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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 20-F

[   ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)
or (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended**December 31,
2006**

OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

[   ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

For the transition period from ___________ to ____________

Commission File Number: **0-27524**

DYNAMOTIVE ENERGY SYSTEMS CORPORATION(Exact name of Registrant as specified in its charter)

**Province of British Columbia
(Canada)** (Jurisdiction of incorporation or organization)

**Suite 230 -1700 West 75th Avenue Vancouver, British
Columbia V6P 6G2 Canada**(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(Title
of Class)

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

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Indicate the number of outstanding shares of each of the
issuer's classes of capital or common stock as of the close of the period
covered by the annual report:

Outstanding at December 31, 2006 171,765,776

Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ 
 ] No [X]

If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Securities Act of 1934. Yes [   ] No
[X]

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

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No
[   ]

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

Large accelerated filer [   ]    
Accelerated filer [X]     Non-accelerated filer
[   ]

Indicate by check mark which financial statement item the
registrant has elected to follow. Item 17 [X] Item 18 [   ]

If this is an annual report, indicate by check mark whether if
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act) Yes [   ] No [X]

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS)

Indicate by check marck whether the registrant has filed all
documents and reports required bySections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes [   ] No [   ]

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TABLE OF CONTENTS

|                           |                                                                                            | PAGE
|-------------------------- | ------------------------------------------------------------------------------------------ | ----
|                           |                                                                                            |     
|GENERAL                    | 4                                                                                         
|                           |                                                                                            |     
|FORWARD-LOOKING STATEMENTS | 4                                                                                         
|                           |                                                                                            |     
|PART I                     | 4                                                                                         
|                           | ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                              | 4   
|                           | ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE                                            | 4   
|                           | ITEM 3. KEY INFORMATION                                                                    | 4   
|                           | ITEM 4. INFORMATION ON THE COMPANY                                                         | 8   
|                           | ITEM 4A. UNRESOLVED STAFF COMMENTS                                                         | 17  
|                           | ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                       | 17  
|                           | ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                         | 26  
|                           | ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                                  | 35  
|                           | ITEM 8. FINANCIAL INFORMATION                                                              | 36  
|                           | ITEM 9. THE OFFER AND LISTING                                                              | 36  
|                           | ITEM 10. ADDITIONAL INFORMATION                                                            | 37  
|                           | ARTICLES OF ASSOCIATION                                                                    | 37  
|                           | ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
      MARKET RISK                  | 55  
|                           | ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                            | 56  
|                           |                                                                                            |     
|PART II                    | 57                                                                                        
|                           | ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                                   | 57  
|                           | ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHT OF SECURITY
      HOLDERS AND USE OF PROCEEDS | 57  
|                           | ITEM 15T. CONTROLS AND PROCEDURES                                                          | 57  
|                           | ITEM 16. [RESERVED]                                                                        | 58  
|                           | ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT                                                 | 58  
|                           | ITEM 16B CODE OF ETHICS                                                                    | 58  
|                           | ITEM 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES                                            | 59  
|                           | ITEM 16D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
      COMMITTEES                  | 59  
|                           | ITEM 16E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND
      AFFILIATED PURCHASERS.     | 59  
|                           |                                                                                            |     
|PART III                   | 60                                                                                        
|                           | ITEM 17. FINANCIAL STATEMENTS                                                              | 60  
|                           | ITEM 18. FINANCIAL STATEMENTS                                                              | 102 
|                           | ITEM 19. EXHIBITS                                                                          | 102 

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GENERAL

In this Annual Report on Form 20-F, all references to we,
us, our, the Company or Dynamotive refer to Dynamotive Energy Systems
Corporation and its subsidiaries. The Company is currently listed on the
over-the-counter bulletin board (OTCBB) under the symbol: DYMTF.OB.

The Company uses the U.S. dollar as its reporting currency. All
references in this document to dollars or $ are expressed in U.S. dollars,
unless otherwise indicated. Unless otherwise indicated, all financial
information contained in this Annual Report on Form 20-F is in U.S. dollars and
based on Canadian generally accepted accounting principles (GAAP).

Except as noted, the information set forth in this Annual
Report is as of May 16, 2007 and all information included in this document
should only be considered correct as of such date.

FORWARD-LOOKING STATEMENTS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements as defined
under federal securities law that reflect our current expectations about our
future results, performance, prospects and opportunities. Where possible, the
forward-looking statements are identified by words such as "believes,"
"anticipates," "plans," "expects," "seeks," "estimates," intends, may,
will, and other similar expressions; however, these words are not the
exclusive means of identifying such statements. In addition, any statements that
refer to expectations, projections or other characterization of future events or
circumstances are forward-looking statements. Forward-looking statements are
subject to risks, uncertainties and other factors which could cause actual
results to differ materially from those expressed in or implied by such
statements. Such risks, uncertainties and factors include, but are not limited
to, future capital needs, changes and delays in product development plans and
schedules, customer acceptance of new products, changes in pricing or other
actions by competitors, patents owned by the Company and its competitors, and
general economic conditions, as well as other risks detailed in the Risk
Factors section of this Form 20-F. The Company undertakes no obligation to
publicly update or revise any forward-looking statements to reflect events or
circumstances occurring subsequent to the filing of this report or for any other
reason.

PART I

Item 1. Identity Of Directors, Senior Management and
Advisers

Not applicable, this is an Annual Report only.

Item 2. Offer Statistics and Expected Timetable

Not applicable, this is an Annual Report only.

Item 3. Key Information

A. Selected financial data

The following table represents selected consolidated financial
information of Dynamotive Energy Systems Corporation. The table should be read
together with Item 5. Operating and Financial

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Review and Prospects. Except as otherwise indicated, the
following selected financial data have been prepared in accordance with Canadian
generally accepted accounting principles.

Fiscal Year2006
      2005
      2004
      2003
      2002(US Dollars)Results of operations:Revenue
      
      
      
      
      68,569Loss from operations Cdn GAAP
      (14,319,641)
      (11,822,274)
      (9,917,889)
      (4,995,624)
      (3,733,499)Loss from operations US GAAP
      (14,401,201)
      (12,015,523)
      (9,917,889)
      (4,995,624)
      (3,733,499)Loss from continuing operations Cdn GAAP
      (14,252,382)
      (11,997,344)
      (9,916,215)
      (4,921,650)
      (4,366,454)Loss from continuing operations US GAAP
      (14,669,647)
      (13,124,724)
      (8,405,184)
      (4,984,681)
      (5,264,469)Net loss per Cdn GAAP
      (14,252,382)
      (11,997,344)
      (9,916,215)
      (4,984,681)
      (5,261,607)Net loss per US GAAP
      (14,669,647)
      (13,124,724)
      (8,405,184)
      (4,984,681)
      (5,264,469)Net loss per share Cdn GAAP
      (0.09)
      (0.11)
      (0.12)
      (0.09)
      (0.12)Net loss per share US GAAP
      (0.10)
      (0.12)
      (0.10)
      (0.09)
      (0.12)Net loss from continuing operation per share
      (0.09)
      (0.11)
      (0.12)
      (0.09)
      (0.10)Financial position at year-end:Total assets, Cdn GAAP
      38,093,699
      16,962,573
      13,198,698
      3,759,605
      1,285,813US GAAP
      37,993,062
      16,962,573
      13,198,698
      3,759,605
      1,285,813Total liabilities, Cdn GAAP
      6,958,287
      8,670,165
      8,911,500
      2,035,168
      1,957,625US GAAP
      6,958,287
      8,692,977
      8,911,500
      2,035,168
      1,957,625Non-controlling interest, Cdn GAAP
      1,354,923
      
      
      
      US GAAP
      1,354,923
      
      
      
      Shareholders equity, Cdn GAAP
      29,780,489
      8,292,408
      4,287,198
      1,724,437
      (671,812)Shareholders equity, US GAAP
      29,679,852
      8,269,596
      4,287,198
      1,724,437
      (671,812)Common shares issued
      171,765,776
      123,211,875
      93,129,798
      69,915,654
      49,941,000


The Company has not declared or paid any dividends since
incorporation.

B. Capitalization and indebtedness

Not applicable, this is an Annual Report only.

C. Reasons for the offer and use of proceeds

Not applicable, this is an Annual Report only.

D. Risk factors

RISK FACTORS

You should carefully consider the risks, uncertainties and
other factors described below because they could materially and adversely affect
our business, financial condition, operating results, prospects and or the
market price of our common shares.

RISKS RELATED TO OUR OPERATIONS

WE HAVE INCURRED NET LOSSES SINCE COMMENCING BUSINESS AND
EXPECT LOSSES TO CONTINUE FOR THE FORESEEABLE FUTURE

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We have had limited revenues to date and have not shown a
profit since inception. The Company had a net loss of $14,252,382 for the year
ended December 31, 2006 as well as a net loss of $11,997,344 for the year ended
December 31, 2005. As at December 31, 2006, the Company has a working capital of
$4,938,473. As this is a new business, we may experience typical problems,
difficulties, complications and delays. We expect to show a substantial net loss
for the year ended 2007. We do not expect revenues to occur in any significant
way until we have successfully established commercial BioOil operations.
Accordingly, we may not be able to operate profitably on a consistent basis, if
at all.

The ability of the Company to continue as a going concern is in
substantial doubt and is dependent on achieving profitable operations,
commercializing its BioOil production technology and obtaining the necessary
financing in order to develop this technology. The outcome of these matters
cannot be predicted at this time. The Companys future operations are dependent
on the markets acceptance of its products in order to ultimately generate
future profitable operations, and the Companys ability to secure sufficient
financing to fund future operations. There can be no assurance that the
Companys products will be able to secure market acceptance. Management plans to
raise additional equity financing to enable the company to complete its
development plans. These financial statements do not include any adjustments
that might result from the outcome of these uncertainties.

Subsequent to the year end, during the period from January 1 to
April 17, 2007, the Company issued 2,280,259 common shares for total proceeds of
$2,480,900 relating to a private placement commencing during the first quarter
of 2007. In addition during the period from January 1 to April 17, 2007, the
Company received $4,373,000 on the exercise of 744,166 options and 6,851,049
warrants. Management is of the opinion that this and expected future financing
along with expected sales will provide sufficient working capital to meet the
Companys liabilities and commitments as they become due.

OUR TECHNOLOGY MAY NOT PROVE COMMERCIALLY VIABLE

Our technology is currently being tested at a commercial scale.
Ongoing efforts at commercialization may expose operational flaws and
unanticipated costs that may inhibit or preclude ultimate market acceptance. Our
technology has not demonstrated it can generate positive cash flow or a return
on investment.

WE HAVE LIMITED FINANCIAL AND MANAGEMENT RESOURCES TO PURSUE
OUR GROWTH STRATEGY

Our growth strategy may place a significant strain on our
management, operational and financial resources. We have negative cash flow from
operations and continue to seek additional capital. We will have to obtain
additional capital either through debt or equity financing to continue our
research and development strategies and the commercial expansion of our
technologies. There can be no assurance, however, that we will be able to obtain
such financing on terms acceptable to the Company. If adequate funds are not
available on acceptable terms when needed, we may be required to delay,
scale-back or eliminate the manufacturing, marketing or sales of one or more of
our products or research and development programs.

If we raise additional funds through the issuance of equity or
convertible securities, these new securities may contain certain rights,
preferences or privileges that are senior to those of our Common Shares.
Additionally, the percentage of ownership of the Company held by existing
shareholders will be reduced.

WE MUST DEVELOP AND EXPAND OUR SALES AND MARKETING CAPABILITIES

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Our sales and marketing experience is very limited. We will be
required to further develop our marketing and sales force in order to
effectively demonstrate the advantages of our technology over more traditional
technology, as well as other competitors technology. We may not be able to
establish adequate sales and distribution capabilities, and there is no
guarantee that our sales and marketing experience will be successful.

WE MAY NOT BE ABLE TO SUCCESSFULLY PROTECT OUR PROPRIETARY
RIGHTS

Patents and other intellectual property are a critical aspect
of the present operation and future success of our business. Policing
unauthorized use of our proprietary technologies and other intellectual rights
could entail significant expense and could be difficult or impossible,
particularly given that the laws of some countries afford little or no effective
protection of our intellectual property. Given the nature of our business, third
parties may bring claims of copyright, patent or trademark infringement against
us. Further, third parties may claim that we have misappropriated their creative
ideas or otherwise infringed on their proprietary rights in connection with our
technologies. Any claims of infringement, with or without merit, could be time
consuming to defend, result in costly litigation, divert management attention,
require us to enter into costly royalty or licensing agreements or prevent us
from using important technologies or methods.

OUR BUSINESS ENVIRONMENT IS VERY COMPETITIVE

The markets for alternative energy technologies is highly
competitive, and other providers of such technologies, especially producers of
ethanol from biomass, may have various advantages in competition with ours. Many
of our competitors have established long-standing relationships with power
generation companies, utilities, manufacturers and others that we view as
potential customers. Many competitors also have substantially greater access to
capital and technical resources than we do and may therefore have a significant
competitive advantage.

Our primary technologies face market acceptance barriers that
do not affect already established technologies. To date, our primary
technologies have gained only limited market acceptance and have generated
minimal revenues.

WE MAY BE SUBJECT TO HAZARDOUS WASTE LIABILITIES

BioOil and some of its derivative products may be deemed to be
hazardous wastes for which a liability may be imposed upon us should any
contamination from improper storage or handling occur. Liability costs
associated with environmental cleanups of contaminated sites historically have
been very high as have been the level of fines imposed by regularity authorities
upon parties deemed to be responsible for environmental contamination. We have
obtained limited insurance protection but this may not be sufficient insurance
protection from such liabilities if they should ever arise. If contamination
should take place for which we are deemed to be liable, potentially liable or a
responsible party, the resulting costs could have a material effect on our
business.

OUR BUSINESS WILL SUFFER IF WE LOSE KEY SKILLED PERSONNEL

We are dependent on certain members of our management and
engineering staff, and if we lose their services our business could be severely
impacted. In particular, we rely on the services of our Chief Executive Officer
and Vice President Engineering. In addition, our ability to manage growth
effectively will require that we continue to implement and improve our
management systems and recruit and train new employees. We may not be able to
successfully attract and hire skilled and experienced personnel.

OUR STRATEGIC ALLIANCES MAY NOT ACHIEVE THEIR GOALS

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We expect to partially rely on strategic alliances for
development contracts, assistance in research and development and marketing
expertise. Even if we are successful in forming these alliances, they may not
achieve their goals.

THE ABILITY TO TRADE THE COMPANYS STOCK MAY BE LIMITED

Shares of the Companys Common Shares currently trade only upon
the Over-the-Counter Bulletin Board market. This may not provide the same
liquidity for the trading of securities as the NASDAQ or other exchanges.
Because our shares are not listed on NASDAQ or any other exchange, the Companys
stock presently comes within the definition of a penny stock as defined in the
Securities Exchange Act of 1934 and the rules under that Act.

Generally, the penny stock rules require a broker-dealer,
before a transaction in a penny stock to deliver a standardized risk disclosure
document prepared by the SEC that provides information about penny stocks and
the nature and level of risks in the penny stock market. The broker-dealer must
also provide the customer with current bid and offer quotations for the penny
stock, the compensation of the broker-dealer and its salesperson in the
transaction, and monthly account statements showing the market value of each
penny stock held in the customers account. In addition, the penny stock rules
generally require that the broker-dealer must make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchasers written agreement to the transaction. These
disclosure requirements may have the effect of reducing the level of trading
activity in the secondary market for a stock that is subject to the penny stock
rules. Therefore, investors may find it more difficult to sell their shares.

OUR STOCKS TRADING PRICE WILL BE SUBJECT TO MARKET VOLATILITY

In recent years, the stock market in general, and the prices of
stock of technology companies including our own, have experienced extreme price
fluctuations, sometimes without regard to the fundamentals of the particular
company. These broad market and industry fluctuations may adversely affect the
market price of our Common Shares.

Item 4. Information On The Company

A. History and development of the Company

The Companys principal business is the development and
commercialization of technology for biomass-to-liquid fuel conversion using a
process called Fast Pyrolysis. Fast Pyrolysis is a process that rapidly heats
biomass in the absence of oxygen to produce a liquid fuel (BioOil). BioOil is
a clean, renewable fuel which, providing the equipment is suitably modified, can
replace natural gas, diesel and other fossil fuels to produce power, mechanical
energy and heat in certain industrial boilers, fuel gas turbines and other
industrial applications. The Company aims to generate significant amounts of
energy, in the form of BioOil fuels, based upon utilization of relatively
abundant and inexpensive biomass waste streams from agricultural and forest
operations and other post-industrial biomass residues. In many cases, the
feedstock sources are costly to dispose of and therefore are available at zero
cost or are potentially revenue generating when converted into BioOil. The
process of biomass to energy conversion is sustainable, renewable and greenhouse
gas neutral, and is consistent with other renewable energy sources such as wind,
hydro and solar. The significant advantage of biomass energy over other
renewable forms of energy, is that biomass is capable of delivering energy on a
24/7 basis, whereas wind, hydro and solar energy sources are all subject to
natural fluctuations often entailing significant downtime.

Dynamotive is attempting to establish its patented technology
as the industry standard for the production of liquid biomass based fuels (other
than ethanol and biodiesel), in competition with other pyrolysis technologies,
and other biomass to energy applications. The Companys fast pyrolysis process
converts raw forest and agricultural biomass residues such as sawdust, sugar

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cane bagasse, rice husks and wheat straw, amongst others, into
three fuel types: Liquid (BioOil), Solid (char) and Gas (non-condensable gases).
The non-condensable gases are used to fuel the pyrolysis process. The entire
system is a closed loop with virtually no emissions or waste byproducts. The
process was developed by RTI.

In 1996, the Company obtained the exclusive worldwide rights
from RTI for air emissions control products from this technology. In 1998, this
exclusive arrangement with RTI was expanded to include the Fast Pyrolysis
process and virtually any new products derived from BioOil including fuels and
slow release fertilizers. In February 2000, the Company acquired the patent to
this technology from RTI and entered into a research agreement with RTI on
biofuels and BioOil derivative products. The research agreement has terminated
and the patents are owned royalty-free.

The Company and its partners are also engaged in research and
development on a range of derivative products that, if successful, could further
enhance the market and value for BioOil as an alternative fuel and product
source.

In September 2006, the Company and Pendana Limited BVI
(Pendana) entered into joint venture agreement to establish DBRC (a company
incorporated federally in Canada) with the purpose of securing biomass and to
source project development opportunities and additional biofuel and green credit
pipeline opportunities. The agreement expires on December 31, 2016.

Pursuant to terms of the agreement, the Company earned a 51%
interest in Dynamotive Biomass Resource Corporation (DBRC) by contributing
cash of $500,000 and granting DBRC certain rights associated with specific
biomass development opportunities in Canada, South America, and Europe. In
return for a 49% ownership in DBRC, Pendanas contribution amounted to cash
payments of $2,000,000 ($1.5 million was received in DBRC as at December 31,
2006 and $500,000 received subsequent to year end). In addition, the Company has
agreed to lend DBRC up to $1 million, with terms to be entered into at a later
date. Pendana has also further agreed to provide a $20 million revolving line of
credit to DBRC. Any sums advanced under this credit facility shall at Pendanas
sole discretion, be repayable on demand and shall bear interest at 4% above the
rate of the Royal Bank of Scotland. Pendana shall be entitled to security in the
projects or assets funded under this clause of the credit facility. As at
December 31, 2006 and to date, no funds have been advanced by Pendana under this
credit facility.

In September 2006, the Company and Pendana entered into an
agreement in connection with the Companys then wholly-owned subsidiary
Dynamotive Europe Limited (DEL). The agreement was made in an effort to
establish DEL as a permanent presence in Europe to develop European projects.
Under the terms of the agreement, Pendana completed a private placement with the
Company, whereby the Company issued 2,332,361 common shares and 583,090 share
purchase warrants for gross cash proceeds of $2,000,000. The warrants were
exercisable at $1.26 and expired on February 24, 2007. In addition, the Company
issued a total of 3,000,000 warrants, with an exercise price of $1.2375, to
Pendana, 1,000,000 of these warrants expire on April 24, 2007 and the remaining
2,000,000 warrants expire on February 28, 2007. Pendana also received a 20%
interest in DEL, with Dynamotive maintaining the remaining 80% interest. The
Company further agreed to loan DEL $2,000,000 on commercial terms.

Pursuant to the terms of the agreement, 20% of the net cash
generated by DEL will be distributed to Pendanas agent and 80% to the Company
in settlement of the intercompany debt. In the event DEL wishes to seek further
debt or equity funding to finance specific projects at any time following the
date of the agreement, Pendana shall have the right of first refusal.

The Company was incorporated on April 11, 1991 in the Province
of British Columbia, Canada, under the name of Dynamotive Canada Corporation. On
October 31, 1995, the shareholders approved a change of name to Dynamotive
Technologies Corporation and on June 26, 2001, the shareholders again approved a
change of name to the Companys current name.

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As at December 31, 2006, the Company had five wholly-owned
subsidiaries Dynamotive Canada Inc., federally incorporated under the laws of
Canada in 2000; Dynamotive Corporation, incorporated under the laws of Rhode
Island, U.S.A in 1990.; Dynamotive USA Inc. incorporated under the laws of
Delaware, U.S.A. in 2006; Dynamotive Latinoamericana S.A., incorporated under
the laws of Buenos Aires, Argentina in 2006; First Resources Corporation,
incorporated under the laws of British Columbia, Canada in 2006. In addition,
the Company maintains an 80% ownership interest in DEL, formally known as
Dynamotive Technologies (UK) Ltd, incorporated in the United Kingdom in 1996 and
owns a 99.98% interest in the West Lorne BioOil Co-Generation LP, formed under
the laws of Ontario, Canada in 2003. Dynamotive Canada Inc. acts as the General
Partner of the Limited Partnership, which operates the West Lorne BioOil and
electricity generation plant. The Company also holds a 51% interest of DBRC,
incorporated in Canada in 2006, which the Company has determined to be a
variable interest entity.

The principal executive office of the Company is Suite 230 -
1700 West 75th Avenue, Vancouver, British Columbia, Canada, V6P 6G2 (Telephone:
604-267-6000).

B. Business Overview

Dynamotives primary focus is to commercialize its patented
BioOil production technology and establish this technology as the worldwide
industry standard for production of BioOil as a clean, renewable fuel utilizing
biomass feedstocks. To support this goal, the Company plans over the next year
to develop full commercial scale BioOil production facilities in conjunction
with its alliance partners and then expand upon its existing marketing efforts
to generate new licensees throughout Canada, Europe, the USA, Asia and Latin
America.

The Company is currently commercializing its Fast Pyrolysis
biomass-to-energy technology that converts low or zero cost forest and
agricultural biomass residues into liquid BioOil that is then used as a green
renewable fuel alternative for power generation, industrial use or as the raw
material for a range of derivative products. In 2005 the Company completed
construction of its first 100 tpd commercial scale plant (currently being
upgraded and expanded to 130 tpd capacity), located adjacent to the Erie
Flooring and Wood Products manufacturing plant in West Lorne, Ontario, Canada.
In addition, the Company is currently completing construction of a 200 tpd plant
in Guelph, Ontario, Canada which is expected to enter operation in the second
quarter or early third quarter of 2007.

I. CORE TECHNOLOGIES

Initial applications for BioOil are targeted for generating
heat, power and mechanical energy in industrial boilers, gas turbines and
stationary reciprocating engines. The char can also be used as a fuel or as a
feedstock for the production of charcoal briquettes, in its raw form as a coal
or coke alternative; or in other potential value added applications including
activated carbon for use in the water and wine industries and carbon black for
domestic and industrial uses. The char can also be added back into the BioOil to
produce an Intermediate grade BioOil with higher energy content. The
noncondensable gases are re-cycled in the Fast Pyrolysis process and provide the
majority of the energy required for the process.

Dynamotive has six phases to its commercialization program as
shown below:

Phase 1: Bench scale, proof of concept was completed
by Resource Transforms International, Ltd. (RTI) in 1996. Dynamotive licensed
the Fast Pyrolysis technology in 1997 and purchased the exclusive worldwide
rights to the technology from RTI in 2000.

Phase 2: In 1997, Dynamotive built a 0.5 tonnes per day
(tpd) prototype plant in Vancouver, BC, which was upgraded in 1998 to a capacity
of 2 tpd. This plant has operated for over 3,000 hours.

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Phase 3: In 2001, Dynamotive entered into a strategic
alliance with Tecna S.A. of Argentina to develop commercial energy systems based
on Dynamotives pyrolysis technology in Latin America and other markets on a
non-exclusive basis. Tecna would also collaborate with Dynamotive to provide
technical design and optimization input on Dynamotives BioOil production
technology. Tecna has provided valuable technical support, engineering and
consulting services to validate the basic engineering and operation of the
BioOil technology and to evaluate and quantify the potential for improvements to
the efficiency of the BioOil technology. This work has been on going since and
resulted in confirmation of the basic BioOil designs and process efficiencies,
development of process designs and equipment specification and design details
that are being incorporated into the current BioOil plant designs.

