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UNITED STATES

FORM 20-F AMENDMENT NO.1

□
      REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
      SECURITIES EXCHANGE ACT OF 1934ORx
      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
      EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2005OR□
      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934For
      the transition period from ______ to _______


Commission file number 001-32475

BIRCH MOUNTAIN RESOURCES LTD.

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

Alberta, Canada 
(Jurisdiction of incorporation or organization)

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

Securities registered or to be registered pursuant to Section
12(b) of the Act:

None

Securities registered or to be registered pursuant to Section
12(g) of the Act:

Common shares, without par value and Shareholders Rights

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.

80,421,487 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.

x
Yes                 □No

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

x Item 17
□Item 18

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|TABLE OF CONTENTS                                    
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|GLOSSARY & ABBREVIATIONS                             
|SPECIAL NOTE REGARDING FORWARD
    LOOKING STATEMENTS
|REPORTING CURRENCY AND FINANCIAL
    INFORMATION     
|ITEM 1                                               
|ITEM 2                                               
|ITEM 3                                               
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|ITEM 11  | QUANTITATIVE AND QUALITATIVE DISCLOSURES
    ABOUT MARKET RISK      | 50
|-------- | ------------------------------------------------------------------- | --
|ITEM 12  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY
    SECURITIES          | 50
|ITEM 13  | DEFAULTS, DIVIDEND ARREARAGES AND
    DELINQUENCIES                 | 50
|ITEM 14  | MATERIAL MODIFICATIONS TO THE
    RIGHTS OF SECURITYHOLDERS AND USE
|         | OF PROCEEDS                                                         | 50
|ITEM 15  | CONTROLS AND PROCEDURES                                             | 50
|ITEM 16  | RESERVED BY THE SEC                                                 | 51
|ITEM 16A | AUDIT COMMITTEE FINANCIAL EXPERT                                    | 51
|ITEM 16B | CODE OF ETHICS                                                      | 51
|ITEM 16C | PRINCIPAL ACCOUNTANT FEES AND SERVICES                              | 51
|ITEM 16D | EXEMPTIONS FROM THE LISTING STANDARDS FOR
    AUDIT COMMITTEE       | 52
|ITEM 16E | PURCHASES OF EQUITY SECURITIES BY THE ISSUER
    AND AFFILIATED     |   
|         | PURCHASERS                                                          | 52
|ITEM 17  | FINANCIAL STATEMENTS                                                | 53
|ITEM 18  | FINANCIAL STATEMENTS                                                | 53
|ITEM 19  | EXHIBITS                                                            | 54

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GLOSSARY & ABBREVIATIONSCertain terms and their usage
used throughout this Form 20-F are defined below.

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

4

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

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

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

5

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SPECIAL
NOTE REGARDING FORWARD LOOKING STATEMENTS

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

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

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

REPORTING CURRENCY AND FINANCIAL INFORMATION

Currency and Exchange Rates

Financial information in this Form 20-F is expressed in
Canadian dollars; therefore, unless otherwise noted, references to "Cdn$" or "$"
are to Canadian dollars. The following tables sets forth the period-end exchange
rate, the average of the period, and the high and low exchange rates in the
period, for the Canadian dollar in exchange for United States dollars, based
upon the inverse of exchange rates reported by the Federal Reserve Bank of New
York at the noon buying rates in New York City for cable transfers payable in
Canadian dollars as certified for customs purposes. As of December 31, 2005, the
noon rate of exchange, as reported by the Federal Reserve Bank of New York for
the conversion of United States dollars into Canadian dollars was US $0.8579 (US
$1.00 = CDN $1.1656). As of February 28, 2006 the noon rate of exchange, as
reported by the Federal Reserve Bank of New York for the conversion of United
States dollars into Canadian dollars was US $0.8788 (US $1.00 = CDN $1.1379).

Twelve Months Ended December 312005
    2004
    2003
    2002
    2001Rate at End of
    Period
    $0.8579
    $0.8310
    $0.7727
    $0.6344
    $0.6672Average Rate
    During Period
    0.8254
    0.7696
    0.7163
    0.6372
    0.6461High Rate During
    Period
    0.8690
    0.8493
    0.7747
    0.6656
    0.6714Low Rate During Period
    0.7872
    0.7158
    0.6327
    0.6175
    0.6227


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

6

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February
    January
    December
    November
    October
    September2006
    2006
    2005
    2005
    2005
    2005Rate at End of
    Period
    $0.8788
    $0.8744
    $0.8579
    $0.8569
    $0.8477
    $0.8615Average Rate
    During Period
    0.8704
    0.8642
    0.8610
    0.8463
    0.8493
    0.8491High Rate During
    Period
    0.8788
    0.8744
    0.8690
    0.8579
    0.8579
    0.8615Low Rate During Period
    0.8638
    0.8528
    0.8521
    0.8361
    0.8413
    0.8418


ITEM 1        
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

This item is not applicable.

ITEM 2         OFFER
STATISTICS AND EXPECTED TIMETABLE

This item is not applicable.

ITEM 3         KEY
INFORMATION

A. Selected
Financial Information

The following selected consolidated financial data for the
years ended December 31, 2005, 2004, 2003, 2002, and 2001 are derived from the
audited consolidated financial statements for the periods indicated and should
be read in conjunction therewith.

|                                   | Twelve Months Ended December 31 (audited)
|---------------------------------- | -----------------------------------------
|                                   | 2005                                     
|                                   |                                          
|Canadian GAAP(1)                   |                                          
|Interest income                    | 332                                      
|Expenses                           | 4,974                                    
|Loss before income taxes           | (4,642)                                  
|Loss for the year                  | (4,642)                                  
|Loss per share(2)                  | (0.08)                                   
|Total assets                       | 48,561                                   
|Liabilities                        | 7,126                                    
|Shareholders' equity               | 41,435                                   
|Total common shares outstanding(3) | 80,487                                   
|US GAAP (4)                        |                                          
|Interest income                    | 332                                      
|Expenses                           | 15,254                                   
|Loss before income taxes           | (14,922)                                 
|Loss for the year                  | (14,922)                                 
|Loss per share(2)                  | (0.17)                                   
|Total assets                       | 34,792                                   
|Liabilities                        | 7,126                                    
|Shareholders' equity               | 27,666                                   
|Total common shares outstanding(3) | 80,847                                   

> Notes:

(1)

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

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

Birch is Currently in the Exploration Stage (under U.S. GAAP)

Under Canadian GAAP, the Company is regarded as a development
stage enterprise because it has established NI 43-101 compliant proven and
probable mineral reserves and has obtained financing through Canadian financial
institutions to develop the MVQ for mineral production. Under U.S. GAAP, the
Company is regarded as an exploration stage enterprise because it did not meet
the criteria under SEC Industry Guide 7 for defining a mineral reserve. There is
a risk that operations may have delays, interruptions or increased costs or that
operations may not commence at all, due to many factors, including, without
limitation:

- breakdown or failure of equipment or processes;
- production performance falling below expected levels of
  output or efficiency;
- design errors;
- contractor or operator errors;
- non-performance by third-party contractors;
- labour disputes, disruptions or declines in productivity;
- increases in materials or labour costs;
- inability to attract sufficient numbers of qualified
  workers;
- delays in obtaining, or conditions imposed by, regulatory
  approvals;
- changes in the scope of the development or operations;
- violation of permit requirements;
- disruption of energy supply; and
- catastrophic events such as fires, earthquakes, storms or
  explosions.

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

Given the stage of development of the MVQ and the Hammerstone
Project, various changes may be made prior to completing construction. The MVQ
was open for production at the end of 2005 with sales expected to commence in
2006 and based on current scheduling, the Hammerstone Project is not expected to
start commercial quicklime operations until 2009. The information contained
herein, including, without limitation, reserve and economic evaluations, is
conditional upon receipt of all regulatory approvals and no material changes
being made to the MVQ and the Hammerstone Project.

Reserves and Resource Quantities and Quality are Based on
Estimates

There are numerous uncertainties inherent in estimating
quantities of reserves and resources, including many factors beyond Birch's
control, and no assurance can be given that the indicated level of reserves or
recovery thereof will be realized. In general, estimates of economically
recoverable limestone reserves and the future net cash flow there from are based
upon a number of factors and assumptions made as of the date on which the
reserve and resource estimates were determined, such as geological and
engineering estimates which have inherent uncertainties, the assumed effects of
regulation by governmental agencies and estimates of future commodity prices and
operating costs, all of which

8

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

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

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

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

Birch is a developing company with insufficient revenue to
meet its yearly operating and capital requirements. The Company has historically
raised funds necessary to conduct its business primarily through issuance of
equity. There is no guarantee the Company will be able to continue to raise
funds through additional equity issuances, project debt financing, joint
ventures and/or partnering arrangements. Although these are alternatives the
Company will investigate, there is no assurance that the Company will receive
significant revenues from operations at any time in the near future or that it
will have the cash required to become successful or economically viable.

The Company holds large land blocks under metallic and
industrial mineral permits, permits in the process of conversion to leases and
mineral leases issued by the Government of Alberta. The terms and conditions of
mineral permits require a mandated level of exploration expenditures for each
two-year period in order to continue to hold the rights to explore the land over
the ten-year term of a mineral permit.

Mineral leases require an annual rental payment in order to
hold the leases in good standing. 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 land in good standing beyond the current term. There is no
assurance that the Government of Alberta will approve the conversion of permits
to leases. The Government of Alberta has recently indicated it may extend the
term of permits beyond the current ten-year term; it is unknown whether or not
the term extension will apply retroactively to current permit-to-lease
conversions.

Competitive Risk May Reduce the Company's Ability to Operate

Birch must develop the mineral deposits and there is no
assurance the type or amount of the deposit will produce the economic results
expected. Additionally, Birch must negotiate sales arrangements with its
customers and prove its products are reliable and suitable for use in the oil
sands industry. Although Birch believes that competing aggregates in the Fort
McMurray region are limited in both size and quality and, as a result, high
market share assumptions have been made, Birch may have to compete with larger
companies that have greater assets and financial and human resources than Birch,
and which may be able to sustain larger losses than Birch to develop business.
Birch and the economic viability of the MVQ and the Hammerstone Project may be
negatively impacted if a new source of aggregates is located and developed.

9

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Graymont Western Canada Inc. ("Graymont"), a private
quicklime and limestone producing company and competitor to Birch, owns a small
number of mineral permits and leases in the vicinity of Birch's Athabasca
mineral property. Birch believes these permits and leases are either in an area
that is not surface accessible or are in an area that is designated as
recreational and environmental preserve. To Birch's knowledge Graymont has not
filed a public disclosuredocument with the Alberta Government which would indicate their intention to
seek regulatory approval to develop their mineral leases.

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

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

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

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

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

Customer Dependency May Reduce the Flexibility of the Company
to Operate

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

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

At December 31, 2005, Birch had thirteen full time employees
and two part time employees working for the Company. The Company relies on
various other part time workers, contractors and consultants to assist in
executing operations and providing technical guidance. From time to time, Birch
also utilizes the services of independent consultants and contractors to perform
various specific professional services, particularly in the areas of
engineering, environmental assessment, drilling, blasting, crushing, processing,
analysis and research. Although Birch believes that its relations with its
employees, management, directors, consultants and contractors are satisfactory,
there can be no assurance that they will remain with Birch for the immediate or
foreseeable future.

10

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Birch may also rely on joint ventures or other business
relations with companies its operations and business strategy. The MVQ will
initially require an experienced contract operator.

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

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

Birch Will Require Additional Government Operating Permits

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

Title Risks
May Result in Title Claims or Disputes

Birch is satisfied that it has good and proper right, title
and interest in and to the mineral properties that it intends to develop.

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

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

The Company operates in areas that are subject to
governmental provisions regulating exploration and development of mineral
resources. Birch may be constrained or forbidden to develop a project in areas
of economic mineral deposits or mandated operating guidelines may adversely
affect the economic viability of Birch. Additionally, the Company holds metallic
and industrial mineral permits, permits-to-lease conversions and leases issued
by the Government of Alberta and there are no guarantees the Government will
continue to extend land rights under its current practices. Regulatory agencies
may impose operating limitations that may adversely affect Birch's revenues
and/or the economic viability of a project.

11

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Birch is required by regulation to operate under certain
environmental guidelines that are mandated by the Government of Alberta and the
Government of Canada. Additionally, public expectation of the industry's
environmental performance remains high and this continues to translate into new
and generally more rigorous environmental policies, legislation and regulations.
The interventions of environmental groups or local persons in the application
for the Hammerstone Project could impact the Company's ability to develop the
project. The approval of new development in Canada has, for the past three
decades, been the subject of detailed review through a clearly established
public hearing process.
Abandonment and Reclamation Costs and Regulations May Change

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

Birch is Subject to Certain Mining Hazards

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

Independent Reviews Provide No Assurance of Future Results

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

There is a Possibility of Dilution to Present and Prospective
Shareholders

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

Stock Exchange Rules May Reduce the Liquidity of the
Company's Common Shares

Based on the past experience of the Company with respect to
the TSXV, 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 made by the
Company, trading of the Company's Common Shares was halted by the TSXV on June
16, 2000. In January 2002, Birch accepted a proposal from the TSXV for a
negotiated settlement and the matter was resolved in the Company's favour.
Trading in Birch's Common Shares resumed on March 11, 2002. The TSXV advised
that, "no adverse inference should be drawn from the suspension."

12

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Shareholders Rights Plan May Discourage Change in Control
TransactionsAlthough 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".

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

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

ITEM 4        
INFORMATION ON BIRCH



Birch was formed under the provisions of the ABCA, by
amalgamation of one of Birch's predecessors, also named Birch Mountain Resources
Ltd., and its wholly owned subsidiary, Birch Mountain Minerals Ltd on December
31, 1995.

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

The Company is currently focused on industrial minerals and
the development of a limestone quarry and limestone processing facilities on its
mineral leases in northern Alberta, near the City of Fort McMurray and in the
center of the Canadian oil sands industry.

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

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

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

13

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B. Principal
Capital Expenditures

The Company has invested principally in its mineral
properties in the Athabasca over the last three years. Over the past three
years, $14,780,627 has been invested in the MVQ and the Hammerstone Project and
$305,108 has been invested in local software, hardware, leasehold improvements
and miscellaneous office equipment. There have been no significant divestitures
or disposals over the past three years.

C. Business
Overview

Birch holds metallic and industrial mineral rights over an
extensive portion of the Athabasca region north of Fort McMurray, Alberta, in
the heart of the expanding Canadian oil sands industry. Birch does not own the
mineral rights to the geological formations that contain the oil sands, but owns
the mineral rights to the rocks that lie geologically beneath the oil sands. The
Company operates separate divisions for industrial minerals, and mineral
exploration and technology and the consolidated financial statements provide
segmented information to identify expenditures in each. See "Item 17 - Financial
Statements."

The Corporation has opened a limestone quarry and aggregate
processing plant, and is developing a limestone processing facility to produce
quicklime, cement and other products required by the growing oil sands industry
and for use in municipal construction and regional infrastructure development.
The initial limestone aggregate quarry, called

Birch received Approval NR-2005-1 from the NRCB on July 14,
2005, as authorized by an Order in Council from the Alberta Government the
previous day, to construct and operate the Muskeg Valley Quarry and aggregate
plant. Construction began in August 2005 and the quarry was opened in late
December 2005 with sales expected to commence in 2006. Birch expects to file the
Environmental Impact Assessment and Application for the Hammerstone Project
later in 2006.

Industrial Minerals

Birch formed its Industrial Minerals Division in June 2002,
to pursue market opportunities for the development of limestone on its Athabasca
mineral properties and for the sale of limestone products to the oil sands
industry. Since this time, industrial minerals have become the principle focus
of the Company. In 2005, Birch opened the Muskeg Valley Quarry. Later in 2006,
the Company intends to submit an environmental impact assessment and development
application for the expanded Hammerstone Project.

Muskeg Valley Quarry

In 2004, Birch formally applied to license a limestone quarry
called the MVQ. This original application was to develop a quarry to supply
crushed limestone aggregate to the local market.

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

14

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In March 2004, Birch filed an application and the supporting
Environmental Impact Assessment ("MVQ Application") with the NRCB to develop,
operate and reclaim a quarry and aggregate plant on its mineral leases adjacent
to the Muskeg River. With no interventions received opposing the MVQ
Application, the NRCB advised the Corporation that a public hearing was not
required. The NRCB issued a positive decision report on June 14, 2005, followed
by the Approval NR-2005-1 on July 14, 2005 as authorized by an Order in Council
from the Alberta Government the previous day. The Corporation has received all
operating approvals for the construction and production of limestone from the
MVQ.

During 2005, the Corporation contracted NORAMAC Ventures Inc.
for site clearing, access road construction, and for weigh scale and scale house
installation. NORAMAC is a joint venture between North American Construction
Group, a major road-building contractor in the region, and the Fort McKay Group
of Companies, a group of businesses owned and operated by the Fort McKay First
Nation. This site construction work is substantially complete, allowing the
opening of the MVQ in December 2005.

Also during 2005, Birch contracted with a local established
aggregate company to be the quarry operator for the MVQ. Stony Valley has worked
in the region for many years and had the equipment and personnel to run the
operations. Their local knowledge and reputation was seen as a benefit to Birch
in starting operations and gaining market share. The contract runs until
December 31, 2006 and is extendable as agreed by both parties.

