UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

REGISTRATION STATEMENT PURSUANT TO SECTION
12(b) OR (g)
                                                 OF THE SECURITIES EXCHANGE ACT OF 1934OR ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
                                                   OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2002
OR TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d)
                                                        OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from       to

Commission file number
000-31645

BIRCH MOUNTAIN RESOURCES LTD.(Exact name or Registrant as
specified in its charter)

Not Applicable(Translation of Registrant's name
into English)Alberta, Canada(Jurisdiction of incorporation or
organization)

Suite 3100, 205 - 5th Avenue
S.W.Calgary, Alberta, Canada 
T2P 2V7(Address of principal executive offices)

Securities registered or to be
registered pursuant to Section 12(b) of the Act:NoneSecurities registered or to be
registered pursuant to Section 12(g) of the Act:Common shares, without par
value(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.

42,107,521 Common Shares

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
          No
Indicated by check mark which financial statement
item the registrant has elected to follow.

Item 17 
Item 18  - 1 -

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|TABLE OF
    CONTENTS                                
|-----------------------------------------------------
|GLOSSARY &
    ABBREVIATIONS                         
|SPECIAL NOTE
    REGARDING FORWARD LOOKING STATEMENTS
|REPORTING CURRENCY
    AND FINANCIAL INFORMATION     
|ITEM 1                                               
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|ITEM 2                                               
|ITEM 3                                               
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|ITEM 8                                               
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|ITEM 9                                               
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|ITEM 10                                              
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|- 2 -                                                

|        | G.                                                                     | Statement by Experts   |  | 40
|------- | ---------------------------------------------------------------------- | ---------------------- |  | --
|        | H.                                                                     | Documents on Display   |  | 40
|        | I.                                                                     | Subsidiary Information |  | 41
|ITEM 11 | QUANTITATIVE AND QUALITATIVE
    DISCLOSURES ABOUT MARKET RISK         | 41                    
|ITEM 12 | DESCRIPTION OF SECURITIES OTHER
    THAN EQUITY SECURITIES             | 41                    
|ITEM 13 | DEFAULTS, DIVIDEND ARREARAGES
    AND DELINQUENCIES                    | 41                    
|ITEM 14 | MATERIAL MODIFICATIONS TO THE
    RIGHTS OF SECURITYHOLDERS AND USE OF |                       
|        | PROCEEDS                                                               | 41                    
|ITEM 15 | CONTROLS AND PROCEDURES                                                | 41                    
|ITEM 16 | RESERVED BY THE SEC                                                    | 41                    
|ITEM 17 | FINANCIAL STATEMENTS                                                   | 42                    
|ITEM 18 | FINANCIAL STATEMENTS                                                   | 42                    
|ITEM 19 | EXHIBITS                                                               | 43                    
|- 3 -  

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GLOSSARY & ABBREVIATIONS

Certain terms and their usage used throughout
this annual report are defined below.

|ABCA                              | Means the
    Business Corporation Act (Alberta).                                                                                                                                                                                                                                                                                                                    
|--------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                  |                                                                                                                                                                                                                                                                                                                                                                      
|Assay or fire assay               | A
    high-temperature process involving the melting of a rock to determine its
    metal content.                                                                                                                                                                                                                                                                   
|                                  |                                                                                                                                                                                                                                                                                                                                                                      
|Basement                          | The part of the Earth's crust
    that occurs beneath a cover of sedimentary rocks.                                                                                                                                                                                                                                                                                  
|                                  |                                                                                                                                                                                                                                                                                                                                                                      
|Carbonate                         | A sedimentary rock composed of
    minerals containing carbon and oxygen in the form                                                                                                                                                                                                                                                                                 
|                                  | of carbonate (CO3);
    for example, limestone.                                                                                                                                                                                                                                                                                                                      
|                                  |                                                                                                                                                                                                                                                                                                                                                                      
|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.                                                                                                                                                                                                                                                                                          
|                                  |                                                                                                                                                                                                                                                                                                                                                                      
|Electric Log or E-Log             | A graphic or digital record of
    the measured properties of rocks in a drill hole, recorded as a function of depth.                                                                                                                                                                                                                                                
|                                  |                                                                                                                                                                                                                                                                                                                                                                      
|Evaporite                         | A sedimentary rock containing
    minerals formed from the evaporation of marine and non-marine waters.                                                                                                                                                                                                                                                              
|                                  |                                                                                                                                                                                                                                                                                                                                                                      
|Exchange or TSXV                  | The TSX Venture Exchange Inc.
    and its predecessors.                                                                                                                                                                                                                                                                                                              
|                                  |                                                                                                                                                                                                                                                                                                                                                                      
|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.                                                                                                                                                                                                                                                                                 
|                                  |                                                                                                                                                                                                                                                                                                                                                                      
|Formation or Geological           | A body of rock having easily
    recognizable boundaries and properties that allow it to                                                                                                                                                                                                                                                                             
|Formation                         | 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 tonne of rock or percent of
    copper.                                                                                                                                                                                                                               
|                                  |                                                                                                                                                                                                                                                                                                                                                                      
|Hectare                           | A metric measurement of area
    equivalent to 10,000 square meters or 2.4711 acres.                                                                                                                                                                                                                                                                                 
|                                  |                                                                                                                                                                                                                                                                                                                                                                      
|Igneous                           | A rock that has cooled and
    solidified from a melt.                                                                                                                                                                                                                                                                                                               
|                                  |                                                                                                                                                                                                                                                                                                                                                                      
|Kilometre                         | A metric measure of length: one
    kilometre is equivalent to 1000 metres or 0.6214 miles.                                                                                                                                                                                                                                                                          
|                                  |                                                                                                                                                                                                                                                                                                                                                                      
|Limestone                         | A rock predominantly
    composed of the mineral calcite (calcium carbonate (CaCO3)).                                                                                                                                                                                                                                                                                
|                                  |                                                                                                                                                                                                                                                                                                                                                                      
|Microparticulate or Microparticle | Composed of or comprising
    particles on the order of 0.1 to 100 micrometres in size.                                                                                                                                                                                                                                                                              
|                                  |                                                                                                                                                                                                                                                                                                                                                                      
|Mineral Deposit                   | A body of rock enriched in
    naturally occurring minerals of potential commercial value.                                                                                                                                                                                                                                                                           
|                                  |                                                                                                                                                                                                                                                                                                                                                                      
|                                  |                                                                                                                                                                                                                                                                                                                                                                      
|Mineral                           | A naturally occurring
    homogeneous substance having fixed physical properties and chemical composition and a
    defined crystal form.                                                                                                                                                                                                                            
|                                  |                                                                                                                                                                                                                                                                                                                                                                      
|Mineralization                    | The process of formation of
    minerals in a specific area or geological formation.                                                                                                                                                                                                                                                                                 
|                                  |                                                                                                                                                                                                                                                                                                                                                                      
|Mineral Properties or Mineral     | The right to explore and/or mine
    granted by a government pursuant to one or more of                                                                                                                                                                                                                                                                              
|Property                          | a claim, contract of work,
    special exploration permit, mineral lease or mineral permit.                                                                                                                                                                                                                                                                          
|                                  |                                                                                                                                                                                                                                                                                                                                                                      
|Nanoparticulate or Nanoparticle   | Composed of or comprising
    particles on the order of 0.1 to 100 nanometres in size.                                                                                                                                                                                                                                                                               
|                                  |                                                                                                                                                                                                                                                                                                                                                                      
|Oil Sand Deposit                  | A porous body of sandstone
    containing liquid hydrocarbons or bitumen.                                                                                                                                                                                                                                                                                            
|                                  |                                                                                                                                                                                                                                                                                                                                                                      
|Prairie Gold Model                | An exploration model postulating
    the origin of microparticulate precious and non-precious metals observed in
    rocks from the Athabasca region of Alberta and the Dawson Bay area of Manitoba. In
    this model, metals are carried in brines of sedimentary origin and are
    deposited where oxidation-reduction reactions cause the metals to precipitate.
|                                  |                                                                                                                                                                                                                                                                                                                                                                      
|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.                                                                                                                                                                                                                                                 
|                                  |                                                                                                                                                                                                                                                                                                                                                                      
|- 4 -                            

|Sedimentary Rock | A rock
    originating from the weathering of pre-existing rocks which 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.                                                                                                                                                         
|                 |                                                                                                                                                                                                                                                    
|Troy ounce       | Unit of weight measurement used
    for all precious metals. The familiar 16-ounce avoirdupois pound equals 14.583
    troy ounces. One troy ounce is equivalent to 31.1034 grams.                                                                 
|                 |                                                                                                                                                                                                                                                    
|Unmetamorphosed  | Refers to rocks that have not
    undergone metamorphism, where metamorphism is the process by which the mineralogy
    and textures of a rock changes during deep burial or by contact with igneous rocks at
    high temperature and/or pressure.
|                 |                                                                                                                                                                                                                                                    

|U.S.                | Refers to the United States of America.
|------------------- | ---------------------------------------
|                    |                                        
|CONVERSION FACTORS: | 1 Troy ounce                           
|                    | 1 Tonne                                
|                    | 1 Tonne                                
|                    | 1 Troy ounce per ton                   
|                    | 1 Hectare                              
|                    | 1 Kilometre                            
|                    | 1 Metre                                
|                    | 1 micrometre                           
|                    | 1 nanometre                            
|                    |                                        
|SYMBOLS:            | Au                                     
|                    | g/t                                    

In this annual report, 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 annual report which may
relate to the disclosure in question.

SPECIAL NOTE REGARDING FORWARD LOOKING
STATEMENTS

The information presented in or incorporated by
reference in this annual report 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 Mountain
Resources Ltd. (including projections and business trends), which involve risks
and uncertainties. Except where the context indicates otherwise, "Company" or "Birch" means Birch Mountain Resources Ltd., its predecessors and subsidiaries.

Numerous factors could cause actual results to
differ materially from those in the forward-looking statements, including
without limitation the risk of developing new technology, protection of
intellectual property, exploration of mineral properties and related activities,
the ability to finance future exploration, market prices for precious metals,
the ability to produce and market precious metals, the actions of government
authorities including increases in taxes, changes in environmental and other
regulations, and changes in government, and the dependence upon the abilities
and continued participation of certain key employees 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.

- 5 -

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REPORTING CURRENCY AND FINANCIAL INFORMATION

Currency and Exchange Rates

Financial information in this annual report is expressed in
Canadian dollars, unless otherwise noted. References to "Cdn$" or "$" are to Canadian dollars. The following tables sets forth, for the period
indicated, the high and low exchange rates, the average of the month-end
exchange rates and the period-end exchange rate of 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. On June 16, 2003 the noon buying rate was Cdn$1.00 =
U.S.$0.75010.

|                            | Three Months |         |        |  |                                  |  |        |         |        |  |         | 
|--------------------------- | ------------ | ------- | ------ |  | -------------------------------- |  | ------ | ------- | ------ |  | ------- | 
|                            | Ended        |         |        |  | Twelve Months Ended December 31, |  |        |        
|                            | March 31,    |         |        |  |                                  |  |        |         |        |  |         | 
|                           
|                            | 2003         |         | 2002   |  | 2001                             |  | 2000   |         | 1999   |  | 1998    | 
|                           
|Rate at End of Period       |              | $0.6797 |        |  | $0.6344                          |  |        | $0.6672 |        |  | $0.6672 | 
|                            |              |         |        |  |                                  |  |        |         |        |  |         | 
|Average Rate 
 DuringPeriod |              | 0.6621  |        |  | 0.6372                           |  |        | 0.6461  |        |  | 0.6733  | 
|                            |              |         |        |  |                                  |  |        |         |        |  |         | 
|High Rate During            |              |         |        |  |                                  |  |        |         |        |  |         | 
|Period                      | 0.6857       |         | 0.6656 |  | 0.6714                           |  | 0.6400 |         | 0.6922 |  | 0.7060  | 
|                            |              |         |        |  |                                  |  |        |         |        |  |         | 
|Low Rate During             |              |         |        |  |                                  |  |        |         |        |  |         | 
|Period                      | 0.6327       |         | 0.6175 |  | 0.6227                           |  | 0.6988 |         | 0.6466 |  | 0.6327  | 
|                            |              |         |        |  |                                  |  |        |         |        |  |         | 



|Note:
    (1) | Average Rate During Period means the average
rate of exchange based upon the closing rate of exchange on the last day of each
month during the year or period indicated.
|------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table sets forth the high and low
exchange rates 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.

|                           | May     |  | April   |  | March   |  | February |  | January |  |  | December | 
|-------------------------- | ------- |  | ------- |  | ------- |  | -------- |  | ------- |  |  | -------- | 
|                           |        
|Rate at End of Period      | $0.7326 |  | $0.6936 |  | $0.6797 |  | $0.6697  |  | $0.6545 |  |  | $0.6344  | 
|Average Rate During Period | 0.7221  |  | 0.6864  |  | 0.6775  |  | 0.6603   |  | 0.6484  |  |  | 0.6416   | 
|High Rate During Period    | 0.7461  |  | 0.6941  |  | 0.6857  |  | 0.6724   |  | 0.6592  |  |  | 0.6474   | 
|Low Rate During Period     | 0.69280 |  | 0.6690  |  | 0.6685  |  | 0.6516   |  | 0.6327  |  |  | 0.6328   | 

ITEM 1 IDENTITY OF DIRECTORS, SENIOR
MANAGEMENT AND ADVISORS

A.Directors and Senior Management

This item is not applicable.

B.Advisors

This item is not applicable.

C.Auditors

This item is not applicable.

- 6 -

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ITEM 2 OFFER STATISTICS AND EXPECTED TIMETABLE

This item is not applicable.

ITEM 3 KEY INFORMATION

A.Selected Financial Information

The following selected consolidated financial
data for the years ended December 31, 2002, 2001, 2000, 1999 and 1998 are
derived from the audited consolidated financial statements for the periods
indicated and should be read in conjunction therewith. References to the
three-month periods ended March 31, 2003 and 2002 are derived from Birch
unaudited quarterly reports to shareholders and should be read in conjunction
therewith. Except as noted, all monetary references contained in this annual
report are in Canadian dollars.

|                            |                                                                                                                                                                                                       | Three Months Ended |        |      |         |                                  |         |                                      |         |       |         |       |        
|--------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------ | ------ | ---- | ------- | -------------------------------- | ------- | ------------------------------------ | ------- | ----- | ------- | ----- | -------
|                            |                                                                                                                                                                                                       | March 31           |        |      |         | Twelve Months Ended December 31, |         |                                      |        
|                            |                                                                                                                                                                                                       |                    |        |      |        
|                            |                                                                                                                                                                                                       | 2003               |        | 2002 |         | 2002                             |         | 2001                                 |         | 2000  |         | 1999  |        
|                            |                                                                                                                                                                                                       |                    |        |      |        
|Canadian GAAP
    
    (1)  | (in
    thousands of Canadian dollars, except loss per share in dollars and shares
    outstanding in thousands)                                                                                      |                   
|Revenues                    |                                                                                                                                                                                                       | 0                  |        | 0    |         | 251                              |         | 88                                   |         | 195   |         | 71    |        
|Expenses                    |                                                                                                                                                                                                       | 495                |        | 584  |         | 2,147                            |         | 2,627                                |         | 3,964 |         | 873   |        
|(Loss) before income        | (495)                                                                                                                                                                                                 |                    | (584)  |      | (1,896) |                                  | (2,539) |                                      | (3,769) |       | (802)   |       | (3,217)
|taxes                       |                                                                                                                                                                                                       |                    |        |      |         |                                  |         |                                      |         |       |         |       |        
|Net (loss) for the
    year | (471)                                                                                                                                                                                                 |                    | (568)  |      | (1,810) |                                  | (2,179) |                                      | (3,531) |       | (576)   |       | (2,890)
|(Loss) per share(2)         | (0.01)                                                                                                                                                                                                |                    | (0.02) |      | (0.05)  |                                  | (0.06)  |                                      | (0.11)  |       | (0.02)  |       | (0.13) 
|Total Assets                | 233                                                                                                                                                                                                   |                    | 475    |      | 265     |                                  | 610     |                                      | 11,491  |       | 8,982   |       | 8,188  
|Liabilities                 |                                                                                                                                                                                                       | 1,280              |        | 682  |         | 934                              |         | 309                                  |         | 385   |         | 325   |        
|Shareholders' Equity        | (1,048)                                                                                                                                                                                               |                    | (207)  |      | (669)   |                                  | 301     |                                      | 11,106  |       | 8,657   |       | 7,652  
|Total Common Shares         | 37,352                                                                                                                                                                                                |                    | 33,647 |      | 36,886  |                                  | 33,647  |                                      | 33,553  |       | 28,290  |       | 24,487 
|outstanding(3)              |                                                                                                                                                                                                       |                    |        |      |         |                                  |         |                                      |         |       |         |       |        
|                            |                                                                                                                                                                                                       |                    |        |      |         |                                  |         |                                      |         |       |         |       |        
|                            |                                                                                                                                                                                                       | Three Months Ended |        |      |         |                                  |         |                                      |         |       |         |       |        
|                            |                                                                                                                                                                                                       | March 31           |        |      |         |                                  |         | Twelve
    Months Ended December 31, |         |       |        
|                            |                                                                                                                                                                                                       |                    |        |      |        
|                            |                                                                                                                                                                                                       | 2003               |        | 2002 |         | 2002                             |         | 2001                                 |         | 2000  |         | 1999  |        
|                            |                                                                                                                                                                                                       |                    |        |      |        
|U.S. GAAP
    
    (4)      | (in
    thousands of Canadian dollars, except loss per share in dollars and shares
    outstanding in thousands)                                                                                      |                   
|Revenues                    |                                                                                                                                                                                                       | 0                  |        | 0    |         | 251                              |         | 88                                   |         | 195   |         | 71    |        
|Expenses                    |                                                                                                                                                                                                       | 495                |        | 584  |         | 2,147                            |         | 2,627                                |         | 4,474 |         | 1,486 |        
|(Loss) before income        | (495)                                                                                                                                                                                                 |                    | (584)  |      | (1,896) |                                  | (2,539) |                                      | (4,279) |       | (1,415) |       | (1,654)
|taxes                       |                                                                                                                                                                                                       |                    |        |      |         |                                  |         |                                      |         |       |         |       |        
|Net (loss) for the
    year | (495)                                                                                                                                                                                                 |                    | (584)  |      | (1,896) |                                  | (2,539) |                                      | (4,279) |       | (1,415) |       | (1,654)
|(Loss) per share(2)         | (0.01)                                                                                                                                                                                                |                    | (0.02) |      | (0.05)  |                                  | (0.08)  |                                      | (0.13)  |       | (0.05)  |       | (0.08) 
|Total Assets                | 233                                                                                                                                                                                                   |                    | 475    |      | 265     |                                  | 610     |                                      | 3,153   |       | 1,153   |       | 992    
|Liabilities                 |                                                                                                                                                                                                       | 1,280              |        | 682  |         | 934                              |         | 309                                  |         | 385   |         | 325   |        
|Shareholders' Equity        | (1,048)                                                                                                                                                                                               |                    | (207)  |      | (669)   |                                  | 301     |                                      | 2,768   |       | 828     |       | 456    
|Total Common Shares         | 37,352                                                                                                                                                                                                |                    | 33,647 |      | 36,886  |                                  | 33,647  |                                      | 33,553  |       | 26,681  |       | 20,833 
|outstanding(3)              |                                                                                                                                                                                                       |                    |        |      |         |                                  |         |                                      |         |       |         |       |        
|                            |                                                                                                                                                                                                       |                    |        |      |         |                                  |         |                                      |         |       |         |       |        
|Notes:                      |                                                                                                                                                                                                       |                    |        |      |         |                                  |         |                                      |         |       |         |       |        
|(1)                         | Refers to Canadian
    Generally Accepted Accounting Principles.                                                                                                                                      |                    |        |      |         |                                  |        
|(2)                         | The net 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 period indicated. Excludes common shares issuable upon
exercise of stock options and any other outstanding convertible securities. |                   
|(4)                         | Refers to U.S. 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.

- 7 -

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B.Capitalization and Indebtedness

This item is not applicable.

C.Reasons for the Offer and Use of Proceeds

This item is not applicable.

