CONDUCT                                                                 | 58                         
|ITEM 16C | PRINCIPAL ACCOUNTANT FEES AND
    SERVICES                                      | 58                         
|ITEM 16D | EXEMPTIONS FROM THE LISTING
    STANDARDS FOR AUDIT COMMITTEE                   | 58                         
|ITEM 16E | PURCHASES OF EQUITY SECURITIES BY
    THE ISSUER AND AFFILIATED PURCHASERS      | 58                         
|ITEM 17  | FINANCIAL STATEMENTS                                                            | 59                         
|ITEM 18  | FINANCIAL STATEMENTS                                                            | 59                         
|ITEM 19  | EXHIBITS                                                                        | 88                         







3

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GLOSSARY & ABBREVIATIONS

Certain terms and their usage used throughout this Form 20-F are
defined below.

|ABCA                              | The Business Corporations Act (Alberta).                                                                                                                                                                       
|--------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Aggregate                         | A granular material composed of gravel or crushed rock and
    containing less than 50% sand.                                                                                                                  
|Asphalt                           | A mixture of crushed rock, gravel or sand and bitumen
    residues from oil and gas refining that is used in paving and roofing
    applications.                                                              
|Assay or fire assay               | A high-temperature process involving the melting of a rock to
    determine its precious metal content.                                                                                                        
|AMEX                              | The American Stock Exchange.                                                                                                                                                                                   
|Basement                          | The part of the Earth's crust that occurs beneath a cover of
    sedimentary rocks.                                                                                                                            
|Birch or Company                  | Birch Mountain Resources Ltd., its predecessors and
    subsidiaries.                                                                                                                                          
|Carbonate                         | A sedimentary rock composed of minerals containing carbon and
    oxygen in the form of carbonate (CO3); for example, limestone.                                                                               
|CERI                              | Canadian Energy Research Institute.                                                                                                                                                                            
|Coke                              | A solid residue of impure carbon obtained as a residual
    product of hydrocarbon upgrading or refining.                                                                                                      
|Cretaceous                        | The geological time period between about 135 and 65 million
    years ago.                                                                                                                                     
|Devonian                          | The geological time period between about 410 and 360 million
    years ago.                                                                                                                                    
|Evaporite                         | A sedimentary rock containing minerals formed from the
    evaporation of marine and/or non-marine waters.                                                                                                     
|Extraction                        | A chemical or physical process by which a metal or mineral is
    separated and removed from a host rock.                                                                                                      
|Fault                             | A discrete surface separating two rock masses which have
    moved past one another.                                                                                                                           
|Flue Gas Desulphurization or FGD  | A process by which gaseous sulphur compounds, including
    sulphur (SO2)and sulphur trioxide(SO3)
    are removed from flue gases produced by burning sulphur-bearing fossil
    fuels.                       
|Formation or Geological Formation | A body of rock having easily recognizable boundaries and
    properties that allows it to be identified in the field without resorting to
    microscopic or chemical analyses.                                
|Grade                             | The relative quantity of ore-mineral content in a mineralized
    body, e.g. grams of gold per t of rock or percent of copper.                                                                                 
|Glacial Gravels                   | Surface gravels deposited by glaciers.                                                                                                                                                                         
|Hammerstone Project               | The project to develop and commercialize limestone mineral
    reserves on Birch's mineral leases in the Fort McMurray region of northeast
    Alberta, which encompasses the initial starter quarry (the MVQ).
|Igneous                           | A rock that has cooled and solidified from a melt.                                                                                                                                                             
|Industrial Mineral                | A non-metallic mineral or rock that is used for industrial
    purposes.                                                                                                                                       
|Kiln                              | A large fire-brick lined furnace for making quicklime.                                                                                                                                                         
|Limestone                         | A rock predominantly composed of the mineral calcite (calcium
    carbonate (CaCO3)).                                                                                                                          
|Microparticle                     | A particle of 0.1 to 100 micrometres in size.                                                                                                                                                                  
|Mineral Lease                     | A metallic and industrial mineral lease issued by the
    Province of Alberta that conveys the right to develop and produce metallic
    and industrial minerals.                                              

4

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|Mineral Permit              | A metallic and industrial mineral permit issued by the
    Province of Alberta that conveys the right to explore for metallic and
    industrial minerals.                                                                                                                                                                                                                              
|--------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Mineral                     | A naturally occurring homogeneous substance having fixed
    physical properties and chemical composition and a defined crystal form.                                                                                                                                                                                                                                                   
|Mineral Property            | Any form of title or right to explore and/or mine granted by
    a government pursuant to one or more of: a claim, contract of work, special
    exploration permit, mineral lease or mineral permit.                                                                                                                                                                                   
|Mineral Reserve             | That part of a mineral deposit that could be economically and
    legally extracted or produced at the time of the reserve determination.                                                                                                                                                                                                                                               
|Mineralization              | Generically refers to (i) the process of formation of
    minerals in a specific area or geological formation, or (ii) an occurrence
    of potentially valuable minerals.  The term has no economic implications.                                                                                                                                                                      
|Mineralized Material        | A mineralized body that has been delineated by appropriately
    spaced drilling and/or underground sampling to support a sufficient tonnage
    and average grade of materials.  Such a deposit does not qualify as a
    reserve until a comprehensive evaluation based upon unit cost, grade,
    recoveries and other material factors concludes legal and economic
    feasibility.
|MVQ                         | The initial limestone aggregate quarry called the Muskeg
    Valley Quarry.                                                                                                                                                                                                                                                                                                             
|Nanoparticle or nanocluster | A particle of 0.1 to 100 nanometres in size.                                                                                                                                                                                                                                                                                                                                            
|NI 43-101                   | National Instrument 43-101 prepared by the Canadian
    Securities Regulators and which governs the public disclosure of mining
    information in Canada.                                                                                                                                                                                                                              
|NRCB                        | Natural Resources Conservation Board.                                                                                                                                                                                                                                                                                                                                                   
|Oil Sands Deposit           | A porous body of sand containing liquid hydrocarbons or
    bitumen.                                                                                                                                                                                                                                                                                                                    
|Prairie Gold Model          | An exploration model postulating the origin of precious and
    non-precious metals microparticles observed in rocks from the Athabasca
    region of Alberta and the Dawson Bay area of Manitoba.                                                                                                                                                                                      
|Precambrian Era             | The major period of geologic time before 570 million years
    ago.                                                                                                                                                                                                                                                                                                                     
|Precious Metals             | A group of unoxidizable metals of relatively high economic
    value; includes silver, gold, platinum and palladium, amongst others.                                                                                                                                                                                                                                                    
|Quicklime                   | Calcium oxide or CaO produced by heating limestone at white
    heat in a kiln.                                                                                                                                                                                                                                                                                                         
|RMWB                        | Regional Municipality of Wood Buffalo.                                                                                                                                                                                                                                                                                                                                                  
|Sedimentary Rock            | A rock originating from the weathering of pre-existing rocks
    that is deposited in layers on the Earth's surface by air, water or ice.                                                                                                                                                                                                                                               
|Structure                   | The physical arrangement of rock related to its deformation
    by, for example, faulting.                                                                                                                                                                                                                                                                                              
|Tailings                    | The material removed from the milling circuit after
    separation of the valuable metals, minerals or in the case of oil sands,
    bitumen.                                                                                                                                                                                                                                           
|TSX                         | The Toronto Stock Exchange Inc.                                                                                                                                                                                                                                                                                                                                                         
|TSXV                        | The Toronto Venture Exchange and its predecessors.                                                                                                                                                                                                                                                                                                                                      
|US                          | The United States of America.                                                                                                                                                                                                                                                                                                                                                           

5

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|CONVERSION FACTORS: | 1 tonne      | = | 1 t, 1.1023 short tons, 1,000 kilograms or 2,204.6 pounds
|------------------- | ------------ | - | ---------------------------------------------------------
|                    | 1 Hectare    | = | 2.4711 Acres                                             
|                    | 1 Kilometre  | = | 0.6214 Miles                                             
|                    | 1 Micrometre | = | 0.000001 metre                                           
|                    | 1 Nanometre  | = | 0.000000001 metre                                        
|                    |              |   |                                                          
|SYMBOLS:            | $ or Cdn$    | = | Canadian dollar                                          
|                    | t            | = | Metric tonne                                             
|                    | Kt           | = | Kilotonnes (thousands of metric tonnes)                  
|                    | Km           | = | Kilometre                                                



In this Form 20-F, the Company may provide cross-references
relevant to the information being provided.  These cross-references are provided
for ease of reference only and are not meant to be exclusionary to other
relevant information in this Form 20-F, which may relate to the disclosure in
question.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

The information presented in or incorporated by reference in this
Form 20-F includes both historical information and forward-looking statements
(within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended) relating to
the future results of Birch (including projections and business trends), which
involve risks and uncertainties.

Numerous factors could cause actual results to differ materially
from those in the forward-looking statements, including without limitation,
continuing production by oil sands companies in the Company's market area,
development of new competing or replacement technology, lack of market
acceptance or insufficient demand, declining commodity prices, specifically the
price of oil, inability of the Company to execute the business plan, failure to
protect intellectual property, unsuccessful exploration of mineral properties
and related activities, unfavourable changes in the regulatory environment
including environmental, tax, land tenure or other regulatory regimes, the
inability to finance future development and the dependence upon the abilities
and continued participation of certain key employees or consultants of Birch.
 As a result of the foregoing and other factors, no assurance can be given as to
future results, levels of activity and achievements.

Investors are cautioned not to put undue reliance on
forward-looking statements, and should not infer that there has been no change
in the affairs of Birch since the date of this report that would warrant any
modification of any forward-looking statement made in this document or other
documents filed periodically with securities regulators.  All subsequent written
and oral forward-looking statements attributable to Birch or persons acting on
its behalf are expressly qualified in their entirety by this notice.  Except as
required by law, Birch disclaims any intent or obligation to update publicly
these forward-looking statements, whether as a result of new information, future
events or otherwise.

REPORTING CURRENCY AND FINANCIAL INFORMATION

Currency and Exchange Rates



Financial information in this Form 20-F is expressed in Canadian
dollars; therefore, unless otherwise noted, references to Cdn$ or $ are to
Canadian dollars.  The following tables sets forth the period-end exchange rate,
the average of the period, and the high and low exchange rates in the period,
for the Canadian dollar in exchange for United States dollars, based upon the
inverse of exchange rates reported by the Federal Reserve Bank of New York at
the noon buying rates in New York City for cable transfers payable in Canadian
dollars as certified for customs purposes.  As of December 31, 2006, the noon
rate of exchange, as reported by the Federal Reserve Bank of New York for the
conversion of United States dollars into Canadian dollars was US $0.8582 (US
$1.00 = CDN $1.1652).  As of March 28, 2007 the noon rate of exchange, as
reported by the Federal Reserve Bank of New York for the conversion of United
States dollars into Canadian dollars was US $0.8636 (US $1.00 = CDN $1.1579).

6

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Twelve Months Ended December 312006
      2005
      2004
      2003
      2002Rate at End of Period
      $0.8582
      $0.8579
      $0.8310
      $0.7727
      $0.6344Average Rate During Period
      0.8818
      0.8254
      0.7696
      0.7163
      0.6372High Rate During Period
      0.9100
      0.8690
      0.8493
      0.7747
      0.6656Low Rate During Period
      0.8528
      0.7872
      0.7158
      0.6327
      0.6175


The following table sets forth the period-end exchange rate, the average of the
period, and the high and low exchange rates in the period for the Canadian
dollar in exchange for United States dollars, for each month during the previous
six months, based upon the inverse of exchange rates reported by the Federal
Reserve Bank of New York at the noon buying rates in New York city for cable
transfers payable in Canadian dollars as certified for customs purposes.

|                           | February
    2007 | January
    2007 | December
    2006 | November
    2006 | October
    2006 | September
    2006
|-------------------------- | ----------------- | ---------------- | ----------------- | ----------------- | ---------------- | ------------------
|Rate at End of Period      | $0.8547           | $0.8480          | $0.8582           | $0.8762           | $0.8907          | $0.8952           
|Average Rate During Period | 0.8540            | 0.8502           | 0.8671            | 0.8804            | 0.8861           | 0.8827            
|High Rate During Period    | 0.8631            | 0.8586           | 0.8760            | 0.8869            | 0.8965           | 0.9100            
|Low Rate During Period     | 0.8437            | 0.8457           | 0.8582            | 0.8715            | 0.8784           | 0.8528            

ITEM 1

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

This item is not applicable.

ITEM 2

OFFER STATISTICS AND EXPECTED TIMETABLE

This item is not applicable.

7

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ITEM 3

KEY INFORMATION

A.

Selected Financial Information

The following selected consolidated financial data for the years
ended December 31, 2006, 2005, 2004, 2003, and 2002 are derived from the audited
consolidated financial statements for the periods indicated and should be read
in conjunction therewith.

|Twelve Months Ended December 31 (audited)
    All amounts are expressed as thousands of Canadian dollars
    (except per share data in Canadian dollars)
|--------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                        
|                                                                                                                                                        
|Canadian GAAP(1)                                                                                                                                        
|Sales                                                                                                                                                   
|Interest income                                                                                                                                         
|Expenses                                                                                                                                                
|Loss before income taxes                                                                                                                                
|Loss for the year                                                                                                                                       
|Loss per share(2)                                                                                                                                       
|Total assets                                                                                                                                            
|Liabilities                                                                                                                                             
|Shareholders' equity                                                                                                                                    
|Total common shares outstanding(3)                                                                                                                      
|US GAAP(4)                                                                                                                                              
|Sales                                                                                                                                                   
|Interest income                                                                                                                                         
|Expenses                                                                                                                                                
|Loss before income taxes                                                                                                                                
|Loss for the year                                                                                                                                       
|Loss per share(2)                                                                                                                                       
|Total assets                                                                                                                                            
|Liabilities                                                                                                                                             
|Shareholders' equity                                                                                                                                    
|Total common shares outstanding(3)                                                                                                                      

Notes:

(1)

Refers to Canadian Generally Accepted Accounting Principles.

(2)

The loss per common share was calculated using the weighted
average number of common shares outstanding during the period indicated.

(3)

Based on the number of common shares outstanding at the end of
the year indicated.  Excludes common shares issuable upon exercise of stock
options and any other outstanding convertible securities.

(4)

Refers to US Generally Accepted Accounting Principles.



Neither Birch nor its predecessors have declared or paid
dividends on its common shares during the last five fiscal years.  Any future
decision to declare dividends on Birch common shares will be made by the Board
of Directors depending upon the financial requirements of Birch to finance
growth, the financial condition of Birch and other factors that the Board of
Directors of Birch may consider appropriate in the circumstances.  Birch
anticipates that future earnings will be retained for the development of its
business and does not anticipate the payment of dividends to shareholders for
the foreseeable future.

B.

Capitalization and Indebtedness

This item is not applicable.

8

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C.

Reasons for the Offer and Use of Proceeds

This item is not applicable.

D.

Risk Factors

Birch is an Early Production Stage Company

Birch opened the Muskeg Valley Quarry, the initial starter quarry
situated within the Hammerstone Project, in December 2005, under the regulatory
approvals and operating permits received in August 2005.  The MVQ is fully
operational, providing and selling a range of limestone aggregate products.
 First commercial sales occurred in the second quarter of 2006.

In May 2006, Birch filed an application with the provincial
regulatory authorities for the remainder of the Hammerstone Project, to
integrate the existing MVQ with an expanded quarry and aggregate plant, as well
as a limestone processing complex to produce limestone-based reagent products.

There are risks that the MVQ's ongoing operations may experience
slowdowns and production interruptions and that operating costs may be higher
than estimated.

Similarly, there are risks that the Hammerstone Project may be
delayed or that the limestone processing complex may not commence operations.

These risks are due to many factors, including, without
limitation:



breakdown or failure of equipment or processes;



production performance falling below expected levels of output or
efficiency;



design errors;



contractor or operator errors;



non-performance by third-party contractors;



labour disputes, disruptions or declines in productivity;



increases in materials, equipment or labour costs;



inability to attract sufficient numbers of qualified workers;



delays in obtaining, or conditions imposed by, regulatory
approvals;



changes in the scope of the development or operations;



violation of permit requirements;



disruption of energy supply; and



catastrophic events such as fires, earthquakes, storms or
explosions.



The current operation and construction schedules may not proceed
as planned, there may be delays and the development of the Hammerstone Project
may not be completed on budget.  Any such delays will likely increase the costs
and may require additional financing, which financing may not be available.
 Actual costs to construct and develop the Hammerstone Project will vary from
estimates and such variances may be significant.



Given the stage of development of the Hammerstone Project,
various changes may be made prior to completing construction.  Based upon
current scheduling, the Hammerstone Project is not expected to start commercial
quicklime operations until 2009.  The information contained herein, including,
without limitation, reserve and economic evaluations, is conditional upon
receipt of all regulatory approvals and no material changes being made to the
planned MVQ operations and the Hammerstone Project.

9

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Mineral Reserve Quantities and Quality are Based on
Estimates

There are numerous uncertainties inherent in estimating
quantities of mineral reserves, including many factors beyond Birch's control,
and no assurance can be given that the indicated level of reserves or recovery
thereof will be realized.  In general, estimates of economically recoverable
limestone reserves and the future net cash flow there from are based upon a
number of factors and assumptions made as of the date on which the reserve
estimates were determined, such as estimates of future demand for limestone
products, geological and engineering estimates which have inherent
uncertainties, the assumed effects of regulation by governmental agencies and
estimates of future commodity prices and operating costs, all of which may vary
considerably from actual results.  All such estimates are, to some degree,
uncertain and classifications of reserves are only attempts to define the degree
of uncertainty involved.  For these reasons, estimates of the economically
recoverable limestone, the classification of such reserves based on risk of
recovery and estimates of future net revenue expected there from, prepared by
different engineers or by the same engineers at different times, may vary
substantially.

Estimates with respect to mineral reserves that may be developed
and produced in the future are often based upon volumetric calculations and upon
analogy to similar types of reserves and/or estimates of future sales, rather
than upon actual production history.  Estimates based on these methods generally
are less reliable than those based on actual production history.  Subsequent
evaluation of the same reserves based upon production history will result in
variations, which may be material, in the estimated reserves.

Mineral reserve estimates may require revision based on actual
production experience.  Mineral reserves have been determined based upon
projected demand and estimated aggregate and quicklime prices and operating
costs.  Market price fluctuations of aggregate, quicklime, cement and other
product prices may render uneconomic the recovery of certain grades of
limestone.  Moreover, short-term factors relating to oil sands development and
world oil prices may impair profitability in any particular period.

No assurance can be provided as to the quantity or quality of the
limestone to be produced from the quarry.

Birch Has a Lack of Cash Flows and Financing May Not be
Available to the Company

Birch is a developing company and does not yet have sufficient
revenues to meet its yearly operating and capital requirements. The Company has
historically raised funds necessary to conduct its business primarily through
issuance of equity or debt.  There is no guarantee the Company will be able to
continue to raise funds through additional equity issuances, project debt
financing, joint ventures and/or partnering arrangements.

The Company has incurred operating losses since its inception in
1995.  Losses are from costs incurred in operating and developing the Industrial
Minerals Division, mineral exploration and mineral technology research.
 Additional operating losses may occur in the future as a result of the
continued operation of the MVQ and development of the Hammerstone Project.
 However, the MVQ is expected to start generating increased revenues from
aggregate sales in 2007.

Competitive Risk May Reduce the Company's Ability to
Operate

Birch negotiates sale arrangements with its customers and has
proven that its aggregate products are reliable and suitable for use in the oil
sands industry.  Although the Company believes that competing aggregate
resources in the Fort McMurray region are limited in both size and quality and,
as a result, high market share assumptions have been made, Birch may have to
compete with larger companies that have greater assets and financial and human
resources, and which may be able to sustain larger losses than the Company to
develop business.  Birch, and the economic viability of the MVQ and the
Hammerstone Project may be negatively impacted if large new sources of
aggregates and/or industrial minerals are located and developed.

10

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Although no other quicklime and reagent limestone production
operations exist in the region, one or more competitors currently supply lime
products to the oil sands industry. Even with a quicklime and reagent limestone
plant in the region, Birch expects it will face intense competitive pressures as
it begins to bring its reagent limestone and lime products to market. In the
face of this competition, Birch may need to lower prices for its products to
reach its market share objectives.

Alternate Technologies May Reduce the Demand for the
Company's Products

The use of limestone for aggregates and the use of quicklime and
limestone as products for the treatment of air emissions and water treatment
could be replaced by alternate technologies if the oil sands industry develops
or locates more cost effective and efficient methods.  The rate of development
of new technologies and the impact of their development on the Company's
business cannot be determined.

Price Risks May Affect the Marketability of Products
Produced and the Company's Financial Results

The industrial mineral industry is intensely competitive and even
if commercial quantities of mineral reserves are developed, a profitable market
may not exist for the sale of such reserves. Factors beyond the control of the
Company may affect the marketability of any product produced. Significant price
movements over short periods of time may be affected by numerous factors,
including international economic and political trends, expectations of
inflation, currency exchange fluctuations (specifically, the Canadian dollar
relative to other currencies), interest rates and global or regional consumption
patterns, speculative activities and increased production due to improved mining
and production methods. The price of industrial minerals has a significant
influence on the market price of the Company's shares and the Company's business
activities.  The effect of these factors on the price of the Company's products
cannot accurately be predicted.

Aggregate pricing in the Fort McMurray region is typically done
on a spot or job basis and long-term contracts are uncommon.  Future prices and
forecasting of revenues is difficult and unknown and future prices are outside
the control of the Company.  If prices decline, the financial results of the
Company will be adversely affected.

Customer Dependency May Reduce the Flexibility of the
Company to Operate

Birch is reliant on the oil sands industry in the Fort McMurray
area for the majority of its revenue.  Costs of transportation of aggregate are
high relative to its cost of production and will limit the Company's ability to
ship the product over longer distances.  Risks affecting oil sands companies,
such as fluctuating oil and natural gas prices, fluctuations between the US and
Canadian dollar, energy costs, labour shortages and capital cost overruns, could
have a negative impact on Birch.  There is no guarantee oil sands companies will
require the predicted volume of the Company's products.

11

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Personnel Risks May Impact the Company's Ability to Carry
Out its Operational Plans

At December 31, 2006, Birch had 27 full time and two part-time
employees.  The Company relies on various other part time workers, contractors
and consultants to assist in executing operations and providing technical
guidance.

From time to time, Birch also utilizes the services of
independent consultants and contractors to perform various specific professional
services, particularly in the areas of engineering, environmental assessment,
drilling, blasting, crushing, processing, analysis and research.  Although Birch
believes that its relations with its employees, management, directors,
consultants and contractors are satisfactory, there can be no assurance that
they will remain with Birch for the immediate or foreseeable future.

Birch will be dependent on maintaining its key staff to explore
and develop the mineral deposits on the Company's mineral properties.  As the
Company continues to grow and expand its operations. it will be necessary to
rely on workers, contractors and consultants in the local area. In northern
Alberta, skilled labour shortages are common. There is uncertainty regarding the
ability to retain and attract personnel to the project and should the Company
not have adequate personnel, the project may not become operational or may not
be economically viable.

Additionally, Birch is relying upon the good faith, expertise and
judgment of the officers and directors of the Company to make appropriate
decisions with respect to investments and operations.

Birch Will Require Additional Regulatory Approvals and
Operating Permits

In the ordinary course of business, mining companies are required
to seek regulatory approvals and operating permits from the federal, provincial
and local governments for expansion of existing operations and the commencement
of new operations.  Obtaining the necessary regulatory approvals and operating
permits is a complex and time-consuming process involving numerous agencies and
often involving public hearings and costly undertakings on the part of the
Company.  The duration and success of regulatory and permitting efforts are
contingent upon many variables outside the Company's control.  Environmental
protection permitting, including the approval of reclamation plans, may increase
costs and cause delays depending on the nature of the activity to be permitted
and the interpretation of applicable requirements implemented by the permitting
authority.  There can be no assurance that all regulatory approvals and
operating permits will be obtained and, if obtained, that the costs involved
will not exceed those previously estimated by the Company.  It is possible that
the costs and delays associated with the compliance with such standards and
regulations could become such that the Company could not proceed with the
development or operation of the Hammerstone Project.  All regulatory approvals
and operating permits for the MVQ were received in July 2005.

Title Risks May Result in Title Claims or Disputes

Birch is satisfied that it has good and proper right, title and
interest in and to the mineral properties that are currently under development
or in production.

Aboriginal peoples have claimed aboriginal title and rights to a
substantial portion of western Canada.  Certain aboriginal peoples have filed a
claim against the Government of Canada, the Province of Alberta, certain
governmental entities and the RMWB (which includes the City of Fort McMurray,
Alberta) claiming, among other things, aboriginal title to large areas of lands
surrounding Fort McMurray, including the lands on which the MVQ and the
Hammerstone Project and most of the oil sands operations in Alberta are located.
 Such claims, if successful, could have a significant adverse effect on the oil
sands bitumen producers and on Birch, the MVQ and/or the Hammerstone Project.

12

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Regulatory and Environmental Requirements May Impact the
Company's Ability to Operate

The Company operates in areas that are subject to governmental
provisions regulating operations and development of mineral resources.  Birch
Mountain may be constrained or forbidden to develop its plans or mandated
operating guidelines may adversely affect the economic viability of the
projects.  The Company holds mineral permits and leases issued by the Government
of Alberta.

Birch is required by regulation to operate under certain
environmental guidelines that are mandated by the Government of Alberta and the
Government of Canada.  Additionally, public expectation of industry's
environmental performance remains high. The Company has established
environmental policies that it believes will allow it to operate effectively
under the environmental guidelines.  Birch has and will continue to work with
the regulators and local communities to address public environmental concerns.
Regulatory agencies may impose operating limitations that could adversely affect
Birch's revenues and/or the economic viability of a project.

Abandonment and Reclamation Costs and Regulations May
Change

Birch is responsible for complying with terms and conditions of
environmental and regulatory approvals and all laws and regulations regarding
the abandonment of the site and reclamation of its lands at the end of its
economic life, which abandonment and reclamation costs may be substantial.  A
breach of such legislation and/or regulations may result in the imposition of
fines and penalties, including an order for cessation of operations at the site
until satisfactory remedies are made.  Abandonment and reclamation costs are
estimates and since they will be a function of regulatory requirements at the
time, costs of goods and services at the time and the value of the salvaged
equipment may be more or less than the abandonment and reclamation costs. Birch
is required to post bond or a letter of credit with Alberta Environment annually
in an amount sufficient to reclaim the lands disturbed, thus managing the
long-term reclamation liability.

Birch is Subject to Certain Mining Hazards

The business of mining is subject to certain types of risks and
hazards, including environmental hazards, and industrial accidents.  Such
occurrences could result in damage to, or destruction of, mineral properties or
production facilities, personal injury or death, environmental damages, delays
in mining, monetary losses and possible legal liability.  Any payments made with
regards to such liabilities may have a material adverse effect on Birch's
financial position.  The Company carries insurance to protect itself against
certain risks of mining and processing to the extent that it is economically
feasible but which may not be adequate.

Independent Reviews Provide No Assurance of Future Results

Although third parties have prepared reviews, reports and
projections relating to the viability and expected performance of the MVQ and
the Hammerstone Project, it cannot be assured that these reports, reviews and
projections and the assumptions on which they are based will, over time, prove
to be accurate.

There is a Possibility of Dilution to Present and
Prospective Shareholders

Any transaction involving the issuance of additional Birch shares
or securities may result in dilution, possibly substantial, to present and
prospective holders of Common Shares.