The Hammerstone Project

As geological evaluation of the proposed MVQ progressed,
testing of core samples from a 1996 drill hole

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

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

15

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Details of the Muskeg Valley Quarry and the Hammerstone Project

Location and Mineral Interests

The MVQ and the Hammerstone Project are located within
Birch's Athabasca mineral property, approximately 60 km north of the City of
Fort McMurray near the hamlet of Fort McKay, Alberta. Birch has assembled a
strategic land position centered on the area of surface mineable oil sands in
the Athabasca region of northeast Alberta. The Athabasca mineral property is
described in greater detail in Section 4(D). As of February 28, 2006, the
Company's mineral interests covered 402,748 hectares (995,208 acres). The
Company's mineral leases convey the rights to develop and produce metallic and
industrial minerals, including limestone, while the permits allow the Company to
explore for these same minerals. The locations of Birch's mineral holdings in
the Athabasca region are illustrated in Figure 4-1.



Figure 4-1. Location of the Hammerstone Project and the
Company's Athabasca mineral property relative to oil sands leases in the Fort
McMurray region, northeast Alberta.

The MVQ and the Hammerstone Project are located at a
favourable site for development, where limestone occurs at surface or is
overlain by only thin layers of muskeg and overburden. The development
boundaries have been determined from geological, environmental, and economic
considerations. The western boundary is set back 200 metres from the Muskeg
River, consistent with setbacks for wildlife habitat in adjacent oil sands
leases. The southern boundary is an area where limestone is known from the
Company's geological mapping to be at or near surface. The eastern boundary has
been placed where the overlying Cretaceous and Quaternary sediments are more
than 20 metres thick, making commercial development less attractive due to the
requirement to remove increasing amounts of materials overlying the limestone.
Currently, the northern boundary is the south end of the MVQ, however the
Hammerstone Project development application expected to be filed in 2006 will
incorporate the MVQ.

16

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

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

Exploration

Birch has conducted mineral exploration of the MVQ and the
Hammerstone Project areas since 1995, as described in the 2005 Technical Report.
Industrial minerals exploration began in late 2002 and since this time Birch has
conducted geological mapping and sampling, core drilling, geochemical analyses,
bulk sampling, calcine testing and

Mineralization

Limestone is exposed at surface across the MVQ and
Hammerstone Project areas or is present beneath a thin layer of muskeg or
glacial overburden. The limestone is accessible from surface and is up to 45
metres thick. The 2005 Technical Report identifies construction aggregate,
concrete rock and quicklime as products to be made from limestone quarried at
the MVQ and the Hammerstone Project. Other products including reagent limestone,
hydrated lime, milk of lime and cement were identified in the 2006 Project
Update.

Drilling

Birch has conducted drill programs within and near the MVQ
and the Hammerstone Project areas, drilling 5 holes in 1996, 9 holes in
2002/2003 and 10 holes in 2004. Additional drilling was done for hydrogeological
testing in 2006, but these holes were not cored, the drill core was examined and
sampled by Birch staff, and sent to independent laboratories for analysis. The
drill results show continuity of stratigraphy and both quicklime and aggregate
qualities across the MVQ and the Hammerstone Project areas.

Sampling and Analysis

Birch conducted surface sampling programs across the MVQ and
the Hammerstone areas in 2001, 2003 and 2004; a total of 174 samples were
collected and submitted for multi-element geochemical analyses. In 2004, one 300
tonne bulk sample was collected from a surface pit for aggregate testing. In
2005, drill core and excavated samples were tested to determine suitability for
producing aggregate products. Drill core samples were taken over selected
intervals and submitted for some or all of: aggregate testing, multi-element
geochemical analyses and calcine testing. Birch concluded the results of its
surface and drill core sampling programs demonstrated that construction
aggregates, concrete rock and quicklime can be produced from the MVQ and
Hammerstone Projects.

17

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Initial Development of the Muskeg Valley Quarry and the Hammerstone
Project

The details in this section for the Muskeg Valley Quarry and
the Hammerstone Project are extracted from the 2005 Technical Report. However,
an updated prefeasibility report containing preliminary engineering drawings and
specifications will be prepared in spring 2006, and a technical report based on
the updated prefeasibility report, conforming to Canadian Securities Regulators
National Instrument 43-101, will subsequently be released publicly. An
Environmental Impact Assessment and Application to construct and develop the
Hammerstone Project is scheduled for submission to Alberta Environment and the
NRCB in the first half of 2006. The magnitude of the operation and range of
products are being expanded to capture the evolving product and service
opportunities and the increased development in the oil sands region. The updated
prefeasibility report could include material changes in the estimates for sales
and capital requirements. The financial analysis summarized in the following
section is based on assumptions and estimates in the 2005 Technical Report.

Quarry and Aggregate Plant Development

The MVQ was opened in December 2005 and production began in
2006. Site preparation of the MVQ required clearing of trees and stripping and
stockpiling of organic soils and overburden, construction of access roads, water
diversion structures and wash ponds, and installation of a weigh scale and
office. The site preparation was largely complete at the end of 2005. The quarry
is planned as a conventional drill-blast-crush operation. Primary crushing
plants will be located near the rock face and fed by excavators or wheel
loaders. In-pit conveyors will move rock from the primary crushers to secondary
crushing plants. Birch contracted a local quarry operator to initially operate
the quarry production from blasting to stockpiling. The quarry operator began
production in early 2006 with sales expected to commence later in 2006. As
production volumes grow, Birch intends to purchase additional equipment and
operate the quarry itself. Birch expects to commence production with its own
equipment in 2006 or 2007.

Initial Quicklime Plant Development

The Company based its original development plans on a 2005
Technical Report. Kiln sizing was based on an initial quicklime capacity of
225,000 t per year beginning in 2008. Based on future projected sales,
additional quicklime producing capacity of 225,000 t per year and 350,000 t per
year would be added in 2012 and 2021, respectively. The Company is updating the
technical report to include new market information and product offering that
have been identified as critical to the oil sands production growth. The 2005
Technical Report derived future sales estimates based on eventual bitumen
production from the oil sands of 5.5 million barrels per day .

The quicklime process designed for this study is based on the
preliminary bench-scale test work carried out to date, which Birch believes has
shown that two different limestone units produce quicklime of acceptable quality
and indicates a horizontal kiln is most suitable for quicklime production. The
prefeasibility design calls for the quicklime plant to be equipped with a FGD
system to remove sulphur produced by coke combustion and a regenerative thermal
oxidizer to reduce emissions of volatiles.

Capital Cost

Based on the 2005 Technical Report, the estimated cost to
construct, install and commission the initial phase of the Hammerstone Project
is $130 million, which includes the capital cost of blasting, crushing and
stockpiling equipment for operating the MVQ. This estimate is categorized as
prefeasibility level with an expected accuracy of ±25%. This amount covers the
direct field costs of executing the MVQ and the Hammerstone Project, plus
indirect costs associated with design, construction and commissioning. The base
pricing is fourth quarter 2004 Canadian dollars with no allowance for escalation
beyond that time. Interest and financing costs during construction are excluded.
The total capital cost estimate over the life of the project is $291 million.
The capital cost estimates for the Hammerstone Project are summarized in Table
4-1.

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Table 4-1.Summary of capital costs, Hammerstone
Project from the 2005 Technical Report.

Timing
    Description
    Total2005-2008
    Initial quarry and kiln 1
    $
    130,000,0002011
    Kiln
    2 - Year 7
    70,000,0002021
    Kiln
    3 - Year 17
    91,250,000Total Capital Cost
    $ 291,250,000


Operating Costs

The operating cost estimate is based on an owner-operated
quarry, aggregate plant, and quicklime plant, as described in the 2005 Technical
Report. Costs have been calculated for the four main areas of mining, aggregate
processing, quicklime processing, and site administration. Costs have been
developed from data considered applicable to the Fort McMurray area. Table 4-2
shows the overall average operating cost anticipated for the Hammerstone Project
over its planned 66-year life. This estimate is categorized as Class 4,
Prefeasibility Study level, with a nominal expected accuracy of +35%/-25%, as
defined by the Association for the Advancement of Cost Engineering Cost Estimate
Classification System.

Table 4-2. Summary of average life-of-quarry operating
costs, Hammerstone Project from the 2005 Technical Report.

Cost Area
    Operating Costs ($/t)Quarrying and
    haulage
    1.89Aggregate
    processing
    1.45Site operating
    0.01Administration
    0.23Quicklime processing
    47.50


Financial Analysis in Respect of Canadian Mineral Reserves



Results of the AMEC base-case financial analysis indicate
that the project has a potential pre-tax IRR of 30.0% and a pretax NPV of
$697,843,000 at a discount rate of 7.5% (See Table 4-3). The payback period is
estimated at 8.8 years from first production. The base-case quarry life used by
AMEC was 66 years.

Table 4-3. Hammerstone financial valuations at various
discount rates and IRR from the 2005 Technical Report.

Discount Rate (pre-tax)
    0%
    7.5%
    10%
    15%
    25%NPV (000)
    $7,171,884
    $697,843
    $396,131
    $147,291
    $18,493IRR
    30.0 %


Sensitivity analysis shows the cash flow model in the 2005
Technical Report is most sensitive to changes in product price, significantly
less to processing cost, and least sensitive to changes in quarrying cost and
capital expenditures. Specifically, the model is most sensitive to changes in
the price of quicklime, then of B-grade aggregate followed by A-grade aggregate,
and finally concrete rock.

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Regulatory Status

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

Birch has largely completed the geological and environmental
fieldwork to be used in the regulatory filings for the Hammerstone Project EIA
and application, which the Company expects to file later in 2006. Engineering,
environmental and regulatory costs necessary for work related to this
application in were approximately $2.0 million in 2005 and are projected to be
approximately $1.5 million in 2006. The final cost for regulatory approval of
the Hammerstone Project could be higher if referred to a public hearing.

Industry Overview

The MVQ and the Hammerstone Project are centrally located
among numerous existing and planned oil sands mining and in-situ projects. Crude
bitumen production from Alberta's oil sands reached one million barrels per day
in 2004 and is anticipated to increase five-fold to five million barrels per day
by 2030 (Oil Sands Technology Roadmap, Alberta Chamber of Resources, 2004).

Both mining and in-situ recovery of crude bitumen require
large inputs of energy and materials. Limestone aggregates from the MVQ and the
Hammerstone Project will initially be used for both the construction and
operating phases of current and planned oil sands projects while concrete rock
will be used predominantly in the construction phase. Quicklime is primarily
used in the operating phase for water treatment and removal of sulphur from air
emissions - so called flue gas desulphurization or, FGD. Through time, as the
number of projects and production from the oil sands increases, the use of
limestone products will be proportionally greater for ongoing operations rather
than construction.

Uses for Aggregate

In the Fort McMurray region, aggregates are used to construct
oil sands mines and plants, but are also utilized in operations for in-pit haul
road construction. Lower grade aggregates, such as Birch's B-grade aggregate, is
typically used in non-critical applications such as road base construction,
while higher quality aggregates, such as Birch's A-grade aggregate, may be used
to surface gravel roads. The highest quality aggregates such as Birch's concrete
rock, is used for concrete and asphalt production. High-calcium limestone can be
used as a reagent for wet limestone FGD.



Quicklime has two principal uses in the production of bitumen
from oil sands: scrubbing sulphur dioxide, sulphur trioxide, and mercury from
major process atmospheric emissions in FGD, and treatment of recycled process
waters in bitumen processing and SAGD plants. Quicklime is the main reagent for
warm and hot lime softening systems used to treat process-affected waters in the
in-situ extraction process and bitumen upgrading. In SAGD, where a large
proportion of the recovered water originates as high-temperature steam injected
into the formation, lime and magnesium oxide are used together in warm and hot
lime softening systems, with the principal goal of removing silica to prevent
scaling in steam generation boilers.

Supply and Demand - Aggregate

Demand for aggregate in the Fort McMurray region is driven
primarily by the construction and operating requirements of the oil sands
industry. Current supplies of aggregate in the Fort McMurray region are limited
in both size and quality. One of the two main aggregate pits, Poplar Creek, is
rapidly nearing total depletion. The other, Susan Lake, is believed to have less
than a ten-year supply at current consumption rates.

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Based on information reported in the 2003 and 2004 Athabasca
Regional Issues Working Group ("RIWG") aggregate surveys, the average demand for
road quality aggregate over the period 2003 to 2008 is estimated to be 7.7
million t and for concrete aggregate, 1.5 million t. However, concrete aggregate
consist of both rock and sand, of which Birch currently plans to produce only
concrete rock. Typically, concrete rock makes up about 55% of a concrete
aggregate; therefore, the average demand for concrete rock is estimated from the
survey to be 0.8 million t per year.

The RIWG aggregate surveys deal only with glacial gravels,
specifically excluding Birch's limestone currently being used for aggregate
purposes by two current oil sands producers. Average annual limestone use for
aggregate by oil sands companies for 2000 to 2004 is 1.6 million t. Therefore,
based on historical limestone aggregate use and RIWG reported data, the current
average road quality aggregate demand is estimated to be 9.3 million t annually,
of which 7.7 million t per year currently comes from glacial gravel deposits.

Supply and Demand - Quicklime

Quicklime is not produced in the region and must be trucked
in from plants located elsewhere. Graymont Western Canada Inc. and Graymont
Western US Inc. own the four quicklime plants closest to Fort McMurray; the
Summit plant at Coleman, Alberta, is not currently in operation. Competing
sources of quicklime, their respective capacities, and approximate road
distances from the location of the proposed quicklime plant are listed in Table
4-4.

Table 4-4. Competing Quicklime Plants, Canadian Prairies
and Northern US Plains. (1)

Province
    Production
    Units
    DistancePlant
    Location
    or State
    Capacity(1)
    
    (km)Exshaw
    Exshaw
    Alberta
    197,000
    t/year
    900Summit
    Coleman
    Alberta
    82,000
    t/year
    1,050Faulkner
    Faulkner
    Manitoba
    115,000
    t/year
    1,500Indian
    Townsend
    Montana
    329,000
    ton/year
    2,000Creek(1) Graymont Western
    US Inc. website - Capacities and Products, Jan 24, 2005, plus an assumed 10%
    downtime for scheduled maintenance.


Long-Term Demand and Sales Forecast

The long-term demand for limestone products in the Fort
McMurray region is dominated by the requirements of the oil sands industry.
Therefore, to best gauge the future market for limestone products, a forecast of
future

Forecast sales for limestone products were estimated by Birch
by multiplying CERI's forecast base-case demand by Birch's estimates of future
market share. For aggregate, market share estimates were adjusted to reflect
competition from other known gravel deposits. For quicklime, market share
estimates were made by distance weighting market share based on the closest
alternative supplier at Exshaw, Alberta. Sales estimates for all products
considered in the prefeasibility study may be found in the 2005 Technical
Report.

21

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Competitive Landscape

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

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

Further Development of the Hammerstone Project

The 2006 Project Update provides an overview of the current
Hammerstone development plan, which has evolved from the 2005 Technical Report,
and outlines the long-term development plans for the Hammerstone Project.
Production facilities for aggregate and quicklime remain, supplemented by
facilities to produce activated limestone, hydrated lime, milk of lime, recycled
spent lime and cement. Reagent limestone, for capturing sulphur in various
processes, has also been added, as a product not included in the initial
development plans. The Company expects total capital investment in the
Hammerstone Project could exceed $500 million over the next 15 or more years.

Reagent Limestone

In response to the developing market for limestone as a
reagent for capturing sulphur from combustion of alternative fuels to natural
gas, such as petroleum coke, asphaltenes or bitumen, Birch has added reagent
limestone to its suite of products. FGD limestone will be supplied to operators
using direct combustion of alternative fuels while FBC (fluidized bed
combustion) limestone will be supplied to absorb sulphur in advanced fluidized
bed combustion or gasification systems.

Lime Plant

The first lime plant will come on stream in Phase 1 in 2009,
along with fuel processing and environmental units, and facilities for limestone
handling, activating and storing sales products. Later, in phases 2 and 3,
additional lime kilns will be added to meet the expected long-term demand from
the oil sands industry for reagent limestone products. Lime products quicklime,
hydrated lime and milk of lime will be made using the highest-grade limestone in
our quarry. After it has been crushed to specified sizes, this calcinable
limestone will be processed in an activating kiln to remove the small percentage
of bitumen and water it contains. Off-gases from the activating kilns will be
burned with fuel and air in a combustion chamber to remove volatile
hydrocarbons. Heat recovered from the activating kilns will be recovered and
used to pre-heat other feedstocks or dry recycled spent lime. Activated
limestone will be used as a feedstock for producing quicklime and reagent
limestone.

Activated limestone is fed into a pre-heater prior to being
introduced into a calcining kiln. The pre-heater utilizes the heat in the
exhaust gases from the calcining kiln to raise the temperature of the activated
limestone before it is fed into the calcining kiln, substantially reducing fuel
consumption. A mixture of natural gas and petroleum coke will be used to fire
the kilns. Upon exiting the calcining kiln, the hot lime will be fed to a lime
cooler where the excess heat will be captured and used to pre-heat air for the
kiln.