Phase 4: Dynamotive completed commissioning of a new 10
tpd pilot plant in March 2001 which was de-commissioned in December 2002. The
plant was built to industrial specifications complete with a state-of-the-art
distributed control system (DCS). The plant had a production capacity of 6,000
litres of BioOil per day and achieved or exceeded this capacity output for more
or less continuous periods of up to 10 days at a time. The plant has exceeded
design parameters operating on a continuous basis at 50% above its nominal
design capacity.

Phase 5: Following the 10 tpd pilot, Dynamotive began
construction of a 100 tpd commercial scale plant, with initial commissioning in
2005. This plant processes wood residues and is designed for continuous 24-hour
production at commercial scale although this capacity has only been achieved for
short periods of time since commissioning. This project is also intended to
demonstrate continuous operation of end use applications (boilers/kilns and gas
turbines). The principal goal of the commercial demonstration project is to
demonstrate the economics of the process, and to secure future engineering,
procurement and construction (EPC) commitments from the Companys current
partners and potential future service and equipment providers. Ultimately, the
Company expects these EPC commitments to facilitate lending commitments to
execute on BioOil project developments as part of the Companys final
commercialization phase.

During the period January 1 to December 31, 2006, the plant was
either producing or available (e.g. reactor warm) for 135 days. During this
period, the West Lorne plant produced BioOil and Char for a number of purposes
including BioOil shipments to the US of $123,954 and deliveries of electricity
to the grid of $30,966; successful commercial scale fuel demonstrations in a
number of industries within Canada; running of the turbine; providing BioOil for
business development and research initiatives in North America and Europe
(including emulsification development); and providing a commercial scale
platform for the Company in its evaluation of design and process improvements
for its 200tpd unit now completing construction in Guelph.

In December 2006, the Company began an upgrade and expansion of
the West Lorne plant that will increase its capacity to 130 tonnes per day. It
is expected to re-enter operations in Q3, 2007.

The West Lorne facility has provided Dynamotive with a showcase
of its commercial BioOil technology to many interested companies and government
institutions and has been fundamental in the Companys successes in sale of
plant and master licenses previously disclosed and those currently in
negotiation.

Phases 6/7: With completion of the West Lorne 100 tpd
plant, Dynamotive and partners are working to develop multiple commercial plants
at the 200 tpd scale and larger and to bring the costs of the plants down
significantly. The Company is currently near completion of its first 200 tpd
plant, located in Guelph, Ontario, Canada. The Company is presently seeking to
secure rights to multiple high disposal cost biomass waste streams around the
world, in order to accelerate its commercial efforts. The Company believes that
by securing rights to these biomass waste streams and related BioOil, power
and/or energy purchase commitments will be able to catalyze the development of
commercial BioOil projects that incorporate the design, engineering and
licensing of its Fast Pyrolysis technology.

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By virtue of being derived from biomass residues, all BioOil
fuels are considered to be carbon dioxide and greenhouse gas neutral. When
combusted, they produce no sulfur dioxide and significantly reduced nitrogen
oxide emissions compared with hydrocarbon fuels, therefore having significant
environmental advantages over these fuels with respect to atmospheric pollution.

1) BIOOIL PRODUCTION PROCESS

In the fast pyrolysis reactor, biomass waste materials are
rapidly heated in the absence of oxygen. The rapidly vaporized volatiles are
then quickly condensed, forming a liquid fuel referred to as BioOil, solid char
and non-condensable gases. Depending upon the feedstock used (many different
sources of feedstock have been bench tested thus far), the process typically
produces 60-75 tons of BioOil, 15-25 tons of char and approximately 15 tons of
non-condensable gases from 100 tons of biomass residues. The Company believes
that the overall simplicity of the Fast pyrolysis process and the fact that all
the major equipment is already well proven in existing related industrial
applications gives the Companys BioOil technology competitive advantages over
other pyrolysis conversion technologies such as lower capital and operating
costs, higher product yields, a significantly higher quality BioOil and the
flexibility to process a wide variety of feedstocks.

The Company began producing batch quantities of BioOil in 1997
in its 0.5 tpd Fast Pyrolysis pilot plant located at the Companys research and
development facility in Vancouver, BC. By the end of 1998, the BioOil Technology
Group had upgraded, commissioned and operated the plant to a capacity of two tpd
on a continuous basis. In 1999, further changes were made to the feed system,
Fast Pyrolysis reactor, cyclone, and instrumentation and control systems to
provide increased stable operation. Once these changes were made, the Fast
Pyrolysis was re-commissioned and produced BioOil of sufficiently high quality
to meet fuel specification requirements as defined by our engine testing
partners.

The Companys 10 tpd BioOil plant was commissioned in March,
2001. Commissioning included a sustained 10 day, 24 hr/7 day a week operation
which demonstrated that this design with minor adjustments could yield 14.5 tpd
rather than the estimated 10 tons. The Company believes that the plant conforms
to all applicable British Columbia safety, electrical and mechanical design
standards, utilizing state-of-the-art smart instrumentation and a high-powered
industrial-grade distributed control system. The Company adopted this design
policy in order to facilitate easy scaleup to commercial plant capacities.

2) BIOOIL COMMERCIAL DEMONSTRATIONS, APPLICATIONS AND MARKETS

During 2004, the Company began construction of its first 100
tpd plant in Ontario, Canada at the Erie Flooring and Wood Products (Erie
Flooring) facilities in West Lorne, Ontario, Canada (West Lorne). The
integrated plant utilizes wood residue from Erie Floorings operations and is
comprised of wood conditioning equipment, pyrolysis plant and power island.
Pyrolysis and generation equipment are to be provided by Dynamotive and Magellan
Aerospace, Orenda division (Orenda) respectively. Erie Flooring provides wood
residue for the project and will receive char for process heat for its
operations. The project began to export green power to Ontarios grid system in
2005. The project is expected to reach operating cash flow positive in 2007
based on sales of BioOil for energy and derivative products and sales of
electricity and char. Operating costs are expected to be approximately $2
million per year or more on a normalized basis.

The Company has entered into lease, wood supply, steam and
other agreements with Erie Flooring, which allow for operation of the plant. The
Company has received its generation license from the Ontario Energy Board and
has an interconnection agreement with Hydro One for the export of electric power
to the Ontario electricity grid and in January 2007 was approved for a contract
with the Ontario Power Authority to sell all of its electricity at C$110/Mwh
over a 20 year period. On April 5, 2007 the Company entered into certain amended
agreements with Erie Flooring regarding the supply by Erie Flooring of wood to
the West Lorne BioOil plant over the

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next 12 years at no charge and the provision of char from the
BioOil plant to Erie at no charge. In relation to these agreements, the Company
agreed to pay for the purchase and installation of a char based boiler system
and related char delivery infrastructure. The terms include an immediate payment
of $500,000 to Erie Flooring and a further $359,000 to Erie in equal monthly
payments plus 8% interest, over the next 10 years for the purchase of the
boiler.

The Company believes that the near term commercial application
for BioOil is as a clean burning fuel that can be used to replace natural gas,
diesel and other fossil fuels in boilers, gas turbines and slow and medium speed
reciprocating engines for heat and power generation, to replace natural gas in
the forest industry and for lumber dry kiln and lime kiln applications. Initial
markets may include Canada, the US, Europe, Latin America, Asia and Island based
economies.

Orenda is in the second phase of a program to develop a
commercial gas turbine package fueled by Dynamotives BioOil. The 2.5 MW
(megawatt) GT2500 turbine was successfully commissioned on BioOil in 2005 and is
at the West Lorne site. Orenda has also identified further commercial scale
projects for its turbines and BioOil, in addition to West Lorne as referred to
above.

Dynamotive also targets the industrial fuels market. Working
with the Canadian federal department of Natural Resources CANMET Energy
Technology Centre in Ottawa, Ontario, it developed a burner nozzle design for
stable BioOil fuel combustion. This has created opportunities for early
commercial applications for BioOil as a clean burning fuel to replace natural
gas, diesel and other fossil fuels in the multi-billion dollar industrial
boilers, kiln fuels and specialty heating applications markets. Testing of
BioOil in lumber kilns was successfully completed in 2002. In 2003, Dynamotive
completed pilot scale limekiln testing of BioOil fuel in conjunction with the
University of British Columbia (UBC) and in July 2006 completed an industrial
scale lime kiln burn in British Columbia, Canada. In 2006, the Company also
completed test burns in greenhouses and in an aluminium smelter with Alcoa.
Customers for BioOil fuels could potentially include local, regional and
international power generators and electrical utilities (fuel substitution in
large scale power plants and fuel for district heating), fuel distributors,
forest companies (natural gas substitute in lime kilns, lumber kilns and
boilers), oil and gas producers (steam production for extraction) and
manufacturing companies (process heat) including sawmills, pulp mills and
greenhouses. Beyond the programs above, testing continued with various
industrial burner and boiler combustion experts and manufacturers and with
industrial customers in 2006. These tests are a necessary prerequisite to long
term fuel sales agreements.

The Company has completed a series of production runs
converting 100% softwood bark derived from spruce, pine and fir into fuel
quality BioOil. Lower value bark residues are a major problem for the forest
industry; as bark has little or no value and is costly to dispose of. Canada,
for example, produces approximately 18 million tons of sawmill residues per year
of which 5 to 6 million tons are considered wastes and are subsequently
incinerated or landfilled.

3) BIOOIL APPLICATIONS & DERIVATIVE PRODUCTS

BioOil has a wide range of potential commercial applications.
As the BioOil industry matures it has the potential to follow a similar
development path as the petroleum industry, beginning with exploitation of basic
unrefined BioOil fuels for power generation and district heating followed by
blends and emulsions for transportation. Development of higher value products,
including agro-products, resins, adhesives, specialty chemicals, slow release
fertilizers and other derivatives, may occur as refining and processing
techniques are established by future licensees or partnerships with Dynamotive.
Over time, we anticipate that BioOil will be refined in much the same way that
petroleum is today in order to derive the highest value energy and chemical
products.

The Company is following a staged approach to product
development, focusing initially on the earliest and most appropriate application
of BioOil as a clean, renewable fuel to generate power and heat in industrial
boilers and kilns, gas turbines and stationary reciprocating engines. The

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Company is also supporting efforts to develop a next generation
of higher-value fuels, including BioOil/ethanol blends, BioOil/diesel emulsions
and catalytic reforming of BioOil to produce synthetic fuels and bio-methanol.
BioOil also has potential as a raw material to produce agro-products such as
slow release fertilizers and other high-value products.

Over the longer term, the Company believes that exploitation of
specialty chemicals contained in BioOil has the potential to create significant
value. Dynamotive and colaborating research institutions are developing
techniques to extract chemicals such as hydroxyacetaldehyde, levoglucosan,
levoglucosenone, acetol, acetic acid and formic acid. These chemicals have a
wide variety of possible applications including food flavorings, adhesives,
resins, pharmaceuticals, bio-based pesticides and paper brighteners.

CHAR PRODUCTION

Char is a significant co-product of the Companys pyrolysis
process comprising 15% to 20% yield from the input biomass at a value of
approximately one half that of BioOil on a weight basis when used for fuel
purposes. Char is a granular solid with properties similar to coal. At 23  30
Giga Joules per tonne, pyrolysis char has a higher heating value than wood and
many grades of coal. Like BioOil, it is a green fuel which is CO2 (carbon
dioxide) neutral and contains virtually no sulfur.

A commercial scale BioOil plant processing 200 tpd of wood
residue is expected to produce approximately 13,000 tons per year of char with a
total energy value of 300,000  325,000 Giga Joules, dependent on the
composition and species of the feedstock.

Early stage applications of char will focus on direct
substitution or augmentation of fossil fuels to produce process heat and power
via commercially available technologies in BioOil plants, sawmills, thermal
power generation and cement production. Char also has potential for use as a
feedstock for manufacturing of charcoal briquettes. Dynamotive char has been
successfully tested at industrial scale and the prototype briquettes showed
excellent results, meeting or exceeding all charcoal industry quality standards.
The char can also be added back into the BioOil to produce an Intermediate
grade BioOil with higher energy content.

In 2003 and 2004 the Company, with the University of
Saskatchewan, completed initial analysis concluding that char is an appropriate
material for activated carbon. Research and testing in this area continued
through 2006.

4) BIOOIL STRATEGIC PARTNERS, INVESTMENT AND GOVERNMENT FUNDING

The Companys BioOil technologies are consistent with the
environmental and economic objectives of many governments around the world.

The Company has received strong support from Canadian
government departments and funded entities.

During 1997, the Company entered into a contribution agreement
with Industry Canada-Technology Partnerships Canada (TPC) whereby the Company is
entitled to receive a maximum of approximately $7 million (Cdn$ 8.2 million) or
37% of eligible expenditures, as defined in the agreement. The agreement, as
amended, specifies that in the event commercial viability is achieved, then the
assistance is repayable, commencing January 1, 2005 based on royalties from
sales of specified products resulting from the project to a maximum of $13.7
million (Cdn$16 million) or until the expiration of contract on December 31,
2014.

TPC is a key element in the federal governments innovation
strategy, leveraging private sector investments in research, development and
innovation in critical, leading-edge technologies. As at

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December 31, 2006, the Company had claimed US$7.1 million to
fund pre-commercial Fast Pyrolysis research and development. The contribution
agreement was amended to confirm a maximum reimbursement cap of $7.1 million and
extend the agreement to March 31, 2006. The Company is required to repay these
funds from a percentage of future sales up to a maximum of US$13.7 million. The
Company will focus all funding from the amended contribution agreement towards
construction of a full commercial-scale forestry demonstration BioOil facility
in Canada. As the Company has not achieved commercial viability and no revenue
has been recorded from the project, no repayment has been made and no amount
accrued for TPC assistance as at December 31, 2006.

In 2003, the Company was approved to receive a funding
contribution for the West Lorne Project from Sustainable Development Technology
Canada (SDTC). On March 5, 2004 the Company signed the Contribution Agreement
with SDTC, confirming their $ 4.3 million (C$5,000,000) capital grant to the
Project, subject to completion of the agreed work plan and documentation of
eligible costs and other reporting requirements over a three year period
following completion of the Project (the Contract Period). In 2004, the
Company received the three payments totaling $3.2 million (C$3.7 million) from
SDTC. In November 2005, the Company received a payment of $0.7 million (C$0.8
million) from SDTC. In December 2006, the Company received the remaining $0.4
million (C$0.5 million). The funds received from SDTC have been accounted for as
a credit to the carrying cost of the West Lorne Plant.

II. RAW MATERIALS AND SUPPLIERS

For the most part, the Company's products are custom designed
and manufactured and are not produced for inventory. BioOil units will only be
produced for specific projects with procurement commencing when project funding
has been fully committed.

The Company outsources the final assembly of its products prior
to sale and does not manufacture the major components of its systems. The
manufactured components and materials used in the Company's products are
obtained from both domestic and foreign sources. Historically, lead-time for
delivery of materials has not been a problem.

While the Company has chosen to use only a limited number of
manufacturers to produce the components for its technologies, in the opinion of
management, the Company has a readily available supply of components and raw
materials for all of its anticipated products from various sources and does not
anticipate any difficulties in obtaining the components and raw materials
necessary to its business. These components comprise primarily pyrolysis reactor
chambers, burner assemblies, and conveyers.

The Company believes that this licensing and focused,
outsourced manufacturing strategy allows it to deliver superior products without
the high capital expenditures that the Company would otherwise require in order
to manufacture the components in house. As a result of limiting the number of
suppliers for the key components for the Company's products, the Company
believes it is better able to control costs while still maintaining high quality
specifications for the components' manufacture. Moreover, the Company believes
that it is better able to limit the number of third parties who have access to
the Company's proprietary technologies.

III. EFFECT OF GOVERNMENTAL AND ENVIRONMENTAL PROTECTION
REGULATIONS

Operators of the Companys pyrolysis plants will be subject to
federal, provincial, state or foreign environmental laws. If full commercial use
of BioOil in power generation, heat and other applications commences, the
Company will become subject to various federal, local and foreign laws and
regulations pertaining to the discharge of material into the environment, the
use of biological waste products as feedstock, and otherwise relating to the
protection of the

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environment. The Company believes that it will be able to
comply with such laws at a cost which will not be prohibitive.

The Company currently has two plants in Canada and is
developing opportunities globally. There is no seasonality in current
operations. Marketing of fuels is conducted directly with industrial customers.

C. Organizational Structure



As at December 31, 2006, the Company had five wholly-owned
subsidiaries Dynamotive Canada Inc., federally incorporated under the laws of
Canada in 2000; Dynamotive Corporation, incorporated under the laws of Rhode
Island, U.S.A in 1990.; Dynamotive USA Inc. incorporated under the laws of
Delaware, U.S.A. in 2006; Dynamotive Latinoamericana S.A., incorporated under
the laws of Buenos Aires, Argentina in 2006; First Resources Corporation,
incorporated under the laws of British Columbia, Canada in 2006. In addition,
the Company maintains an 80% ownership interest in Dynamotive Europe Limited,
formally known as Dynamotive Technologies (UK) Ltd, incorporated in the United
Kingdom in 1996 and owns a 99.98% interest in the West Lorne BioOil
Co-Generation LP, formed under the laws of Ontario, Canada in 2003. Dynamotive
Canada Inc. acts as the General Partner of the Limited Partnership, which
operates the West Lorne BioOil and electricity generation plant.

The Company also holds a 51% interest of Dynamotive Biomass
Resource Corporation, incorporated in Canada in 2006, which the Company has
determined to be a variable interest entity.

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D. Property, Plants and Equipment

The Companys office facilities are leased. The Companys
corporate headquarters, leased for a five-year period which commenced in May
2004, are located in a business park complex in Vancouver, BC, Canada with
approximately 8,000 square feet of office space. The Companys principal capital
asset is the West Lorne Plant discussed above and the Guelph plant currently
nearing completion of construction.

Item 4A. Unresolved Staff Comments

None.

Item 5. Operating and Financial Review and Prospects

OVERVIEW

This section should be read in conjunction with the Companys
financial statements included under Item 17 of this Form 20-F.

Operations

The Company focused its efforts in 2006 on the operation of its
Pyrolysis technology and the completion of its first commercial scale (100 tpd)
BioOil production facility located in West Lorne, Ontario, Canada.

In Canada, the Company's research and development efforts are
focused on optimization of its West Lorne 100 tpd plant and on the planning and
design of its proposed 200 tpd plant. In Canada, opportunities in British
Columbia, Saskatchewan, Nova Scotia continue to be pursued and additional
projects were investigated including promising opportunities in Ontario and
elsewhere.

Financing Activities

The Company's financing efforts were successful and continued
to support the Canadian focused operations of the Company. The Company is
continuing to raise equity capital in support of its project development and its
ongoing operations.

In 2006, Dynamotive invested primarily in the construction of
its Guelph Plant and as well continued its research and development activities
related to its BioOil technology along with business development activities to
develop initial commercial projects and market acceptance of BioOil. Ongoing
operations were focused in Canada.

A. RESULTS OF OPERATIONS

During the year ended December 31, 2006, the Company recorded a
net operating loss of $14,252,382 compared to a net operating loss of
$11,997,344 for the year 2005. The increase in operating loss in 2006 as
compared to 2005 was primarily attributable to (i) increased activity related to
construction of a second, 200 tpd plant, (ii) an increase in marketing and
business development expense, (iii) an increase in research and development
expenditures and (iv) an increase in general and administrative expense. During
the year ended December 31, 2005, the Company recorded a net operating loss of
$11,997,344 compared to a net operating loss of $9,916,215 for the year 2004.
The increase in operating loss in 2005 as compared to 2004 was primarily
attributable to increased activity related to completion of the Companys 100
tpd plant resulting in (i) an increase in interest expense and (ii) an increase
in marketing and business development expense.

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The basic and diluted loss per common share was nine cents
($0.09) for the year 2006 compared to eleven cents ($0.11) for the year 2005.
The loss per common share for the year 2004 was twelve cents ($0.12) . The
decrease in basic and diluted loss per share for 2006 was due to a combination
of the increase in the loss for the year and the increase in the weighted
average number of Common Shares outstanding from 108,009,185 shares in 2005 to
153,685,553 in 2006.

For the years 2006, 2005 and 2004, the Company had expended on
an annual basis $4,629,465, $3,586,855 and $3,670,936 respectively, on research
and development. Of these amounts, $227,121 $782,423 and $765,106 respectively,
were reimbursed by government funding. In 2006, the Company also offset product
sales of $154,560 (2005 - $nil; 2004 - $nil) against research and development
expenses, which are considered incidental sales of BioOil until such time as the
Companys plant has reached commercial production levels. The level of research
and development expenditure has increased in 2006 and 2005 in support of
development of the commercial scale plant and other product development
activities. Future research and development expenditures are expected to be at a
similar level.

The Company has been able to draw significantly from government
grant and loan facilities, including the Government of Canadas Technology
Partnerships Canada program both for expenditures made in 2005 and technical and
project related expenditures in 2006. The Companys agreement with Technology
Partnerships Canada pertains to maximum funding of US$7.1 million (C$8.235
million), of which $6.0 million (C$ 7.0 million) has been received as of year
end 2006 and $1.1 million is included in government grants receivable.

Marketing and business development increased to $1,768,063 in
2006 from $1,199,959 in 2005. The increase was due mainly to the increase of
business development activities, like public investor relation, commissions paid
on the Companys initial license sales and the corporate brand implementation,
and to increased participation in a major environmental conference during the
year. Marketing and business development increased to $1,199,959 in 2005 from
$466,435 in 2004. The increase was due mainly to the increase of business
development activities and participation in environmental and biofuel industry
conferences during the year.

General and administrative expenses increased to $7,763,275 in
2006 from $6,257,086 in 2005. The increase in 2006 was mainly due to increased
activity in the general administrative expenses, an increase in consulting
expenses, an increase in non-cash compensation of $244,014 and an increase in
the Companys development activities with its 200 tpd plant. General and
administrative expenses were about stable at $6,257,086 in 2005 from $6,316,110
in 2004. The decrease in 2005 was mainly due to a decrease in non-cash
compensation of $1,508,040 largely offset by increased payroll and other
business activities.

Amortization and depreciation decreased to $124,067 in 2006
from $148,556 in 2005 due to the write-off of the 10 tpd pilot plant at the year
end 2005. Amortization and depreciation increased to $148,556 in 2005 from
$130,912 in 2004 due to the replacement of certain computer equipment and an
increase in computer equipment for a number of new staff.

Interest and other income increased to $493,610 in 2006 from
$5,614 in 2005 due mainly to higher cash balances and the resultant interest
income from investments in short-term money market deposits. Interest and other
income decreased to $5,614 in 2005 from $8,766 in 2004 due mainly to a decrease
of miscellaneous income in 2005.

Interest expense decreased in 2006 to $505,340 from $1,445,918
in 2005 due mainly to the decrease in long-term and convertible debenture
financing. Also, all of the outstanding convertible debenture and long-term debt
financing were paid off during the first six months of 2006. Interest expense
increased in 2005 to $1,445,918 from $151,758 in 2004 due mainly to the
accretion of the debt discount and expense incurred on the conversion of
long-term and short-term convertible loans.

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There was no write-down of long-term assets in 2006. Loss on
the write-down of long-term assets increased to $200,457 in 2005 from $nil in
2004 as the Company wrote-off its 10 tpd pilot plant as management determined
its value was permanently impaired.

Loss on settlement of accounts payable increased to $98,189 in
2006 from $nil in 2005 due to a non-cash compensation payment exceeding the book
value of the outstanding payable.

Loss on sale of interest in subsidiary increased to $420,400 in
2006 from $nil in 2005 due mainly to sell-off of a 20% interest of Dynamotive
Europe Limited and the loss arises from the issue of common share purchase
warrants related to this transaction. See additional information in audited
Consolidated Financial Statements of the Company Note 9.

Currency exchange gain in 2006 amounted to $88,888 compared to
a gain of $33,677 in 2005 due to the appreciation of the US Dollar. Currency
exchange gain in 2005 amounted to $33,677 compared to a gain of $53,156 in 2004
due to the depreciation of the US Dollar.

B. LIQUIDITY AND CAPITAL RESOURCES

The principal sources of liquidity during the year ended
December 31, 2006 were (i) $27,495,575 in net proceeds after deducting related
issue costs and expenses from private placement offerings of the Companys
Common Shares and the exercise of Common Share options and warrants for cash,
(ii) $18,091 in deposits for Common Shares to be issued in 2007 pursuant to the
exercise of warrants, (iii) $1,500,000 contribution received from joint venture;
less (iv) $899,184 decrease in long term loan and (v) $473,451 increase in
government grant receivable.