13

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Shareholders Rights Plan May Discourage Change in Control
Transactions

Although the Company's shareholders rights plan (Rights Plan)
is not intended to prevent a take over of the Company, to secure continuance of
current management or the directors in office or to deter fair offers for the
common shares of the Company, it may have the result of discouraging certain
transactions by making such transactions impractical.  See Item 10B -
Additional Information - Memorandum and Articles of Association.

Enforcement of Civil Liabilities by Present and Prospective
Shareholders May be Adversely Affected

The enforcement by investors of civil liabilities under the
federal securities laws of the US may be affected adversely by the fact that the
Company is incorporated under the laws of Alberta, Canada, that the independent
auditors who have audited the Company's financial statements and some or all of
its directors and officers may be residents of Canada or elsewhere, and that all
or a substantial portion of the Company's assets and said persons are located
outside the US.  As a result, it may be difficult for holders of the Common
Shares to effect service of process within the US upon people who are not
residents of the US or to realize in the US upon judgments of courts of the US
predicated upon civil liabilities under the federal securities laws of the US.

ITEM 4

INFORMATION ON BIRCH

A.

History and Development of Birch

Birch is an Alberta mineral exploration, development and
production company formed under the provisions of the ABCA, by amalgamation of
one of Birch's predecessors, also named Birch Mountain Resources Ltd., and its
wholly owned subsidiary, Birch Mountain Minerals Ltd., on December 31, 1995.

Birch's head office and registered office are located at Suite
300, 250 - Sixth Avenue S.W., Bow Valley Square 4, Calgary, Alberta T2P 3H7,
phone: (403) 262-1838, and Suite 1000, 400 Third Avenue S.W., Calgary, Alberta
T2P 4H2, phone: (403) 232-9500, respectively.

Birch was founded in 1995 as a junior mineral exploration
company.  Prior to 2000 it explored for precious metals, base metals and
diamonds on properties in western Canada, the Yukon and Kalimantan, Indonesia.
 Since 2000, the Company has expanded beyond conventional mineral exploration to
include industrial minerals as well as research and development on naturally
occurring precious and non-precious metal microparticles and nanoparticles.
 Currently, Birch is only active in Alberta, Canada.

From early 2000 to 2002, the Company's work led to the
development of methods to isolate and image, using high-resolution transmission
electron microscopes, naturally occurring base and precious metal nanoparticles
in rocks and process residues from the Athabasca region of northeast Alberta.
 The commercial significance of these findings has not been determined.  A
reliable method for measuring precious metal concentration has not yet been
developed nor have independently verified and commercial methods of extraction
been developed.  In December 2002, Birch was awarded US patent 6,494,932
entitled, Recovery of Natural Nanoclusters and the Nanoclusters Isolated
Thereby, which covers processes for the recovery of natural nanoparticles from
geological materials and their processed counterparts.

In June 2002, the Industrial Minerals Division was established to
pursue opportunities arising from growing demand for industrial minerals in the
Athabasca region of northeast Alberta.  The mineral rights held by the Company
offer a compelling business opportunity due to their location close to current
and planned oil sands facilities and the forecast increase in demand for
aggregate and quicklime products from the oil sands industry and local
infrastructure requirements.  Consequently, management has focused on this
business opportunity over the past four and a half years.

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Principal Capital Expenditures



The Company has invested principally in its mineral properties in
the Athabasca over the last four years.  Over the past four years, $50.9 million
has been invested in the MVQ and the Hammerstone Project and $19.4 million has
been invested in mining equipment, software, hardware, leasehold improvements
and miscellaneous office equipment.  There have been no significant divestitures
or disposals over the past three years.

B.

Business Overview

Birch's principal operations are located north of Fort McMurray,
Alberta, where the Company holds metallic and industrial mineral rights over an
extensive portion of the Athabasca region in the heart of Alberta's expanding
oil sands industry.  Birch does not own the mineral rights to the geological
formations that contain the oil sands, but owns the mineral rights to the rocks
that lie geologically beneath the oil sands. Since 2002, Birch has worked to
commercialize the industrial mineral potential of limestone deposits that occur
on its mineral holdings in the Athabasca region.

The Company operates separate divisions for industrial minerals,
and mineral exploration and technology and the consolidated financial statements
provide segmented information to identify expenditures in each. See Item 17 -
Financial Statements.

Industrial Minerals

Muskeg Valley Quarry



In 2004, Birch formally applied to license a limestone quarry
called the Muskeg Valley Quarry, situated within the Hammerstone Project.  This
original application was to develop a starter quarry to supply crushed limestone
aggregate to the local market.



In February 2004, Birch released an independent technical report
on the MVQ project entitled, Muskeg Valley Project, Alberta  Independent
Qualified Person's Review and Technical Report(the 2004 Technical
Report).  The 2004 Technical Report was a preliminary assessment of the
aggregate and calcinable limestone potential of the proposed MVQ.  It included a
mineral resource estimate for calcinable and aggregate grade limestone, and a
preliminary financial model. The 2004 Technical Report concluded that additional
studies directed towards the construction and operation of a combined aggregate
and quicklime facility were justified.



In March 2004, Birch filed an application and the supporting
Environmental Impact Assessment (the MVQ Application) with the NRCB to
develop, operate and reclaim a quarry and aggregate plant on its mineral leases
adjacent to the Muskeg River. The Company received Approval NR-2005-1 from the
NRCB on July 14, 2005, as authorized by an Order in Council from the Alberta
Government the previous day, to construct and operate the MVQ and an aggregate
plant.  During the last two quarters of 2005, site preparation work was
completed that provided access to the MVQ.  Trees and overburden were cleared
and a two-kilometre commercial access road was established.  The Company
extracted limestone from surface exposures of its own limestone and used it in
building the access road.  During the second quarter of 2006, aggregate meeting
various product specifications was produced and the first sales from the MVQ
were made.

15

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Quarry development continued through 2006 in order to create the
space necessary to operate efficiently and to provide access to the four
limestone rock units present in the quarry.  Overburden was removed and pit
materials were excavated and trucked to stockpiles.

The Hammerstone Project



As geological evaluation of the proposed MVQ progressed, testing
of core samples from a 1996 drill hole and from new holes drilled in late 2002
and early 2003 confirmed the presence of high-calcium limestone suitable for
producing quicklime. Quicklime is used in a range of industrial and
environmental applications including flue gas desulphurization (FGD), which
removes sulphur, mercury and other contaminants from atmospheric emissions from
bitumen upgrading, and in treating water used in producing bitumen from SAGD
in-situ projects.  Birch has determined that a number of oil sands operators are
interested in a local source of quicklime and intends to pursue the business
opportunity to establish a quicklime plant on its proposed quarry site.



In December 2004, the Company filed a Public Disclosure Document
for the Hammerstone Project, a project involving a southward expansion of the
MVQ and construction and operation of a quicklime plant.  The footprint of the
starter MVQ lies wholly within and is continuous with the Hammerstone Project.
Subsequently, in March 2005, Birch released a report conforming to NI 43-101
prepared by AMEC entitled Hammerstone Project Alberta:  Independent Qualified
Person's Review and Technical Report(the 2005 Technical Report).  The
2005 Technical Report was based on AMEC's prefeasibility study of the
Hammerstone Project.  The 2005 Technical Report is available on SEDAR at its
website, www.sedar.com.



In February 2006, Birch filed a Project Update for the
Proposed Hammerstone Project(the 2006 Project Update), describing
an expanded limestone processing facility producing, in addition to quicklime:
hydrated lime, milk of lime, recycled spent lime, cement and reagent limestone.
  The update outlines the long-term development plan for the Hammerstone
Project, which will include an initial lime plant and a cement plant constructed
sequentially for more efficient use of project resources and alignment to local
demand.  As the oil sands region expands, the Company will add additional lime
kilns and product offerings to service the local demand requirements.  Birch's
vision is to provide full-cycle products and services such as re-calcining spent
lime and utilization of the gypsum by-product of flue gas desulphurization in
site remediation.



In May 2006, Birch filed an application and environmental impact
assessment with Alberta regulatory authorities for the Hammerstone Project (the
Hammerstone Application). The area of the Hammerstone Application includes
areas outside the area of the original MVQ Application. The proposed Hammerstone
Project integrates the existing MVQ into an expanded quarry and aggregate plant,
and adds a limestone-processing complex to produce limestone-based reagent
products such as quicklime, hydrated lime and cement, as well as facilities for
recycling spent lime and reclaiming solid residues generated when reagent
limestone or lime are used to capture sulphur.



In August 2006, an updated independent NI 43-101 technical report
entitled Hammerstone Project, Alberta: Qualified Person's Review and
Technical Report (the 2006 Technical Report) was released, based on an
update of the pre-feasibility study. The 2006 Technical Report was authored by
AMEC Americas Limited and Phoenix Process Engineering, Inc.

The 2006 Technical Report describes and values the Hammerstone
Project, which will ultimately cover an area of 1,608 hectares (4,408 acres).
Aggregate processing facilities within the quarry will supply the needs of the
oil sands industry, local infrastructure and municipal demand, as well as
providing feedstock for the proposed limestone-processing complex. Limestone
aggregate and reagent product average yearly sales are projected to reach an
ultimate level of 19 Mt. The limestone-processing complex includes a quicklime
plant that will be built in stages, projected to reach a production capacity of
1 Mt per year. Some of the quicklime will be further processed into hydrated
lime in a plant with an ultimate capacity of 400,000 tonnes per year.

16

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Details of the Muskeg Valley Quarry and the Hammerstone
Project



Location and Mineral Interests



The Hammerstone Project, which encompasses the MVQ, is located
within Birch's Athabasca mineral property, approximately 60 km north of the City
of Fort McMurray near the hamlet of Fort McKay, Alberta.  The Athabasca mineral
property is described in greater detail in Section 4(D).  The Company's mineral
leases convey the rights to develop and produce metallic and industrial
minerals, including limestone, while the mineral permits allow the Company to
explore for these same minerals.



The Hammerstone Project is located at a site favourable for
development, where limestone occurs at surface or is overlain by only thin
layers of muskeg and overburden.  The development boundaries have been
determined from geological, environmental, and economic considerations.  The
western boundary is set back 200 metres from the Muskeg River, consistent with
setbacks for wildlife habitat on adjacent oil sands leases.  The southern
boundary is an area where limestone is known from the Company's geological
mapping to be at or near surface. The eastern boundary has been placed where the
overlying Cretaceous and Quaternary sediments are more than 20 metres thick,
making commercial development less attractive due to the requirement to remove
increasing amounts of materials overlying the limestone.  To the north, the
limestone deepens beneath increasingly thick oil sands.



Future expansion of the Hammerstone Project is only possible to
the south because in this area limestone lies at or near surface.  The Quarry of
the Ancestors, the site of an ancient stone quarry, was discovered by Birch
during its fieldwork.  This northeast corner of the project area has been set
aside as an archaeological exclusion zone and due to it historical significance
is under protective notation by the Government of Alberta.



In some areas, Birch's mineral leases overlap with oil sands
leases of Shell Canada Ltd. (leases 90 and 13) and Syncrude Canada Ltd. (leases
22 and 30). These companies own the mineral and hydrocarbon rights to the oil
sands but not to the underlying Devonian limestone. Birch has co-development
agreements with Syncrude Canada Ltd. and a cooperation and information sharing
agreement with Albian Sands Energy Inc. (a joint venture between Shell Canada
Ltd., Chevron Canada, and Western Oil Sands Inc.) that provide for cooperative
exploration, environmental planning, development, extraction, and production
activities in areas of the overlapping leases.



Exploration



Birch has conducted mineral exploration of the Hammerstone
Project since 1995, as described in the 2006 Technical Report.  Industrial
minerals exploration began in 2002 and since this time Birch has conducted
geological mapping and sampling, core drilling, geochemical analyses, bulk
sampling, calcine testing and aggregate testing of limestone from the
Hammerstone Project area.  Birch interprets the results of its surface and
subsurface exploration programs to indicate that limestone from the Hammerstone
Project is suitable for producing construction aggregates, quicklime, cement and
other products used by the oil sands industry and in municipal and
infrastructure construction.

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Mineralization



Limestone is exposed at surface across the Hammerstone Project
area or is present beneath a thin layer of muskeg or glacial overburden. The
four limestone units selected for quarrying are accessible from surface and all
together are up to 45 metres thick; additional limestone units are present below
the lowest unit. The 2005 Technical Report identifies construction aggregate,
concrete rock and quicklime as products to be made from limestone quarried at
the Hammerstone Project.  Other products including reagent limestone, hydrated
lime, milk of lime and cement were identified in the 2006 Technical Report.



Drilling



Birch has conducted drill programs within and near the
Hammerstone Project, drilling 5 holes in 1996, 9 holes in 2002/2003 and 10 holes
in 2004.  Additional drilling was done for hydrogeological testing in late 2005
and early 2006, but these holes were not cored. In 2006, Birch Mountain
Resources drilled fourteen core holes at 13 locations. Twelve holes development
holes were within MVQ and one exploration hole was drilled off-site at Poplar
Creek, north of Fort McMurray. All core was logged by Birch staff. The MVQ drill
results show continuity of stratigraphy with other drill data from across the
Hammerstone Project. The 2006 drill core information was not available to be
included in the 2006 Technical Report.



Sampling and Analysis



Birch conducted industrial mineral sampling programs across the
Hammerstone Project area from 2002 to 2006; a total of 205 samples were
collected and submitted for multi-element geochemical analyses.  In 2004, one
300 tonne bulk sample was collected from a surface pit for aggregate testing.
 In 2005, drill core and excavated samples were tested to determine suitability
for producing aggregate products. Drill core samples were taken over selected
intervals and submitted for some or all of: aggregate testing, multi-element
geochemical analyses and calcine testing. Birch concluded the results of its
surface and drill core sampling programs demonstrated that construction
aggregates, concrete rock and quicklime can be produced from the Hammerstone
Projects.



Development of the Hammerstone Project



The details in this section for the Hammerstone Project are
extracted from the 2006 Technical Report.



Quarry and Aggregate Plant Development and Operations



The MVQ was opened in December 2005; production began in the
first quarter of 2006 with the first sale recorded in June 2006. Site
preparation at the MVQ required clearing of trees and stripping and stockpiling
of organic soils and overburden, construction of access roads, water diversion
structures and wash ponds, and installation of a weigh scale and office. The
quarry operates as a conventional drill-blast-crush operation.  Primary crushing
plants are to be located near the rock face and fed by excavators or wheel
loaders.  In-pit conveyors move rock from the primary crushers to secondary
crushing plants.  Birch contracted a local quarry operator to operate the quarry
in 2006, but has since assumed control of all quarry operations.  In 2006, Birch
purchased a Hitachi EX1800 hydraulic shovel and a Cedarapids portable screening
and crushing plant to meet increasing production demands.

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Hammerstone Limestone Processing Complex



The current development plan for the Hammerstone Project was
presented in the 2007 Hammerstone Project Update (the 2007 Project Update),
filed with NRCB, Alberta Environment and the Alberta Board on February 27, 2007.
The purpose of the 2007 Project Update was to inform regulators and regional
stakeholders of Birch Mountain's optimized development plan for the Hammerstone
Project, completed subsequent to filing the 2006 Technical Report in August
2006. The 2007 Project Update contains a revised start-up plan and staged
capital expenditures that better align production capacity with demand
projections. Quarry and aggregate plant operations for the Hammerstone Project
remain unchanged from the 2006 Technical Report; however, plans for the
limestone processing facilities have been revised and the early capital
requirements reduced.



The capital savings are due to the adoption of flash calciners
for initial quicklime production, beginning on-schedule in 2009. The modular
flash calciners reduce project risk and enhance flexibility because they are
less expensive and can be brought on stream as the market grows. Commissioning
of the first rotary kiln is now scheduled for 2012, when projected quicklime and
hydrated lime sales require its construction. Additional kilns for producing
activated limestone and quicklime are scheduled for construction post-2012, as
they are required to meet projected sales.



Capital Cost



The
revised capital plan for Hammerstone presented in the 2007 Project Update was
prepared using the quarry and aggregate plant information contained in the 2006
Technical Report, and new information and cost estimates prepared by
independent qualified person Mr. John Macfadyen, P.E., principle of Phoenix
Process Engineering, Inc. for the limestone-processing complex.  The total capital cost estimate over the life of the project is now
estimated to be $437 million (down from $536 million in 2006), which covers the
direct field costs of executing four crushing plants, two flash calciners, one
activation plant, three calcining plants, and the indirect costs associated with
design, construction and commissioning.  Based on the 2007 Project Update, the
estimated capital spending requirements for 2007 to 2011 are $108 million, down
from the $229 million estimate in 2006 Technical Report.  Interest and financing
costs during construction are excluded. The 2007 capital cost estimates for the
Hammerstone Project are summarized in Table 4-1.



Table 4-1.Hammerstone Development
Capital (C$ million): 2007 Project Update.



Component
      2007 to
      2011
      2012 to
      2016
      2016 to
      2060
      TotalQuarry and Aggregate Plant
      11.9
      11.3
      
      23.2Flash Calciner -1
      24.0
      
      
      24.0Flash Calciner -2
      30.0
      
      
      30.0Quicklime -1
      42.0
      42.0
      
      84.0Quicklime -2
      
      74.0
      
      74.0Activation -1
      
      74.0
      
      74.0Quicklime -3
      
      
      148.0
      148.0Total Capital Cost
      108
      201
      148
      457




Operating Costs



The operating cost estimate is based on an owner-operated quarry,
aggregate plant, and limestone processing complex, as described in the 2006
Technical Report. Costs have been calculated for the four main areas of mining,
aggregate processing, calcining, hydrating, and site general and administration.
Costs have been developed from data considered applicable to the Fort McMurray
area. Table 4-2 shows the overall average operating cost anticipated for the
Hammerstone Project over its planned 55-year life. This estimate is categorized
as Class 4, Prefeasibility Study level, with a nominal expected accuracy of
+25%/-25%, as defined by the Association for the Advancement of Cost Engineering
Cost Estimate Classification System.

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Table 4-2.Estimated Average
Operating Cost for the Hammerstone Project from the 2006 Technical Report.



|Area                       | Cost per Tonne Product ($)
|-------------------------- | --------------------------
|Quarrying and rock haulage | 1.88                      
|Aggregate plant processing | 1.66                      
|Activation plant           | 9.48                      
|Calcining plant processing | 36.40                     
|Hydration plant costs      | 15.22                     
|General and administration | 0.30                      



Financial Analysis



In the 2006 Technical Report, AMEC performed an independent
financial analysis on the Hammerstone Project using a discounted cash flow
approach that assumed 100% equity financing using first quarter 2006 Canadian
dollars. Projections for annual revenues and costs are based on data developed
for the limestone quarry, aggregate and limestone processing plants, capital
expenditures and operating costs. Estimated project cash flows were used to
determine the pre- and after-tax net present value (NPV) and pre- and
after-tax internal rate of return (IRR).



The pre-tax NPV of the Hammerstone Project presented in the 2006
Technical Report is C$1,669 million and the corresponding after-tax NPV is
C$1,099 million (see Table 4-3), using a discount rate of 7.5%. The project's
pre-tax IRR is estimated to be 36.3% and after-tax IRR is estimated to be 31.2%.
The payback period is estimated at 5.9 years from first production in January
2006. The base-case quarry life is 55 years.



Table 4-3.

Variation in NPV ($ million) with Discount Rate and IRR from the
2006 Technical Report.



|                  | 0%      | 2.5%  | 5%    | 7.5%  | 8%    | 10%   | 12.5% | 15%
|----------------- | ------- | ----- | ----- | ----- | ----- | ----- | ----- | ---
|Pre-tax NPV       | $12,891 | 5,874 | 2,987 | 1,669 | 1,500 | 1,005 | 640   | 424
|Pre-tax IRR (%)   | 36.3%   |       |       |       |       |       |       |    
|After-tax NPV     | $8,613  | 3,913 | 1,981 | 1,099 | 986   | 655   | 411   | 266
|After-tax IRR (%) | 31.2 %  |       |       |       |       |       |       |    



Sensitivity analysis was performed by varying quarrying cost,
process cost, product price and capital expenditure across a range of minus 20%
to plus 20%. The cash flow model is most sensitive to changes in reagent
limestone and aggregate product price, significantly less sensitive to mining
costs, processing cost, and capital costs, and least sensitive to lime plant
fuel cost.



Regulatory Status



On June 14, 2005, Birch received a decision report from the NRCB
recommending approval of the MVQ. All final operating permits for the MVQ were
received in the third quarter of 2005.

20

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Birch filed the application and EIA for the Hammerstone Project
on May 24, 2006 and released the 2007 Project Update to regulators and the
public on February 27, 2007.  The Company expects to receive regulatory approval
for the Hammerstone Project by the end of 2007 or early 2008.



Industry Overview



The Hammerstone Project is centrally located among numerous
existing and planned bitumen extraction and upgrading projects in the Athabasca
oil sands region of Alberta.  These projects and the associated infrastructure
and municipal development, are expected to be the primary sources of demand for
aggregate and reagent limestone products in the Fort McMurray region.



Demand for aggregate and reagent limestone products changes
between the construction and production phases of bitumen extraction and
upgrading projects. The construction phase requires a range of aggregate
products including sub-base, base and construction aggregates for building roads
and production facilities. In addition, asphalt aggregate is required for road
building, concrete rock for building bridges, foundations and other structures,
and low permeability shale pond liner to construct impermeable liners and
surface water control structures. There is little or no demand for reagent
limestone during the construction phase of oil sands projects.



Oil sands bitumen production facilities also require aggregate
products for on-going mine and in situ project development, facilities
maintenance and support, but in lower amounts than for construction.  Demand for
reagent limestone products is driven by oil sands production where they are used
for boiler feed-water treatment and for the control of sulphur emissions
(desulphurization) where alternative fuels containing sulphur are used instead
of natural gas. The reagent limestone products used for desulphurization are
crushed limestone with a high calcium carbonate content for flue gas
desulphurization (FGD) or fluidized bed combustion (FBC), and quicklime for FGD.
Hydrated lime is used for water treatment at in-situ extraction and upgrading
projects.



Supply and Demand  Aggregate



Current supplies of glacial aggregates in the Fort McMurray
region are limited in both size and quality.  Poplar Creek is a gravel pit near
Fort McMurray that has recently reached total depletion.  Susan Lake is another
gravel pit that is believed to have less than 5 to 10 years' supply.  Although
additional deposits have been found more recently, they are typically small and
inadequate to assure a long-lived supply for construction and operation of oil
sands mining and in situ projects.  Typically, aggregate deposits remaining in
the region are sand-rich and contain ironstone, rendering them inappropriate for
use in manufacturing concrete.



Based on information reported in the 2003 and 2004 Athabasca
Regional Issues Working Group (RIWG) aggregate surveys, the average annual
demand for road quality aggregate over the period 2003 to 2008 was 7.7 million
tonnes and for concrete rock, 0.8 million tonnes. However, the RIWG aggregate
surveys did not consider limestone, which was then being used by two major oil
sands producers. The average annual limestone use for aggregate by these
companies for 2001 to 2005 was 2.2 Mt.  Therefore, based on historical limestone
aggregate use and RIWG reported data, the average aggregate demand is estimated
to be 10.7 Mt annually, of which 8.5 Mt is estimated to come from glacial
gravels.



Supply and Demand  Reagent Limestone and Quicklime



Quicklime and hydrated lime are not currently produced in the
region and must be trucked in from plants located elsewhere. Competing sources
of quicklime, their respective capacities and approximate road distances from
the location of the proposed Hammerstone limestone processing complex are listed
in Table 4-4.

21

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Table 4-4.

Competing Quicklime Plants, Canadian Prairies and Northern US
Plains



|Plant1       | Location | Province/State | Capacity (tonnes/yr) | Distance (km)
|------------ | -------- | -------------- | -------------------- | -------------
|Exshaw       | Exshaw   | Alberta        | 180,000              | 900          
|Summit       | Coleman  | Alberta        | 50,000               | 1,050        
|Faulkner     | Faulkner | Manitoba       | 117,000              | 1,500        
|Indian Creek | Townsend | Montana        | 300,000              | 2,000        

1Data from government and industry sources.



Crushed limestone for FGD is used at the Tar Island power plant
operated by TransAlta Utilities Ltd. on behalf of Suncor Energy Inc.  This
limestone is believed to be obtained from Waterways Formation limestone exposed
at the base of Suncor's original pit located on the west side of the Athabasca
River, north of the Tar Island complex. No commercial sources of limestone,
including high-calcium reagent grade limestone, currently exist in the region,
other than Birch Mountain's Muskeg Valley Quarry and Hammerstone Project.
 Although precise figures are not publicly available, Birch Mountain estimates
that current use of reagent grade limestone in neutralizing sulphur emissions in
the region amounts to approximately 250,000 to 300,000 tonnes per year.



No independent information has been found on the consumption of
quicklime by the oil sands industry or other industries in the region.
 Quicklime is used as a reagent in existing industrial and municipal water
treatment facilities and by the pulp-and-paper industry.  Some information has
been obtained from public disclosure of chemical reagents used in the oil sands
industry.  Birch Mountain estimates that the current total market for quicklime
and hydrated lime in northeast Alberta is 50,000 to 100,000 tonnes per year.
 Much of the current demand is believed to be in the Cold Lake region, where
water treatment is required for in situ steam-assisted recovery of bitumen from
the oil sands.



Long-Term Demand and Sales Forecast



The long-term demand for limestone products in the Fort McMurray
region is dominated by the construction and production requirements of the oil
sands industry.  As described in the 2006 Technical Report, Birch Mountain
contracted the Canadian Energy Research Institute (CERI) of Calgary, and Dr.
Graham Davis, a mineral economist and professor at the Colorado School of Mines,
to update the oil sands bitumen supply model developed be CERI and used in the
2005 Technical Report. The updated CERI/Davis model projected oil sands
construction activity and bitumen production and upgrading from 2006 to 2070 and
this formed the basis of Birch's most recent long-term demand and sales
projections. The CERI/Davis model predicts that oil sands bitumen supply will
continuously increase over the period 2006 to 2070, reaching nearly 12 million
barrels per day by 2070.



Demand factors were derived for each of the limestone aggregate
and reagent products scheduled for production at the Hammerstone Project. The
demand factors are estimates of how much of each product is required for each
barrel-per-day of oil sands capacity added by construction or each
barrel-per-day of production capacity. Demand factors for aggregate and hydrated
lime were independently derived from engineering design considerations. Demand
factors for reagent limestone and quicklime were calculated using assumptions
regarding the types and amounts of alternative sulphur-bearing fuels used by the
oil sands industry over the period 2006 to 2060.

22

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Forecast sales for limestone products were estimated by
multiplying the CERI/Davis forecast oil sands construction and supply figures by
the demand parameters and Birch's estimates of future market share.  For
aggregate, market share estimates were adjusted to reflect competition from
other known gravel deposits.  For quicklime and reagent limestone, market share
estimates were made by distance weighting market share based on the closest
alternative supplier at Exshaw, Alberta.  The most recently published sales
estimates for all products are in the 2006 Technical Report.



Competitive Landscape



Studies by RIWG and the Alberta provincial government indicate
that currently known sources of glacial gravels are insufficient to meet the
long-term growth requirements of the oil sands industry.  Although additional
deposits have been found recently, Birch believes they are small and inadequate
to assure a long-lived supply for the construction and operation of oil sands
mining and in-situ projects. Birch believes most aggregate deposits remaining in
the region are sand-rich and contain abundant ironstone, rendering them
inappropriate for use in making concrete and asphalt.