22

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Quicklime will be marketed in pebble form or processed for sale as a
powder or as hydrated lime and milk of lime. A hydrated lime plant will mix
quicklime with sufficient water to produce solid calcium hydroxide, which will
be sold in bulk to water treatment plants. A portion of the lime for water
treatment plants and FGD will be sold as milk of lime. Milk of lime is made by
mixing lime with excess water to form a calcium hydroxide slurry. This will be
stored in tanks and transferred to trucks for customer delivery.

Spent Lime Recycling Plant

As part of Birch's commitment to provide full-cycle
environmental solutions for its products, installation of a flash calciner is
proposed for 2010 to recycle spent lime from water treatment plants. Spent lime
is an environmental challenge to many oil sands operators, and the proposed
recycling plant will address this problem by converting this waste into a useful
product. Dewatered spent lime will be delivered from remote water treatment
plants and dried using heat recovered in the lime plant before being fed into
the flash calciner to remove any remaining water and regenerate a fresh
recalcined lime. Unreacted grit will be separated from the recalcined lime,
which is mixed with water, or "slaked" to produce a milk of lime slurry. The
resulting milk of lime product can be returned by bulk carrier to the water
treatment plant or used for other purposes such as soil or biosolids
stabilization.

Cement Plant

Limestone is the principle feedstock for making cement. The
Phase 1 cement plant is proposed to start-up in 2010. It will include facilities
for storing, grinding and pre-blending the raw materials, a kiln for making
cement klinker and a grinding plant to produce cement powder. A cement kiln, and
later a pre-calciner, will be used to calcine and partly melt the kiln feed
material to produce cement clinker. In Phase 1, the cement plant will operate at
lower throughput rates without a pre-calciner, and will be equipped with a
pre-heater to recover the heat in the gasses escaping the cement kiln. In the
Phase 2 plant expansion, adding a pre-calciner to partly calcine the kiln feed
before it enters the kiln will increase throughput rates. A mixture of petroleum
coke and natural gas will be used to fuel both the cement kiln and pre-calciner.
Hot clinker exiting the kiln will be cooled and conveyed to an external storage
structure prior to being ground to produce cement powder. Because cement usage
is seasonal, significant clinker storage will be maintained on site to allow
higher cement powder production in the summer months.

Development Plans

An updated prefeasibility report containing preliminary
engineering drawings and specifications is being prepared, and a technical
report based on the prefeasibility update and conforming to Canadian Securities
Regulators National Instrument 43-101 will subsequently be released publicly. An
Environmental Impact Assessment and Application to Construct and Develop the
Hammerstone Project is scheduled to be submitted to Alberta Environment and the
NRCB in the first half of 2006. Detailed engineering is expected to commence in
the latter half of 2006. Initial production of quicklime and hydrated lime is
scheduled for early 2009, with recycled lime and cement production to follow in
2010. The planned life of the Hammerstone Project is to 2070, but this is solely
a function of the limestone reserves in the Hammerstone Quarry, which may be
enlarged by expanding the quarry to the south.

Precious Metals

Since 1993, Birch has conducted precious metals exploration
and research on the Athabasca mineral property. Precious metal microparticles
and nanoparticles have been identified and independently confirmed in both
sedimentary and basement rocks from the Athabasca mineral property and are the
target of Birch's precious metal exploration. There are no known potentially
economic occurrences of precious metals on the Athabasca mineral property.

23

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Since mid-2002, the Company's focus has shifted from precious
metals to industrial minerals. In 2003, Birch conducted limited in-house work
toward developing a reliable precious metals assay technique and continued to
review new developments in precious metal assaying that may prove useful in
exploring the Athabasca mineral property. In May 2003, Birch filed an
independent technical report by APEX Geoscience Ltd. ("APEX") entitled, 2003
Technical Report on the Gold Potential of the Athabasca Property(the "2003
Technical Report").APEX synthesized more than 80 years of published and
unpublished information relevant to exploration for low-temperature
sediment-hosted precious metal deposits on the Athabasca mineral property. The
2003 Technical Report concluded anomalous to potentially economic concentrations
of precious metals, including gold, platinum and palladium, exist on the
Athabasca mineral property and recommended additional precious metals
exploration be conducted.

Birch conducted limited work related to precious metals in
2004 and 2005. In the future, Birch will assess its research and development
work to date and determine an approach for realizing the value of the data
accumulated and the patented processes. Any further precious metals field
exploration is contingent on developing or acquiring, and independently
verifying, a technology to accurately and reliably determine the concentrations
of precious metals in rocks, oil sands tailings and other materials that may
contain precious metal nanoparticles or microparticles. There is no assurance
that there are commercial concentrations of precious or base metals on Birch's Athabasca mineral property, or that a commercially viable process will be
developed to extract these metals from rocks or oil sands tailings.

D. Organizational Structure

Birch has three inactive, wholly owned subsidiaries, Dawson
Bay Minerals Inc., incorporated pursuant to the Corporations Act
(Manitoba), Muskeg Valley Minerals Inc., incorporated pursuant to the ABCA 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 two
main divisions: Industrial Minerals and Mineral Exploration and Technology.

E.

Office Space

Birch maintains its head office in Calgary, Alberta.
Executive, administrative and support staff work in the 7,972 square foot office
space. The rental commitment is $202,000 per year.

Core and Metallurgical Laboratories

The Company maintains secure lab and storage facilities in
Calgary in an industrial area, for storage, logging and testing of drill core
samples and for testing in relation to the mineral exploration and technology
research work. The rental commitment of these facilities is $36,000 per year.

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

Plant and Equipment

Birch owns office and computer equipment and small laboratory
equipment in its offices and laboratories. 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 mineral property.

24

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



Birch's mineral properties are exclusively located in the
Province of Alberta where Birch holds metallic and industrial mineral permits,
metallic industrial mineral leases and permit-to-lease conversions. Birch's
mineral properties are all located in northeast Alberta and are collectively
called the Athabasca mineral property. The Athabasca mineral property was
originally acquired for precious metals exploration. In 1997 and 1998, Birch
explored for diamonds in a joint venture with Tahera Corporation. Since 2002,
Birch's Industrial Minerals Division has explored the Athabasca mineral property
for limestone and the Company is focused on commencing the operations of a
limestone quarry and quicklime plant.

Mineral Tenure in Alberta

Metallic and Industrial Mineral Permits

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

Metallic and Industrial Mineral Leases

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

Metallic and Industrial Mineral Permit-to-Lease Conversions

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

Overlapping Mineral Rights

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

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Athabasca Mineral Property

As of March 15, 2006, Birch's Athabasca mineral property
covered 402,748 hectares (995,207 acres). Annual rental payments on mineral
leases of the Athabasca mineral property are $477,172 in 2005. If current
permit-to-lease conversions are received in 2006, net annual mineral lease
rental payments will increase by approximately $177,000. Lease rental permits
will increase if the Company elects to acquire new mineral leases or decrease if
existing low priority leases are allowed to expire. The Company continues its
exploration and anticipates that the extent of its mineral properties will be
reduced in the future to areas Birch believes to be the most prospective.



Limestone and precious metals are the principal exploration
targets on the Athabasca mineral property. The geology of the Athabasca mineral
property is relatively simple, and is characterized by Precambrian basement
overlain by about 300 meters of shallow westward dipping, 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 minor normal or reverse normal offset and minor rotation. A
large structure, the Bitumount Graben, has resulted in an aggregate total
downdrop of up to 200 meters of both sedimentary and basement rocks along
numerous structures in the north-central part of the Athabasca mineral property.

Location and Access

The Athabasca mineral property is located in the Regional
Municipality of Wood Buffalo in northeast Alberta, Canada. The City of Fort
McMurray is the urban and economic center of RMWB. While the region covers
61,566 square km (23,771 square miles), most of itsresidents live in
Fort McMurray, which has a population of 60,983 (2005 census). In addition, an
estimated 10,000 persons live in work camps located close to major oil sands
construction projects. The hamlet of Fort McKay is located in the central area
of Birch's Athabasca mineral property.

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

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

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Mineral Title

Birch's currently active Athabasca mineral permits,
permit-to-lease conversions and leases were either originally acquired from the
Province of Alberta, or were acquired by purchase or option from other companies
or individuals. At December 31, 2005 the Athabasca mineral property covers
402,748 hectares (995,207 acres) as outlined in Table 5 below:

Table 4-5. Athabasca mineral property: mineral permits,
permit-to-lease conversions and leases.

| | Year Issued                   | Term Expiry | Number | Area (hectares) | Area (acres)
| | ----------------------------- | ----------- | ------ | --------------- | ------------
| | Mineral Permits by Issue Date |             |        |                
| | 1996                          | 2006        | 5      | 32,256          | 79,706      
| | 1998                          | 2008        | 2      | 8,448           | 20,875      
| | 2003                          | 2013        | 1      | 5,776           | 14,273      
| | 2004                          | 2014        | 15     | 101,500         | 250,811     

| | 2005                         | 2015 | 9  | 67,775  | 167,475
| | ---------------------------- | ---- | -- | ------- | -------
| | Total                        |      | 32 | 215,755 | 533,140
| | Mineral Leases by Issue Date |      |    |        
| | 1991                         | 2006 | 1  | 112     | 277    
| | 1999                         | 2014 | 4  | 3,207   | 7,924  
| | 2000                         | 2015 | 23 | 45,658  | 112,822
| | 2003                         | 2018 | 4  | 4,742   | 11,719 
| | 2004                         | 2019 | 37 | 82,615  | 204,147
| | Total                        |      | 69 | 136,335 | 336,889
| | Permit-to-Lease Conversions  |      |    |        
| | Total                        |      | 22 | 50,648  | 125,178
| | GRAND TOTAL                  |      |    | 402,748 | 955,207

Previous Exploration

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

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

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

Industrial Minerals Reserves

Mineral Reserves

Canadian and US regulations on disclosure of mineral
resources and reserves are significantly different, particularly for industrial
minerals, and lead to different classifications for Birch's recoverable
limestone. In Canada, mineral resources and reserves disclosure must conform to
NI 43-101 of the Canadian Securities Regulators. In the US, Industry Guide 7
("IG7") of the US Securities and Exchange Commission (the "SEC") governs the
disclosure of mineral reserves.

27

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Disclosure of Canadian Mineral Resources and Reserves

Under NI 43-101, the first report of mineral resources and/or
mineral reserves must be disclosed in an independent qualified person's
technical report. An independent technical report prepared to the level of a
scoping study is the minimum requirement for reporting a mineral resource
whereas for a mineral reserve an independent technical report at the level of a prefeasibility study is the minimum requirement. Under Canadian regulations, a
mineral resource need only have "reasonable prospects for economic extraction,"
while a mineral reserve must demonstrate "that economic extraction can be
justified."

Aggregate resources and reserves are classified based on
Canadian Standards Association ("CSA") specifications for Concrete Materials
(CSA Standard A23.1), Alberta Department of Transportation ("ADT") Standard
Specifications for Highway Construction, and local oil sands industry
specifications. For A- and B-grade aggregates, tests included Los Angeles
Abrasion ("LAA") and Plasticity Index (PI). For concrete rock, test included the
LAA and Magnesium Sulphate Soundness ("MSS").

All LAA results for Unit 1 are less than 40% and PI
designation is non-plastic, exceeding specifications for ADT Designation 1,
therefore Unit 1 resources and reserves are designated as A-Grade Aggregate. The
average thickness-weighted LAA values for all drill hole intersection of Unit 3
is less than 50% and the PI designation is nonplastic, exceeding specifications
for ADT Designation 2, therefore Unit 3 resources and reserves are designated as
B-

The limestone resource of the MVQ was first defined in the
independent 2004 Technical Report. Limestone mineral resources and reserves for
the expanded Hammerstone Project were defined in AMEC's independent 2005
Technical Report, which included a financial estimate of project valuation, as
required under NI 43-101 (See footnote 9 to Table 4-6). Based on the conclusions
of the 2004 Technical Report and the 2005 Technical Report, Birch believes that
a market exists for limestone aggregate and quicklime produced at the MVQ or the
Hammerstone Project.

Limestone resource and reserve estimates conforming to
Canadian NI 43-101 from the 2005 Technical Report are summarized in Table 4-6.
The proven reserves listed in Table 4-6 are the part of the measured resource
that falls within the economic pit design selected by AMEC. The probable
reserves are the part of the indicated resource that falls within the economic
pit design selected by AMEC. The limestone resources and reserves shown in Table
4-6 are mutually exclusive; that is, none of the mineral resources are included
in mineral reserves, and vice versa. The reserves listed exceed the sales
forecast feed requirements for all products over the estimated 66-year life of
the quarry. AMEC's independent financial valuation estimate shows there is a
reasonable expectation of profit from the limestone quarried within the pit
given the processes described and the estimated prices for saleable products.

Disclosure of Mineral Reserves in the US

The SEC does not recognize the term "mineral resource" used
in Canada, and has more stringent requirements for defining a mineral reserve.
However the SEC permits use of term "mineralized material." Under IG7,
mineralized material may not be classified as a reserve unless it, "could be
economically and legally extracted or produced at the time of the reserve
determination." In practise, the SEC requires economic and legal feasibility to
be demonstrated by having all regulatory permits and approvals in place or
expected imminently and a binding sales contract be in place and production be
imminent.

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Reconciliation of Canadian and US Mineral Reserve Estimates

In Canada, use of the terms "indicated resource" and
"measured resource" is permissible. However, in the United States these terms
are not recognized. Instead, the term "mineralized material" is permissible if
there is sufficient information to justify its use. On this basis, limestone
reported as indicated and measured resources in Canada may only be reported as
mineralized material in the U.S (Table 5).

In Canada, mineral reserves may be disclosed based on
economic feasibility being demonstrated by a prefeasibility study whereas in the
US economic feasibility an be demonstrated with approved regulatory permits and
a defined market or having contracts in place. Current mining practise defines a
prefeasibility study as having an accuracy level of ±25%. Further, in the US
demonstration of legal feasibility and, for industrial minerals, having
contracts in place is required prior to defining a proven or probable reserve.
Because Birch has only recently initiated the regulatory process for the
Hammerstone Project and does not have any sales contracts in place, mineral
reserves defined under Canadian NI 43-101 may only be classified as mineralized
material in the US (Table 4-6).

Table 4-6. Hammerstone Project recoverable limestone
reconciliation table (figures rounded).

| |                           | CANADA                | UNITED STATES     
| | ------------------------- | --------------------- | ------------------
| |                           | Mineral Resource1,2,3 | Mineral Reserve1,6
| | Product in million tonnes | Indicated4            | Measured5         
| | Concrete Rock             | 39.5                  | 1.0               
| | A-Grade Aggregate         | 91.0                  | 62.5              
| | B-Grade Aggregate         | 113.5                 | 45.0              
| | Calcinable Limestone      | 22.0                  | 15.0              
| | Total                     |                       | 389.5             

Footnotes:

1

2Cautionary Note to US Investors
  Concerning Estimates of Measured and Indicated Resources: This table uses
  the terms Measured Resource and Indicated Resource. Birch
  advises US investors that while such terms are recognized and permitted under
  Canadian regulations, the SEC does not recognize them. US investors are
  cautioned not to assume that any part or all of the mineral deposits in these
  categories will ever be converted into reserves.

CANADIAN MINING DEFINITIONS

3

4An Indicated Mineral Resource is that part of a Mineral
  Resource for which quantity, grade or quality, densities, shape and
  physical characteristics, can be estimated with a level of confidence
  sufficient to allow the appropriate application of technical and economic
  parameters, to support mine planning and evaluation of the economic viability
  of the deposit. The estimate is based on detailed and reliable exploration and
  testing information gathered through appropriate techniques from locations
  such as outcrops, trenches, pits, workings and drill holes that are spaced
  closely enough for geological and grade continuity to be reasonably assumed.

5A Measured Mineral Resource is that part of a Mineral
  Resource for which quantity, grade or quality, densities, shape, physical
  characteristics are so well established that they can be estimated with
  confidence sufficient to allow the appropriate application of technical and
  economic parameters, to support production planning and evaluation of the
  economic viability of the deposit. The estimate is based on detailed and
  reliable exploration, sampling and testing information gathered through
  appropriate techniques from locations such as outcrops, trenches, pits,
  workings and drill holes that are spaced closely enough to confirm both
  geological and grade continuity.

6A Mineral Reserve is the economically mineable part of a Measured or Indicated Mineral Resource demonstrated by at least a
  Preliminary Feasibility Study9. This Study must include
  adequate information on mining, processing, metallurgical, economic and other
  relevant factors that demonstrate, at the time of reporting, that economic
  extraction can be justified. A Mineral Reserve includes diluting materials and
  allowances for losses that may occur when the material is mined.

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7A Probable Mineral Reserve is the economically mineable part of
  an Indicated, and in some circumstances a Measured Mineral Resource
  demonstrated by at least a Preliminary Feasibility Study. This study
  must include adequate information on mining, processing, metallurgical,
  economic, and other relevant factors that demonstrate, at the time of
  reporting, that economic extraction can be justified.

8A Proven Mineral Reserve is the economically mineable part of a
  Measured Mineral Resource demonstrated by at least a Preliminary
  Feasibility Study. This study must include adequate information on mining,
  processing, metallurgical, economic, and other relevant factors that
  demonstrate, at the time of reporting, that economic extraction is justified.