For the previous year ended December 31, 2005 principal sources
of liquidity during the year ended December 31, 2005 were (i) $6,398,254 in net
proceeds after deducting related issue costs and expenses from private placement
offerings of the Companys Common Shares and the exercise of Common Share
options for cash, (ii) $1,957,000 in deposits for Common Shares to be issued in
2006 pursuant to private placement offerings commenced in 2005, (iii) $1,825,000
increase in short-term convertible loan, (iv) $42,331 decrease in repayment of
short-term loan and (v) $368,712 increase in government grant receivable.

For the year ended December 31, 2004 the Principal sources of
liquidity during the year ended December 31, 2004 were (i) $4,857,699 in net
proceeds after deducting related issue costs and expenses from private placement
offerings of the Companys Common Shares and the exercise of Common Share
options for cash, (ii) $1,636,408 in deposits for Common Shares to be issued in
2005 pursuant to private placement offerings commenced in 2004, (iii) $830,013
increase in convertible loan, (iv) $816,727 increase in long-term debts and (v)
$509,879 decrease in government grant receivable.

Overall cash inflows increased during 2006 due to significantly
increased financing activities such as issuance of share capital. During the
year ended December 31, 2006, the Company used cash in operating activities and
in investing activities of $9,402,744 and $10,339,843 respectively, and
generated cash from financing activities of $27,641,031.

During the previous year ended December 31, 2005, overall cash
inflows increased during 2005 due to significantly increased financing
activities and the completion of constructing of the West Lorne Project in 2005.
During the year ended December 31, 2005, the Company used cash in operating
activities and in investing activities of $6,734,729 and $1,775,189
respectively, and generated cash from financing activities of $9,769,211. During
the year ended December 31, 2004, the Company used cash in operating activities
and in investing activities of $2,883,735 and $5,824,645 respectively, and
generated cash from financing activities of $8,693,057.

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The net amount of cash used in operating activities during 2006
increased by 40% (over cash used in operating activities during 2005) due to the
construction of the Companys 200 tpd plant and the resulting increase in
business development activities. Cash used in operating activities consisted
primarily of a net loss for 2006 of $14,252,382 less non-cash expenses of (i)
amortization of $124,067, (ii) accretion expense in the amount of $208,022,
(iii) loss on settlement of accounts payable of $98,189, (iv) loss on sale of
interest in subsidiary of $420,400, and (v) equity compensation expenses of
$4,337,590.

The net amount of cash used in operating activities during 2005
increased by 134% (over cash used in operating activities during 2004) due to
the commissioning of the Companys 100 tpd plant and the resulting increase in
business development activities. Cash used in operating activities consisted
primarily of a net loss for 2005 of $11,997,344 less non-cash expenses of (i)
amortization of $148,556, (ii) equity compensation expenses, $3,697,057, (iii)
loss on write-down of property, plant and equipment of $200,457, and (iv)
accretion expense in the amount of $1,068,192.

The net amount of cash used in operating activities during 2004
increased by 33% of cash used in operating activities during 2003. Cash used in
operating activities consisted primarily of a net loss for 2004 of $9,916,215
that was offset by (i) amortization of non-cash items in the sum of $130,912,
(ii) non-cash equity compensation expenses, $4,730,604, and (iii) net change in
non-cash working capital balances related to operations of $2,087,156.

Financing activities during 2006 generated a net cash inflow of
$27,641,031, primarily from the Companys private placements of Common Shares.
Financing activities during 2005 generated a net cash inflow of $9,769,211,
primarily from the Companys private placements of Common Shares and the
proceeds from convertible debentures.

Investing activities in 2006 resulted in the use of cash, net
of grants, in the amount of $10,339,843 that consisted of $10,496,423 incurred
in the acquisition of capital assets (Guelph plant), $21,016 expended on
patents, and a $177,596 decrease in restricted cash. Investing activities in
2005 resulted in the use of cash, net of grants and disposal, in the amount of
$1,775,189 that consisted of $1,580,195 incurred in the acquisition of capital
assets, $22,181 expended on patents and $172,813 increase in restricted cash
(funds held in escrow as collateral for short-term convertible debentures).
Investing activities in 2004 resulted in the use of cash, net of grants and
disposal, in the amount of $5,824,645 that consisted of $5,804,656 that was
incurred in the acquisition of capital assets, $19,989 was expended on patents.

As at December 31, 2006, the Company had working capital of
$4,938,473 and incurred a net loss of $14,252,382 for the year ended December
31, 2006, and has an accumulated deficit of $73,099,779.

In the year ended December 31, 2006, Dynamotive had no
commercial revenue from its core BioOil operations. Sales revenue going forward
is uncertain and the Company is therefore dependent on its financing activities
to fund its operations. The proceeds from the recent equity financing, together
with Technology Partnerships Canada (TPC) funding receivable, will be applied
to finance the Companys ongoing research and development and commercial
demonstration activities and to support its efforts to obtain the award of
customer contracts. Dynamotive will be required to raise sufficient additional
funds to finance its commercialization strategy. The raising of additional
finance to fund operations is subject to uncertainty. There is no assurance that
such financing will be available on commercially reasonable terms, if at all.
Dynamotives operations are subject to all of the risks inherent in the
establishment of a new business enterprise and in particular Dynamotive will
require significant additional financing in the future to develop and market its
technology to its full potential.

In addition to contemplated equity offerings during 2007, the
Company has been able to draw significantly from government grant and loan
facilities, including the Government of Canadas

20

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TPC program both for expenditures made in 2005 and technical
and project related expenditures in 2006. The Companys agreement with
Technology Partnerships Canada pertains to maximum funding of US$7.1 million
(C$8.235 million), of which $6.0 million (C$ 7.0 million) has been received as
of year end 2006 and $1.1 million is included in government grants receivable.

During the first quarter of 2004, the Company signed a
Contribution Agreement with SDTC whereby SDTC will contribute $4.3 million (C$5
million) to the capital cost of the Companys West Lorne 100 TPD BioOil
co-generation project development. This amount is a government grant and is
accounted for as a reduction in the capital cost of the project. In 2004, the
Company received the three payments of $3.2 million (C$3.7 million) from SDTC.
In November 2005, the Company received a payment of $0.7 million (C$0.8 million)
from SDTC. In December 2006, the Company received the remaining $0.4 million
(C$0.5 million).

During the first quarter of 2006, the Company raised
subscription funds of $10.2 million relating to the private placement commenced
commencing in the second quarter of 2004 at subscription prices ranging from
$0.60 to $1.055 per share. 13 million shares and 2.7 million Common Share
Purchase Warrants were issued as a result of this funding.

During the second quarter of 2006, the Company raised total
subscription funds of $9.3 million from private placement commenced during the
first quarter of 2004 ($0.2 million at subscription prices ranging from $0.81 to
$1.35 per share) and from the private placement commenced during the second
quarter of 2006 ($9.1 million at subscription prices ranging from $0.86 to $1.33
per share). 8.0 million Shares and 2.0 million Common Share Purchase Warrants
were issued as a result of these subscriptions.

During the second quarter of 2005 the Company issued $1.825
million of convertible debentures including $175,000 of debentures issued to
officers and directors (or companies controlled by officers and directors) of
the Company. The debentures were due between June and September 2006, had an
interest rate of 10% payable in shares and were convertible into Company common
shares at rates between $0.40 and $0.425 per share. These debentures were
collateralized by certain government receivables and guaranteed by the Company.
In September and December 2005, $1.15 million of the debentures were converted
into 2.7 million common shares and 0.68 million Series U warrants. In 2006, the
remaining $675,000 of the debentures were converted into 1,613,969 common shares
and 484,787 Series U warrants. In addition, 109,370 shares and 29,493 Series U
warrants were issued in 2006 as interest payments on the debentures. As at
December 31, 2006, no debentures were outstanding.

During the third and fourth quarter of 2006, the Company did
not raise subscription funds relating to the same private placement of the
previous quarter.

In total, the Company raised from private placements during
2006 $19.5 million in cash and settled $0.09 million in consulting fees payable
by the Company (these shares were valued based on the quoted market price on the
date of the settlement agreement) for a total of 21.2 million Common Shares and
4.7 million Common Share Purchase Warrants.

With the current cash on hand, anticipated cash flow from
product sales and additional equity and debt financing, the Company anticipates
that it will have sufficient cash resources and available financing to satisfy
its cash requirements for the next 12 months. The Company expects to require
additional funding for the commercial expansion of its technologies through the
year 2007 and beyond. Given market conditions and other factors, there can be no
guarantee that the Company will be successful in securing additional finance. If
adequate funds are not available on acceptable terms when needed, the Company
may be required to delay, scaleback or eliminate the manufacturing, marketing or
sales of one or more of its products or research and development programs. The
outcome of these matters cannot be predicted at this time. The Companys future
operations are dependent on the markets acceptance of its products in order to
ultimately generate future profitable operations, and the Companys ability to
secure sufficient financing to fund

21

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future operations. There can be no assurance that the Companys
products will be able to secure market acceptance. Management plans to raise
additional equity financing to enable the company to complete its development
plans.

In recognition of our liquidity and capital resources, our
independent public accountants have included a comment in their report on our
accompanying consolidated financial statements for the year ended December 2006,
that express substantial doubt as to our ability to continue as a going concern.

Subsequent to the year end, during the period from January 1 to
April 17, 2007, the Company issued 2,280,259 common shares for total proceeds of
$2,480,900, relating to a private placement commencing during the first quarter
of 2007. In addition during the period from January 1 to April 17, 2007, the
Company received $4.37 million on the exercise of 744,166 options and 6,851,049
warrants.

The Companys 2007 financing plan is structured to enable
completion, commissioning and ramp-up of the Companys first 200 tonne per day
(tpd) BioOil manufacturing facility in Guelph. The plant is to be owned 100%
by the Company and leased to Evolution Biofuels Inc., a company owned 20% by the
Dynamotive. As well the Company expected to spend approximately $5 million on an
upgrade and expansion of the plant in West Lorne. The core of the strategy
surrounds market and project based equity financing that minimizes equity
dilution while raising sufficient capital for operations and projects. In
addition, the Company will seek asset backed debt financing if such facilities
are available on reasonable commercial terms.

In connection with the Companys West Lorne project upgrade and
construction advances related to the 200 tpd plants, the Company has committed
to outstanding construction commitments of approximately $8.2 million at
December 31, 2006.

The Companys funding plan for 2007 is structured so that
equity placements explained above will maintain Company and project operations.
Additionally, the Company contemplates a private placement and project finance
strategy which, with other project funding and sales, are expected to fund the
200 tpd project(s) which are expected to be developed during 2007. Any delay in
securing project funding for a project will delay the construction and
commissioning of that project.

CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements are prepared based on the
accounting policies described in Note 2 to our consolidated financial statements
included herein. The preparation of financial statements in conformity with
Canadian generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and notes. Actual results could differ from these estimates.

Revenue Recognition

[a] Product Sales

The Company recognizes revenue from the sale of products,
including BioOil, char, and other byproducts, upon shipment of the product when
the risk and reward of ownership has been transferred to the customer, provided
that the amount is fixed or determinable and collection is reasonably
assured.

22

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[b] Licenses and royalties

Revenue from license agreements may include multiple elements
within a single contract. Payments received under license agreements may include
the following: non-refundable fees at inception of the contract, fees for
services to be performed, milestone payments for specific achievements, and
royalty payments based upon resulting sales of products. Agreements with
multiple elements are separated into significant discrete units of accounting
based on the relative fair value of each element. Revenue recognized for each
element when all significant acts have been completed and delivery has occurred
with no substantial risk of return and collectibility is reasonably assured.
When the fair value cannot be determined, revenue is deferred until objective
evidence exists or recognized as the final elements are delivered.

Deferred revenue is comprised of amounts received prior to the
satisfaction of the revenue recognition criteria described above and includes
non-refundable amounts related to sales of master license and plant license
agreements. Master license agreements grant the licensee the exclusive right and
license to use and commercially exploit the Companys BioOil technology
including the rights to manufacture, market, distribute, and sub-license the
technology for the production of BioOil within a specific territory. Plant
license agreements grant a licensee the right to use and commercially exploit
the Companys BioOil technology for the development of one or more pyrolysis
plant facilities.

In 2006, the Company received a total of $950,000 in payments
from three unrelated companies as licensing fees. $500,000 from Rika Ltd. as
payment for a Master License to develop project opportunities in the Ukraine and
the Baltic republics using Dynamotives patented pyrolysis technology; $150,000
from Classic Power Inc. as an initial payment on a Plant License for Guelph,
Ontario, Canada; $200,000 from Renewable Oil Corporation Pty Ltd. (ROC) for a
Master License to develop project opportunities in Australia and $100,000 from
ROC as a deposit on an initial plant license.

Deferred revenue is net of $330,000 advanced to entities
controlled by Rika Ltd. and a $100,000 long-term investment in ROC.

All the above funds are non-refundable and have been recorded
as deferred revenue.

Government Assistance and Investment Tax Credits

Government assistance towards current expenses is included in
the determination of income for the period as a reduction of the expenses to
which it relates. Amounts received for future expenditures are recorded as a
current liability. Government assistance towards the acquisition and
construction of property, plant and equipment is deducted from the cost of the
related property, plant and equipment. Government grants receivable are recorded
when the Company has incurred the qualifying expenditure and there is reasonable
assurance the receipts will be recovered.

Repayment of contribution is contingent solely upon the
Companys ability to generate revenue from the sale of specified products or
technology. Accordingly, liability of repayment will only be accrued when sales
of the products or technology have been generated.

Investment tax credits are accounted for under the cost
reduction method whereby they are netted against the expense or capital asset to
which they relate. Investment tax credits are recorded when the Company has
incurred the qualifying expenditures and there is reasonable assurance the tax
credits will be realized. As at December 31, 2006 and 2005, no investment tax
credits have been recognized.

23

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Research and Development Costs

Research costs are expensed in the period incurred. Development
costs are expensed in the period incurred unless the Company believes the
development project meets Canadian generally accepted accounting criteria for
deferral and amortization. In evaluating these criteria the Company considers
technological feasibility to be established only when a product demonstrates it
operates under conditions which are acceptable to target customers. If
management determines that the development of products to which such costs have
been capitalized is not reasonably certain, or that costs exceed recoverable
value, such costs are charged to operations. The Company has not capitalized any
development costs for any of the year ends presented.

During the year ended December 31, 2006, the Company netted
$154,560 (2005 - $nil; 2004 - $nil) of product sales against research and
development expenses, which are considered incidental sales of BioOil until such
time as the Companys plant has reached commercial production levels.

Projects Under Development

The Company expenses all preliminary stage costs incurred with
respect to a potential capital project, including costs related to the
consideration of alternatives, feasibility studies, and activities occurring
prior to the decision to proceed with the project until the capital project
meets the Companys capitalization policy and is considered a project under
development. The Company begins to capitalize costs for projects under
development when it has determined that it is more likely than not that the
financing for the capital project is available and it is more likely than not
that the Company will be able to meet the requisite local and other governmental
regulations to develop the capital project.

For those capital projects that meet the Companys
capitalization policy, the Company capitalizes incremental costs that are
directly identifiable with the specific capital project until the capital
project is substantially complete and ready for its intended use. Financing
costs, including interest, are capitalized when they arise from indebtedness
incurred, directly or indirectly, to finance the construction of the capital
project. Capitalization of financing costs will cease when a capital project is
considered to be substantially complete and ready for its intended use.

Annually, or whenever events and circumstances indicate that
the carrying value of the assets might be impaired and the carrying value may
not be recoverable, the Company performs evaluations to assess the
recoverability of its projects under development. When the carrying value of
projects under development is determined to exceed its recoverable amount, an
impairment loss is recorded to reduce the carrying value of the projects under
development to its fair value.

Stock Based Compensation Plan

The Company has two stock based compensation plans - a stock
appreciation rights (SA Rights) plan and a stock option plan for directors and
employees, which are described in note 15. Under the terms of the stock option
plan the Company may grant fixed options or options whose vesting is contingent
on future performance. Compensation is recognized under the fair value based
method when fixed or performance based stock options are granted to employees
and directors. Compensation is recognized using the fair value based method for
SA Rights when the performance criteria have been met and amortized over the
service period.

The Company may also issue stock options and warrants to
employees or as consideration for services rendered by non-employees. As a
result of the change in accounting policy (note 3), such equity awards are
recorded at their fair value using the Black Scholes option pricing model, as
compensation expense or capitalized to long-term assets under construction when
the Company receives the related services and the equity awards vest. No
compensation is recognized in connection with options and warrants awarded in
connection with private placements, since the

24

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share issue costs are netted against the proceeds raised. All
unvested or modified options for non-employees are re-measured on each balance
sheet date until such options vest, are exercised or forfeited.

C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENCES, ETC.

The Company considers patents to be an important aspect of the
Companys business. The Company protects its intellectual property such as
trademarks, patents, product designs, manufacturing processes and new product
research and concepts. These rights are protected through patents and trademark
registrations, the maintenance of trade secrets and, when necessary and
appropriate. The Company also maintains stringent procedures to maintain the
secrecy of its confidential business information. These procedures include the
establishment of "need to know" criteria for the dissemination of certain
information and the use of written confidentiality agreements in cases where the
sharing of proprietary information with third parties is necessary.

As of May 24, 2007, the Companys key patent is protected in 11
countries, patent applications pending in 5 countries and is scheduled to expire
between years 2016 and 2018. A US Patent was granted in February 2006 to expire
in year 2024 with respect to an enhancement of the key patent and based on this,
a US PCT application was filed in February 2005; a Eurasian patent application
was filed in March 2006

Research costs are expensed in the year incurred and are
recorded net of incidental product sales. Development costs are expensed in the
year incurred unless the Company believes the development project meets Canadian
generally accepted accounting criteria for deferral and amortization. In
evaluating these criteria the Company considers technological feasibility to be
established only when a product demonstrates it operates under conditions, which
are acceptable to target customers.

If management determines that the development of products to
which such costs have been capitalized is not reasonably certain, or that costs
exceed recoverable value, such costs are charged to operations

Please refer to the Item 5.A. Results of operations for
additional information on research and development.

D. TREND INFORMATION

The Companys Fast Pyrolysis technology produces BioOil, a fuel
that will compete with conventional energy sources and other alternative energy
industrial fuels. Therefore, price trends in the broad energy industry and
developments in the alternative energy sector will affect the commercial
viability and attractiveness of BioOil. The economic attractiveness of BioOil
production is significantly affected by the availability of suitable biomass
feedstock, the price of which may be effected on a regional basis by competing
uses for the feedstock from other industries. The price of emissions credits,
which can result from combustion of BioOil which displaces hydrocarbon fuels,
may be affected by many outside factors including legislated requirements and
international agreements.

E. OFF-BALANCE SHEET ARRANGEMENTS

Nil

F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The following table provides as of December 31, 2006 the known
long term obligations and commitments of the Company:

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Contractual Obligations
    Total
    Less than 1 year
    1  3 years
    3  5 years
    More than 5 yearsOperating lease obligations  
        Office equipment
      30,000
      10,000
      17,000
      3,000
      NilPremise lease obligations
    471,000
    242,000
    229,000
    Nil
    NilBusiness development contract
    150,000
    140,000
    10,000
    Nil
    NilConstruction commitments
    8,191,000
    8,191,000
    Nil
    Nil
    NilTotal
    8,842,000
    8,583,000
    256,000
    3,000
    Nil


Note: On April 5, 2007 the Company entered into certain amended
agreements with Erie Flooring and Wood Products (Erie) regarding the supply by
Erie of wood to the West Lorne BioOil plant (BioOil plant) over the next 12
years at no charge and the provision of char from the BioOil plant to Erie at no
charge. In relation to these agreements, Dynamotive agreed to pay for the
purchase and installation of a char based boiler system and related char
delivery infrastructure. The terms include an immediate payment of $500,000 to
Erie and a further $359,000 to Erie in equal monthly payments plus 8% interest,
over the next 10 years for the purchase of the boiler.

We have an operating lease for office facilities of our head
office.

G. SAFE HARBOR

Item 6. Directors, Senior Management and Employees

A. Directors and Senior Management

As at May 16, 2007, the Companys directors and executive
officers are:

|Name                             | Age | Position                                                  
|-------------------------------- | --- | ----------------------------------------------------------
|Richard Chen-Hsing Lin (2)(3)    | 63  | Chairman, President,
      Operations-China and Director  
|R. Andrew Kingston (3)           | 47  | President, Chief Executive Officer and Director           
|Curtin Winsor, Jr., Ph.D. (1)(2) | 67  | Director                                                  
|Desmond Radlein, Ph.D. (1)(2)(3) | 58  | Director                                                  
|Shing-Cheng Hong (1)             | 73  | Director                                                  
|Chih-Lin Chu                     | 39  | Director                                                  
|George J. Terwilliger III        | 57  | Director                                                  
|Brian Richardson                 | 44  | Chief Financial Officer                                   
|Jan Barynin, Ph.D.               | 69  | Vice President, Engineering                               
|Laura Santos                     | 57  | Corporate Secretary                                       
|Jeffrey Lin                      | 37  | Vice President, Business
      Development-China and Japan
|Anton Kuipers                    | 53  | Vice President of Business Development                    
|Robert Nigel Horsley             | 59  | Executive Director of Marketing                           

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-------

|(1) | Member of the Audit and Corporate Governance Committee of
      the Board of Directors.
|--- | ---------------------------------------------------------------------------------------
|    |                                                                                        
|(2) | Member of the Compensation Committee of the Board of
      Directors.                  
|    |                                                                                        
|(3) | Member of the Executive Committee of the Board of
      Directors.                     

All Directors are elected annually at the Company's Annual
Meeting of Shareholders. The executive officers of the Company are appointed
annually at the first meeting of the Company's Board of Directors held after
each annual meeting of shareholders. Each director and executive officer of the
Company holds office until his or her successor is duly elected and qualified or
until his or her death or resignation or until he or she shall be removed in the
manner provided by the Company's by-laws. There is no arrangement or
understanding between any director or executive officer and any other person
pursuant to which any director or executive officer is selected.

Richard Chen Hsing Lin. Mr. Lin has been a Director of
the Company since 1992 and Chairman of the Company since May of 1995. He is the
past President of the Taiwan Chamber of Commerce in Canada. Mr. Lin is also
co-founder, Vice President and Secretary of Neoventi Technology Corporation
since 1991 and Neoventi Investment Corporation since 1992, and has been a
Director of Concert Industries Ltd. since December 1992. Mr. Lin was also
President of the Taiwan Chamber of Commerce in B.C., and Vice President of
R.C.A. Taiwan. Mr. Lins son, Jeffrey Lin, is the Companys Vice President,
Business Development for China and Japan. (See Jeffrey Lins affiliations
below)

Robert Andrew Kingston. Mr. Kingston was appointed
President and CEO in April 1999. Mr. Kingston has held senior positions in
multi-national oil companies, property and investment corporations and financial
institutions in Europe, the USA and South America. From 1996 to 1999, Mr.
Kingston was advisor to public and private companies in the U.S. Canada and the
U.K. From 1995 to 1996, Mr. Kingston was senior advisor to the Chairman of Rotch
Property Group Ltd., a UK property investment and development company with
assets in excess of US $7 billion. From 1992 to 1995, Mr. Kingston was a
financial advisor on corporate restructuring for Interpetrol S.A., a South
American oil trading company that at the time was partly owned by the Argentine
National Oil Company (NYSE: YPF). He held a number of positions with the Gatoil
Group of Companies from 1986 to 1990,: a fully integrated, privately owned oil
conglomerate, including Managing Director of Gatoil Services (UK) Limited and
Financial Vice President of Gatoil Enterprises Inc. (USA). He also worked for
Price Waterhouse & Co. and Ducilo S.A., a subsidiary to E.1. DuPont de
Nemours & Co.

Curtin Winsor, Jr., Ph.D. Dr. Winsor has been a Director
of the Company since June 1996. He received his MA and Ph.D. in Latin American
Area Studies and History of Diplomacy from the School of International Service
of American University in 1979. He served at the Department of State's Office of
Congressional Relations until 1971. Dr. Winsor became Special Assistant to
Senator Bob Dole, Chairman of the Republican National Committee, from June 1971
to May 1973. Moving to the private sector, he served as Manager for
International Affairs at the Washington office of Chase Manhattan Bank from 1973
to 1979. He helped to found the Alliance for Free Enterprise in 1979 and served
as its Deputy Director until 1983. Dr. Winsor served as US Ambassador to Costa
Rica from 1983 to 1985. He continued to serve as Consultant on Central America
to the Under Secretary of Defense from 1985 to 1987. Dr. Winsor is a Governor of
the Donner Canadian Foundation of Toronto, and a Trustee of the Pan-American
Development Foundation (of the Organization of American States) in Washington,
DC. He has been the owner of the American Chemical Services Company of Marmet,
WV, which provides chemical blending, storage and distribution services for
larger chemical companies servicing the coal industry for more than the past
five years.