Based on all available information, Birch believes there will be
little competition in the region for high value aggregates suitable for making
concrete and asphalt. There is however more competition for lower grades of
aggregate.  The prefeasibility study shows that competing sources of concrete
rock are in limited supply and may be exhausted by 2011 and competing sources of
lower quality A-grade and B-grade aggregates may not be totally exhausted until
about 2025 to 2030.  However, Birch believes that as these competing deposits
are depleted, operating costs to produce them will rise and, in the face of a
long-term stable supply of aggregate from the MVQ and the Hammerstone Project,
these deposits are likely to be shut-in before becoming totally exhausted.



Continuing Development of the Hammerstone Project



The Hammerstone prefeasibility update study, upon which the 2006
Technical Report is based, defined the geological, engineering, process, and
financial criteria necessary to develop a quarry plan and mineral reserve
estimate for the Hammerstone Project. The quarry will include and expand upon
the existing Muskeg Valley Quarry and grow to cover an area of 1,608 hectares
with a projected life of approximately 55 years. Quarrying will progress from
north to south exposing the rock units required for production as needed. In the
Hammerstone Application filed in May 2006, Birch is also seeking regulatory
approval to construct and operate facilities to produce cement, recycle spent
lime and store the solid by-product gypsum that is generated when limestone
and/or lime are used to capture sulphur in combustion of alternative fuels. The
Company expects to invest in excess of $500 million in developing the
Hammerstone Project.



C.

Organizational Structure

Birch has two inactive, wholly owned subsidiaries, Dawson Bay
Minerals Inc., incorporated pursuant to the Corporations Act (Manitoba) and
Muskeg Valley Minerals Inc., incorporated pursuant to the ABCA.



The Company also has a 49% interest in a joint venture
partnership operating as Hammerstone Products Limited.  The other joint venture
partner is the Fort McKay First Nation who own the remaining 51% interest.  Hammerstone
Products Limited will provide a marketing service on behalf of the MVQ in
exchange for a marketing fee of $0.10 per tonne of limestone sold from the MVQ.



The work activities of the Company are organized under two main
divisions:  Industrial Minerals and Mineral Exploration and Technology.

23

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D.

Property, Plants and Equipment

Office Space

Birch maintains its head office in Calgary, Alberta.  Executive,
administrative and support staff work in the 7,972 square foot office space.
 The rental commitment is $406,548 per year.

Core and Metallurgical Laboratories

The Company maintains secure lab and storage facilities in
Calgary in an industrial area, for storage, logging and testing of drill core
samples and for testing in relation to the mineral exploration and technology
research work.  The rental commitment of these facilities is $37,200 per year.

Core drilled by Birch and core obtained from oil sands mining
companies is shipped to Calgary for cutting, logging and sampling.  Drill core
and samples are archived at the storage facility.  The laboratory is equipped
for sample preparation, fire assay and wet chemical treatments.  Instrumental
analyses are done offsite using rented analytical instruments at the University
of Calgary or commercial analytical services.

Plant and Equipment

Birch owns office and computer equipment and small laboratory
equipment in its offices and laboratories.  During 2006, a Hitachi EX1800
hydraulic shovel was purchased and is being used for selective excavation of
limestone and should reduce the amount of blasting required.  Erection of a
custom designed crushing and screening spread, acquired by the Company, is
underway with delivery of the first pieces in September 2006. The Company
expects this high-capacity crushing spread to be available to support aggregate
sales in early 2007. Construction of scale house for weighing loaded trucks
exiting the quarry was completed in late 2006.



The Company purchased three used rotary kilns, two pre-heaters
and associated equipment in the second quarter of 2006 from a company in Addy,
Washington and successfully dismantled and shipped all of the equipment to a
laydown area cleared within the MVQ. All of the equipment will be stored at the
quarry until the company receives regulatory approval to commence construction
and operation of the limestone processing facilities.



Intellectual Property

In December 2002, Birch was granted US patent number 6,494,932
entitled, Recovery of natural nanoclusters and the nanoclusters isolated
thereby.  Birch has also filed a similar patent application for protection
under the International Patent Cooperation Treaty.  A divisional patent derived
from the original patent application has been filed with the US Patent and
Trademark Office.

Mineral Properties

Birch's mineral properties are located in northeast Alberta and
they are collectively called the Athabasca mineral property. Since 2002, Birch's
Industrial Minerals Division has explored the Athabasca mineral property with
the intent of developing a commercial limestone producing operation.

24

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Mineral Tenure in Alberta

Mineral Permits



Birch holds mineral permits issued by the Alberta Department of
Energy.  Mineral permits have a 14-year term and convey the right to explore for
metallic and industrial minerals.  Mineral exploration or assessment costs must
be filed with the government every two years against an escalating work
requirement ranging from $5.00 to $15.00 per hectare (approximately $2.00 to
$6.00 per acre) for each 2-year assessment period.  Birch owns a 100% working
interest in all of its mineral permits held in Alberta.  Some mineral permits
are subject to a production royalty payable to the original mineral permit
holder; Birch has the option to purchase most of these royalties for a fixed
price.  A small minority convey a royalty right to the original mineral permit
holder or its designees, with no right to purchase the royalty.  Mineral permits
held in good standing may be converted to mineral leases any time prior to the
expiry of their term.

Mineral Leases



Birch also holds mineral leases issued by the Alberta Department
of Energy.  Mineral leases convey the right to develop and produce metallic and
industrial minerals, subject to meeting development approvals.  Mineral leases
have a renewable fifteen-year term, subject to payment of an annual rent of
$3.50 per hectare ($1.42 per acre).  Mineral leases under production are
automatically renewed at the end of their 15-year term.

In addition to Alberta mineral leases, Birch holds one Mineral
Lease Agreement issued by Indian and Northern Affairs Canada (Table 4-5). This
agreement conveys the mineral rights, including limestone, on lands included as
part of a Treaty Settlement agreement between Canada and the Fort McKay First
Nation.  The term of the agreement is 12 years.



Metallic and Industrial Mineral Permit-to-Lease Conversions



Birch has applied to have parts of certain permits that have
reached the end of their respective ten-year terms converted to mineral leases.
 The Province of Alberta formally recognizes their applications as
permit-to-lease conversions.

Overlapping Mineral Rights



Ownership of minerals within the area of the Athabasca Oil Sands
Mining Area, as defined by the Government of Alberta, is split between oil sands
leaseholders and mineral lease or permit holders.  The Athabasca Oil Sands
Mining Area covers all of Birch's mineral leases and many of Birch's mineral
permits and permit-to-lease conversions.  Within this area, the oil sands
leaseholders own the rights to all minerals that occur within the geological
formations mined for oil.  Oil sands leaseholders do not own metallic or
industrial mineral rights to either the overlying sedimentary rocks or the
underlying Devonian limestone, which rights are owned by the metallic and
industrial mineral permit or lease holders such as Birch.

Athabasca Mineral Property

As of December 31, 2006, Birch's Athabasca mineral property
covered 378,201 hectares (934,533 acres). Annual rental payments on mineral
leases of the Athabasca mineral property were $431,901 in 2006.  If current
permit-to-lease conversions are received in 2007, net annual mineral lease
rental payments will increase by $430,605. Lease rental permits will increase if
the Company elects to acquire new mineral leases or decrease if existing low
priority leases are allowed to expire. The Company continues its exploration and
anticipates that the extent of its mineral properties will be reduced in the
future to areas Birch believes to be the most prospective.

25

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Rock Formations and Mineralization



Limestone is the principal exploration target on the Athabasca
mineral property. The geology of the Athabasca mineral property is relatively
simple, and is characterized by Precambrian basement overlain by about 300
meters of shallow westward dipping sedimentary rocks chiefly of Devonian and
Cretaceous age. The Devonian rocks are predominantly marine dolostones,
limestones and evaporites while overlying Cretaceous rocks are predominantly
sandstones and shales, including oil-bearing sandstone, or oil sands, of the
McMurray Formation. Structurally, the property is underlain by complexly folded
and faulted Precambrian basement rocks, but the sedimentary rocks are largely
undeformed, although fault zones with limited offset are present.  A large
structure, the Bitumount Graben, has resulted in an estimated total downdrop of
up to 200 meters of both sedimentary and basement rocks along numerous
structures in the north-central part of the Athabasca mineral property.

Location and Access



The Athabasca mineral property is located in the Regional
Municipality of Wood Buffalo (RMWB) in northeast Alberta, Canada.  The City of
Fort McMurray is the urban and economic center of RMWB.  While the region covers
61,566 square km (23,771 square miles), most of itsresidents live in
Fort McMurray, which has a population of 64,441. The total population of RMWB is
79,810 including an estimated 10,000 persons living in work camps located close
to major oil sands construction projects. The First Nation community of Fort
McKay is located in the central part of Birch's Athabasca mineral property.

Fort McMurray is located 435 km northeast of the provincial
capital of Edmonton and can be reached by paved highways 2 and 63 or by
regularly scheduled airline flights and bus service from Calgary and Edmonton.
Fort McMurray is situated at the confluence of the Athabasca and Clearwater
rivers. The larger oil sands mining plants are located approximately 45 to 100
km north of Fort McMurray.  Infrastructure north of Fort McMurray, in the
vicinity of Fort McKay, is very good due to the presence of the large oil sands
mining operations.  Fort McKay and the oil sands operations are accessed from
Fort McMurray by provincial highway 63.  All major services, including goods and
accommodation, air and helicopter service, vehicle and heavy equipment servicing
and expediting can be obtained in Fort McMurray.  Infrastructure development is
ongoing in Fort McMurray and the Athabasca Oil Sands Mining Area.

Near the Athabasca River, between Fort McMurray and Fort McKay,
road access is good; once away from the river and further north, the number and
condition of the roads decreases. A winter road exists from Fort McKay to Fort
Chipewyan.  The Athabasca mineral property is accessible by road or all terrain
vehicles. A high voltage power distribution line and high-pressure natural gas
pipeline cross the Athabasca mineral property. Exploration activities are
curtailed on certain exploration permits during moose and caribou calving
season; this restriction occurs during spring break-up, which precludes land
access for exploration activities at this time. Additionally, large area
clearing is prohibited from May 1st to August 15th under
the federal Migratory Birds Convention Act.

Mineral Title



Birch's currently active Athabasca mineral permits,
permit-to-lease conversions and leases were either originally acquired from the
Province of Alberta, or were acquired by purchase or option from other companies
or individuals.  One mineral lease was obtained from Canada. At March 15, 2007
the Athabasca mineral property covered 380,136 hectares (939,315 acres), as
outlined in Table 4-5 below:

26

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Table 4-5.

Athabasca mineral property: mineral permits, permit-to-lease
conversions and leases.



Year Issued
      Term Expiry
      Number
      Area (hectares)
      Area (acres)Mineral Permits - Alberta1998
      2012
      2
      8,448
      20,8752003
      2017
      1
      5,776
      14,2722005
      2019
      9
      67,775
      167,4722006
      2020
      5
      36,784
      90,893Subtotal
      
      17
      118,783
      293,512Mineral Leases - Alberta1994
      2009
      2
      1,991
      4,9201999
      2014
      2
      1,216
      3,0052000
      2015
      23
      43,610
      107,7602003
      2018
      4
      4,742
      11,7172004
      2019
      36
      81,336
      200,9812006
      2021
      1
      112
      277Subtotal
      
      68
      133,007
      328,660Permit-to-Lease Conversions - Alberta56
      123,030
      304,007Subtotal
      56
      123,030
      304,007Mineral Lease - Federal2006
      2018
      1
      3,381
      8,354Subtotal
      1
      3,381
      8,354GRAND TOTAL
      378,201
      934,533




Previous Exploration



Birch and others have previously explored the Athabasca mineral
property for precious metals, diamonds and limestone.  Comprehensive details of
all known prior exploration are included in the 2003 Technical Report. The 2003
Technical Report, filed in May 2003 in Canada and on June 3, 2003 as an exhibit
to a Form 6-K filed with the SEC and is available in the Company's public
documents at www.sedar.com and www.sec.gov.

In the period from 1993 to 1995, Birch and others explored for
precious metals in areas that are now part of Birch's Athabasca mineral
property.  Birch is unaware of any current precious metals exploration in the
area.

In 1997-98, Birch explored with a joint venture partner for
diamonds on its Athabasca mineral property.  No potentially diamond-bearing
rocks were found during this exploration program.

27

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Industrial Mineral Reserves



Mineral Reserves



Canadian and US regulations on disclosure of mineral reserves
differ.  In Canada, mineral resources and reserves disclosure must conform to NI
43-101 of the Canadian Securities Regulators. In the US, Industry Guide 7
(Guide 7) of the US Securities and Exchange Commission (SEC) governs the
disclosure of mineral reserves.



The limestone mineral resources and reserves for Hammerstone were
first defined in the 2005 Technical Report under NI 43-101 in Canada. At that
time the Canadian mineral reserves did not conform to the Guide 7 requirements.
Subsequently, Birch brought the quarry into production and since the second
quarter of 2006 has sold limestone aggregates from the quarry at market prices.
On May 24, 2006, Birch submitted the Hammerstone Application containing all
applications for required approvals of the Hammerstone Project that Birch
reasonably expects will be received in late 2007. By establishing commercial
viability through sales of aggregates to various end-users at market prices and
with expectation of regulatory approval, the Hammerstone mineral reserves met
Guide 7 requirements for US purposes for qualification as a reserve as of May
24, 2006. The Hammerstone mineral reserves were updated in the 2006 Technical
Report released in August 2006.



Limestone reserves are defined for each of the four geological
units present in the proposed Hammerstone Quarry (2006 Technical Report).
Aggregate resources and reserves are classified based on Canadian Standards
Association (CSA) specifications for Concrete Materials (CSA Standard A23.1),
Alberta Department of Transportation (AT) Standard Specifications for Highway
Construction, and local oil sands industry specifications. For aggregates, tests
included Los Angeles Abrasion (LAA) and Plasticity Index (PI). For concrete
rock, test included the LAA and Magnesium Sulphate Soundness (MSS). Calcinable
limestone reserves were defined based on the results of geochemical analyses of
Unit 2, which contains an average 95.4% calcium carbonate and produces quicklime
meeting user requirements (2006 Technical Report).



Limestone reserve estimates from the 2006 Technical Report are
summarized in Table 4-6. The reserves listed meet the sales forecast feed
requirements for the estimated 55-year life of the quarry. The reserves
for the rock delineated within the boundaries of the approved and permitted
Muskeg Valley Quarry are included in the larger footprint of the Hammerstone
Project and in the reserves computed in the 2006 Technical Report and shown in
Table 4-6.



Table 4-6.

Hammerstone Project limestone reserves reconciliation table
(figures rounded; see Notes to Table 4.6, following).



|                    |                                             | CANADA          | UNITED STATES  
|------------------- | ------------------------------------------- | --------------- | ---------------
|                    |                                             | Mineral Reserve | Mineral Reserve
|Geological
    Unit | Product(s)                                  | Proven          | Probable       
|Unit 1              | Aggregate, reagent limestone                | 181.1           | 172.0          
|Unit 2              | Reagent limestone, quicklime                | 59.9            | 58.0           
|Unit 3A             | Aggregate, concrete rock, reagent limestone | 0.8             | 22.4           
|Units 3B, 3C        | Sub-base, shale liner                       | 211.7           | 282.6          
|Unit 4              | Reagent limestone, quicklime, concrete rock | 5.6             | 4.5            
|Total               |                                             | 459.2           | 539.5          

28

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|Notes to Table 4-6:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Mineral reserves for Canada listed in this table conform to
    definitions of the Canadian Institute of Mining, Metallurgy and Petroleum (CIM),
    in Standards on Mineral Resources and Reserves Definitions and Guidelines
    adopted by the CIM Council on August 20, 2000, and incorporated into NI
    43-101 of the Canadian Securities Regulators.                                                                                                                                                                                                                                                                                                                                                                                 
|CANADIAN MINING DEFINITIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|A Mineral Resource is a concentration or occurrence of
    natural, solid, inorganic or fossilized organic material in or on the
    Earth's crust in such form and quantity and of such a grade or quality that
    it has reasonable prospects for economic extraction.  The location,
    quantity, grade, geological characteristics and continuity of a Mineral
    Resource are known, estimated or interpreted from specific geological
    evidence and knowledge.                                                                                                                                                                                                                                                                     
|An Indicated Mineral Resource is that part of a Mineral Resource for which quantity, grade or quality, densities, shape
    and physical characteristics, can be estimated with a level of confidence
    sufficient to allow the appropriate application of technical and economic
    parameters, to support mine planning and evaluation of the economic
    viability of the deposit. The estimate is based on detailed and reliable
    exploration and testing information gathered through appropriate techniques
    from locations such as outcrops, trenches, pits, workings and drill holes
    that are spaced closely enough for geological and grade continuity to be
    reasonably assumed.                                    
|A Measured Mineral Resource is that part of a Mineral Resource for which quantity, grade or quality, densities, shape,
    physical characteristics are so well established that they can be estimated
    with confidence sufficient to allow the appropriate application of technical
    and economic parameters, to support production planning and evaluation of
    the economic viability of the deposit.  The estimate is based on detailed
    and reliable exploration, sampling and testing information gathered through
    appropriate techniques from locations such as outcrops, trenches, pits,
    workings and drill holes that are spaced closely enough to confirm both
    geological and grade continuity.               
|A Mineral Reserve is the economically mineable part of
    a Measured or Indicated Mineral Resource demonstrated by at
    least a Preliminary Feasibility Study. This Study must include
    adequate information on mining, processing, metallurgical, economic and
    other relevant factors that demonstrate, at the time of reporting, that
    economic extraction can be justified.  A Mineral Reserve includes diluting
    materials and allowances for losses that may occur when the material is
    mined.                                                                                                                                                                                                                        
|A Probable Mineral Reserve is the economically
    mineable part of an Indicated, and in some circumstances a Measured Mineral Resource demonstrated by at least a Preliminary
    Feasibility Study.  This study must include adequate information on
    mining, processing, metallurgical, economic, and other relevant factors that
    demonstrate, at the time of reporting, that economic extraction can be
    justified.                                                                                                                                                                                                                                                                                                              
|A Proven Mineral Reserve is the economically mineable
    part of a Measured Mineral Resource demonstrated by at least a Preliminary Feasibility Study. This study must include adequate
    information on mining, processing, metallurgical, economic, and other
    relevant factors that demonstrate, at the time of reporting, that economic
    extraction is justified.                                                                                                                                                                                                                                                                                                                                                                 
|A Preliminary Feasibility Study or Prefeasibility
    Study is a comprehensive study of the viability of a mineral project
    that has advanced to a stage where the mining method, in the case of
    underground mining, or the pit configuration, in the case of an open pit,
    has been established, and where an effective method of mineral processing
    has been determined. This study must include a financial analysis based on
    reasonable assumptions of technical, engineering, operating, and economic
    factors and evaluation of other relevant factors that are sufficient for a
    Qualified Person acting reasonably, to determine if all or part of the Mineral Resource may be classified as a Mineral Reserve.
|US MINING DEFINITIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|The SEC Guide 7 defines a Mineral Reserve as, That
    part of a mineral deposit which could be economically and legally extracted
    or produced at the time of the reserve determination. According to
    interpretations by SEC staff of mining industry disclosure standards, such
    terms may not be used by SEC registrants unless the registrant has proven
    economic feasibility and all applicable permits are in place or expected
    imminently.                                                                                                                                                                                                                                                                          



ITEM 4A.

Unresolved Staff Comments

Not applicable.

29

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ITEM 5

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

General

This discussion should be read in conjunction with Birch's
consolidated financial statements.  Birch's consolidated financial statements
have been prepared in accordance with Canadian GAAP, which differ from US GAAP.
 For a discussion of these differences, see the notes to Birch's consolidated
financial statements in Item 17 - Financial Statements.

A.

Operating Results

Years Ended December 31, 2006, 2005 and 2004



Prior to 2002, the Company focused on precious metals, base
metals and diamond exploration and minerals technology development.  In 2002,
the Company identified a business opportunity to develop a limestone quarry for
aggregate sales and the manufacturing of quicklime for use by the oil sands
industry.  As a result, since 2002 the Company has focused on advancing this
limestone business opportunity and deferred funding for precious metal
exploration and further technology development.  Birch intends to continue
research and development of precious metals in the future.



The Company incurred a loss of $10,194,274 in the year ended
December 31, 2006 (2005$4,641,818; 2004$2,887,057) and as at December 31,
2006, had an accumulated deficit of $17,484,901.



Income



The Company earned revenues from limestone sales of $1,540,564 in
2006, which includes an off-quarry limestone sale and cost of sales of $989,412
in 2006.   The Company did not have any sales in 2005 or 2004.



The Company earned interest income in 2006 of $498,028 and
$332,568 in 2005.  In 2004, the Company's only source of revenue was a small
amount of interest income, $48,190.



Expenses



In 2006, expenses totaled $11,243,454.



|Expenses                              | 2006         | 2005        | 2004       
|------------------------------------- | ------------ | ----------- | -----------
|Amortization, Accretion and Depletion | $285,577     | $ 63,424    | $ 50,336   
|Consulting                            | 102,384      | 96,027      | 79,973     
|Interest and Bank Charges             | 442,447      | 4,746       | -          
|Mineral Exploration Costs             | 858,964      | 540,481     | 762,371    
|Office                                | 458,806      | 937,756     | 683,316    
|Professional Fees                     | 1,474,021    | 746,377     | 396,552    
|Indirect Quarry Costs                 | 2,544,028    | -           | -          
|Salaries and Benefits                 | 1,052,387    | 597,714     | 386,579    
|Shareholder Services and Promotion    | 1,179,043    | 742,439     | 329,993    
|Stock-based Compensation              | 2,845,797    | 1,245,422   | 246,127    
|Total Expenses                        | $ 11,243,454 | $ 4,974,386 | $ 2,935,247



Total expenses have risen in 2006 and 2005 as the Company moves
forward with activities necessary for operations, including work necessary for
the Hammerstone Project, the South Haul Road ("SHR") application, the payment of
professional fees related to long-term debt financing, compliance with the
Sarbanes-Oxley Act and the independent 2006 Technical Report.  Total expenses
increased $6,269,068 or 126%, of which $2,544,028 or 41% was related to indirect
quarry costs, $1,600,375 or 26% was related to stock-based expenses, $727,644 or
12% was related to professional fees, $436,604 or 7% was related to shareholder
services, $454,673 or 7% was due to increased salaries and benefits, $437,701
was related to interest and bank charges and $222,153 or 4% was related to
amortization, accretion and depletion.  Office expense decreased $478,950 from
2005 due to an accrual of $516,286 in 2005 for the flow through shares. The
remaining difference is related to development, operations and corporate
activities for the development of the Company's limestone reserve in its
Athabasca leases.

30

---





The increase in professional fees of $727,644 was due in part to
$234,000 of fees paid for various credit facility and equipment financing
contracts secured during 2006 and $242,891 in consulting fees paid for
assistance in implementing compliance with Sarbanes-Oxley.  In addition,
additional legal fees of $81,000 were paid for contract review and assistance
with preparing and negotiating a legal settlement, and approximately $27,000 for
auditing fees related to the restatement of prior years financial statements.



Salaries and benefits increased $454,673 or 76% during the year
due to the addition of three senior executives and three new support employees
plus milestone bonuses paid to fourteen employees totaling $138,400.



Indirect Quarry Costs



In 2006, the Company spent a total of $2,544,028 on indirect
quarry costs.



Indirect Quarry Costs
      2006
      2005
      2004Facility and Equipment
      $ 758,885
      $ -
      $ -Services and Contractors
      1,280,530
      -
      -Travel and Accommodation
      104,859
      -
      -Salaries and Benefits
      399,754Indirect Quarry Costs
      $  2,544,028
      $ -
      $ -




Facility and equipment costs included equipment rental, repairs
and maintenance, insurance, and quarry office expenses.  Services and
contractors costs included fees for the general contractor, Stony Valley, quarry
dewatering, equipment mobilization, site grading and dust control, engineering,
technical and professional fees.  Salaries and benefit costs include scale
personnel, mechanics and office and administration staff.



Shareholder Services



In 2006, the Company spent a total of $1,179,043 on shareholder
services.



|Shareholder Services        | 2006         | 2005      | 2004     
|--------------------------- | ------------ | --------- | ---------
|Canada Stock Exchange Costs | $ 472,087    | $ 165,542 | $ 105,418
|US Stock Exchange Costs     | 207,668      | 151,195   | 17,925   
|Marketing                   | 224,852      | 149,162   | 63,854   
|Travel and Accommodation    | 263,783      | 244,504   | 112,668  
|Other                       | 10,653       | 32,036    | 30,128   
|Total Shareholder Services  | $  1,179,043 | $ 742,439 | $ 329,993



Total shareholder service costs increased $436,604 or 59% due
mostly to an increase in Canada stock exchange costs of $306,545 or 185%.   The
increase was due, in part, to increased filing fees paid to the relevant
Canadian stock exchanges for the new debenture listing and the migration of
Birch to the TSX for a total of $161,495.  Mail and transfer agent fees
increased $146,530 due to the increased shareholder base in Canada. The increase
in U.S. stock exchange costs was due mainly to higher U.S. exchange filing fees.
Total marketing costs increased $75,690 due to increased expenditures on
advertising in trade magazines and fees paid to the marketing joint venture with
the Fort McKay First Nation.

31

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Mineral Development Costs



In 2006, the Company spent a total of $32,987,591 of which
$32,128,627 was capitalized.



|Mineral Development Costs                    | 2006         | 2005         | 2004       
|-------------------------------------------- | ------------ | ------------ | -----------
|Industrial Minerals Costs (Site Development) | $ 32,128,627 | $ 10,279,606 | $ 3,153,233
|Mineral Exploration and Technology Costs     | 858,964      | 540,481      | 762,371    
|Total Mineral Expenditures                   | 32,987,591   | 10,820,087   | 3,915,604  
|Less Amounts Capitalized                     | 32,128,627   | 10,279,606   | 3,153,233  
|Mineral Exploration Costs                    | $  858,964   | $    540,481 | $   762,371



Industrial Minerals Costs



In 2006, Birch Mountain focused most of its resources on the
opening and development of the MVQ.  These industrial mineral development costs
can be broken down into four broad categories with the following estimated
expenditures:



Site construction of $29.7 million paid to NORAMAC Ventures, an
independent third party, for the excavation and stockpiling of surface
overburden, development of the quarry pit, construction of equipment maintenance
and lay down pads and a road and scale foundations, preparing part of the SHR
and clearing the plant site;



Payments of $2.2 million to contractors and consultants for
engineering, drilling, technical, environmental and regulatory services
including any related materials;



An accrual of $679,000 for future site reclamation costs for the
MVQ; and



Various administrative costs and salaries directly related to the
MVQ or the Hammerstone Project.



Mineral Exploration and Technology Costs



Mineral exploration costs in 2006 were $858,964 as compared to
$540,481 in 2005 and $762,371 in 2004.  The majority of these costs were land
lease and permit payments to hold mineral rights. In 2006, Birch also initiated
surface exploration on part of its Athabasca property north of the Hammerstone
Project and adjacent to an announced oil sands development project.



The Company will make minor expenditures on mineral exploration
and technology in order to hold patents and allow for some small level of future
research work directed at evaluation of opportunities that may exist on mineral
properties the Company holds in northeast Alberta outside of the Hammerstone
Project.



B.