D.Risk Factors

Legal, Regulatory and Stock Exchange
Listing Risks

In all areas where Birch conducts exploration
activities, there are statutory provisions regulating exploration of mineral
resources. Birch may be constrained or forbidden to develop a mine in areas of
economic mineral deposits as a result of conflicting regulations governing other
natural resource extraction activities. Regulatory agencies may impose operating
limitations that may adversely affect Birch's revenues and/or the economic
viability of a project.

Based on the past experience of the Company with
respect to the TSXV, management of the Company believes there is a risk that the
Company's common shares may be halted or suspended from trading on the TSXV. On
the basis of statements contained in the Company's news release of June 15,
2000, trading of the Company's common shares was halted by the TSXV on June 16,
2000. On June 28, 2000, the TSXV suspended trading in the Company's common
shares. The news release of June 15, 2000 contained statements that, in the view
of the TSXV,"...indicate or infer that the Company has developed a technology
that can detect and/or extract gold not quantifiable by conventional means." The TSXV also expressed that it,
"...was sceptical of representations that
undetectable gold in economically significant quantities exists on the Company's
property or that it had or was developing a process to detect and/or extract
this gold." Therefore, the TSXV, ".... further advised the Company that, prior
to the public disclosure of results from the property or with respect to the
successful testing or advancement in this technology, [it] would require
independent verification by a qualified professional known to the Exchange."

Following a period of information review and
consultation, the Company agreed to (a) issue a clarifying news release, (b)
allow the TSXV to conduct an independent technical audit, and (c) provide an
undertaking to the TSXV by insiders of the Company not to trade in the Company's
securities until the independent audit was complete. On this basis, the TSXV
agreed to allow trading in Birch's shares to resume. The clarifying news release
was issued on September 27, 2000, and the TSXV reinstated trading of the
Company's common shares on September 29, 2000. The clarifying news release
reviewed the history of Birch's exploration in Athabasca, emphasizing that its
mineral properties were at the exploration stage and that they contained no
identified commercially viable mineral deposit or mineral reserve.

Associated Mining Consultants Ltd. or AMCL of
Calgary conducted the independent technical audit. Its final report was issued
to the TSXV and the Company on February 8, 2001. The Company issued a news
release on February 16, 2001, that contained AMCL's conclusions and the
statement that Birch considered the audit process to have been flawed and
disagreed with most of the report's conclusions. The TSXV again suspended
trading of the Company's common shares on March 5, 2001, based on information in
the AMCL audit report. The Company detailed its disagreements with the AMCL
conclusions and filed these, together with other third-party reports, as part of
an appeal of the suspension of trading with the Alberta Securities Commission or
the ASC on March 9, 2001.

On April 3, 2001, the ASC issued a directive to
hear the Company's appeal, and ordered the TSXV to table the "record" of
documents in its possession used in making the determination to suspend trading
of the Birch common shares. Despite efforts throughout most of 2001, there was
no response from the TSXV until the Company and a group of shareholders filed
applications with the ASC for a hearingde
novoon October 30, 2001. In response to
this action, legal counsel for the TSXV proposed an appeal to the TSXV's ListedCompany Review Panel. On consideration of its
options, and preserving the right of appeal to the ASC, Birch

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filed an appeal with the Listed Company Review
Panel. On December 14, 2001, the members of the independent Panel were named,
and the first meeting to discuss process took place on December 18, 2001. Birch
requested a hearingde novo,
or a hearing in which new evidence could be presented. The TSXV objected, and a
preliminary hearing on this application was held January 4, 2002. The Panel
granted the Company's application for a hearingde novo,
citing a "reasonable apprehension of bias" on the part of the TSXV. The full
text of the decision of the Panel is available, by request, from the Company.

The full hearing was to begin January 28, 2002,
but Birch accepted a proposal from the TSXV for a negotiated settlement. After
protracted discussions, an extensive news release was issued March 7, 2002, and
trading of the Company's common shares resumed on the TSXV on March 11, 2002.
The TSXV advised that "no adverse inference should be drawn from the
suspension." Readers should not, therefore, consider the information contained
in the news release of June 15, 2000, in isolation and are referred to the news
releases of July 19, 2000, September 27, 2000, and March 7, 2002 for
clarification.

Contractual and Financing Risks

The Company holds large land blocks under
metallic and industrial mineral permits and mineral leases issued by the
Government of Alberta. The terms and conditions of mineral permits require a
prescribed level of exploration expenditures for each two-year period in order
to continue to hold the rights to explore the land. Mineral leases require an
annual rental payment in order to hold the leases in good standing.

Exploration assessment reports are filed with the
government to document the work, results and money spent on exploration
conducted by the Company for each two-year period on lands held under mineral
permits.  Assessment costs are an escalating work
requirement ranging from $5.00 to $15.00 per hectare (approximately $2.00 to
$6.00 per acre) in two-year increments over the ten-year term of the mineral
permits. 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. Annual rental payments on mineral leases in the
Athabasca valley will cost $172,000 in the year 2003, and in each year
thereafter, unless the Company elects to convert additional lands to mineral
lease or drop existing mineral leases. Under a September 2002 agreement, Suncor
Energy Inc. has agreed to pay $39,000 of these lease rentals, covering six
mineral leases, until 2014. The ability to hold mineral leases in good standing
is not related to the requirement to make exploration expenditures. There is no
assurance that the Company will be able to raise additional funds or have
sufficient exploration expenditures to be able to hold all the la nd in good
standing beyond the current term.

Technology Development Risk

The Company has developed new mineral technology
for which it filed a U.S. patent application in mid-2000. In December 2002 Birch
was awarded U.S. patent number 6,494,392 entitled, "Recovery of Natural Nanoclusters and the Nanoclusters Isolated Thereby". The Company will continue
to file additional applications as the technology is further developed, but
there is no assurance that Birch will receive patent protection for its new
technology or that patents granted to the Company will not be successfully
challenged. The Company will continue to develop new mineral technology, but
there is no assurance that it will be economically viable or that there will be
a market for the new technology.

Intellectual Property Protection

The Company relies on a combination of patent,
confidentiality procedures and contractual provisions to protect its proprietary
rights to its technology. The Company generally enters into confidentiality
agreements with its employees, consultants and advisors and limits access to,
and distribution of, its proprietary information.  Despite the Company's efforts to safeguard and
maintain its proprietary rights both in the U.S. and abroad, there can be no
assurance that the Company will be successful in doing so or that the steps
taken by the Company in this regard will be adequate to deter misappropriation
or independent third-party development of the Company's technology or to prevent
an unauthorized third party from copying or otherwise obtaining and using the
Company's technology. In addition, policing unauthorized use of the Company's
technology is difficult and expensive.

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There can be no assurance that third parties will
not assert infringement or misappropriation claims against the Company in the
future with respect to current or future products or intellectual property. Any
claims or litigation, with our without merit, could be time consuming, result in
costly litigation and diversion of management's attention. Adverse
determinations in such claims or litigation also could have a material adverse
effect on the Company's business, operating results and financial condition.

Litigation to defend and enforce the Company's
intellectual property rights could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
operating results and financial condition, regardless of the final outcome of
such litigation.

Exploration Risk

Birch is an exploration stage company. Mineral
exploration involves a high degree of risk that even a combination of
experience, knowledge and careful evaluation may not be able to overcome. There
is no assurance that Birch's mineral properties will prove to be economically
viable. Even if Birch discovers potentially economically viable mineral
deposits, there is no assurance that profitable marketing and sales arrangements
can be implemented or that Birch will be operated as a profitable business.
Birch competes with larger companie s that have greater assets and financial and
human resources than Birch, and which may be able to sustain larger losses than
Birch to develop business. Any investment in Birch at this time is highly
speculative.

Mineral exploration activities are subject to
numerous risks, many of which are beyond Birch's control. These factors include
the cost of labour, materials and services, cost of financing, technological
change, demand for and price of commodities, and government regulation,
including regulations related to taxes, royalties and environmental protection,
the exact effects of which cannot be accurately predicted. There is a risk that
no commercial deposits of precious or non-precious metals or industrial minerals
will be discovered.

There is no conclusive evidence supportive of the
occurrence of precious metals in potentially economic concentrations or
quantities on Birch's mineral properties. There is no assurance that the Company
has a commercially viable mineral deposit on its mineral properties. Much more
drilling and testing will be required together with internal and independent
technical evaluations of the data before the Company can conclude that there is
an economically feasible mineral reserve suitable for development.

The Company faces certain risks over and above
those of conventional mineral exploration companies. Conventional fire assay has
not, in general, produced repeatable precious metals concentrations above trace
levels for rocks from the Company's mineral properties. There is a risk that an
effective fire assay method may not be developed. The failure to obtain
repeatable precious metal concentrations by standard methods may mean that there
are no significant concentrations of precious metals. If Birch is not successful
in identifying a method to quantitatively determine precious metals
concentrations, it may or may not be possible to define a precious metal
deposit, if such a deposit exists. If a precious metal deposit can be defined, a
method for commercial production of precious metals may or may not be available.

Environmental

The mining industry is subject to environmental
regulation pursuant to extensive legislation enacted by federal and provincial
governments in Canada. Birch is able to conduct its exploration within the
provisions of the applicable environmental legislation without undo constraint
on its ability to carry on efficient operations. Public expectation of the
mining industry's environmental performance remains high and this continues to
translate into new and generally more rigorous environmental policies,
legislation and regulations. The approval of new mines in Canada has, for the
past two decades, been the subject of detailed review through a clearly
established public hearing process. Vigorous interventions by well-organized
environmental groups in the public hearing process have demonstrated their
interest in resource development projects, particularly if the development
includes a mine. Birch has established environmental policies and procedures
that it believes should allow it to operate effectively under increasingly
stringent environmental laws, but there is no assurance that the Company will be
granted all of the necessary permits in the future.

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Going Concern Qualification to Financial
Statements

The Company's auditors have raised the issue that
Birch may not be able to continue as a going concern as a result of a lack of
profits. The Company has used substantial amounts of working capital in its
operations and has sustained significant operatin g losses. During the fiscal
year ended December 31, 2002, the Company raised $926,705 from private
placements. In January 2003 the Company raised $116,428 in a private placement,
and on May 22, 2003 it announced the closing of a private placement for gross
proceeds of $1,188,853. This capital will reduce the working capital deficiency
of $1,201,713 reported at March 31, 2003, and will allow the Company to operate
in the short term. The Company may not be able to continue as a going concern
thereafter if it does not generate profits or secure additional financing.

Management

At December 31, 2002, Birch had ten employees
working full time for the Company, including Douglas J. Rowe, President and
Chief Executive Officer, Donald L. Dabbs, Vice President and Chief Financial
Officer, and Hugh J. Abercrombie, Vice President, Exploration.

Birch also relies on the services of a number of
consultants for technical and operational guidance. Although Birch believes that
its relations with its employees, management and consultants are satisfactory,
there can be no assurance that such individuals will remain with Birch for the
immediate or foreseeable future. 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 drilling, analytical
services, research and environmental assessment.

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 be dependent on
maintaining its key staff to advance its technology and explore for and
delineate mineral deposits on the Company's mineral properties. Birch may rely
on joint ventures or other business relations with companies to advance the
development of its technology and mineral properties.

Shareholders Rights Plan

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 10 - "Additional Information - Memorandum and Articles of Association -
Rights and Privileges of Shareholders".

Gold and Precious Metal Pricing Risks

If the Company were able to identify an economic
mineral deposit on its mineral permits or leases, the price of precious and
non-precious metals may have a significant influence on the market price of the
Company's shares and the Company's business activities. The price of gold is
affected by numerous factors beyond the Company's control, such as the level of inflatio n, fluctuation of the U.S. dollar and foreign currencies, global and
regional demand, sale of gold by central banks, forward selling by producing
companies and the political and economic conditions of major gold producing
countries throughout the world as well as the level of international conflict.

In the past two years the price of gold has moved
off its 20 year lows. As of May 21, 2003, the closing New York spot price for
gold was US$372.20 per troy ounce. The following table sets forth the average of
the daily closing prices for gold for the periods indicated, as reported by the
London Metal Exchange:

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|Year Ended
    December 31,  
|-----------------------------
|                             
|Gold
    (US$/troy
    ounce)

Enforcement of Civil Liabilities

The enforcement by investors of civil liabilities
under the federal securities laws of the United States 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 United States. As a result, it
may be difficult for holders of the common shares to effect service of process
within the United States upon people who are not residents of the United States
or to realize in the United States upon judgments of courts of the United States
predicated upon civil liabilities under the federal securities laws of the
United States.

ITEM 4 INFORMATION ON BIRCH

A.History and Development of Birch

According to a Certificate of Amalgamation issued
on December 31, 1995, under the provisions of the ABCA, Birch was formed by the
merger of one of Birch's predecessors, also named Birch Mountain Resources Ltd.,
and its wholly owned subsidiary, Birch Mountain Minerals Ltd.

Birch's head office and registered office are
located at 3100, 205 Fifth Avenue S.W., Calgary, Alberta T2P 2V7, phone: (403)
262-1838, and Suite 1000, 400 Third Avenue S.W., Calgary, Alberta T2P 4H2, phone
(403) 232-9780, 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 and Kalimantan, Indonesia. Since
2000, the Company has expanded beyond conventional mineral exploration to
include research and development on naturally occurring precious and
non-precious metal microparticles and nanoparticles. Currently, Birch is only
active in Alberta, Canada. In March 2002, Birch formally established two
divisions, Mineral Exploration and Mineral Technology, to differentiate its
mineral exploration activities from its research and development program. In
June 2002, Birch established an Industrial Mineral Division to pursue
opportunities arising from its ownership of industrial minerals in the Athabasca
region of northeastern Alberta, including a proposed dual-purpose limestone
quarry to provide crushed limestone aggregate and quicklime to the Fort McMurray
market.

In 2000 Birch established a Scientific Advisory Board ("SAB") to provide independent advice to the Board and management on the
Company's scientific and technical program and to provide liaison with external
scientific institutions and researchers. Presently, the SAB comprises Dr.
Richard Puddephatt, FRS, FRSC, Professor of Chemistry at the University of
Western Ontario, and Dr. Robert Fitch, President of Fitch and Associates, Taos,
New Mexico. The SAB was active through to the end of 2001, but did not meet in
2002. Birch anticipates reconvening the SAB in the future.

Since early 2000, the Company's work has lead to
the development of methods to extract and image, using high-resolution
transmission electron microscopes, naturally occurring nanoparticulate base and
precious metals in rocks and oil sands tailings from the Athabasca region of
northeastern Alberta. The commercial significance of these findings has not been
determined. These results are being used to assist in acquiring or developing,
and independently verifying, methods to measure the concentration of
nanoparticulate precious metals contained in these materials. A reliable method
for measuring precious metal concentration has not yet been independently
verified. In December 2002, Birch was awarded U.S. patent 6,494,932 entitled,
"Recovery of Natural

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Nanoclusters and the Nanoclusters Isolated
Thereby", which covers processes for the recovery of natural nanoparticles from
geological materials and their processed counterparts.

In previous years the Company focussed
exclusively on precious metal exploration and technology development. Funding
constraints in 2002 resulted in the deferral of further technology development
and verification. When funding is available the Company intends to continue its
research and development related to precious metal

The mineral rights held by the Company offer an
immediate business opportunity to develop a limestone quarry for aggregate sales
and the manufacturing of quicklime for use in the oil sands industry.
Consequently management elected to focus on the business opportunity in the
limestone and most of the business activity in the second half of the year and
to date in 2003 have been focused on capturing this business opportunity.

B.Business Overview

Birch is an exploration stage junior mining
company searching for commercial deposits of precious and non-precious metals
and industrial minerals. The Company has no assurance that a commercial deposit
exists on any of its mineral properties and no mineral reserves have been
identified on any of the Company's properties. The Company is also researching
methods to recover naturally occurring nanoparticulate metals from sedimentary
rocks on its mineral properties in northeastern Alberta and from tailings
produced as a byproduct of oil sands mining. There is no assurance that there
are commercial concentrations of nanoparticulate metals, or that a commercially
viable process will be developed to extract these metals from rocks or oil sands
tailings.

Prior to 2002, the Company has only received
$390,000 from the sale of exploration data plus incidental interest and other
minor revenue. In 2002, Birch sold limestone to Suncor Energy Inc. for $250,000.
Suncor also paid $39,000 to the Alberta Government to cover lease rental
payments for six mineral leases owned by Birch to which Suncor, by agreement,
was granted access to quarryable materials, including limestone.

Precious Metals

Birch will continue its work related to
developing and improving its mineral extraction and measurement technologies,
both in the Company's lab and in external metallurgical and research facilities,
with verification of results in independent testing laboratories.

Birch has entered into a contract with AuRIC
Precious Metals, Inc., or AuRIC, to purchase a customized fire assay method that
AuRIC has developed to analyze precious metals in rock from the Company's Athabasca property in northeastern Alberta. Independent testing of AuRIC's
method began in 2002. If certain conditions are met, including achieving a
verified fire assay grade in excess of 1 g/t precious metal in a
chain-of-custody sample from the Athabasca property, Birch will pay AuRIC a
combination of common shares and cash in return for exclusive rights to the
technology in the regions of Athabasca, Alberta and Dawson Bay, Manitoba, and
non-exclusive rights elsewhere. Verification of the AuRIC method was suspended
in 2002, pending financing. Birch intends to continue the AuRIC verification
testing when it is able to do so.

Birch did not conduct field exploration in 2002,
focusing instead on its objective of developing or acquiring technology to
accurately and reliably determine the concentrations of precious metals in rocks
and other materials that may contain precious metals in nanoparticulate and
microparticulate form. Any further field exploration for precious metals is
contingent on developing or acquiring, and independently verifying such a
method. In the second half of 2003, Birch intends to resume its Calgary-based
analysis of electric logs and drill core from holes drilled by oil sands
companies who hold overlapping mineral interests, more fully described below
under "Property, Plants and Equipment". Birch has agreements with three
producing oil sands companies under which the cores and logs are accessed.

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Industrial Minerals

Birch formed its Industrial Mineral Division in
June 2002, to pursue market opportunities for the sale of limestone from its
Athabasca mineral property. In September 2002, a sale of limestone was made and
shortly thereafter the Company initiated the application process to license a
limestone quarry. The original application was to develop a quarry to supply
crushed limestone aggregate to the local market. As geological evaluation of the
proposed quarry progressed, testing of core 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. Birch has not
identified a limestone reserve on its Athabasca mineral property. Birch intends
to continue its exploration stage limestone program in 2003.

Quicklime is used in a range of industrial and
environmental applications, including flue gas desulphurization which removes
sulphur and other contaminants, and in water treatment to remove heavy metals.
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. Birch has no assurance
that a commercial high-calcium limestone deposit exists at this location or that
it will be successful in negotiating contracts for the sale of aggregate or
quicklime.

C.Organizational Structure

Birch has three inactive, wholly owned
subsidiaries, Dawson Bay Minerals Inc., incorporated pursuant to theCorporations Act
(Manitoba), Muskeg Valle y Minerals Inc.,
incorporated pursuant to theBusiness
Corporations Act(Alberta) and Rockyview
Development Limited, and its subsidiaries, incorporated pursuant to the laws of
the British Virgin Islands.

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

D.Property, Plants and Equipment

Birch maintains a head office in Calgary.
Executive, administrative and support staff work in the 11,000 square foot
office space that also contains a boardroom. The rental commitment is $212,238
per year and Birch offsets approximately one-half of the cost by subletting
office space to third parties.

Mineral Technology Division

Intellectual Property

In December 2002, Birch was awarded U.S. 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.

Metallurgical Laboratory

Birch's research activities are principally
carried out at the Company's Calgary laboratory. The laboratory is housed in a
1,800 square foot facility, which is leased at a cost of $18,600 per year. 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.

Mineral Exploration Division

Core Laboratory

Birch maintains core analysis and secure storage
facilities in Calgary. Core drilled by Birch and core obtained from oil sands
mining companies is shipped to Calgary for cutting, logging and sampling. Drill
core and

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samples are archived in a secure storage
facility. The core analysis facility is leased at an annual cost of $14,800.
Long-term storage facilities are leased at an annual cost of $22,700.