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Desmond Radlein, Ph.D.Dr. Radlein became a Director of
the Company in December 1997, retired in August 2002 and was re-appointed in
August 2003. Dr. Radlein has been the President of RTI - Resource Transforms
International, Ltd., an R&D company specializing in pyrolysis technology and
applications, since 1994. Dr. Radlein received a B.Sc: in Chemistry (1986) from
the Alcan Scholar University of the West Indies in Jamaica and M.Sc. in
Theoretical Chemistry (1970) from the University of Calgary in Alberta. He
received his Ph.D. from the University of Cambridge, England (1975) in Physical
Chemistry. He was a member of the Board of the Waterloo Region Community Legal
Services from 1994 to 1995. Dr. Radlein was also an Associate Research Professor
at the Chemical Engineering Department of the University of Waterloo from 1987
to 1994. He is an inventor or co-inventor of 10 patents on pyrolysis and
petroleum processing and has also authored over 20 publications in various
scientific journals. Some of his research activities include: pyrolytic
production of fermentable sugars, fundamental studies on biomass pyrolysis
mechanisms, catalytic hydropyrolysis for hydrocarbon production and catalyst
development for gasification.

Shing-Cheng Hong. Mr. Hong became a Director of the
Company in December 1997. With 40 years of financial and industrial background,
Mr. Hong led a 42-member management team of Hotung Venture Capital Corp. where
he served as its President since 1987. Hotung is the leading venture capital
group in Taiwan and currently manages total funds of US$7 billion. Thirty-three
additional venture capital funds were also established under his leadership;
including Daitung VC; Yuantung VC; Litung VC; Futung VC and Wantung VC. Mr. Hong
retired in 2001 from Hotung and now serves as Chairman of Giga Venture Partners
& Co.

Chih-Lin Chu. Mr. Chu became a Director of the Company
in June 2001. He is General Manager for Business Development at China Strategic
Holdings Limited (CSH) since March 2000. CSH is a public company listed on Hong
Kong Exchange with investments in energy, tire manufacturing, breweries, paper,
pharmaceuticals and other light and heavy industries including power plants,
diesel engine manufacturing, cement,. chemical plants, electrical machinery and
auto parts as well as information technology and e-commerce related projects.
From 1999 to 2000, Mr. Chu was Vice Chairman and President, China Operation for
Tricom Holdings Limited, also a public company in Hong Kong with a focus on
telecommunication products. Since 1994, Mr. Chu has been involved in business
development and government relationship in China for various companies including
Cathay Pacific Airline O.B.C. G.S.A., Shanghai E&T Wako Express Co. Ltd and
Shanghai Tricom Limited. Mr. Chu received his MBA from the China Europe
International Business School in China.

George J. Terwilliger III.Mr. Terwilliger became a
Director of the Company in November 2006. He was Deputy Attorney General of the
United States from 1991 to 1993 and served as the number two official and chief
operating officer of the Department of Justice. He was Principal Associate
Deputy Attorney General from 1990 to 1991, and a U.S. Attorney for the District
of Vermont from 1986 to 1991. His public service career dates back to 1978 when
he was appointed Assistant U.S. Attorney for the District of Columbia. From 1993
to 2000, Mr. Terwilliger was a Managing Partner and member of the Partnerships
Executive Committee at McGuire Woods Washington, DC office and led the
corporate defense and white collar practice group. He is currently, a senior
partner and head of corporate defense and special projects with White & Case
LLP, of Washington DC, where he leads teams of lawyers on behalf of major
corporate clients, including oil companies. His business and financial
experience includes matters of corporate governance, financial management and
controls, public relations and management of business projects and initiatives.

Brian Richardson, C.A., MBA Mr. Richardson was appointed
Chief Financial Officer of the Company in August 2003. From 1993 - 2002, Mr.
Richardson was a financial consultant in a variety of industries, including
working for four years as a project manager for Westcoast Energy on gas and
electric infrastructure projects in Latin America. In the early 1990's, he was
CFO of a publicly traded venture capital firm, helping to bring it onto the TSE
via a reverse take-over. Mr. Richardson also worked in investment banking, and
as CFO of a biotech start-up. He has

28

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significant experience in project planning, management and
control and in working with early stage technology companies. Mr. Richardson
received his designation as a Chartered Accountant in 1987, and in 1990,
graduated with a MBA degree from IMD in Switzerland.

Jan Barynin, PhD., P.Eng. Dr. Barynin was appointed Vice
  President, Engineering in June 2004. Dr. Barynin spent almost 30 years of his
  professional career in steam, power, and boiler engineering; from 1970 to 1980
  with Combustion Engineering (CE-Canada), from 1980 to 1986 with Babcock and
  Wilcox and from 1986 to 1999 with H.A. Simons. He oversaw the development of
  the Companys 10 tpd BioOil demonstration plant and lately, has been responsible
  for the completion and commissioning of the 100 tpd BioOil plant in West Lorne,
  Ontario. His latest endeavours have been dedicated to renewable energy and use
  of agricultural and forestry residues. Dr. Barynin graduated as a Chemical Engineer
  in 1961 from the Royal Technology University of Denmark and in 1970 received
  his doctorate in Chemical Engineering and Chemical Technology from the Imperial
  College, UK.

Laura Santos, BFA. Mrs. Santos has been Secretary of the
Company since March 1998, Assistant Secretary and Executive Assistant from 1994
to 1998. Prior to joining the Company, she was Accounting Supervisor with Everex
Systems from 1990 to 1993; Senior Accounting Assistant with Walbar, Canada from
1989 to 1990 and with CitiBank, N.A. and Chemical Bank in New York from 1983 to
1988. She was also Assistant to the Executive Secretary of the Philippine
American Chamber of Commerce in New York from 1982 to 1983. Mrs. Santos
graduated with a Bachelor of Fine Arts degree from the University of the East,
Philippines.

Jeffrey Lin, B.Sc. MBA, CMA.Mr. Lin joined Dynamotive
in 1994 and has been appointed VP Business Development to lead the Companys
expansion efforts in Japan and China. Before joining the business development
team, Mr. Lin previously held positions as the Director of Finance and Project
Manager with the Company. Mr. Lin has the technical knowledge, business and
financial experience as well as the cultural background and the language skills
to open new business opportunities in Asia.

Anton Kuipers. Mr. Kuipers joined Dynamotive in January
2007 and has been appointed Vice President Strategic Initiatives with specific
responsibilities to oversee new business development initiatives in Canada.
Before joining Dynamotive, Mr. Kuipers was Vice President of Business
Development, Marketing and Trade with Leading Edge British Columbia, a
technology marketing society created by the Government of British Columbia to
promote the technology industry sectors in British Columbia. Prior to Leading
Edge BC, Mr. Kuipers worked for BC Trade Development Corporation and the BC
Trade and Investment Office. Mr. Kuipers worked extensively with British
Columbia energy and environmental technology industry sectors, facilitated and
structured contracts with major multinationals and government agencies in Canada
and abroad.

Robert Nigel Horsley.Mr. Horsley was appointed
Executive Director of Communications and Investor Relations in October 2006. He
was Vice-President and General Manager of Isee3D from April, 1993 to 1998 and
was also a board member until December 2000. Mr. Horsley was a co-founder of
Railpower Technologies Inc. in 2000, and was on Railpowers board from November
2000 until his resignation in December 2003. He continued in consulting and
senior management roles until August 2005 at which time he again, took up
consulting and later employment with General Hydrogen Corporation, a company he
helped co-found in 1999. He relinquished his final position as Director of
Investor and Public Relations with General Hydrogen on September 2006, prior to
joining Dynamotive.

B. Compensation of Directors and Senior Management

The following table contains a summary of compensation paid or
payable to directors and senior management during the year ended December 31,
2006(1):

29

---

Name
    Salary ($)
    Bonus ($)
    Long-term Incentive Plan
      ($)Richard Chen-Hsing Lin
    209,965
    302,970
    169,400(3)Robert Andrew Kingston
    326,612
    468,227
    242,000(4)Curtin Winsor, Jr., Ph.D
    13,044(2)
    -
    -Shing-Cheng Hong
    17,451(2)
    -
    -Desmond Radlein
    17,187(2)
    -
    -Chih-Lin Chu
    8,814(2)
    -
    -George Terwillger
    1,058(2)
    -
    -Paul Hughes
    215,935(6)
    -
    -Brian Richardson
    193,901
    49,577
    36,300(5)Jan Barynin
    123,392
    -
    -Laura Santos
    105,764
    88,798
    -Jeffrey Lin
    105,764
    88,798
    -Robert Nigel Horsley
    30,848
    -
    -


Notes:

|(1) | Except as otherwise noted, all compensation are disclosed
      in U.S. dollars based upon 2006s average exchange rate of $0.8814 per
      dollar.                                                                          
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | 50% to be paid in cash ($28,777) and 50% in shares (total
      of 22,187 restricted common shares)                                                                                                                           
|(3) | Unissued bonus share option earned pursuant to milestone
      achievement calculated at 700 shares per ton of capacity per 200 tpd plant
      contracted, priced at $1.21 per share determined on September 29,
    2006    
|(4) | Unissued bonus share option earned pursuant to milestone
      achievement calculated at 1,000 shares per ton of capacity per 200 tpd
      plant contracted, priced at $1.21 per share determined on September 29,
      2006
|(5) | Unissued bonus share option earned pursuant to milestone
      achievement calculated at 150 shares per ton of capacity per 200 tpd plant
      contracted, priced at $1.21per share determined on September 29,
    2006     
|(6) | Mr. Hughes resigned from the Company on December 7,
      2006                                                                                                                                                                

The following table lists stock options outstanding at December
31, 2006 to purchase common shares of the Company for directors and senior
management:

Name
    Number of Shares
    Exercise Price
    Expiry DateRichard Chen Hsing Lin
    750,000
    $0.50
    02-Feb-10 to 29-Apr-12Richard Chen Hsing Lin
    300,000
    $0.23
    30-Aug-13Richard Chen Hsing Lin
    605,660
    $0.20
    30-Aug 13 to 31-Mar-14Richard Chen Hsing Lin
    2,000,000
    $0.45
    31-Jul-14 to 31-Jul-16Richard Chen Hsing Lin
    150,000
    $1.60
    12-Jul-09Robert Andrew Kingston
    775,000
    $0.50
    02-Feb-10 to 23-Feb-12Robert Andrew Kingston
    907,649
    $0.20
    30-Aug-13 to 14-Mar-14Robert Andrew Kingston
    300,000
    $0.23
    30-Aug-13Robert Andrew Kingston
    2,400,000
    $0.22
    30-Aug-13 to 22-Dec-13Robert Andrew Kingston
    2,000,000
    $0.45
    31-Jul-14 to 31-Jul-16


30

---

Name
    Number of Shares
    Exercise Price
    Expiry DateRobert Andrew Kingston
    150,000
    $1.60
    12-Jul-09Curtin Winsor, Jr., Ph.D
    24,000
    $0.33
    22-Dec-08Curtin Winsor, Jr., Ph.D
    45,000
    $0.45
    05-Aug-08 to 01-Jul-10Desmond Radlein, Ph.D
    24,000
    $0.33
    22-Dec-08Desmond Radlein, Ph.D
    69,000
    $0.45
    05-Aug-08 to 01-Jul-10Shing-Cheng Hong
    23,000
    $0.45
    01-Jul-10Chih-Lin Chu
    16,000
    $0.33
    22-Dec-08Chih-Lin Chu
    45,000
    $0.45
    05-Aug-08 to 01-Jul-10Paul Hughes
    400,000
    $0.49
    31-May-08 to 31-May-09Brian Richardson
    600,000
    $0.48
    01-Nov-08 to 30-Sep-09Brian Richardson
    300,000
    $0.58
    01-Nov-08 to 30-Sep-09Brian Richardson
    100,000
    $1.60
    12-Jul-09Jan Barynin
    600,000
    $0.48
    21-Jan-09 to 08-Dec-10Jan Barynin
    50,000
    $1.60
    12-Jul-09Laura Santos
    10,000
    $1.00
    2-Feb-10Laura Santos
    80,000
    $1.50
    14-Jun-10 to 31-Jan-11Laura Santos
    15,000
    $0.50
    28-Apr-12Laura Santos
    100,000
    $0.23
    30-Aug-13Laura Santos
    122,308
    $0.20
    30-Aug-13 to 14-Mar-14Laura Santos
    400,000
    $0.49
    31-Dec-09 to 31-Dec-10Laura Santos
    100,000
    $1.60
    12-Jul-09Jeffrey Lin
    110,000
    $1.00
    02-Feb-10Jeffrey Lin
    15,000
    $0.50
    28-Apr-12Jeffrey Lin
    400,000
    $0.49
    31-Dec-09 to 31-Dec-10Jeffrey Lin
    100,000
    $1.60
    12-Jul-09Robert Nigel Horsley
    400,000
    $1.35
    30-Sep-12


C.Board Practices

Members of the Board of Directors have served in their
respective capacities since their election. Each director elected will hold
office until the conclusion of the next Annual General Meeting of the Company at
which a director is elected, unless the directors office is earlier vacated in
accordance with the Articles of the Company or the provisions of the Business
Corporations Act (British Columbia).

The Company maintains standing Executive, Compensation and
Audit and Corporate Governance Committees, but does not have a nominating
committee. The Executive Committee is comprised of Dr. Desmond Radlein, Messrs.
R. Andrew Kingston and Richard Chen-Hsing Lin. The purpose of the Committee is
to act on behalf of the Board to provide direction to management and to

31

---

authorize and approve expenditures in excess of the authority
delegated by the Board to management, with such approvals to be ratified by the
Board at the next regular scheduled Meeting.

The Companys Audit and Corporate Governance Committee, whose
members include Mr. Shing-Cheng Hong, Drs. Curtin Winsor, Jr. and Desmond
Radlein and Mr. George Terwilliger III, reviews the financial reporting process
of the Company on behalf of the Board by reviewing the independence of the
Companys independent auditors, the adequacy of internal controls, the quality
of financial reporting, and accounting estimates involving the use of
significant management judgment.

The Compensation Committee of the Board of Directors makes
recommendations to the Board of Directors on compensation issues, including (i)
salary levels for officers; (ii) executive compensation plans; (iii) the review
of employee benefit programs; (iv) the review of proposed compensation plans
applicable to the Companys officers and employees; and (v) the administration
of the Companys stock option plans as authorized by the Board. The Committee is
comprised of Drs. Desmond Radlein and Curtin Winsor, Jr. and Mr. Richard
Chen-Hsing Lin.

The Board approved in May 2004 a new compensation plan as
proposed by the Compensation Committee for non-management Board members and
Committee chairs, as follows: a) annual retainer of $8,814, and $4,407 for Board
members and Committee chairs respectively, payable in 50% cash and 50% in common
stock priced at the market closing price on the day of the AGM or the average of
the five trading days prior to the AGM, whichever is lower; b) 15,000 and 8,000
stock options for Board members, and Committee chairs, respectively; the term of
the stock options is for four (4) years and priced at $0.45 per share for years
2004-2006; c) Board and Committee meeting fees  $264 per meeting under two (2)
hours and $1,058 per meeting over two (2) hours, payable in 50% cash and 50% in
common stock priced on the last trading day of the respective quarter at the
lower of the price on such day or the average of the previous five trading days.
Shares when issued with respect to these fees are restricted for a twelve-month
period and subject to Rule 144 of the Securities Act of 1933. The Compensation
Committee of the Board regularly reviews the appropriateness of Directors
compensation. The directors are also reimbursed for out-of-pocket expenses such
as reasonable traveling, hotel and other expenses incurred in and about the
business of the Company.

Executive officers of the Company who also act as directors of
the Company do not receive any additional compensation for services rendered in
their capacity as directors, other than as paid by the Company to such executive
officers in their capacity as executive officers.

D. Employees

The following table lists the number of employees at the end of
the period for each of the past three financial years broken down by geographic
location.

2006
    2005
    2004Canada
    36
    25
    24US
    0
    0
    0UK
    0
    0
    0Total
    36
    25
    24


32

---

E. Share ownership

The following table sets out the names of directors and senior
management, the period of time during which each has been a director or senior
manager of the Company, and the number of common shares of the Company
beneficially owned by each of them, directly or indirectly, or over which
control or direction is exercised and percentage of ownership as at May 16,
2007:

Name
    Periods during which Has Served
      as a Director or Senior Manager
    Shares Owned and % of
      OwnershipRichard Chen-Hsing Lin(2)Chairman, President, Operations-China and Director
    Since 1992
    2,245,370 Common shares(2)1.21%Robert Andrew Kingston (3)President, Chief Executive Officer and Director
    Since 1999
    900,468 Common shares(3)0.49%Curtin Winsor, Jr., Ph.D.(4)Director
    Since 1996
    1,541,393 Common shares(4)0.83%Shing-Cheng Hong(5)Director
    Since 1997
    130,226 Common shares(5)0.07%Chih-Lin Chu(6)Director
    Since 2001
    10,206 Common shares(6)0.006%Desmond Radlein, Ph.D. Director
    1997  2002 and 2003 to present
    57,223 Common shares(7)0.03%George J. Terwilliger III Director
    Since 2006
    5,463 Common shares 0.003%Brian Richardson Chief Financial Officer
    Since 2003
    152,000 Common shares 0.08%Jan Barynin, Ph.D., P.Eng Vice President,
      Engineering
    Since 2004
    nilLaura Santos Corporate Secretary
    Since 1998
    6,016 Common shares 0.003%Jeffrey Lin Vice President, Business
      Development  China and Japan
    Since 2005
    nilRobert Nigel Horsley Executive Director
      of Marketing
    October 2006
    nilAnton Kuipers Vice President of Business
      Development
    January 2007
    nil


Notes:

|(1) | The information as to Shares beneficially owned or
      controlled is not within the knowledge of the management of the Company
      and has been furnished by the respective nominees.                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                             
|(2) | Includes 2,245,370 Common Shares, of which 423,746 Common
      Shares are held by Cantai Property Limited (Cantai), a company controlled
      by Mr. Lin and includes 1,648,712 Common Shares held by Leede Financial 
      354,218 common shares on behalf of Mr. Lin and 1,294,494 on behalf of
      Cantai; also includes 172,912 Common Shares held by Neoventi Technology
      Corporation over which Mr. Lin has

33

---

|    | voting and disposition powers. Mr. Lin also holds options
      to purchase up to an aggregate of 5,805,660 Common Shares (3,000,000
      Common Shares (1,000,000 common shares non-vested) at an exercise price of
      $0.45, expiring from July 31, 2014 to July 31, 2018; 1,000,000 Common
      Shares (1,000,000 common shares non-vested) at an exercise price of $0.58,
      expiring from July 31, 2019 to July 31, 2020; 750,000 Common Shares at an
      exercise price of $0.50, expiring from February 2, 2010 to April 28, 2012,
      300,000 Common Shares at an exercise price of $0.23, expiring on August
      30, 2013; 605,660 Common Shares at an exercise price of $0.20, expiring
      from August 30, 2013 to March 31, 2014 and 150,000 Common Shares at an
      exercise price of $1.60, expiring July 12, 2009).                                                                                                                                                                                                                                                                                                                                                                      
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(3) | Includes 900,468 Common Shares; 761,912 of these Shares
      are held in the name of Cape Fear Limited, an Isle of Man company which
      all shares are held by an arms length trustee of a discretionary trust of
      which Mr. Kingston is a beneficiary. Mr. Kingston also holds options to
      purchase up to an aggregate of 8,532,649 Common Shares (3,000,000 Common
      Shares (1,000,000 common shares non-vested) at an exercise price of $0.45,
      expiring from July 31, 2014 to July 31, 2018; 1,000,000 Common Shares
      (1,000,000 common shares non-vested) at an exercise price of $0.58,
      expiring from July 31, 2019 to July 31, 2020; 300,000 Common Shares at an
      exercise price of $0.23, expiring on August 30, 2013; 2,400,000 Common
      Shares at an exercise price of $0.22, expiring from August 30, 2013 to
      December 22, 2013; 907,649 Common Shares at an exercise price of $0.20,
      expiring from August 30, 2013 to March 14, 2014, 775,000 Common Shares at
      an exercise price of $0.50, expiring from February 2, 2010 to February 23,
      2012, and 150,000 Common Shares at an exercise price of $1.60, expiring on
      July 12, 2009).
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(4) | Includes 1,541,393 Common Shares of which 1,273,262
      Common Shares are held by Legacy Trust. Dr. Winsor also holds options to
      purchase up to an aggregate of 69,000 Common Shares (24,000 Common Shares
      at an exercise price of $0.33, expiring on December 22, 2008; 45,000
      Common Shares at an exercise price of $0.45, expiring from August 5, 2008
      to July 1, 2010).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(5) | Mr. Hong also holds options to purchase up to 23,000
      Common Shares at an exercise price of $0.45, expiring on July 1,
    2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(6) | Mr. Chu also holds options to purchase up to an aggregate
      of 61,000 Common Shares (16,000 Common Shares at an exercise price of
      $0.33, expiring on December 22, 2008; 45,000 Common Shares at an exercise
      price of $0.45, expiring from August 5, 2008 to July 1, 2010).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(7) | Dr. Desmond Radlein also holds options to purchase up to
      an aggregate of 93,000 Common Shares (24,000 Common Shares at an exercise
      price of $0.33, expiring on December 22, 2008; 69,000 Common Shares at an
      exercise price of $0.45, expiring from August 5, 2008 to July 1,
    2010).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

The number of shares beneficially owned by the directors and
senior management, directly or indirectly, are based on information furnished by
Computershare Trust Company of Canada, the registrar and transfer agent of the
Company, and by the nominees themselves. The Directors and Officers beneficially
own or effectively control as a group a total of 5,685,166 shares which
represent 3.07% of the total issued and outstanding shares of the Company.

The Directors and Senior Management hold a total of 15,286,617
options. 4,799,617 options are exercisable between $0.20 and $0.33 each;
8,837,000 are exercisable between $0.45 and $0.58 each; and 1,650,000 options
are exercisable between $1.00 and $1.60 each. 13,756,617 unexercised options
were in the money and 1,530,000 unexercised options were out of the money based
on the average trading price of $1.13 per Common share as listed on the OTC BB
as at May 16, 2007.

Percentage of class is calculated based on the outstanding
common shares as at May 16, 2007 of 185,348,245.

The Company has a Stock Option Plan (the Plan), enabling the
Company to provide its directors, officers and employees with an opportunity to
share in increases in the value of the Companys shares. The Plan is intended to
attract and retain the services of directors, officers, employees and
consultants to the Company for the benefit of the Company and its shareholders
and to provide additional incentive for such directors, officers and employees
to continue to work in the best interests of the Company and its shareholders
through continuing ownership of its Common Stock. At May 16, 2007, 11,077,315
options were issuable under the Plan and 16,845,367 options were outstanding at
exercise prices ranging from $0.20 to $1.60 per common share.

34

---

Item 7. Major Shareholders and Related Party Transactions

A. Major Shareholders

To the Companys knowledge, it is not directly or indirectly
owned or controlled by another corporation or by any foreign government, nor is
it aware of any person who owns more than 5% of the Companys common stock (the
only outstanding class of the Companys voting securities).

The Company knows of no arrangements which may, at a subsequent
date, result in a change of control.

Computershare Trust Company of Canada (Computershare) is the
Company's registrar and transfer agent for the Company's shares. Computershares
records as of May 16, 2007 indicate 186,051,212 shares of common stock issued
and outstanding as follows:

Residence of Shareholder
    Number of Holders
    Number of Shares(1)
    PercentCanada
    73
    73,390,578
    39.45%U.S.A.
    204
    86,889,566
    46.70%Other
    138
    25,771,068
    13.85%Total
    415
    186,051,212
    100.00%


(1) Includes the total number of shares held by
registered and beneficial shareholders.

B. Related Party Transactions

Except as disclosed herein, the Company has not, since the
beginning of its last fiscal year ended December 31, 2006, and does not propose
to:

|(1) | enter into any transactions which are material to the
      Company or a related party or any transactions unusual in their nature or
      conditions involving goods, services or tangible or intangible assets to
      which the Company or any its former subsidiaries was a party;
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                         
|(2) | make any loans or guarantees directly or through any of
      its former subsidiaries to or for the benefit of any of the following
      persons:                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                         
|    | (a)                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                         
|    | (b)                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                         
|    | (c)                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                         
|    | (d)                                                                                                                                                                                                                                                                                     

35

---

| | (e) | enterprises in which a substantial voting interest is
      owned, directly or indirectly, by any person described in (c) or (d) or
      over which such a person is able to exercise significant
  influence.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following transactions with related parties are in the
normal course of operations and are recorded at amounts established and agreed
between the related parties. The Company had the following transactions with
related parties since December 31, 2005:

Consulting fees and salaries of $1,763,575 for the year ended
December 31, 2006 (2005 - $1,940,421; 2004 - $3,053,332) have been paid to
Directors (or companies controlled by Directors) of the Company. Included in the
amount above, is $543,122 (2005 - $974,392; 2004 - $2,288,556) paid by stock
based compensation.

Consulting fees and share issue costs of $nil for the year
ended December 31, 2006 (2005 - $87,395; 2004 - $574,326) have been paid to a
shareholder of the Company. Included in the amount above, is $nil (2005 -
$1,113; 2004 - $513,958) paid by stock based compensation.