Liquidity and Capital Resources

Years Ended December 31, 2006, 2005 and 2004



Birch is a developing company with insufficient revenue as yet,
to meet its yearly operating and capital requirements. The Company has
historically raised funds necessary to conduct its business primarily through
issuance of equity or debt.  The Company has incurred operating losses since its
inception in 1995, and as of December 31, 2006, had an accumulated deficit of
$17,484,901 (2005 - $7,290,627).  Losses are from costs incurred in the
operation and development of the Industrial Minerals Division, exploration of
mineral opportunities and research of mineral technology.  Results of operations
have fluctuated from period to period and may continue to do so in the future.
Additional operating losses may occur in the future as a result of the continued
operation of the MVQ and development of the Hammerstone Project.  However, the
MVQ is expected to start generating significant revenues from aggregate sales in
2007.

32

---





The Company has a working capital balance at December 31, 2006 of
$9,064,787, a decrease of approximately $17.4 million from December 31, 2005.
 The decrease is a result of the continued operation and development of the MVQ
and Hammerstone Project as the Company spent a total of $32.1 million on mineral
development, $0.9 million on mineral exploration, $2.5 million on initial quarry
operations and purchased approximately $18.4 million in equipment during 2006.



During the year, Birch Mountain received $0.4 million (2005 -
$4.3 million) from the exercise of stock options.  Additionally, the Company
completed a public debenture financing for net proceeds, after costs of
financing, of $33.2 million.  However, as the Company develops its limestone
reserve, constructs the SHR and builds plant facilities, additional funds may be
required.  The current estimates for capital for the MVQ and the initial phases
of the Hammerstone Project, from 2007 to 2011, are $108 million, down from the
$229 million in the 2006 Technical Report.  The Company is investigating
project-specific financing for the longer-term development of the Hammerstone
Project.



At present, the Company does not have sufficient working capital
or cash flows to continue operations through 2007, without significant cash
receipts from product sales from the quarry or short term financing through debt
and/or equity.  The Company is actively quoting on several large aggregate
construction projects scheduled for the first half of 2007.  The Company is also
investigating debt alternatives and has completed a $15.5 million senior secured
credit facility subsequent to December 31, 2006. The net proceeds from the
financing will be used to fund the continued development and construction of the
SHR recently acquired mineral permits and for general working capital purposes.



Project-specific financing for larger anticipated capital
expenditures related to the Hammerstone Project may be available in the future.
 To the extent the Company raises additional capital by issuing equity or
convertible debt securities, ownership dilution to shareholders will result.



On-going commitments for capital resources relate largely to the
maintenance of the mineral permits and leases granted to the Company by the
Government of Alberta plus general operating leases and long term debt
repayments.  At December 31, 2006, the Company held mineral leases, mineral
permits and permit-to-lease conversions in the Athabasca region, covering an
area of 380,136 hectares (939,315 acres).  Lease payments, along with associated
fees in 2007 and years beyond will be approximately $432,000 annually, if Birch
continues to hold all of its mineral leases into the future.    Mineral permits
are maintained in good standing by making allowable exploration expenditures,
although there is no obligation to do so.  Birch continuously evaluates its
mineral permit holdings, relinquishing and/or acquiring permits as dictated by
financial considerations as well as exploration and strategic priorities.



The Company issued convertible unsecured subordinated debentures
having a face value of $34.5 million during the year.  The debentures were
issued pursuant to a public offering and mature on December 31, 2011.  The
debentures are convertible into common shares of the Company at any time prior
to maturity at the option of the debenture holder at a conversion price of $3.30
per share.  In the year ended December 31, 2006 no debentures were converted
into shares. The debentures bear interest at 6% and interest is payable
semi-annually commencing on June 30, 2007.  Interest expense relating to the
debentures will be approximately $2.07 million annually.

33

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In 2006, the Company entered into a financing agreement with the
Canadian Western Bank to finance a crushing and screening plant costing
$6,922,050 plus goods and services taxes aggregating to 6%.  The original loan
amount was $7,337,373 with an interest rate of 6.02%.  The loan is to be paid
down over five years based on blended principal and interest payments of
$1,379,184 per year.



Additionally, the Company financed a piece of quarry excavation
equipment costing $1,235,000 under a lease arrangement.  Lease payments,
consisting of principal and interest, will be $255,384 annually until August
2011 when the Company will have the option to purchase the equipment at its
residual value of $200,000.



The Company is required to reclaim any land disturbances as
detailed in its environmental approvals for the MVQ.  The Company estimated,
based on costs provided by consulting engineers to the Company, the costs for
third parties to return the MVQ to its reclaimed status as at December 31, 2006,
would be $2.85 million.  For financial statement purposes, these costs have been
discounted to $1.1 million.  Based on a preliminary estimate, the Company issued
a letter of credit to Alberta Environment for $2.0 million for this reclamation
work.  The Company must re-evaluate this annually and post additional security,
as additional lands are disturbed by development, with Alberta Environment.
 Also in connection with land disturbances, the Company was required to pay
timber damage fees for immature trees removed, which had not reached commercial
value.  The Company paid fees based on the permitted area of the MVQ even though
not all the trees were cut during 2006.  A long-term asset has been recorded for
the balance of amounts prepaid and this will be reduced as trees are actually
cleared.



The Company estimated a future liability for the indemnification
of shareholders for flow-through shares issued in 2003 and 2004, for which the
Company was not able to incur qualifying expenditures.  The estimated liability
and potential taxes payable, interest and penalties payable in the amount of
$2.4 million has been accrued as a current liability.  During 2006, the Company
amended its tax filing position and has reported the impact to the subscribers.
 The actual liability will not be known until the Canada Revenue Agency
reassesses each affected subscriber and the amounts are known by the Company.
 The payment of the liability may stretch over many future years and could vary
by up to 15%.



C.

Research and Development, Patent and Licenses

During the fiscal year ended December 31, 2000, the Company
commenced research in novel mineral technology applications.  The research
resulted in the filing of US and international patent applications.  It is the
Company's policy that costs associated with such research are expensed in the
period in which they are incurred.  During the fiscal years ended December 31,
2004, 2005 and 2006 the Company did not incur any related expenses.

Late in 2002, Birch was granted US patent number 6,494,932
entitled Recovery of Natural Nanoclusters and the Nanoclusters Isolated
Thereby.  Birch has also filed a parallel patent application for protection
under the International Patent Cooperation Treaty.

D.

Trend Information

Industrial Minerals



Our financial results are subject to changes in aggregate product
prices.  In the past fiscal year, the general trend has been relatively flat
with market sales prices consistent with those used in the 2006 Technical
Report. Since 2005 there has been some upward pressure on the price of concrete
rock due to its scarcity in the region, with prices rising to about $30 per
tonne from $20 per tonne through this period.

34

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E.

Off-Balance Sheet Arrangements

The Company has an operating line with a Canadian chartered bank
that provides for an operating overdraft on the Company's chequeing account and
is available for letters of credit.  At December 31, 2006, the Company has
issued letters of credit under this agreement, in the amount of $2.0 million to
Alberta Environment for future site reclamation liabilities.  As security for
this operating line, the Company has pledged $2.0 million of short-term
investments on deposit at the bank.  These particulars are disclosed in the
Company's financial statements.



F.

Tabular Disclosure of Contractual Obligations

As of December 31, 2006, the Company's known contractual
obligations are as follows:



| |                                                                                                                                                | Payments due in each period
| | ---------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------
| | Contractual Obligations                                                                                                                        | Total                      
| | Long-term Debt Obligations                                                                                                                     | 7,337,373                  
| | Capital (Finance) Lease Obligations                                                                                                            | 1,370,533                  
| | Operating Lease Obligations                                                                                                                    | 2,283,333                  
| | Purchase Obligations                                                                                                                           | -                          
| | Other Long-Term Liabilities Reflected on the Company's Balance Sheet under
    the GAAP of the primary financial statements  Land Lease Costs | 2,159,505                  
| | Total                                                                                                                                          | 13,150,744                 



35

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ITEM 6

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

1F.

Directors and Senior Management

The following table sets forth the name, business experience,
functions and areas of experience in Birch and principal business activities
performed outside of Birch (including, in the case of directors of Birch, other
principal directorships) of each director, member of senior management and
employees upon whose work Birch is dependent, as of March 18, 2007:

|Name              | Function                                                                                               |  | Principal Business Activities, Business Experience and
    Principal Directorships                                                                                                                                                                                                                                                                                                                                                                                                                                            | Number of Common Shares and Percentage of Class and Number
    of Stock Options(14) Held at
    March 18, 2007                                                                          
|----------------- | ------------------------------------------------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Kerry E. Sully    | Chairman of the Board and Director since 1995                                                          |  | Since 1999, Mr. Sully has been President and CEO of CGX
    Energy Inc., a company exploring for hydrocarbons in Guyana.                                                                                                                                                                                                                                                                                                                                                                                                      | 319,000 common shares
    (0.39%)
    125,000 stock options(4)
    75,000 stock options(7)
    35,000 stock options(10)                                                                 
|Douglas J. Rowe   | President and Chief Executive Officer and Director since 1994                                          |  | Mr. Rowe is President and CEO of the Company, and was
    President and Chairman of the Board of Brougham Geoquest, Ltd., a company
    engaged in mineral exploration, and Brougham Energy Corporation, a company
    engaged in oil and gas exploration and development.  Mr. Rowe is a director
    of Energy Exploration Technologies Inc., a company developing remote sensing
    technology to assist in the exploration of hydrocarbons.  Mr. Rowe has been
    a director of Dumont Nickel Inc. since July 20, 2005. | 1,070,983 common shares
    (1.29%)
    
    90,000 stock options(1)
    300,000 stock options(2)
    250,000 stock options(4)
    175,000 stock options(7)
    70,000 stock options(10)
|Donald L. Dabbs   | Senior Vice President and Director since 1994, formerly
    Vice-President and Chief Financial Officer |  | Mr. Dabbs was the President and Chief Executive Officer of
    Niaski Environmental Inc. from 1998-1999.  He was Regional Manager, Bovar
    Environmental, and had served as a Vice-President of Concord Environmental
    Corporation from 1988 to 1994 where he was responsible for resource
    development planning and regulatory approvals for clients, particularly in
    the Athabasca oil sands.                                                                                                                   | 612,372 common shares
    (0.74%)
    
    250,000 stock options(2)
    200,000 stock options(4)
    75,000 stock options(7)
    40,000 stock options(10)                               
|Lanny K. McDonald | Director since 1995                                                                                    |  | In 1990, after more than 16 years of National Hockey League
    play, Mr. McDonald joined the Calgary Flames as Vice President for ten
    years.   He is now Marketing Director with Baker Hughes Canada, an oilfield
    services company.                                                                                                                                                                                                                                                                                  | 376,666 common shares
    (0.46%)
    
    150,000 stock options(2)
    100,000 stock options(4)
    50,000 stock options(7)
    25,000 stock options(10)                               
|Charles Hopper    | Director since 2001                                                                                    |  | Mr. Hopper is a Managing Director of Lehman Brothers, Inc. of
    New York and has twenty-five years experience in the financial industry.
      During the past five years at Lehman Brothers, Mr. Hopper has been
    responsible for Private Client Services Asset Management.                                                                                                                                                                                                                                             | 455,000 common shares
    (0.55%)
    
    50,000 stock options(7)
    25,000 stock options(10)                                                                                         

36

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|Name | Function |  | Principal Business Activities, Business Experience and
    Principal Directorships | Number of Common Shares and Percentage of Class and Number
    of Stock Options(14) Held at
    March 18, 2007
|---- | -------- |  | ---------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------

|Larry Shelley        | Director since 2005                           |  | From 2000 to 2003 Mr. Shelley was the Executive
    Vice-President of Advisory Services at Meyers Norris Penny LLP, a public
    accounting firm, and President of the Tamarack Group Ltd., a corporate
    finance company. Since 2004 Mr. Shelley has been the President of SRG
    Capital Ltd., a private investment firm.                                                                                                                                                                                           | 111,500 common shares
    (0.13%)
    
    262,500 stock options(8)
    25,000 stock options(10)                                                                                     
|-------------------- | --------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|C. Douglas Annable   | Director since 2006                           |  | From 2003 to 2006, Mr. Annable was President, Energy & Mining
    Division, AMEC Americas and from 1992 to 2003, held various executive
    positions including Executive Vice President, Energy, AMEC E&C Services
    (formerly AGRA Monenco). Mr. Annable is the owner of C.D. Consulting  Inc.
    and recently retired from the position of President, Energy & Mining
    Division, AMEC Americas.                                                                                                                 | No common shares
    
    125,000 stock options(11)
    125,000 stock options(13)                                                                                                    
|Derrick Kershaw      | Senior Vice-President and Director since 2004 |  | Mr. Kershaw recently retired as General Manager, Aurora Mine
    for Syncrude Canada, where he was responsible for all aspects of the new
    Aurora Mine Project.  With Syncrude, he held the position of General
    Manager, Extraction Operations, Manager Overburden and Tailings in Mining
    Operations, and Manager Mine Mobile Maintenance.  He also was Manager in
    Syncrude Research Department.  Mr. Kershaw served as Chair of the Advisory
    Board for the Fort McMurray Oil sands Discovery Centre. | 15,600 common shares
    (0.02%)
    
    125,000 stock options(3)
    125,000 stock options(4)
    50,000 stock options(7)
    45,000 stock options(10)                             
|Dr. Hugh Abercrombie | Vice-President, Exploration
    since 1998    |  | Dr. Abercrombie joined Birch in 1997 from the Geological
    Survey of Canada Since taking on his current position in 1998,
    Dr. Abercrombie has directed Birch's exploration and technology development
    programs, and led the reserves estimation and valuation studies for the
    Hammerstone Project.                                                                                                                                                                                                         | 347,699 common shares
    (0.42%)
    
    65,000 stock options(1)
    200,000 stock options(2)
    150,000 stock options(4)
    75,000 stock options(7)
    40,000 stock options(10)

37

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|Name | Function |  | Principal Business Activities, Business Experience and
    Principal Directorships | Number of Common Shares and Percentage of Class and Number
    of Stock Options(14) Held at
    March 18, 2007
|---- | -------- |  | ---------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------

|Hansine Ullberg
    (on maternity leave since September 2006) | Vice-President, Finance and Chief Financial Officer since
    2005                         |  | Ms. Ullberg has held the positions of Director of Finance for
    The Calgary Flames, Vice President of Finance and Administration for Alterna
    Technologies Group Inc., Divisional Controller for Barton Instrument
    Systems, and Manager of Accounting and Auditing for Ernst and Young LLP.
     Ms. Ullberg has a Bachelor of Commerce (Honours) and Masters of Accountancy
    from the University of Manitoba and obtained her CA in 1996.                                  | 20,000 common shares
    (0.02%)
    
    50,000 stock options(6)
    112,500 stock options(7)
    40,000 stock options(10)                             
|------------------------------------------------------------- | ------------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|Russell Gerrish                                               | Vice-President, Operations and Engineering since 2005                                      |  | Mr. Gerrish has 27 years of experience in engineering
    management and consulting, aggregate exploration, and mine
    planning/implementation related to aggregates, asphalt and ready-mix
    concrete.                                                                                                                                                                                                                                                                             | 150,000 common shares
    (0.18%)
    
    7,500 stock options(5)
    167,500 stock options(6)
    150,000 stock options(7)
    40,000 stock options(10)
|David Reid                                                    | Vice-President, Facilities Engineering, since 2005                                         |  | Mr. Reid worked with TransCanada PipeLines over a 31 year
    period, including 8 years as Vice President, Engineering and Construction.
    In the past 7 years he has worked as Project Manager for the design and
    construction of a chemical plant, and recently spent 2 years in China
    managing the construction of a 3900 km gas pipeline.                                                                                                                                 | 10,000 common shares
    (0.01%)
    
    150,000 stock options(9)
    40,000 stock options(10)
    100,000 stock options(13)                           
|Dan J. Rocheleau                                              | Acting Chief Financial Officer since November 2006 and
    Director of Financial Reporting |  | Mr. Rocheleau became a Chartered Accountant in 1993 after
    completing his Bachelors of Business Administration degree from Lakehead
    University in Thunder Bay, Ontario. Mr. Rocheleau has over a dozen years of
    experience as Controller and Secretary-Treasurer of private business
    organizations and will handle the day-to-day responsibilities as Acting
    Chief Financial Officer until Ms. Ullberg returns from her one-year
    maternity leave in August 2007. | 2,000 common shares
    (0.00%)
    
    40,000 stock options(12)
    100,000 stock options(13)                                                         



Notes:

(1)Each stock option entitles
the holder to purchase one common share at a price of $0.34 per share until
April 3, 2007.

(2)Each stock option entitles
the holder to purchase one common share at a price of $0.30 per share until
October 2, 2008.

(3)Each stock option entitles
the holder to purchase one common share at a price of $0.53 per share until May
31, 2009.

(4)Each stock option entitles
the holder to purchase one common share at a price of $0.55 per share until
August 31, 2009.

(5)Each stock option entitles
the holder to purchase one common share at a price of $0.74 per share until
November 23, 2009.

(6)Each stock option entitles
the holder to purchase one common share at a price of $2.35 per share until
January 11, 2010.

(7)Each stock option entitles
the holder to purchase one common share at a price of $2.48 per share until
March 7, 2010.

(8)Each stock option entitles
the holder to purchase one common share at a price of $2.09 per share until
April 15, 2010.

(9)Each stock option entitles
the holder to purchase one common share at a price of $7.81 per share until
November 14, 2010.

(10)Each stock option entitles
the holder to purchase one common share at a price of $8.78 per share until
January 23, 2011.

(11)Each stock option entitles
the holder to purchase one common share at a price of $8.00 per share until May
4, 2011.

(12)Each stock option entitles
the holder to purchase one common share at a price of $4.40 per share until
August 15, 2011.

(13)Each stock option entitles
the holder to purchase one common share at a price of $2.80 per share until
January 2, 2012.

(14)All stock options are
issued at a strike price equal to market close of the day previous to the grant
date.



To the knowledge of Birch, there are no arrangements or
understandings with major shareholders, customers, suppliers or others, pursuant
to which any person referred to above was selected as a director or member of
senior management of Birch and there is no family relationship between any of
the persons named above.  Pursuant to an Option Agreement dated May 9, 1996,
among Birch, Calvyn M. Loree, James A. Brown, Saskatoon Natural Resources Ltd.
and Robert M. Friedland.  Mr. Friedland currently has the right to nominate one
individual to the Board of Directors of Birch; however, Mr. Friedland has made
no such nomination for the forthcoming year.

38

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B.

Compensation

The following table sets forth the amount of compensation that
was paid and benefits that were granted in the financial year ended December 31,
2006 to each of the individuals listed in Item 6(A) above.



|Summary Compensation Table                       
|-------------------------------------------------
|                                                 
|Named Executive Officer and Principal Position   
|                                                 
|Douglas J. Rowe
    President & CEO              
|Donald Dabbs
    Senior Vice President           
|Derrick Kershaw
    Senior Vice President        
|Dr. Hugh Abercrombie
    VP Exploration          
|Hansine Ullberg
    VP Finance & CFO             
|Russell Gerrish
    VP Engineering and Operations
|David Reid
    VP Plant Engineering              
|Dan J. Rocheleau
    Acting CFO                  
|Kerry Sully
    Chairman of the Board            
|Lanny MacDonald
    Director                     
|Charles Hopper
    Director                      
|Larry Shelley
    Director                       
|C. Douglas Annable
    Director                  

39

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See Item 6  Directors, Senior Management and Employees 
Directors and Senior Management regarding the number of options to purchase
common shares of Birch, the exercise price and the expiration date of options
granted to each of the individuals listed in Item 6(A) above.



C.

Board Practices

Directors are elected annually at Birch's annual meeting of
shareholders and hold office until the earlier of their resignation or removal
from office at a subsequent annual meeting of shareholders.  The Board of
Directors may fill vacancies created by departing directors between annual
shareholders meetings.  Directors representing in number up to one-third the
size of the board elected at the most recent shareholders meeting may be
appointed by the Board of Directors between shareholders' meetings.

Audit Committee



The Audit Committee of Birch currently consists of Larry Shelley,
CA (chair), Charles Hopper and Kerry E. Sully.   The function of the Audit
Committee is to review the overall audit plan, results of the external audit,
the annual financial statements and management discussion and analysis (MD&A),
the review of quarterly financial statements and MD&A, the review of any
financial press releases and securities filings, the Company's system of
internal controls, the Company's accounting and disclosure policies and to
resolve any potential disputes with Birch's auditors.  The Audit Committee has a
significant list of detailed responsibilities that are outlined in its charter.

Compensation Committee



The Compensation Committee of Birch currently consists of Lanny
K. McDonald (chair), Larry Shelley and Douglas Annable.  The purpose of the
Compensation Committee as outlined in its charter is to determine the
compensation arrangement of executive officers, to provide oversight of
compensation programs to other employees and to assist or recommend with respect
to various compensation issues such as policies, benefits, personnel issues and
other issues. The Committee has a significant list of detailed responsibilities
that are outlined in its charter.

Compensation Policy



The Company's compensation policy has three components:  (i) base
salary/consulting fee and benefits, (ii) the award of stock options and
(iii) bonus.  The salary/consulting fee for each executive officer is determined
having regard to such executive officer's responsibilities and performance.  The
Compensation Committee undertakes a review of the compensation paid by similar
companies in setting guidelines for the compensation of all Company's employees.
The Compensation Committee has provided greater emphasis on the issuance of
stock options to its executive officers as a major form of compensation.  In the
view of the Compensation Committee, the issuance of stock options has had the
advantages of encouraging growth in the Company and its share value, while
reducing the cash expenditures required for executive salaries. The Company is
currently a party to an employment contract with Douglas J. Rowe dated
December 1, 1995, and approved by the shareholders of the Company on May 31,
1996.  Pursuant to the employment contract Mr. Rowe receives a salary of
$108,000 annually and is entitled to receive stock options as determined from
time to time by the Committee.  The Board of Directors of the Company has
subsequently approved increases in Mr. Rowe's annual salary to $140,000 per
annum, effective June 15, 2000, $164,800 effective January 1, 2004, $180,000
effective March 1, 2005 and $250,000 effective January 1, 2006.

40

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Disclosure Committee



The Disclosure Committee of Birch has four members: Kerry Sully
(chair), Suzanne L. Loov, Hugh J. Abercrombie and Dan J. Rocheleau. The purpose
of the Committee is to ensure that the Company implements and maintains internal
procedures for appropriate and timely collection, evaluation and disclosure of
information potentially subject to public disclosure under the legal, regulatory
and stock exchange requirements to which the Company is subject. As excerpted
from the charter of the Disclosure Committee, the Committee's responsibilities
include:



Reviewing material developments and providing timely advice on
the Company's disclosure obligations;



Discussing and advising on the timely review, publication and
filing of periodic and current reports with the various parties involved,
including the CEO and CFO;



Periodically reviewing past disclosure and advising whether
updates or corrections are appropriate;



Evaluating and advising on the effectiveness of the Company's
internal disclosure controls and procedures.



Governance and Risk Committee



The Governance and Risk Committee of Birch currently consists of
Charles Hopper (chair), Lanny K. McDonald and Larry Shelley.  The Corporate
Governance and Risk Committee charter outlines the primary purpose of the
Governance and Risk Committee as threefold.



to develop and recommend to the Board a set of corporate
governance principles including policies, disclosure and business conduct;



to act as the nominating committee of the board which includes
identifying, and recommending director nominees fore ach annual meeting or as
vacancies occur; and



to oversee the evaluation of the effectives of Board members,
implement a framework for orientation and continuing education.



Health, Safety and Environment Committee



The Health, Safety and EnvironmentCommittee of Birch
currently consists of Douglas Annable (chair), Derrick Kershaw and Don Dabbs.
 The general function of the Health, Safety and Environment Committee is to
review the Company's practices and policies related to health, safety and the
environment and to review the Company's performance in the areas of health,
safety and environment.

D.

Employees

The following table sets out the number of employees of Birch at
the end of each of the past three financial years, including their main category
of activity.  All of Birch's employees are employed in Alberta, Canada.



As at December 312006
      2005
      2004Operations(1)
      20
      7
      6Accounting
      3
      2
      1Administration
      4
      4
      4Total
      27
      13
      11(1)  Includes personnel involved in technology, exploration and industrial
      minerals.


41

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E.

Share Ownership

See Item 6  Directors, Senior Management and Employees 
Directors and Senior Management, above, for disclosure regarding share
ownership and options of Birch directors and senior management.

The Board of Directors of the Company adopted the stock option
plan of the Company on April 24, 2006, which was ratified by shareholders on May
25, 2006 (the Plan). The purpose of the Plan is to advance the interests of
the Company by encouraging the directors, officers, employees and consultants of
the Company, and of its subsidiaries, if any, to acquire shares in the Company,
thereby increasing their proprietary interest in the Company, encouraging them
to remain associated with the Company and furnishing them with additional
incentive in their efforts on behalf of the Company in the conduct of its
affairs. The Plan is administered by the Board of Directors of the Company or by
a special committee of the Board of Directors, if appointed, from time to time
(the Board).  Pursuant to the Plan, the Board may grant non-transferable
options to purchase Common shares of the Company to directors, officers,
employees and consultants of the Company and its subsidiaries and employees of a
person or company which provides management services (excluding investor
relations services) to the Company or its subsidiaries (Management Company
Employees) (such persons hereinafter collectively referred to as
Participants).  Under the Plan, stock options may be granted by the Company to
officers, directors, employees, consultants and employees of a person or company
which provides services to the Company, its subsidiary or affiliates of the
Company from time to time up to a maximum of 10% of the Company's issued
capital.  Any expiration or exercise of stock options during the terms of the
Plan will allow the Company to re-grant the options on a continuous revolving
and reloading basis.  Any increase in the issued and outstanding common shares
will result in an increase in the available number of Common Shares issuable
under the Plan, and any exercises of options will make new grants available
under the Plan effectively resulting in a re-loading of the number of options
available to grant under the Plan.

The price of options granted under the Plan shall not be less
than the market price of the Common Shares at the time the option is granted.
Options issued under the Plan may be exercised during a period determined by the
Board, which cannot exceed five (5) years if listed on the TSXV or ten (10)
years if listed on the TSX, and are subject to earlier termination upon the
termination of the optionee's employment, upon the optionee ceasing to be a
director and/or officer of the Company, or upon the retirement, permanent
disability or death of an optionee.  The options are non-transferable, except in
limited circumstances.  There is no agreement whereunder financial assistance
will be provided by the Company to facilitate the purchase of shares under the
Plan.

The number of securities issuable or reserved for issuance to
insiders under all security based compensation arrangements cannot at any time
exceed 10% of the issued and outstanding securities of the Company and the
number of securities issued to insiders under all security based compensation
arrangements within a one year period may not exceed 10% of the issued and
outstanding securities.

The Plan permits the Board to amend, suspend, terminate or
discontinue the Plan subject to any applicable regulatory approval. In
particular, the Board may amend the Plan without shareholder approval if the
amendment: (a) is for the purpose of curing any ambiguity, error or omission in
the Plan or to correct or supplement any provision that is inconsistent with any
other provision of the Plan; (b) is necessary to comply with applicable law or
requirements of any stock exchange on which the common shares of the Company are
listed; (c) is an amendment to the Plan respecting administration and
eligibility for participation under the Plan; (d) changes the terms and
conditions on which options may be granted pursuant to the Plan including the
provisions relating to option price, vesting provisions and option period; (e)
changes the termination provisions of an option or the Plan; (f) is an addition
of a cashless exercise feature, payable in cash or securities which provides for
a full deduction of the number of underlying securities from the Plan; or (g) is
an amendment to the Plan of a housekeeping nature.  Notwithstanding the
foregoing, no such amendment may have the effect of (h) amending the number of
common shares issuable under the Plan; (i) adding any form of financial
assistance by the Company for the exercise of any option; (j) resulting in a
material or unreasonable dilution in the number of outstanding common shares or
any material benefit to option holders; or (k) changing the class of eligible
optionees to broaden the participation by insiders of the Company.