9A Preliminary Feasibility Study or Prefeasibility Study
  is a comprehensive study of the viability of a mineral project that has
  advanced to a stage where the mining method, in the case of underground
  mining, or the pit configuration, in the case of an open pit, has been
  established, and where an effective method of mineral processing has been
  determined. This study must include a financial analysis based on reasonable
  assumptions of technical, engineering, operating, and economic factors and
  evaluation of other relevant factors that are sufficient for a Qualified
  Person acting reasonably, to determine if all or part of the Mineral
  Resource may be classified as a Mineral Reserve.

US MINING DEFINITIONS

10

11The SEC IG7 defines a Mineral Reserve as, "That part of a
  mineral deposit which could be economically and legally extracted or produced
  at the time of the reserve determination." According to interpretations by SEC
  staff of mining industry disclosure standards, such terms may not be used by
  SEC registrants unless the registrant has proven economic feasibility and all
  applicable permits are in place or expected imminently.

ITEM 5        
OPERATING AND FINANCIAL REVIEW AND PROSPECTS

General

This discussion should be read in conjunction with Birch's
consolidated financial statements. Birch's

A.

Years Ended December 31, 2005, 2004 and 2003

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

The Company incurred a loss of $4,641,818 in the year ended
December 31, 2005 (2004-$2,887,057; 2003-$1,568,435) and as at December 31,
2005, had retained deficit of $7,290,627.

Corporate Income

The Company earned interest income in 2005 of $323,568 and
2004 of $48,190. In 2003, income included a small amount of interest, revenue
from an agreed sale of $100,000 of limestone to Syncrude Canada Ltd. and a gain
on forgiveness of debt for $194,000. Birch Mountain has not had regular ongoing
revenue from customers as the Industrial Minerals Division was under
development. The Company's ability to generate income requires sales from the
MVQ and this is the Company's focus in 2006.

30

---



Expenses

Expenses totaled $4,974,386 in 2005 and $2,935,247 in 2004.
Total expenses have risen in 2005 as the Company moves forward with activities
necessary for operation, including work necessary for the preparation of the
Hammerstone Application and the payment of professional fees for the independent
technical report released in March 2005. Total expenses increased $2,039,139, or
70%, of which 49% of the increase or $999,295 was related to stock-based
compensation expenses. Office expense increased $259,186 and 95% of that
increase was for a $246,264 accrual of estimated interest, penalties and
corporate taxes payable upon re-filing of its flow through share renouncements.
The remaining increase in 2005 of $793,580 over the prior year reflects
additional corporate activity for the development of the Company's limestone
reserve in its Athabasca leases. Specifically these include:

- An increase of approximately $211,000 in salaries resulting
  from the hiring of two senior employees;
- An increase of approximately $150,000 in professional fees,
  after adjustment for the inclusion of stock-based expenses in the amount of
  $197,115 for options issued to a Board advisor, which have already been
  deducted from adjusted G&A expenses. The majority of the increase in
  professional fees, approximately $90,000, is due to an increase in business
  activity, including quarterly reviews by independent accountants and regular
  legal fees for corporate activity. In addition, professional fees of $60,000
  were paid for various special projects such as a tax review and accounting
  policy development.
- An increase of approximately $412,000 in shareholder
  services and promotion as a result of an expanding investors base resulting
  from the American Stock Exchange (AMEX) listing in April 2005 and increased
  promotion as the Company moves into operations. Of the increase, approximately
  $57,000 is related to the AMEX listing, $132,000 related to additional travel
  for investor meetings, $53,000 related to increase publication and
  distribution of Company materials to an increased number of shareholders,
  $130,000 related to increased filing and reporting fees in Canada and the
  United States, and $32,000 from increased advertising.

Mineral Exploration Costs

In 2005, the Company spent a total of $10,820,087 of which
$10,279,606 was capitalized.

|Mineral Exploration Costs                    | 2005         | 2004        | 2003     
|-------------------------------------------- | ------------ | ----------- | ---------
|Industrial Minerals Costs                    | $ 10,279,606 | $ 3,153,233 | $ 807,327
|Mineral Exploration and Technology
    Costs | 540,481      | 762,371     | 273,194  
|Total Mineral Expenditures                   | 10,820,087   | 3,915,604   | 1,080,521
|Less Amounts Capitalized                     | 10,279,606   | 3,153,233   | 336,136  
|Mineral Exploration Expenses                 | $ 540,481    | $ 762,371   | $ 744,385

Industrial Minerals Costs

In 2005, we focused most of our resources on the opening of
the MVQ. In 2005, $10,279,606 was spent with this entire amount being
capitalized, in 2004, $3,153,233 was spent with this entire amount being
capitalized and in 2003, $807,327 was spent with $336,136 of this amount being
capitalized. In 2005 these industrial mineral costs can be broken down into four
broad categories with the following estimated expenditures:

- Site construction of $5.9 million paid to Noramac Ventures
  for the excavation and stockpiling of surface overburden removed from the road
  and scale construction sites and removal of unsaleable, sub-grade aggregate
  material from the quarry pit which was used for the construction of an access
  road and scale foundations;
- Payments of $2.6 million to contractors and consultants for
  engineering, drilling, technical, environmental and regulatory services
  including any related materials;

31

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- An accrual of $360,000 for future site reclamation costs to
  for the Muskeg Valley Quarry; and
- Various administrative costs and salaries directly related
  to the Muskeg Valley Quarry or the Hammerstone Project.

Mineral Exploration and Technology Costs

Mineral exploration costs in 2005 were $540,481 as compared
to $762,371 in 2004 and $273,194 in 2003. The Company continues a small amount
of funding to this division in order to hold patents and allow for some small
level of future research work, directed at evaluation of opportunities that may
exist in the limestone or on other permit lands the Company holds in northern
Alberta outside of the MVQ or Hammerstone Project footprint.

B.

Years Ended December 31, 2005, 2004 and 2003

Birch Mountain is in the development stage. The Company has
virtually no revenues and funding has come primarily from private and public
financings. The Company has incurred operating losses since its inception in
1995, and as of December 31, 2005, has an accumulated deficit of $7,290,627,
after an adjustment, approved by shareholders in June 2004, for the elimination
of $27,748,932 of deficit. Losses are from costs incurred in the development of
the Industrial Minerals Division, exploration of mineral opportunities and
research of mineral technology. Results of operations have fluctuated from
period to period and may continue to do so in the future. Additional operating
losses may occur in the future as a result of the continued development of the
MVQ and the Hammerstone Project. However, the Muskeg Valley Quarry is expected
to start generating income from aggregate sales in 2006.

Working capital at December 31, 2005 is $27,474,950 an
increase of approximately $24.7 million from December 31, 2004. The increase
resulted primarily from the Company's $36 million equity financing during the
third quarter of 2005.

During the year, Birch Mountain received $4.3 million from
the exercise of stock options and warrants and completed a financing for net
proceeds, after costs of financing, of $33.7 million. At gross expenditure rates
consistent with 2005, the Company has existing capital to continue operations
into the foreseeable future. However, as the Company develops its limestone
reserve and builds plant facilities additional funds may be required. The
current estimates for capital for the initial phases of the MVQ and the
Hammerstone Project are $130 million. The Company is investigating strategic
options of early investment in plant process equipment, which may require
immediate capital. After initial operations of the MVQ, project-specific
financing may be available for the longer-term development of the Hammerstone
Project.

On-going commitments for capital resources relate largely to
the maintenance of the mineral permits and leases granted to the Company by the
Government of Alberta plus some general operating leases. At December 31, 2005,
the Company holds mineral leases, mineral permits and mineral permits for which
applications have been filed for conversion to leases, in the Athabasca region,
covering an area of 402,748 hectares (995,208 acres). Lease payments, along with
associated fees in 2006 and years beyond will be approximately $460,000
annually, if Birch Mountain continues to hold all of its mineral leases into the
future. Mineral permits are maintained in good standing by making allowable
exploration expenditures, although there is no obligation to do so. Birch
Mountain continuously evaluates its mineral permit holdings, relinquishing
and/or acquiring permits as dictated by financial considerations as well as
exploration and strategic priorities.

32

---



The Company is required to reclaim any land disturbances as
outlined in its environmental approvals for the MVQ. The Company estimated,
based on costs provided by consulting engineers of the Company, the costs for
third parties to return the MVQ to its reclaimed status as at December 31, 2005,
would be $1,100,000. For financial statement purposes, these costs have been
discounted to $360,000. Based on a preliminary estimate, the Company issued a
letter of credit to Alberta Environment for $670,000 for this reclamation work.
The Company must re-evaluate this annually and post additional security with
Alberta Environment. Also in connection with land disturbances, the Company was
required to pay timber damage fees for immature trees removed, which have not
reached commercial value. The Company paid fees based on the permitted area of
the MVQ even though not all the trees were cut during 2005. A long-term asset
has been recorded for the balance of amounts prepaid and this will be reduced as
trees are actually cleared.

The Company estimated a future liability for the
indemnification of shareholders for flow-through shares issued in 2003 and 2004,
for which the Company was not able to incur qualifying expenditures. The
estimated liability and potential taxes payable, interest and penalties payable
in the amount of $3.3 million has been accrued as an other current liability.
Subsequent to year-end, the Company amended its tax filing position and has
reported the impact to the subscribers. The actual liability will not be known
until the Canada Revenue Agency reassesses each affected subscriber and the
amounts are known by the Company. The payment of the liability may stretch over
many future years and could vary by up to fifteen percent.

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 US and international patent applications. It is the Company's
policy that costs associated with such research are expensed in the period in
which they are incurred. During the fiscal year ended December 31, 2005, the
Company did not spend any monies on research as compared to nil in 2004 and
$11,150 in 2003.

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

D. Trend
Information

Industrial Minerals

There is a growing demand for aggregate and quicklime in the
Fort McMurray region of Alberta and Birch has applied to licence a limestone
quarry and will apply to license a quicklime plant. The expansion, construction
and operation of oil sands projects requires large volumes of aggregate, in
addition to aggregate required for constructing the regional infrastructure to
support this development, and aggregate products.

The proposed MVQ 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 to treat water used for bitumen production
and to remove sulphur, mercury 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 facility on its proposed quarry site. Birch plans to file an
application for an expanded quarry and quicklime plant, the Hammerstone Project,
in early 2006.

E. Off-balance Sheet
Arrangements



33

---

F. Tabular Disclosure of
Contractual ObligationsAs of December 31, 2005, the
Company's known contractual obligations are as follows:

| |                                           | Payments due in each period
| | ----------------------------------------- | ---------------------------
| | Contractual Obligations                   | Total                      
| |                                           |                            
| | Long-term Debt Obligations                | -                          
| | Capital (Finance) Lease
    Obligations   | -                          
| | Operating Lease Obligations               | 388,231                    
| | Purchase Obligations                      | -                          
| | Other Long-Term Liabilities
    Reflected | 5,460,358                  
| | on the Company's Balance Sheet
    under  |                            
| | the GAAP of the primary financial         |                            
| | statements - Land Lease Costs             |                            
| | Total                                     | 5,848,589                  

ITEM 6        
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. Directors
and Senior Management

The following table sets forth the name, business experience,
functions and areas of experience in Birch and principal business activities
performed outside of Birch (including, in the case of directors of Birch, other
principal directorships) of each director, member of senior management and
employees upon whose work Birch is dependent, as of March 15, 2006:

|                         |                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Number of Common              
|------------------------ | ------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------
|                         |                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Shares and Percentage         
|                         |                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | of Class and Number of        
|                         |                                                                                                        | Principal
    Business Activities, Business Experience                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Stock Options (13)
    Held at
|Name                     | Function                                                                                               | and Principal Directorships                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | March 15, 2006                
|Kerry E. Sully           | Chairman of the Board and
    Director since 1995                                                      | Since 1999, Mr. Sully has been
    President and CEO of CGX Energy Inc., a company exploring for hydrocarbons
    in Guyana and was President, Chief Executive Officer and a Director of
    Ranchmen's Resources Ltd. from 1989 to 1995.                                                                                                                                                                                                                                                                                       | 244,000 common shares         
|(0.30%)                 
|                        
|75,000 stock options(2) 
|125,000 stock options(6)
|                         |                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 75,000 stock options(9)       
|                         |                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 35,000 stock options(12)      
|                         |                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                               
|Douglas J. Rowe          | President and Chief Executive
    Officer and Director since 1994                                      | Mr. Rowe is President and CEO
    of the Company, and was President and Chairman of the Board of Brougham
    Geoquest, Ltd., a company engaged in mineral exploration, and Brougham
    Energy Corporation, a company engaged in oil and gas exploration and
    development. Mr. Rowe is a director of Energy Exploration Technologies Inc.,
    a company developing remote sensing technology to assist in the exploration
    of hydrocarbons. Mr. Rowe has been a director of Dumont Nickel Inc. since
    July 20, 2005. | 677,983 common shares         
|(0.84%)                 
|                        
|390,000 stock options(2)
|90,000 stock options(3) 
|300,000 stock options(4)
|250,000 stock options(6)
|175,000 stock options(9)
|70,000 stock options(12)
|                        
|                         |                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                               
|Donald L. Dabbs          | Senior Vice President and
    Director since 1994, formerly Vice-President and Chief Financial Officer | Mr. Dabbs was the President and
    Chief Executive Officer of Niaski Environmental Inc. from 1998-1999. He was
    Regional Manager, Bovar Environmental, and had served as a Vice-President of
    Concord Environmental Corporation from 1988 to 1994 where he was responsible
    for resource development planning and regulatory approvals for clients,
    particularly in the Athabasca oil sands.                                                                                                                      | 338,972 common shares         
|(0.42%)                 
|                        
|200,000 stock options(2)
|100,000 stock options(3)
|250,000 stock options(4)
|200,000 stock options(6)
|75,000 stock options(9) 
|40,000 stock options(12)

34

---



|                          |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Number of Common          
|------------------------- | ------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------
|                          |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Shares and Percentage     
|                          |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | of Class and Number of    
|                          |                                                        | Principal Business Activities,
    Business Experience                                                                                                                                                                                                                                                                                                                                                                                                                                                                | Stock Options (13) Held at
|Name                      | Function                                               | and Principal Directorships                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | March 15, 2006            
|Lanny K. McDonald         | Director since 1995                                    | In 1990, after more than 16
    years of National Hockey League play, Mr. McDonald joined the Calgary Flames
    as Vice President for ten years. He is now Marketing Director with Baker
    Hughes Canada, an oilfield services company.                                                                                                                                                                                                                                                                            | 126,666 common shares     
|(0.16%)                  
|                         
|100,000 stock options(2) 
|150,000 stock options(3) 
|150,000 stock options(4) 
|100,000 stock options(6) 
|50,000 stock options(9)  
|25,000 stock options(12) 
|                          |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                           
|Dr. Jack Clark O.C.       | Director since 2001                                    | Dr. Clark is an independent
    consultant with over 40 years of engineering experience. For 15 years (until
    March 1997) he was President & CEO of C-CORE, an applied research company in
    St. John's, Newfoundland & Labrador. Dr. Clark has been an Honorary
    Professor of Engineering at Memorial University of Newfoundland and
    continues to consult to a wide range of government and industry clients.                                                                                            | 167,001 common shares     
|(0.21%)                  
|                         
|75,000 stock options(4)  
|100,000 stock options(6) 
|50,000 stock options(9)  
|25,000 stock options(12) 
|                         
|                          |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                           
|Charles Hopper            | Director since 2001                                    | Mr. Hopper is a Managing
    Director of Lehman Brothers, Inc. of New York and has twenty-five years
    experience in the financial industry. During the past five years at Lehman
    Brothers, Mr. Hopper has been responsible for Private Client Services Asset
    Management.                                                                                                                                                                                                                                   | 108,000 common shares     
|(0.13%)                  
|                         
|125,000 stock options(3) 
|150,000 stock options(4) 
|100,000 stock options(6) 
|50,000 stock options(9)  
|25,000 stock options(12) 
|                          |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                           
|Larry Shelley             | Director since 2005                                    | From 2000 to 2003 Mr. Shelley
    was the Executive Vice-President of Advisory Services at Meyers Norris Penny
    LLP, a public accounting firm, and President of the Tamarack Group Ltd., a
    corporate finance company. Since 2004 Mr. Shelley has been the President of
    SRG Capital Ltd., a private investment firm.                                                                                                                                                                                        | 50,000 common shares      
|(0.06%)                  
|                         
|262,500 stock options(10)
|25,000 stock options(12) 
|                         
|                         
|                          |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                           
|Derrick Kershaw           | Senior Vice-President and
    Director 
    since 2004 | Mr. Kershaw recently retired as
    General Manager, Aurora Mine for Syncrude Canada, where he was responsible
    for all aspects of the new Aurora Mine Project. With Syncrude, he held the
    position of General Manager, Extraction Operations, Manager Overburden and
    Tailings in Mining Operations, and Manager Mine Mobile Maintenance. He also
    was Manager in Syncrude Research Department. Mr. Kershaw served as Chair of
    the Advisory Board for the Fort McMurray Oil sands Discovery Centre. | No common shares          
|                         
|125,000 stock options(5) 
|125,000 stock options(6) 
|50,000 stock options(9)  
|45,000 stock options(12) 
|                         
|                         
|                         
|                         
|                          |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Dr. Hugh Abercrombie      | Vice-President,
    Exploration since 1998             | Dr. Abercrombie joined Birch
    from the Geological Survey of Canada where he studied low temperature,
    metastable geochemical processes and developed the theories underlying the
    Prairie Gold Model. Since taking on his current position, Dr. Abercrombie
    has directed Birch's exploration and technology activities, spearheading
    efforts to understand the origin and behaviour of natural nanoparticles.                                                                                        | 237,699 common shares     
|(0.29%)                  
|                         
|100,000 stock options(2) 
|65,000 stock options(3)  
|200,000 stock options(4) 
|150,000 stock options(6) 
|75,000 stock options(9)  
|40,000 stock options(12) 