As at December 31, 2006, $nil (2005 - $82,529; 2004 - $136,370)
was advanced to a Director of the Company in connection with the formation of a
joint venture for the development of the Companys BioOil technology and related
products. The joint venture did not proceed and the advance was written-off on
December 31, 2005.

As at December 31, 2006, there was $5,925 (2005 - $11,926) due
  from related parties and $1,218,932 (2005 - $1,005,447) due to related parties,
  which amounts are non-interest bearing, unsecured and due on demand.

During 2006, $150,000 of convertible debentures plus interest
issued to a former officer were converted into 468,820 common shares and 200,650
Series U warrants.

C. Interest of Experts and Counsel

Not applicable.

Item 8. Financial Information

A. Consolidated Statements and Other Financial
Information

See Item 17 of this Annual Report for the Companys
Consolidated Financial Statements for the years ended December 31, 2006, 2005
and 2004.

B. Significant Changes

There have been no significant changes in the Companys
business since December 31, 2006 except as disclosed in this Annual Report.

Item 9. The Offer and Listing

Dynamotive Energy Systems Corporations Common Shares is traded
on the Over the Counter Bulletin Board (OTCBB) under the symbol DYMTF.OB. As at
December 31, 2006, the closing market sales price on the OTC BB for the
Companys Common Share was $1.12 per share. The following table shows the annual
High and Low market prices for the securities traded on the NASD OTC Bulletin
Board for the five most recent full financial years; the high and low market
prices for each financial quarter for the two most recent full financial years
and any subsequent period; and the monthly high and low market prices for the
most recent six months:

36

---

Year Ended
    High
    Low2002
    0.67
    0.182003
    0.79
    0.142004
    0.80
    0.412005
    1.00
    0.432006
    1.76
    0.76Quarter Ended
    High
    LowMarch 31, 2005
    0.66
    0.47June 30, 2005
    0.59
    0.43September 30, 2005
    0.63
    0.49December 31, 2005
    1.00
    0.53March 31, 2006
    1.76
    0.76June 30, 2006
    1.70
    1.01September 30, 2006
    1.40
    1.09December 31, 2006
    1.22
    0.88March 31, 2007
    1.36
    0.97Month Ended
    High
    LowDecember 2006
    1.22
    0.93January 2007
    1.35
    0.97February 2007
    1.29
    1.15March 2007
    1.36
    1.15April 2007
    1.34
    1.17May 2007
    1.21
    1.00


The Company has never declared or paid cash dividends on its
Common Shares. The Company currently intends to retain its earnings, if any, to
provide funds for the operation and expansion of its business and, therefore,
does not anticipate declaring or paying cash dividends in the foreseeable
future.

Item 10. Additional Information

A. Share capital

Not applicable

B. Business Corporations Act Memorandum, Amendments and
Articles of Incorporation

Articles of Association

The Company was incorporated on April 11, 1991 pursuant to the
Companies Act (British Columbia), later the Company Act. The
Company's corporate constituting documents were then comprised of its Notice of
Articles and its Articles of Association ("Articles").

The Business Corporations Act (British Columbia) ("BCA") was
adopted in British Columbia in 2004 and is now in effect. The Business
Corporations Act replaces the Company Act (British

37

---

Columbia) and adopts many provisions similar to those contained
in corporate legislation elsewhere in Canada. There was a mandatory transition
process under the Business Corporations Act, so that all companies had to comply
with the new regulations. As part of its transition, the Company adopted new
Articles in June 2005.

Under the Business Corporations Act, every "pre-existing
company" remained subject to certain "Pre-existing Company Provisions" contained
in the Company Act (British Columbia) unless such provisions are removed with
the approval of shareholders by way of a special resolution. Such Pre-existing
Company Provisions include the following provisions that were relevant to the
Company:

- The majority required to pass a special resolution is three-quarters of
  those votes cast at a properly constituted meeting of shareholders. Under the
  BCA, a special resolution may be passed with a minimum two-thirds vote; and
- A repurchase or redemption of shares can only be offered pro-rata to all
  shareholders. This provision has been removed under the BCA.

In order to take full advantage of the flexibility offered by
the BCA, the Company's board of directors proposed removal of the Pre-existing
Company Provisions in connection with the adoption by the Company of a new form
of Articles that incorporates provisions permitted under the BCA. The removal of
the Pre-existing Company Provisions required the affirmative vote of not less
than three-quarters of the votes cast at a meeting of the shareholders of the
Company, present in person or by proxy. This approval of the shareholders by
special resolution was obtained at the annual general meeting of the
shareholders of the Company held on June 27, 2005. The removal of the
Pre-existing Company Provisions became effective upon the filing of a Notice of
Alteration to the Company's Articles with the British Columbia Registrar of
Companies on October 5, 2005. The Company's shareholders also approved by
special resolution the adoption of a new form of Articles (the "Articles"). The
Articles were adopted by the Company with a view to updating its charter
documents to bring them into line with the Business Corporations Act and
incorporating some of the new provisions of the Business Corporations
Act. These Articles were filed with the Registrar of Companies on October 5,
2005.

The following is a summary of certain material provisions of
(i) the Company's Notice of Articles, as amended by the Notice of Alteration
approved by shareholders, (ii) the Company's new Articles, as adopted by
shareholders, and (iii) certain provisions of the Business Corporations
Act and related laws applicable to the Company:

1.          
Objects and Purposes

The Company's Memorandum and Articles do not specify objects or
purposes. The Company is entitled under the Business Corporations Act to
carry on all lawful businesses which can be carried on by a natural person.

2.          
Directors

Generally

The Directors of the Company are generally empowered, by
majority vote, to manage the business and to bind the Company to all manners of
agreements and transactions as they see fit, acting in the best interests of the
Company. So long as the Preferred Shares are outstanding, the Company directors
are restricted from effecting certain kinds of dividends and distributions on
the common shares.

38

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Director's power to vote on a proposal, arrangement or
contract in which the director is interested.

According to the Business Corporations Act, a director
holds a disclosable interest in a contract or transaction if:

|1. | the contract or transaction is material to the
      company;                             
|-- | ------------------------------------------------------------------------------------------
|   |                                                                                           
|2. | the company has entered, or proposes to enter, into the
      contract or transaction, and
|   |                                                                                           
|3. | either of the following applies to the
director:                                          
|   |                                                                                           
|   | a.                                                                                        
|   |                                                                                           
|   | b.                                                                                        

However, the Business Corporations Act also provides
that in the following circumstances, a director does not hold a disclosable
interest in a contract or transaction if:

|1. | the situation that would otherwise constitute a
      disclosable interest arose before the coming into force of the Business
      Corporations Actor, if the company was recognized under the
      Business Corporations Act, before that recognition, and was
      disclosed and approved under, or was not required to be disclosed under,
      the legislation that:
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                             
|   | a.                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                             
|   | b.                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                             
|2. | both the company and the other party to the contract or
      transaction are wholly-owned subsidiaries of the same
  corporation;                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                             
|3. | the company is a wholly-owned subsidiary of the other
      party to the contract or transaction;                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                             
|4. | the other party to the contract or transaction is a
      wholly-owned subsidiary of the company; or                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                             
|5. | where the director or senior officer is the sole
      shareholder of the company or of a corporation of which the company is a
      wholly-owned subsidiary.                                                                                                                                                                                                              

The Business Corporations Act further provides that a
director of a company does not hold a disclosable interest in a contract or
transaction merely because:

|1. | the contract or transaction is an arrangement by way of
      security granted by the company for money loaned to, or obligations
      undertaken by, the director or senior officer, or a person in whom the
      director or senior officer has a material interest, for the benefit of the
      company or an affiliate of the company;
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                              
|2. | the contract or transaction relates to an indemnity or
      insurance;                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                              
|3. | the contract or transaction relates to the remuneration
      of the director or senior officer in that person's capacity as director,
      officer, employee or agent of the company or of an affiliate of the
      company;                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                              
|4. | the contract or transaction relates to a loan to the
      company, and the director or senior officer, or a person in whom the
      director or senior officer has a material interest, is or is to be a
      guarantor of some or all of the loan; or                                                                                    

39

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|5. | the contract or transaction has been or will be made with
      or for the benefit of a corporation that is affiliated with the company
      and the director or senior officer is also a director or senior officer of
      that corporation or an affiliate of that
corporation.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Under the Company's Articles, a director or senior officer who
holds a disclosable interest (as that term is used in the Business
Corporations Act) in a contract or transaction into which the Company has
entered or proposes to enter:

|1. | is liable to account to the Company for any profit that
      accrues to the director or senior officer under or as a result of the
      contract or transaction only if and to the extent provided in the
    Act;                                                          
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                               
|2. | is not entitled to vote on any directors' resolution to
      approve that contract or transaction, unless all the directors have a
      disclosable interest in that contract or transaction, in which case any or
      all of those directors may vote on such resolution;
|   |                                                                                                                                                                                                                                                                               
|3. | and who is present at the meeting of directors at which
      the contract or transaction is considered for approval may be counted in
      the quorum at the meeting whether or not the director votes on any or all
      of the resolutions considered at the meeting.    

A director or senior officer who holds any office or possesses
any property, right or interest that could result, directly or indirectly, in
the creation of a duty or interest that materially conflicts with that
individual's duty or interest as a director or senior officer, must disclose the
nature and extent of the conflict as required by the Business Corporations
Act. No director or intended director is disqualified by his or her office
from contracting with the Company either with regard to the holding of any
office or place of profit the director holds with the Company or as vendor,
purchaser or otherwise, and no contract or transaction entered into by or on
behalf of the Company in which a director is in any way interested is liable to
be voided for that reason

Directors' power, in the absence of an independent quorum,
to vote compensation to themselves or any members of their body.

The compensation of the directors is decided by the directors
unless the board of directors requests approval to the compensation from the
shareholders by ordinary resolution. The Business Corporations Act
provides that a director of a company does not hold a disclosable interest in a
contract or transaction merely because the contract or transaction relates to
the remuneration of the director or senior officer in that person's capacity as
director, officer, employee or agent of the Company or of an affiliate of the
Company.

Borrowing powers exercisable by the directors.

Under the Articles, the directors may, on behalf of the
Company:

1.          
Borrow money in such manner and amount, on such security, from such sources and
upon such terms, and conditions as they consider appropriate;

2.          
Issue bonds, debentures, and other debt obligations either outright or as a
security for any liability or obligation of the Company or any other person and
at such discounts or premiums and on such other terms as they consider
appropriate;

3.          
guarantee the repayment of money by any other person or the performance of any
obligation of any other person; and

4.          
  mortgage, charge, whether by way of specific or floating charge, grant a security
  interest in, or give other security on, the whole or any part of the present
  and future assets and undertaking of the Company.

40

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Retirement and non-retirement of directors under an age
limit requirement.

There are no such provisions applicable to the Company under
its Memorandum or its Articles or the Business Corporations Act.

Number of shares required for a director's qualification.

Directors need not own any shares of the Company in order to
qualify as directors.

3.          
Rights, Preferences and Restrictions Attaching to Each Class of Shares

Classes of Shares

The Company has two classes of shares, namely common without
par value and Class A Preferred Shares (the "Preferred Shares") with special
rights and restrictions. The common shares and preferred shares are unlimited in
number. Notice of Alteration of the Companys Articles of Incorporation to
cancel the existing special rights and restrictions attached to the Class A
Preferred shares and to adopt a new special rights and restrictions attached to
the Class A Preferred shares as approved at the Companys Special Meeting of
Shareholders on November 21, 2005. The Companys Articles was altered to change
all of the unissued Class A Preferred shares each with a par value of $5.00
into Class A Preferred with no par value; to delete the existing Article 26
which sets out the special rights and restrictions attached to the Class A
Preferred shares; and to add to the Articles of the Company, revised Article 26,
which will govern the Class A Preferred shares and authorizes directors in the
future to issue them in series and attach specific rights and restrictions to
each such series within the requirements of Article 26.

Dividends

Dividends may be declared by the board out of available assets
and are paid rateably to holders of common shares subject to the rights attached
to the Preferred Shares. No dividend may be paid if the Company is, or would
thereby become, insolvent.

Voting Rights

Subject to the special rights and restrictions of the Preferred
Shares, as set out in Article 26, shares are entitled to one vote on matters to
which shares ordinarily vote including the annual election of directors,
appointment of auditors and approval of corporate changes. Directors
automatically retire at each annual meeting, and may be elected thereat. There
are no staggered directorships among the Company's directors. There are no
cumulative voting rights applicable to the Company.

Rights to Profits and Liquidation Rights

The holders of Class A Preferred shares shall be entitled, on
the liquidation or dissolution of the Company, whether voluntary or involuntary,
or on any other distribution of its assets among its shareholders for the
purpose of winding up its affairs, to receive, before any distribution is made
to the holders of Common shares or any other shares of the Company ranking
junior to the Class A Preferred shares with respect to repayment of capital on
the liquidation or dissolution of the Company, whether voluntary or involuntary,
or on any other distribution of its assets among its shareholders for the
purpose of winding up its affairs, the amount paid up with respect to each Class
A Preferred share held by them, together with any liquidation or other
applicable premium (if any) thereon, all accrued and unpaid cumulative dividends
(if any and if preferential) thereon, which for such purpose shall be calculated
as if such dividends were accruing on a day-to-day basis up to the date of such
distribution, and all declared and unpaid non-cumulative dividends (if any and
if preferential) thereon. After payment to the holders of Class A Preferred
shares of the amounts so payable to them, they shall not, as such, be entitled
to share in any further distribution of the property or assets of the Company
except as specifically provided in the special rights and restrictions attached
to any particular series.

41

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Redemption

Sinking Fund Provisions

The Company has no sinking fund provisions or similar
obligations which require it to, restrict its assets except for as set out in
Article 26 of the Articles.

Shares Fully Paid

All the Company shares must, by applicable law, be issued as
fully paid for cash, property or services. They are therefore non-assessable and
not subject to further calls for payment.

Pre-emptive Rights

There are no pre-emptive rights as a consequence of the
Company's Articles or the BCA which provide a right to any person to participate
in offerings of the Company's equity or other securities, except as noted
below.

With respect to the rights, preferences and restrictions
attaching to the Company's common shares, there are generally no significant
differences between Canadian and United States law as the shareholders, or the
applicable corporate statute, will determine the rights, preferences and
restrictions attaching to each class of the Company's shares.

4.          
  Changes to Rights and Restrictions to Shares

The Business Corporations Act provides that a company
may, by the type of shareholders' resolution specified by the articles, or, if
the articles do not specify the type of resolution, by a special resolution:

| | i)  | create special rights or restrictions for, and attach
      those special rights or restrictions to, the shares of any class or series
      of shares, whether or not any or all of those shares have been issued;
      or
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                             
| | ii) | vary or delete any special rights or restrictions
      attached to the shares of any class or series of shares, whether or not
      any or all of those shares have been issued.                                          

The Company's Articles provide that, subject to the Business
Corporations Act, the Company may by ordinary resolution:

| | (a) | create one or more classes or series of shares or, if
      none of the shares of a class or series of shares are allotted or issued,
      eliminate that class or series of shares;                                                                                                                                    
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                          
| | (b) | increase, reduce or eliminate the maximum number of
      shares that the Company is authorized to issue out of any class or series
      of shares or establish a maximum number of shares that the Company is
      authorized to issue out of any class or series of shares for which no
      maximum is established;
| |     |                                                                                                                                                                                                                                                                                                                          
| | (c) | subdivide or consolidate all or any of its unissued, or
      fully paid, issued, shares;                                                                                                                                                                                                                                
| |     |                                                                                                                                                                                                                                                                                                                          
| | (d) | if the Company is authorized to issue shares of a class
      of shares with par value:                                                                                                                                                                                                                                  

| | (i) | decrease the par value of those shares;
  or
| | --- | --------------------------------------------

42

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| | (ii) | if none of the shares of that class of shares are
      allotted or issued, increase the par value of those
  shares;
| | ---- | ---------------------------------------------------------------------------------------------------------------------

| | (e) | change all or any of its unissued, or fully paid issued,
      shares with par value into shares without par value or any of its unissued
      shares without par value into shares with par value;
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                     
| | (f) | alter the identifying name of any of its shares;
  or                                                                                                                                               
| |     |                                                                                                                                                                                                     
| | (g) | otherwise alter its shares or authorized share structure
      when required or permitted to do so by the Act where it does not specify a
      special resolution.                                 

An ordinary resolution is a resolution of shareholders that is
approved by a majority of those votes cast at a properly constituted meeting of
shareholders.

If special rights and restrictions are altered and any right or
special right attached to issued shares is prejudiced or interfered with, then
the consent of the holders of shares of that class by a special separate
resolution will be required.

The Business Corporations Act also provides that a
company may reduce its capital if it is authorized to do so by a court order,
or, if the capital is reduced to an amount that is not less than the realizable
value of the company's assets less its liabilities, by a special resolution or
court order.

Generally, there are no significant differences between British
Columbia and United States law with respect to changing the rights of
shareholders as most state corporation statutes require shareholder approval
(usually a majority) for any such changes that affect the rights of
shareholders.

5.          
Meetings of Shareholders

The Articles provide that the Company must hold its annual
general meeting once in every calendar year (and being a date not more than 15
months from the last annual general meeting) at such time and place to be
determined by the directors of the Company. Shareholders meetings are governed
by the Articles of the Company but many important shareholder protections are
also contained in the Securities Act (British Columbia) (the "Securities
Act") and the British Columbia Corporations Act. The Articles provide
that the Company will provide at least 21 days advance written notice if the
Company is a public company, and 10 days otherwise, of any meeting of
shareholders and will provide for certain procedural matters and rules of order
with respect to conduct of the meeting. The directors may fix in advance a date,
which is no fewer than 21 days if the company is a public company, and 10 days
otherwise, prior to the date of the meeting for the purpose of determining
shareholders entitled to receive notice of and to attend and vote at a general
meeting.

The Securities Act and the British Columbia
Corporations Actsuperimpose requirements provide that shareholders meetings
generally require about a 60 day notice period from initial public notice and
that The Company makes a thorough advanced search of intermediary and brokerage
registered shareholdings to facilitate communication with beneficial
shareholders so that meeting proxy and information materials can be sent via the
brokerages to unregistered but beneficial shareholders. The form and content of
information circulars and proxies and like matters are governed by the
Securities Actand the British Columbia Corporations Act. This
legislation specifies the disclosure requirements for the proxy materials and
various corporate actions, background information on the nominees for election
for director, executive compensation paid in the previous year and full details
of any unusual matters or related party transactions. The

43

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Company must hold an annual shareholders meeting open to all
  shareholders for personal attendance or by proxy at each shareholder's determination.

Most state corporation statutes require a public company to
hold an annual meeting for the election of directors and for the consideration
of other appropriate matters. The state statutes also include general provisions
relating to shareholder voting and meetings. Apart from the timing of when an
annual meeting must be held and the percentage of shareholders required to call
an annual meeting or an extraordinary meeting, there are generally no material
differences between Canadian and United States law respecting annual meetings
and extraordinary meetings.

6.          
Rights to Own Securities

There are no limitations under the Company's Articles or in the
Business Corporations Act on the right of persons who are not citizens of
Canada to hold or vote common shares.

7.          
Restrictions on Changes in Control, Mergers, Acquisitions or Corporate
Restructuring of theCompany

The Company's Articles do not contain any provisions that would
have the effect of delaying, deferring or preventing a change of control of the
Company. The Company has not implemented any shareholders' rights or other
"poison pill" protection against possible take-overs. The Company does not have
any agreements which are triggered by a take-over or other change of control.
There are no provisions in its Articles triggered by or affected by a change in
outstanding shares which gives rise to a change in control. There are no
provisions in the Company's material agreements giving special rights to any
person on a change in control.

The Business Corporations Act does not contain any
provisions that would have the effect of delaying, deferring or preventing a
change of control of a company. Securities legislation and stock exchange
policies applicable to the Company however do require shareholder's approval's
for change of control transactions.

Generally, there are no significant differences between British
Columbia and United States law in this regard, as many state corporation
statutes also do not contain such provisions and only empower a company's board
of directors to adopt such provisions.

8.          
Ownership Threshold Requiring Public Disclosure

The Articles of the Company do not require disclosure of share
ownership. Share ownership of director nominees must be reported annually in
proxy materials sent to the Company's shareholders. There are no requirements
under British Columbia corporate law to report ownership of shares of the
Company but the Securities Act requires disclosure of trading by insiders
(generally officers, directors and holders of 10% of voting shares) within 10
days of the trade. Controlling shareholders (generally those in excess of 20% of
outstanding shares) must provide seven days advance notice of share sales. All
insider trading reports filed by the Company's insiders pursuant to Canadian
securities legislation are available on the internet at www.sedi.ca.

Most state corporation statutes do not contain provisions
governing the threshold above which shareholder ownership must be disclosed.
United States federal securities laws require a company that is subject to the
reporting requirements of the Securities Exchange Act of 1934 to disclose, in
its annual reports filed with the Securities and Exchange Commission those
shareholders who own more than 5% of a corporation's issued and outstanding
shares.

9.          
Differences in Law between the US and British Columbia

Differences in the law between United States and British
Columbia, where applicable, have been explained above within each category.

44

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10.         
Changes in the Capital of the Company

There are no conditions imposed by the Company's Notice of
Articles or Articles which are more stringent than those required by the
Business Corporations Act.

C. Material contracts

There have been no material contracts entered into, other than
contracts entered into in the ordinary course of business, to which the Company
or any member of the group is a party, for the two years immediately preceding
publication of this document.

The following are the material contracts entered into during
the period January 1, 2005 to date (included as exhibits):

- Executive Services Agreement with B. Richardson dated October 1, 2005;
- Heads of Agreement with Consensus Business Group and Joint Venture
  Proposal dated February 20, 2006
- Engineering, and Construction Management Agreements with Tecna S.A. dated
  July 7, 2006
- DT2 Engineering, Development Agreements with Tecna S.A. dated July 7, 2006
- Shareholder Agreement with Pendana and Dynamotive Biomass Resource
  Corporation dated September 22, 2006;
- Joint Venture Agreement with Pendana and Dynamotive Europe Limited dated
  September 22, 2006;
- Loan Agreement with Dynamotive Biomass Resource Corporation dated
  September 30, 2006
- Loan Agreement with Dynamotive Europe Limited dated September 30, 2006
- Consulting Agreement with D. Radlein dated December 8, 2006;
- Executive Services Agreement with A. Kuipers dated January 16, 2007;
- Umberlla Amending Agreement by and amongst Erie Flooring & Wood
  Products and West Lorne BioOil Co-generation LP and Dynamotive Energy Systems
  Corporation dated April 5, 2007

D. Exchange controls

The Company is a Province of British Columbia, Canada
corporation. There is no law or governmental decree or regulation in Canada that
restricts the export or import of capital, or affects the remittance of
dividends, interest or other payments to a non-resident holder of common shares,
other than withholding tax requirements and British Columbia corporate laws
which restrict the Company from paying dividends where the Company is or as a
result of paying the dividend will become insolvent. Any remittances to United
States residents are generally subject to withholding tax, however no such
remittances are likely in the foreseeable future. See "Taxation" below.

There is no limitation imposed by the laws of Canada or by the
charter or other constituent documents of the Company on the right of a
non-resident to hold or vote its common shares, other than as provided in the
Investment Canada Act (Canada) (the "Investment Act"). The
following discussion summarizes the material features of the Investment
Act for a non-resident who proposes to acquire a controlling number of the
Company's common shares. It is general only, it is not a substitute for
independent advice from an investor's own advisor, and it does not anticipate
statutory or regulatory amendments. The Company does not believe the
Investment Act will have any affect on it or on its non-Canadian
shareholders due to a number of factors including the nature of its operations
and the Company's relatively small capitalization.

The Investment Act generally prohibits implementation of
a "reviewable" investment by an individual, government or agency thereof,
corporation, partnership, trust or joint venture (each an

45

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"entity") that is not a "Canadian" as defined in the
Investment Act (ie. a "non-Canadian"), unless after review the Director
of Investments appointed by the Minister responsible for the Investment
Act is satisfied that the investment is likely to be of net benefit to
Canada. An investment in the Company's common shares by a non-Canadian (other
than a "WTO investor" as that term is defined in the Investment Act and
which term includes entities which are nationals of or are controlled by
nationals of member states of the World Trade Organization) when the Company was
not controlled by a WTO investor, would be reviewable under the Investment
Act if it was an investment to acquire control of the Company and the value
of the assets of the Company, as determined in accordance with the regulations
promulgated under the Investment Act, was over CDN$5 million, or if an
order for review was made by the federal cabinet on the grounds that the
investment related to Canada's cultural heritage or national identity,
regardless of the value of the assets of the Company. An investment in the
common shares by a WTO investor, or by a non-Canadian when the Company was
controlled by a WTO investor, would be reviewable under the Investment
Act if it was an investment to acquire control of the Company and the value
of the assets of the Company, as determined in accordance with the regulations
promulgated under the Investment Act, was not less than a specified
amount, for 2007 is CDN$281 million. A non-Canadian would acquire control of the
Company for the purposes of the Investment Act if the non-Canadian
acquired a majority of the common shares. The acquisition of less than a
majority but one-third or more of the common shares would be presumed to be an
acquisition of control of the Company unless it could be established that, on
the acquisition, the Company was not controlled in fact by the acquiror through
the ownership of the common shares.