Exploration Properties

At one time Birch held the mineral exploration
rights to about 10 million acres in northeastern Alberta. Through time this has
been reduced to approximately one million acres distributed across Birch's two
Alberta mineral properties: Athabasca and Birch Mountains. Birch anticipates
that as it continues its exploration the extent of its mineral properties will
be reduced, to areas Birch believes to be the most prospective for precious
metals and industrial minerals.

Mineral Tenure in Alberta

Metallic and Industrial Mineral Permits:The majority of Birch's Alberta mineral
properties are held under metallic and industrial mineral permits, or "mineral
permits", issued by the Provincial Government of Alberta. Mineral permits may be
held for up to ten years and convey the right to explore for metallic and
industrial minerals. Assessment costs must be filed 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 virtually all of its mineral permits held in
Alberta. Some mineral permits are subject to a 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 conveys a royalty right to the original
mineral permit holder or its designees, with no right to purchase the royalty.

Metallic and Industrial Mineral Leases:Birch also holds a number of metallic and
industrial mineral leases, or "mineral leases". Mineral leases are granted by
the Alberta Government and convey the right to explore and produce minerals,
subject to meeting development approvals. Mineral leases have a renewable
15-year term, subject to payment of an annual rent of $3.50 per hectare ($1.42
per acre). In Alberta, mineral permits held in good standing may be converted to
mineral leases any time prior to the expiry of their 10-year term. Birch's
mineral lease rental payments are $172,000 in the year 2002. Under a September
2002 agreement, Suncor Energy Inc. has agreed to pay $39,000 of these lease
rentals, covering six mineral leases, until 2014.

Overlapping Mineral Rights:Ownership of metallic and industrial minerals within the area of the Athabasca
Oil Sands Mining Area, as defined by the Alberta Government, is split between
oil sands leaseholders and mineral lease and mineral permit holders. The
Athabasca Oil Sands Mining Area covers all of Birch's mineral leases and most of
Birch's Athabasca mineral permits. 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
in either the overlying sedimentary rocks, nor in the underlying Devonian
limestone, which rights are owned by the mineral permit and lease holders.

Athabasca Mineral Property

Location and Access:
The Athabasca mineral property is located in the
Fort McMurray-Fort MacKay region of northeastern Alberta. The City of Fort
McMurray is located 375 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 Edmonton. Infrastructure north of Fort McMurray, in
the vicinity of Fort McKay, is excellent due to the presence of large oil sands
mining operations located about 45 km north of Fort McMurray. 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 servicing and expediting can be obtained in Fort McMurray.
Accommodation for up to 500 workers is available in work camp facilities located
on the Athabasca Property.

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 Property is generally accessible by road
or all terrain vehicle, with some of the more remote locations requiring the use
of a helicopter. Major power lines cross the Athabasca Property and

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additional power transmission lines are planned.
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 at this time in any case.

Mineral Title:
Birch's currently active Athabasca mineral permits
and leases were either originally acquired from the Crown, or were acquired by
purchase or option from other companies or individuals. At December 31, 2002 the
Athabasca mineral property included 46 mineral permits covering approximately
277,099 hectares (684,724 acres) 28 mineral leases covering approximately 49,233
hectares (121,657 acres). The years of issue and expiry of the mineral permits
(10 year non-renewable term) and mineral leases (15 year renewable term) are
tabulated below. Birch obtained one additional permit of 5776 hectares (14,273
acres) on May 9, 2003, increasing total mineral permit area to 282,875 hectares
(698,996 acres).

Athabasca Mineral Permits by Issue Date.

|Year
    Issued | Term
    Expiry | No. of
    Permits | Area
    (hectares) | Area
    (acres)
|--------------- | --------------- | ------------------ | ------------------- | ----------------
|1993            | 2003            | 7                  | 57,244              | 141,452         
|1994            | 2004            | 32                 | 179,151             | 442,691         
|1996            | 2006            | 5                  | 32,256              | 79,706          
|1998            | 2008            | 2                  | 8,448               | 20,875          
|2003            | 2013            | 1                  | 5776                | 14,273          

Athabasca Mineral Leases by Issue Date.

|Year
    Issued | Term
    Expiry | No. of
    Leases | Area
    (hectares) | Area
    (acres)
|--------------- | --------------- | ----------------- | ------------------- | ----------------
|1991            | 2006            | 1                 | 112                 | 277             
|1994            | 2009            | 2                 | 1,991               | 4,920           
|1999            | 2014            | 1                 | 1,024               | 2,530           
|2000            | 2015            | 23                | 45,658              | 112,823         
|2002            | 2017            | 1                 | 448                 | 1,107           

Previous Mineral Exploration:
Prior exploration of the Athabasca property has
included exploration for precious metals, diamonds and limestone. Comprehensive
details of all known prior exploration are included in a report entitled "2003 Technic al Report on the Gold Potential of the Athabasca Property" dated May,
20003, prepared by M.B. Dufresne and D.J. Besserer of APEX Goescience Ltd. (the
"2003 Technical Report"). The 2003 Technical Report was filed in May 2003 in
Canada and on June 3, 2003 under a Form 6-K in the U.S.A., is incorporated
herein by reference and is available in the Company's public documents at

www.sedar.comand www.sec.gov.

Precious metals exploration on the Athabasca
property began in 1911/1912 when American wildcatter Homer Bradley drilled a
series of holes to basement seeking the source of the Athabasca oil sands.
Although the origin of the tar sands was not discovered, an Alberta government
report indicates that gold was assayed in core from drill hole Athabasca Oils
No. 1. From this time on, sporadic exploration for precious metals occurred
through to 1993, when the current round of precious metals exploration began. In
the period from 1993 to 1995, Birch, Focal Resources Ltd., Tintina Mines
Limited, NSR Resources Inc., Winslow Gold Ltd., LAC North America Ltd. (LAC),
Ultrasonic Industries Ltd., Mr. K. Richardson and associated companies HMS
Properties Ltd. (HMS) and RMS Masonry Systems Inc. (RMS), Mr. L. MacGougan and
associated company 777195 Alberta Inc., Grizzly Gold, and possibly 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
other than its own in

- 16 -

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this area, although Mr. K. Richardson and Mr. L.
MacGougan still hold mineral properties in the vicinity of the Athabasca
property.

In 1997-98, in a joint venture with Tahera
Corporation, Birch explored for diamonds on its Athabasca mineral property. Much
of the information resulting from this exploration program is available through
assessment reports filed with the Alberta Government and is covered in the 2003
Technical Report. No potentially diamond-bearing rocks were found during this
exploration program.

Prior exploration for limestone was restricted to
now-expired land holdings within the area of the Athabasca permits. No limestone
development is known within the Athabasca property. In 2002, Graymont Western
Canada Inc. acquired mineral permits on the perimeter of Birch's Athabasca
property.

Current Status:The Athabasca property is without known reserves of either precious metals or
limestone, and Birch's continuing work is exploratory in nature. Since 1993,
Birch or its antecedent companies have conducted extensive precious metals
exploration on the Athabasca property, including field mapping and prospecting,
land and airborne geochemical and geophysical surveys, drilling, core logging,
sampling and analysis, and a wide variety of analytical testing and
mineralogical research. The authors of the 2003 Technical Report concluded,"Although precious metals, including gold,
silver, platinum and palladium have been discovered on a few rare occasions in
concentrations that might constitute economic concentrations if a resource can
be identified, Birch's Athabasca Property is considered an early stage, high
risk precious metals exploration property."

Birch does not plan to conduct field exploration
for precious metals until such time that it has acquired or developed, and
independently verified, a method for reliably determining precious metals
concentrations in rocks from its Athabasca property. In 2003, Birch will
continue its Calgary based examination of core and geophysic al logs acquired
from oil sands companies.

In late 2002 and early 2003, Birch conducted a
drilling program for limestone in the area of its proposed limestone quarry.
Testing of limestone recovered from this drill program and one hole from a 1996
drill program resulted in the identification of high-calcium limestone suitable
for the production of quicklime. As discussed under Industrial Minerals, below,
Birch has initiated the regulatory process to license a limestone quarry on its
Athabasca mineral property. More information on the proposed limestone quarry is
available in the Public Disclosure Document dated October 15, 2002, available on
Birch's website at:www.birchmountain.com. The information on
Birch's website is not incorporated herein by reference.

Plant and Equipment:Apart from currently active oil sands mining operations operated by oil sands
companies unrelated to Birch, no other mining-related plant or equipment exists
on Birch's Athabasca property.

Rock Formations and Mineralization:Precious metals and limestone are the principal exploration targets on the
Athabasca mineral property. The geology of the Athabasca property is relatively
simple, and is characterized by Precambrian basement overlain by about 300 m of
shallow westward dipping, unmetamorphosed sedimentary rocks chiefly of Devonian
and Cretaceous age. The Devonian rocks are predominantly marine dolostones,
limestones and evaporites while overlying Cretaceous rocks are 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 characterized by normal
or reverse normal offset and minor rotation. A large structure, the Bitumount
Graben, has resulted in up to 200 m downdrop of both sedimentary and basement
rocks in the central part of the Athabasca property.

Precious metal microparticles and nanoparticles
have been identified in both sedimentary and basement rocks from the Athabasca
property and are the target of Birch's precious metal exploration. A
comprehensive discussion of the geology and mineralization of the Athabasca
property is included in the 2003 Technical Report.

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Birch Mountains Mineral Property:

Location and Access:
The Birch Mountains mineral property is in a remote
location, approximately 120 kilometres northwest of Fort MacKay and the
Athabasca property. Access to the Birch Mountains mineral property is either by
winter road or helicopter with accommodation, food, supplies and fuel available
in Fort McMurray, Fort MacKay or Fort Vermilion.

Mineral Title:At December 31, 2002, the Birch Mountains mineral property comprises 9 mineral
permits issued in 1994, covering approximately 82,944 hectares (204,959 acres)
and one mineral permit issued December 21, 2001, covering an additional 9,216
hectares (22,773 acres), for a total of 10 permits covering 92,160 hectares
(227,731 acres).

Birch Mountains Mineral Permits by Issue Date.

|Year
    Issued | Term
    Expiry | No. of
    Permits | Area
    (hectares) | Area
    (acres)
|--------------- | --------------- | ------------------ | ------------------- | ----------------
|1994            | 2004            | 9                  | 82,944              | 204,959         
|2001            | 2011            | 1                  | 9,216               | 22,773          

Previous Mineral Exploration:Previous mineral exploration by companies other than Birch not known. In 1995
Birch conducted preliminary precious metal exploration on the Birch Mountains
mineral property; no further precious metals exploration has been conducted. In
1999, Birch conducted an airborne magnetometer survey of the Birch Mountains
property and identified a number of targets that exhibited magnetic signatures
similar to those of potentially diamond bearing rocks. In 2001, Birch concluded
an option agreement with Shear Minerals Inc., or Shear, and Marum Resources
Ltd., or Marum, whereby Shear and Marum could earn up to 90% of the diamond
rights to the Birch Mountains property. Under the option agreement, in early
2002 Shear and Marum conducted a drilling program for diamonds. No potentially
diamond-bearing rocks were discovered.

Current Status:The Birch Mountains mineral property is without known mineral reserves. Birch's
continuing work is exploratory in nature. No further exploration work on the
Birch Mountains is planned for 2003.

Plant and Equipment:No mining-related plant or equipment exists on the Birch Mountains mineral
property.

Rock Formations and Mineralization:The geology of the Birch Mountains mineral property is identical to that of the
Athabasca mineral property except that the thickness of sedimentary rocks
overlying Precambrian basement rocks is greater. No potentially economic
mineralization is known on the Birch Mountains mineral property. Diamonds are
the primary exploration target.

2002 Assessment Filings

Alberta Mineral Properties

In August 2002, the Alberta Department of Energy
notified Birch that it had accepted the April 2002 assessment filing of $5.15
million in exploration expenditures for the Athabasca and Birch Mountains
mineral properties. The assessment expenditures were applied to 55 minerals
permits covering 360,675 hectares (861,900 acres). Additional
assessment-eligible work has been completed and will be available for future
assessment reports. A number of Birch Mountain's Athabasca mineral permits
reached the end of their 10-year term in 2002 and lapsed, reducing Birch
Mountain's Athabasca mineral property by 348,800 hectares (861,900 acres). All
exploration permits in the Birch Mountains mineral property have been retained,
in accordance with the option agreement with Shear Minerals Inc. and Marum
Resources Ltd.

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Manitoba Properties

Birch's wholly owned subsidiary, Dawson Bay
Minerals Inc., announced April 22, 2002, that it allowed the Special Exploration
Permit 99-1 covering 9,784 hectares (24,177 acres) near Dawson Bay, Manitoba, to
lapse. Birch no longer holds any mineral interests in Manitoba.

Industrial Minerals Division

The Company's mineral leases convey the rights to
metallic and industrial minerals, including limestone. In 2002, Birch
established an Industrial Minerals Division to take advantage of potential
business opportunities arising from the Company's ownership of the rights to
mine and market limestone from its Athabasca mineral leases. A sale of limestone
to Suncor Energy Ltd. for $250,000 was announced in September 2002. Following
this, a geological appraisal of a potential limestone quarry located about 60
kilometres north of Fort McMurray was completed. After consultations with
Alberta Environment, in October 2002 Birch initiated the regulatory process to
licence a limestone quarry, issuing a Public Disclosure Document and the Draft
Terms of Reference for an Environmental Impact Assessment ("EIA"). The Public
Disclosure Document is available on the Birch website atwww.birchmountain.com.
Subsequently, the Company received the Final Terms of Reference and is working
to complete the EIA in 2003.

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 U.S. GAAP. For a discussion of these differences, see the notes to Birch's
consolidated financial statements.

A.Operating Results

Years Ended December 31, 2002, 2001 and 2000

In previous years the Company focussed
exclusively on precious metal exploration and technology development. Funding
constraints in 2002 resulted in the deferral of further technology development
and verification. When funding is available the Company intends to continue its
research and development related to precious metal

The mineral rights held by the Company offer an
immediate business opportunity to develop a limestone quarry for aggregate sales
and the manufacturing of quicklime for use in the oil sands industry.
Consequently management elected to focus on the business opportunity in the
limestone and all efforts in the second half of the year and to date in 2003
have been focused on capturing this business opportunity.

In March 2000, the Accounting Standards Board of the Canadian
Institute of Chartered Accountants ("CICA") issued Accounting
Guideline 11 "Enterprises in the Development Stage" ("AcG-11"). The Guideline
was effective for fiscal periods beginning on or after April 1, 2000. Under
AcG-11, all deferred resource property expenditures are reviewed, on a
property-by-property basis, to assess their recoverability. When the carrying
value of a property exceeds its net recoverable amount (net recoverable amounts
are estimated by quantifiable evidence of an economic geological resource or
reserve, joint venture expenditure commitment or the Company's assessment of a
property's realizable value), a provision is made for the impairment in value.
Prior to the adoption of this guideline, mineral leases and permits were
recorded at cost. Cost included cash consideration and the market value of
shares issued, if any. All direct and indirect acquisition and exploration
expenditures were capitalized and deferred until the leases and permits to which
they related were placed into production, sold, allowed to lapse, or abandoned.

These costs were to be amortized over the
estimated useful lives of the leases and permits following the commencement of
production, or written off if the leases and permits were sold, allowed to
lapse, or abandoned.

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The Company assessed the carrying value of these
mineral exploration costs annually and then, based on estimates, adjusted the
carrying amount for any impairments in value or surrender of permits or leases.
The net costs related to abandonment or impairment were charged to earnings.

The Company was aware that there were differing
views of how AcG-11 could affect mining companies with respect to deferred
mineral exploration costs. Although the Company had, and still continues to
hold, sizeable land areas under mineral exploration leases and permits, it
adopted AcG-11 and, in the absence of quantifiable evidence of a geological
resource or reserve, wrote off its deferred mineral exploration costs. The
Company has accounted for this change in accounting policy on a retroactive
basis as a cumulative adjustment to increase the opening deficit and reduce the
carrying value of mineral exploration costs at January 1, 2001, by $8,338,431.
Prior periods have not been restated.

In March 2002, subsequent to the adoption of the
accounting policy, the CICA issued Emerging Issues Committee "Accounting by
Mining Enterprises for Exploration Costs" ("EIC-126") as additional guidance on
this matter. Among other things, EIC-126 concluded that a mining enterprise that
has not established mineral reserves objectively and, therefore, has no basis
for preparing a projection of the estimated future net cash flow from the
property is not precluded from capitalizing exploration costs, nor is it obliged
to conclude that the capitalized costs have been impaired.

While the Company understands that EIC-126
provides additional clarification and guidance to support its previous policy
for accounting for mineral exploration costs, the Company believes the change in
accounting policy is appropriate for its circumstances and is consistent with
reporting practices followed in the United States. The Company considers its
exploration properties to be prospective, and will continue its exploration
activities in search of an economic ore body.

Costs and ExpensesTotal costs in 2002 were $1,170,931 (excluding
$976,305 of mineral exploration and industrial mineral costs) down from
$1,685,713 (excluding $941,530 of mineral exploration costs) in 2001, and down
from $2,171,366 (excluding $1,792,388 in mineral exploration costs) in 2000.
Salaries, management fees and benefits of $437,786 increased slightly in 2002
from $428,171 in 2001 and decreased compared to $475,912 in 2000. Expenses in
2002 reflect an increased focus on the industrial mineral potential of the
Athabasca leases.  Expenses in 2001 and 2000 reflected the increase
in laboratory work, the filing of U.S. and international patent applications,
and the preparation of assessment filings to hold the Company's Athabasca and
Birch Mountains mineral permits. Legal, consulting and staff costs associated
with the suspension of trading imposed by the Exchange and the independent
technical audit required by the Exchange represented a major component of the
operating expenses in the first quarter of 2002 and for the years 2001 and 2000.
The writing and filing of the Form 20-F Registration with the U.S. Securities
and Exchange Commission also added to professional fees in both 2001 and 2000.

Corporate IncomeBirch is engaged in precious metals exploration,
technology development related to nanoparticle characterization and extraction
from geological sources, and industrial minerals exploration. The Company's main
source of income from year to year is interest earned on its term deposits. The
interest income over the years has varied with the amount of money in term
deposits and has not been a significant component of the Company's ability to
operate. Interest and other income in 2002 was $250,986 including the sale of
limestone, compared to interest only income of $72,560 in 2001, and $194,504 in
2000.

The Company and its subsidiaries have limited
income from production because most properties are still at an exploration stage
and technology is still under development.

Three Months Ended March 31, 2003 and 2002

Costs and ExpensesTotal costs and expenses in the first quarter of
2003 were $230,350 (excluding $264,661 of Mineral Exploration and Industrial
Minerals) down from $346,870 (excluding $237,135 of Mineral Exploration
Expenses) in 2002.

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Salaries, management fees and benefits of
$120,813 decreased slightly in 2003 from $124,680 in 2002.Professional Fees were $2,277 in the quarter of
2003 down significantly from $98,122 in 2002. The expenses in the first quarter
of 2002 related to the completion of the review and resumption of trading on the
CDNX (now the TSX Venture Exchange).

Corporate IncomeThe Company does not have regular income from
sale of minerals or other products. The main source of income from year to year
is interest earned on its term deposits. There was negligible income in the
first quarter of 2002.

B.Liquidity and Capital Resources

Years Ended December 31, 2002, 2001 and 2000

The primary source of cash has been private
placements. At December 31, 2002, the working capital was approximately negative
$832,000, compared to $75,000 in 2001 and $2.6 million in 2000. Two private
placements took place in 2002 for a total amount of $926,705 and only one during
2001 for the amount of $72,500. The Company completed a private placement
financing of $2.7 million in January 2000, and the exercise of warrants in April
2000 provided an additional $1.3 million. In January 2003 the Company raised
$116,428 in a private placement. A private placement financing was announced
April 10, 2003, and closing was announced May 22, 2003, with total proceeds of
$1,188,853. This provides sufficient funds to eliminate most of the working
capital deficit and provide working capital to sustain basic operations for
several months. Project specific financing may be available to advance the
limestone/quicklime project.

The Company's main source of income from year to
year is interest earned on its term deposits. The interest income over the years
has varied with the amount of money in term deposits and has not been a
significant component of the Company's ability to operate. Interest and other
income in 2002 was $250,986 including the sale of limestone, compared to
interest only income of $72,560 in 2001, and $194,504 in 2000.