42

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Without limiting the generality of the foregoing, but subject to
any required regulatory approval of any regulatory authority or stock exchange,
the Board may amend the option price, the option period (which in no event shall
exceed ten (10) years from the date of grant) and the termination provisions of
options granted pursuant to the Plan, without shareholder approval, provided
that if the Board proposes to reduce the option price or extend the option
period of options granted to insiders of the Company pursuant to the Plan, such
amendments will require shareholder approval.

The TSX rules require shareholder approval of the Plan every
three (3) years.

ITEM 7

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.

Major Shareholders

To the knowledge of Birch, as of February 28, 2007, there are no
persons or entities who beneficially hold, directly or indirectly or exercise
control or direction over, more than 5% of the voting rights attached to the
issued and outstanding common shares of Birch.

As of March 18, 2007, Birch had 141 registered shareholders of
which 81 holders had an address of record within the US owning common shares,
representing 16% of Birch's outstanding common shares.

B.

Related Party Transactions

During the Company's last fiscal year and up to the date of this
Form 20-F, Birch has had no transactions and there are no presently proposed
transactions which are material to Birch or a related party, or any transactions
that are unusual in their nature or conditions, involving goods, services, or
tangible or intangible assets with (a) enterprises that, directly or indirectly,
through one or more intermediaries, control or are controlled by, or are under
common control with, the Company; (b) associates, being an unconsolidated
enterprise in which the Company has a significant influence or which has
significant influence over the Company, where significant influence over an
enterprise is the power to participate in the financial and operating policy
decisions of the enterprise but is less than control over those polices and
where shareholders beneficially owning a 10% interest in the voting power of the
Company are presumed to have a significant influence on the Company; (c)
individuals owning, directly or indirectly, an interest in the voting power of
the Company that gives them significant influence over the Company, and close
members of any such individual's family; (d) key management personnel, being
those persons having authority and responsibility for planning, directing and
controlling the activities of the Company, including directors and senior
management of the Company and close members of such individuals' families; and
(e) enterprises in which a substantial interest in the voting power is owned,
directly or indirectly, by any person described in (c) or (d) over which such
person is able to exercise significant influence.  This includes enterprises
owed by directors or major shareholders of the Company and enterprises that have
a member of key management in common with the Company.  Close members of
individual's family are those that may be expected to influence, or be
influenced by, that person in their dealings with the Company.

The Company has not made any loans for the benefit of any of the
persons listed in the previous paragraph.

43

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C.

Interests of Experts and Counsel

This item is not applicable.

ITEM 8

FINANCIAL INFORMATION

A.

Consolidated Statements and Other Financial Information

Incorporated hereto are the audited consolidated financial
statements for the years ended December 31, 2006, 2005 and 2004, which are set
forth in Item 17 - Financial Statements.

Birch is not involved in any legal or arbitration proceedings
that may have, or have had in the recent past, significant effects on Birch's
financial position or profitability.

Birch is not aware of any material proceeding in which any
director, any member of senior management or any of Birch's affiliates is a
party adverse to Birch or has a material interest adverse to Birch.

No dividends have been paid on any common shares of Birch.  Birch
intends to retain its earnings for use in the business and does not expect to
pay dividends on its common shares in the foreseeable future.

B.

Significant Changes

No significant changes have occurred during 2006 or during the
first three months of 2007.

ITEM 9

THE OFFER AND LISTING

A.

Offer and Listing Details

The following table sets forth the high and low market of the
common shares on the TSXV or TSX for the periods indicated. The Company traded
on the TSXV until December 10, 2006, at which time it moved its listing to the
TSX.

Year or Month
      Period
      High (Cdn$)
      Low (Cdn$)December 31, 2002
      Year
      0.73
      0.10December 31, 2003
      Year
      0.56
      0.19December 31, 2004
      Year
      2.50
      0.45December 31, 2005
      Year
      9.85
      1.90December 31, 2006
      Year
      9.83
      2.602005
      First Quarter
      3.53
      1.90Second Quarter
      3.20
      1.91Third Quarter
      5.60
      2.73Fourth Quarter
      9.85
      5.252006
      First Quarter
      9.63
      6.60Second Quarter
      9.83
      4.46Third Quarter
      6.00
      3.14Fourth Quarter
      5.09
      2.60September 2006
      Month
      4.34
      3.14October 2006
      Month
      4.27
      3.55November 2006
      Month
      5.09
      2.61December 2006
      Month
      3.40
      2.60January 2007
      Month
      3.03
      2.30February 2007
      Month
      3.75
      2.77


44

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The following table sets forth the high and low market prices of the common
shares on the OTC-BB; until March 21, 2005, at which time the Company's stock
began trading on the American Stock Exchange (AMEX).  All financial figures in
this table are expressed in US dollars.

Year or Month
      Period
      High (US$)
      Low (US$)December 31, 2002
      Year
      0.29
      0.07December 31, 2003
      Year
      0.45
      0.30December 31, 2004
      Year
      2.05
      0.34December 31, 2005
      Year
      8.50
      1.40December 31, 2006
      Year
      8.95
      2.192005
      First Quarter
      2.85
      1.55Second Quarter
      2.57
      1.40Third Quarter
      4.83
      2.22Fourth Quarter
      8.50
      4.502006
      First Quarter
      8.20
      5.50Second Quarter
      8.95
      3.98Third Quarter
      5.34
      2.80Fourth Quarter
      4.49
      2.19September 2006
      Month
      3.91
      2.80October 2006
      Month
      3.83
      3.15November 2006
      Month
      4.49
      2.22December 2006
      Month
      2.97
      2.19January 2007
      Month
      2.57
      1.95February 2007
      Month
      3.21
      2.35




B.

Plan of Distribution

This item is not applicable.

C.

Markets

Trading in Canada



The Company's common shares trade on the TSX under the symbol BMD.

Trading in the US

45

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The Company's common shares trade on the AMEX under the symbol
BMD.



D.

Selling Shareholders

This item is not applicable.



E.

Dilution

This item is not applicable.



F.

Expenses of the Issue

This item is not applicable.



ITEM 10

ADDITIONAL INFORMATION

A.

Share Capital

This item is not applicable.

B.

Memorandum and Articles of Association

The information under Item 14 - Description of Securities to be
Registered contained in Amendment No. 4 to the Company's Registration Statement
on Form 20-F dated April 25, 2001 is hereby incorporated by reference.

On March 28, 2005 the Board of Directors (the Board) of the
Company adopted the rights plan of the Company (Rights Plan), which was
implemented pursuant to a shareholders rights plan agreement (the Rights Plan
Agreement) of the same date between the Company and Computershare Trust Company
of Canada, as rights agent.  The shareholders of the Company approved the Rights
Plan on May 12, 2005.  The purpose of the Rights Plan is, firstly, to protect
shareholders of the Company from unfair, abusive or coercive takeover
strategies, including the acquisition of control of the Company by a bidder in a
transaction or series of transactions that does not treat all shareholders
equally or fairly or that does not afford all shareholders an equal opportunity
to share in any premium paid upon an acquisition of control.  Secondly, the
purpose of the Rights Plan is to afford both the shareholders of the Company and
the Board adequate time to assess an offer made for the Company and to pursue,
explore and develop alternative courses of action in any attempt to maximize
shareholder value.

The Rights Plan is not intended to deter a person from seeking to
acquire control of the Company if such person is prepared to make a takeover bid
pursuant to a permitted bid or competing permitted bid in accordance with
the provisions of the Rights Plan.  The Rights Plan is intended to make it
impracticable to acquire 20% percent or more of the outstanding voting shares of
the Company other than by way of a permitted bid or a competing permitted bid.
 This impracticability arises as a result of the fact that the Rights will
substantially dilute the holdings of a person that seeks to acquire control of
the Company other than by means of a permitted bid or a competing permitted bid.

There are no provisions in the By-laws regarding public
disclosure of individual shareholdings.  Notwithstanding this, applicable
Canadian securities legislation required certain public disclosure of persons
owning or acquiring common shares in excess of 10% of a Company's issued and
outstanding share capital.

46

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C.

Material Contracts

Birch has not entered into any material contracts (not made in
the ordinary course of business) in the two years prior to the date of filing of
this Form 20-F, except the Rights Plan. (See Item 10 Additional Information 
Memorandum and Articles of Association).

D.

Exchange Controls

Canadian Investment Controls



There are no governmental laws, decrees or regulations in Canada
relating to restrictions on the export or import of capital, or affecting the
remittance of interest, dividends or other payments to non-residents.  Dividends
paid to US residents, however, are subject to a 15% withholding tax or a 5%
withholding tax for dividends if the shareholder is a corporation owning at
least 10% of the outstanding voting shares of Birch pursuant to Article X of the
reciprocal tax treaty between Canada and the US (See Item 10 - Additional
Information - Taxation).

Except as provided in the Investment Canada Act(the ICA),
which has provisions that restrict the holding of voting shares by
non-Canadians, there are no limitations specific to the rights of non-Canadians
to hold or vote the common shares under the laws of Canada or the Province of
Alberta, or in the charter documents of Birch or its subsidiaries.

The ICA requires a person who is not a Canadian resident (a
non-Canadian) making an investment, which would result in the establishment of
a new Canadian business or which would result in the acquisition of control of a
Canadian business (i.e. the gross value of the assets of which exceed a certain
monetary threshold), to identify, notify, or file an application for review with
the Investment Review Division of Industry Canada (IRD).  The notification
procedure involves a brief statement of information about the investment on a
prescribed form to be filed with the IRD by the investor within 30 days
following implementation of the investment.  Specific investments are subject to
review under the ICA.  It is intention of the IRD that investments requiring
only notification will proceed without government intervention unless the
investment is in a specific type of business activity related to Canada's
cultural heritage and national identity.

If an investment is reviewable under the ICA, an application for
review in the form prescribed is normally required to be filed with the IRD
prior to the investment taking place and the investment may not be implemented
until the review has been completed and the Minister of Industry (Minister)
(the Minister responsible for Investment Canada) is satisfied that the
investment is likely to be of net benefit to Canada.  The Minister has up to 75
days to make this determination.  If the Minister is not satisfied that the
investment is likely to be of net benefit to Canada, the non-Canadian must not
implement the investment or, if the investment has been implemented, may be
required to divest himself of control of the business that is the subject of the
investment.

In 1999, some of the powers, duties and functions of the Minister
were transferred to the Minister of Canadian Heritage under Parts II to VI of
the ICA as they relate to the prescribed business activities enumerated under
paragraph 15(a) of the ICA, namely those that relate to Canada's cultural
heritage or national identity (Cultural Activities) Cultural Activities
include, among other things, the distribution or sale of books, magazines, film
and video recordings and music recordings.  As a result, an application for
review must be submitted to the Cultural Sector Review Division of the
Department of Canadian Heritage (the CSRD) in respect of the acquisition of
control of a Canadian business engaged in a Cultural Activity that exceeds the
prescribed lower monetary threshold applicable to the acquisition of such
Canadian businesses.

47

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The Minister of Canadian Heritage's review, similar to the
Minister's review, is based on the statutory threshold of net benefit to Canada.
 CSRD is guided by certain policy statements regarding investments by
non-Canadians in Canadian businesses engaged in certain Cultural Activities.  CSRD's
policy statements address certain Cultural Activities at the
production/publication, distribution and/or exhibition levels.

The following investments by non-Canadians are subject to
notification under ICA:

1.

An investment to establish a new Canadian business; and

2.

An investment to acquire control of a Canadian business that is
not reviewable pursuant to the ICA.

The following investments by non-Canadians are subject to review
under the ICA:

1.

An investment is reviewable if there is an acquisition of control
of a Canadian business and the asset value of the Canadian business being
acquired equals or exceeds the following thresholds:

a.

For non-World Trade Organization (WTO) investors, the threshold
is $5 million for a direct acquisition and $50 million for an indirect
acquisition; the $5 million threshold will apply however for an indirect
acquisition if the asset value of the Canadian business being acquired exceeds
50% of the asset value of the global transaction;

b.

Except as specified in paragraph (c) below, a threshold is
calculated annually for reviewable direct acquisitions by or from WTO investors.
 The threshold for 2007 is $281 million.  Pursuant to Canada's international
commitments, indirect acquisitions by or from WTO investors are not reviewable;

c.

The limits set out in paragraph (a) apply to all investors for
acquisitions of a Canadian business that:

i.

engages in the production of uranium and owns an interest in
a producing uranium property in Canada;

ii.

provides any financial service;

iii.    provides any transportation services; or



iv.    is a cultural business.



2.

Notwithstanding the above, any investment which is usually only
notifiable, including the establishment of a new Canadian business, and which
falls within a specific business activity, including the publication and
distribution of books, magazines, newspapers, film or video recordings, audio or
video music recordings, or music in print or machine-readable form may be
reviewed if an Order-in-Council directing a review is made and a notice is sent
to the Investor within 21 days following the receipt of a certified complete
notification.

With reference to 1 (a) above, generally speaking, an acquisition
is direct if it involves the acquisition of control of the Canadian business or
of its direct or indirect Canadian parent and an acquisition is indirect if it
involves the acquisition of control of a non-Canadian direct or indirect parent
of an entity carrying on the Canadian business.  No change of voting control
will be deemed to have occurred if an investor acquires less than one-third of
the voting control of a Canadian corporation.

With reference to 1(a) above, a WTO investor, as defined in the
ICA, includes an individual who is a national of a member country of the WTO or
who has the right of permanent residence in relation that WTO member, a
government or government agency of a WTO member, a WTO investor-controlled
entity, a corporation, a limited partnership, trust or other specified business
organizations that is neither WTO-investor controlled or Canadian controlled of
which two-thirds of its board of directors, general partners or trustees, as the
case may be, are any combination of Canadians and WTO investors.

48

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The ICA exempts certain transactions from notification and
review, including, among others,



1.

An acquisition of voting shares if the acquisition were made in
the ordinary course of that persons' business as a trader or dealer in
securities;

2.

An acquisition of control of the company in connection with the
realization of a security interest granted for a loan or other financial
assistance and not for any purpose related to the provisions of the ICA;

3.

The acquisition of voting interests by any person in the ordinary
course of a business carried on by that person that consists of providing, in
Canada, venture capital on terms and conditions not inconsistent with such terms
and conditions as may be fixed by the Minister; and

4.

Acquisition of control of the company by reason of an
amalgamation, merger, consolidation or corporate reorganization, following which
the ultimate direct or indirect control in fact of the company, through the
ownership of voting interests, remains unchanged.



E.

Taxation

The following is a summary of the principal Canadian federal
income tax considerations under theIncome Tax Act (Canada) and the
regulations thereunder (collectively, the Tax Act, or ITA), generally
applicable in respect of the holding and disposition of common shares.  The
income tax consequences to any particular holder of common shares will vary
according to the particular circumstances of each holder, including without
limitation, the status of that holder as an individual, trust, corporation or
member of a partnership, the jurisdiction in which that holder is subject to
taxation and the place where that holder is resident.

This summary is based upon the Company's understanding of current
provisions of the Tax Act and the Canada-United States Tax Convention (1980)
(the Tax Convention) as at the date of this Form 20-F, of all specific
proposals to amend the Tax Act publicly announced prior to the date hereof and
of the current published administrative and assessing practices of the Canada
Revenue Agency (the CRA).  Other than such proposed amendments, this summary
does not take into account or anticipate changes in the law, whether by way of
judicial decision or legislative action, nor any changes in the administrative
or assessing practices of the CRA.  There is no assurance that any specific
proposals to amend the Tax Act will be enacted as proposed or at all.  This
summary does not take into account, or anticipate any provincial, territorial or
foreign tax legislation or other considerations, which may differ from those
consideration described herein.

This summary is applicable only to holders of common shares who,
for the purposes of the Tax Act and the Tax Convention, are resident in the US,
have never been resident in or deemed to be resident in Canada at any time while
they have held common shares, deal at arm's length with and are not affiliated
with, the Company, hold their common shares as capital property, do not carry on
and are not deemed to carry on an insurance business in Canada, and will not use
or hold or be deemed to use or hold the common shares in the course of carrying
on business in Canada.  Common shares will generally be considered to capital
property for purposes of the Tax Act unless they are held in the course of
carrying on a business of trading or dealing in securities or acquired in a
transaction which may be considered to be an adventure in the nature of the
trade.  Special rules, which are not discussed in this summary, may apply to a
US holder that is a corporation that carries on business in Canada and
elsewhere.

This summary is of a general nature only and is not exhaustive of
all Canadian federal income tax considerations and is not intended to be, nor
should it be construed to be, legal or tax advice to any holder of common
shares.  No opinion, with respect to taxation matters, was requested by the
Company or provided by its auditors or legal counsel.  Each holder should
consult his own tax advisor with respect to the income tax consequences
applicable to him in his own particular circumstances.

49

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Disposition of Common Shares



A non-resident of Canada will not be subject to tax under the Tax
Act in respect of a capital gain realized upon the disposition or deemed
disposition of a common share of the Company unless it constitutes taxable
Canadian property under the Tax Act and the holder is not entitled to relief
under the Tax Convention.  Such common shares will generally not be taxable
Canadian property provided the holder thereof does not use or hold and is not
deemed to use or hold such shares in connection with carrying on a business in
Canada; such shares are not designated insurance property of the holder within
the meaning of the Tax Act; that if the shares listed on a prescribed stock
exchange under the Tax Act, the holder has not, either alone or in combination
with persons with whom the holder does not deal at arm's length, owned or had
the right to acquire 25% or more of the issued shares of any class or series of
shares in the Company within 60 months preceding the date of disposition; such
holder has not elected to treat such shares as taxable Canadian property upon
ceasing to be a resident in Canada; and such shares were not acquired in a tax
deferred exchange for property that was itself taxable Canadian property.

In the case of a non-resident holder to whom shares of the
Company represent taxable Canadian property and who is resident in the US,
relief from Canadian taxation may not be available under the Tax Convention in
certain cases, including, without limitation, where the value of such shares is
derived principally from real property situated in Canada.  Mineral exploration
rights are generally considered to be real property for this purpose.
Shareholders should consult with their tax advisors as to whether they will be
afforded relief under the Tax Convention.

If common shares of the Company constitute taxable Canadian
property and a holder is not afforded relief under the Tax Convention, a capital
gain (or capital loss) will generally be realized to the extent that the
proceeds of disposition received or deemed to be received exceed (or are less
than) the aggregate adjusted cost base of such shares, net of any reasonable
costs of disposition or deemed disposition.  One-half of any such capital gain
(taxable capital gain) will be required to be included in income in the year
of the disposition.  One half of the amount of any capital loss (allowable
capital loss) may be deductible against certain taxable capital gains realized
in that year in accordance with the provisions of the Tax Act.  Allowable
capital losses for a taxation year in excess of taxable capital gains for that
year may otherwise be available for deduction in other taxation years in
accordance with the provisions of the Tax Act.

However, special rules apply if a non-resident of Canada or
certain designated partnerships dispose of common shares of the Company to
another corporation resident in Canada with which the non-resident does not deal
or is deemed not to deal at arm's length and, immediately after the disposition,
the Company is connected with the purchaser corporation within the meaning of
the Tax Act.  Each holder should consult with their own tax advisor with respect
to the income tax consequences of any such disposition applicable to them, in
their own particular circumstances.

Dividends



In the case of any dividends paid or credited or deemed to be
paid or credited to non-residents, the non-resident will be subject to tax on
the gross amount of such dividends.  In the absence of relief under the Tax
Convention, the Company will be required to withhold therefrom on account of
tax, 25% of the amount of such dividend, and remit same to the Receiver General
of Canada, and the net amount of the dividend will be paid to the non-resident
holder.  In certain cases Article X of the Tax Convention reduces the rate of
tax on dividends paid to residents of the US to 15% of the gross dividend (or 5%
in the case of dividends paid to certain corporate shareholders that
beneficially own at least 10% of the Company's voting shares).  Stock dividends
received by non-residents from the Company are taxable in Canada as ordinary
dividends.

50

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Dispositions of common shares to the Company will generally
result in a deemed dividend to the holder equal to the amount by which the
consideration paid or deemed to be paid by the Company exceeds the paid-up
capital of such shares.  The amount of such deemed dividend would be subject to
withholding tax as described above.

US Federal Income Tax Consequences



The following is a discussion of possible US Federal income tax
consequences, under US law, generally applicable to a US Holder (as defined
below) of common shares of the Company.  This discussion does not address
consequences peculiar to persons subject to special provisions of US Federal
income tax law, such as those described below as excluded from the definition of
a US Holder.  In addition, this discussion does not cover any alternative
minimum, US state and local or foreign tax consequences.

The following discussion is based upon the Internal Revenue Code
of 1986, as amended (the Code), Treasury Regulations, published Internal
Revenue Service (IRS) rulings, published administrative positions of the IRS,
and court decisions that are currently applicable, any of which could be
materially and adversely changed, possibly on a retroactive basis, at any time.
 In addition, the discussion does not consider the potential effects, both
adverse and beneficial, of recently proposed legislation that, if enacted, could
be applied, possibly on a retroactive basis, at any time.

Circular 230 Disclosure

Any tax statement made herein regarding any US federal tax is
not intended or written to be used, and cannot be used, by any taxpayer for
purposes of avoiding any penalties.  Any such statement herein is written in
connection with the marketing or promotion of the transaction to which the
statement relates.  Each taxpayer should seek advice based on the taxpayer's
particular circumstances from an independent tax advisor.

As used herein, a US Holder includes a holder of common shares
who is a citizen or individual resident (as defined under US tax laws) of the
United States; a corporation created or organized in or under the laws of the US
or of any political subdivision thereof; an estate the income of which is
taxable in the US irrespective of source; or a trust if (a) a court within the
US is able to exercise primary supervision over the trust's administration and
one or more US persons have the authority to control all of its substantial
decisions or (b) the trust was in existence on August 20, 1996 and has properly
elected to continue to be treated as a US person.  This summary does not address
the US tax consequences to, and US Holders do not include, persons subject to
specific provisions of federal income tax law, including, but not limited to,
tax-exempt organizations, qualified retirement plans, individual retirement
accounts and other tax-deferred accounts, financial institutions, insurance
companies, real estate investment trusts, regulated investment companies,
broker-dealers, non-resident alien individuals, persons or entities that have a
functional currency other than the US dollar, persons who hold common shares
as part of a straddle, hedging or a conversion transaction, and persons who
acquire their common shares as compensation for services.  This summary is
limited to US Holders who own common shares as capital assets and who hold the
common shares directly and not through an intermediary entity.

51

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Distributions on Common Shares of the Company

Subject to the discussion below regarding passive foreign
investment companies (PFICs), US Holders receiving dividend distributions
(including constructive dividends) with respect to common shares of the Company
are required to include in gross income (for US Federal income tax purposes) the
gross amount of such distributions, to the extent that the Company has current
or accumulated earnings and profits, as determined under US Federal tax
principals.  This inclusion is done without reduction for any Canadian income
tax withheld from such distributions.

Any Canadian tax withheld generally may be credited (subject to
certain limitations) against the US Holder's US Federal taxable income.  (See
more detailed discussion at Foreign Tax Credits below.)  To the extent that
distributions exceed current or accumulated earnings and profits of the Company,
they will be treated first as a return of capital up to the US Holder's adjusted
basis in the common shares and thereafter as a gain from the sale or exchange of
the common shares.  Dividends received by non-corporate US Holders may be
subject to US federal income tax at lower rates (generally 15%) than other types
of ordinary income in taxable years beginning before 2011 if certain conditions
are met.  These conditions include the Company not being classified as a PFIC,
it being a qualified foreign corporation, the US Holder's satisfaction of a
holding period requirement, and the US Holder not treating the distribution as
investment income for purposes of the investment interest deduction rules.  In
the case of US Holders that are corporations, such dividends generally will not
be eligible for the dividends received deduction.

Foreign Tax Credit

A US Holder who pays (or has withheld from distributions)
Canadian income tax with respect to the common shares of the Company may be
entitled, at the option of the US Holder, to either a deduction or a tax credit
for such foreign tax paid or withheld, at the option of the US Holder.
 Generally, it will be more advantageous to claim a credit because a credit
reduces US Federal income taxes on a dollar-for-dollar basis, while a deduction
merely reduces the taxpayer's income subject to tax.

This election is made on a year-by-year basis, and applies to all
foreign income taxes (or taxes in lieu of income tax) paid by (or withheld from)
the US Holder during the year.  There are significant and complex limitations
which apply to the credit, among which is the general limitation that the credit
cannot exceed the proportionate share of the US Holder's US income tax liability
that the US Holder's foreign source income bears to his/her or its worldwide
taxable income.

In the determination of the application of this limitation,
various items of income and deduction must be classified into foreign and
domestic sources.  Complex rules govern this classification process.

In addition, this limitation is calculated separately with
respect to specific classes or baskets of income; foreign taxes assigned to a
particular class of income generally cannot offset United States tax on income
assigned to another class.  For tax years beginning after 2006, there are two
classes of income, passive category income and general category income for
United States foreign tax credit purposes.  For tax years of US Holders
beginning after October 22, 2004, unused foreign tax can generally be carried
back one year and forward ten years.

The availability of the foreign tax credit and the application of
the limitations with respect to the foreign tax credit are fact specific, and US
Holders should consult their own tax advisors regarding the foreign tax credit
rules.

52

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Currency Fluctuations

For United States federal income tax purposes, the amount
received by a US Holder as payment with respect to a distribution on, or
disposition of, common shares, if paid in Canadian dollars, will be the US
dollar value of the payment, regardless of whether the payment is later
converted into US dollars.  In such case, the US Holders may recognize
additional ordinary income or loss as a result of currency fluctuations between
the date on which the payment is made and the date the payment is converted into
US dollars.

Disposition of Common Shares of the Company

Subject to the PFIC discussion below, a US Holder will recognize
gain or loss upon the sale of commons shares of the Company equal to the
difference, if any, between the amount of cash plus the fair market value of any
property received, and the US Holder's tax basis in the common shares of
Company.

This gain or loss will be capital gain or loss if the common
shares are a capital asset in the hands of the US Holder, which will be a
short-term or long-term capital gain or loss depending upon the holding period
of the US Holder.  Under present law, a non-corporate US Holder generally is
eligible for a maximum 15% US Federal income tax rate, subject to the PFIC
discussion below, for net long-term (held more than one year) capital gains.
 Gains and losses are netted and combined according to special rules in arriving
at the overall capital gain or loss for a particular tax year.  Deductions for
net capital losses are subject to significant limitations.

US Anti-Deferral Regimes - Passive Foreign Investment
Company (PFIC) Regime

The PFIC rules may apply to US Holders if the Company, or an
entity directly or indirectly owned by the Company (Related Entity), derives
75% or more of its gross income from certain types of passive income
(generally, interest, dividends, rents, royalties and the like), or if the
average value during a taxable year of the Company or the Related Entity's
passive assets (generally, assets that generate passive income) is 50% or more
of the average value of all assets held by the Company or the Related Entity.
 If the Company or a Related Entity is classified as a PFIC, a US Holder will be
subject to increased tax liability in respect of gain recognized on the
disposition of common shares or upon the receipt of certain distributions,
unless the US Holder makes an election to be taxed currently on his, her or its
pro rata portion of the Company's income and gain, whether or not such income or
gain is distributed in the form of dividends or otherwise, and the Company
provides certain annual statements which include the information necessary to
determine inclusions and assure compliance with the PFIC rules.  As another
alternative to the foregoing rules, a US Holder may make a mark-to-market
election to include in income each year as ordinary income an amount equal to
the increase in value of the Common shares for that year or to claim a deduction
for any decrease in value (but only to the extent of previous mark-to-market
gains).