35

---



|                          |                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                               
|------------------------- | ------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------
|                          |                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Number of Common              
|                          |                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Shares and Percentage         
|                          |                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                           | of Class and Number of        
|                          |                                                                    | Principal Business Activities,
    Business Experience                                                                                                                                                                                                                                                                                                                                                                                                    | Stock Options
    (13) Held at
|Name                      | Function                                                           | and Principal Directorships                                                                                                                                                                                                                                                                                                                                                                                                                               | March 15, 2006                
|Hansine Ullberg           | Vice-President, Finance and
    Chief Financial Officer since 2005 | Ms. Ullberg has held the
    positions of Director of Finance for The Calgary Flames, Vice President of
    Finance and Administration for Alterna Technologies Group Inc., Divisional
    Controller for Barton Instrument Systems, and Manager of Accounting and
    Auditing for Ernst and Young LLP. Ms. Ullberg has a Bachelor of Commerce (Honours)
    and Masters of Accountancy from the University of Manitoba and obtained her
    CA in 1996. | 20,000 common shares          
|(0.02%)                  
|                         
|75,000 stock options(8)  
|112,500 stock options(9) 
|45,000 stock options(12) 
|                         
|                         
|                         
|                          |                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                               
|Russell Gerrish           | Vice-President, Operations and
    Engineering since 2005          | Mr. Gerrish has 27 years of
    experience in engineering management and consulting, aggregate exploration,
    and mine planning/implementation related to aggregates, asphalt and
    ready-mix concrete.                                                                                                                                                                                                                                               | 130,000 common shares         
|(0.16%)                  
|                         
|7,500 stock options(7)   
|167,500 stock options(8) 
|150,000 stock options(9) 
|40,000 stock options(12) 
|                          |                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                               
|David Reid                | Vice-President, Facilities
    Engineering, since 2005             | Mr. Reid worked with
    TransCanada PipeLines over a 31 year period, including 8 years as Vice
    President, Engineering and Construction. In the past 7 years he has worked
    as Project Manager for the design and construction of a chemical plant, and
    recently spent 2 years in China managing the construction of a 3900 km gas
    pipeline.                                                                                               | No common shares              
|                         
|150,000 stock options(11)
|40,000 stock options(12) 

Notes:

(1)

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

B. Compensation

The following table sets forth the amount of compensation
that was paid and benefits that were granted in the financial year ended
December 31, 2005 to each of the individuals listed in Item 6(A) above.

36

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|                           |      |                         |                            |           |            |             |         |             
|-------------------------- | ---- | ----------------------- | -------------------------- | --------- | ---------- | ----------- | ------- | ------------
|Summary Compensation Table
|                           |      | Annual
    Compensation | Long Term
    Compensation | All Other
|                           |      |                         |                            |           |            |             |         | Compensation
|Named Executive            | Year | Salary                  | Bonus                      | Other     | Securities | Restricted  | LTIP    |             
|Officer and                |      |                         |                            | Annual    | Under      | Shares or   | Payouts |             
|Principal Position         |      |                         |                            |           | Options /  | Restricted  |         |             
|                           |      |                         |                            |           | SARS       | Share Units |         |             
|                           |      |                         |                            |           | Granted    |             |         |             
|                           |      | ($)                     | ($)                        | ($)       | (#)        | ($)         | ($)     | ($)         
|Douglas J. Rowe            | 2005 | 177,476                 | -                          | 2,969     | 175,000    | -           | -       | -           
|President & CEO            | 2004 | 165,923                 | -                          | 1,123     | 250,000    | -           | -       | -           
|Donald Dabbs               | 2005 | 139,044                 | -                          | 16,691    | 75,000     | -           | -       | -           
|Senior Vice President      | 2004 | 132,389                 | -                          | 3,124     | 200,000    | -           | -       | -           
|Dr. Hugh                   | 2005 | 117,205                 | -                          | 14,041    | 75,000     | -           | -       | -           
|Abercrombie                |      |                         |                            |           |            |             |         |             
|VP Exploration             | 2004 | 123,491                 | -                          | 4,526     | 150,000    | -           | -       | -           
|Hansine Ullberg            | 2005 | 111,705                 | -                          | 9,601     | 350,000    | -           | -       | -           
|VP Finance & CFO           | 2004 | -                       | -                          |           | -          | -           | -       | -           
|Russell Gerrish            | 2005 | 200,090                 | -                          | 2,986     | 350,000    | -           | -       | -           
|VP Engineering and         | 2004 | 101,281                 | -                          |           | 30,000     | -           | -       | -           
|Operations                 |      |                         |                            |           |            |             |         |             
|David Reid                 | 2005 | 25,000                  | -                          | -         | 150,000    | -           | -       | -           
|VP Plant Engineering       | 2004 | -                       | -                          | -         | -          | -           | -       | -           
|Kerry Sully                | 2005 | -                       | -                          | -         | 75,000     | -           | -       | -           
|Chariman of the            | 2004 | -                       | -                          | -         | 125,000    | -           | -       | -           
|Board                      |      |                         |                            |           |            |             |         |             
|Lanny MacDonald            | 2005 | -                       | -                          | -         | 50,000     | -           | -       | -           
|Director                   | 2004 | -                       | -                          | -         | 100,000    | -           | -       | -           
|Dr. Jack Clark             | 2005 | -                       | -                          | -         | 50,000     | -           | -       | -           
|Director                   | 2004 | -                       | -                          | -         | 100,000    | -           | -       | -           
|Charles Hopper             | 2005 | -                       | -                          | -         | 50,000     | -           | -       | -           
|Director                   | 2004 | -                       | -                          | -         | 100,000    | -           | -       | -           
|Derrick Kershaw            | 2005 | -                       | -                          | -         | 50,000     | -           | -       | -           
|Director                   | 2004 | -                       | -                          | -         | 250,000    | -           | -       | -           
|Larry Shelley              | 2005 | -                       | -                          | -         | 350,000    | -           | -       | -           
|Director                   | 2004 | -                       | -                          | -         | -          | -           | -       | -           

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

37

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C. Board Practices

Directors are elected annually at Birch's annual meeting of
shareholders and hold office until the earlier of their

Audit Committee

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

Compensation Committee

The Compensation Committee of Birch currently consists of
Lanny K. McDonald (chair), Jack Clark and Derrick Kershaw. The purpose of the
Compensation Committee as outlined in its charter is to determine the
compensation arrangement of executive officers, to provide oversight of
compensation programs to other employees and to assist or recommend with respect
to various compensation issues such as policies, benefits, personnel issues and
other issues.

Compensation Policy

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

Governance and Risk Committee

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

- to develop and recommend to the Board a set of corporate
  governance principles including policies, disclosure and business conduct;
- to act as the nominating committee of the board which
  includes identifying, and recommending director nominees fore ach annual
  meeting or as vacancies occur; and

38

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

Health, Safety and Environment Committee

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

D. Employees

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

As at December 312005
    2004
    2003Operations(1)
    7
    6
    6Accounting
    2
    1
    1Administration
    4
    4
    4Total
    13
    11
    11(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", above, for disclosure regarding share
ownership and options of Birch directors and senior management.

The Board of Directors of the Company adopted the stock
option plan of the Company on May 7, 2004, which was ratified by shareholders on
July 8, 2004 (the "Plan"). The purpose of the Plan is to advance the interests
of the Company by encouraging the directors, officers, employees and consultants
of the Company, and of its subsidiaries, if any, to acquire shares in the
Company, thereby increasing their proprietary interest in the Company,
encouraging them to remain associated with the Company and furnishing them with
additional incentive in their efforts on behalf of the Company in the conduct of
its affairs. The Plan is administered by the Board of Directors of the Company
or by a special committee of the Board of Directors, if appointed, from time to
time (the "Board"). Pursuant to the Plan, the Board may grant nontransferable
options to purchase Common shares of the Company to directors, officers,
employees and consultants of the Company and its subsidiaries and employees of a
person or company which provides management services (excluding investor
relations services) to the Company or its subsidiaries ("Management Company
Employees") (such persons hereinafter collectively referred to as
"Participants"). Under the Plan, 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 Participant shall not exceed the maximum number of shares permitted by any
stock exchange or exchanges on which the Common shares of the Company are then
listed and any other regulatory body having jurisdiction (the "Exchange"). The
aggregate number of Common shares issuable upon the exercise of all options
granted under the Plan may not exceed 10,269,047 shares. Options issued pursuant
to the Plan will have an exercise price determined by the Board provided that
such exercise price shall not be less than the price permitted by the Exchange.
Options granted under the Plan are non-transferable and expire the earlier of 5
years from the date of grant or 90 days from the date the optionee ceases to be
a director, officer, employee or consultant of the Company of its subsidiaries
or a Management Company Employee (or, in the case of an optionee performing
investor relations activities, within 30 days of the cessation of services to
the Company). In the event of death of an optionee, options held by such
optionee will expire the earlier of 5 years from the date of grant or one year
from the date of such death.

39

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ITEM 7         MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. Major
Shareholders

To the knowledge of Birch, as of February 28, 2006, there are
no persons or entities who beneficially hold, directly or indirectly or exercise
control or direction over, more than 5% of the voting rights attached to the
issued and outstanding common shares of Birch.

As of March 6, 2006, Birch had 156 registered shareholders of
which 99 holders had an address of record within the US owning common shares,
representing 16% of Birch's outstanding common shares.

B. Related
Party Transactions



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

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, 2005, 2004 and 2003, which are set
forth in "Item 17 - Financial Statements."

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

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

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

B. Significant
Changes

No significant changes have occurred during 2005 or during
the first two months of 2006.

ITEM 9         THE
OFFER AND LISTING

A. Offer and
Listing Details

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

|Year or Month     | Period         | High (Cdn$) | Low (Cdn$)
|----------------- | -------------- | ----------- | ----------
|December 31, 2001 | Year           | 1.10        | 0.50      
|December 31, 2002 | Year           | 0.73        | 0.10      
|December 31, 2003 | Year           | 0.56        | 0.19      
|December 31, 2004 | Year           | 2.50        | 0.45      
|December 31, 2005 | Year           | 9.85        | 1.90      
|                  |                |             |           
|2004              | First Quarter  | 1.08        | 0.46      
|                  | Second Quarter | 0.71        | 0.45      
|                  | Third Quarter  | 0.67        | 0.49      
|                  | Fourth Quarter | 2.50        | 0.53      
|2005              | First Quarter  | 3.53        | 1.90      
|                  | Second Quarter | 3.20        | 1.91      
|                  | Third Quarter  | 5.60        | 2.73      
|                  | Fourth Quarter | 9.85        | 5.25      
|                  |                |             |           
|September 2005    | Month          | 5.60        | 4.30      
|October 2005      | Month          | 6.67        | 5.25      
|November 2005     | Month          | 9.12        | 5.31      
|December 2005     | Month          | 9.85        | 7.65      
|January 2006      | Month          | 9.63        | 7.52      
|February 2006     | Month          | 8.70        | 7.32      

The following table sets forth the high and low market prices
of the common shares on the OTC-BB; except for prices listed after March 21,
2005, when the Company's stock began trading on the American Stock Exchange
("AMEX"). All financial figures in this table are expressed in US dollars.

|Year or Month     | Period | High (US$) | Low (US$)
|----------------- | ------ | ---------- | ---------
|December 31, 2002 | Year   | 0.29       | 0.07     
|December 31, 2003 | Year   | 0.45       | 0.30     
|December 31, 2004 | Year   | 2.05       | 0.34     
|December 31, 2005 | Year   | 8.50       | 1.40     

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|Year or Month  | Period         | High (US$) | Low (US$)
|-------------- | -------------- | ---------- | ---------
|               |                |            |          
|2004           | First Quarter  | 0.90       | 0.37     
|               | Second Quarter | 0.56       | 0.34     
|               | Third Quarter  | 0.52       | 0.34     
|               | Fourth Quarter | 2.05       | 0.37     
|2005           | First Quarter  | 2.85       | 1.55     
|               | Second Quarter | 2.57       | 1.40     
|               | Third Quarter  | 4.83       | 2.22     
|               | Fourth Quarter | 8.50       | 4.50     
|               |                |            |          
|September 2005 | Month          | 4.83       | 3.65     
|October 2005   | Month          | 5.72       | 4.50     
|November 2005  | Month          | 7.72       | 4.51     
|December 2005  | Month          | 8.50       | 6.40     
|January 2006   | Month          | 8.20       | 6.48     
|February 2006  | Month          | 7.55       | 6.37     

B. Plan of Distribution



C.

Trading in Canada

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

Trading in the US

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

D. Selling Shareholders

This item is not applicable.

E. Dilution

This item is not applicable.

F. Expenses of the Issue

This item is not applicable.

ITEM 10         ADDITIONAL
INFORMATION

A. Share Capital

This item is not applicable.

B. Memorandum and Articles of
Association

The information under "Item 14 - Description of Securities to be Registered"
contained in the Form 20-F/A4 Registration Statement dated April 25, 2001 is
hereby incorporated by reference.

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

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

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

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 Form 20-F, except the Rights Plan. (See "Item 10 -Additional Information
-
Memorandum and Articles of Association").

D.

Canadian Investment Controls

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

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

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

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

1.    
An investment is reviewable if there is an acquisition of control of a Canadian
business and the asset value of the Canadian business being acquired equals or
exceeds the following thresholds:

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

(b)  
Except as specified in paragraph (c) below, a threshold is calculated annually
for reviewable direct acquisitions by or from WTO investors. The threshold for
2006 is $265 million. Pursuant to Canada's international commitments, indirect
acquisitions by or from WTO investors are not reviewable;

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

(i)    
engages in the production of uranium and owns an interest in a producing uranium
property in Canada; 
(ii)    
provides any financial service; 
(iii)    
provides any transportation services; or 
(iv)    
is a cultural business.

2.    
Notwithstanding the above, any investment which is usually only notifiable,
including the establishment of a new Canadian business, and which falls within a
specific business activity, including the publication and distribution of books,
magazines, newspapers, film or video recordings, audio or video music
recordings, or music in print or machine-readable form may be reviewed if an
Order-in-Council directing a review is made and a notice is sent to the Investor
within 21 days following the receipt of a certified complete notification.

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

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

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

1.    
An acquisition of voting shares if the acquisition were made in the ordinary
course of that persons' business as a trader or dealer in securities;

2.    
An acquisition of control of the company in connection with the realization of a
security interest granted for a loan or other financial assistance and not for
any purpose related to the provisions of the ICA;

3.    
The acquisition of voting interests by any person in the ordinary course of a
business carried on by that person that consists of providing, in Canada,
venture capital on terms and conditions not inconsistent with such terms and
conditions as may be fixed by the Minister; and

44

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

E. Taxation

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

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

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



Disposition of Common Shares

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

45

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

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

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

Dividends

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

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

US Federal Income Tax Consequences

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

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

46

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This summary is for general information only and it is not
intended to be, nor should it be construed to be, legal or tax advice to any
holder or prospective holder of common shares and no opinion or representation
with respect to the US Federal income tax consequences to any such holder or
prospective holder is made. Holders and prospective holders of common shares of
the Company should consult their own tax advisors about the US Federal, US state
and local, and foreign tax consequences of purchasing, owning and disposing of
common shares of the Company.

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

Distributions on Common Shares of the Company

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

Any Canadian tax withheld may be credited (subject to certain
limitations) against the US Holder's US Federal taxable income. (See more
detailed discussion at "Foreign Tax Credits" below.) To the extent that
distributions exceed current or accumulated earnings and profits of the Company,
they will be treated first as a return of capital up to the US Holder's adjusted
basis in the common shares and thereafter as a gain from the sale or exchange of
the common shares. Dividends received by non-corporate US Holders may be subject
to US federal income tax at lower rates (generally 15%) than other types of
ordinary income in taxable years beginning before 2009 if certain conditions are
met. These conditions include the Company not being classified as a PFIC, it
being a qualified foreign corporation, the US Holder's satisfaction of a holding
period requirement, and the US Holder not treating the distribution as
"investment income" for purposes of the investment interest deduction rules. In
the case of US Holders that are corporations, such dividends generally will not
be eligible for the dividends received deduction.

Foreign Tax Credit

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

47

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

In the determination of the application of this limitation,
various items of income and deduction must be classified into foreign and
domestic sources. Complex rules govern this classification process. 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. Foreign
taxes assigned to a particular class of income generally cannot offset United
States tax on income assigned to another class. Under the American Jobs Creation
Act of 2004 (the "Act"), the basket limitation will be modified significantly
for tax years beginning after 2006.

Under the Act, unused foreign tax credits can generally be
carried back one year and carried forward ten years. US Holders should consult
their own tax advisors concerning the ability to utilize foreign tax credits,
especially in light of the changes made by the Act.

Currency Fluctuations

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

Disposition of Common Shares of the Company

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

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

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

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

48

---



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

F. Dividends and Paying Agents

This item is not applicable.

G. Statement by Experts

This item is not applicable.