While Birch has been successful in raising funds,
management believes junior resource companies will continue to have difficulty
financing new issues in 2003. As a result, the Company will remain prudent and
cautious, preserving its working capital by conducting selective field programs
and laboratory work, as well as minimizing general and administrative costs.

The Company has init iated the regulatory
approval process to licence a limestone aggregate quarry which, when approved,
has the potential to produce stable long-term cash flow. In addition, the
opportunity to produce quicklime from the same quarry for sale to oil sands
companies is under active consideration.

Precious Metals Exploration Costs
Mineral exploration costs were $863,845 in 2002
and $941,530 in 2001 compared with $1,792,388 in 2000. All exploration in 2002
was focused on the Company's Athabasca mineral properties. In 2001, the focus
was on the two prairie gold prospects, with 99% of the exploration expenditures
directed to the Athabasca project and the balance to Dawson Bay, and in 2000,
90% was directed to Athabasca.

Mineral Technology CostsThe Company spent $42,514 in 2002, down from
$128,068 in 2001 and $160,539 in 2000, on scientific research, primarily the
development of proprietary extraction and analytical techniques. There were no
similar expenditures on research in previous years. The results of the research
led to the filing of U.S. and international patent applications in the spring of
2000. One U.S. patent was received in December 2002.

Industrial Minerals CostsIn 2002, the Company established an Industrial
Mineral Division to take advantage of the business opportunity in the market for
limestone from its Athabasca leases. This division incurred costs of $112,460
during the year, which related to a geological investigation of the proposed
limestone quarry, initial drilling and filing for environmental approvals. A
sale of limestone for $250,000 occurred in September of 2002.

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Financing ActivitiesFinancing activities provided cash of $4,364,500
in 2000, primarily from proceeds received from private placements. On January
28, 2000, Birch announced the completion of a non-brokered private placement
consisting of 2,365,256 units, under which 1,160,000 common shares were issued
with attached flow-through benefits. Each unit was priced at $1.15 and consisted
of one common share and one-half common share purchase warrant. Each whole
common share purchase warrant entitled the holder to purchase one common share
at an exercise price of $1.50 per common share for one year from the date of
issuance. These warrants expired unexercised in December 2002.

In 2001 the Company completed only one private
placement financing for $75,000. Two private placements took place in 2002 for a
total amount of $926,705. The closing of a non-brokered private placement
announced on May 22, 2003, with total proceeds of $1,188,853, less commission,
expenses and filing fees of approximately $25,000. A total of 4,755,410 units
were sold at a price of $0.25 per unit. Each unit consisted of one common share
and one common share purchase warrant entitling the holder to purchase one
common share at an exercise price of $0.50 for sixteen months from the date of
closing. A total of 1,870,000 common shares were issued with attached
flow-through benefits.

The Company repriced to $0.50 per warrant, the
following common share purchase warrants issued by private placement: 881,652
expiring August 6, 2003, 285,715 expiring September 19, 2003, 2,071,910 expiring
June 20, 2004 and 465,712 expiring July 24, 2004.

There were no options exercised in 2002 or 2001.
In 2000, employees, consultants and directors of Birch exercised an aggregate of
625,600 stock options pursuant to Birch's stock option plan.

Birch's existing capital resources are inadequate
to maintain operations at its current rate of investment in exploration,
research and industrial minerals to the end of 2003. The Company is working on
plans to raise additional operating capital to advance the regulatory approval
of a limestone quarry for the sale of aggregate and business opportunities
associated with quicklime production from the same quarry, research and precious
metal assay program development, together with ongoing corporate activities.
There is no assurance that events will not result in changes affecting the
Company's ability to continue operations. Additional financing may not be
available when needed, or if available, it may not be on terms that are
acceptable. To the extent that Birch raises additional capital by issuing equity
or convertible debt securities, ownership dilution to shareholders will result.

Common shares of Marum Resources Inc. and Shear
Minerals Ltd. were accepted in 2001 as the option payment under an agreement for
these two companies to earn an interest in the Company's Birch Mountains
properties by expending certain amounts on exploration. The Marum and Shear
shares were subsequently sold in 2003. Tahera Corporation shares, which were
accepted as a settlement of debt, were sold during 2001. The Company only
invests in bank guaranteed certificates of deposit, and consequently, no
material loss from marketable security instruments are expected and the Company
believes that interest rate exposure is limited. Birch does not use derivative
instruments.

Three Months Ended March 31, 2003 and 2002

The primary source of cash has been private
placements. One private placement took place in January 2002 for $116,428. At
March 31, 2003, the working capital deficiency was approximately $1,200,000.
Comparatively, at March 31, 2002, the working capital deficiency was
approximately $420,000. As a subsequent event, the Company closed a private
placement financing on May 16, 2003, with proceeds of $1,189,000. While Birch
has been successful in raising funds, management believes junior resource
companies will continue to have difficulty financing new issues in 2003.

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Mineral Exploration Costs

Precious Metals Exploration Costs
Mineral Exploration Costs in the first quarter of
2003 were $45,155 compared to $237,135 in 2002. Limited exploration work
reflects the shift in emphasis to industrial minerals.

Mineral Technology CostsThe Company spent $2,579 in 2003, down from
$23,455 in 2002 on scientific research, primarily on the development of
proprietary extraction and analytical techniques. There were no similar
expenditures on research in previous years.

Industrial Minerals CostsIn 2002 the Company established an Industrial
Mineral division in order to take advantage of the business opportunity in the
market for limestone from its Athabasca leases. This division incurred cost of
$219,509 during the first quarter of 2003, which related to a geological
investigation of the potential limestone quarry, initial drilling and filing for
environmental approvals.

The market interest generated in the
opportunities for the Industrial Mineral Division may result in project
financing to enable the advancement of the limestone/quicklime project.

C.Research and Development, Patent and
Licenses

During the fiscal year ended December 31, 2000,
the Company commenced research in new mineral technology applications. The
research resulted in the filing of a U.S. and international patent applications.
It is theCompany's policy that costs associated with such
projects are expensed in the period in which they are incurred. During the
fiscal year ended December 31, 2001, the Company spent $128,068 on scientific
research compared to $42,514 in research costs in 2002.

Late in 2002, Birch awarded U.S. 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.

D.Trend Information

Industrial MineralsThere is a growing demand for aggregate and
quicklime in the Fort McMurray region of Alberta and Birch has initiated the
application process to licence a new limestone quarry. The expansion and
construction of oil sands projects requires large volumes of aggregate in
addition to aggregate required for constructing the regional infrastructure to
support this development.

The proposed quarry also contains limestone units
suitable for producing quicklime. Quicklime is used to remove sulphur dioxide
and other contaminants from the emission stacks of industrial facilities
including oil sands plants. Quicklime is also used in water treatment plants to
remove heavy metals and other impurities. Birch has been in contact with a
number of oil sands operators regarding future demand for quicklime and intends
to aggressively pursue the business opportunity to establish a quicklime
production facilit y on its proposed quarry site.

Precious MetalsThere has been an upward trend in the spot price
of gold and many analysts predict that the price will continue to be strong for
several years. However, the Company has no expertise in predicting future market
trends in the price of gold or other precious metals. If the price of gold
remains strong, the Company's share price may respond, but Birch has no
production and, therefore, there will be no impact on revenue even if the price
of gold remains at current or higher levels. If the upward trend in the spot
price of gold continues, it may make future financings more attractive to
investors.

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E.Off-balance Sheet Arrangements

The Company has no off-balance sheet
arrangements.

F.Tabular Disclosure of Contractual
Obligations

As of December 31, 2002, the Company's known
contractual obligations are as follows.

|Payments due by period                 
|---------------------------------------
|Contractual
    Obligations            
|Long-term Debt
    Obligations         
|Capital (Finance) Lease
    Obligations
|Operating Lease Obligations            
|Purchase  Obligations                  
|Total                                  



A.    Directors and
    Senior Management



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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, no such nomination has been made by Mr. Friedland for the
forthcoming year.

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B.Compensation

The following table sets forth the amount of
compensation that was paid (including deferred compensation accrued for the
year) and benefits that were granted in the financial year ended December 31,
2002 to each of the individuals listed in Item 6(A) above.

|Name                 | Compensation |   | Deferred Compensation |  | Benefits
|-------------------- | ------------ | - | --------------------- |  | --------
|                    
|Douglas J. Rowe      | $100,000     |   | $40,920               |  | $1,070  
|Kerry E. Sully       |              | 0 |                       |  |         
|Donald L. Dabbs      | $77,000      |   | $29,000               |  | $1,015  
|Lanny K. McDonald    |              | 0 |                       |  |         
|Dr. Hugh Abercrombie | $98,400      |   | $7,244                |  | $4,810  
|Dr. Jack Clark       |              |   | 0                     |  |         
|Charles Hopper       |              |   | 0                     |  |         
|John R. Houghton     |              |   | 0                     |  |         
|Suzanne L. Loov      |              |   | 0                     |  |         

The Company currently has in effect a "rolling"
stock option plan dated November 2, 1994 (the "1994 Plan"). Pursuant to the 1994
Plan, the Board of Directors of the Company or a special committee of directors
appointed from time to time by the Board of Directors of the Company (the Board
of Directors or such special committee is hereinafter referred to as the "Board") may grant non-transferable options (the
"Options") to purchase Common
Shares of the Company to directors, officers, employees and consultants of the
Company or any of its subsidiaries or affiliates (such persons hereinafter
collectively referred to as "1994 Participants"). Under the 1994 Plan, the
number of Common Shares subject to an Option granted to any one 1994 Participant
shall be determined by the Board; however, the aggregate number of Common Shares
which may be reserved for issuance to any one 1994 Participant and the aggregate
number of shares to be delivered upon the exercise of all Options granted under
the 1994 Plan shall not exceed the maximum number of shares permitted under the
rules of any stock exchange on which the Common Shares are then listed or other
regulatory body having jurisdiction (hereinafter collectively referred to as the
"Exchange"). Options issued pursuant to the 1994 Plan will have an exercise
price determined by the Board of the Company provided that such exercise price
shall not be less than the price permitted by the Exchange. The 1994 Plan
contains provisions stating that the option period shall not exceed the maximum
period permitted by the Exchange. In addition, the 1994 Plan contains early
termination provisions for certain situations.

The Company also currently has in effect a
"fixed" stock option plan dated March 27, 2002 (the "2002 Plan"). Pursuant to
the 2002 Plan, the Board of the Company 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 "2002 Participants").
Under the 2002 Plan, the number of Common Shares subject to an Option granted to
any one Participant shall be determined by the Board; however, the aggregate
number of Common Shares which may be reserved for issuance to any one 2002
Participant shall not exceed the maximum number of shares permitted by the
Exchange. The aggregate number of shares to be delivered upon the exercise of
all Options under the 2002 Plan may not exceed 3,392,674 shares. Options issued
pursuant to the 1994 Plan will have an exercise price determined by the Board of
the Company provided that such exercise price shall not be less than the price
permitted by the Exchange. The 2002 Plan contains provisions stating that the
option period shall not exceed the maximum period permitted by the Exchange. In
addition, the 2002 Plan contains early termination provisions for certain
situations.

Due to changes in the policies of the Exchange,
various amendments to the 1994 Plan and 2002 Plan have been approved by the
Board of Directors at a meeting held on May 8, 2003 and will be presented to
shareholders for approval.

The Company is proposing to amend the 1994 Plan
and replace it with the amended stock option plan (the "Amended 1994 Plan") The
Amended 1994 Plan has been drafted to comply with current Exchange policies and
is intended to provide flexibility to the Company when it desires to grant stock
options.

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The material amendments proposed to be made in
the Amended 1994 Plan are as follows:

a)Additional provisions have been added to section 8
of the Amended 1994 Plan to clarify the maximum
         number of options which may be
granted in a twelve month period to (i) any one individual optionee;
        (ii) any
one consultant; and (iii) any employee conducting investor relations activities
for the Company.

b)     Additional provisions have been added to section
9 of the Amended 1994 Plan to clarify the permitted
        duration of options granted.

c)
Additional provisions have been added to section 17 of the Amended 1994 Plan to clarify the

        circumstances under which amendments can be made
to the Amended 1994 Plan.

The Amended 1994 Plan is subject to shareholder
and Exchange approval.

The Company is proposing to amend the 2002 Plan
and replace it with the amended stock option plan (the "Amended 2002 Plan"). The
Amended 2002 Plan has been drafted to comply with current Exchange policies, as
they exist as at the date of this management information circular and is
intended to provide flexibility to the Company when it desires to grant stock
options.

The material amendments proposed to be made in
the Amended 2002 Plan are as follows:

a)   
The number of Common Shares reserved for issuance
under the Amended 2002 Plan has been increased 
        from 3,392,674 to 3,735,211, the
latter number being equal to 20% of the issued and outstanding
        Common Shares as
at the date of this management information circular less the number of Common

        Shares which may be reserved for issuance pursuant to the Amended 1994 Plan.

b)     Additional provisions have been added to section
8 of the Amended 2002 Plan to clarify the maximum 
        number of options which may be
granted in a twelve month period to (i) any one individual optionee;
        (ii) any
one consultant; and (iii) any employee conducting investor relations activities
for the Company.

c)    Additional provisions have been added to section
9 of the Amended 1994 Plan to clarify the 
        permitted duration of Options granted.

d)    Additional provisions have
been added to section 17 of the Amended 2002 Plan to clarify the

        circumstances under which amendments can be made
to the Amended 2002 Plan.

The Amended 2002 Plan is subject to shareholder
and Exchange approval.

The following table sets forth the number of
options to purchase common shares of Birch granted under both the 1994 Plan and
2002 Plan, the purchase price and the expiration date of options granted to each
of the individuals listed in Item 6(A) above.

|Name              | Number of
    options to
    purchase
    Common Shares | Purchase Price                      | Expiry Date                                                         
|----------------- | ------------------------------------------------------- | ----------------------------------- | --------------------------------------------------------------------
|Douglas J. Rowe   | 200,000
    120,000
   390,000
   90,000                | $0.35
    $1.36
    $0.26
    $0.34 | Nov. 16, 2003
    Nov. 18, 2004
   Mar. 18, 2007
    April 03, 2007 
|Kerry E. Sully    | 75,000
    50,000
    150,000
    125,000               | $0.35
    $1.36
    $0.26
    $0.34 | Nov. 16, 2003
    Nov. 18, 2004
    Mar. 18, 2007
    April 03, 2007
|Donald L. Dabbs   | 50,000
    80,000
    200,000
    100,000               | $0.35
    $1.36
    $0.26
    $0.34 | Nov. 16, 2003
    Nov. 18, 2004
    Mar. 18, 2007
    April 03, 2007
|Lanny K. McDonald | 50,000
    50,000                                       | $0.35
    $1.36                     | Nov. 16, 2003
    Nov. 18, 2004                                     

-27-

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|Name                    | Number of
    options to
    purchase
    Common Shares | Purchase Price                      | Expiry Date                                                          
|----------------------- | ------------------------------------------------------- | ----------------------------------- | ---------------------------------------------------------------------
|                        | 100,000
    150,000                                     | $0.26
    $0.34                     | Mar. 18, 2007
    April 03, 2007                                     
|Dr. Hugh J. Abercrombie | 65,000
    120,000
    100,000
    65,000               | $0.35
    $1.36
    $0.26
    $0.34 | Nov. 16, 2003
    Nov. 18, 2004
    Mar. 18, 2007
    April 03, 2007 
|Dr. Jack Clark          | 125,000
    100,000
    125,000                         | $0.65
    $0.26
    $0.34           | April 24, 2006
    Mar. 18, 2007
    April 03, 2007                  
|Charles Hopper          | 100,000
    25,000
    100,000
    125,000              | $0.60
    $0.65
    $0.26
    $0.34 | Jan. 27, 2006
    April 24, 2006
    Mar. 18, 2007
    April 03, 2007
|John R. Houghton        | 50,000
    50,000
    50,000
    50,000                 | $0.22
    $0.35
    $1.36
    $0.34 | July 13, 2003
    Nov. 16, 2003
    Nov. 18, 2004
    April 03, 2007 
|Suzanne L. Loov         | 100,000
    40,000                                      | $0.65
    $0.34                     | April 24, 2006
    April 03, 2007                                    

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 Charles Hopper, Kerry E. Sully and Donald L. Dabbs. There have been no
changes to the membership of this committee since the most recently completed
year-end. The general function of the audit committee is to review the overall
audit plan and Birch system of internal controls, to review the results of the
external audit, and to resolve any potential disputes with Birch's auditors.

Compensation Committee

The Board of Directors established a Compensation
Committee on July 10, 1996, comprises Lanny K. McDonald (Chairman of the Compensation Committee
and a director of the Company), Douglas J. Rowe (the President, Chief Executive
Officer and a director of the Company), Kerry E. Sully (Chairman of the Board of
Directors of the Company).

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 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 to pay executive
salaries. Previously, the Compensation Committee undertook a review of the
compensation paid by similar junior natural resources issues in setting
guidelines for the compensation of the Company's executive officers. 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. On December 5, 2000, the Board of Directors of the
Company approved an increase in Mr. Rowe's annual salary to $140,000 per annum,
effective June 15, 2000.

- 28 -

---

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 and geographic location. All of
Birch's employees are employed in Alberta, Canada.

|                                                                                               | Twelve Months
    Ended December 31
|---------------------------------------------------------------------------------------------- | -----------------------------------
|                                                                                               | 2002                               
|Operations(1)                                                                                  | 6                                  
|Accounting                                                                                     | 1                                  
|Administration                                                                                 | 4                                  
|Total                                                                                          | 11                                 
|                                                                                               |                                    
|Note:                                                                                          |                                    
|(1)        Includes personnel
    involved in technology, exploration and industrial minerals.

E.Share Ownership

See Item 6 - "Directors, Senior Management and
Employees - Directors and Senior Management" and "Directors, Senior Management
and Employees - Compensation", above, for disclosure regarding share ownership
and options of Birch directors and executive officers.

ITEM 7 MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS

A.Major Shareholders

To the knowledge of Birch 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, except as set forth below:

|Name               | Number of Securities Owned | Percentage of Class
|------------------ | -------------------------- | -------------------
|Douglas J. Rowe(1) | 2,152,983(2)               | 5.11%(3)           

|Notes:(1) | Mr. Rowe also holds options to purchase common shares of Birch as
    set forth in Item 6(B), above.                                             
|--------- | -------------------------------------------------------------------------------------------------------------------------------------------------
|(2)       | Number of shares is based upon insider trading
reports filed by the named shareholder with applicable Canadian securities
regulatory authorities.
|(3)       | Based on 42,107,521 issued and outstanding common
shares.                                                                                        

The major shareholders of Birch do not have
different voting rights than other shareholders.

As of May 31, 2003, 94 holders having an address
of record within the United States of America owned 9,958,367 common shares, representing 23.6% of
Birch's 42,107,521 (as of May 31, 2003) outstanding common shares.

B.Related Party Transactions

Other than the participation by certain of the
Company's directors and executive officers in private placement financings on
the same basis as unrelated third party investors, during the Company's last
fiscal year and up to the date of this annual report, 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

- 29 -

---

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 indiv idual's family are
those that may be expected to influence, or be influenced by, that person in
their dealings with the Company.

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, 2002, 2001 and 2000 and
the unaudited consolidated interim financial statements for the periods ended
March 31, 2003 and 2002.

Other than as described herein, 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
whic h 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 since March
31, 2003.