Neither the Company nor any Related Entity can give any assurance
as to its status as a PFIC for the current or any future year, and offers no
opinion or representation of any kind with respect to the PFIC status of the
Company or any Related Entity.US Holders should
consult their own tax advisors with respect to the PFIC issue and its
applicability to their particular tax situation.

F.

Dividends and Paying Agents

This item is not applicable.

53

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G.

Statement by Experts

This item is not applicable.

H.

Documents on Display

Documents concerning Birch which are referred to in this Form
20-F may be inspected upon written request to the Corporate Administrator of
Birch as follows:

Jane Quinn

Shareholder Services

Birch Mountain Resources Ltd.

Suite 300, 250 - Sixth Avenue S.W.

Bow Valley Square 4

Calgary, AB, Canada

T2P 3H7

The Company is subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the Exchange Act), and, to
the extent required of Canadian companies, files periodic reports and other
information with the SEC.  All such reports and information may be read and
copied at the public reference facilities listed below.  The Company intends to
provide its shareholders reports containing audited year-end financial
statements and a report thereon from its independent chartered accountants and
quarterly reports for the first three quarters of each fiscal year containing
unaudited interim financial information.

Statements made in this Form 20-F about the contents of contracts
or other documents are not necessarily complete and the Company refers you to
the copy of such contracts or other documents filed as exhibits to this Form
20-F.

The Company's SEC filings, and the exhibits thereto, are
available for inspection and copying at the public reference facilities
maintained by the Securities and Exchange Commission at 100 F Street N.E.,
Washington, D.C., 20549.  Copies of these filings may be obtained from these
offices after the payment of prescribed fees.  Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information on the public
reference rooms. These filings are also available on the Securities and Exchange
Commission's website at www.sec.gov.

The Company is required to file reports and other information
with Canadian provincial securities commissions. Interested parties are invited
to read and copy any reports, statements or other information, other than
confidential filings, that Birch files with provincial securities commissions.
These filings are also available electronically from the Canadian System for
Electronic Document Analysis and Retrieval (SEDAR) (http://www.sedar.com),
the Canadian equivalent of the SEC's electronic document gathering and retrieval
system.

The Company will provide its shareholders with proxy statements
prepared according to Canadian law.  As a Canadian company, the Company is
exempt from the Exchange Act rules prescribing the furnishing and content of
proxy statements to shareholders and is also exempt from the short-swing profit
recovery and disclosure regime of Section 16 of the Exchange Act. Copies of
proxy statements may be obtained by providing requests to us at the following
address: Attn. Shareholder Services, Birch Mountain Resources Ltd., 300  250 6th
Avenue S.W., Calgary, Alberta, Canada T2P 3H7.

54

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I.

Subsidiary Information

This item is not applicable.

ITEM 11

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has not entered into any activities in derivative
financial instruments or derivative commodity instruments. The Company's
financial assets are in the form of cash and cash equivalents and are held in
short term interest-bearing deposits at institutions with high credit quality
ratings.

As a Canadian Company, Birch's cash balances are kept primarily
in Canadian funds, revenues are negotiated in Canadian dollars and expenses are
predominately in Canadian dollars. The Company does have limited exposure to
foreign exchange risk, but this is restricted to payment of current trade
accounts payable in US Dollars where most of the Company's cash assets are
denominated in Canadian Dollars. The Company maintains a bank account in US
Dollars from payments received in US Dollars to pay these trade accounts.
Therefore, the Company believes it is exposed to only minimal exchange rate
risk. The Company considers the amount of risk to be manageable and does not
currently, nor is likely in the foreseeable future, conduct hedging to reduce
its exchange rate risk.

ITEM 12

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

This item is not applicable.

PART II



ITEM 13

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

There have been no defaults in the payment of principal, interest
or a sinking or purchase fund instalment or any other material default related
to indebtedness.  There are no dividend arrearages or any other delinquencies
with respect to any class of preferred stock.

ITEM 14

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITYHOLDERS AND
USE OF PROCEEDS

There has been no modification of the instruments defining the
rights of holders of any class of the Company's registered securities.  There
has been no modification or qualification of the rights evidenced by any class
of the Company's registered securities by issuing or modifying any other class
of securities.  There are no assets securing any class of the Company's
registered securities.  There has been no change in the last financial year to
the trustee of the Company's registered securities.

ITEM 15

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

A Disclosure Committee of Birch Mountain Resources Ltd. was appointed by the
Board of Directors in 2006 to oversee the Company's disclosure activities and to
assist the Board of Directors in fulfilling its responsibilities in this
respect. The purpose of the Committee is to ensure that the Company implements
and maintains internal procedures for the timely collection, evaluation and
disclosure, as appropriate, of information potentially subject to public
disclosure under the legal, regulatory and stock exchange requirements to which
the Company is subject.

55

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The Committee's responsibilities include the following:

- review material developments and advise on the Company's disclosure
  obligations on a timely basis;
- advise on and discuss the timely review, publication and filing of periodic
  and current reports with the various parties involved, including the Chief
  Executive Officer and the Chief Financial Officer, and review that these
  reports do not contain an untrue statement of a material fact or omit to state
  a material fact required to be stated therein or necessary to make the
  statements therein not misleading;
- periodically review past disclosures contained in public filings and other
  public information and advise whether any updates or corrections are
  appropriate; and
- evaluate and advise on the effectiveness of the Company's internal and
  disclosure controls and procedures, including the steps that it deems
  necessary or desirable to effect compliance with those procedures.

There are inherent limitations as to the effectiveness of any system of
disclosure controls and procedures, including the possibility of human error and
circumvention or overriding of the controls or procedures. It should be also be
noted that the Company's internal controls and procedures will not prevent or
detect all errors and fraud. A control system, no matter how well conceived or
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Accordingly, even effective disclosure
controls and procedures can only provide reasonable assurance of achieving their
control objectives. Consequently, management applies its judgment in evaluating
the cost-benefit relationship of possible controls and procedures.

The Chief Executive Officer and the Chief Financial Officer, together with
management, have evaluated the effectiveness of the Company's disclosure
controls and procedures and internal controls over financial reporting as of
December 31, 2006, and identified the following material weaknesses:

1.     Design weaknesses relating to controls and processes due to (i)
insufficient communication of the Company's policies and Code of the Conduct to
employees of the Company, (ii) a lack of a formal management override policy
relating to the Company's policies and Code of Conduct, and (iii) monitoring
process to confirm responsibility of financial results. Management believes that
weaknesses in these areas aggregated to a material weakness for effective
company level controls and require more formalization of existing controls and
processes.

2.     Design weaknesses related to the processes and communication of
operational information, which may have a financial implication, to accounting
and finance, in a timely manner.

3.     Control design weaknesses relating to a lack of segregation of various
accounting duties resulting from the small size of the Company's accounting
department, lack of certain formal accounting procedures for the documentation
of various approvals and reviews, as well as, control weaknesses inherent in
accounting software employed by the Company which is not a sophisticated
enterprise application.

Solely as a result of these material weaknesses, we concluded that our
disclosure controls and procedures were not effective as of December 31, 2006.

The Company is experiencing rapid growth and has implemented new policies and
processes to address the design weaknesses described above. During fiscal 2006,
the Company undertook a comprehensive assessment of its internal control over
financial reporting by conducting regular reviews and audits to identify
weaknesses and to ensure that an environment of continuous improvement becomes a
part of the culture of the Company. The Company further intends to
systematically and regularly provide and explain its policies and Code of
Conduct to employees. In addition, the Company intends to introduce additional
internal control procedures during the next fiscal year to ensure that
appropriate internal control over financial reporting is in place and that such
controls keep pace with the growth of the Company. The Company has and will
continue to implement improvements in segregation of accounting duties, increase
controls for review, approval and documentation, and will upgrade during 2007
its accounting software to address inherent limitations.

Other than with respect to the identification of these material weaknesses,
there was no change in our internal control over financial reporting during the
year ended December 31, 2006, that materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.

56

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Changes in Internal Control Over Financial Reporting

There were no changes in Birch's internal controls over financial
reporting or in other factors that could significantly affect these controls
during the year ended December 31, 2006, or subsequent to the evaluation date
identified in connection with the evaluation thereof by the Company's management
including the Chief Executive Officer and Acting Chief Financial Officer, that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.



ITEM 16

RESERVED BY THE SEC

ITEM 16A

AUDIT COMMITTEE FINANCIAL EXPERT

The Board of Directors of Birch has determined that Larry
Shelley, CA is an audit committee financial expert, as defined in Item 16A of
Form 20-F and is independent, as defined by rules of the AMEX.

ITEM 16B

CODE OF CONDUCT

On May 7, 2004, the Company's Board of Directors adopted the
Birch Mountain Resources Ltd. Code of Business Conduct and Ethics (Code of
Conduct), which was filed as an exhibit to the Company's Form 20-F dated June
29, 2004.  The Code of Conduct was reviewed by the Corporate Governance and Risk
Committee and amendments approved on January 16, 2006, resulting in a new Code
of Conduct as attached as an exhibit hereto. The Code of Conduct outlines the
Company's business principles, and the ethical and legal standards which each of
its directors, officers and employees, including its principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions must adhere to when acting
on behalf of the Company.

Through its Code of Conduct, the Company prescribes the following
principles:

●

honest and ethical conduct, including the ethical handling of
actual or apparent conflicts of interest between personal and professional
relationships;

●

full, fair, accurate, timely and understandable disclosure in the
Company's shareholder reports and in other public communications and filings of
the Company;

●

compliance with applicable governmental laws, rules and
regulations;

●

the prompt internal reporting of violations of the Code of
Conduct to an appropriate person or persons identified in the Code of Conduct;
and

●

accountability by all of the Company's directors, officers and
employees for adherence to its Code of Conduct.

57

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ITEM 16C

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table sets forth, for each of the years indicated,
the fees billed by Birch's independent public accountants, and the percentage of
the services that were approved by the Audit Committee.



Year Ended December 312006
      2005Audit Fees
      $ 131,500
      $ 62,000Audit-related Fees
      72,000
      89,000Tax Fees
      -
      750All Other Fees
      -
      -Total
      $ 203,500
      $ 151,750


Pre-Approval Policies and Procedures

The Board of Directors has delegated certain responsibilities to
the Audit Committee.  The Audit Committee adopted an Audit Committee Charter
that outlines its responsibilities including the pre-approval of audit and
non-audit services rendered by the Company's independent public accountants.  No
issue regarding these services has arisen in the last two fiscal years.

ITEM 16D

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE

This item is not applicable.

ITEM 16E

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS

Neither the Company, nor any affiliated purchaser of the Company,
has purchased any of the Company's securities during 2006.

58

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PART III



ITEM 17

FINANCIAL STATEMENTS

|                                                                                                        | Page No.
|------------------------------------------------------------------------------------------------------- | --------
|Management's Report on Internal Control Over Financial
    Reporting                                    | 61      
|Report of Independent Registered Public Accounting Firm                                                 | 64      
|Consolidated Balance Sheets for the years ended December 31,
    2006 and 2005                          | 65      
|Consolidated Statements of Loss and Deficit for the years
    ended December 31, 2006, 2005 and 2004    | 66      
|Consolidated Statements of Cash Flows for the years ended
    December 31, 2006, 2005 and 2004          | 67      
|Notes to the Consolidated Financial Statements for the years
    ended December 31, 2006, 2005 and 2004 | 68      



ITEM 18

FINANCIAL STATEMENTS

This item is not applicable.

59

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AUDITED CONSOLIDATED 
FINANCIAL STATEMENTS



December 31, 2006









60

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|Birch Mountain Resources Ltd.
|-----------------------------
|Report of Management         



MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING

The management of Birch Mountain Resources Limited is
responsible for establishing and maintaining adequate internal control over
financial reporting. The Securities and Exchange Act of 1934 in Rule 13a-15(f)
and 15d-15(f) defines this as a process designed by, or under the supervision
of, the Companys principal executive and principal financial officer and
effected by the Companys Board of Directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and
procedure that:

- Pertain to the maintenance of records that, in reasonable
  detail, accurately and fairly reflect the transactions and dispositions of the
  assets of the Company;
- Provide reasonable assurance that transactions are recorded
  as necessary to permit preparation of financial statements in accordance with
  GAAP, and that receipts and expenditures of the Company are being made only in
  accordance with authorizations of management and directors of the Company; and
- Provide reasonable assurance regarding prevention or timely
  detection of unauthorized acquisition, use or disposition of the Companys
  assets that could have a material effect on the consolidated financial
  statements.

Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.

The Companys management assessed the effectiveness of the
Companys internal control over financial reporting as of December 31, 2006. In
making this assessment, the Companys management used the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework.

The Chief Executive Officer and acting Chief Financial
Officer, together with management, have reviewed the design and effectiveness of
the Companys internal control over financial reporting as part of Section 404
of the U.S. Sarbanes-Oxley Act of 2002 and have concluded that there were no
changes in our internal control over financial reporting that occurred during
2006 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting other than the changes
made to address the following material weaknesses:

1. Design weaknesses relating to controls and processes due to
  (i) insufficient communication of the Companys policies and Code of the
  Conduct to employees of the Company, (ii) a lack of a formal management
  override policy relating to the Companys policies and Code of Conduct, and
  (iii) monitoring process to confirm responsibility of financial results.
  Management believes that weaknesses in these areas aggregated to a material
  weakness for effective company level controls and require more formalization
  of existing controls and processes.
2. Design weaknesses related to the processes and
  communication of operational information, which may have a financial
  implication, to accounting and finance, in a timely manner.
3. Control design weaknesses relating to a lack of segregation
  of various accounting duties resulting from the small size of the Companys
  accounting department, lack of certain formal accounting procedures for the
  documentation of various approvals and reviews, as well as, control weaknesses
  inherent in accounting software employed by the Company which is not a
  sophisticated enterprise application.

Solely as a result of these material weaknesses, we concluded that our
disclosure controls and procedures were not effective as of December 31, 2006.

The Company is experiencing rapid growth and has implemented
new policies and processes to address the design weaknesses described above.
During fiscal 2006, the Company undertook a comprehensive assessment of its
internal control over financial reporting by conducting regular reviews and
audits to identify weaknesses and to ensure that an environment of continuous
improvement becomes a part of the culture of the Company. The Company further
intends to systematically and regularly provide and explain its policies and
Code of Conduct to employees. In addition, the Company intends to introduce
additional internal control procedures during the next fiscal year to ensure
that appropriate internal control over financial reporting is in place and that
such controls keep pace with the growth of the Company. The Company has and will
continue to implement improvements in segregation of accounting duties, increase
controls for review, approval and documentation, and will upgrade during 2007
its accounting software to address inherent limitations.

|"signed"                                           | "signed"                                                
|-------------------------------------------------- | --------------------------------------------------------
|                                                   |                                                         
|Douglas J. Rowe, President and
    Chief Executive | Dan J. Rocheleau, Acting Chief
    Financial Officer and
|Officer                                            | Director of Financial Reporting                         

61

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|Birch Mountain Resources Ltd.                           
|--------------------------------------------------------
|Managements Responsibility for
    Financial Statements

TO THE SHAREHOLDERS OF BIRCH MOUNTAIN RESOURCES LTD.

Management is responsible for the preparation of the
financial statements and for the consistency therewith of all other financial
and operating data presented in this Annual Report. In preparation of these
financial statements, management selects appropriate accounting policies and
uses its judgment and best estimates to report events and transactions as they
occur. Management has determined such amounts on a reasonable basis in order to
ensure that the financial statements are presented fairly, in all material
respects.

Management maintains a system of internal controls to ensure,
on a reasonable and cost effective basis, that the Companys assets are
safeguarded and to facilitate the preparation of relevant, reliable and timely
financial information. Management has the responsibility for preparation and
fair presentation of the accompanying financial statements, including the
financial processes that give rise to such consolidated financial statements.
This responsibility includes selecting appropriate accounting principles and
making objective judgments and estimates in accordance with Canadian generally
accepted accounting principles and providing a reconciliation to generally
accepted accounting principles in the United States.

It is the responsibility of the Audit Committee and the Board
of Directors to review the financial statements in detail with management prior
to their approval of the financial statements for publication. In addition, the
Audit Committee meets regularly with management and the external auditor to
review accounting policies, financial reporting and internal controls. The Audit
Committee is comprised of three independent and financially literate directors.
The Audit Committee is responsible for the compensation of the external auditor
and pre-approves their retention for the appointment and any such fees related
to non-audit services.

External auditors appointed by the shareholders have examined
the financial statements. Their report is attached to the audited consolidated
financial statements that follow. The Audit Committee has reviewed these
statements with management and the auditors and has reported to the Board of
Directors. The Board has approved the financial statements.

|"signed"                                           | "signed"                                                
|-------------------------------------------------- | --------------------------------------------------------
|                                                   |                                                         
|                                                   |                                                         
|Douglas J.
    Rowe, President and Chief Executive | Dan J.
    Rocheleau, Acting Chief Financial Officer and
|Officer                                            | Director of Financial Reporting                         



62

---



|Birch Mountain Resources Ltd.                              
|-----------------------------------------------------------
|Report
    of Independent Registered Public Accounting Firm

To the Shareholders ofBirch Mountain Resources Ltd.

We have audited the consolidated balance sheets of Birch
Mountain Resources Ltd. as at December 31, 2006 and 2005, and the consolidated
statements of loss and deficit, and cash flows for each of 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 Canadian generally
accepted auditing standards and the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the financial statements
are free of material misstatement. An audit includes consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. 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, these financial statements present fairly, in
all material respects, the consolidated financial position of Birch Mountain
Resources Ltd. as at December 31, 2006 and 2005, and the results of its
operations and its cash flows for each of the years then ended in conformity
with Canadian generally accepted accounting principles.

The financial statements as at December 31, 2004 and for the
year then ended were audited by another auditor who expressed an opinion without
reservation on those statements in their report dated February 25, 2005 (except
for notes 3 and 8, which are as of July 25, 2005, and note 19, which is as of
November 10, 2006).

|                | "signed"             
|--------------- | ---------------------
|                |                      
|Calgary, Canada | Ernst & Young LLP    
|March 29, 2007  | Chartered Accountants



COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA-U.S. 
REPORTING DIFFERENCES

In the United States, reporting standards for auditors
require the addition of an explanatory paragraph, following the opinion
paragraph, when the financial statements are affected by conditions and events
that cast substantial doubt on the Companys ability to continue as a going
concern, such as those described in note 1 to the consolidated financial
statements. Our report to the shareholders dated March 29, 2007 is expressed in
accordance with Canadian reporting standards which do not permit a reference to
such events and conditions in the auditors report when these are adequately
disclosed in the financial statements.

|                | "signed"             
|--------------- | ---------------------
|                |                      
|Calgary, Canada | Ernst & Young LLP    
|March 29, 2007  | Chartered Accountants
|                |                      

63

---



|Birch Mountain Resources Ltd.
|-----------------------------
|Consolidated Balance Sheets  
|Canadian dollars             





|                                            |              |            
|------------------------------------------- | ------------ | -----------
|As At
    December 31                       | 2006         | 2005       
|                                            |              |            
|Assets                                      |              |            
|Current                                     |              |            
|Cash and cash equivalents (Note 3)          | 1,345,483    | 32,322,603 
|Accounts receivable                         | 2,202,698    | 476,455    
|Inventory (Note 4)                          | 5,703,196    | -          
|Prepaids and deposits (Note 5)              | 7,995,965    | 441,545    
|                                            | 17,247,342   | 33,240,603 
|                                            |              |            
|Restricted cash(Note 6)                     | 4,250,000    | 1,000,000  
|Long-term prepaid(Note 7)                   | 137,294      | 232,489    
|Property, plant and equipment(Note
    8)   | 18,729,682   | 425,112    
|Mineral
    properties(Note 9)              | 44,608,237   | 13,662,648 
|Total Assets                                | 84,972,555   | 48,560,852 
|                                            |              |            
|Liabilities                                 |              |            
|Current                                     |              |            
|Accounts payable and accrued liabilities    | 4,113,610    | 3,369,083  
|Current portion of long term debt (Note 13) | 1,580,858    | -          
|Deferred revenue (Note 11)                  | 50,306       | 50,306     
|Other current liabilities (Note 12)         | 2,437,781    | 3,346,264  
|                                            | 8,182,555    | 6,765,653  
|                                            |              |            
|Long term debt(Note 13)                     | 6,911,321    | -          
|Asset retirement obligation(Note
    14)    | 1,100,000    | 360,000    
|Convertible debentures(Note 15)             | 28,537,087   | -          
|                                            | 44,730,963   | 7,125,653  
|Commitments
    (Note 22)                   |              |            
|                                            |              |            
|Shareholders equity                        |              |            
|Share capital(Note 16)                      | 47,489,830   | 46,950,953 
|Contributed surplus(Note 17)                | 10,236,663   | 1,774,873  
|Deficit(Note 19)                            | (17,484,901) | (7,290,627)
|                                            | 40,241,592   | 41,435,199 
|Total Liabilities and Shareholders Equity  | 84,972,555   | 48,560,852 

See accompanying notes to the audited consolidated financial statements.

Approved on behalf of the Board:

|"signed"         | Director | "signed"       | Director
|---------------- | -------- | -------------- | --------
|Larry W. Shelley |          | Kerry E. Sully |         



64

---



|                 | Birch Mountain Resources
    Ltd.          
|---------------- | -------------------------------------------
|                 | Consolidated Statements of Loss and Deficit
|Canadian Dollars |                                            

|                                       |              |             |             
|-------------------------------------- | ------------ | ----------- | ------------
|Year Ended December 31                 | 2006         | 2005        | 2004        
|                                       |              |             |             
|Revenue                                |              |             |             
|Sales
    (Note 20)                    | 895,455      | -           | -           
|Cost of sales                          | 989,412      | -           | -           
|Gross profit                           | (93,957)     | -           | -           
|Other limestone sale
    (Note 21)     | 645,109      | -           | -           
|                                       | 551,152      | -           | -           
|                                       |              |             |             
|Expenses
    (Note 24)                 |              |             |             
|Amortization, accretion and depletion  | 285,577      | 63,424      | 50,336      
|Consulting                             | 102,384      | 96,027      | 79,973      
|Interest and bank charges              | 442,447      | 4,746       | -           
|Mineral exploration costs
    (Note 9) | 858,964      | 540,481     | 762,371     
|Office                                 | 458,806      | 937,756     | 683,316     
|Professional fees                      | 1,474,021    | 746,377     | 396,552     
|Indirect quarry costs                  | 2,544,028    | -           | -           
|Salaries and benefits                  | 1,052,387    | 597,714     | 386,579     
|Shareholder services and promotion     | 1,179,043    | 742,439     | 329,993     
|Stock-based compensation
    (Note 22) | 2,845,797    | 1,245,422   | 246,127     
|                                       | 11,243,454   | 4,974,386   | 2,935,247   
|Loss before other income               | (10,692,302) | (4,974,386) | (2,935,247) 
|                                       |              |             |             
|Interest and other income              | 498,028      | 332,568     | 48,190      
|Net loss for year(Note 25)             | (10,194,274) | (4,641,818) | (2,887,057) 
|                                       |              |             |             
|                                       |              |             |             
|Deficit,
    beginning of year         | (7,290,627)  | (2,648,809) | (27,510,684)
|Elimination of deficit(Note 19)        | -            | -           | 27,748,932  
|Deficit, end of year                   | (17,484,901) | (7,290,627) | (2,648,809) 
|                                       |              |             |             
|                                       |              |             |             
|                                       |              |             |             
|Loss per
    share                     |              |             |             
|Basic and fully diluted(Note 18)       | (0.13)       | (0.07)      | (0.05)      

See accompanying notes to the audited consolidated financial statements.

65

---



|                 | Birch
    Mountain Resources Ltd.       
|---------------- | ----------------------------------------
|                 | Consolidated Statement of
    Cash Flows
|                 | For the years ended
    December 31     
|Canadian Dollars |                                         



|                                                                 | 2006         | 2005        | 2004       
|---------------------------------------------------------------- | ------------ | ----------- | -----------
|                                                                 |              |             |            
|OPERATING ACTIVITIES                                             |              |             |            
|Net loss                                                         | (10,194,274) | (4,641,818) | (2,887,057)
|Adjustments for non-cash items:                                  |              |             |            
|Accretion of unamortized debenture discount                      | 76,930       | -           | -          
|Amortization, accretion, and depletion                           | 285,577      | 63,424      | 50,336     
|Depletion recorded in cost of sales                              | 140,921      | -           | -          
|Stock-based compensation                                         | 2,942,536    | 1,442,536   | 282,049    
|Changes in non-cash working capital balances:                    |              |             |            
|Accounts receivable                                              | (1,726,243)  | (242,996)   | (181,237)  
|Inventory                                                        | (4,795,102)  | -           | -          
|Prepaids and deposits                                            | (7,554,420)  | (257,437)   | 125,006    
|Accounts payable and accrued liabilities                         | 744,527      | 593,815     | (1,348,125)
|Other current liabilities                                        | (908,483)    | 546,264     | 1,803,355  
|Cash used in operating activities                                | (20,988,031) | (2,496,212) | (2,155,673)
|FINANCING
    ACTIVITIES                                         |              |             |            
|Issue of common shares for cash, net of share
    issue costs    | 440,488      | 38,027,595  | 8,834,703  
|Proceeds from long-term debt                                     | 8,492,179    | -           | -          
|Issue of convertible debentures, net of
    financing costs      | 33,031,974   | -           | -          
|Advances on share subscriptions upon the
    exercise of options | -            | (173,252)   | 173,252    
|Cash provided by financing activities                            | 41,964,641   | 37,854,343  | 9,007,955  
|INVESTING
    ACTIVITIES                                         |              |             |            
|Mineral exploration costs                                        | (30,377,246) | (6,939,447) | (3,153,233)
|Restricted cash                                                  | (3,250,000)  | (1,000,000) | -          
|Long term prepaid                                                | 95,195       | (232,489)   | -          
|Acquisition of capital assets                                    | (18,421,679) | (308,922)   | (73,071)   
|Proceeds from disposal of
    capital assets                     | -            | 1,062       | -          
|Cash used in investing activities                                | (51,953,730) | (8,479,798) | (3,226,304)
|(Decrease)
    Increase in cash and cash equivalents             | (30,977,120) | 26,878,333  | 3,625,978  
|Cash and
    cash equivalents, beginning of year                 | 32,322,603   | 5,444,270   | 1,818,292  
|Cash and cash equivalents, end of year                           | 1,345,483    | 32,322,603  | 5,444,270  

See accompanying notes to the audited consolidated financial statements.

66

---

Birch Mountain Resources Ltd.Notes to the Consolidated Financial StatementsFor the years ended December
    31, 2006, 2005 and 2004

1. Nature of operations and going concern uncertainty

Birch Mountain Resources Ltd. (the
"Company"), incorporated under the jurisdiction of the Business Corporations Act
of Alberta, is exploring and developing its mineral leases and permits and
operating a limestone quarry on its mineral leases, in Northern Alberta. At
inception, the efforts of the Company were focused on exploration of precious
metals and research into precious metals technology. However, over the past four
and a half years its focus has been on the development of its industrial
minerals. The mineral rights of the Company are to develop, extract and sell
limestone products. The Company has two projects in its industrial minerals
division, the Muskeg Valley Quarry and the Hammerstone Project, both of which
are development of and commercialization of the limestone contained on the
Companys mineral leases. The Muskeg Valley Quarry is a limestone aggregate
quarry approved by the government regulators. The Hammerstone Project is a
planned quarry expansion and quicklime and cement plants. The Company must
comply with conditions of the regulatory approvals such as to monitor ground
water, report extraction and pay royalties thereon and the reclaim the site at
the end of production.