H. Documents on Display

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

> Jane Quinn 
>   Shareholder Services 
>   Birch Mountain Resources Ltd. 
>   Suite 300, 250 - Sixth Avenue S.W. 
>   Bow Valley Square 4 
>   Calgary, AB, Canada 
>   T2P 3H7

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

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

The Company's SEC filings, and the exhibits thereto, are
available for inspection and copying at the public reference facilities
maintained by the Securities and Exchange Commission 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.

49

---

I. Subsidiary InformationThis item is not applicable.

ITEM 11 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

As a Canadian Company, Birch's cash balances are kept
primarily in Canadian funds, revenues are negotiated in Canadian dollars and
expenses are predominately in Canadian dollars. Therefore, the Company is
exposed to only minimal exchange rate risk. The Company considers the amount of
risk to be manageable and does not currently, nor is likely in the foreseeable
future, conduct hedging to reduce its exchange rate risk.

The Corporation does have limited exposure to foreign exchange risk, but this
is restricted to payment of current trade accounts payable in US Dollars where
most of the Corporation's cash assets are denominated in Canadian Dollars. The
Corporation maintains a bank account in US Dollars from payments received in US
Dollars to pay these trade accounts; therefore, there is no market risk, within
the meaning of Item 11, to the Corporation from this limited exposure to foreign
exchange translation effects. .

ITEM 12 DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

This item is not applicable.

PART II

ITEM 13 DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

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

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

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

ITEM 15 CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Chief Executive Officer, Douglas J. Rowe, and Chief
Financial Officer, Hansine M. Ullberg, evaluated the effectiveness of Birch's
disclosure controls and procedures as of December 31, 2005 (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 SEC under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the SEC'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.

50

---



Changes in Internal Control Over Financial
Reporting

There were no changes in Birch's internal controls or in other factors that
could significantly affect these controls during the year ended December 31,
2005 or subsequent to the evaluation date that could materially affect, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.

ITEM 16 RESERVED BY THE SEC

ITEM 16A AUDIT COMMITTEE FINANCIAL EXPERT

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

ITEM 16B CODE OF ETHICS

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

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

- 

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

compliance with applicable governmental
  laws, rules and regulations;

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

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

ITEM 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table sets forth, for each of the years
indicated, the fees billed by Birch's independent public accountants, and the
percentage of the services that were approved by the Audit Committee. During
2004, the fees were billed by Meyers Norris Penny LLP, Chartered Accountants and
as the Company changed auditors early in 2005, the fees outlined in 2005 include
any fees billed by Ernst and Young LLP, Chartered Accountants and any final fees
billed by Meyers Norris Penny LLP, necessary for the transition.

51

---



Year Ended December 312005
    2004Audit Fees (1)
    $ 41,000
    $ 51,813Audit-related
    Fees - attendance at Audit Committee meeting, review ofquarterly
    financial statements, review of Management's Discussion andAnalysis and Form
    20-F annual reporting (2)
    33,450
    20,250Tax Fees - review
    of tax note disclosures and the Company's taxcalculations
    4,740
    -All Other Fees -
    review of financial numbers in the Company's shortform prospectus
    and French translation of the financial statementsincluded in the short form
    prospectus (1)
    78,630
    6,382Total
    $ 157,820
    $ 78,445(1)Fees pre-approved
    by Audit Committee.(2)
    Fees incurred on an as-needed basis.


Pre-Approval Policies and Procedures

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

ITEM 16D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE

This item is not applicable.

ITEM 16E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS

Neither the Company, nor any affiliated purchaser of the Company, has
purchased any of the Company's securities during 2005

52

---

PART IIIITEM 17 FINANCIAL
STATEMENTS

|                                                                                                        | Page
|------------------------------------------------------------------------------------------------------- | ----
|                                                                                                        | No. 
|                                                                                                        |     
|Report of Independent Registered Public
    Accounting Firm                                             | F-3 
|                                                                                                        |     
|Report of Independent Registered Public
    Accounting Firm                                             | F-4 
|                                                                                                        |     
|Consolidated Balance Sheets for the years
    ended December 31, 2005 and 2004                          | F-5 
|                                                                                                        |     
|Consolidated Statements of Loss and Deficit
    for the years ended December 31, 2005, 2004 and 2003    | F-6 
|                                                                                                        |     
|Consolidated Statements of Cash Flows for the
    years ended December 31, 2005, 2004 and 2003          | F-7 
|                                                                                                        |     
|Notes to the Consolidated Financial
    Statements for the years ended December 31, 2005, 2004 and 2003 | F-8 

ITEM 18 FINANCIAL STATEMENTS

This item is not applicable.

53

---

AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005



F-1

---



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





TO THE SHAREHOLDERS OF BIRCH MOUNTAIN RESOURCES LTD.

Management has the responsibility for preparation and fair
presentation of the accompanying financial statements, including the financial
processes that give rise to such consolidated financial statements. This
responsibility includes selecting appropriate accounting principles and making
objective judgments and estimates in accordance with Canadian generally accepted
accounting principles and providing a reconciliation to generally accepted
accounting principles in the United States. Management is also responsible for
the preparation, fair presentation and consistency of other financial
information in the Annual Financial Report that is combined with the audited
consolidated financials statements.

In discharging its responsibilities for the integrity and
fairness of the financial statements, management designs and maintains the
necessary accounting systems and related internal controls to provide reasonable
assurance that transactions are authorized, assets safeguarded and proper
records maintained for reporting financial statements and other financial
information in accordance with applicable generally accepted accounting
principles and in accordance with applicable securities rules and regulations.
Management has also established disclosure controls and procedures designed to
ensure accurate and timely disclosure of material information required by
regulators. Disclosure of any financial information is approved in advance by
the Audit Committee.

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

External auditors are appointed by the shareholders to audit
the financial statements and report directly to them. Their report is attached
to the audited consolidated financial statements that follow. The external
auditors have full and free access to the Audit Committee, the Board of
Directors and management.

Douglas J. Rowe, President and
      Chief Executive OfficerHansine M. Ullberg, Vice
      President Finance and Chief Financial Officer


F-2

---



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





To the Shareholders of

Birch Mountain Resources Ltd.

We have audited the consolidated balance sheet of Birch
Mountain Resources Ltd. as at December 31, 2005, and the consolidated statements
of loss and deficit, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with Canadian generally
accepted auditing standards and the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the financial statements
are free of material misstatement. An audit includes consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, these financial statements present fairly, in
all material respects, the consolidated financial position of Birch Mountain
Resources Ltd. as at December 31, 2005, and the results of its operations and
its cash flows for the year then ended in conformity with Canadian generally
accepted accounting principles.

Our previous audit report dated March 22, 2006 has been withdrawn and the
consolidated financial statements have been revised as described in note 22 to
the consolidated financial statements.

The financial statements as at December 31, 2004 and for the
years ended December 31, 2004 and 2003 were audited by other auditors who
expressed an opinion without reservation on those statements in their report
dated February 25, 2005 (except for notes 3 and 8, which are as of July 25,
2005, and note 19, which is as of November 10, 2006).



|                                                                           | Signed "Ernst & Young LLP"
|-------------------------------------------------------------------------- | --------------------------
|Calgary, Canada                                                            | Chartered Accountants     
|March 22, 2006 (except for note
    22, which is as of November 10, 2006).

F-3

---



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



To the Shareholders of

Birch Mountain Resources Ltd.

We have audited the consolidated balance sheets of Birch
Mountain Resources Ltd. as at December 31, 2004 and 2003 and the
consolidated statements of loss and retained earnings (deficit) and cash flows
for each of the years in the three-year period ended December 31, 2004. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with Canadian generally
accepted auditing standards and the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the financial statements
are free of material misstatement. An audit includes 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, 2004 and 2003 and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2004, in
accordance with Canadian generally accepted accounting principles.

Our previous audit report dated February 25, 2005 (except for notes 3 and 8
which are as of July 25, 2005) has been withdrawn and the consolidated financial
statements have been revised as described in note 19 to the consolidated 2004
financial statements



Signed "Meyers Norris Penny LLP"Chartered Accountants


Calgary, Canada

Feb 25, 2005 (except for notes 3 and 8 of the 2004 consolidated financial
statements, which are as of July 25, 2005 and note 19, which is as of November
10, 2006).

F-4

---



|                 | Birch Mountain Resources
    Ltd.                                                       
|---------------- | ----------------------------------------------------------------------------------------
|                 | (A Development Stage Company
    in Canada and An Exploration Stage Company in the U.S.)
|                 | Consolidated Balance Sheets                                                             
|Canadian Dollars |                                                                                         

|                                             |             |            
|-------------------------------------------- | ----------- | -----------
|As At December 31                            | 2005        | 2004       
|                                             |             |            
|Assets                                       |             |            
|Current                                      |             |            
|Cash and cash equivalents (Note 3)           | 32,322,603  | 5,444,270  
|Accounts receivable                          | 476,455     | 233,459    
|Prepaids and deposits                        | 441,545     | 184,108    
|                                             | 33,240,603  | 5,861,837  
|                                             |             |            
|Restricted cash(Note4)                       | 1,000,000   | -          
|Long-term prepaid(Note 5)                    | 232,489     | -          
|Property and equipment(Note 6)               | 318,786     | 181,217    
|Mineral properties(Note 7)                   | 13,768,974  | 3,489,369  
|Total Assets                                 | 48,560,852  | 9,532,423  
|Liabilities                                  |             |            
|Current                                      |             |            
|Accounts payable and accrued
    liabilities | 3,369,083   | 332,229    
|Advances on share subscriptions              | -           | 173,252    
|Deferred revenue (Note 8)                    | 50,306      | 50,306     
|Other current liabilities (Note 9)           | 3,346,264   | 2,500,000  
|                                             | 6,765,653   | 3,055,787  
|                                             |             |            
|Asset retirement obligation (Note 10)        | 360,000     | 25,000     
|                                             | 7,125,653   | 3,080,787  
|Contingent liabilities (Note 9)              |             |            
|                                             |             |            
|Shareholders' equity                         |             |            
|Share capital (Note 11)                      | 46,950,953  | 8,761,876  
|Contributed surplus (Note 12)                | 1,774,873   | 338,569    
|Deficit(Note 13)                             | (7,290,627) | (2,648,809)
|                                             | 41,435,199  | 6,451,636  
|Total Liabilities and Shareholders' Equity   | 48,560,852  | 9,532,423  

See accompanying notes to the audited consolidated financial statements.

Approved on behalf of the Board:

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

F-5

---



|Birch Mountain Resources Ltd.                                                           
|----------------------------------------------------------------------------------------
|(A Development Stage Company in Canada and An Exploration
    Stage Company in the U.S.)
|Consolidated Statements of Loss and Deficit                                             



|                                       |             |              |             
|-------------------------------------- | ----------- | ------------ | ------------
|                                       |             |              |             
|Year Ended December 31                 | 2005        | 2004         | 2003        
|                                       |             |              |             
|Expenses                               |             |              |             
|Amortization                           | 63,424      | 50,336       | 33,632      
|Consulting                             | 96,027      | 79,973       | 800         
|Mineral exploration (Note 7)           | 540,481     | 762,371      | 744,385     
|Office                                 | 942,502     | 683,316      | 263,247     
|Professional fees                      | 746,377     | 396,552      | 125,175     
|Research                               | -           | -            | 11,150      
|Salaries and benefits                  | 597,714     | 386,579      | 422,135     
|Shareholder services and
    promotion | 742,439     | 329,993      | 213,203     
|Stock-based compensation (Note 15)     | 1,245,422   | 246,127      | 66,681      
|Loss before the following              | 4,974,386   | 2,935,247    | 1,880,408   
|Interest and other income              | (332,568)   | (48,190)     | (11,205)    
|Gain on forgiveness of debt (Note 16)  | -           | -            | (194,000)   
|Gain on disposal of investment         | -           | -            | (6,768)     
|Limestone sale (Note 8)                | -           | -            | (100,000)   
|                                       | (332,568)   | (48,190)     | (311,973)   
|Loss for year                          | 4,641,818   | 2,887,057    | 1,568,435   
|Deficit, beginning of year             | (2,648,809) | (27,510,684) | (25,942,249)
|Elimination of deficit(Note 13)        | -           | 27,748,932   | -           
|Deficit, end of year                   | (7,290,627) | (2,648,809)  | (27,510,684)
|                                       |             |              |             
|Loss per share                         |             |              |             
|Basic and diluted (Note 14)            | (0.08)      | (0.05)       | (0.04)      

See accompanying notes to the audited consolidated financial statements.

F-6

---



|Birch Mountain Resources Ltd.                                                           
|----------------------------------------------------------------------------------------
|(A Development Stage Company in Canada and An Exploration
    Stage Company in the U.S.)
|Consolidated Statements of Cash Flows                                                   
|For the years ended December 31                                                         



|                                                                 |             |             |            
|---------------------------------------------------------------- | ----------- | ----------- | -----------
|                                                                 |             |             |            
|                                                                 | 2005        | 2004        | 2003       
|                                                                 |             |             |            
|Cash
    flows from operating activities                         |             |             |            
|Payments to suppliers                                            | (2,362,190) | (1,321,259) | (1,491,817)
|Payments to employees                                            | (687,429)   | (878,063)   | (921,277)  
|Interest paid                                                    | (4,746)     | (3,900)     | (45,921)   
|Interest received                                                | 325,121     | 47,549      | 2,358      
|                                                                 | (2,729,244) | (2,155,673) | (2,456,657)
|Cash flows from financing
    activities                         |             |             |            
|Issuance of common shares for cash                               | 40,331,448  | 9,381,086   | 4,623,601  
|Share issuance costs                                             | (2,303,853) | (546,383)   | (163,590)  
|Advances on share
    subscriptions upon the exercise of options | (173,252)   | 173,252     | -          
|                                                                 | 37,854,343  | 9,007,955   | 4,460,011  
|Cash flows from investing
    activities                         |             |             |            
|Mineral exploration costs                                        | (7,045,773) | (3,153,233) | (230,970)  
|Restricted cash                                                  | (1,000,000) | -           | -          
|Purchase of capital assets                                       | (202,595)   | (73,071)    | (29,442)   
|Proceeds on disposal of investment                               | -           | -           | 26,768     
|Proceeds on disposal
    of capital assets                       | 1,602       | -           | 800        
|                                                                 | (8,246,766) | (3,226,304) | (232,844)  
|Increase in cash and cash
    equivalents                        | 26,878,333  | 3,625,978   | 1,770,510  
|Cash and cash equivalents,
    beginning of year                 | 5,444,270   | 1,818,292   | 47,782     
|Cash and cash equivalents, end
    of year                       | 32,322,603  | 5,444,270   | 1,818,292  

See accompanying notes to the audited consolidated financial statements.

F-7

---



1. Nature of operations

Birch Mountain Resources Ltd. (the "Company"), incorporated
under the jurisdiction of the Business Corporations Act of Alberta, is exploring
and preparing to develop its mineral leases and permits in Northern Alberta. At
inception, the efforts of the Company were focused on exploration of precious
metals and research into precious metals technology. However, over the past
three and a half years its focus has been on the development of its industrial
minerals. The Company has two projects in its industrial minerals division, the
Muskeg Valley Quarry and the Hammerstone Project, both of which are development
of the limestone contained on the Company's mineral leases. The Hammerstone
Project is a planned quarry expansion and quicklime and cement plants. The
Muskeg Valley Quarry has been approved for development by the governmental
regulators. The rights of the Company are to develop, extract and sell limestone
products. The Company must comply with conditions of the regulatory approvals
such as to monitor ground water, report extraction and pay royalties thereon and
the reclaim the site at the end of production. To date, the Company has not
earned significant revenues and is considered to be in the development stage.
The recoverability of the amounts shown for mineral properties is dependant upon
the existence of economically recoverable reserves, securing and maintaining
title and beneficial interest in the properties, and the ability of the Company
to obtain the necessary financing or cash flow to continue the development of
its mineral properties. On February 25, 2005, the Company released an
independent technical report, which indicates the potential for a limestone
quarry in the Fort McMurray area and reports an estimated value for the mineral
reserves in excess of the current carrying value of the mineral properties.

2. Significant accounting policies

(a)    Basis of
presentation

These consolidated financial
statements are prepared in accordance with generally accepted accounting
principles in Canada. The principal accounting policies followed by the Company,
which have been consistently applied in the preparation of these consolidated
financial statements, are summarized below. A summary of the difference between
accounting principles generally accepted in Canada and those generally accepted
in the United States is contained in note 22 to these consolidated financial
statements.

(b)    Principles of
consolidation

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

(c)    Use of
estimates

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

(d)    Cash and cash
equivalents

Cash and cash equivalents include balances with
Canadian chartered banks and investment certificates with maturities of three
months or less at the date of purchase.

(e)    Property and
equipment

Property and equipment are recorded at cost.
Amortization is provided over their estimated useful lives, using the following
methods and rates:

Method
    Annual RateEquipment
    Declining balance
    20%
    - 30%Computer
    Declining balance
    30%
    - 100%Leasehold improvements
    Straight line
    5
    years


F-8

---

2.     Significant accounting policies (continued)
(f)    Mineral
properties

The Company expenses mineral
exploration costs in the year they are incurred, unless on a
property-by-property basis the deferral criteria are met and it is probable that
they will be recoverable from the future operations of the related project. When
it is determined that a mining property can be economically developed as a
result of established proven and probable reserves, the costs of further
exploration and development to further delineate the reserve on such a property
are capitalized. Determination as to the establishment of proven and probable
reserves is based on results of technical reports, which indicate whether a
property is economically feasible. These expenditures will be depleted on a unit
of production basis when the properties are developed to the stage of commercial
production. During 2003, the Company began capitalizing expenditures related to
the exploration and testing of a limestone property, as the criteria for
capitalization had been met.