ITEM 9 THE OFFER AND LISTING

A.Offer and Listing Details

The following table sets forth the high and low
market prices of the common shares on the Exchange for the periods indicated.

|Fiscal Period                                                                                                                                                                     | High (Cdn$)                                                | Low (Cdn$)                                                
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ----------------------------------------------------------
|Years Ended:
    December 31, 1998
    December 31, 1999
    December 31, 2000
    December 31, 2001
    December 31, 2002
    2003
    First Quarter
    2002
    Fourth Quarter | 1.00
    2.10
    3.05
    1.10
    0.73
    0.40
    0.42 | 0.12
    0.29
    0.40
    0.50
    0.10
    0.19
    0.10

- 30 -

---

|Fiscal Period                                                                                                                                                                                                                                                                                | High (Cdn$)                                                                                             | Low (Cdn$)                                                                                                  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------
|Third Quarter
    Second Quarter
    First Quarter
    
    2001
    Fourth Quarter
    Third Quarter
    Second Quarter
    First Quarter
    
    Month Ended
    
    May 30, 2003
    April 30, 2003
    March 31, 2003
    February 28, 2003
    January 31, 2003
    December 31, 2002 | 0.37
    0.40
    0.73
    -
    -
    -
    1.10
    0.55
    0.38
    0.35
    0.39
    0.40
    0.42 | 0.13
    0.20
    0.23
    
    -
    -
    -
    0.50
    0.32
    0.23
    0.19
    0.32
    0.28
    0.21

|          |                                                                                                                                                                                                                                                                                                                                                                                          
|--------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note: (1) | On June 16, 2000, the TSXV
    halted trading of the common shares of the Company and on June 28, 2000,
    trading of the Company's common shares was suspended. Trading of the
    Company's common shares on the TSXV was reinstated on September 29, 2000.
    Trading in the common shares of the Company was again suspended on March 5,
    2001 and reinstated on  March 9, 2002.

The following table sets forth the high and low
market prices of the common shares on the OTC-BB. All financial figures in this
table are expressed in U.S. dollars.

|Fiscal Period                                                                                                                                                                                                                                                                                           | High (US$)                                                                                                                                                    | Low (US$)                                                                                                                                                    
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|Years Ended:
    December 31, 2002
    
    2003
    First Quarter
    
    2002
    Fourth Quarter
    Third Quarter
    Second Quarter
    First Quarter
    
    Month Ended
    May 30, 2003
    April 30, 2003
    March 31, 2003
    February 28, 2003
    January 31, 2003
    December 31, 2002 | 0.2950
    
    
    0.2550
    
    
    0.2625
    0.2400
    0.2500
    0.2950
    
    
    0.4300
    0.2800
    0.2800
    0.3300
    0.2500
    0.2625 | 0.0700
    
    
    0.1300
    
    
    0.0800
    0.0900
    0.1300
    0.2150
    
    
    0.2200
    0.1500
    0.1225
    0.1900
    0.1750
    0.0800

B.Plan of Distribution

This item is not applicable.

- 31 -

---

C.Markets

Trading in Canada

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

Trading in the U.S.A.

The Company's common shares trade on the OTC-BB
under the symbol BHMNF.

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

Incorporation Details and Objects of Birch

Birch was established pursuant to the issuance on
December 31, 1995 of a Certificate of Amalgamation by the Registrar of
Corporations of the Province of Alberta pursuant to the provisions of the ABCA.
The amalgamating companies were Birch Mountain Resources Ltd. and Birch Mountain
Minerals Ltd. Birch's Alberta Corporate Registry Access Number is 20679269. The
Articles of Amalgamation of Birch provide that there are no restrictions on the
nature of the business to be carried on by Birch.

Summary of Directors Powers and Authorities

The rights, duties, powers and authorities of the
Board of Directors of Birch are set out in the Articles and ByLaws of Birch and
the statutory provisions of the ABCA. The following is a selected summary of the
Article s, By-Laws and applicable provisions of the ABCA as they relate to
selected rights, duties, powers and authorities of the Board of Directors of
Birch.

The Articles of Birch provide for a minimum of
one and a maximum of fifteen directors. The ABCA prescribes that a distributing
corporation must have a minimum of three directors, a majority of whom are
Canadian residents and at least two of whom are not officers or employees of
Birch. The Board of Directors may, between annual shareholders' meetings,
appoint one or more additional directors to serve until the next annual
shareholders' meeting provided that the number of directors so added may not
exceed by one-third (1/3) the number of directors who held office at the
expiration of the last shareholders' meeting.

The Chairman of the Board of Directors or any one
director may call a meeting upon the provisions of forty-eight hours notice to
each director in the manner prescribed in the By-Laws. Any such notice shall
include the items of business to be considered at the meeting. A majority of the
directors constitute a quorum provided that half of those directors present are
Canadian residents. Business cannot be transacted without a quorum. A

- 32 -

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quorum of directors may vote on any matter of
business properly brought before the meeting provided that where a director is a
party to a material contract or proposed material contract or has a material
interest in the matter to be considered, such director must disclose his or her
interest at the earliest possible date, request the conflict be noted in the
minutes of the meeting, and with a few limited exceptions enumerated in the
By-Laws, refrain from voting on the matter in which the director has a material
interest. There is no limitation on the Board of Directors to vote on matters of
their remuneration provided such remuneration is disclosed in the financial
statements and annual shareholder proxy materials.

The Board of Directors has broad borrowing powers
and may, without authorization from the shareholders, (a) borrow money on the
credit of Birch; (b) issue, re-issue, sell or pledge debt obligations of Birch;
(c) subject to restrictions respecting financial assistance prescribed in the
ABCA, give a guarantee on behalf of Birch to secure the performance of an
obligation of any person; and (d) mortgage, hypothecate, pledge or otherwise
create a security interest in all or any property of Birch, owned or
subsequently acquired, to secure any obligation of Birch.

A person is qualified to be or stand for election
as a director provided such person is at least 18 years of age, is not a
bankrupt and is not mentally incapacitated pursuant to applicable Alberta mental
health legislation or pursuant to an order of the Alberta courts. There is no
requirement for a director to hold shares of Birch.

Securities of Birch

The Company has an authorized capital consisting
of an unlimited number of common shares, of which 42,107,521 are issued and
outstanding as of the date of this annual report.

The holders of common shares are entitled to one
vote for each share held of record on all matters to be voted on by
stockholders. There is no cumulative voting with respect to the election of
directors, with the result that the holders of more than 50% of the shares
voting for the election of directors can elect all of the directors. Holders of
common shares are entitled to receive dividends when, as and if declared by the
Board of Directors in its discretion, out of funds legally available therefore.
In the event of liquidation, dissolution or winding up of the Company, the
holders of common shares are entitled to share ratably in the assets of the
Company, if any, legally available for distribution to them after payment of
debts and liabilities of the Company after provision has been made for each
class of stock, if any, having liquidation preference over the common shares.
Holders of common shares have no conversion, pre-emptive or other subscription
rights, and there are no redemption or sinking fund provisions applicable to the
common shares. All of the outstanding common shares are fully paid and
non-assessable.

The Company is authorized to issue an unlimited
number of non-voting shares. The holders of the non-voting shares are entitled
to dividends, if, as and when declared by the Board of Directors and, upon
liquidation, to receive such assets of the Company as are distributable to the
holders of the non-voting and common shares.

The Company is authorized to issue an unlimited
number of preferred shares. The preferred shares may be issued from time to time
in one or more series, each consisting of a number of preferred shares as
determined by the Board of Directors of the Company who also may fix the
designations, rights, privileges, restrictions and conditions attaching to the
shares of each series of preferred shares. There are no preferred shares issued
and outstanding. The preferred shares of each series shall, with respect to
payment of dividends and distribution of assets in the event of voluntary or
involuntary liquidation, dissolution or winding-up of the Company or any other
distribution of the assets of the Company among its shareholders for the purpose
of winding-up its affairs, rank on a parity with the preferred shares of every
other series and shall be entitled to preference over the common shares and the
shares of any other class ranking junior to the preferred shares.

Rights and Privileges of Shareholders

The directors of Birch are required to call an
annual meeting of shareholders not later than 15 months after holding the last
preceding annual meeting, subject to obtaining a court order for an extension,
and may at any time call a special meeting of shareholders. Only the registered
holders of common shares on the record date are

- 33 -

---

entitled to receive notice of and vote at annual
and special meetings of shareholders. Where the items of business affect the
rights of shareholders other than common shareholders, a special majority of
two-thirds of the votes cast by the effected shareholders at the meeting called
for such purpose is required to approve the item of business. Beneficial holders
of common shares are also entitled to receive proxy materials in respect of
meetings of shareholders in accordance with Canadian Securities Administrators
National Policy No. 41, provided that such proxies are limited in scope to
instructing the registered shareholder (usually a brokerage house) on how to
vote on behalf of the beneficial shareholder. There are no restrictions on the
number of shares that may be held by non-residents other than restrictions set
out in the Investment Canada Act (Canada). See "Additional Information -
Exchange Controls".

There is no specific provisions in the Articles
or By-Laws of Birch that have the effect of delaying, deferring or preventing a
change of control of Birch. Notwithstanding this, the Board of Directors, under
the general powers conferred to it under the By-Laws, have the authority to
approve and invoke a shareholders rights plan that will protect shareholders
from unfair, abusive or coercive take-over strategies, including the acquisition
or control of Birch 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.

On May 17, 2000 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 Montreal Trust
Company of Canada (now Computershare Trust Company of Canada), as rights agent.
The shareholders of the Company approved the Rights Plan on June 22, 2000. 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's 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 corporation's issued and
outstanding share capital.

C.Material Contracts

Birch has not entered into any material contracts
(not made in the ordinary course of business) in the two years prior the date of
filing of this annual report.

D.Exchange Controls

Canadian Exchange 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 U.S. residents, however, are subject to a 15%
withholding tax or a 5% withholding tax for dividends if the

- 34 -

---

shareholder is a corporation owning at least 10%
of the outstanding voting shares of the Company pursuant to Article X of the
reciprocal tax treaty between Canada and the U.S. (See "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.

Management of the Company believes that the
following summary fairly describes those provisions of the ICA pertinent to an
investment in the Company by a person who is not a Canadian resident (a
"non-Canadian").

The ICA requires a non-Canadian making an investment 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 which is
required to be filed with the IRD by the investor at any time up to 30 days
following implementation of the investment. It is intended 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.

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 the 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 Act.

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

- 35 -

---

|   | (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 2003 is $223
    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)                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | (ii)                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | (iii)                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | (iv)                                                                                                                                                                                                                                                                                                                                                              
|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.

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 less than one-third of the voting control of a Canadian
corporation is acquired by an investor.

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 investor-controlled corporation, a limited
partnership, trust or joint venture 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.

The higher thresholds for WTO investors do not
apply if the Canadian business engages in activities in certain sectors such as
uranium, financial services (except insurance), transportation services or
cultural business.

The ICA exempts certain transactions from the
notification and review provisions of ICA, including, among others, (a) 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; (b) 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; (c) 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 (d) acquisition of control of the Company by reason of an
amalgamation, merger, consolidation or corporate reorganization, follow ing
which the ultimate direct or indirect control in fact of the Company, through
the ownership of voting interests, remains unchanged.

- 36 -

---

E.Taxation

The following summary of the material Canadian
federal income tax considerations generally applicable in respect of the common
shares reflects the Company's opinion. The tax consequences to any particular
holder of common shares will vary according to: 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, the place where that holder is
resident and, generally, according to that holder's particular circumstances.

This following general discussion in respect of
taxation is based upon the Company's understanding of the rules. No opinion was
requested by the Company or provided by its auditors or lawyers.

This summary is applicable only to holders who
are resident in the U.S., have never been resident in Canada, deal at arm's
length with the Company, hold their common shares as capital property, do not
carry on an insurance business in Canada, and will not use or hold the common
shares in carrying on business in Canada. Special rules, which are not discussed
in this summary, may apply to a U.S. holder that is a corporation that carries
on business in Canada and elsewhere.

This summary is based upon the provisions of the
Income Tax Act of Canada and the regulations thereunder (collectively, the "Tax
Act", or "ITA") and the Canada-United States Tax Convention (the "Tax
Convention") as at the date of this annual report, and upon the current
administrative practices of the Canada Customs and Revenue Agency (formerly
Revenue Canada).

Each holder should consult his own tax advisor
with respect to the income tax consequences applicable to him in his own
particular circumstances.

Disposition of Common Shares

Under the Tax Act, a gain from the sale of common
shares by a non-resident will not be subject to Canadian tax, provided the
shareholder (together with persons who do not deal at arm's length with the
shareholder) have not owned 25% or more of the shares of any class of the
Company's stock at any time in the five years preceding the disposition. In
addition, the Tax Convention will exempt from Canadian taxation any capital gain
realized on a disposition of common shares by a resident of the U.S., provided
that the value of the common shares is not derived principally from real
property situated in Canada.

However, special rules apply if a non-resident
were to dispose of common shares of the Company to another Canadian corporation
which deals or is deemed to deal on a non-arm's length basis with the
non-resident and, immediately after the disposition, the Company is connected
with the purchaser corporation (i.e., the purchaser corporation holds shares
representing more than 10% of the voting power and more than 10% of the market
value of all issued and outstanding shares of the Company). In this case, the
amount by which the fair market value of any consideration paid by the purchaser
corporation (other than any shares of the purchaser corporation) exceeds the
paid-up capital of the common shares sold will be deemed to be taxable as a
dividend paid by the purchasing corporation, and subject to withholding taxes as
described below.

Dividends

In the case of any dividends paid or deemed to be
paid to non-residents, the non-resident is subject to tax on the gross amount of
such dividends. The Canadian tax is withheld by the Company, which remits only
the net amount to the shareholder. By virtue of Article X of the Tax Convention,
the rate of tax on dividends paid to residents of the U.S. is generally limited
to 15% of the gross dividend (or 5% in the case of certain corporate
shareholders owning at least 10% of the Company's voting shares). In the absence
of the treaty provisions, the rate of Canadian withholding tax imposed on
non-residents is 25% of the gross dividend. Stock dividends received by
non-residents from the Company are taxable by Canada as ordinary dividends.

Where a holder disposes of common shares to the
Company (unless the Company acquired the common shares in the open market in the
manner in which shares would normally be purchased by any member of the public),

- 37 -

---

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

Capital Gains

A non-resident of Canada is not subject to tax
under the ITA in respect of a capital gain realized upon the disposition of a
share of a class that is listed on a prescribed stock exchange unless the share
represents "taxable Canadian property" to the holder thereof. A common share of
the Company will be taxable Canadian property to a non-resident holder if, at
any time during the period of five years immediately preceding the disposition,
the non-resident holder, persons with whom the non-resident holder did not deal
at arm's length, or the non-resident holder and persons with whom he/she did not
deal at arms' length, owned 25% of more of the issued shares of any class or
series of the Company.

In the case of a non-resident holder to whom
shares of the Company represent taxable Canadian property and who is resident in
the U.S., no Canadian tax will be payable on a capital gain realized on such
shares by reason of the Tax Convention unless the value of such shares is
derived principally from real property situated in Canada or the non-resident
holder previously held the shares while resident in Canada. Mineral exploration
rights are considered to be real property for this purpose.

United States Federal Income Tax Consequences

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

The following discussion is based upon the
sections of 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 or all 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 which, if enacted, could be applied, possibly on a
retroactive basis, at any time.

Holders and prospective holders of common shares
of the Company should consult their own tax advisors about the federal, state,
local, and foreign tax consequences of purchasing, owning and disposing of
common shares of the Company.

U.S. Holders

As used herein, a U.S. Holder includes a holder
of common shares of the Company who is a citizen or resident of the U.S., a
corporation created or organized in or under the laws of the U.S. or of any
political subdivision thereof and any other person or entity whose ownership of
common shares of the Company is effectively connected with the conduct of a
trade or business in the U.S.

A U.S. Holder does not include persons subject to
special provisions of Federal income tax law, such as tax-exempt organizations,
qualified retirement plans, financial institutions, insurance companies,
broker-dealers, non-resident alien individuals or foreign corporation whose
ownership of common shares of the Company is not effectively connected with the
conduct of a trade or business in the U.S. and shareholders who acquired their
stock through the exercise of employee stock options or otherwise as
compensation.

Distributions on Common Shares of the Company

- 38 -

---

U.S. Holders receiving dividend distributions
(including constructive dividends) with respect to common shares of the Company
are required to include in gross income (for U.S. Federal income tax purposes)
the gross amount of such distributions, to the extent that the Company has
current or accumulated earnings and profits. This inclusion is done without
reduction for any Canadian income tax withheld from such distributions.

Any Canadian tax withheld may be credited
(subject to certain limitations) against the U.S. Holder's U.S. 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 U.S.
Holder's adjusted basis in the common shares and thereafter as a gain from the
sale or exchange of the common shares. Preferential tax rates for long-term
capital gains are applicable to an U.S. Holder, which is an individual, estate
or trust. There are currently no preferential tax rates for long-term capital
gains for an U.S. Holder, which is a corporation.

Dividends paid on the common shares of the
Company will not generally be eligible for the dividends-received deduction
provided to corporations receiving dividends from certain U.S. corporations. A
U.S. Holder, that is a corporation may, under certain circumstances, be entitled
to a 70% deduction of the U.S. source-portion of dividends received from the
Company (unless the Company qualifies as a "foreign personal holding company" or
a "passive foreign investment company", as defined below). That occurs if such
U.S. Holder owns shares representing at least 10% of the voting power and value
of the Company. The availability of this deduction is subject to several complex
limitations beyond the scope of this discussion.

Foreign Tax Credit

A U.S. Holder who pays (or has withheld from
distributions) Canadian income tax with respect to the ownership of common
shares of the Company may be entitled, at the option of the U.S. Holder, to
either a deduction or a tax credit for such foreign tax paid or withheld.
Generally, it will be more advantageous to claim a credit because a credit
reduces U.S. 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 U.S. 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 U.S.
Holder's U.S. income tax liability that the U.S. Holder's foreign source income
bears to his/her or its worldwide taxable income.

In the determination of the application of this
limitation, the various items of income and deduction must be classified into
foreign and domestic sources. Complex rules govern this classification process.
There are further limitations on the foreign tax credit for certain types of
income such as "passive income", "high withholding tax interest", "financial
services income", "shipping income", and certain other classifications of
income. The availability of the foreign tax credit and the application of the
limitations on the credit are fact-specific and holders and prospective holders
of common shares of the Company should consult their own tax advisors regarding
their individual circumstances.

Disposition of Common Shares of the Company

A U.S. Holder will recognize gain or loss upon
the sale of common 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 shareholders tax basis in the common shares
of the Company.

This gain or loss will be capital gain or loss if
the common shares are a capital asset in the hands of the U.S. Holder, which
will be a short-term or long-term capital gain or loss depending upon the
holding period of the U.S. Holder. Gains and losses are netted and combined
according to special rule s in arriving at the overall

- 39 -

---

capital gain or loss for a particular tax year.
Deductions for net capital losses are subject to significant limitations.

For U.S. Holders, as individuals, any unused
portion of such net capital loss may be carried over to be used in later tax
years until such net capital loss is thereby exhausted. For U.S. Holders, as
corporations (other than corporations subject to subchapter S of the Code), an
unused net capital loss may be carried back three years from the loss year and
carried forward five years from the loss year to be offset against capital gains
until such net capital loss is thereby exhausted.

F.Dividends and Paying Agents

This item is not applicable.

G.Statement by Experts

This item is not applicable.

H.Documents on Display

Documents concerning Birch which are referred to
in this annual report may be inspected upon written request to the Corporate
Administrator of Birch as follows:

Jane Quinn
        Corporate Administrator 
        Birch Mountain Resources
Ltd.
        3100, 205 - 5th Avenue S.W.
        Calgary, AB, Canada T2P 2V7

The Company is subject to the information
requirements of theSecurities 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 Securities and Exchange Commission. All such
reports and information may be read and copied at the public reference
facilities listed below. The Company intends to give its shareholders annual
reports containing audited 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 annual report on 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 annual report.

The Company's Securities and Exchange Commission
filings, and the exhibits thereto, are available for inspection and copying at
the public reference facilities maintained by the Securities and Exchange
Commission in Judiciary Plaza, Room 1024, 450 Fifth Street N.W., 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 will also provide its shareholders
with proxy statements prepared according to Canadian law. As a Canadian company,
the Company is exempt from the Exchange Act rules about 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.

- 40 -

---

I.    Subsidiary
    Information



This item is not
    applicable.



ITEM 11    QUANTITATIVE AND QUALITATIVE
    DISCLOSURES ABOUT MARKET RISK



This item is not
    applicable.



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 installment. There are no
dividend arrearages or any other delinquencies.

ITEM 14 MATERIAL MODIFICATIONS TO THE RIGHTS
OF SECURITYHOLDERS AND USE OF PROCEEDS

There has been no modification or qualification
of the instruments defining the rights of holders of any class of registered
securities. There are no assets securing any class of registered securities.
There has been no change in the last financial year to the trustee of the
registered securities.