As at December 31, 2006, the
Company had incurred a net loss of $10.2 million for the year then ended and had
an accumulated deficit of $17.5 million. The Companys ability to continue as a
going concern is uncertain and dependent upon its ability to obtain additional
financing and/or achieve profitable operations. The Muskeg Valley Quarry is
operational and the Hammerstone Project is considered to be in the development
stage. The Company is currently exploring a range of strategic opportunities.
The outcome of this review cannot be predicted at this time. If the Company is
unable to obtain adequate additional financing, management may be required to
curtail the Companys operations.

On August 2, 2006, the Company
released an independent technical report, which indicates the existence of a
limestone quarry in the Fort McMurray area and reports an estimated value for
the mineral reserves significantly in excess of the current carrying value of
the mineral properties. The financial statements have been prepared on a going
concern basis, which presumes the realization of assets and settlement of
liabilities through the normal course of operations. The financial statements do
not include any adjustments relating to the recoverability and classification of
recorded assets or liabilities that maybe necessary should the Company be unable
to continue as a going concern. The ability of the Company to continue as a
going concern is dependant upon the existence of economically recoverable
reserves, securing and maintaining title and beneficial interest in the
properties, and the ability of the Company to obtain the necessary financing or
cash flow to continue the development and operation of its mineral properties.

2.

(a)   Basis of presentation

These consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles in Canada. The principal accounting policies followed by the Company,
which have been consistently applied in the preparation of these consolidated
financial statements, are summarized below. A summary of the difference between
accounting principles generally accepted in Canada and those generally accepted
in the United States is contained in note 27 to these consolidated financial
statements. All amounts are reported in Canadian dollars unless otherwise
stated.

(b)   Principles of
consolidation

The consolidated financial
statements are expressed in Canadian dollars and are prepared in accordance with
Canadian generally accepted accounting principles. These financial statements
include the accounts of the Company and its wholly owned subsidiaries, Dawson
Bay Minerals Inc., Muskeg Valley Minerals Ltd. and Rockyview Development Limited
and its subsidiaries, which have been inactive for some time. All intercompany
balances and transactions have been eliminated.

(c)   Use of estimates

The preparation of the consolidated
financial statements in conformity with Canadian generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amount of assets and liabilities and disclosure of contingent
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the period. Actual results
could differ from those reported. Significant areas requiring the use of
management estimates include estimates related to the determination of
impairment of mineral exploration costs, reclamation obligations and
determination of qualifying renouncements and the assumptions used in
calculating stock option compensation expense. These estimates are reviewed
periodically and, as adjustments become necessary, they are reported in earnings
in the periods in which they become known.

67

---



|Birch Mountain Resources Ltd.                           
|--------------------------------------------------------
|Notes to the Consolidated Financial Statements          
|For the years ended December
    31, 2006, 2005 and 2004

2.

(d)   Revenue recognition

The Company recognizes revenue on the sale of its
products when delivery occurs.

(e)   Cash and cash equivalents

Cash and cash equivalents include
balances with Canadian chartered banks and investment certificates with
maturities of three months or less at the date of purchase. Cash equivalents are
carried at cost, plus accrued interest, which approximates market value.

(f)   Inventory

Inventory is valued at the lower of average cost
and net realizable value. Average cost includes direct materials, direct labour,
operational overhead expenses and depletion.

(g)   Property, plant and
equipment

Property, plant and equipment are recorded at cost.
Assets are not amortized until they are put into use. Amortization is provided
over their estimated useful lives, using the following methods and rates:

| |                            | Method            | Annual Rate | 
| | -------------------------- | ----------------- | ----------- | 
| | Plant and
    equipment    | Declining balance | 20%         | 
| | Computer                   | Declining balance | 30% - 100%  | 
| | Leasehold
    improvements | Straight line     | 5 years     | 

(h)   Mineral properties

The Company expenses mineral
exploration costs in the year they are incurred, unless on a
property-by-property basis the deferral criteria are met and it is probable that
they will be recoverable from the future operations of the related project. When
it is determined that a mining property can be economically developed as a
result of established proven and probable reserves, the costs of further
exploration and development to further delineate the reserve on such a property
are capitalized. Determination as to the establishment of proven and probable
reserves is based on results of technical reports, which indicate whether a
property is economically feasible. These expenditures are depleted according to
the unit-of-production method. This method allocates the costs of these assets
to each accounting period. The amount of depletion is measured by the portion of
the mines economically recoverable proven reserves which are recovered during
the period.

The Company reviews its capitalized
costs on a mineral property under development on an annual basis, or more
frequently if events warrant, and will recognize an impairment in value on each
property to the extent that the recoverable amount based on estimated future
cash flows on a discounted basis is less than the carrying amount of the
property. Future cash flows are estimated based on future recoverable minerals
based on proven and probable reserves. Future cash flow estimates will also
incorporate expected sales prices for recoverable minerals, costs of production
and taxes, capital expenditures and development costs, remediation and closure
costs, utilizing assumptions from its feasibility studies and subsequent
engineering, geological or financial information where operations have not yet
commenced.

Managements estimates of mineral
prices, recoverable proven and probable reserves and operating and capital costs
are subject to certain risks and uncertainties, which may affect the
recoverability of mineral property costs. Although management has made its best
estimate of these factors, it is possible that changes could occur in the near
term, which could adversely affect the future net cash flows to be generated
from the properties or the financial position of the Company.

68

---



|Birch Mountain Resources Ltd.                           
|--------------------------------------------------------
|Notes to the Consolidated Financial Statements          
|For the years ended December
    31, 2006, 2005 and 2004

2.

(i)   Asset retirement
obligation

The Company recognizes a liability
for the fair value of environmental and site restoration obligations when the
obligations are incurred and the fair value can be reasonably estimated. The
fair value of the obligations is based on the estimated cash flow required to
settle the obligations discounted using the Companys credit adjusted risk-free
rate. The fair value of the obligation is recorded as a liability with the same
amount recorded as an increase in capitalized costs. The amounts included in
capitalized costs are depleted using the unit-of-production method. The
liability is adjusted for accretion expense representing the increase in the
fair value of the obligations and amortized over the mines useful life. The
accretion expense is recorded as an operating expense through periodic charges
to earnings. The Companys estimate of reclamation costs could change as a
result of changes in regulatory requirements and cost estimates.

(j)   Capital lease obligations

Leases meeting certain criteria are
accounted for as capital leases. The imputed interest is charged against income.
If the lease contains a term that allows ownership to pass to the Company or
there is a bargain purchase option the capitalized value is depreciated over the
estimated useful life of the related asset. Obligations under capital leases are
reduced by rental payments net of imputed interest.

(k)   Future income taxes

The Company follows the liability
method of accounting for income taxes. Under this method, future income tax
assets and liabilities are recorded based on temporary differences between the
carrying amount of balance sheet items and their corresponding tax bases. In
addition, the future benefits of income tax assets, including unused tax losses,
are recognized, subject to a valuation allowance, to the extent that it is more
likely than not that such future benefits will ultimately be realized. Future
income tax assets and liabilities are measured using substantively enacted tax
rates and laws expected to apply when the tax liabilities or assets are to be
either settled or realized.

(l)   Stock-based compensation
and contributed surplus

The Company uses the fair value
method of accounting for all stock options granted whereby stock-based
compensation on options granted is charged as an expense or capitalized
depending on the nature of the grant, in the period the options are vested,
based on the estimated fair value at the date of grant using the Black-Scholes
Option Pricing Model. Consideration paid by the option holders to the Company
upon exercise of options is credited to common share capital.

(m)   Loss per share amounts

Loss per share amounts are computed
using the weighted-average number of common shares outstanding during the
period. Diluted loss per share is calculated based on the treasury stock method,
which assumes that any proceeds obtained on the exercise of options and warrants
would be used to purchase common shares at the average trading price for the
period.

(n)   Foreign currency
translation

Foreign currency denominated assets
and liabilities are translated at the exchange rate prevailing at the balance
sheet date for monetary items. Non-monetary assets and liabilities are
translated at the rates prevailing at the transaction date. Revenues and
expenses are converted at average exchange rates for the period. Any exchange
gain or loss that arises on translation is included in the consolidated
statement of loss for the period.

69

---



|Birch Mountain Resources Ltd.                           
|--------------------------------------------------------
|Notes to the Consolidated Financial Statements          
|For the years ended December
    31, 2006, 2005 and 2004

3. Cash and cash equivalents

At December 31, 2006, cash equivalents included
$683,962 (2005 - $31,911,272) invested in guaranteed investment certificates
earning interest at rates of 2.9% (2005 - 2.15% to 2.55%).

4. Inventory

During the year ended December 31,
2006, the Company began production of limestone, which is crushed for use in
various marketable products. The inventory consists of crushed limestone
stockpiles (considered to be finished product), unprocessed limestone stockpiles
and blasted but unexcavated material. Inventory includes direct production costs
such as fuel, labour, contractors, production overhead and direct rock
excavation work. Inventory is recorded at the lower of cost or net realizable
value. The cost of finished products and in-process inventories is determined on
an average cost basis. At December 31, 2006, the Company has recorded inventory
for work in progress of $3,063,613 (2005  nil) and for finished product of
$2,639,584 (2005  nil).

5. Prepaids and deposits

Prepaids and deposits consist of
$5.6 million of costs management expects to recover within the next twelve
months. Due to the short-term nature of this asset, it has been classified as a
current asset. The Company also has a $2 million refundable deposit on the
Cedarapids crushing equipment (Note 13) which was refunded subsequent to
December 31, 2006.

6. Restricted cash

The Company pledged as collateral
$3,250,000 against a demand operating line and a revolving lease line of credit,
through assignment of one-year term deposits to the Royal Bank of Canada. The
Company has drawn on the operating line for a stand-by letter of credit, which
is explained in Note 10 and has drawn on the revolving lease line, which is
explained in Note 13.

The Company pledged as collateral $1,000,000
against future debt repayments of a crushing spread, through assignment of a
guaranteed investment certificate to the Canadian Western Bank.

7. Long-term prepaid

The Company made a payment for the
estimated timber damage charges for the clearing of the currently approved
limestone quarry. The trees will be cleared as the limestone is accessed over a
number of years of planned production. This long-term prepaid will be reduced as
the clearing occurs on a basis of hectares cleared over the total amount of
hectares for which the timber damage payment was based, being the total approved
area.

8. Property, plant and equipment

| |                            |            | 2006         |            |         | 2006         |         
| | -------------------------- | ---------- | ------------ | ---------- | ------- | ------------ | --------
| |                            |            | Accumulated  | Net Book   |         | Accumulated  | Net Book
| |                            | Cost       | Amortization | Value      | Cost    | Amortization | Value   
| | Computers and software     | 430,514    | 294,960      | 135,554    | 333,238 | 251,222      | 82,016  
| | Leasehold
    improvements | 42,076     | 39,025       | 3,051      | 38,382  | 31,198       | 7,184   
| | Limestone
    processing   |            |              |            |         |              |         
| | plant                      | 8,812,323  | -            | 8,812,323  | 106,326 | -            | 106,326 
| | Mining
    equipment       | 9,433,692  | 6,193        | 9,427,499  | 112,638 | -            | 112,638 
| | Office equipment           | 640,450    | 289,195      | 351,255    | 346,791 | 229,843      | 116,948 
| |                            | 19,359,055 | 629,372      | 18,729,682 | 937,375 | 512,263      | 425,112 

Included in mining equipment are
assets under capital lease with an original cost of $1,235,000 and related
accumulated amortization of $nil (2005  nil).

70

---



|Birch Mountain Resources Ltd.                           
|--------------------------------------------------------
|Notes to the Consolidated Financial Statements          
|For the years ended December
    31, 2006, 2005 and 2004

9. Mineral properties

The Company holds a significant number of permits,
applications to convert permits to leases and leases on mineral rights in the
Athabasca region of Northern Alberta.

At December 31, 2006, the Companys mineral
property in the Athabasca region consisted of 17 (2005  32) permits, 50 (2005
22) lease applications and 68 (2005  69) leases for a total area of 380,136
(2005  402,748) hectares.

The Company has capitalized expenditures related to
its industrial mineral projects and expensed amounts related to its mineral
exploration and technology division. Amounts capitalized and expensed related to
mineral properties are as follows:

| | Mineral
    properties capitalized    |             |                    |            |                    |           
| | ------------------------------------- | ----------- | ------------------ | ---------- | ------------------ | ----------
| |                                       | At Dec 31,  | For the year ended | At Dec 31, | For the year ended | At Dec 31,
| |                                       | 2006        | Dec 31, 2006       | 2005       | Dec 31, 2005       | 2004      
| | Asset
    retirement obligation       | 1,040,656   | 680,656            | 360,000    | 335,000            | 25,000    
| | Administration                        | 1,946,473   | 1,151,868          | 794,606    | 715,223            | 79,383    
| | Assay and
    geological              | 114,835     | 9,091              | 105,744    | 28,004             | 77,740    
| | Equipment                             | 1,109,140   | 1,109,140          | -          | -                  | -         
| | Land lease
    and permit             | 328,580     | 268,772            | 59,808     | 9,278              | 50,530    
| | Materials,
    services and drilling  | 12,792,987  | 7,798,478          | 4,994,509  | 2,473,842          | 2,520,667 
| | Site
    preparation                  | 24,269,407  | 18,267,580         | 6,001,827  | 5,941,257          | 60,570    
| | Stripping
    costs during operations | 1,750,000   | 1,750,000          | -          | -                  | -         
| | Salaries                              | 1,896,069   | 833,059            | 1,063,010  | 478,755            | 584,255   
| | Travel and accommodations             | 543,126     | 259,982            | 283,144    | 191,920            | 91,224    
| |                                       | 45,791,275  | 32,128,627         | 13,662,648 | 10,173,279         | 3,489,369 
| |                                       |             |                    |            |                    |           
| | Depletion                             | (1,183,038) | (1,183,038)        | -          | -                  | -         
| |                                       |             |                    |            |                    |           
| |                                       | 44,608,237  | 30,945,589         | 13,662,648 | 10,173,279         | 3,489,369 
| |                                       |             |                    |            |                    |           
| |                                       |             |                    |            |                    |           
| | Mineral exploration costs             |             |                    |            |                    |           
| |                                       | 2006        | 2005               | 2004       |                    |           
| | Administration                        | 35,476      | 36,209             | 34,276     |                    |           
| | Assay and
    geological              | 3,929       | 84                 | 654        |                    |           
| | Land lease
    and permit             | 666,655     | 390,088            | 611,857    |                    |           
| | Materials,
    services and drilling  | 75,134      | 18,130             | 45,737     |                    |           
| | Salaries                              | 36,297      | 89,715             | 66,708     |                    |           
| | Travel and accommodations             | 41,473      | 6,255              | 3,139      |                    |           
| |                                       | 858,964     | 540,481            | 762,371    |                    |           

Since inception, the Company has
spent a total of $50,721,637 (2005 - $17,734,046) on mineral exploration and
development of which, $45,791,275 (2005 - $13,662,648) has been capitalized.

71

---



|Birch Mountain Resources Ltd.                           
|--------------------------------------------------------
|Notes to the Consolidated Financial Statements          
|For the years ended December
    31, 2006, 2005 and 2004

10.   Operating line of credit

The Company has a revolving credit
facility with a Canadian chartered bank that provides two types of credit. The
first is a revolving demand loan, by way of either, banks prime based loans,
letters of credit or letters of guarantee in the amount of $2,000,000. The
second provides for a revolving lease line of credit by way of approved lease
agreements to acquire capital assets in the amount of $1,455,663. The Company
provided a general security agreement over all assets as collateral for this
credit facility. A $2,000,000 (2005  $670,000) letter of credit was drawn
against the revolving demand facility as guarantee to the Alberta Government for
future site reclamation obligations as outlined in Note 14 and $1,154,806 (2005
 nil) was drawn against the lease line as outlined in Note 13.

11.   Deferred revenue

In September 2003, the Company
signed an agreement to sell limestone to Syncrude Canada Ltd. within Syncrudes
Aurora mine, which would be extracted by Syncrude and reported monthly. The
Company received a non-refundable $100,000 payment and a payment of $50,306 to
be applied against future extraction. During the current year, no limestone was
extracted (2005  nil; 2004 - nil)

12.   Other current liabilities

The Company raised capital through
the issuance of flow through shares in 2003 and 2004, which provided for an
indemnity to the subscriber for additional taxes payable if Birch was unable to
or failed to renounce the qualifying expenditures as agreed, without limiting
the recourse of the subscriber. The Company applied for and filed the necessary
forms to qualify for and renounce expenditures in 2002, 2003 and 2004 and has
subsequently determined some of these expenditures do not qualify for flow
through tax treatment. The Company is exposed to costs for the indemnification
of the subscribers and any assessed corporate taxes. The Company has estimated
and accrued a potential liability in the amount of $2,437,781 (2005 -
$3,346,264). Subsequent to December 31, 2005, the Company amended its tax
filings and the related reported tax balances have been revised to reflect this
change. Based on information available at the time of these amended filings, in
2005 the Company increased its original estimate of the potential liability by
$300,000. This change has been accounted for as a change in estimate due to
better information becoming available. The offsetting entry is recorded to share
capital as the amount is attributable to flow through share capital issued in
prior years. The accrued amount is subject to measurement uncertainty due to the
tax filing positions of the subscribers, their tax rates and the amount of
corporate taxes, penalties or interest that may be payable, which will not be
known until any potentially affected subscribers as reassessed for their tax
positions by the Canada Revenue Agency and these amounts become known to the
Company. To date, the Company has refunded $32,732 (2005  nil) to affected
subscribers who were reassessed by the Canada Revenue Agency. The Company
believes the accrued estimate could vary higher or lower by up to fifteen
percent.

13.   Long term debt

| |                       | 2006      | 2005
| | --------------------- | --------- | ----
| | Equipment loan (a)    | 7,337,373 | -   
| | Capital lease (b)     | 1,154,806 | -   
| | Total long term debt  | 8,492,179 | -   
| | Less: current portion | 1,580,858 | -   
| | Long term portion     | 6,911,321 | -   

(a) In 2006, the
Company entered into a financing agreement with a Canadian lending institution
to finance a spread of crushing equipment costing $6,922,050 plus GST. The
original loan amount was $7,337,373 with an interest rate of 6.02%. The loan is
to be paid off over five years based on blended principal and interest payments
of $114,932 per month commencing on January 22, 2007. The loan is non-revolving
and is collateralized by the equipment and a $1,000,000 guaranteed investment
certificate on deposit at the institution. Interest expense relating to the
equipment loan for the year was $11,255.

72

---



|Birch Mountain Resources Ltd.                           
|--------------------------------------------------------
|Notes to the Consolidated Financial Statements          
|For the years ended December
    31, 2006, 2005 and 2004

Principal payment requirements on
the equipment loan over the next five years are as follows:

| | 2007                 | 1,396,166
| | -------------------- | ---------
| | 2008                 | 1,049,243
| | 2009                 | 1,115,176
| | 2010                 | 1,184,193
| | 2011 and thereafter  | 2,592,595
| |                      | 7,337,373
| | Less current portion | 1,396,166
| | Long term portion    | 5,941,207

(b) As part of the Companys
operating line of credit, outlined in Note 9, the Company financed a piece of
quarry equipment costing $1,235,000 at an annualized interest rate of 6.6% with
a five year repayment term. The equipment has a residual value of $200,000,
which is the purchase option at the end of the lease. The Company is treating
the arrangement as a capital lease. The principal and interest payments are
$21,282 per month commencing on August 3, 2006. Interest expense relating to the
capital lease for the year was $26,218.

Future minimum annual lease payments under the
capital lease obligation over the next five years are as follows:

| | 2007                                            | 255,389  
| | ----------------------------------------------- | ---------
| | 2008                                            | 255,389  
| | 2009                                            | 255,389  
| | 2010                                            | 255,389  
| | 2011 and thereafter                             | 348,977  
| | Total minimum lease
    payments                | 1,370,533
| | Less amounts representing
    interest at 6.60% | (215,727)
| |                                                 | 1,154,806
| | Less current portion                            | 184,692  
| | Long term portion                               | 970,114  

14.    Asset retirement obligation

The Company has
estimated the total discounted future cost of reclaiming the site of its
limestone quarry to be $1,100,000 (2005 -$360,000). The total future
undiscounted costs are estimated at $2,849,650 (2005 - $1,100,000). This amount
is based on estimates provided by consulting engineers to the Company for costs
that would be incurred by third parties to return the quarry to its reclaimed
status as defined under the Companys environmental and operating permits. Costs
are allocated to two categories and the future site reclamation timing is
determined by management for each category. Site infrastructure will service the
quarry for its estimated fifty five year life and the initial production quarry
area is estimated not to be reclaimed for ten years. The discounted future cost
estimates have been determined by management using a 3% inflation rate and a
7.5% credit adjusted risk free rate. The amounts are subject to measurement
uncertainty with respect to costs in the local market for third parties to
perform this work, the actual timing of reclamation, the inflation rate used and
the discount rate used. A $2,000,000 (2005 - $670,000) irrevocable standby
letter of credit was drawn on the Companys operating line of credit as a
guarantee to Alberta Environment for the estimated future reclamation.

| |                                | 2006      | 2005   
| | ------------------------------ | --------- | -------
| | Balance
    beginning of year  | 360,000   | -      
| | Change in
    estimate         | (34,415)  |        
| | Additional
    provision       | 715,071   | 360,000
| | Accretion expense (Note
    2) | 59,344    | -      
| | Balance end of year            | 1,100,000 | 360,000

73

---



|Birch Mountain Resources Ltd.                           
|--------------------------------------------------------
|Notes to the Consolidated Financial Statements          
|For the years ended December
    31, 2006, 2005 and 2004

15.    Convertible debentures

| | Convertible
    debentures | 34,500,000 
| | -------------------------- | -----------
| | Debt issuance costs        | (1,264,842)
| | Unamortized
    discount   | (4,698,071)
| | Carrying value             | 28,537,087 

The Company issued convertible
unsecured subordinated debentures having a face value of $34.5 million during
the year. The debentures were issued pursuant to a public offering and mature on
December 31, 2011. The debentures are convertible into common shares of the
Company at any time prior to maturity at the option of the debenture holder at a
conversion price of $3.30 per share. In the year ended December 31, 2006 no
debentures were converted into shares.

The debentures are unsecured and bear interest at
6% and interest is payable semi-annually commencing on June 30, 2007. Interest
expense relating to the debentures for the year was $141,781 (2005  nil) and
has been included in accrued liabilities.

The Company has classified the
debentures in the financial statements according to the separate debt and equity
component parts using the effective interest rate method resulting in (i)
$4,775,000 being allocated to contributed surplus representing the relative fair
value of the conversion feature as determined by the effective interest method,
and (ii) $29,725,000 being allocated to the carrying value of the convertible
debentures.

In connection with the debenture
issue, the Company paid professional fees in the sum of $1,468,025. These fees
have been allocated to debt and equity on the same pro-rata basis used to
allocate the original proceeds. The debentures are shown net of the issue costs
of $1,264,842 and the resulting carrying value of the convertible debentures of
$28,460,158 will be accreted to the $34,500,000 principal amount over the term
to maturity using the effective interest method with the corresponding interest
expense being included in the consolidated statements of loss. The accretion of
the discount on the convertible debentures for the year amounted to $76,930 and
is included in interest and bank charges.

16.   Share capital

(a)    Authorized capital

Unlimited number of common voting shares, no par
value 
Unlimited number of preferred shares, issuable in series 
Unlimited number of non-voting shares

(b)    Issued - Common shares

| |                                                                    | Number     | Amount     
| | ------------------------------------------------------------------ | ---------- | -----------
| | Balance
    December 31, 2004                                      | 66,306,799 | 8,761,876  
| | Issued for cash                                                    |            |            
| | Public offering (i)                                                | 9,000,000  | 36,000,000 
| | Issued on exercise of options                                      | 2,229,500  | 1,430,848  
| | Issued on exercise of warrants                                     | 2,885,188  | 2,900,600  
| | Reclassified from contributed surplus upon
    exercise of options | -          | 461,482    
| | Share issuance costs (i)                                           | -          | (2,303,853)
| | Reduction in
    share capital for flow through shares (Note 12)   |            | (300,000)  
| | Balance
    December 31, 2005                                      | 80,421,487 | 46,950,953 
| | Issued for cash                                                    |            |            
| | Issued on exercise of options                                      | 857,000    | 440,487    
| | Reclassified
    from contributed surplus upon exercise of options | -          | 98,390     
| | Balance December 31, 2006                                          | 81,278,487 | 47,489,830 

(i)    On
September 2, 2005, the Company closed a public equity offering of 9,000,000
shares at $4.00 per share for gross proceeds of $36,000,000. Share issue costs
of $2,303,853 were incurred in connection with this offering. These fees are
reflected as a reduction in the proceeds from the share issuance.

(c)    Options

74

---



|Birch Mountain Resources Ltd.                           
|--------------------------------------------------------
|Notes to the Consolidated Financial Statements          
|For the years ended December
    31, 2006, 2005 and 2004

The Company has a stock option plan
that was established in 1994 and has been subsequently amended by the
shareholders, including most recently in 2006. The purpose of the plan is to
offer persons who provide services to the Company, whether directors, officers,
consultants or employees, an opportunity to obtain an interest in the Company
through the purchase of common shares and to aid in attracting, retaining and
encouraging the continued involvement of such persons. The plan contains
provisions stating that the option period may not exceed five years and the
aggregate number of shares issuable upon the exercise of all options granted
under the Plan shall not exceed 10% of the issued and outstanding common shares
of the Corporation from time to time. The options currently vest over a period
of eighteen moths. The plan is administered by the Compensation Committee of the
Board of Directors who determines to whom options shall be granted including the
terms and vesting of the grants. When options are granted, the Compensation
Committee sets the strike price equal to the closing price on the Toronto Stock
Exchange for the previous day.