The foregoing assumes the Company will not engage in the
production of uranium or own an interest in a producing uranium property in
Canada, or provide any financial service or transportation service or is a
cultural business, as the rules under the Investment Act governing those
businesses are different.

Certain transactions relating to the common shares of the
Company would be exempt from the

Investment Act, including:

| | (a) | an acquisition of the common shares by a person in the
      ordinary course of that person's business as a trader or dealer in
      securities,                                                                                                                                           
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                             
| | (b) | an acquisition of control of the Company in connection
      with the realization of security granted for a loan or other financial
      assistance and not for a purpose related to the provisions of the
      Investment Act, and                                                       
| |     |                                                                                                                                                                                                                                                                                             
| | (c) | an 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 the common shares, remained
  unchanged.

E. Taxation

ALL PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT THEIR OWN
TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF PURCHASING THE
COMMON SHARES.

Material Canadian Federal Income Tax Consequences for United
States Residents

The following summarizes the material Canadian federal income
tax consequences generally applicable to the holding and disposition of Common
Shares by a holder who, (a) for the purposes of the Income Tax Act (Canada) (the
"Tax Act"), is not resident in Canada, deals at arm's length with Dynamotive,
holds the Common Shares as capital property and does not use or hold the Common
Shares in the course of carrying on, or otherwise in connection with, a business
in

46

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Canada, and (b) for the purposes of the Canada-United States
Income Tax Convention, 1980 (the "Treaty"), is a resident solely of the United
States, has never been a resident of Canada, has not held or used (and does not
hold or use) Common Shares in connection with a permanent establishment or fixed
base in Canada, and is entitled to the benefits of the Treaty. A holder meeting
all of the foregoing requirements is referred to in this summary as a U.S.
Holder, and this summary only addresses such U.S. Holders. This summary does
not apply to traders or dealers in securities, limited liability companies,
tax-exempt entities, insurers, financial institutions (including those to which
the mark-to-market provisions of the Tax Act apply), or any other U.S. Holder to
which special considerations apply.

This summary is based on the current provisions of the Tax Act
including all regulations thereunder, the Treaty, all proposed amendments to the
Tax Act and the regulations publicly announced by the Minister of Finance to the
date hereof, and the current administrative practice of the Canada Revenue
Agency. It has been assumed that all currently proposed amendments will be
enacted as proposed and that there will be no other relevant change in any
governing law, judicial interpretation or administrative practice, although no
assurances can be given in these respects. The summary does not take into
account Canadian provincial, U.S. federal (which follows further below under the
heading Material United States Tax Consequences), state or other foreign
income tax law or practice. The tax consequences to any particular U.S. Holder
will vary according to the status of that holder as an individual, trust,
corporation, partnership or other entity, the jurisdictions in which that U.S.
Holder is subject to taxation, and generally according to that holder's
particular circumstances. Accordingly, this summary is not, and is not to be
construed as, Canadian tax advice to any particular U.S. Holder. All holders or
prospective holders should consult with their own tax and legal advisors
regarding their particular circumstances. The discussion below is qualified
accordingly.

Dividends

Dividends paid or credited, or deemed to be paid or credited to
a U.S. Holder by Dynamotive will be subject to Canadian withholding tax. Under
the Treaty, the rate of withholding tax on dividends paid to a U.S. Holder is
generally limited to 15% of the gross amount of the dividend (or 5% if the U.S.
Holder is a corporation and beneficially owns at least 10% of Dynamotive's
voting shares). Dynamotive will be required to withhold the applicable
withholding tax from any such dividend and remit it to the Canadian government.

Disposition

A U.S. Holder is subject to tax under the Tax Act in respect of
a capital gain realized on the disposition or deemed disposition of a Common
Share unless the U.S. Holder is entitled to relief under the Treaty. For this
purpose, the U.S. Holder's capital gain (or loss) from a disposition or deemed
disposition of a Common Share is the amount by which the proceeds of disposition
exceed (or are exceeded by) the aggregate of the U.S. Holder's adjusted cost
base of the Common Share for purposes of the Tax Act and any reasonable expenses
of disposition. Absent Treaty relief, one-half of any capital gain so realized
is included in computing the U.S. Holder's income for purposes of the Tax Act.

A qualifying U.S. Holder may generally qualify for relief under
the Treaty in respect of such tax on such capital gain if and provided that the
value of shares of Dynamotive is not derived principally from real property
situated in Canada at the relevant time.Management believes that the
value of Dynamotive's common shares is not currently derived principally from
real property situated in Canada.

A U.S. Holder wishing to claim any such applicable Treaty
relief should consult with the U.S. Holder's own tax advisors regarding the
procedure for claiming the relief in a relevant Canadian tax return reporting
the disposition or deemed disposition. In addition, notwithstanding any
potentially applicable Treaty relief, a disposition or deemed disposition of
Common Shares is

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subject to certain tax clearance certificate and withholding
procedures that should also be discussed with the U.S. Holder's own tax advisors
in advance of a disposition.

United States Tax Consequences

United States Federal Income Tax Consequences

The following is a discussion of all material United States
federal income tax consequences, under current law, generally applicable to a
U.S. Holder (as hereinafter defined) of common shares of Dynamotive. This
discussion does not address all potentially relevant federal income tax matters
and it does not address consequences peculiar to persons subject to special
provisions of federal income tax law, such as those described below as excluded
from the definition of a U.S. Holder. In addition, this discussion does not
cover any state, local or foreign tax consequences. (see "Taxation - Canadian
Federal Income Tax Consequences" above). Accordingly, we urge holders and
prospective holders of common shares of Dynamotive to consult their own tax
advisors about the specific federal, state, local, and foreign tax consequences
to them of purchasing, owning and disposing of common shares of Dynamotive,
based upon their individual circumstances.

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

U.S. Holders

As used herein, a "U.S. Holder" means a holder of common shares
of Dynamotive who is a citizen or individual resident of the United States, a
corporation or partnership created or organized in or under the laws of the
United States or of any political subdivision thereof, an estate whose income is
taxable in the United States irrespective of source or a trust subject to the
primary supervision of a court within the United States and control of a United
States fiduciary as described Section 7701(a)(30) of the Code. This summary does
not address the tax consequences to, and U.S. Holder does not include, persons
subject to specific provisions of federal income tax law, such as tax-exempt
organizations, qualified retirement plans, individual retirement accounts and
other tax-deferred accounts, financial institutions, insurance companies, real
estate investment trusts, regulated investment companies, broker-dealers,
non-resident alien individuals, persons or entities that have a "functional
currency" other than the U.S. dollar, shareholders subject to the alternative
minimum tax, shareholders who hold common shares as part of a straddle, hedging
or conversion transaction, and shareholders who acquired their common shares
through the exercise of employee stock options or otherwise as compensation for
services. This summary is limited to U.S. Holders who own common shares as
capital assets and thesummary does not address the consequences to a
person or entity holding an interest in a shareholder or the consequences to a
person of the ownership, exercise or disposition of any options, warrants or
other rights to acquire common shares. In addition, this summary does not
address special rules applicable to United States persons (as defined in Section
7701(a)(30) of the Code) holding common shares through a foreign partnership or
to foreign persons holding common shares through a domestic partnership.

Distribution on Common Shares of Dynamotive

In general, U.S. Holders receiving dividend distributions
(including constructive dividends) with respect to common shares of Dynamotive
are required to include in gross income for United States federal income tax
purposes the gross amount of such distributions, equal to the U.S. dollar value
of such distributions on the date of receipt (based on the exchange rate on such
date), to the extent that Dynamotive has current or accumulated earnings and
profits, without reduction for any

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Canadian income tax withheld from such distributions. Such
Canadian tax withheld may be credited, subject to certain limitations, against
the U.S. Holder's federal income tax liability or, alternatively, may be
deducted in computing the U.S. Holder's federal taxable income by those who
itemize deductions. (See more detailed discussion at "Foreign Tax Credit"
below). To the extent that distributions exceed current or accumulated earnings
and profits of Dynamotive, they will be treated first as a return of capital up
to the U.S. Holder's adjusted basis in the common shares and thereafter as gain
from the sale or exchange of property. Preferential tax rates for long-term
capital gains are applicable to a U.S. Holder which is an individual, estate or
trust. There are currently no preferential tax rates for long-term capital gains
for a U.S. Holder which is a corporation.

In the case of foreign currency received as a dividend that is
not converted by the recipient into U.S. dollars on the date of receipt, a U.S.
Holder will have a tax basis in the foreign currency equal to its U.S. dollar
value on the date of receipt. Generally any gain or loss recognized upon a
subsequent sale or other disposition of the foreign currency, including the
exchange for U.S. dollars, will be ordinary income or loss. However, an
individual whose realized gain does not exceed $200 will not recognize that
gain, provided that there are no expenses associated with the transaction that
meet the requirements for deductibility as a trade or business expense (other
than travel expenses in connection with a business trip) or as an expense for
the production of income.

Dividends paid on the common shares of Dynamotive generally
will not be eligible for the dividends received deduction provided to
corporations receiving dividends from certain United States corporations. A U.S.
Holder which is a corporation and which owns shares representing at least 10% of
the voting power and value of Dynamotive may, under certain circumstances, be
entitled to a 70% (or 80% if the U.S. Holder owns shares representing at least
20% of the voting power and value of Dynamotive) deduction of the United States
source portion of dividends received from Dynamotive (unless Dynamotive
qualifies as a "foreign personal holding company" or a "passive foreign
investment company," as defined below). Dynamotive does not anticipate that it
will earn any United States income, however, and therefore does not anticipate
that any U.S. Holder will be eligible for the dividends received deduction.

Under current Treasury Regulations, dividends paid on
Dynamotive's common shares, if any, generally will not be subject to information
reporting and generally will not be subject to U.S. backup withholding tax.
However, dividends and the proceeds from a sale of Dynamotive's common shares
paid in the U.S. through a U.S. or U.S. related paying agent (including a
broker) will be subject to U.S. information reporting requirements and may also
be subject to the 31% U.S. backup withholding tax, unless the paying agent is
furnished with a duly completed and signed Form W-9. Any amounts withheld under
the U.S. backup withholding tax rules will be allowed as a refund or a credit
against the U.S. Holder's U.S. federal income tax liability, provided the
required information is furnished to the IRS.

Foreign Tax Credit

A U.S. Holder who pays (or has withheld from distributions)
Canadian income tax with respect to the ownership of common shares of Dynamotive
may be entitled, at the option of the U.S. Holder, to either receive a deduction
or a tax credit for such foreign tax paid or withheld. Generally, it will be
more advantageous to claim a credit because a credit reduces United States
federal income taxes on a dollar-for-dollar basis, while a deduction merely
reduces the taxpayer's income subject to tax. This election is made on a
year-by-year basis and generally applies to all foreign taxes paid by (or
withheld from) the U.S. Holder during that year. There are significant and
complex limitations which apply to the credit, among which is the general
limitation that the credit cannot exceed the proportionate share of the U.S.
Holder's United States income tax liability that the U.S. Holder's foreign
source income bears to his or its worldwide taxable income. In the determination
of the application of this limitation, the various items of income and deduction
must be classified into foreign and domestic sources. Complex rules govern this
classification process. In addition, this limitation is calculated separately
with respect to specific classes of income such as "passive

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income, " "high withholding tax interest," "financial services
income," "shipping income," and certain other classifications of income.
Dividends distributed by Dynamotive will generally constitute "passive income"
or, in the case of certain U.S. Holders, "financial services income" for these
purposes. The availability of the foreign tax credit and the application of the
limitations on the credit are fact specific, and U.S. Holders of common shares
of Dynamotive should consult their own tax advisors regarding their individual
circumstances.

Disposition of Common Shares of Dynamotive

In general, U.S. Holders will recognize gain or loss upon the
sale of common shares of Dynamotive equal to the difference, if any, between (i)
the amount of cash plus the fair market value of any property received, and (ii)
the shareholder's tax basis in the common shares of Dynamotive. Preferential tax
rates apply to long-term capital gains of U.S. Holders which are individuals,
estates or trusts. In general, gain or loss on the sale of common shares of
Dynamotive will be long-term capital gain or loss if the common shares are a
capital asset in the hands of the U.S. Holder and are held for more than one
year. Deductions for net capital losses are subject to significant limitations.
For U.S. Holders which are not corporations, any unused portion of such net
capital loss may be carried over to be used in later tax years until such net
capital loss is thereby exhausted.

For U.S. Holders that are corporations (other than corporations
subject to Subchapter S of the Code), an unused net capital loss may be carried
back three years and carried forward five years from the loss year to be offset
against capital gains until such net capital loss is thereby exhausted.

Other Considerations

Set forth below are certain material exceptions to the
above-described general rules describing the United States federal income tax
consequences resulting from the holding and disposition of common shares:

Foreign Personal Holding Company

If at any time during a taxable year more than 50% of the total
combined voting power or the total value of Dynamotive's outstanding shares is
owned, directly or indirectly (pursuant to applicable rules of constructive
ownership), by five or fewer individuals who are citizens or residents of the
United States and 60% or more of Dynamotive's gross income for such year is
derived from certain passive sources (e.g., from certain interest and
dividends), Dynamotive may be treated as a "foreign personal holding company."
In that event, U.S. Holders that hold common shares would be required to include
in gross income for such year their allocable portions of such passive income to
the extent Dynamotive does not actually distribute such income. Dynamotive does
not believe that it currently qualifies as a foreign personal holding company.
However, there can be no assurance that Dynamotive will not be considered a
foreign personal holding company for the current or any future taxable year.

Foreign Investment Company

If 50% or more of the combined voting power or total value of
Dynamotive's outstanding shares is held, directly or indirectly, by citizens or
residents of the United States, United States domestic partnerships or
corporations, or estates or trusts other than foreign estates or trusts (as
defined by the Code Section 7701(a)(31)), and Dynamotive is found to be engaged
primarily in the business of investing, reinvesting, or trading in securities,
commodities, or any interest therein, it is possible that Dynamotive may be
treated as a "foreign investment company" as defined in Section 1246 of the
Code, causing all or part of any gain realized by a U.S. Holder selling or
exchanging common shares to be treated as ordinary income rather than capital
gain. Dynamotive does not believe that it currently qualifies as a foreign
investment company. However, there can be no assurance that

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Dynamotive will not be considered a foreign investment company
for the current or any future taxable year.

Passive Foreign Investment Company

United States income tax law contains rules governing "passive
foreign investment companies" ("PFIC") which can have significant tax effects on
U.S. Holders of foreign corporations. These rules do not apply to non-U.S.
Holders. Section 1297 of the Code defines a PFIC as a corporation that is not
formed in the United States if, for any taxable year, either (i) 75% or more of
its gross income is "passive income," which includes interest, dividends and
certain rents and royalties or (ii) the average percentage, by fair market value
(or, if the corporation is not publicly traded and either is a controlled
foreign corporation or makes an election, by adjusted tax basis), of its assets
that produce or are held for the production of "passive income" is 50% or more.
Dynamotive appears to have been a PFIC for the fiscal year ended December 31,2003, and at least certain prior fiscal years. In addition, Dynamotive
expects to qualify as a PFIC for the fiscal year ending December 31, 2006 and
may also qualify as a PFIC in future fiscal years. Each U.S. Holder of
Dynamotive is urged to consult a tax advisor with respect to how the PFIC rules
affect such U.S. Holder's tax situation.

Each U.S. Holder who holds stock in a foreign corporation
during any year in which such corporation qualifies as a PFIC is subject to
United States federal income taxation under one of three alternative tax regimes
at the election of such U.S. Holder. The following is a discussion of such
alternative tax regimes applied to such U.S. Holders of Dynamotive. In addition,
special rules apply if a foreign corporation qualifies as both a PFIC and a
"controlled foreign corporation" (as defined below) and a U.S. Holder owns,
actually or constructively, 10% or more of the total combined voting power of
all classes of stock entitled to vote of such foreign corporation (See more
detailed discussion at "Controlled Foreign Corporation" below).

A U.S. Holder who elects to treat Dynamotive as a qualified
electing fund ("QEF") will be subject, under Section 1293 of the Code, to
current federal income tax for any taxable year to which the election applies in
which Dynamotive qualifies as a PFIC on his pro rata share of Dynamotive's (i)
"net capital gain" (the excess of net long-term capital gain over net short-term
capital loss), which will be taxed as long-term capital gain, and (ii) "ordinary
earnings" (the excess of earnings and profits over net capital gain), which will
be taxed as ordinary income, in each case, for the shareholder's taxable year in
which (or with which) Dynamotive's taxable year ends, regardless of whether such
amounts are actually distributed. A U.S. Holder's tax basis in the common shares
will be increased by any such amount that is included in income but not
distributed.

The procedure a U.S. Holder must comply with in making an
effective QEF election, and the consequences of such election, will depend on
whether the year of the election is the first year in the U.S. Holder's holding
period in which Dynamotive is a PFIC. If the U.S. Holder makes a QEF election in
such first year, i.e., a "timely" QEF election, then the U.S. Holder may make
the QEF election by simply filing the appropriate documents at the time the U.S.
Holder files his tax return for such first year. If, however, Dynamotive
qualified as a PFIC in a prior year during the U.S. Holder's holding period,
then, in order to avoid the Section 1291 rules discussed below, in addition to
filing documents, the U.S. Holder must elect to recognize under the rules of
Section 1291 of the Code (discussed herein), (i) any gain that he would
otherwise recognize if the U.S. Holder sold his stock on the qualification date
or (ii) if Dynamotive is a controlled foreign corporation, the U.S. Holder's pro
rata share of Dynamotive's post-1986 earnings and profits as of the
qualification date. The qualification date is the first day of Dynamotive's
first tax year in which Dynamotive qualified as a QEF with respect to such U.S.
Holder. For purposes of this discussion, a U.S. Holder who makes (i) a timely
QEF election, or (ii) an untimely QEF election and either of the above-described
gain-recognition elections under Section 1291 is referred to herein as an
"Electing U.S. Holder." A U.S. Holder who holds common shares at any time during
a year of Dynamotive in which Dynamotive is a PFIC and who is not an Electing
U.S. Holder (including a U.S. Holder who makes an untimely QEF election and
makes neither of the above-described gain-recognition

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elections) is referred to herein as a "Non-Electing U.S.
Holder." An Electing U.S. Holder (i) generally treats any gain realized on the
disposition of his Dynamotive common shares as capital gain; and (ii) may either
avoid interest charges resulting from PFIC status altogether, or make an annual
election, subject to certain limitations, to defer payment of current taxes on
his share of Dynamotive's annual realized net capital gain and ordinary earnings
subject, however, to an interest charge. If the U.S. Holder is not a
corporation, any interest charge imposed under the PFIC regime would be treated
as "personal interest" that is not deductible.

In order for a U.S. Holder to make (or maintain) a valid QEF
election, Dynamotive must provide certain information regarding its net capital
gains and ordinary earnings and permit its books and records to be examined to
verify such information. Dynamotive intends to make the necessary information
available to U.S. Holders to permit them to make (and maintain) QEF elections
with respect to Dynamotive. Dynamotive urges each U.S. Holder to consult a tax
advisor regarding the availability of, and procedure for making, the QEF
election.

A QEF election, once made with respect to Dynamotive, applies
to the tax year for which it was made and to all subsequent tax years, unless
the election is invalidated or terminated, or the IRS consents to revocation of
the election. If a QEF election is made by a U.S. Holder and Dynamotive ceases
to qualify as a PFIC in a subsequent tax year, the QEF election will remain in
effect, although not applicable, during those tax years in which Dynamotive does
not qualify as a PFIC. Therefore, if Dynamotive again qualifies as a PFIC in a
subsequent tax year, the QEF election will be effective and the U.S. Holder will
be subject to the rules described above for Electing U.S. Holders in such tax
year and any subsequent tax years in which Dynamotive qualifies as a PFIC. In
addition, the QEF election remains in effect, although not applicable, with
respect to an Electing U.S. Holder even after such U.S. Holder disposes of all
of his or its direct and indirect interest in the shares of Dynamotive.
Therefore, if such U.S. Holder reacquires an interest in Dynamotive, that U.S.
Holder will be subject to the rules described above for Electing U.S. Holders
for each tax year in which Dynamotive qualifies as a PFIC.

In the case of a Non-Electing U.S. Holder, special taxation
rules under Section 1291 of the Code will apply to (i) gains realized on the
disposition (or deemed to be realized by reasons of a pledge) of his Dynamotive
common shares and (ii) certain "excess distributions," as defined in Section
1291(b), by Dynamotive.

A Non-Electing U.S. Holder generally would be required to pro
rate all gains realized on the disposition of his Dynamotive common shares and
all excess distributions on his Dynamotive common shares over the entire holding
period for the common shares. All gains or excess distributions allocated to
prior years of the U.S. Holder (excluding any portion of the holder's period
prior to the first day of the first year of Dynamotive (i) which began after
December 31, 1986, and (ii) for which Dynamotive was a PFIC) would be taxed at
the highest tax rate for each such prior year applicable to ordinary income. The
Non-Electing U.S. Holder also would be liable for interest on the foregoing tax
liability for each such prior year calculated as if such liability had been due
with respect to each such prior year. A Non-Electing U.S. Holder that is not a
corporation must treat this interest charge as "personal interest" which, as
discussed above, is wholly non-deductible. The balance, if any, of the gain or
the excess distribution will be treated as ordinary income in the year of the
disposition or distribution, and no interest charge will be incurred with
respect to such balance. In certain circumstances, the sum of the tax and the
PFIC interest charge may exceed the amount of the excess distribution received,
or the amount of proceeds of disposition realized, by the U.S. Holder.

If Dynamotive is a PFIC for any taxable year during which a
Non-Electing U.S. Holder holds Dynamotive common shares, then Dynamotive will
continue to be treated as a PFIC with respect to such Dynamotive common shares,
even if it is no longer definitionally a PFIC. A Non-Electing U.S. Holder may
terminate this deemed PFIC status by electing to recognize gain (which will be
taxed under the rules discussed above for Non-Electing U.S. Holders) as if such
Dynamotive common shares had been sold on the last day of the last taxable year
for which it was a PFIC.

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Effective for tax years of U.S. Holders beginning after
December 31, 1997, U.S. Holders who hold (actually or constructively) marketable
stock of a foreign corporation that qualifies as a PFIC may elect to mark such
stock to the market annually (a "mark-to-market election"). If such an election
is made, such U.S. Holder will generally not be subject to the special taxation
rules of Section 1291 discussed above. However, if the mark-to-market election
is made by a Non-Electing U.S. Holder after the beginning of the holding period
for the PFIC stock, then the Section 1291 rules will apply to certain
dispositions of, distributions on and other amounts taxable with respect to
Dynamotive common shares. A U.S. Holder who makes the mark-to-market election
will include in income for each taxable year for which the election is in effect
an amount equal to the excess, if any, of the fair market value of the common
shares of Dynamotive as of the close of such tax year over such U.S. Holder's
adjusted basis in such common shares. In addition, the U.S. Holder is allowed a
deduction for the lesser of (i) the excess, if any, of such U.S. Holder's
adjusted tax basis in the common shares over the fair market value of such
shares as of the close of the tax year, or (ii) the excess, if any, of (A) the
mark-to-market gains for the common shares in Dynamotive included by such U.S.
Holder for prior tax years, including any amount which would have been treated
as a mark-to-market gain for any prior tax year but for the Section 1291 rules
discussed above with respect to Non-Electing U.S. Holders, over (B) the
mark-to-market losses for shares that were allowed as deductions for prior tax
years. A U.S. Holder's adjusted tax basis in the common shares of Dynamotive
will be adjusted to reflect the amount included in or deducted from income as a
result of a mark-to-market election. A mark-to-market election applies to the
taxable year in which the election is made and to each subsequent taxable year,
unless Dynamotive common shares cease to be marketable, as specifically defined,
or the IRS consents to revocation of the election. Because the IRS has not
established procedures for making a mark-to-market election, U.S. Holders should
consult their tax advisor regarding the manner of making such an election. No
view is expressed regarding whether common shares of Dynamotive are marketable
for these purposes or whether the election will be available.