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

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

(g)

The Company has adopted the new
recommendations of the CICA relating to accounting for asset retirement
obligations. This recommendation replaces the previous method of accounting for
site restoration costs on an accrual basis. The Company has adopted the new
standard on a retroactive basis in accordance with the CICA recommendations on
Accounting Changes. Under the new standard, a liability for the fair value of
environmental and site restoration obligations are recorded when the obligations
are incurred and the fair value can be reasonably estimated. The fair value of
the obligations is based on the estimated cash flow required to settle the
obligations discounted using the Government of Canada Bond Rate for the
applicable term adjusted for the Company's credit rating. The fair value of the
obligation is recorded as a liability with the same amount recorded as an
increase in capitalized costs. The amounts included in capitalized costs are
depleted using the unit-of-production method. The liability is adjusted for
accretion expense representing the increase in the fair value of the obligations
due to the passage of time. The accretion expense is recorded as an operating
expense. There was no accretion expense recorded on the current year's financial
statements, as the amount was immaterial.

(h)

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.

(i)

The Company was 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.

F-9

---



2.

(j)    Future income
taxes

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

(k)    Stock-based
compensation and contributed surplus

The Company has a stock-based
compensation plan as described in note 11. Effective January 1, 2003, the
Company adopted the new accounting standards of the Canadian Institute of
Chartered Accountants for accounting for stock-based compensation.

The Company has adopted the fair
value method of accounting for all stock options granted whereby stock-based
compensation on options granted is charged as an expense or capitalized
depending on the nature of the grant, in the period the options are vest, based
on the estimated fair value at the date of grant using the Black-Scholes Option
Pricing Model. Prior to January 1, 2003, the Company only expensed the fair
value of options granted to non-employees and disclosed those granted to all
others on a pro-forma basis only. Consideration paid by the option holders to
the Company upon exercise of options is credited to common share capital.

(l)    Loss per
share amounts

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

(m)    Foreign
currency translation

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

3.    
Cash and cash equivalents

At December 31, 2005, cash equivalents included $31,911,272 (2004 -
$4,425,596) invested in guarantee investment certificates earning interest at
rates of 2.15% to 2.55% (2004 - 2.4%).

4.    
Restricted cash

The Company pledged as collateral $1,000,000 against a demand
operating line, through assignment of one-year term deposits to the Royal Bank
of Canada. The Company has not drawn on the operating line except for a stand-by
letter of credit, which is explained in Note 10.

5.    
Long-term prepaid

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

F-10

---

6. Property and
equipment

| |                        |         | 2005         |          |         | 2004         |         
| | ---------------------- | ------- | ------------ | -------- | ------- | ------------ | --------
| |                        |         | Accumulated  | Net Book |         | Accumulated  | Net Book
| |                        | Cost    | Amortization | Value    | Cost    | Amortization | Value   
| | Equipment              | 459,429 | 229,843      | 229,586  | 312,522 | 205,485      | 107,037 
| | Computer               | 333,238 | 251,222      | 82,016   | 279,553 | 220,233      | 59,320  
| | Leasehold improvements | 38,382  | 31,198       | 7,184    | 38,382  | 23,522       | 14,860  
| |                        | 831,049 | 512,263      | 318,786  | 630,457 | 449,240      | 181,217 

7.

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

Athabasca Region

At December 31, 2005, the Company's mineral property in the Athabasca region consisted of 32 (2004
- 38) permits, which includes 22 (2004 -
15) permits in the process of being converted by the Company to leases and 69
(2004 - 65) leases for a total area of 402,748 (2004 - 335,190) hectares.

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

| | Mineral properties capitalized       |            |               |            |               |           
| | ------------------------------------ | ---------- | ------------- | ---------- | ------------- | ----------
| |                                      | At Dec 31, | For the year  | At Dec 31, | For the year  | At Dec 31,
| |                                      | 2005       | ended Dec 31, | 2004       | ended Dec 31, | 2003      
| |                                      |            | 2005          |            | 2004          |           
| | Asset retirement obligation          | 360,000    | 335,000       | 25,000     | 25,000        | -         
| | Administration                       | 811,137    | 731,754       | 79,383     | 73,910        | 5,473     
| | Assay and
    geological             | 105,744    | 28,004        | 77,740     | 77,740        | -         
| | Land lease and
    permit            | 59,808     | 9,278         | 50,530     | 47,320        | 3,210     
| | Materials,
    services and drilling | 5,084,304  | 2,563,638     | 2,520,667  | 2,308,342     | 212,325   
| | Site preparation                     | 6,001,827  | 5,941,256     | 60,570     | 60,571        | -         
| | Salaries                             | 1,063,010  | 478,755       | 584,255    | 479,089       | 105,166   
| | Travel and accommodations            | 283,144    | 191,920       | 91,224     | 81,262        | 9,962     
| |                                      | 13,768,974 | 10,279,606    | 3,489,369  | 3,153,233     | 336,136   
| |                                      |            |               |            |               |           
| | Mineral exploration costs            |            |               |            |               |           
| |                                      | 2005       | 2004          | 2003       |               |           
| | Administration                       | 36,209     | 34,276        | 65,797     |               |           
| | Assay and
    geological             | 84         | 654           | 20,429     |               |           
| | Land lease and
    permit            | 390,088    | 611,857       | 146,327    |               |           
| | Materials,
    services and drilling | 18,130     | 45,737        | 179,060    |               |           
| | Salaries                             | 89,715     | 66,708        | 315,925    |               |           
| | Travel and accommodations            | 6,255      | 3,139         | 16,847     |               |           
| |                                      | 540,481    | 762,371       | 744,385    |               |           

Since inception, the Company has spent a total of $17,734,046 on mineral
exploration and development of which, $13,768,974 has been capitalized.

F-11

---



8.Deferred
revenue

In September 2003, the Company signed an agreement to sell
limestone to Syncrude Canada Ltd. within Syncrude's Aurora mine, which would be
extracted by Syncrude and reported monthly. The Company received a
non-refundable $100,000 payment and a payment of $57,188 to be applied against
future extraction. During the current year, no limestone was extracted (2004 -
nil; 2003 - $6,882)

9.Other
current liabilities

The Company raised capital through the issuance of flow
through shares in 2003 and 2004, that provided for an indemnity to the
subscriber for additional taxes payable if Birch was unable to or failed to
renounce the qualifying expenditures as agreed, without limiting the recourse of
the subscriber. The Company applied for and filed the necessary forms to qualify
for and renounce expenditures in 2002, 2003 and 2004 and has subsequently
determined some of these expenditures do not qualify for flow through tax
treatment. The Company is exposed to costs for the indemnification of the
subscribers and any assessed corporate taxes, penalties and interest. The
Company has estimated and accrued a potential liability in the amount of
$3,346,264 (2004 - $2,500,000). Subsequent to December 31, 2005, the Company
amended its tax filings and the related reported tax balances have been revised
to reflect this change. Based on information available at the time of these
amended filings, the Company increased its original estimate of the potential
liability by $300,000. This change has been accounted for as a change in
estimate due to better information becoming available. The offsetting entry is
recorded to share capital as the amount is attributable to flow through share
capital issued in prior years. This amount is subject to measurement uncertainty
due to the tax filing positions of the subscribers, their tax rates and the
amount of corporate taxes, penalties or interest that may be payable, which will
not be known until any potentially affected subscribers as reassessed for their
tax positions by the Canada Revenue Agency and these amounts become known to the
Company. The Company believes this estimate could vary higher or lower by up to
fifteen percent.

10.   Asset retirement obligation

The Company has estimated the total discounted cost of
reclaiming the site of its limestone quarry, which underwent significant
development and site work during the year to be $360,000 (undiscounted -
$1,100,000). This estimate is based on costs provided by consulting engineers to
the Company for costs that would be incurred by third parties to return the
Muskeg Valley Quarry to its reclaimed status as defined under the Company's
environmental and operating permits. The estimate has been determined using a 2%
inflation rate and a 7.5% discount factor for costs allocated to two categories.
Site infrastructure will service the quarry for its estimated fifty year life
and the initial production quarry area is estimated not be reclaimed for ten
years. This amount is subject to measurement uncertainty with respect to costs
in the local market for third parties to perform this work, the actual timing of
reclamation and the discount rate used. A $670,000 irrevocable standby letter of
credit was drawn on the Company's operating line of credit as a guarantee to
Alberta Environment for the estimated future reclamation.

F-12

---



11.   Share capital

(a) Authorized capital

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

(b) Issued - Common shares

| |                                                                    | Number     |  | Amount      
| | ------------------------------------------------------------------ | ---------- |  | ------------
| | Balance December 31, 2003                                          | 50,449,085 |  | 28,946,174  
| | Issued for cash                                                    |            |  |             
| | Issued on exercise of options                                      | 545,180    |  | 198,834     
| | Issued on exercise of warrants                                     | 5,395,292  |  | 2,723,054   
| | Private placements (ii)                                            | 3,891,013  |  | 2,865,038   
| | Flow-through shares (ii)                                           | 6,026,229  |  | 2,294,344   
| | Reclassified from
    contributed surplus upon exercise of options | -          |  | 29,746      
| | Share issuance
    costs                                           | -          |  | (546,382)   
| | Elimination of deficit (note 13)                                   | -          |  | (27,748,932)
| | Balance December 31, 2004                                          | 66,306,799 |  | 8,761,876   
| | Issued for cash                                                    |            |  |             
| | Public offering (i)                                                | 9,000,000  |  | 36,000,000  
| | Issued on exercise of options                                      | 2,229,500  |  | 1,430,848   
| | Issued on exercise of warrants                                     | 2,885,188  |  | 2,900,600   
| | Reclassified from
    contributed surplus upon exercise of options | -          |  | 461,482     
| | Share issuance
    costs (i)                                       | -          |  | (2,303,853) 
| | Reduction in share capital for
    flow through shares (note 10)   |            |  | (300,000)   
| | Balance December 31, 2005                                          | 80,421,487 |  | 46,950,953  

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

(ii)   In December 2004, the Company completed a private placement of 732,263 units at
$1.50 per unit. Of these units 142,896 units were flow-through and the remaining
589,367 consisted of one common share and one common share warrant, entitling
the holder to purchase one additional common share at a price of $2.00 before
December 31, 2005.

In July, August and December 2004,
the Company completed a private placement in three tranches. A total of
9,184,979 units at $0.60 per unit were issued. Of these units 5,883,333 units
were flow-through and the remaining 3,301,646 consisted of one common share and
one-half of one common share warrant, each whole share warrant entitling the
purchase of one common share at a price of $0.75 before December 31, 2005. The
agent received 666,667 warrants, each warrant entitling the purchase of one
common share at a price of $0.75 before December 31, 2005.

F-13

---



11.   Share capital (continued)

(c) Options

The Company has a stock option plan
that was established in 1994 and has been subsequently amended by the
shareholders, including most recently in 2004. The purpose of the plan is to
offer persons who provided services to the Company, whether directors, officers,
consultants or employees, an opportunity to obtain an interest in the Company
through the purchase of common shares and to aid in attracting, retaining and
encouraging the continued involvement of such persons. The plan contains
provisions stating that the option period may not exceed five years and that the
number of common shares issuable on exercise of outstanding stock options may
not exceed 10,269,047 shares. The plan is administered by the Compensation
Committee of the Board of Directors who determines to whom options shall be
granted including the terms, and vesting of the grants. When options are
granted, the Compensation Committee sets the strike price equal to the closing
price on the Toronto Venture Stock Exchange of the previous day.

The Company has outstanding options on common shares
as follows:

Number of
    Exercise
    Weighted Average
    ExpiryOptions
    Price Range
    Exercise Price ($)
    Date($)December 31, 2003
    6,391,250
    0.22 - 1.36
    0.51
    2004 - 2008Granted
    2,135,000
    0.50 - 0.74
    0.55
    2009Cancelled
    665,000
    1.36
    1.36
    2004Exercised
    545,180
    0.26 - 0.55
    0.40
    2007-2008December 31, 2004
    7,316,070
    0.26 - 0.74
    0.37
    2005-2009Granted
    2,465,000
    2.09 - 7.81
    2.60
    2009Cancelled
    350,000
    2.35 - 2.48
    2.41
    2009Exercised
    2,229,500
    0.26 - 2.48
    0.78
    2007-2010December 31, 2005
    7,201,570
    0.26 - 7.81
    0.84
    2006 -2010


Stock options outstanding and exercisable as at December 31, 2005 are as
follows:

Exercise
    Number of
    Number of
    ExpiryPrice ($)
    Options Outstanding
    Options Exercisable
    Date0.60
    65,000
    65,000
    January 20060.65
    125,000
    125,000
    April 20060.50
    67,000
    67,000
    May 20060.26
    790,000
    790,000
    March 20070.34
    975,000
    975,000
    April 20070.30
    1,550,000
    1,550,000
    October 20080.53
    125,000
    125,000
    May 20090.55
    1,649,500
    1,237,125
    August 20090.74
    7,500
    5,625
    November 20092.35
    267,500
    133,750
    January 20102.48
    1,092,570
    546,285
    March 20102.09
    262,500
    131,250
    April 20107.81
    225,000
    56,250
    November 20100.84
    7,201,570
    5,807,825
    2006 - 2010


F-14

---



(d) Warrants



| |                                | Number of  | Exercise Price | Weighted Average   | Expiry
| | ------------------------------ | ---------- | -------------- | ------------------ | ------
| |                                | Warrants   | Range ($)      | Exercise Price ($) | Date  
| | December 31, 2003, outstanding | 10,792,381 | 0.50           | 0.50               | 2004  
| |                                | 2,906,857  | 0.75 - 2.00    | 1.01               | 2005  
| |                                | 5,418,758  | 0.50           | 0.50               | 2004  
| |                                | 5,395,292  | 0.50 - 2.00    | 0.50               | 2004  
| | December 31, 2004, outstanding | 2,885,188  | 0.75 - 2.00    | 1.01               | 2005  
| |                                | 2,885,188  | 0.75 - 2.00    | 1.01               | 2005  
| | December 31, 2005, outstanding | -          | -              | -                  | -     

(i)

(ii) During 2004, 5,395,292 warrants were exercised and a corresponding
number of common shares were issued at a weighted average price of $0.50 each
for a total consideration of $2,723,054.

12.   Contributed surplus

| | Balance, December 31, 2003                           | 89,957   
| | ---------------------------------------------------- | ---------
| | Options granted to employees, directors and officers | 246,127  
| | Options granted to advisors                          | 32,231   
| | Options exercised
    and reclassed to share capital | (29,746) 
| | Balance December 31, 2004                            | 338,569  
| |                                                      |          
| | Options granted to employees, directors and officers | 1,700,671
| | Options granted to advisors                          | 197,114  
| | Options exercised
    and reclassed to share capital | (461,482)
| | Balance December 31, 2005                            | 1,774,873

13.   Deficit

Pursuant to Section 38 of the Business Corporations Act of Alberta, the
shareholders approved a reduction in the stated capital by the amount of the
accumulated deficit as of June 30, 2004. As a result, the deficit and share
capital were reduced by $27,748,932.

14.   Loss per share amounts

Basic loss per share is calculated using the weighted-average
number of shares outstanding for the year. For purposes of the calculations, the
weighted-average number of shares outstanding was 71,644,531 (2004 - 56,596,951;
2003 - 41,147,226,). Diluted loss per share amounts have not been calculated as
the effect of common shares issuable upon exercise of share options and warrants
is anti-dilutive. All of the Company's outstanding options are available for
dilution in future periods.

F-15

---

15.   Stock-based compensation and stock-based expensesStock-based compensation expense and stock-based expenses recorded were are
follows:

2005
    2004
    2003Stock-based compensation for
    stock issued and
    798,569
    112,765
    66,681vested in the current period (i)Stock-based
    compensation for stock issued in
    902,102
    133,362
    -prior periods and vested in the current periodLess stock-based
    compensation capitalized in
    (455,248)
    -
    -mineral propertiesNet stock-based compensation
    expense
    1,245,422
    246,127
    66,681Stock-based
    expenses for options issued to
    197,114
    35,922
    -advisors included in professional fees in theperiod (ii)Total stock-based expenses
    1,442,536
    282,049
    66,681


(i) During 2005, $350,000 stock options at a weighted average price of $2.41
were forfeited by a director.

(ii) Expenses included in professional fees were valued based on the market
price of the stock at the time of the transaction.