The Company has outstanding options on common
shares as follows:

| |                       | Number of | Exercise    | Weighted Average   | Expiry    
| | --------------------- | --------- | ----------- | ------------------ | ----------
| |                       | Options   | Price Range | Exercise Price ($) | Date      
| |                       |           | ($)         |                    |           
| | December 31,
    2004 | 7,316,070 | 0.26  0.74 | 0.37               | 2005-2009 
| | Granted               | 2,465,000 | 2.09  7.81 | 2.60               | 2009      
| | Cancelled             | 350,000   | 2.35  2.48 | 2.41               | 2009      
| | Exercised             | 2,229,500 | 0.26  2.48 | 0.78               | 2007-2010 
| | December 31, 2005     | 7,201,570 | 0.26  7.81 | 0.84               | 2006 -2010
| | Granted               | 907,500   | 4.40  8.78 | 7.92               | 2011      
| | Exercised             | 857,000   | 0.26  2.48 | 0.51               | 2006-2010 
| | December 31, 2006     | 7,252,070 | 0.26  8.78 | 2.00               | 2007 -2011

Stock options outstanding and
exercisable as at December 31, 2006 are as follows:

| | Exercise  | Number of           | Number of           | Expiry       
| | --------- | ------------------- | ------------------- | -------------
| | Price ($) | Options Outstanding | Options Exercisable | Date         
| | 0.26      | 490,000             | 490,000             | March 2007   
| | 0.34      | 875,000             | 875,000             | April 2007   
| | 0.30      | 1,420,000           | 1,420,000           | October 2008 
| | 0.53      | 125,000             | 125,000             | May 2009     
| | 0.55      | 1,633,250           | 1,633,250           | August 2009  
| | 0.74      | 7,500               | 7,500               | November 2009
| | 2.35      | 217,500             | 217,500             | January 2010 
| | 2.48      | 1,088,820           | 1,088,820           | March 2010   
| | 2.09      | 262,500             | 262,500             | April 2010   
| | 7.81      | 225,000             | 168,750             | November 2010
| | 8.78      | 592,500             | 296,250             | January 2011 
| | 8.60      | 30,000              | 15,000              | April 2011   
| | 8.00      | 125,000             | 62,500              | May 2011     
| | 4.40      | 160,000             | 40,000              | August 2011  
| | 2.00      | 7,252,070           | 6,702,070           | 2007 - 2011  

75

---

Birch Mountain Resources Ltd.Notes to the Consolidated Financial StatementsFor the years ended December
    31, 2006, 2005 and 200417.    Contributed surplus
Balance, December 31, 2004
    338,569Options granted to
    employees, directors and officers
    1,700,671Options granted to advisors
    197,114Options exercised and
    reclassed to share capital
    (461,482)Balance December 31, 2005
    1,774,873Options granted to
    employees, directors and officers
    4,018,711Options granted to advisors
    96,739Options exercised and
    reclassed to share capital
    (98,390)Cancellation of options
    granted to advisors
    (127,087)Convertible debenture
    proceeds allocated to contributed 
    surplus, net of debt issuance costs
    (Note 15)
    4,571,817Balance December 31, 2006
    10,236,66318.   Loss per share amountsBasic loss per share is calculated
using the weighted-average number of shares outstanding for the year. For
purposes of the calculations, the weighted-average number of shares outstanding
was 81,002,073 (2005  71,644,531; 2004  56,596,951). All of the outstanding
options have been excluded from the calculation of diluted loss per share for
all periods presented as the effect common shares issuable upon exercise of
share options is anti-dilutive. All of the Companys outstanding options are
available for dilution in future periods.
The Company issued convertible
unsecured subordinated debentures having a face value of $34.5 million during
the year. The debentures are convertible into common shares of the Company at
any time prior to maturity at the option of the debenture holder at a conversion
price of $3.30 per share resulting in a potential for an additional 10,454,545
shares being issued. All of the outstanding debentures have been excluded from
the calculation of diluted loss per share for all periods as the effect common
shares issuable upon conversion is anti-dilutive.19.   DeficitPursuant to Section 38 of the
Business Corporations Act of Alberta, the shareholders approved a reduction in
the stated capital by the amount of the accumulated deficit as of June 30, 2004.
As a result, the deficit and share capital were reduced by $27,748,932.20.   Concentration of credit riskAssets that potentially subject the
Company to concentration of credit risk are sales and accounts receivable. The
Company provides credit to most of its customers in the ordinary course of
business, and generally collateral or other security is not required. The
Company conducts ongoing credit evaluations of its customers and maintains
allowances for potential credit losses. During 2006, the Company had two major
customers that accounted for 87% of our revenues and accounts receivable. The
loss of any one of our large customers could have a material adverse effect on
our financial position, results of operations and cash flows, however, these
particular customers are large, well-known and respected entities in their
industry and management does not consider the risk unmanageable.
76
Birch Mountain Resources Ltd.Notes to the Consolidated Financial StatementsFor the years ended December
    31, 2006, 2005 and 200421.    Other limestone saleThe Company earned income from the
sale of limestone on leases outside of the active quarry, hence the Companys
only direct cost of sale for this income is government royalties, which are
netted against the gross sales.22.    Stock-based compensation and stock-based expenses

| |                                                                                                                                                              | 2006        | 2005      | 2004   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------- | --------- | -------
| | Stock-based compensation
    for stock issued and vested in the current period (i)                                                                           | 2,165,572   | 798,569   | 112,765
| | Stock-based compensation
    for stock issued in prior periods and vested in the current period                                                              | 1,726,051   | 902,102   | 133,362
| | Less stock-based
    compensation capitalized in mineral properties                                                                                          | (1,045,826) | (455,248) | -      
| | Net stock-based
    compensation expense                                                                                                                     | 2,845,797   | 1,245,422 | 246,127
| | Stock-based expenses for
    options issued to advisors included in professional fees in the period (ii)                                                     | 96,739      | 197,114   | 35,922 
| | Total stock-based expenses                                                                                                                                   | 2,942,536   | 1,442,536 | 282,049
| | (i)     During 2005,
    350,000 stock options at a weighted average price of $2.41 were forfeited by
    a director.                                       
| | (ii)    Expenses included
    in professional fees in the period were valued based on the value of the
    services provided at the time of the transaction.

The Company uses the Black-Scholes
option-pricing model to estimate the fair-value for stock-based compensation for
employees, directors, officers and advisors. The vesting period of the options
is eighteen months and their fair value was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:

| |                                                         | 2006       | 2005           | 
| | ------------------------------------------------------- | ---------- | -------------- | 
| | Weighted
    average fair value                         | $3.55      | $1.46 to $1.94 | 
| | Total fair value of
    options granted during the year | $3,220,421 | $3,728,556     | 
| | Expected
    life                                       | 2 years    | 2 years        | 
| | Risk-free
    interest rate                             | 4.00%      | 4.3 to 4.8%    | 
| | Expected
    volatility                                 | 74%-81%    | 85% - 100%     | 
| | Annual
    dividends                                    | nil        | nil            | 

Prior to January 1, 2003, the
Company was not required to recognize compensation expense for options granted
to employees, directors, officers and advisors. Had the fair-value method been
used from January 1, 2001 to January 1, 2003, the Companys net loss and net
loss per share, adjusted for the amortization of stock options issued in prior
periods into stock based expenses, would have been as follows:

| |                       | 2006         | 2005        | 2004       
| | --------------------- | ------------ | ----------- | -----------
| | Pro-forma loss        | (10,248,274) | (4,714,830) | (2,960,069)
| | Loss per share, basic | (0.13)       | (0.07)      | (0.05)     

77

---



|Birch Mountain Resources Ltd.                           
|--------------------------------------------------------
|Notes to the Consolidated Financial Statements          
|For the years ended December
    31, 2006, 2005 and 2004

23.   Commitments

The Company has land lease agreements
on exploration properties and rents premises and equipment under operating
leases. Commitments under these agreements require the following payments over
the next five years:

| |      | Land      | Other     | Total     | 
| | ---- | --------- | --------- | --------- | 
| | 2007 | 431,901   | 493,338   | 925,239   | 
| | 2008 | 431,901   | 505,513   | 937,414   | 
| | 2009 | 431,901   | 441,504   | 873,405   | 
| | 2010 | 431,901   | 421,489   | 853,390   | 
| | 2011 | 431,901   | 421,489   | 853,390   | 
| |      | 2,159,505 | 2,283,333 | 4,442,838 | 

Not included in the above amounts
is a contingent royalty commitment on one land lease to pay $0.15 per tonne of
limestone used, should limestone be produced from minerals on that specific
lease and a $0.10 per tonne marketing fee to be paid on all limestone sold from
the Muskeg Valley Quarry.

24.   Related-party transactions

The Company incurs transactions with related
parties, in the normal course of business. The transactions are measured at the
exchange amount, which is the consideration established and agreed to by the
related party and were as follows:

- Included in shareholder
  services and promotion is $5,700 (2005 - $7,874; 2004 - $14,656) paid to a
  company controlled by the spouse of a director.
- Included in professional
  fees is $282,820 (2005 - $85,734; 2004  $37,159) of consulting and legal fees
  paid to companies owned by officers.
- Included in professional
  fees is $264,354 (2005 - $240,859; 2004  $99,145) of legal fees paid to a law
  firm in which an officer was a partner.
- Included in salaries and
  benefits are amounts paid to a related party employee of $53,649 (2005 
  $2,498).
- Included in accounts payable
  is $3,151 (2005 - $18,789; 2004 - $7,945) relating to these transactions.

25.    Income taxes

The income tax recovery differs from the amount
that is expected by applying the current tax rates for the following reasons:

| |                                                                       | 2006        | 2005      | 2004     
| | --------------------------------------------------------------------- | ----------- | --------- | ---------
| | Loss before taxes                                                     | 10,194,274  | 4,641,818 | 2,887,057
| | Expected tax recovery at
    (200632.50%; 2005 33.62%; 200436.70%) | 3,313,139   | 1,560,579 | 1,059,550
| | Non-deductible expenses for tax                                       | (1,247,690) | (593,026) | (120,779)
| | Other                                                                 | 366,572     | 179,941   | (9,665)  
| | Change in
    enacted tax rates                                       | (1,363,242) | (602,277) | -        
| | Valuation allowance                                                   | (1,068,269) | (545,217) | (929,106)
| | Future income tax recovery                                            | -           | -         | -        

The realization of income tax benefits related to
these future potential tax deductions is uncertain and cannot be viewed as more
likely than not. Accordingly, no future income tax asset has been recognized for
accounting purposes.

78

---



|Birch Mountain Resources Ltd.                           
|--------------------------------------------------------
|Notes to the Consolidated Financial Statements          
|For the years ended December
    31, 2006, 2005 and 2004

Future income tax assets
consist of the following temporary differences:

| |                                                                                                                                                                                  | 2006        | 2005        | 2004       
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ----------- | -----------
| | Industrial mineral mines (i)                                                                                                                                                     | 4,862,490   | 4,974,118   | 6,590,913  
| | Property and equipment (i)                                                                                                                                                       | (131,768)   | -           | 69,911     
| | Scientific Research and
    Experimental Development expenditures unclaimed (ii)                                                                                                 | 61,400      | 85,141      | 77,702     
| | Non-capital loss carry
    forwards (iii)                                                                                                                                        | 3,843,248   | 2,815,375   | 654,525    
| | Share issuance costs and
    other                                                                                                                                               | 825,865     | 754,824     | 154,518    
| | Asset retirement
    obligation                                                                                                                                                  | 357,390     | 121,032     | -          
| | Valuation allowance                                                                                                                                                              | (9,818,625) | (8,750,490) | (7,547,569)
| | Future tax assets (net of
    valuation allowance)                                                                                                                               | -           | -           | -          
| | (i)     The Company has
    undepreciated capital cost allowance of $79,650,754 (2005 - $28,880,000;
    2004 - $21,480,000), which may be carried forward indefinitely.        
| | (ii)    The Company has
    Scientific Research and Experimental Development costs of $211,000 (2005 -
    $211,000), which may be carried forward indefinitely.                
| | (iii)    Non-capital loss
    carry forwards of approximately $13,252,000 (2005 - $8,400,000) are
    available to offset future income. If unused, they will expire as follows:

2007
      $ 185,0002008
      719,0002009
      20,0002010
      190,0002011
      -2012
      -2013
      -2014
      1,680,0002015
      3,336,0002016
      7,122,000




79

---



|Birch Mountain Resources Ltd.                           
|--------------------------------------------------------
|Notes to the Consolidated Financial Statements          
|For the years ended December
    31, 2006, 2005 and 2004

26.   Segmented information

The Companys principal business
segment, Industrial Minerals, is the acquisition, exploration, development and
operation of its mineral leases and permits. The Company also engages in ongoing
exploration and research of mineral technology. In identifying these segments
the Company considers the organizational structural and areas of budget
responsibility as well as the general corporate philosophy. The Industrial
Minerals division generates its revenue from the sale of limestone products such
as aggregates and reagent products. The Mineral Exploration and Technology
division could generate income from the sale of technology patents or
significant valuable mineral or metals discoveries. The accounting for revenue,
expense and assets attributed to each segment is based on each transaction,
which is coded to separate general ledger department codes for each segment. The
Companys activities are focused in Western Canada and the Companys assets are
located in Alberta.

| |                           | Industrial  | Mineral         |              |             
| | ------------------------- | ----------- | --------------- | ------------ | ------------
| |                           |             | Exploration and | Corporate    | Total       
| |                           | Minerals    | Technology      |              |             
| | 2006                      |             |                 |              |             
| | Sales revenue             | 895,455     | -               | -            | 895,455     
| | Cost of sales             | (989,412)   | -               | -            | (989,412)   
| | Other limestone sale      | 645,109     | -               | -            | 645,109     
| | Interest and other income | -           | -               | 498,028      | 498,028     
| | Expenses                  | 2,544,028   | 858,964         | 7,840,462    | 11,243,454  
| | Loss                      | (1,992,876) | (858,964)       | (7,342,434)  | (10,194,274)
| | Assets                    | 79,023,053  | 26,264          | 5,923,238    | 84,972,555  
| | 2005                      |             |                 |              |             
| | Sales revenue             | -           | -               | -            | -           
| | Cost of sales             | -           | -               | -            | -           
| | Interest income           | -           | -               | 332,568      | 332,568     
| | Expenses                  | -           | 540,481         | 4,433,905    | 4,974,386   
| | Loss                      | -           | (540,481)       | (4,101,337)  | (4,641,818) 
| | Assets                    | 14,424,221  | 33,798          | 34,102,833   | 48,560,852  
| | 2004                      |             |                 |              |             
| | Sales revenue             | -           | -               | -            | -           
| | Cost of sales             | -           | -               | -            | -           
| | Interest income           | -           | -               | 48,190       | 48,190      
| | Expenses                  | -           | 762,371         | 2,172,876    | 2,935,247   
| | Loss                      | -           | (762,371)       | (2,124,686 ) | (2,887,057) 
| | Assets                    | 3,585,938   | 59,393          | 5,887,092    | 9,532,423   

Financial instruments

Fair values

The carrying amount of cash and
cash equivalents, restricted cash, accounts receivable, deposits, accounts
payable and accrued liabilities, long-term debt, other current liabilities and
convertible debentures approximates their fair value because of the short-term
maturities of these items.

Foreign currency risk

The Company maintains cash balances
and occasionally enters into transactions to purchase goods and services
denominated in United States currency for which the related expenses and
accounts payable balances are subject to exchange rate fluctuations. The
transactions and balances have been stated in Canadian dollars in accordance
with the Companys foreign currency translation policy.

80

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|Birch Mountain Resources Ltd.                           
|--------------------------------------------------------
|Notes to the Consolidated Financial Statements          
|For the years ended December
    31, 2006, 2005 and 2004

27.   Material differences between Canadian and United States generally
accepted accounting principles

The consolidated financial
statements of the Company have been prepared in accordance with generally
accepted accounting principals in Canada ("Canadian GAAP"), which in most
respects conform to accounting principles generally accepted in the United
States ("U.S. GAAP").

If these consolidated financial statements were
prepared in accordance with U.S. GAAP, the impact would be as follows:

| |                                                                           |            | 2006         | 2005         | 
| | ------------------------------------------------------------------------- | ---------- | ------------ | ------------ | 
| | Mineral properties 
    Canadian GAAP                                    |            | 44,608,237   | 13,662,648   | 
| | Exploration expenditures
    capitalized (a)                              |            | (26,067,542) | (13,662,648) | 
| | Depletion (a)                                                             |            | 670,969      | -            | 
| | Stripping costs
    capitalized during operations (b)                     |            | (1,750,000)  | -            | 
| | Mineral properties - U.S.
    GAAP                                        |            | 17,461,664   | -            | 
| |                                                                           |            |              |              | 
| |                                                                           |            | 2006         | 2005         | 
| | Inventory  Canadian GAAP                                                 |            | 5,703,196    | -            | 
| | Depletion (a)                                                             |            | (464,815)    | -            | 
| | Stripping costs
    capitalized during operations (b)                     |            | 1,479,787    | -            | 
| | Inventory - U.S. GAAP                                                     |            | 6,718,168    | -            | 
| |                                                                           |            |              |              | 
| |                                                                           |            | 2006         | 2005         | 
| | Convertible debentures 
    Canadian GAAP                                |            | 28,537,087   | -            | 
| | Debt issuance costs                                                       |            | 1,264,842    | -            | 
| | Unamortized discount (c)                                                  |            | 4,698,071    | -            | 
| |                                                                           |            | 34,500,000   | -            | 
| | Unamortized debt issuance
    costs                                       |            | (1,448,584)  | -            | 
| | Convertible debentures -
    U.S. GAAP                                    |            | 33,051,416   | -            | 
| |                                                                           |            |              |              | 
| |                                                                           |            |              |              | 
| | Shareholders equity 
    Canadian GAAP                                  |            | 40,241,592   | 41,435,199   | 
| | Exploration expenditures
    capitalized (a)                              |            | (26,067,542) | (13,662,648) | 
| | Accretion of convertible
    debentures (c)                               |            | 57,489       | -            | 
| | Unamortized discount of
    convertible debentures (c)                    |            | (4,698,071)  | -            | 
| | Cost of sales  depletion
    (a)                                         |            | 72,131       | -            | 
| |  stripping costs (b)                                                     |            | (229,639)    | -            | 
| | Shareholders equity -
    U.S. GAAP                                      |            | 9,375,960    | 27,772,551   | 
| |                                                                           |            |              |              | 
| | The impact on the
    consolidated statement of loss would be as follows: |            |              |              | 
| |                                                                           | 2006       | 2005         | 2004         | 
| | Loss for the year -
    Canadian GAAP                                     | 10,194,274 | 4,641,818    | 2,887,057    | 
| | Exploration expenditures
    capitalized (a)                              | 12,404,894 | 10,173,279   | 3,153,233    | 
| | Cost of sales  depletion
    (a)                                         | (72,131)   | -            | -            | 
| | stripping costs (b)                                                      | 229,639    | -            | -            | 
| | Accretion of convertible
    debentures (c)                               | (57,489)   | -            | -            | 
| | Loss for the year - U.S.
    GAAP                                         | 22,699,187 | 14,815,097   | 6,040,290    | 
| | Loss per share - U.S. GAAP                                                |            |              |              | 
| | Basic and fully diluted                                                   | (0.28)     | (0.21)       | (0.11)       | 

81

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|Birch Mountain Resources Ltd.                           
|--------------------------------------------------------
|Notes to the Consolidated Financial Statements          
|For the years ended December
    31, 2006, 2005 and 2004

27.   Material differences between Canadian and United States generally
accepted accounting principles (continued)

Significant differences between Canadian GAAP and
U.S. GAAP that would have an effect on these consolidated financial statements
are as follows:

a)     Mineral
properties are accounted for in accordance with Canadian GAAP as discussed in
Note 2. For U.S. GAAP purposes, exploration costs relating to unproven mineral
leases and permits as well as acquisition costs for leases and permits that do
not provide for unrestricted exploration, are expensed as incurred.

The Company tracks expenditures on
its mineral properties as exploration or development and under U.S. GAAP
capitalizes costs relating to the development of proven reserves as defined by
SEC Industry Guide 7.

Capitalized costs are then assessed
to determine if a writedown in the carrying value is necessary and any writedown
would be considered an operating expense and included in the determination of
operating loss for the period in which the writedown occurred.

Under Canadian GAAP, the Company
was regarded as a production stage enterprise for 2006 and under U.S. GAAP the
Company was regarded as an exploration stage enterprise. On May 24, 2006,
management concluded, based on a number of factors including the fact that the
Company filed all of the necessary applications to prove it had the legal rights
to exploit its mineral leases with their was a reasonable expectation of
on-going and further regulatory approvals, sales to various end-users at market
prices had occurred and volumes of production and expected orders were
significant, that the Hammerstone mineral reserves met SEC Industry Guide 7
requirements for qualification as a reserve. Subsequent to May 24, 2006, the
Company is regarded as a production stage enterprise under Canadian and U.S.
GAAP. Total sales volumes for 2006 were 1,539,292 tonnes of limestone including
the off-quarry sale and the Company produced 2,244,987 tonnes of limestone
during 2006.

For 2004, 2005 and to May 24, 2006,
the Companys reserves did not meet the criteria for proven reserves under SEC
Industry Guide 7, therefore, all expenditures on mineral properties capitalized
under Canadian GAAP were expensed as operating costs under U.S. GAAP, increasing
the losses and loss for each year.

b)     Under Canadian GAAP,
stripping costs related to the betterment of the mineral property are
capitalized while those related to removing overburden to access limestone for
processing are included in the cost of inventory and cost of goods sold.

Under U.S. GAAP, stripping costs
incurred during the production phase of a mine should be included in inventory
and cost of goods sold for that period.

Management has determined
that stripping costs prior to production beginning on May 24, 2006, which are
included in site preparation costs under Canadian GAAP, would be expensed as
exploration expenditures under U.S. GAAP.  Further, stripping costs during
production, which are capitalized under Canadian GAAP as betterment of the
mineral property, would be expensed under U.S. GAAP.

c)     Under
Canadian GAAP, the conversion option embedded in the convertible debentures was
presented separately as a component of shareholders equity. Under U.S. GAAP,
the embedded conversion option was not subject to bifurcation and was thus
presented as a liability along with the balance of the convertible debentures.
The principal accretion occurring under Canadian GAAP was not required under
U.S. GAAP and the adjustment was included in the interest expense adjustment in
the reconciliation.

Under Canadian GAAP, the accretion
expense for 2006 was $76,930 and under U.S. GAAP the accretion expense was
$19,441, a difference of $57,489.

d)    
Commencing January 1, 2003, the Company adopted the fair value method of
accounting for stock options for both Canadian and U.S. GAAP purposes. The
effect of this change was that stock-based compensation is recorded as an
expense instead of disclosing the effect of granting options as pro-forma
information in the notes to the financial statements. For the year ended
December 31, 2004, these costs were calculated in accordance with the Black-Scholes
option-pricing model assuming no dividends are paid, an annual risk-free
interest rate of 3.8%, an expected volatility of 65% and an expected life of one
to two years. For 2004, the fair value of the options, calculated as $278,357,
is included in the net loss.

82

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|Birch Mountain Resources Ltd.                           
|--------------------------------------------------------
|Notes to the Consolidated Financial Statements          
|For the years ended December
    31, 2006, 2005 and 2004

27.   Material differences between Canadian and United States generally
accepted accounting principles (continued)

In December 2004, the FASB enacted
FAS 123  revised 2004 (FAS 123R), 

Had the Company adopted the fair value method for
its U.S. GAAP disclosure prior to Jan 1, 2003, the following net losses would
have been reported:

| |                                             | 2006       | 2005       | 2004     
| | ------------------------------------------- | ---------- | ---------- | ---------
| | Loss for the year - U.S.
    GAAP           | 22,699,187 | 14,815,097 | 6,040,290
| | Pro-forma stock
    compensation            | 54,000     | 73,012     | 73,012   
| | Pro-forma loss for the
    year - U.S. GAAP | 22,753,187 | 14,888,109 | 6,113,302
| | Pro-forma loss per share -
    U.S. GAAP    |            |            |          
| | Basic and diluted                           | (0.28)     | (0.21)     | (0.11)   

e)      For U.S. GAAP cash flow
statement purposes, mineral exploration costs would be shown under operating
activities rather than under investing activities.

New Accounting Pronouncements for U.S. GAAP

Accounting for Uncertainty in Income Taxes

In June 2006, the FASB issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"),
an interpretation of FASB Statement No. 109, "Accounting for Income Taxes". FIN
48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The Interpretation requires that the
Corporation recognize in the financial statements, the impact of a tax position,
if that position is more likely than not of being sustained on audit, based on
the technical merits of the position. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods and disclosure. The provisions of FIN 48 are effective beginning January
1, 2007 with the cumulative effect of the change in accounting principle
recorded as an adjustment to the opening balance of deficit. The Corporation is
currently evaluating the impact FIN 48 will have on its consolidated financial
statements.

Fair Value Measurements

In September 2006, the FASB issued
FAS No. 157, "Fair Value Measurements" ("FAS 157"), which defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. FAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years, and is applicable beginning in the first quarter of 2008.
The Company is currently evaluating the impact that FAS 157 will have on its
consolidated financial statements.

The Fair Value Option for Financial Assets and
Financial Liabilities

In February 2007, the FASB issued
FAS No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement No. 115", ("FAS 159")
which permits entities to choose to measure many financial instruments and
certain other items at fair value at specified election dates. A business entity
is required to report unrealized gains and losses on items for which the fair
value option has been elected in earnings at each subsequent reporting date.
This statement is expected to expand the use of fair value measurement. FAS 159
is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years, and is
applicable beginning in the first quarter of 2008. The Company is currently
evaluating the impact that FAS 159 will have on its consolidated financial
statements.

83

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|Birch Mountain Resources Ltd.                           
|--------------------------------------------------------
|Notes to the Consolidated Financial Statements          
|For the years ended December
    31, 2006, 2005 and 2004

28.   Subsequent events

Subsequent to year-end, an additional 725,000 stock
options were issued to employees, directors, consultants and officers.

On March 30, 2007 the Company completed a
$15,500,000 senior secured credit facility with Brookfield Bridge Lending Fund
Inc. to provide financing for the continued development and construction of the
South Haul Road, recently acquired mineral permits and for general corporate
purposes. The facility has a term of twelve months with an extension option for
an additional twelve months. The facility may be repaid at any time without
penalty.

On March 16, 2007, the Company completed a lease
buyout with the Royal Bank of Canada for the lease on the quarry equipment
costing $1,235,000 as described in Note 8. The Companys lease line of credit
was closed and the RBC released a restriction on a GIC for $1,250,000.

29.   Comparative figures

Certain comparative figures have been reclassified
to confirm with presentation adopted in the current year.







84

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ITEM 19

EXHIBITS

EXHIBIT NO.

1.1

Articles of Amalgamation(1)

1.2

By-Law No. 1(1)

2.1

Shareholders Rights Plan Agreement(1)

4.1

Stock Option Plan of the Company dated November 2, 1994
(1)

4.2

Stock Option Plan of the Company dated March 27, 2002
(2)

4.3

Amended 1994 Stock Option Plan of the Company dated May 8, 2003(2)

4.4

Amended 2002 Stock Option Plan of the Company dated May 8, 2003(2)

4.5

Stock Option Plan of the Company dated May 7, 2004(3)

4.6

Employment Contract with Douglas J. Rowe(1)

4.7

Finders Fee Agreement between the Company and American Precious
Metals Inc. dated June 24, 1999(1)

4.8

Shareholders Rights Plan Agreement dated March 28, 2005
(4)

11.1

Code of Business Conduct and Ethics(3)

11.2

Code of Conduct(5)

12.1

Certification of Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

12.2

Certification of Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

13.1

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

13.2

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

13.3

Consent from Myers Norris Penny LLP for December 31, 2004 and 2003.(5)

13.4

Consent from Ernst and Young LLP for December 31, 2006 and 2005.(5)

13.5

Map
of permits, leases and lease applications as at December 31, 2006.

| | (1) | Previously filed by the Company as part of its Registration
    Statement on Form 20-F filed on September 29, 2000 (SEC File No. 0-31645)
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------
| | (2) | Previously filed by the Company as part of its Form 20-F
    filed on June 30, 2003 (SEC File No. 0-31645)                               
| | (3) | Previously filed by the Company as part of its Form 20-F
    filed on June 29, 2004 (SEC File No. 0-31645)                               
| | (4) | Previously filed by the Company as part of its Form 20-F
    filed on June 28, 2005 (SEC File No. 0-31645)                               
| | (5) | Previously filed by the Company as part of its Form 20-F
    filed on April 2, 2007 (SEC File No. 0-31645)                               

85

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SIGNATURES

The registrant hereby certifies that it meets
all of the requirements for filing on Form 20-F and that it has duly caused and
authorized the undersigned to sign this Amendment No. 2 to the Form 20-F annual
report on its behalf.

|                   | BIRCH MOUNTAIN RESOURCES LTD.        
|------------------ | -------------------------------------
|                   |                                      
|                   |                                      
|                   |                                      
|Date: May 29, 2008 |                                      
|                   | By: /s/ Douglas J.
    Rowe          
|                   | Douglas J. Rowe                      
|                   | President and Chief Executive Officer



86

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