ITEM 15 CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Chief Executive Officer, Douglas J. Rowe, and
Chief Financial Officer, Donald L. Dabbs, evaluated the effectiveness of Birch's
disclosure controls and procedures as of a date within 90 days of the filing of
this report (the "Evaluation Date"), and concluded that, as of the Evaluation
Date, Birch's disclosure controls and procedures were effective to ensure that
information Birch is required to disclose in its filing with the Securities and
Exchange Commission under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified in the
Commission's rules and forms, and to ensure that information required to be
disclosed by Birch in the reports that it files under the Exchange Act is
accumulated and communicated to Birch's management, including its principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure.

Changes to Internal Controls and Procedures for
Financial Reporting

There were no significant changes to Birch's
internal controls or in other factors that could significantly affect these
controls subsequent to the Evaluation Date.

ITEM 16 RESERVED BY THE SEC

- 41 -

---

|PART III                                                                                                
|--------------------------------------------------------------------------------------------------------
|                                                                                                        
|ITEM 17 FINANCIAL STATEMENTS                                                                            
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|Report of Independent Auditors                                                                          
|                                                                                                        
|Consolidated Balance
    Sheets for the years ended December 31, 2001 and 2002                          
|                                                                                                        
|Consolidated
    Statements of Loss and Deficit for the years ended December 31, 2002, 2001
    and 2000
|                                                                                                        
|Consolidated
    Statements of Cash Flow for the years ended December 31, 2002, 2001 and 2000           
|                                                                                                        
|Notes to the Consolidated Financial
    Statements                                                      
|                                                                                                        
|Consolidated Balance
    Sheet for the three months ended March 31, 2003                                
|                                                                                                        
|Consolidated
    Statements of Loss and Deficit for the three months ended March 31, 2003               
|                                                                                                        
|Consolidated
    Statements of Cash Flow for the three months ended March 31, 2003                      
|                                                                                                        
|Notes to the Consolidated Financial
    Statements                                                      
|                                                                                                        
|ITEM 18 FINANCIAL STATEMENTS                                                                            
|                                                                                                        
|Not Applicable                                                                                          

- 42 -

---

|ITEM 19     | EXHIBITS                                                                              |     |                                                                                                                                            
|----------- | ------------------------------------------------------------------------------------- | --- | -------------------------------------------------------------------------------------------------------------------------------------------
|            |                                                                                       |     |                                                                                                                                            
|EXHIBIT NO. |                                                                                       |     |                                                                                                                                            
|            |                                                                                       |     |                                                                                                                                            
|1.          | Articles of Amalgamation
    
    (1)                                                 |     |                                                                                                                                            
|            |                                                                                       |     |                                                                                                                                            
|2a.         | By-Law No. 1(1)                                                                       |     |                                                                                                                                            
|            |                                                                                       |     |                                                                                                                                            
|2b.         | Shareholders Rights Plan
    Agreement(1)                                             |     |                                                                                                                                            
|            |                                                                                       |     |                                                                                                                                            
|4a.         | Stock Option Plan of
    the Company dated November 2, 1994(1)                       
|            |                                                                                       |     |                                                                                                                                            
|4b.         | Stock Option Plan of
    the Company dated March 27, 2002                            
|            |                                                                                       |     |                                                                                                                                            
|4c.         | Proposed amended
    1994 Stock Option Plan of the Company dated May 8, 2003         
|            |                                                                                       |     |                                                                                                                                            
|4d.         | Proposed amended
    2002 Stock Option Plan of the Company dated May 8, 2003         
|            |                                                                                       |     |                                                                                                                                            
|4e.         | Employment Contract
    with Douglas J. Rowe(1)                                      
|            |                                                                                       |     |                                                                                                                                            
|4f.         | Finders Fee
    Agreement between the Company and American Precious Metals Inc. dated
|            | June 24, 1999(1)                                                                      |     |                                                                                                                                            
|            |                                                                                       |     |                                                                                                                                            
|12a.        | 906 Certificate -
    Chief Executive Officer                                         |    
|            |                                                                                       |     |                                                                                                                                            
|12b.        | 906 Certificate -
    Chief Financial Officer                                         |    
|            |                                                                                       |     |                                                                                                                                            
|12c.        | News Release of the
    Company dated September 27, 2000(1)                          
|            |                                                                                       |     |                                                                                                                                            
|            |                                                                                       | (1) | Previously filed by the Company
    as part of its RegistrationStatement on Form 20-F filed on
    September 29, 2000 (SECFile No. 0-31645)
|            |                                                                                      
|            |                                                                                      

- 43 -

---

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 annual report on its behalf.

|                    |     | BIRCH MOUNTAIN RESOURCES LTD.                             
|------------------- | --- | ----------------------------------------------------------
|Date: June 24, 2003 |     |                                                           
|                    | By: | /s/
    Douglas J. Rowe                                   
|                    |     | Douglas J. Rowe 
    President and Chief Executive Officer
|                    |     |                                                           

- 44 -

---

SECTION 302 CERTIFICATION

I, Douglas J. Rowe, certify that:

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

3. Based on my knowledge, the financial
statement, and other financial information included in this annual report, fair
ly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods
presented in this annual report;

4. The registrant's other certifying officers and
I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:

a) designed such disclosure controls and
procedures to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which the annual report is
being prepared;

b) evaluated the effectiveness of the
registrant's disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the "Evaluation Date"); and

c) presented in this annual report our
conclusions about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and
I have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent function);

a) all significant deficiencies in the design or
operation of internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in internal
controls; and

b) any fraud, whether or not material, that
involves management or other employees who have a significant role in the
registrant's internal controls, and

6. The registrant's other certifying officers and
I have indicated in this annual report whether or not there were significant
changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions wit h regard to significant deficiencies and
material weaknesses.

|Date: June 24, 2003 |  |                                                            
|------------------- |  | -----------------------------------------------------------
|                    |  | /s/
    Douglas J. Rowe                                    
|                    |  | Douglas J. Rowe, 
    President and Chief Executive Officer

- 45 -

---

SECTION 302 CERTIFICATION

I, Donald L. Dabbs, certify that:

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

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

4. The registrant's other certifying officers and
I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:

a) designed such disclosure controls and
procedures to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which the annual report is
being prepared;

b) evaluated the effectiveness of the
registrant's disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the "Evaluation Date"); and

c) presented in this annual report our
conclusions about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and
I have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent function);

a) all significant deficiencies in the design or
operation of internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in internal
controls; and

b) any fraud, whether or not material, that
involves management or other employees who have a significant role in the
registrant's internal controls, and

6. The registrant's other certifying officers and
I have indicated in this annual report whether or not there were significant
changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to signif icant deficiencies and
material weaknesses.

|Date: June 24, 2003 |  |                                                                
|------------------- |  | ---------------------------------------------------------------
|                    |  | /s/ Donald L. Dabbs                                            
|                    |  | Donald L. Dabbs,
    Vice-President and Chief Financial Officer

- 46 -









Birch Mountain
Resources Ltd.

Consolidated Financial Statements

December 31, 2002 and 2001





|Birch Mountain
    Resources Ltd.Auditors' Report
|-------------------------------------------------





To the
Shareholders of

Birch Mountain Resources Ltd.

We have audited the consolidated
balance sheets of Birch Mountain Resources Ltd. as at December 31, 2002
and 2001 and the consolidated statements of loss and deficit and cash flows for
each of the years in the three-year period ended December 31, 2002. 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 and United States generally accepted auditing
standards. 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 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.



In our opinion, these
consolidated financial statements present fairly, in all material respects, the
financial position of the Company as at December 31, 2002 and 2001 and the
results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 2002, in accordance with Canadian generally
accepted accounting principles.





Calgary, Alberta                                                                                                                     
Chartered Accountants
April 29, 2003



Comments for U.S. Readers



In the United States, reporting
standards for auditors require the addition of an explanatory paragraph
following the opinion paragraph when there are substantial uncertainties about
the Company's ability to continue as a going concern, as referred to in Note 1
to these consolidated financial statements. Our report to the shareholders dated
April 29, 2003, is expressed in accordance with Canadian reporting standards,
which do not permit a reference to such matters in the auditors' report when the
facts are adequately disclosed in the financial statements.







Calgary, Alberta                                                                                                                       
Chartered Accountants
April 29, 2003

|                                                                             
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|Suite 600, 808 -
    4th Ave. S.W., Calgary, Alberta T2P 3E8 (403)263-3385F-1









|Birch Mountain Resources Ltd.Consolidated Balance SheetsAs at December 31
|-------------------------------------------------------------------------
|                                                                         
|                                                                         
|                                                                         
|Assets                                                                   
|Current                                                                  
|Cash and cash equivalents (Note 4)                                       
|Accounts receivable                                                      
|Share subscription receivable                                            
|Investments (Note 5)                                                     
|Prepaids and deposits                                                    
|                                                                         
|Capital assets(Note
    6)                                               
|                                                                         
|Liabilities                                                              
|Current                                                                  
|Accounts payable (Note
    7)                                            
|Shareholders' equity (deficiency)                                        
|Share
    capital (Note 9)                                               
|Deficit                                                                  
|                                                                         
|                                                                         







/s/ Donald L. DabbsDirector
Donald L. Dabbs



/s/ Kerry E. SullyDirector
Kerry E. Sully

|                                                                                 
|---------------------------------------------------------------------------------
|The accompanying
    notes are an integral part of these financial statements.F-2
|                                                                                 





|Birch Mountain
    Resources Ltd.Consolidated Statements of Loss
    and DeficitFor the years ended December 31
|---------------------------------------------------------------------------------------------------------------
|                                                                                                               
|                                                                                                               
|Expenses                                                                                                       
|Amortization                                                                                                   
|Consulting                                                                                                     
|Mineral exploration costs                                                                                      
|Office                                                                                                         
|Professional fees                                                                                              
|Research costs                                                                                                 
|Salaries, management fees and benefits                                                                         
|Shareholder services and
    promotion                                                                         
|Loss before the following                                                                                      
|Interest and other income                                                                                      
|Gain on disposal of investment                                                                                 
|Limestone sale                                                                                                 
|Writedown of mineral
    exploration costs                                                                     
|                                                                                                               
|Loss
    before income taxes                                                                                   
|Future income tax
    recovery                                                                                 
|Net loss for year                                                                                              
|Deficit, beginning of year, as previously stated                                                               
|Adjustment for change in accounting
    policy(Note 3)                                                         
|Deficit, beginning of year, as
    restated                                                                    
|Deficit, end of year                                                                                           
|Loss per share                                                                                                 
|Basic                                                                                                          





|                                                                                           
|-------------------------------------------------------------------------------------------
|The accompanying notes are an integral part
    of these financial statements.
    
    F-3







|Birch Mountain Resources Ltd.Consolidated
    Statements of Cash FlowsFor the
    years ended December 31
|---------------------------------------------------------------------------------------------------------
|                                                                                                         
|Cash
    flows from operating activities                                                                 
|Cash received from customers                                                                             
|Interest income received                                                                                 
|Cash paid to employees                                                                                   
|Cash paid to
    suppliers                                                                               
|                                                                                                         
|Cash
    flows from financing activities                                                                 
|Issuance of common shares for cash                                                                       
|Share issuance
    costs                                                                                 
|                                                                                                         
|Cash
    flows from investing activities                                                                 
|Proceeds on disposal of investment                                                                       
|Proceeds on disposal of capital assets                                                                   
|Purchase of capital assets                                                                               
|Mineral exploration
    costs                                                                            
|                                                                                                         
|Increase (decrease) in cash                                                                              
|Cash at beginning of year                                                                                
|Cash at end of year                                                                                      





|                                                                                      
|--------------------------------------------------------------------------------------
|The accompanying notes are an integral part of
    these financial statements.
    F-4

|Birch Mountain
    Resources Ltd.Notes to the Consolidated Financial
    Statements
    For the years ended December 31,
    2002, 2001 and 2000
|------------------------------------------------------------------------------------------------------------------------------------------------





|1. | Nature of
    operations and going concern considerations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Birch Mountain
    Resources Ltd. (the "Company") is in the process of exploring its mineral
    leases and permits and has not yet determined whether they contain
    economically recoverable reserves.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | These financial
    statements have been prepared by management in accordance with Canadian
    generally accepted accounting principles on a going concern basis. This
    presumes funds will be available to finance ongoing exploration, operations
    and capital expenditures and permit the realization of assets and the
    payment of liabilities in the normal course of operations for the
    foreseeable future. The Company has incurred a net loss of $1,809,950 during
    the year ended December 31, 2002 (2001 - $2,179,395; 2000 - $3,530,628) and
    as at December 31, 2002, has a deficit of $25,855,949.                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The Company is
    obligated to incur certain levels of expenditures to maintain its rights to
    continue exploration of certain mineral leases and permits. The Company's
    ability to continue as a going concern is largely dependent on its success
    in obtaining sufficient funds to carry out exploration activities on its
    mineral claims, preserving its interest in the underlying claims,
    establishing the existence of economically recoverable mineral reserves,
    achieving successful results from its research efforts and obtaining the
    financing to complete the development and achieve future profitable
    production or, alternatively, upon the Company's ability to dispose of its
    interests on an advantageous basis.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | In the past, the
    Company has been successful in raising funds in the equity market for
    exploration, research and operating activities, but there is no assurance
    that it will be able to do so in the future. If future financing efforts do
    not meet with success, there is substantial doubt about the ability of the
    Company to continue as a going concern as it would likely have to dispose of
    its assets on a less than advantageous basis.                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | These financial
    statements do not give effect to any adjustments which might be necessary
    should the Company be unable to continue its operations as a going concern.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|2. | Significant
    accounting policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The consolidated
    financial statements are expressed in Canadian dollars and are
    prepared in accordance with accounting principles generally accepted in
    Canada. These financial statements include the accounts of the Company and
    its wholly owned subsidiaries, Dawson Bay Minerals Inc., Swift River
    Minerals Ltd., and Rockyview Development Limited and its subsidiaries. Swift
    River Minerals Ltd. was voluntarily dissolved on June 30, 2000. Rockyview
    Development Limited and its subsidiaries have been inactive for the past
    four years.                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | During the quarter
    ended March 31, 2001, the Company adopted the requirements of Accounting
    Guideline 11, "Enterprises in the Development Stage" (see Note 3). Pursuant
    to the adoption of this Guideline, commencing January 1, 2001, the Company
    expenses mineral exploration costs unless the deferral criteria are met and
    it is probable that they will be recoverable from the future operations of
    the related project.                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Previously, the
    Company capitalized all of the exploration costs incurred on its mineral
    properties if exploration was continuing on the property, on the basis that
    sufficient exploration had not occurred to assess whether the deferred costs
    would be recovered from a geological resource or reserve.                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Leases and permits
    acquired under option or joint venture agreements, whereby payments are made
    at the sole discretion of the Company, are recorded in the accounts at the
    time of payment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|F-5
|---

|Birch Mountain Resources Ltd.Notes to the
    Consolidated Financial StatementsFor the years ended December 31, 2002, 2001 and
    2000
|---------------------------------------------------------------------------------------------------------------------------------------

|2. | Significant
    accounting policies (continued)                                                                                                                         
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | (b)                                                                                                                                                                     
|   | Capital assets are
    recorded at cost. Amortization is provided using methods and rates intended
    to amortize the cost of assets over their estimated useful lives.



Method
      Annual RateEquipment
      Declining balance
      20% - 30%Computer
      Declining balance
      30% - 100%Automotive
      Declining balance
      30%Leasehold improvements
      Straight line
      20%


|    | (c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Future Income
    Taxes      
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------
|    | The Company has
    adopted the asset and liability method of accounting for income taxes. Under
    this method, future income tax liabilities and future income tax assets are
    recorded based on temporary differences - the difference between the
    carrying amount of an asset or liability in the consolidated balance sheet
    and its tax basis - at the rate enacted at the date of the balance sheet. At
    the end of each year, future tax assets and future tax liabilities are
    reassessed, and any changes in the settlement value are reflected in income.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | (d)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Stock Options                
|    | The Company has
    adopted the new Canadian Institute of Chartered Accountant's standard for
    stock based compensation. No compensation costs are recognized upon the
    granting of options and share capital is credited when options are
    exercised. The new standard does require additional disclosures including
    proforma information as if the fair value based method had been used to
    account for employee options.                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | (e)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Cash and Cash
    Equivalents
|    | Cash and cash
    equivalents include balances with banks and short-term investments with
    maturities of three months or less. Cash subject to restrictions that
    prevent its use for current purposes is included in restricted cash.                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | (f)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Investments                  
|    | The investment in
    marketable securities is recorded at the lower of cost or quoted market
    value. If market value is less than cost, the unrealized loss is charged to
    income.                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | (g)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Flow-through
    Shares      
|    | Under Canadian
    income tax legislation, corporations are permitted to issue shares whereby
    the Company agrees to incur qualifying expenditures, as defined under the
    Canadian Income Tax Act, and renounce the related income tax deductions to
    the investors. The tax benefits renounced are reflected as a future tax
    liability and deducted from the proceeds of share capital.                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | (h)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Research
    Costs           
|    | The Company is
    actively engaged in researching new mineral technology applications. Costs
    associated with such projects, including patent application costs, are
    expensed in the period they are incurred.                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | (i)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Per Share
    Amounts        
|    | Earnings per share
    amounts are computed using the weighted average number of common shares
    outstanding. On January 1, 2001, the Company adopted the treasury stock
    method to calculate diluted earnings per share 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 during the period.                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|F-6







|Birch Mountain
    Resources Ltd.Notes to the Consolidated Financial
    Statements
    For the years ended
    December 31, 2002, 2001 and 2000
|------------------------------------------------------------------------------------------------------------------------------------------------





|2.  | Significant
    accounting policies (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | (j)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | Transaction amounts
    denominated in foreign currencies are translated into their Canadian dollar
    equivalents at exchange rates prevailing at the transaction dates. Carrying
    values of monetary assets and liabilities reflect the exchange rates at the
    balance sheet date. Translation gains and losses are included in current
    earnings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | (k)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | The preparation of
    financial statements in conformity with Canadian generally accepted
    accounting principles requires management to make estimates and assumptions
    that affect the reported amounts of assets and liabilities and disclosure of
    contingent assets and liabilities at the date of the financial statements
    and the reported amounts of revenues and expenses during the reporting
    period. 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. These estimates are reviewed periodically and, as adjustments
    become necessary, they are reported in earnings in the periods in which they
    become known.                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|3.  | Adoption of
    accounting policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | Effective January
    1, 2002 the Company adopted CICA Handbook 3870 "Stock-based Compensation
    and Other Stock-based Payments", which establishes standards for the
    recognition, measurement and disclosure of stock-based compensation and
    other stock-based payments made in exchange for goods and services. The new
    standard sets out a fair-value based method of accounting that is required
    for certain, but not all, stock-based transactions.
    The new standard permits the Company to continue its existing policy that no
    compensation cost is recorded on the grant of stock options to employees.
    Consideration paid by employees on the exercise of stock options is recorded
    as share capital. However, Handbook 3870 requires additional
    disclosures for options granted to employees, including disclosure of pro
    forma earnings and pro forma earnings per share as if the fair-value based
    accounting method had been used to account for employee stock options (see
    Note 10).                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | The Canadian
    Institute of Chartered Accountants has approved a new standard for the
    computation, presentation and disclosure of earnings per share amounts. The
    Company adopted this new standard effective January 1, 2001, and has applied
    it retroactively to calculate earnings per share. Under the new standard,
    the treasury stock method is used, instead of the imputed earnings method,
    to determine the dilutive effect of stock options and other instruments.
    Under the treasury stock method, only "in the money" dilutive instruments
    have an impact on the diluted calculations. The effect of stock options and
    warrants on the per share amounts for the years presented are anti-dilutive
    as their inclusion would reduce the loss per share; therefore, diluted
    amounts are not presented.                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | (c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | In March 2000, the
    Accounting Standards Board of the Canadian Institute of Chartered
    Accountants (CICA) issued Accounting Guideline 11 "Enterprises in the
    Development Stage" (AcG-11). The Guideline was effective for fiscal periods
    beginning on or after April 1, 2000. Under AcG-11, all deferred resource
    property expenditures are reviewed, on a property-by-property basis, to
    assess their recoverability. When the carrying value of a property exceeds
    its net recoverable amount (net recoverable amounts are estimated by
    quantifiable evidence of an economic geological resource or reserve, joint
    venture expenditure commitment or the Company's assessment of a property's
    realizable value), a provision is made for the impairment in value. Prior to
    the adoption of this guideline, mineral leases and permits were recorded at
    cost. Cost included cash consideration and the market value of shares
    issued, if any. All direct and indirect acquisition and exploration
    expenditures were capitalized and deferred until the leases and permits to
    which they related were placed into production, sold, allowed to lapse, or
    abandoned.
|F-7