The Company uses the Black-Scholes option-pricing model to
provide a fair-value for stock based compensation for employees, directors,
officers and advisors. The weighted average assumptions used for options issued
to employees, directors and officers may differ from those used for options
issued to advisors as the expected life of the options issued by the Company may
be different as the term of the option is often shorter. 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:

| |                             | 2005          | 2004        | 2003        
| | --------------------------- | ------------- | ----------- | ------------
| |                             | Employees,    | Advisors    | Employees,  
| |                             | directors and |             | directors   
| |                             | officers      |             | and officers
| | Expected life               | 2 years       | 2 years     | 1 to 2 years
| | Risk-free
    interest rate | 4.3 to 4.8%   | 4.3 to 4.8% | 3.8%        
| | Expected
    volatility     | 85% - 100%    | 85% - 100%  | 65%         
| | Annual dividends            | nil           | nil         | nil         

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

| |                       | 2005        | 2004        | 2003       
| | --------------------- | ----------- | ----------- | -----------
| | Pro-forma loss        | (4,714,830) | (2,960,069) | (1,641,447)
| | Loss per share, basic | (0.07)      | (0.05)      | (0.04)     

16.   Gain on forgiveness of debt

During 2003, the Company reversed a $194,000 accrued payable that was an
estimate accrued in 1998 and no longer payable relating to the estimated costs
of discontinuing the Indonesian operations.

F-16

---

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

Land
    Other
    Total2006
    471,172
    265,563
    736,7352007
    471,172
    93,048
    564,2202008
    471,172
    29,620
    500,7922009
    471,172
    -
    471,1722010
    471,172
    -
    471,1722,355,860
    388,231
    2,744,091


Not included in the above amounts is a contingent royalty commitment on one
land lease to pay $.015 per tonne of limestone sold, should limestone be
produced from minerals on that specific lease.

18.   Related-party transactions

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

> 

19.   Income taxes

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

| |                                                                       | 2005      | 2004      | 2003     
| | --------------------------------------------------------------------- | --------- | --------- | ---------
| | Loss before taxes                                                     | 4,641,818 | 2,887,057 | 1,568,435
| | Expected tax recovery at
    (2005-33.62%; 2004 -36.70%; 2003-40.80%) | 1,560,579 | 1,059,550 | 639,921  
| | Non-deductible
    expenses for tax                                   | (593,026) | (120,779) | (36,613) 
| | Other                                                                 | 179,941   | (9,665)   | -        
| | Change in enacted
    tax rates                                       | (602,277) | -         | -        
| | Valuation allowance                                                   | (545,217) | (929,106) | (608,308)
| | Future income tax recovery                                            | -         | -         | -        

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

F-17

---

19.   Income taxes (continued)Future income tax assets consist of the following temporary differences:

| |                                                                   | 2005        | 2004        | 2003       
| | ----------------------------------------------------------------- | ----------- | ----------- | -----------
| | Industrial mineral mines (i)                                      | 4,974,118   | 6,590,913   | 5,840,161  
| | Property and
    equipment (i)                                    | -           | 69,911      | 90,770     
| | Scientific
    Research and Experimental Development expenditures | 85,141      | 77,702      | 79,438     
| | unclaimed (ii)                                                    |             |             |            
| | Non-capital loss
    carry forwards (iii)                         | 2,815,375   | 654,525     | 436,552    
| | Share issuance
    costs and other                                | 754,824     | 154,518     | 54,692     
| | Asset retirement
    obligation                                   | 121,032     | -           | -          
| | Valuation allowance                                               | (8,750,490) | (7,547,569) | (6,501,613)
| | Future tax assets (net of
    valuation allowance)                | -           | -           | -          

(i) The Company has undepreciated capital cost allowance of $28,880,000 (2004
- $21,480,000; 2003 - $16,804,000), which may be carried forward indefinitely.

(ii) The Company has Scientific Research and Experimental Development costs
of $211,000, which may be carried forward indefinitely.

(iii) Non-capital loss carry forwards of approximately $8,400,000 are
available to offset future income. If unused, they will expire as follows:

| | 2006 | $
    185,000
| | ---- | -------------
| | 2007 | -            
| | 2008 | 719,000      
| | 2009 | 20,000       
| | 2010 | -            
| | 2011 | 4,116,000    
| | 2012 | 3,360,000    

F-18

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20.   Segmented informationThe Company's principal business segment, Industrial
Minerals, is the acquisition, exploration and development of its mineral leases
and permits. The Company also engages in ongoing exploration and research of
mineral technology. In identifying these segments the Company considers the
organizational structural and areas of budget responsibility as well as the
general corporate philosophy. The Industrial Minerals division will generate its
revenue from the sale of limestone products such as aggregates and reagent
products. The Mineral Exploration and Technology division could generate income
from the sale of technology patents or significant valuable mineral or metals
discoveries. In 2003 and 2004 the Mineral Exploration and Technology segments of
the business were reported separately. As they have become less significant
segments and the general corporate philosophy has shifted to industrial
minerals, these segments have been combined and the prior period amounts
reclassified to reflect the combination into one segment. The accounting for
revenue, expense and assets attributed to each segment is based on each
transaction, which is coded to separate general ledger department codes for each
segment. The Company's activities are focused in Western Canada and the
Company's assets are located in Alberta.

| |                 | Industrial | Mineral         |              |            
| | --------------- | ---------- | --------------- | ------------ | -----------
| |                 |            | Exploration and | Corporate    | Total      
| |                 | Minerals   | Technology      |              |            
| | 2005            |            |                 |              |            
| | Interest income | -          | -               | 332,568      | 332,568    
| | Expense         | -          | 540,481         | 4,433,905    | 4,974,386  
| | Loss            | -          | (540,481)       | (4,101,337)  | (4,641,818)
| | Assets          | 14,424,221 | 33,798          | 34,102,833   | 48,560,852 
| | 2004            |            |                 |              |            
| | Interest income | -          | -               | 48,190       | 48,190     
| | Expense         | -          | 762,371         | 2,172,876    | 2,935,247  
| | Loss            | -          | (762,371)       | (2,124,686 ) | (2,887,057)
| | Assets          | 3,585,938  | 59,393          | 5,887,092    | 9,532,423  
| | 2003            |            |                 |              |            
| | Interest income | 100,000    | -               | 211,973      | 311,973    
| | Expense         | 471,191    | 273,194         | 1,136,023    | 1,880,408  
| | Loss            | (371,191)  | (273,194)       | (924,050)    | (1,568,435)
| | Assets          | 364,892    | 39,510          | 2,019,831    | 2,424,233  

21.   Financial instruments

Fair values

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

Foreign currency risk

The Company maintains cash balances and occasionally enters
into transactions to purchase goods and services denominated in United States
currency for which the related expenses and accounts payable balances are
subject to exchange rate fluctuations. The transactions and balances have been
stated in Canadian dollars in accordance with the Company's foreign currency
translation policy (Note 2). As at year-end, the following items were
denominated in United States currency and have been converted into Canadian
currency at the year-end exchange rate.

2005
    2004Cash (CAD$)
    234,711
    387,182Accounts payable (CAD$)
    47,142
    20,376


F-19

---

22.   Material differences between Canadian and United States generally
accepted accounting principlesThe consolidated financial statements of the Company have
been prepared in accordance with generally accepted accounting principals in
Canada ("Canadian GAAP"), which in most respects conform to accounting
principles generally accepted in the United States ("U.S. GAAP").
If these consolidated financial statements were prepared in accordance with
U.S. GAAP, the impact would be as follows:

| |                                                                           | 2005             | 2005              | 2004            | 2004             
| | ------------------------------------------------------------------------- | ---------------- | ----------------- | --------------- | -----------------
| |                                                                           | As
    restated  | As
    previously | As
    restated | As
    previously
| |                                                                           |                  | reported          |                 | reported         
| |                                                                           |                  |                   |                 |                  
| | Mineral
    properties - Canadian GAAP                                    | 13,768,974       | 13,768,974        | 3,489,369       | 3,489,369        
| | Exploration expenditures
    capitalized (a)                              | (13,768,974)     | (1,525,699)       | (3,489,369)     | (1,525,699)      
| | Mineral properties - U.S. GAAP                                            | -                | 12,243,275        | -               | 1,963,670        
| |                                                                           |                  |                   |                 |                  
| |                                                                           |                  |                   |                 |                  
| | Shareholders' equity - Canadian GAAP                                      | 41,435,199       | 41,435,199        | 6,451,636       | 6,451,636        
| |                                                                           |                  |                   |                 |                  
| | Share capital (c)                                                         | 74,699,885       | 46,950,953        | 36,510,808      | 8,761,876        
| | Contributed
    surplus                                                   | 1,774,873        | 1,774,873         | 338,569         | 338,569          
| | Deficit (c)                                                               | (35,039,559)     | (7,290,627)       | (30,397,741)    | (2,648,809)      
| |                                                                           | 41,435,199       | 41,435,199        | 6,451,636       | 6,451,636        
| | Exploration expenditures
    capitalized (a)                              | (13,768,974)     | (1,525,699)       | (3,489,369)     | (1,525,699)      
| | Shareholders' equity - U.S. GAAP                                          | 27,666,225       | 39,909,500        | 2,962,267       | 4,925,937        
| |                                                                           |                  |                   |                 |                  
| | The
    impact on the consolidated statement of loss would be as follows: |                 
| |                                                                           | 2005             | 2005              | 2004            | 2004             
| |                                                                           | A
    s restated | As
    previously | As
    restated | As
    previously
| |                                                                           |                  | reported          |                 | reported         
| | Loss for the year - Canadian GAAP                                         | 4,641,818        | 4,641,818         | 2,887,057       | 2,887,057        
| | Exploration expenditures
    capitalized (a)                              | 10,279,606       | -                 | 3,153,233       | 1,189,563        
| | Loss for the year - U.S. GAAP                                             | 14,921,424       | 4,641,818         | 6,040,290       | 4,076,620        
| |                                                                           |                  |                   |                 |                  
| | Loss per share -
    U.S. GAAP                                            |                  |                   |                 |                  
| | Basic and fully diluted                                                   | (0.21)           | (0.08)            | (0.11)          | (0.07)           

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

(a)   
Mineral properties are accounted for in accordance with Canadian GAAP as
discussed in Note 2. The Company has adjusted its accounting for mineral
properties under U.S. GAAP. Previously, the Company capitalized development
costs for mineral properties commencing in 2004 when an independent
prefeasibility report confirmed a local market for products to be produced from
the Company's mineral properties. Now for U.S. GAAP purposes, exploration costs
relating to unproven mineral leases and permits as well as acquisition costs for
leases and permits that do not provide for unrestricted exploration, are
expensed as incurred. The Company tracks expenditures on its mineral properties
as exploration or development and under U.S. GAAP capitalizes costs relating to
the development of proven reserves as defined by SEC Industry Guide 7.
Capitalized costs are then assessed to determine if a writedown in the carrying
value is necessary and any writedown would be considered an operating expense
and included in the determination of operating loss for the period in which the
writedown occurred. The result of this restatement is to write-off $10,279,606
($0.13 per share) and $1,963,670 ($0.04 per share) of mineral expenditures in
2005 and 2004, respectfully.

Under Canadian GAAP, the Company is regarded as a
development stage enterprise and under U.S. GAAP the Company is regarded as an
exploration stage enterprise.

F-20

---

Prior to January 1, 2003, the
Company's treatment of mineral exploration costs as an expense is similar to the
treatment under U.S. GAAP, resulting in no difference. For 2003, 2004 and 2005,
the Company's reserves do not meet the criteria for proven reserves under SEC
Industry Guide 7, therefore, all expenditures on mineral properties capitalized
under Canadian GAAP would be expensed as operating costs under U.S. GAAP,
increasing the losses and loss for each year.
(b)Commencing January 1, 2003, the Company adopted the fair value method of
accounting for stock options for both Canadian and U.S. GAAP purposes. The
effect of this change was that stock-based compensation is recorded as an
expense instead of disclosing the effect of granting options as pro-forma
information in the notes to the financial statements.
For the years ended December 31, 2004
and 2003, these costs were calculated in accordance with the Black-Scholes
option-pricing model assuming no dividends are paid, an annual risk-free
interest rate of 3.8% to 3.9%, an expected volatility of 65% and an expected
life of one to three years. For 2004, the fair value of the options, calculated
as $278,357 (2003 - $66,681), is included in the net loss. Prior to Jan 1, 2003,
the Company accounted for stock options in accordance with APB Opinion No.25, Accounting for Stock Issued to Employees(APB 25). Under APB 25, stock-based
compensation to employees and directors is calculated using the intrinsic-value
method whereby compensation cost is recorded for the excess, if any, of the
quoted market price versus the exercise price at the date granted.
Had the Company adopted the fair value method for its
U.S. GAAP disclosure prior to Jan 1, 2003, the following net losses would have
been reported.

2005
    2004
    2003Loss for the year - U.S. GAAP
    14,921,424
    6,040,290
    1,904,571Pro-forma stock compensation
    73,012
    73,012
    73,012Pro-forma loss for the year - U.S. GAAP
    14,994,436
    6,113,302
    1,977,583Pro-forma loss per share - U.S. GAAPBasic and diluted
    (0.21)
    (0.11)
    (0.06)


(c)

(d)

F-21

---

22.  Material differences between Canadian and United States generally
accepted accounting principles (continued)New Accounting Pronouncements in U.S. GAAP
In December 2004, the Financial
Accounting Standards Board ("FASB") issued Statement 123R, Share-Based Payments.
This statement revised Statement 123, Accounting for Stock-Based Compensation,
and supersedes APB Opinion 25, Accounting for Stock Issued to Employees.
Statement 123R requires all stock-based awards issued to employees to be
measured at fair value and to be expensed in the income statement. This
statement is effective for fiscal years beginning after June 15, 2005. We are
currently expensing all stock based awards issued to employees, directors and
advisors using the fair value method and do not believe the adoption of this
standard will impact our results of operations or financial position.
In March 2005, the Emerging Issues
Task Force ("EITF") reached a consensus on Issue No. 04-6 Accounting for
Stripping Costs Incurred during Production in the Mining Industry. The EITF
concluded that the costs of removing overburden and waste materials, referred to
as "stripping costs" incurred during the production phase of a mine are variable
production costs and should be included in the costs of the inventory produced
during the period that the stripping occurred. Issue No. 04-6 is effective for
the first reporting period in fiscal years beginning after December 15, 2005. As
the Company begins production subsequent to December 31, 2005, we will follow
the recommendations of No. 04-6.
In June 2005, The FASB issued
Statement 154, Accounting Changes and Error Corrections, which replaces APB
Opinion 20 and FASB Statement 3. Statement 154 changes the requirement for the
accounting and reporting for a change in accounting principle. Opinion 20
previously required that most voluntary changes in accounting principles be
recognized by including the cumulative effect of the new accounting principle in
net income of the period of the change. In the absence of explicit transition
provision provided in a new or existing accounting pronouncement, Statement 154
now requires retrospective application of changes in accounting principles to
prior period financial statements, unless it is impracticable to do so. This
Statement is effective for fiscal years beginning after December 15, 2005. We do
not expect the adoption of this statement will have a material impact on our
results of operations or financial position.
F-22

---

23. Subsequent eventsSubsequent to year-end, an additional 592,500 stock
options were issued to employees, directors and officers.24. Comparative figures
Certain comparative figures have been
reclassified to confirm with presentation adopted in the current year.

F-23

---

ITEM 19 EXHIBITSEXHIBIT NO.

|1.1  | Articles of
    Amalgamation (1)                                                         
|---- | -----------------------------------------------------------------------------------------
|     |                                                                                          
|1.2  | By-Law No. 1 (1)                                                                         
|     |                                                                                          
|2.1  | Shareholders
    Rights Plan Agreement (1)                                               
|     |                                                                                          
|4.1  | Stock Option Plan
    of the Company dated November 2, 1994 (1)                          
|     |                                                                                          
|4.2  | Stock Option Plan
    of the Company dated March 27, 2002 (2)                            
|     |                                                                                          
|4.3  | Amended 1994
    Stock Option Plan of the Company dated May 8, 2003 (2)                  
|     |                                                                                          
|4.4  | Amended 2002
    Stock Option Plan of the Company dated May 8, 2003 (2)                  
|     |                                                                                          
|4.5  | Stock Option Plan
    of the Company dated May 7, 2004 (3)                               
|     |                                                                                          
|4.6  | Employment
    Contract with Douglas J. Rowe (1)                                         
|     |                                                                                          
|4.7  | Finders Fee
    Agreement between the Company and American Precious Metals Inc. dated    
|     | June 24, 1999
    (1)                                                                    
|     |                                                                                          
|4.8  | Shareholders
    Rights Plan Agreement dated March 28, 2005 (4)                          
|     |                                                                                          
|11.1 | Code of Business
    Conduct and Ethics (3)                                              
|     |                                                                                          
|11.2 | Code of Conduct                                                                          
|     |                                                                                          
|12.1 | Certification of
    Principal Executive Officer Pursuant to Section 302 of the Sarbanes-
|     | Oxley Act of 2002                                                                        
|     |                                                                                          
|12.2 | Certification of
    Principal Financial Officer Pursuant to Section 302 of the Sarbanes-
|     | Oxley Act of 2002                                                                        
|     |                                                                                          
|13.1 | Certification of
    Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, As  
|     | Adopted Pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002                    
|     |                                                                                          
|13.2 | Certification of
    Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, As  
|     | Adopted Pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002                    
|     |                                                                                          
|13.3 | Consent from
    Myers Norris Penny LLP for December 31, 2004 and 2003.                  
|     |                                                                                          
|13.4 | Consent from
    Ernst and Young LLP for December 31, 2005.                              
|     |                                                                                          
|99.1 | News Release of
    the Company dated September 27, 2000 (1)                             

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

54

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SIGNATURESThe 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: November 10, 2006 |  |                              
|                        |  | By:                          
|                        |  |                              
|                        |  |                              

55

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