Under Section 1291(f) of the Code, the IRS has issued Proposed
Treasury Regulations that, subject to certain exceptions, would treat as taxable
certain transfers of PFIC stock by Non-Electing U.S. Holders that are generally
not otherwise taxed, such as gifts, exchanges pursuant to corporate
reorganizations, and transfers at death. Generally, in such cases the basis of
Dynamotive common shares in the hands of the transferee and the basis of any
property received in the exchange for those common shares would be increased by
the amount of gain recognized. Under the Proposed Treasury Regulations, an
Electing U.S. Holder would not be taxed on certain transfers of PFIC stock, such
as gifts, exchanges pursuant to corporate reorganizations, and transfers at
death. The transferee's basis in this case will depend on the manner of the
transfer. In the case of a transfer by an Electing U.S. Holder upon death, for
example, the transferee's basis is generally equal to the fair market value of
the Electing U.S. Holder's common shares as of the date of death under Section
1014 of the Code. The specific tax effect to the U.S. Holder and the transferee
may vary based on the manner in which the common shares are transferred. Each
U.S. Holder of Dynamotive is urged to consult a tax advisor with respect to how
the PFIC rules affect his or its tax situation.

Whether or not a U.S. Holder makes a timely QEF election with
respect to common shares of Dynamotive, certain adverse rules may apply in the
event that both Dynamotive and any foreign corporation in which Dynamotive
directly or indirectly holds shares is a PFIC (a "lower-tier PFIC"). Pursuant to
certain Proposed Treasury Regulations, a U.S. Holder would be treated as owning
his or its proportionate amount of any lower-tier PFIC shares, and generally
would be subject to the PFIC rules with respect to such indirectly-held PFIC
shares unless such U.S. Holder makes a timely QEF election with respect thereto.
Dynamotive intends to make the necessary information available to U.S. Holders
to permit them to make (and maintain) QEF elections with respect to each
subsidiary of Dynamotive that is a PFIC.

Under the Proposed Treasury Regulations, a U.S. Holder who does
not make a timely QEF election with respect to a lower-tier PFIC generally would
be subject to tax (and the PFIC interest charge) on (i) any excess distribution
deemed to have been received with respect to his or its

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lower-tier PFIC shares and (ii) any gain deemed to arise from a
so-called "indirect disposition" of such shares. For this purpose, an indirect
disposition of lower-tier PFIC shares would generally include (i) a disposition
by Dynamotive (or an intermediate entity) of lower-tier PFIC shares, and (ii)
any other transaction resulting in a diminution of the U.S. Holder's
proportionate ownership of the lower-tier PFIC, including an issuance of
additional common shares by Dynamotive (or an intermediate entity). Accordingly,
each prospective U.S. Holder should be aware that he or it could be subject to
tax even if such U.S. Holder receives no distributions from Dynamotive and does
not dispose of its common shares. Dynamotive strongly urges each prospective
U.S. Holder to consult a tax advisor with respect to the adverse rules
applicable, under the Proposed Treasury Regulations, to U.S. Holders of
lower-tier PFIC shares.

Certain special, generally adverse, rules will apply with
respect to Dynamotive common shares while Dynamotive is a PFIC unless the U.S.
Holder makes a timely QEF election. For example under Section 1298(b)(6) of the
Code, a U.S. Holder who uses PFIC stock as security for a loan (including a
margin loan) will, except as may be provided in regulations, be treated as
having made a taxable disposition of such shares.

Controlled Foreign Corporation

If more than 50% of the total combined voting power of all
classes of shares entitled to vote or the total value of the shares of
Dynamotive is owned, actually or constructively, by citizens or residents of the
United States, United States domestic partnerships or corporation, or estates or
trusts other than foreign estates or trusts (as defined by the Code Section
7701(a)(31)), each of which own, actually or constructively, 10% or more of the
total combined voting power of all classes of shares entitled to vote of
Dynamotive ("United States Shareholder"), Dynamotive could be treated as a
controlled foreign corporation ("CFC") under Subpart F of the Code. This
classification would effect many complex results, one of which is the inclusion
of certain income of a CFC which is subject to current U.S. tax. The United
States generally taxes United States Shareholders of a CFC currently on their
pro rata shares of the Subpart F income of the CFC. Such United States
Shareholders are generally treated as having received a current distribution out
of the CFC's Subpart F income and are also subject to current U.S. tax on their
pro rata shares of increases in the CFC's earnings invested in U.S. property.
The foreign tax credit described above may reduce the U.S. tax on these amounts.
In addition, under Section 1248 of the Code, gain from the sale or exchange of
shares by a U.S. Holder of common shares of Dynamotive which is or was a United
States Shareholder at any time during the five-year period ending on the date of
the sale or exchange is treated as ordinary income to the extent of earnings and
profits of Dynamotive attributable to the shares sold or exchanged. If a foreign
corporation is both a PFIC and a CFC, the foreign corporation generally will not
be treated as a PFIC with respect to United States Shareholders of the CFC. This
rule generally will be effective for taxable years of United States Shareholders
beginning after 1997 and for taxable years of foreign corporations ending with
or within such taxable years of United States Shareholders. Special rules apply
to United States Shareholders who are subject to the special taxation rules
under Section 1291 discussed above with respect to a PFIC. Because of the
complexity of Subpart F, a more detailed review of these rules is outside of the
scope of this discussion. Dynamotive does not believe that it currently
qualifies as a CFC. However, there can be no assurance that Dynamotive will not
be considered a CFC for the current or any future taxable year.

F. Dividends and paying agents

Not applicable.

G. Statements by experts

Not applicable.

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H. Documents on display

Documents and exhibits referred to in this document may be
inspected at the offices of the Securities and Exchange Commission or obtained
from the Company by telephoning (604)267-6013 or in writing at Suite 230  1700
West 75th Avenue, Vancouver, BC, V6P 6G2.

I. Subsidiary Information

The Company operates the Erie Plant through a principal
subsidiary which is a Canadian registered limited partnership (LP). The
Company holds all the equity and controls all aspects of the LP. A copy of the
LP agreement is part of the Consortium master Agreement filed as Exhibit 4.6.

The Companys other subsidiaries were not active in 2006 and
are not material to Company at this time.

Item 11. Quantitative and Qualitative Disclosures About
Market Risk

The Company is exposed to financial market risks, including
changes in interest rates and foreign currencies.

FOREIGN CURRENCY RISK

The Company has operations in primarily in Canada with some
limited activities in the U.S. and the United Kingdom, and therefore the Company
is subject to some risks typical of an international business including, but not
limited to, differing economic conditions, changes in political climate,
differing tax structures, other regulations and restrictions and foreign
exchange rate volatility.

The Company can be adversely affected when the Canadian
currency appreciates. Management has the ability, to some extent, to time the
exchange and enter into forward exchange contracts in an attempt to mitigate
such risk. The Company has not entered into any forward exchange contracts
during the reporting period. The Companys financial statements are reported in
U.S. currency. The extent of the Companys exposure depends on the degree of
fluctuation in foreign currencies. Due to the nature of foreign currency
exchange, the exact exposure is difficult to estimate.

The Companys sales, corresponding receivables and the majority
of its expenses are in Canadian and U.S. dollars. The Company holds cash in
U.S., Canadian and U.K. funds, and exchanges from U.S. currency to Canadian and
U.K. currency as necessary. Through operations in Canada and the U.S., the
Company incurs research and development and administrative expenses in Canadian
dollars and U.S. dollars and potentially other foreign currencies. The Company
is exposed, in the normal course of business, to foreign currency risks on any
non-Canadian dollar expenditures. The Company has evaluated its exposure to
these risks and has determined that the only significant foreign currency
exposure at this time is to the U.S. dollar, through receipt of proceeds of U.S.
dollar denominated share offerings. At this time, the Company does not believe
the exposure to other currency fluctuations is material.

INTEREST RATE RISK

The Company invests its cash in a variety of short-term
financial instruments, including bank deposits. These deposits are typically
denominated in U.S. and Canadian dollars. Cash balances in other foreign
currencies are operating balances and are only invested in demand or short-term
deposits of the local operating bank.

55

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Investments in both fixed rate and floating rate interest
earning instruments carry a degree of interest rate risk. Fixed rate securities
may have their fair market value adversely impacted because of a rise in
interest rates, while floating rate securities may produce less income than
expected if interest rates fall. Due in part to these factors, the Companys
future investment income may fall short of expectations because of changes in
interest rates or we may suffer losses in principal if forced to sell securities
which have seen a decline in market value because of changes in interest rates.

The Companys investments are made in accordance with an
investment policy approved by our Board of Directors. Under this policy, all
short-term investments must be made in investment grade securities with original
maturities of less than one year at the time of acquisition.

The Company does not attempt to reduce or eliminate its
investment exposure to interest rate risk through the use of derivative
financial instruments due to the short-term nature of the Companys investments.
Based on a sensitivity analysis performed on the balances as of December 31,
2005, the fair value of short term investments would not be significantly
impacted by either a 100 basis point increase or decrease in interest rates.

The Company has no bank loans outstanding.

Item 12. Description Of Securities Other Than Equity
Securities

Not applicable.

56

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PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies

Not applicable.

Item 14. Material Modifications To The Right Of Security
Holders and Use Of Proceeds

Not applicable.

Item 15T. Controls and Procedures

A. Disclosure Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of
1934 (the "Exchange Act"), the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures as of December 31, 2006. This evaluation was carried out under
the supervision and with the participation of the Company's Chief Executive
Officer, Robert Andrew Kingston, and the Company's Chief Financial Officer,
Brian Richardson. Based upon that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
by the rules and forms of the Securities and Exchange Commission (the SEC).
There have been no changes in the Company's internal controls, or in other
factors that significantly affected or could significantly affect internal
controls, subsequent to the date the Company carried out the evaluation.

Disclosure controls and procedures are controls and other
procedures that are designed to ensure that information required to be disclosed
in the Company's reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed in the Company's reports filed
under the Exchange Act is accumulated and communicated to management, including
the Company's Chief Executive Officer and Chief Financial Officer, to allow
timely decisions regarding required disclosure.

B. Management's Annual Report on Internal Control over
Financial Reporting

Our management is responsible for establishing and maintaining
adequate internal control over financial reporting for the Company. Internal
control over financial reporting is a process designed by, or under the
supervision of, our Chief Executive Officer and Chief Financial Officer, and
effected by our board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of our financial reporting and
the preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America.
Internal control over financial reporting includes policies and procedures
pertaining to maintaining records that in reasonable detail accurately and
fairly reflect our transactions; providing reasonable assurance that
transactions are recorded as necessary for preparation of our financial
statements; providing reasonable assurance that receipts and expenditures of the
Company are made in accordance with management authorization; and providing
reasonable assurance that unauthorized acquisition, use or disposition of
Company

57

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assets that could have a material effect on our financial
statements would be prevented or detected on a timely basis. Because of its
inherent limitations, internal control over financial reporting is not intended
to provide absolute assurance that a misstatement of our financial statements
would be prevented or detected.

Management conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation, management
concluded that the Company's internal control over financial reporting was
effective as of December 31, 2006.

This annual report does not include an attestation report of
the Company's registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by the
Company's registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management's report in this Annual Report (Form 20-F).

C. Changes in Internal Control Over Financial Reporting

There have occurred no changes in our internal control over
financial reporting (as defined in Rule 13a-15 or 15d-15 under the Exchange Act)
during the period covered by this Annual Report (Form 20-F) that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.

The information furnished pursuant to Item 15T of this Annual
Report (Form 20-F) shall not be deemed filed for purposes of the Securities
Exchange Act of 1934, as amended, nor shall it be incorporated by reference into
any of the Companys filings under the Securities Act of 1933, as amended,
unless otherwise expressly stated in such filing.

Item 16. [Reserved]

ITEM 16A. Audit committee financial expert

Our board of directors has determined that Mr. Shing-Cheng Hong
is an independent member of the board and is the committee financial expert on
our audit committee. For details on his professional career see Item 6.
Directors, Senior Management and Employees.

ITEM 16B Code of Ethics

The Company has adopted a code of ethics which requires all
employees to acknowledge a responsibility for honest, fair and respectful
dealings between the Company and its employees, customers and suppliers. The
Code requires observance of high standards of respect for the laws applicable to
the Company's business activities and precludes offering or accepting any
benefit from a customer or supplier which could be construed as an improper
inducement to do business. The Company's insiders acknowledge their
responsibility for careful compliance with corporate disclosure and securities
trading laws. The Code is available for review on the Company's website at
www.dynamotive.com.

58

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ITEM 16C Principal accountant fees and services

A summary of accountant fees and services are provided in a
table below:

Total
        Fees2006
      2005Audit Fees (1)
      186,245
      125,347Audit-Related Fees (2)
      
      Tax Fees (3)
      9,878
      All Other Fees
        (4)
      
      Total
      196,123
      125,347


(1) Audit Fees include fees necessary to perform the annual
audit and quarterly reviews of the Companys consolidated financial statements.
Audit Fees include fees for review of tax provisions and for accounting
consultations on matters reflected in the financial statements. Audit Fees also
include audit or other attest services required by legislation or regulation,
such as comfort letters, consents, reviews of securities filings and statutory
audits.(2) Audit-Related Fees include services that are traditionally
performed by the auditor. These audit-related services include employee benefit
audits, due diligence assistance, accounting consultations on proposed
transactions, internal control reviews and audit or attest services not required
by legislation or regulation. (3) Tax Fees include fees for all tax
services other than those included in Audit Fees and Audit-Related Fees.
This category includes fees for tax compliance, tax planning and tax advice. Tax
planning and tax advice includes assistance with tax audits and appeals, tax
advice related to mergers and acquisitions, and requests for rulings or
technical advice from tax authorities. (4) All Other Fees include all
other non-audit services.

ITEM 16D Exemptions from the Listing Standards for Audit
Committees

Not Applicable

ITEM 16E Purchases of Equity Securities by the Issuer and
Affiliated Purchasers

Not Applicable

59

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PART III

Item 17. Financial Statements

Financial Statements required under this item are filed
herewith and attached to this Form 20-F and form part of this Annual Report.

Index to Financial Statements

|Auditors
      Report                                                                                                          
|--------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                
|Comments
      by Auditors for U.S. Readers on Canada-United States Reporting Difference                                        
|                                                                                                                                
|Consolidated
      Balance Sheets as at December 31, 2006 and December 31, 2005                                                 
|                                                                                                                                
|Consolidated
      Statements of Loss for the years ended December 31, 2006, December 31,
      2005 and December 31, 2004      
|                                                                                                                                
|Consolidated
      Statements of Deficit for the years ended December 31, 2006, December 31,
      2005 and December 31, 2004   
|                                                                                                                                
|Consolidated
      Statements of Cash Flows for the years ended December 31, 2006, December
      31, 2005 and December 31, 2004
|                                                                                                                                
|Notes
      to Consolidated Financial Statements                                                                                

60

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Consolidated Financial Statements (in U.S. dollars)



Dynamotive Energy Systems Corporation

December 31, 2006 and 2005

61

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| | BDO Dunwoody LLPChartered
      Accountants | 600 Cathedral Place 925 West Georgia Street
      Vancouver, BC, Canada V6C 3L2 Telephone: (604) 688-5421
      Telefax: (604) 688-5132 E-mail: vancouver@bdo.ca www.bdo.ca
| | ------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

AUDITORS REPORT

To the Shareholders of

Dynamotive Energy Systems Corporation

We have audited the consolidated balance sheets of Dynamotive
Energy Systems Corporation as at December 31, 2006 and 2005 and the consolidated
statements of loss, deficit and cash flows for each of the years in the
three-year period ended December 31, 2006. 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, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of the
Company as at December 31, 2006 and 2005 and the results of its operations and
its cash flows for each of the years in the three-year period ended December 31,
2006 in accordance with Canadian generally accepted accounting principles.

/s/ BDO Dunwoody LLP

Chartered Accountants

Vancouver, Canada April 17, 2007

62

---

| | BDO Dunwoody LLPChartered
      Accountants | 600 Cathedral Place 925 West Georgia Street
      Vancouver, BC, Canada V6C 3L2 Telephone: (604) 688-5421
      Telefax: (604) 688-5132 E-mail: vancouver@bdo.ca www.bdo.ca
| | ------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Comments by Auditors for U.S. Readers

on Canada-United States Reporting Difference

The reporting standards of the Public Company Accounting
Oversight Board (United States) for auditors require the addition of an
explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the Companys ability to continue as a going concern, such as those described in
Note 1 to the financial statements. Public Company Accounting Oversight Board
(United States) reporting standards also require the addition of an explanatory
paragraph when changes in an accounting policy, such as those described in notes
3 and 23, have a material effect on the consolidated financial statements.
Although we conducted our audit in accordance with both Canadian generally
accepted auditing standards and the standards of the Public Company Accounting
Oversight Board (United States), our report to the shareholders dated April 17,
2007 is expressed in accordance with Canadian reporting standards which do not
permit a reference to such conditions and events in the auditors report when
these are adequately disclosed in the financial statements.

/s/ BDO Dunwoody LLP

Chartered Accountants

Vancouver, Canada April 17, 2007

63

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Dynamotive Energy Systems CorporationIncorporated
under the laws of British Columbia, Canada

CONSOLIDATED BALANCE SHEETSAs at
December 31 (in U.S. dollars)

|                                                    |  | 2006        |   |  | 2005        |  
|--------------------------------------------------- |  | ----------- | - |  | ----------- | -
|                                                    |  | $           |   |  | $           |  
|                                                    |  |             |   |  |             |  
|ASSETS                                              |  |             |   |  |             |  
|Current                                             |  |             |   |  |             |  
|Cash and cash equivalents [note 2]                  |  | 9,346,534   |   |  | 1,428,468   |  
|Restricted cash [note 12]                           |  |            |   |  | 172,813     |  
|Receivables [note 4]                                |  | 474,903     |   |  | 40,326      |  
|Government grants receivable [note 20]              |  | 1,087,910   |   |  | 627,582     |  
|Prepaid expenses and deposits                       |  | 467,413     |   |  | 235,127     |  
|Total current assets                                |  | 11,376,760  |   |  | 2,504,316   |  
|Property, plant and equipment [note 6]              |  | 26,362,390  |   |  | 14,199,148  |  
|Patents [note 7]                                    |  | 253,912     |   |  | 259,109     |  
|Other assets                                        |  | 100,637     |   |  |            |  
|                                                    |  | 38,093,699  |   |  | 16,962,573  |  
|                                                    |  |             |   |  |             |  
|LIABILITIES AND SHAREHOLDERS EQUITY                |  |             |   |  |             |  
|Current                                             |  |             |   |  |             |  
|Accounts payable and accrued liabilities [note 11]  |  | 6,438,287   |   |  | 7,314,856   |  
|Convertible debenture [note 12]                     |  |            |   |  | 546,461     |  
|Total current liabilities                           |  | 6,438,287   |   |  | 7,861,317   |  
|Long-term debt [note 13]                            |  |            |   |  | 808,848     |  
|Deferred revenue
      [notes 5, 10, and 14]        |  | 520,000     |   |  |            |  
|Total liabilities                                   |  | 6,958,287   |   |  | 8,670,165   |  
|Commitments and contingencies [notes 1, 16, and 20] |  |             |   |  |             |  
|Non-controlling interest[note 8]                    |  | 1,354,923   |   |  |            |  
|Shareholders Equity                                |  |             |   |  |             |  
|Share capital [note 15(b)]                          |  | 85,127,873  |   |  | 51,849,476  |  
|Shares to be issued [note 15(c)]                    |  | 1,741,339   |   |  | 2,677,832   |  
|Contributed surplus [note 15(h)]                    |  | 16,800,527  |   |  | 13,047,158  |  
|Cumulative translation adjustment                   |  | (789,471    | ) |  | (434,661    | )
|Deficit                                             |  | (73,099,779 | ) |  | (58,847,397 | )
|Total
      shareholders equity                    |  | 29,780,489  |   |  | 8,292,408   |  
|                                                    |  | 38,093,699  |   |  | 16,962,573  |  

See accompanying notes

On behalf of the Board:

| | Richard Lin | Andrew Kingston
| | ------------- | -----------------
| | Director      | Director         

64

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Dynamotive Energy Systems CorporationIncorporated
under the laws of British Columbia, Canada

CONSOLIDATED STATEMENTS OF LOSSFor the Year Ended December 31 (in U.S. dollars)

|                                                        |  | 2006        |   |  | 2005        |   |  | 2004       |  
|------------------------------------------------------- |  | ----------- | - |  | ----------- | - |  | ---------- | -
|                                                        |  | $           |   |  | $           |   |  | $          |  
|                                                        |  |             |   |  |             |   |  |            |  
|EXPENSES                                                |  |             |   |  |             |   |  |            |  
|Marketing and business development                      |  | 1,768,063   |   |  | 1,199,959   |   |  | 466,435    |  
|Research and development [notes 15(i),
      20 and 21] |  | 4,247,784   |   |  | 2,804,432   |   |  | 2,905,830  |  
|General and administrative [note 15(i)]                 |  | 7,763,275   |   |  | 6,257,086   |   |  | 6,316,110  |  
|Amortization and depreciation                           |  | 124,067     |   |  | 148,556     |   |  | 130,912    |  
|Interest expense [note 15(i)]                           |  | 505,340     |   |  | 1,445,918   |   |  | 151,758    |  
|Foreign exchange gain                                   |  | (88,888     | ) |  | (33,677     | ) |  | (53,156    | )
|                                                        |  | 14,319,641  |   |  | 11,822,274  |   |  | (9,917,889 | )
|Loss from operations                                    |  | (14,319,641 | ) |  | (11,822,274 | ) |  | (9,917,889 | )
|                                                        |  |             |   |  |             |   |  |            |  
|OTHER INCOME AND EXPENSES                               |  |             |   |  |             |   |  |            |  
|Interest and other income                               |  | 493,610     |   |  | 5,614       |   |  | 8,766      |  
|Gain/(loss) on asset disposals                          |  |            |   |  | 19,773      |   |  | (7,092     | )
|Loss on settlement of accounts payable [note 15(i)]     |  | (98,189     | ) |  |            |   |  |           |  
|Loss on sale of interest in subsidiary
      [note 9]   |  | (420,400    | ) |  |            |   |  |           |  
|Loss on write-down
      of long-term assets [note 6]   |  |            |   |  | (200,457    | ) |  |           |  
|                                                        |  | (24,979     | ) |  | (175,070    | ) |  | 1,674      |  
|Loss before non-controlling interest                    |  | (14,344,620 | ) |  | (11,997,344 | ) |  | (9,916,215 | )
|                                                        |  |             |   |  |             |   |  |            |  
|Non-controlling
      interest                          |  | 92,238      |   |  |            |   |  |           |  
|Net loss for the year                                   |  | (14,252,382 | ) |  | (11,997,344 | ) |  | (9,916,215 | )
|                                                        |  |             |   |  |             |   |  |            |  
|Weighted average number of common                       |  |             |   |  |             |   |  |            |  
|shares outstanding[note 15[j]]                          |  | 153,685,553 |   |  | 108,009,185 |   |  | 80,979,299 |  
|                                                        |  |             |   |  |             |   |  |            |  
|Basic and
      diluted loss per common share           |  | (0.09       | ) |  | (0.11       | ) |  | (0.12      | )

See accompanying notes



Dynamotive Energy Systems CorporationIncorporated
under the laws of British Columbia, Canada

CONSOLIDATED STATEMENTS OF DEFICITAs at December 31 (in U.S. dollars)

|                                                     |  | 2006        |   |  | 2005        |   |  | 2004        |  
|---------------------------------------------------- |  | ----------- | - |  | ----------- | - |  | ----------- | -
|                                                     |  | $           |   |  | $           |   |  | $           |  
|Deficit, beginning of year                           |  | (58,847,397 | ) |  | (46,850,053 | ) |  | (36,136,236 | )
|Effect of change
      in accounting policy [note 3] |  |            |   |  |            |   |  | (797,602    | )
|Deficit, beginning of year restated                  |  | (58,847,397 | ) |  | (46,850,053 | ) |  | (36,933,838 | )
|Loss for the year                                    |  | (14,252,382 | ) |  | (11,997,344 | ) |  | (9,916,215  | )
|Deficit, end of year                                 |  | (73,099,779 | ) |  | (58,847,397 | ) |  | (46,850,053 | )

See accompanying notes

65

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Dynamotive Energy Systems CorporationIncorporated
under the laws of British Columbia, Canada