|Birch Mountain
    Resources Ltd.Notes to the Consolidated Financial
    Statements
    For the years ended
    December 31, 2002, 2001 and 2000
|------------------------------------------------------------------------------------------------------------------------------------------------





|3. | Adoption of
    accounting policies (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | (c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | These costs were to
    be amortized over the estimated useful lives of the leases and permits
    following the commencement of production, or written off if the leases and
    permits were sold, allowed to lapse, or abandoned. The Company assessed the
    carrying value of these mineral exploration costs annually and then, based
    on estimates, adjusted the carrying amount for any impairments in value or
    surrender of permits or leases. The net costs related to abandonment or
    impairment were charged to earnings.
    The Company was aware that there were differing views of how AcG-11 could
    affect mining companies with respect to deferred mineral exploration costs.
    Although the Company had, and still continues to hold, sizeable land areas
    under mineral exploration leases and permits, it adopted AcG-11 and, in the
    absence of quantifiable evidence of a geological resource or reserve, wrote
    off its deferred mineral exploration costs. The Company has accounted for
    this change in accounting policy on a retroactive basis as a cumulative
    adjustment to increase the opening deficit and reduce the carrying value of
    mineral exploration costs at January 1, 2001, by $8,338,431. Prior periods
    have not been restated.
    In March 2002, subsequent to the adoption of the accounting policy, the CICA
    issued Emerging Issues Committee "Accounting by Mining Enterprises for
    Exploration Costs" (EIC-126) as additional guidance on this matter. Among
    other things, EIC-126 concluded that a mining enterprise that has not
    established mineral reserves objectively and, therefore, has no basis for
    preparing a projection of the estimated future net cash flow from the
    property is not precluded from capitalizing exploration costs, nor is it
    obliged to conclude that the capitalized costs have been impaired.
    While the Company understands that EIC-126 provides additional clarification
    and guidance to support its previous policy for accounting for mineral
    exploration costs, the Company believes the change in accounting policy is
    appropriate for its circumstances and is consistent with reporting practices
    followed in the United States. The Company considers its exploration
    properties to be prospective, and will continue its exploration activities
    in search of an economic ore body.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|4. | Cash and cash
    equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

| |                              | 2002   | 2001   
| | ---------------------------- | ------ | -------
| | Cash,
    available for use  | 47,782 | 271,714
| | Cash, subject to restriction | -      | 19,000 
| |                              | 47,782 | 290,714





|    | Cash subject to
    restriction represents an amount on deposit as security for a letter of
    credit to the government of Manitoba.                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|5.  | Investments                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | Under the terms of
    an agreement referred to in Note 8, the Company received common shares of
    Shear Minerals Ltd. and Marum Resources Inc. The market value of these
    shares upon receipt, and at December 31, 2002 was $20,000. The receipt of
    those shares resulted in a corresponding $20,000 credit to mineral
    exploration costs as a cost recovery. 
    These shares were sold subsequent to the year end for net proceeds
    approximating $26,700.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|F-8

|Birch Mountain
    Resources Ltd.Notes to the Consolidated Financial
    Statements
    For the years ended
    December 31, 2002, 2001 and 2000
|------------------------------------------------------------------------------------------------------------------------------------------------

|6. | Capital assets
|-- | --------------



| | 2002                   | 2001              
| | ---------------------- | ------------------
| | Cost                   | Net Book
    Value
| | Equipment              | 271,568           
| | Computer               | 227,482           
| | Automotive             | -                 
| | Leasehold improvements | 30,009            
| |                        | 529,059           





|7.  | Accounts payableIncluded in accounts payable is $67,083 of loans payable. These loans
    are unsecured, due on demand and bear interest at an average rate of 7%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|8.  | Mineral
    exploration costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(a) | AlbertaAthabasca RegionAlthough the Company has adopted the policy of expensing mineral
    exploration costs, it still holds a significant number of mineral rights in
    the Athabasca and Birch Mountain regions of northern Alberta.
    The Company is party to Co-Development Agreements with Syncrude Canada Ltd.,
    Suncor Energy Inc. and Albian Sands Energy Inc. The agreements provide for a
    co-operative development of the lands and data sharing by bringing together
    the holder of the oil sands rights and the holder of the metallic and
    industrial mineral rights.
    During 2001, certain lands in the Marguerite River area were designated
    wildlife preserves under the Special Places 2000 initiative of the Alberta
    Government. This designation effects only a small portion of the land
    interests held by the Company, and it is management's opinion that this
    designation will have a minimal effect on the Company. 
    At December 31, 2001, the Company's mineral property in the Athabasca region
    comprised of 83 permits and 27 leases covering 675,316 hectares (1,668,375
    acres). 
    In April 2002, the Company filed its assessment report for $5.15 million of
    expenditures comprising of direct spending by the Company as well as
    significant costs incurred by other parties involved with the Company as a
    result of Co-Development Agreements. Also during the year, certain permits
    were allowed to lapse thereby reducing the Company's Athabasca mineral
    property by approximately 348,000 hectares leaving the Company's land
    position in this region at 326,000 hectares (806,000 acres) at December 31,
    2002.
    Based on the amount of land held under lease at December 31, 2002, annual
    lease payments of approximately $172,000 will be required. Under a 2002
    agreement, Suncor Energy Inc. has agreed to pay $39,000 of these lease
    rentals, covering six mineral leases, until 2014.
    In 2002, the Company established an Industrial Minerals Division to take
    advantage of potential business opportunities arising from the Company's
    ownership of the rights to mine and market limestone from its Athabasca
    mineral leases. In September 2002, the Company announced a sale of limestone
    to Suncor Energy Ltd. for $250,000. Following this, the Company completed a
    geological appraisal of a potential limestone quarry in the area and is
    continuing to investigate the establishment of a dual-purpose quarry capable
    of supplying limestone aggregate and quicklime to the Fort McMurray area.
    In December 2002, the Company acquired a 100% undivided interest in a
    mineral lease located near the limestone property in exchange for a
    Limestone Royalty of $0.15 per tonne of limestone sold from the proposed
    quarry.
|    | F-9                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         





|Birch Mountain
    Resources Ltd.Notes to the Consolidated Financial
    Statements
    For the years ended
    December 31, 2002, 2001 and 2000
|------------------------------------------------------------------------------------------------------------------------------------------------





|8.  | Mineral
    exploration costs (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Alberta
    (continued)Birch Mountains RegionAt December 31, 2002, the Company's mineral property in the Birch
    Mountains region comprised of 10 permits covering 92,160 hectares (227,731
    acres). Diamond-bearing kimberlite intrusive rocks are the principal
    exploration target on this property, but the Company has also conducted some
    preliminary precious metal exploration in this region as well.
    The assessment filed in April 2002 was applied to the permits in the Birch
    Mountains region. 
    During 2001, the Company entered into an agreement with Shear Minerals Ltd.
    (Shear) and Marum Resources Inc. (Marum). Under the terms of the agreement,
    Marum agreed to pay 100,000 of their shares, and Shear agreed to pay 50,000
    of their shares, to the Company. These shares were issued to the Company
    during 2002. Per the agreement, Marum and Shear can earn a total of 30%
    interest in the diamond rights held by the Company by spending $150,000 on
    exploration and by completing three drill holes, within the first year of
    the agreement. Marum and Shear can earn an additional 30% interest in the
    diamond rights in year two by spending $150,000 on exploration, and another
    30% interest in the diamond rights, for a total of 90% interest in the
    diamond rights, by spending $250,000 on exploration in year three of the
    agreement. The Company will retain a 10% interest in the project and will
    hold a 2% gross overriding royalty on diamond production from the property.
    Marum and Shear may purchase 1% of the gross overriding royalty at any time
    for a payment of $2,000,000.
|(b) | ManitobaThe Company's exploration activity in Manitoba was in the Dawson Bay
    area. The Dawson Bay mineral property is held by Dawson Bay Minerals Inc., a
    wholly owned subsidiary of Birch Mountain Resources Ltd. 
    On May 8, 2001 the Company announced that it had relinquished 82,030
    hectares (202,614 acres) of special exploration permits in the Dawson Bay
    area, retaining only one exploration permit covering 9,784 hectares (21,177
    acres). During 2002, the Company announced it had elected to let the
    remaining permit lapse and has no mineral interest in Manitoba.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(c) | Total mineral
    exploration costs over the years consist of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               



| |                                  | 2002
    Expensed | 2001
    Expensed | 2000
    Capitalized
| | -------------------------------- | ----------------- | ----------------- | --------------------
| | Administration                   | 66,941            | 6,414             | 71,136              
| | Assay and
    geological         | 9,138             | 56,091            | 210,313             
| | Land
    lease and permit *      | 117,778           | 171,250           | 1,579,366           
| | Materials, services and drilling | 300,381           | 177,744           | 140,103             
| | Rental                           | 45,172            | 81,228            | 58,486              
| | Salaries                         | 421,419           | 342,915           | 185,303             
| | Travel and accommodations        | 15,476            | 105,888           | 57,606              
| |                                  | 976,305           | 941,530           | 2,302,313           



|     | * The 2000 land lease
    and permit cost includes $1,400,000 relating to shares issued for mineral
    permits.                                  
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------
|9.   | Share capital                                                                                                                                     
|     | The Company is incorporated under
    the jurisdiction of the Business Corporations Act of Alberta.                                               
|(a)  | Authorized
    capital                                                                                                                            
|     | Unlimited number of
    common voting shares
    Unlimited number of preferred shares issuable in series
    Unlimited number of non-voting shares
|F-10





|Birch Mountain
    Resources Ltd.Notes to the Consolidated Financial
    Statements
    For the years ended
    December 31, 2002, 2001 and 2000
|------------------------------------------------------------------------------------------------------------------------------------------------





|9.  | Share capital
    (continued)
|--- | -----------------------------
|(b) | Common shares                

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Number     | Amount    
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------- | ----------
|     | Balance
    December 31, 2000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 33,552,966 | 24,633,830
|     | Issued
    for cash                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |            |           
|     | Private
    placement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 94,156     | 72,500    
|     | Tax benefits renounced on flow-through
    shares                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | -          | (359,825) 
|     | Balance
    December 31, 2001                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 33,647,122 | 24,346,505
|     | Issued
    for cash                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |            |           
|     | Private
    placements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 2,397,277  | 716,205   
|     | Flow-through shares                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 842,000    | 210,500   
|     | Tax benefits renounced on flow through
    shares                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | -          | (86,300)  
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | 36,886,399 | 25,186,910
|     | In December 2002, the Company completed a private placement of 2,071,910
    units at $0.25 per unit. Of these, 842,000 units were flow through. All
    units consisted of one common share and one non-transferable share purchase
    warrant entitling the holder to purchase an additional common share for
    $0.75 for a period of 16 months after closing.
    In June and July 2002, the Company completed two additional private
    placements of 1,167,367 units at $0.35 per unit. Each unit consisted of one
    common share plus one non-transferable share purchase warrant entitling the
    holder to purchase an additional common share for $1.00 for a period of 14
    months after closing.
    At December 31, 2002, the Company had renounced all of its flow-through
    commitment and incurred $75,634 of expenditures. The balance of $134,866 of
    qualifying expenditures has been incurred subsequent to the year end.
    During 2001, the Company completed a private placement of 94,156 units at
    $0.77 per unit, none of which were flow-through units. Each unit consisted
    of one common share. No commissions were paid in relation to this issue.
    At December 31, 2001, the Company had incurred and renounced approximately
    $1,259,000 of its flow-through commitment of $1,334,000. 
    During 2001, the Company entered into an agreement with AuRIC Precious
    Metals Inc. (AuRIC) to purchase rights to a customized fire assay protocol
    developed by AuRIC. The contract includes provisions for independent,
    third-party verification tests using a double-blind, chain-of-custody test
    protocol, the costs of which are to be born by the Company. When the Company
    is satisfied that AuRIC has met all of the conditions of the agreement, the
    Company has agreed to purchase the assay protocol from AuRIC for
    consideration of US$400,000 plus 640,000 common shares of the Company,
    400,000 that will be free trading, and the issuance of which must comply
    with the applicable laws in Canada and the United States. Independent
    verification tests conducted to date are inconclusive.
    During the 2000 year, the Company entered into an agreement with American
    Precious Metal (APM) whereby APM will provide introductions to parties who
    could aid in advancing the determination of precious metals. The Company
    issued 350,000 shares at $1.40 during the year and were to issue an
    additional 150,000 shares upon the determination that APM had delivered to
    Birch a successful assay method, as confirmed by independent tests done in a
    third-party laboratory. To date, APM has not presented an assay method and,
    as a result, the Company has not issued any additional shares to APM.
|(c)  | Preferred SharesAn unlimited number of preferred shares may be issued in one or more
    series, and the directors are authorized to fix the number of shares in each
    series and to determine the designation, rights, privileges and conditions
    attached to the shares of each series.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|F-11



|Birch Mountain
    Resources Ltd.Notes to the Consolidated Financial
    Statements
    For the years ended
    December 31, 2002, 2001 and 2000
|------------------------------------------------------------------------------------------------------------------------------------------------

|9.  | Share capital (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(e) | Reserved for Issue                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | OptionsThe Company has two stock option plans. The original plan was
    established in 1994 to grant options to directors, officers, employees and
    consultants of the Company. The plan is administered by the Compensation
    Committee of the Board of Directors and contains provisions stating that the
    option period may not exceed 5 years and that the number of common shares
    issuable on exercise of outstanding stock options may not exceed 10% of the
    issued and outstanding common shares.
    In March 2002, the Board of Directors approved a new stock option plan
    ("2002 Plan") which was approved by the shareholders at the June 2002 annual
    general and special meeting. The purpose of the 2002 Plan is to afford
    persons who provided services to the Company, whether directors, officers,
    consultants or employees, an opportunity to obtain a proprietary interest in
    the Company through the purchase of common shares and to aid in attracting,
    retaining and encouraging the continued involvement of such persons with the
    Company. The number of common shares reserved for issuance pursuant to the
    exercise of all options under this plan may not exceed 3,392,674. The plan
    is administered by the Board of Directors who determine to whom options
    shall be granted including the terms, pricing and vesting of the grants.
    The Company has granted options on common shares as follows:



| |                                   | Number of
    Options | Price
    Range ($) | Weighted 
    Average
    Price ($) | Expiry
    Date
| | --------------------------------- | --------------------- | ------------------- | ----------------------------------- | ---------------
| | December
    31, 2000 outstanding | 1,920,000             | 0.22 - 1.36         | 0.85                                | 2002 - 2004    
| | Granted                           | 683,750               | 0.60 - 0.65         | 0.62                                | 2006           
| | Cancelled                         | (305,000)             | 0.70                | 0.70                                | 2004           
| | December
    31, 2001 outstanding | 2,298,750             | 0.22 - 1.36         | 0.77                                | 2002 - 2006    
| | Granted                           | 2,555,000             | 0.26 - 0.34         | 0.30                                | 2007           
| | Cancelled                         | (135,000)             | 0.70                | 0.70                                | 2002           
| | December 31, 2002 outstanding     | 4,718,750             | 0.22 - 1.36         | 0.54                                | 2003 - 2007    

| | Number
    of Shares | Expiry
    date | Option
    Price ($)
| | -------------------- | --------------- | --------------------
| | Original Plan        |                 |                     
| | 150,000              | March 2003      | 0.90                
| | 75,000               | July 2003       | 0.22                
| | 490,000              | November 2003   | 0.35                
| | 30,000               | July 2004       | 1.25                
| | 735,000              | November 2004   | 1.36                
| | 408,750              | January 2006    | 0.60                
| | 275,000              | April 2006      | 0.65                
| | 1,140,000            | March 2007      | 0.26                
| | 3,303,750            |                 | 0.63                
| | 2002 Plan            |                 |                     
| | 1,415,000            | April 2007      | 0.34                
| | Both Plans           | 4,718,750       |                     
| |                      |                 |                     

|F-12                                                                                                                                                            
|----------------------------------------------------------------------------------------------------------------------------------------------------------------
|Birch Mountain
        Resources Ltd.Notes to the Consolidated
        Financial Statements
        For the years
        ended December 31, 2002, 2001 and 2000

|9. | Share capital
    (continued)                                                             
|-- | ------------------------------------------------------------------------------------------
|   |                                                                                           
|   | Warrants                                                                                  
|   | In relation to
    private placements, the Company has the following warrants outstanding:





|                                  | Number of
    Warrants | Price
    Range ($) | Weighted 
    Average
    Price ($) | Expiry
    Date
|--------------------------------- | ---------------------- | ------------------- | ----------------------------------- | ---------------
|December
    31, 2001 outstanding | 1,410,781              | 1.50                | 1.50                                | 2002           
|Issued                            | 3,239,277              | 0.75 - 1.00         | 0.84                                | 2003 - 2004    
|Expired                           | (1,410,781)            | 1.50                | 1.50                                | 2002           
|December 31, 2002 outstanding     | 3,239,277              | 0.75 - 1.00         | 0.84                                | 2003 - 2004    





|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10. | Stock-based
    compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | The Company accounts for stock-based
    compensation using the intrinsic value method. Under this method, no costs
    are recognized in the financial statements for share options granted to
    employees or directors when the options are issued at market value.
    Effective January 1, 2002, Canadian Generally Accepted Accounting Principles
    require disclosure of the impact on net earnings using the fair value method
    for stock options issued on or after January 1, 2002. Had the fair value
    method been used, the Company's net earnings and net earnings per share
    would have been as follows for the year ended December 31, 2002:





December 31, 2002
      As reported
      
      December 31, 2002
      Pro-formaNet
      loss
      1,809,950
      
      2,079,950Loss
      per share, basic
      (0.05)
      
      (0.06)






| | The fair value of each option was estimated on the date of grant using the
    Black-Scholes option pricing model with the following weighted average
    assumptions:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------





|Expected life               | 5 years
|--------------------------- | -------
|Risk free
    interest rate | 4.5%   
|Expected
    volatility     | 30%    





|    | Option pricing
    models require the input of highly subjective assumptions including the
    expected price volatility. Change in the subjective input assumptions can
    materially affect the fair value estimate, and therefore the existing models
    do not necessarily provide a reliable single measure of the fair value of
    the Company's stock options.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                         
|11. | Continuing
    obligations                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                         
|    | The Company rents
    premises and equipment under operating leases expiring during the next three
    years requiring annual payments as follows:                                                                                                                                                                                                                      



|2003 | 290,843
|---- | -------
|2004 | 50,173 
|2005 | 30,000 





|F-13
|----



|Birch Mountain Resources Ltd.
    Notes to the Consolidated Financial
    Statements
    For the years ended
    December 31, 2002, 2001 and 2000
|-------------------------------------------------------------------------------------------------------------------------------------------------





|12. | Related-party transactions                                                                                                                                                                         
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | The Company had the following
    transactions with related parties:                                                                                                                               
|    | •                                                                                                                                                                                                  
|    | •                                                                                                                                                                                                  
|    | •                                                                                                                                                                                                  
|    | •                                                                                                                                                                                                  
|    | These transactions were in the normal
    course of operations and were measured at the exchange amount, which is the
    amount of consideration established and agreed to by the related parties.
|13. | Income taxes                                                                                                                                                                                       
|    | Future income tax assets consist of
    the following temporary differences:                                                                                                                       





| |                                                    | 2002        | 2001        | 2000       
| | -------------------------------------------------- | ----------- | ----------- | -----------
| | Mineral
    exploration costs                      | 5,838,957   | 5,355,105   | 2,004,052  
| | Capital
    assets                                 | 101,291     | 172,156     | 141,985    
| | Scientific Research and Experimental Development   |             |             |            
| | Expenditures Unclaimed                             | 86,806      | 89,157      | 94,471     
| | Loss
    carryforwards                             | 987,185     | 869,553     | 662,160    
| | Share
    issuance costs                           | 12,519      | 21,843      | 32,780     
| | Valuation allowance                                | (7,026,758) | (6,507,814) | (2,935,448)
| | Future tax assets (net of valuation
    allowance) | -           | -           | -          





| | At December 31,
    2002, the Company has the following deductions available:
| | -----------------------------------------------------------------------------
| | *#8226                                                                       
| | •                                                                            
| | •                                                                            





|2003 | 307,000
|---- | -------
|2004 | 297,000
|2005 | 132,000
|2006 | 185,000
|2007 | -      
|2008 | 754,000
|2009 | 472,000





|     | In
    addition to the above, the Company has the following deductions available,
    which have not been reflected in the financial statements:
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------
|     | &8226                                                                                                                                           
|     | •                                                                                                                                               
|F-14

|Birch Mountain
    Resources Ltd.Notes to the Consolidated Financial
    Statements
    For the years ended
    December 31, 2002, 2001 and 2000
|------------------------------------------------------------------------------------------------------------------------------------------------





|13. | Income taxes
    (continued)The income tax recovery differs from the amount that would be expected
    by applying the current tax rates for the following reasons:
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |                            | 2002      | 2001      | 2000       
| | -------------------------- | --------- | --------- | -----------
| | Loss before taxes          | 1,809,950 | 2,539,220 | 3,769,250  
| | Expected
    tax recovery  | 742,080   | 1,069,266 | 1,681,839  
| | Other                      | (3,587)   | (25,007)  | (9,464)    
| | Resource
    allowance     | (55,971)  | (64,780)  | (184,491)  
| | Share
    issue costs      | 8,749     | 9,093     | 73,035     
| | Valuation allowance        | (604,971) | (628,747) | (1,322,297)
| | Future income tax recovery | 86,300    | 359,825   | 238,622    





|14. | Segmented
    informationThe Company's principal business segment is the acquisition and
    exploration of mineral leases and permits. The Company also engages in
    research of mineral technology and in 2002 established an industrial mineral
    division to pursue the development of its limestone property. The Company's
    activities are focused on Western Canada.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|     | Mineral
    Exploration | Mineral
    Technology | Industrial
    Minerals | Corporate | Total      
|---- | ----------------------- | ---------------------- | ----------------------- | --------- | -----------
|2002 |                         |                        |                         |           |            
|     | Revenue                 | -                      | -                       | 250,000   | 986        
|     | Expense                 | 863,845                | 42,514                  | 112,460   | 1,128,417  
|     | Loss                    | (863,845)              | (42,514)                | 137,540   | (1,127,431)
|     | Assets                  | 81,600                 | -                       | -         | 183,492    
|2001 |                         |                        |                         |           |            
|     | Revenue                 | -                      | -                       | -         | 88,023     
|     | Expense                 | 941,530                | 128,068                 | -         | 1,557,645  
|     | Loss                    | (941,530)              | (128,068)               | -         | (1,469,622)
|     | Assets                  | 56,459                 | 82,872                  | -         | 470,276    
|2000 |                         |                        |                         |           |            
|     | Revenue                 | -                      | -                       | -         | 194,504    
|     | Expense                 | 1,792,388              | 160,539                 | -         | 2,010,827  
|     | Loss                    | (1,792,388)            | (160,539)               | -         | (1,816,323)
|     | Assets                  | 8,404,507              | 30,088                  | -         | 3,056,524  







|15.  | Financial
    instruments                                                                                                                                                                                                                                                                                                                                                                                                                                         
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|     | The Company, as
    part of its operations, carries a number of financial instruments. It is
    management's opinion that the Company is not exposed to significant
    interest, currency or credit risks arising from these financial instruments
    except as otherwise disclosed.
    The carrying amount of cash, accounts receivable, investments, accounts
    payable approximates their fair value due to the short-term maturities of
    these items.
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|F-15





|Birch Mountain Resources Ltd.
    Notes to the Consolidated Financial
    Statements
    For the years ended
    December 31, 2002, 2001 and 2000
|-------------------------------------------------------------------------------------------------------------------------------------------------





|16.                                                                                                                                                | 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 (GAAP) in Canada. Significant
    differences between GAAP in Canada and the United States that would have an
    effect on these consolidated financial statements are as follows:
|                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                   | (a)                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                   | (b)                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                   | (c)                                                                                                                                                                                                                                                                                                                            
|If these
    consolidated financial statements were prepared in accordance with US GAAP,
    the impact on the balance sheets would be as follows:



|                                | 2002       | 2001      
|------------------------------- | ---------- | ----------
|Deficit
    under Canadian GAAP | 25,855,949 | 24,045,999
|Future income taxes             | 1,316,189  | 1,229,889 
|Deficit under U.S. GAAP         | 27,172,138 | 25,275,888





In addition, the impact on the
consolidated statements of loss would be as follows:



|                                              | 2002      | 2001      | 2000     
|--------------------------------------------- | --------- | --------- | ---------
|Net loss
    for the year under Canadian GAAP | 1,809,950 | 2,179,395 | 3,530,628
|Exploration expenditures                      | -         | -         | 509,885  
|Future income taxes                           | 86,300    | 359,825   | 238,662  
|Net loss for the year under U.S. GAAP         | 1,896,250 | 2,539,220 | 4,279,175
|Loss per
    share under U.S. GAAP            |           |           |          
|Basic                                         | (0.05)    | (0.08)    | (0.13)   
|                                              |           |           |          
|F-16                                         







|Birch Mountain
    Resources Ltd.Notes to the Consolidated Financial
    Statements
    For the years ended
    December 31, 2002, 2001 and 2000
|------------------------------------------------------------------------------------------------------------------------------------------------



|16. | Material differences between Canadian and United States generally accepted
    accounting principles (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | For
    U.S. GAAP purposes, the Company has adopted APB Opinion No.25, Accounting
    for Stock Issued to Employees(APB 25), to account for stock based
    compensation to employees and directors using the intrinsic value-based
    method whereby compensation cost is recorded for the excess, if any, of the
    quoted market price, at the date granted. As at December 31, 2002, no
    compensation cost has been required to be recorded for any period under this
    method, as the option price has been equal to the market price on the date
    of the grant.
    The Statement of Financial Accounting Standards No. 123, Accounting for
    Stock-Based Compensation (SFAS 123), issued in October 1995, requires
    the use of the fair value-based method of accounting for stock options.
    Under this method, compensation cost is measured at the date of grant based
    on the fair value of options granted and is recognized over the vesting
    period. These costs were calculated in accordance with the Black-Scholes
    option pricing model assuming no dividends are paid, annual risk-free
    interest rate of 4.5% to 5%, expected volatility of 12% to 30% and an
    expected life of five years.
    Had the Company adopted SFAS 123 for its U.S. GAAP disclosure, the following
    net losses would have been reported



| |                                                 | 2002      | 2001      | 2000     
| | ----------------------------------------------- | --------- | --------- | ---------
| | Net loss
    for the year under U.S. GAAP       | 1,896,250 | 2,539,220 | 4,279,175
| | Pro-forma stock compensation                    | 270,000   | 95,061    | 193,087  
| | Pro-forma loss for the year under U.S.
    GAAP | 2,166,250 | 2,634,281 | 4,472,262
| | Loss per
    share under U.S. GAAP              |           |           |          
| | Basic                                           | (0.06)    | (0.08)    | (0.14)   
| |                                                 |           |           |          
| | F-17                                           













Birch Mountain Resources Ltd.





|BIRCH MOUNTAIN RESOURCES LTD.                                          
|-----------------------------------------------------------------------
|                                                                       
|CONSOLIDATED BALANCE SHEET
    AS
    AT MARCH 31, 2003
    (UNAUDITED)
|                                                                       
|                                                                       
|ASSETS                                                                 
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|                                                                       
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|                                                                       
|Total Assets                                                           
|                                                                       
|                                                                       
|LIABILITIES & 
    SHAREHOLDERS' DEFICIT                               
|                                                                       
|                                                                       
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|                                                                       
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|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Total Liabilities and 
    Shareholder's Equity                        
|                                                                       







F-18





|BIRCH MOUNTAIN RESOURCES LTD.                                                                               
|------------------------------------------------------------------------------------------------------------
|CONSOLIDATED STATEMENT OF LOSS AND DEFICIT
    FOR
    THE THREE MONTHS ENDED MARCH 31, 2003
    (UNAUDITED)
|                                                                                                            
|                                                                                                            
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F-19





|BIRCH MOUNTAIN RESOURCES LTD.                                                                             
|----------------------------------------------------------------------------------------------------------
|CONSOLIDATED STATEMENT OF CASH FLOW
    FOR
    THE THREE MONTHS ENDED MARCH 31, 2003
    (UNAUDITED
    )
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
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F-20



|Birch Mountain
    Resources Ltd.Notes to the Financial StatementsFor the period
    ended March 31, 2003
    (unaudited)
|-------------------------------------------------------------------------------------------------------------------------

1.       Nature of operations
and going concern considerations



Birch Mountain
  Resources Ltd. (the "Company") is in the process of exploring its mineral
  leases and permits and has not yet determined whether they contain
  economically recoverable reserves.



These financial statements have been prepared by management
  in accordance with Canadian generally accepted accounting principles on a
  going concern basis. This presumes funds will be available to finance ongoing
  exploration, operations and capital expenditures and permit the realization of
  assets and the payment of liabilities in the normal course of operations for
  the foreseeable future.



As at March 31, 2003, the Company has a working capital
  deficiency of approximately $1.2 million and on accumulated deficit $26.3
  million. These accumulated losses and the need for continued funding raise
  substantial doubt about the Company's ability to continue as a going concern.



In the past, the Company has been successful in raising
  funds in the equity market for exploration, research and operating activities,
  but there is no assurance that it will be able to do so in the future. If
  future financing efforts do not meet with success, there is substantial doubt
  about the ability of the Company to continue as a going concern as it would
  likely have to dispose of its assets on a less than advantageous basis.



The Company's ability to continue as a going concern is
  largely dependent on its success in obtaining sufficient funds to carry out
  exploration activities on it mineral claims, preserving its interest in the
  underlying claims, establishing the existence of economically recoverable
  mineral reserves, achieving successful results from its research efforts and
  obtaining the financing to complete the development and achieve future
  profitable production or, alternatively, upon the Company's ability to dispose
  of its interests on an advantageous basis.



These financial statements do not give effect to any
  adjustments that might be necessary should the Company be unable to continue
  its operations as a going concern.



2.        
Significant accounting policies



These consolidated financial statements have been prepared
  in accordance with Canadian generally accepted accounting principles. The
  accounting policies followed in preparing these financial statements are those
  used by the Company as set out in the audited financial statements for the
  year ended December 31, 2002. Certain information and note disclosure normally
  included in consolidated financial statements prepared in accordance with
  generally accepted accounting principles are not included. These interim
  financial statements should be read together with the Company's audited
  consolidated financial statements for the year ended December 31, 2002.



In the opinion of management, all adjustments considered
  necessary for fair presentation have been included in these consolidated
  financial statements.



F-21





|Birch Mountain Resources Ltd.Notes to the Financial
    StatementsFor the period ended
    March 31, 2003
|---------------------------------------------------------------------------------------------------------



3.       Investments



Under the terms of an agreement involving mineral leases,
  the Company received common shares of Shear Minerals Ltd. and Marum Resources
  Inc. The market value of these shares upon receipt was $20,000.



Theses shares were sold in April for net proceeds
  approximating $26,700.



4.       Short term loan



The short-term loans are advances from shareholders that
  are unsecured, due on demand and bear interest at an average rate of 7%.



5.       Share capital



Common shares



Number
      AmountBalance December
      31, 2002
      36,886,399
      25,189,910Private
      placements
      217,712
      54,428Flow through
      shares
      248,000
      62,000Tax benefits to be renounced
      
      (24,000)Balance March 31, 2003
      37,352,111
      25,279,337






Reserved for issue



Options



The Company has two stock option plans. The original plan
  was established in 1994 to grant options to directors, officers, employees and
  consultants of the Company. The plan is administered by the Compensation
  Committee of the Board of Directors and contains provisions stating that the
  option period may not exceed 5 years and that the number of common shares
  issuable on exercise of outstanding stock options may not exceed 10% of the
  issued and outstanding common shares.



In March 2002, the Board of Directors approved a new stock
  option plan ("2002 Plan"), which was approved by the shareholders at the June
  2002 annual general and special meeting. The purpose of the 2002 Plan is to
  afford persons who provide services to the Company, whether directors,
  officers, consultants or employees, an opportunity to obtain a proprietary
  interest in the Company through the purchase of common shares and to aid in
  attracting, retaining and encouraging the continued involvement of such
  persons with the Company. The number of common shares reserved for issuance
  pursuant to the exercise of all options under this plan may not exceed
  3,392,674. The plan is administered by the Board of Directors who determines
  to whom options shall be granted including the terms, pricing and vesting of
  the grants.



F-22



|Birch Mountain
    Resources Ltd.
    Notes to the Financial Statements
    For the period ended March 31, 2003
|---------------------------------------------------------------------------------------------------------------



5.    Share capital (continued)



The Company has granted options on common shares under the original plan as
follows:





Number of Options
      
      Price Range($)
      Weighted
      Average
      Price ($)
      Expiry DateDecember 31, 2002
      outstanding
      4,718,750
      0.22 -1.36
      0.54
      2003 - 2004Cancelled
      (150,000)
      0.90
      0.90
      2002March 31, 2003 outstanding
      4,568,750
      0.22 - 1.36
      0.53
      2003 - 2007




The following summarizes information about the various stock options
  outstanding at March 31, 2003 under both plans:



Shares Under Option
      Expiry Date
      Option PriceOriginal
      plan75,000
      July 2003
      .22490,000
      November 2003
      .3530,000
      July 2004
      1.25735,000
      November 2004
      1.36408,750
      January 2006
      .60275,000
      April 2006
      .651,140,000
      March 2007
      .263,153,750
      
      .602002 plan1,415,000
      April 2007
      .34Both plans
      4,568,750
      
      .53






Warrants



In relation to private placements, the Company has the following warrants
outstanding:





Number of Warrants
      
      Exercise Price
      Weighted Average
      Price ($)
      Expiry DateBalance, Dec. 31,
      2002, outstanding
      3,239,277
      0.75 - 1.00
      0.84
      2003 -2004Issued
      465,712
      0.75
      0.75
      2004March 31, 2003 outstanding
      3,704,989
      0.75 - 1.00
      0.84
      2003 - 2004




During this first quarter, in conjunction with a private
  placement, the Company issued 465,712 share purchase warrants at a price of
  $0.75 per warrant, exercisable until July, 2004.

F-23





|Birch Mountain
    Resources Ltd.Notes to the Financial StatementsFor the period
    ended March 31, 2003
|---------------------------------------------------------------------------------------------------------



6.        Related party
transactions



The Company had the following transactions with related
  parties at March 31, 2003.

•    Included in shareholder services
      and promotion are amounts of nil in 2003 (2002 - $1,375) paid to a company
      controlled by the spouse of a director.

•     Included in professional fees
      is $103 (2002 - $nil) of consulting and legal fees paid to a company owned
      by an officer.

•    Included in professional fees is
      $5,971 (2002 - $24,360) of legal fees paid to two firms in which officers
      are partners.

•    Included in accounts payable is $
      76,777 (2002 - $39,143) relating to these transactions.



These transactions were in the normal course of operations
  and were measured at the exchange amount, which is the amount of consideration
  established and agreed to by the related parties.



7.

The Company's principal business segment is the acquisition and exploration
  of mineral leases and permits. The Company also engages in research of mineral
  technology and in 2002 established an industrial mineral division to pursue
  the development of its limestone property. The Company's activities are
  focused on Western Canada.



Mineral
      Exploration
      Mineral
      Technology
      Industrial
      Minerals
      Corporate
      
      TotalMarch 2003Revenue
      
      
      
      
      2
      2Expense
      45,155
      2,579
      219,509
      227,771
      495,011Loss
      (45,155)
      (2,579)
      (219,509)
      (227,769)
      (495,011)Assets
      67,769
      
      
      164,950
      232,719March 2002Revenue
      
      
      
      
      149
      149Expense
      237,135
      23,455
      
      323,415
      584,005Loss
      (237,135)
      (23,455)
      
      (323,266)
      (583,856)Assets
      147,302
      
      
      327,864
      475,166






F-24



|Birch Mountain
    Resources Ltd.Notes to the Financial StatementsFor the period
    ended March 31, 2003
|---------------------------------------------------------------------------------------------------------

8



The consolidated financial statements of the Company have
  been prepared in accordance with generally accepted accounting principals (GAAP)
  in Canada. Significant differences between GAAP in Canada and the United
  States that would have an effect on these consolidated financial statements
  are as follows:

|(a) | The balance of any unspent funds raised
    under a flow-through arrangement is considered restricted cash under U.S.
    GAAP and would require separate disclosure on the face of the balance sheet.
    In addition, such restricted amounts would not be considered cash and cash
    equivalents for cash flow reporting purposes. The amount of such restricted
    cash applicable to future flow-through expenditures included in the balance
    sheet was $62,000 (at December 31, 2002 - $135,000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | Mineral exploration costs are accounted
    for in accordance with Canadian GAAP as discussed in Note 2. For U.S. GAAP
    purposes, the Company expenses exploration costs relating to unproven
    mineral leases and permits as incurred as well as acquisition costs for
    leases and permits that do not provide for unrestricted exploration. Any
    write-down of capitalized exploration costs would be considered an operating
    expense and included in the determination of operating loss for the period
    in which the write down occurred. For U.S. GAAP cash flow statement
    purposes, mineral exploration costs would be shown under operating
    activities rather than under investing activities. With the adoption of the
    policy for accounting for mineral exploration costs the Company's treatment
    of mineral exploration costs is similar to the treatment under U.S. GAAP,
    resulting in no material differences for 2003 and 2002.
|(c) | Future income taxes, related to
    flow-through shares for renunciation of qualified resource expenditures, are
    treated as a cost of issuing those securities for Canadian GAAP. For U.S.
    GAAP, these costs are included in the future tax provision.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

If these consolidated financial statements were prepared in
  accordance with US GAAP, the impact on the balance sheets would be as follows:





March 31, 2002
      December 31, 2002Deficit under
      Canadian GAAP
      26,326,957
      25,855,949Future income taxes
      1,340,189
      1,316,189Deficit under U.S. GAAP
      27,667,146
      27,172,138






F-25





|Birch Mountain
    Resources Ltd.Notes to the Financial StatementsFor the period
    ended March 31, 2003
|---------------------------------------------------------------------------------------------------------



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



In addition, the impact on the consolidated statements of loss would be as
  follows:





March 31, 2003
      March 31, 2002Net loss for the period under
      Canadian GAAP
      471,009
      567,963Future income taxes
      24,000
      15,893Net loss for the period under U.S. GAAP
      495,009
      583,856Loss per share under U.S. GAAPBasic
      (0.01)
      (0.02)






For U.S. GAAP purposes, the Company has adopted APB Opinion
  No.25, Accounting for Stock Issued and Employees(APB 25), to account
  for stock based compensation to employees and directors using the intrinsic
  value based method whereby compensation cost is recorded for the excess, if
  any, of the quoted market price, at the date granted. As at December 31, 2002,
  no compensation cost has been recorded for any period under this method, as
  the option price has been equal to the market price on the date of the grant.



The Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), issued in October
  1995, requires the use of the fair value based method of accounting for stock
  options. Under this method, compensation cost is measured at the date of grant
  based on the fair value of options granted and is recognized over the vesting
  period. These costs were calculated in accordance with the Black-Scholes
  option pricing model, assuming no dividends are paid, annual risk free rate of
  4.5% to 5%, a volatility factor of 12% to 30%, and an expected life of five
  years.



Had the Company adopted SFAS 123 for its U.S. GAAP
  disclosure, the following net losses would have been reported:





March 31, 2003
      March 31, 2002Net loss under U.S. GAAP
      495,009
      583,856Pro-forma stock compensation, after net tax affect
      -
      24,953495,009
      608,809Loss per share under U.S. GAAPBasic
      (0.01)
      (0.02)




F-26