CONSOLIDATED STATEMENTS OF CASH FLOWSAs at December 31 (in U.S. dollars)

|                                                              |  | 2006        |   |  | 2005        |   |  | 2004       |  
|------------------------------------------------------------- |  | ----------- | - |  | ----------- | - |  | ---------- | -
|                                                              |  | $           |   |  | $           |   |  | $          |  
|                                                              |  |             |   |  |             |   |  |            |  
|OPERATING ACTIVITIES                                          |  |             |   |  |             |   |  |            |  
|Net loss for the year                                         |  | (14,252,382 | ) |  | (11,997,344 | ) |  | (9,916,215 | )
|Add items not involving cash:                                 |  |             |   |  |             |   |  |            |  
|Amortization and depreciation                                 |  | 124,067     |   |  | 148,556     |   |  | 130,912    |  
|Accretion expense                                             |  | 208,022     |   |  | 1,068,192   |   |  |           |  
|Non-controlling interest                                      |  | (92,238     | ) |  |            |   |  |           |  
|Interest expense non-cash                                     |  | 14,408      |   |  | 67,970      |   |  | 97,200     |  
|(Gain) Loss on asset disposals                                |  |            |   |  | (19,773     | ) |  | 7,092      |  
|Loss on write-down of
      long-term assets                  |  |            |   |  | 200,457     |   |  |           |  
|Loss on settlement of accounts payable                        |  | 98,189      |   |  |            |   |  |           |  
|Loss on sale of interest in
      subsidiary                  |  | 420,400     |   |  |            |   |  |           |  
|Stock based compensation [note 15(i)]                         |  | 4,337,590   |   |  | 3,697,057   |   |  | 4,730,604  |  
|Foreign exchange gain and
      other items                   |  | (88,888     | ) |  | (33,677     | ) |  | (20,484    | )
|Net change in non-cash working capital balances               |  |             |   |  |             |   |  |            |  
|related to operations [note 19]                               |  | (171,912    | ) |  | 133,833     |   |  | 2,087,156  |  
|Cash used in
      operating activities                       |  | (9,402,744  | ) |  | (6,734,729  | ) |  | (2,883,735 | )
|                                                              |  |             |   |  |             |   |  |            |  
|FINANCING ACTIVITIES                                          |  |             |   |  |             |   |  |            |  
|Contribution received from joint venture
      [note 8]       |  | 1,500,000   |   |  |            |   |  |           |  
|Proceeds from convertible debenture                           |  |            |   |  | 1,825,000   |   |  | 830,013    |  
|Proceeds from long-term debt                                  |  |            |   |  |            |   |  | 816,727    |  
|Proceeds from short term loan                                 |  |            |   |  |            |   |  | 42,331     |  
|Decrease in long-term debt                                    |  | (899,184    | ) |  |            |   |  |           |  
|Repayment of short term loan                                  |  |            |   |  | (42,331     | ) |  |           |  
|(Increase) decrease in government grant                       |  |             |   |  |             |   |  |            |  
|receivables                                                   |  | (473,451    | ) |  | (368,712    | ) |  | 509,879    |  
|Share capital issued                                          |  | 27,495,575  |   |  | 6,398,254   |   |  | 4,857,699  |  
|Shares to be
      issued                                     |  | 18,091      |   |  | 1,957,000   |   |  | 1,636,408  |  
|Cash provided by financing activities                         |  | 27,641,031  |   |  | 9,769,211   |   |  | 8,693,057  |  
|                                                              |  |             |   |  |             |   |  |            |  
|INVESTING ACTIVITIES                                          |  |             |   |  |             |   |  |            |  
|Increase in patent costs                                      |  | (21,016     | ) |  | (22,181     | ) |  | (19,989    | )
|Purchase of property, plant and equipment
      (net of       |  |             |   |  |             |   |  |            |  
|government grants received)                                   |  | (10,496,423 | ) |  | (1,580,195  | ) |  | (5,804,656 | )
|Decrease (increase) in restricted cash                        |  | 177,596     |   |  | (172,813    | ) |  |           |  
|Cash used in
      investing activities                       |  | (10,339,843 | ) |  | (1,775,189  | ) |  | (5,824,645 | )
|                                                              |  |             |   |  |             |   |  |            |  
|Increase (decrease) in cash and cash                          |  |             |   |  |             |   |  |            |  
|equivalents                                                   |  | 7,898,444   |   |  | 1,259,293   |   |  | (15,323    | )
|Effects of foreign
      exchange rate changes on cash        |  | 19,622      |   |  | 32,204      |   |  | (131,220   | )
|Increase (decrease) in cash and cash                          |  |             |   |  |             |   |  |            |  
|equivalents during year                                       |  | 7,918,066   |   |  | 1,291,497   |   |  | (146,543   | )
|Cash and cash equivalents, beginning of year                  |  | 1,428,468   |   |  | 136,971     |   |  | 283,514    |  
|Cash and cash
      equivalents, end of year                  |  | 9,346,534   |   |  | 1,428,468   |   |  | 136,971    |  
|                                                              |  |             |   |  |             |   |  |            |  
|Supplemental cash flow information [notes 15(i)
      and 19] |  |             |   |  |             |   | 

See accompanying notes

66

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|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

1. NATURE OF BUSINESS AND FUTURE OPERATIONS

Dynamotive Energy Systems Corporation (the Company or
Dynamotive) was incorporated on April 11, 1991 under the laws of the Province
of British Columbia. Dynamotive is focused on the development of innovative
energy solutions based on its patented fast pyrolysis system. The Companys
focus is to commercialize its patented BioOil production technology and
establish this technology for production of BioOil clean fuels.

These financial statements have been prepared in accordance
with Canadian generally accepted accounting principles on a going concern basis,
which presumes the Company will be able to realize its assets and discharge its
liabilities and commitments in the normal course of operations for the
foreseeable future. As at December 31, 2006, the Company has working capital of
$4,938,473 (2005 - working capital deficiency of $5,357,001), and has incurred a
loss of $14,252,382 (2005 - $11,997,344; 2004 - $9,916,215) for the year ended
December 31, 2006.

The ability of the Company to continue as a going concern is in
substantial doubt and is dependent on achieving profitable operations,
commercializing its BioOil production technology and obtaining the necessary
financing in order to develop this technology. The outcome of these matters
cannot be predicted at this time. The Companys future operations are dependent
on the markets acceptance of its products in order to ultimately generate
future profitable operations, and the Companys ability to secure sufficient
financing to fund future operations. There can be no assurance that the
Companys products will be able to secure market acceptance. Management plans to
raise additional equity financing to enable the Company to complete its
development plans. These financial statements do not include any adjustments
that might result from the outcome of these uncertainties.

Management is of the opinion that expected future financing
along with expected sales will provide sufficient working capital to meet the
Companys liabilities and commitments as they become due.

2. SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared by
management in accordance with Canadian generally accepted accounting principles.

The following is a summary of significant accounting policies
used in the preparation of these consolidated financial statements:

Principles of consolidation

These consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries Dynamotive Canada Inc., federally
incorporated under the laws of Canada; Dynamotive Corporation, incorporated
under the laws of Rhode Island, U.S.A.; Dynamotive USA Inc. incorporated under
the laws of Delaware, U.S.A.; Dynamotive Latinoamericana S.A., incorporated
under the laws of Buenos Aires, Argentina; First Resources Corporation,
incorporated under the laws of British Columbia.

67

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|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

2. SIGNIFICANT ACCOUNTING POLICIES (contd.)

In September 2006, the Company entered into an agreement to
sell-off a 20% interest of its then wholly owned subsidiary Dynamotive Europe
Limited (DEL) (note 9). The Company maintains the remaining 80% ownership
interest in DEL. The Company continues to fully consolidate DEL for each of the
years presented.

Effective January 1, 2005, the Company adopted CICA Accounting
Guideline 15, Consolidation of Variable Interest Entities (AcG-15). The
guidance establishes when a company should consolidate a variable interest
entity in its financial statements. AcG-15 provides the definition of variable
interest entity and requires a variable interest entity to be consolidated if a
company is at risk of absorbing the majority of the variable interest entitys
expected losses, is entitled to receive a majority of the variable interest
entitys residual returns, or both. As a result, the Company has applied the
guidance of AcG-15, and has consolidated the accounts of its joint venture
Dynamotive Biomass Resource Corporation (DBRC), in which the Company has a 51%
ownership interest (note 8). In addition, the Company owns 99.98% of the West
Lorne BioOil Co-Generation LP formed under the laws of Ontario and has accounted
for its proportionate share of the partnership.

All inter-company balances and transactions have been
eliminated on consolidation.

Use of estimates

The preparation of financial statements in conformity with
Canadian generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates.

Foreign currency translation

The accounts of the Company and its consolidated subsidiaries
are measured using the Canadian dollar as the functional currency. Monetary
items denominated in foreign currencies are translated into Canadian dollars
using exchange rates in effect at the balance sheet date and non-monetary items
are translated using historical exchange rates. Exchange gains or losses arising
on the transaction or settlement of foreign currency denominated monetary items
are included in the determination of net loss.

The Company uses the U.S. dollar as the reporting currency for
its consolidated financial statements. Assets and liabilities are translated
into U.S. dollars using current exchange rates in effect at the balance sheet
date and revenue and expense accounts are translated using the average exchange
rate during the period. Gains and losses resulting from this translation are
recorded in shareholders equity as an adjustment to the cumulative translation
adjustment account.

68

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|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

2. SIGNIFICANT ACCOUNTING POLICIES (contd.)

Revenue recognition

[a]Product Sales

The Company recognizes revenue from the sale of products,
including BioOil, char, and other byproducts, upon shipment of the product when
the risk and reward of ownership has been transferred to the customer, provided
that the amount is fixed or determinable and collection is reasonably
assured.

[b]Licenses and royalties

Revenue from license agreements may include multiple elements
within a single contract. Payments received under license agreements may include
the following: non-refundable fees at inception of the contract, fees for
services to be performed, milestone payments for specific achievements, and
royalty payments based upon resulting sales of products. Agreements with
multiple elements are separated into significant discrete units of accounting
based on the relative fair value of each element. Revenue recognized for each
element when all significant acts have been completed and delivery has occurred
with no substantial risk of return and collectibility is reasonably assured.
When the fair value cannot be determined, revenue is deferred until objective
evidence exists or recognized as the final elements are delivered.

Deferred revenue is comprised of amounts received prior to the
satisfaction of the revenue recognition criteria described above and includes
non-refundable amounts related to sales of master license and plant license
agreements. Master license agreements grant the licensee the exclusive right and
license to use and commercially exploit the Companys BioOil technology
including the rights to manufacture, market, distribute, and sub-license the
technology for the production of BioOil within a specific territory. Plant
license agreements grant a licensee the right to use and commercially exploit
the Companys BioOil technology for the development of one or more pyrolysis
plant facilities.

Government assistance and investment tax credits

Government assistance towards current expenses is included in
the determination of income for the period as a reduction of the expenses to
which it relates. Amounts received for future expenditures are recorded as a
current liability. Government assistance towards the acquisition and
construction of property, plant and equipment is deducted from the cost of the
related property, plant and equipment. Government grants receivable are recorded
when the Company has incurred the qualifying expenditure and there is reasonable
assurance the receipts will be recovered.

Repayment of contribution is contingent solely upon the
Companys ability to generate revenue from the sale of specified products or
technology. Accordingly, liability of repayment will only be accrued when sales
of the products or technology have been generated.

69

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|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

2. SIGNIFICANT ACCOUNTING POLICIES (contd.)

Investment tax credits are accounted for under the cost
reduction method whereby they are netted against the expense or capital asset to
which they relate. Investment tax credits are recorded when the Company has
incurred the qualifying expenditures and there is reasonable assurance the tax
credits will be realized. As at December 31, 2006 and 2005, no investment tax
credits have been recognized.

Research and development costs

Research costs are expensed in the period incurred. Development
costs are expensed in the period incurred unless the Company believes the
development project meets Canadian generally accepted accounting criteria for
deferral and amortization. In evaluating these criteria the Company considers
technological feasibility to be established only when a product demonstrates it
operates under conditions which are acceptable to target customers. If
management determines that the development of products to which such costs have
been capitalized is not reasonably certain, or that costs exceed recoverable
value, such costs are charged to operations. The Company has not capitalized any
development costs for any of the year ends presented.

During the year ended December 31, 2006, the Company netted
$154,560 (2005 - $nil; 2004 - $nil) of product sales against research and
development expenses, which are considered incidental sales of BioOil until such
time as the Companys plant has reached commercial production levels.

Patents

Patents are recorded at cost, including related legal costs,
and are amortized on a straight-line basis over the lesser of the estimated
useful life of the related technology and the life of the patent. If management
determines that development of products to which patent costs relate is not
reasonably certain, or that costs exceed recoverable value, such costs are
charged to operations. Due to the long-term nature of estimates inherent in
determining future cash flows, it is possible that the future cash flows or the
estimated useful life of such assets could be reduced in the future.

70

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|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

2. SIGNIFICANT ACCOUNTING POLICIES (contd.)

Property, plant and equipment

Property, plant and equipment are recorded at cost, net of
government assistance, and amortized using the following methods and annual
rates:

| | Furniture and fixtures | 20% declining balance                                                                        
| | ---------------------- | ---------------------------------------------------------------------------------------------
| | Computer equipment     | 30% declining balance                                                                        
| | Computer software      | 100% declining balance                                                                       
| | Equipment              | 20% declining balance                                                                        
| | Leasehold improvements | Straight line over the term of
      the lease 
      (which approximates its estimated life)

Annually, or whenever events and circumstances indicate that
the carrying value of the assets might be impaired and the carrying value may
not be recoverable, the Company performs evaluations to assess the
recoverability of its property, plant and equipment. When the carrying value of
property, plant and equipment is determined to exceed its recoverable amount, an
impairment loss is recorded to reduce the carrying value of the capital asset to
its fair value.

Projects under development

The Company expenses all preliminary stage costs incurred with
respect to a potential capital project, including costs related to the
consideration of alternatives, feasibility studies, and activities occurring
prior to the decision to proceed with the project until the capital project
meets the Companys capitalization policy and is considered a project under
development. The Company begins to capitalize costs for projects under
development when it has determined that it is more likely than not that the
financing for the capital project is available and it is more likely than not
that the Company will be able to meet the requisite local and other governmental
regulations to develop the capital project.

For those capital projects that meet the Companys
capitalization policy, the Company capitalizes incremental costs that are
directly identifiable with the specific capital project until the capital
project is substantially complete and ready for its intended use. Financing
costs, including interest, are capitalized when they arise from indebtedness
incurred, directly or indirectly, to finance the construction of the capital
project. Capitalization of financing costs will cease when a capital project is
considered to be substantially complete and ready for its intended use.

Annually, or whenever events and circumstances indicate that
the carrying value of the assets might be impaired and the carrying value may
not be recoverable, the Company performs evaluations to assess the
recoverability of its projects under development. When the carrying value of
projects under development is determined to exceed its recoverable amount, an
impairment loss is recorded to reduce the carrying value of the projects under
development to its fair value.

71

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|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

2. SIGNIFICANT ACCOUNTING POLICIES (contd.)

Income taxes

The Company accounts for income taxes using the asset and
liability method of tax allocation. Future income taxes are recognized for the
future income tax consequences attributable to differences between the carrying
values of assets and liabilities and their respective income tax bases. Future
income tax assets and liabilities are measured using substantively enacted
income tax rates expected to apply to taxable income in the periods in which
temporary differences are expected to be recovered or settled. The effect on
future income tax assets and liabilities of a change in rates is included in
earnings in the period that includes the substantial enactment date. Future
income tax assets are recorded in the consolidated financial statements if
realization is considered more likely than not. A valuation allowance is
recorded to reduce future income tax assets recognized by the amount of any
future income tax benefits that, based on available evidence, are not expected
to be realized.

Stock based compensation

The Company has two stock based compensation plans - a stock
appreciation rights (SA Rights) plan and a stock option plan for directors and
employees, which are described in note 15. Under the terms of the stock option
plan the Company may grant fixed options or options whose vesting is contingent
on future performance. Compensation is recognized under the fair value based
method when fixed or performance based stock options are granted to employees
and directors. Compensation is recognized using the fair value based method for
SA Rights when the performance criteria have been met and amortized over the
service period.

The Company may also issue stock options and warrants to
employees or as consideration for services rendered by non-employees. As a
result of the change in accounting policy (note 3), such equity awards are
recorded at their fair value using the Black Scholes option pricing model, as
compensation expense or capitalized to long-term assets under construction when
the Company receives the related services and the equity awards vest. No
compensation is recognized in connection with options and warrants awarded in
connection with private placements, since the share issue costs are netted
against the proceeds raised. All unvested or modified options for non-employees
are re-measured on each balance sheet date until such options vest, are
exercised or forfeited.

72

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|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

2. SIGNIFICANT ACCOUNTING POLICIES (contd.)

Loss per common share

Basic loss per common share is based on the weighted average
number of shares outstanding for the period excluding contingently issuable
shares and excluding escrowed shares. For the years ended December 31, 2006,
potentially dilutive common shares (relating to shares to be issued, options and
warrants outstanding, and convertible instrument agreements outstanding at year
end) totaling 45,003,779 (2005  55,107,401, 2004  39,342,607) were not
included in the computation of loss per share because their effect was
anti-dilutive.

Financial instruments

The fair values of the financial instruments approximate their
carrying value due to their short term or demand nature. In 2005, the fair
values of the convertible debenture and long-term debt were calculated using
discounted cash flow analysis and approximated their carrying value as the
effective interest rates implicit in these financial instruments were similar to
current market rates.

Management has assessed that it is not practical to determine
the fair value of the long-term investment, which represents 2,658,994 common
shares of Renewable Energy Corp., a company incorporated in Australia, as these
shares are not traded in an organized financial market.

Leases

Leases are classified as either capital or operating leases.
Leases which transfer substantially all the benefits and risks of ownership of
the property to the Company are accounted for as capital leases. Capital lease
obligations reflect the present value of future minimum lease payments,
discounted at the appropriate interest rate. All other leases are accounted for
as operating leases wherein rental payments are expensed as incurred.

Cash and cash equivalents

Cash and cash equivalents consist of cash on hand and balances
invested in short-term money market deposits with an original maturity less than
90 days from the date of purchase. For the year ended December 31, 2006, the
weighted average interest rate earned on cash equivalent balances was 4.77%
(2005  3.51%) . As at December 31, 2006, the Company had $409,810 (2005 -
$328,468) in cash, which includes $203,400 in Canadian currency (converted to US
dollars based on the year end foreign exchange rate), $6,650,000 (2005 -
$1,100,000) in short-term US dollar money market deposits and $2,286,724 (2005 
nil) in Canadian dollar (converted to US dollars based on the year end foreign
exchange rate) T-bill mutual funds.

73

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|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

2. SIGNIFICANT ACCOUNTING POLICIES (contd.)

Asset retirement obligations

The Company records the fair value of an asset retirement
obligation as a liability in the period in which it incurred a legal obligation
associated with the retirement of tangible long-lived assets that result from
the acquisition, construction, development, and/or normal use of the assets and
when a reasonable estimate of the fair value can be made. The obligation is
measured initially at fair value using present value methodology, and the
resulting costs capitalized into the carrying amount of the related asset. In
subsequent periods, the liability will be adjusted for any changes in the amount
or timing of the underlying future cash flows. Capitalized asset retirement
costs will be depreciated on the same basis as the related asset and the
discount accretion of the liability is included in determining the results of
operations. As at December 31, 2006 and 2005, the Company estimated the fair
value of the asset retirement obligations was $nil and consequently, no
liability was accrued.

Long-term investment

The Companys long-term investment is accounted for on a cost
basis. The investment is written-down to its estimated net realizable value when
there is evidence of a decline in value below carried cost that is other than
temporary.

3. CHANGE IN ACCOUNTING POLICY

Stock based compensation

Effective January 1, 2004, the Company adopted, on a
retroactive basis without restatement, the recommendations of revised CICA
Handbook Section 3870 (CICA 3870), Stock-based compensation and other
stock-based payments, which now requires companies to adopt the fair value
based method for all stock-based awards granted on or after January 1, 2002.
Previously, companies were only required to disclose the pro-forma effect of
stock options issued to employees and directors in the notes to the financial
statements. The effect of this change in accounting policy was to increase the
deficit at January 1, 2004 by $797,602 with a corresponding increase to
contributed surplus.

4. RECEIVABLES

|                                 |  | 2006    |  |  | 2005   | 
|-------------------------------- |  | ------- |  |  | ------ | 
|                                 |  | $       |  |  | $      | 
|                                 |  |         |  |  |        | 
|Receivables from sales of BioOil |  | 96,337  |  |  | 1,955  | 
|Government taxes recoverable     |  | 318,416 |  |  | 19,144 | 
|Sundry receivables               |  | 60,150  |  |  | 19,227 | 
|                                 |  | 474,903 |  |  | 40,326 | 

74

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|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

5. Long-term advance

On April 7, 2006, the Company loaned $250,000 to Rika Ukraina
Ltd to fund its wholly owned subsidiarys (Rika Biofuels Ltd.) biomass
development activities. The loan is unsecured and bears interest at 6% per annum
and the principal and interest was originally due no later than July 15, 2006.
The repayment was extended to March 15, 2007 and subsequently extended again to
May 17, 2007. On December 18, 2006, an additional $80,000 loan with the same
terms was advanced to Rika Ukraina Ltd. from DBRC. Under the terms of the
agreement, the Company has the option to convert the principal and any accrued
interest into a 50% ownership interest in Rika Biofuels Ltd. at any time the
loan is outstanding. For the year ended December 31, 2006, the entire long-term
advance of $330,000 has been offset against amounts received from Rika Ltd. and
recorded as deferred revenue (note 14).

6. PROPERTY, PLANT AND EQUIPMENT

|                                      |  | 2006       |  |  | 2005         | 
|------------------------------------- |  | ---------- |  |  | ------------ | 
|                                      |  |            |  |  | Accumulated  | 
|                                      |  | Cost       |  |  | Amortization | 
|                                      |  | $          |  |  | $            | 
|                                      |  |            |  |  |              | 
|Furniture and fixtures                |  | 155,358    |  |  | 129,257      | 
|Computer equipment and software       |  | 552,498    |  |  | 426,057      | 
|Equipment                             |  | 119,786    |  |  | 28,511       | 
|Projects under development:           |  |            |  |  |              | 
|West Lorne                            |  | 13,271,968 |  |  |             | 
|Construction advances  200 tpd plant |  | 12,765,393 |  |  |             | 
|Leasehold improvements                |  | 214,503    |  |  | 133,291      | 
|                                      |  | 27,079,506 |  |  | 717,116      | 
|Net book value                        |  | 26,362,390 |  |  | 14,199,148   | 

The Company has constructed a 100 tonne per day BioOil
co-generation project at the site of Erie Flooring in West Lorne, Ontario. At
December 31, 2006, the Company has also recorded $12,765,393 [2005 - $1,196,885]
as plant and equipment representing initial payments on a 200 tonne per day
(tpd) plant at Guelph, Ontario. All of the construction payments were paid in
cash or shares.

During 2006, government grants of $1,331,964 [2005 - $873,583]
have been applied to reduce the cost of property, plant and equipment under
construction.

In 2005, the Company recorded write-downs of certain property,
plant and equipment totaling $190,146, pertaining to certain BioOil Power
Generation testing equipment. The Company determined that the net recoverable
amount of certain test equipment was below its carrying value.

75

---

|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

7. PATENTS

|               |  | 2006    |  |  | 2005         | 
|-------------- |  | ------- |  |  | ------------ | 
|               |  |         |  |  | Accumulated  | 
|               |  | Cost    |  |  | Amortization | 
|               |  | $       |  |  | $            | 
|               |  |         |  |  |              | 
|Patents        |  | 410,530 |  |  | 156,618      | 
|Net book value |  | 253,912 |  |  | 259,109      | 

Patents are recorded at cost, including related legal costs,
and are amortized on a straight-line basis over the lesser of the estimated
useful life of the related technology and the life of the patent. The annual
amortization expense of these patents for the next five years is estimated to be
approximately $25,000 per annum.

In 2005, the Company recorded write-downs of certain patents
the Company is no longer pursuing totaling $10,311. The Company determined that
the net recoverable amount of these patents was below their carrying values.

8. BIOMASS JOINT VENTURE

In September 2006, the Company and Pedana Limited BVI
(Pendana) entered into joint venture agreement to establish DBRC (a company
incorporated federally in Canada) with the purpose of securing biomass and to
source project development opportunities and additional biofuel and green credit
pipeline opportunities. The agreement expires on December 31, 2016.

Pursuant to terms of the agreement, the Company earned a 51%
interest in DBRC by contributing cash of $500,000 and granting DBRC certain
rights associated with specific biomass development opportunities in Canada,
South America, and Europe. In return for a 49% ownership in DBRC, Pendanas
contribution amounted to cash payments of $2,000,000 ($1.5 million was received
in DBRC as at December 31, 2006 and $500,000 received subsequent to year end).
In addition to the above, the Company has agreed to lend DBRC up to $1 million,
with terms to be entered into at a later date. Pendana has also further agreed
to provide a $20 million revolving line of credit to DBRC. Any sums advanced
under this credit facility shall at Pendanas sole discretion, be repayable on
demand and shall bear interest at 4% above the rate of the Royal Bank of
Scotland. Pendana shall be entitled to security in the projects or assets funded
under this clause of the credit facility. As at December 31, 2006, no funds have
been advanced by Pendana under this credit facility.

Management has determined that DBRC meets the criteria of a
variable interest entity (VIE) under AcG-15 and accordingly has consolidated
the accounts of DBRC into these financial statements. The non-controlling
interest represents Pendanas share of the carrying value of DBRC as a result of
Pendanas 49% interest.

76

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|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

9. DYNAMOTIVE EUROPE LIMITED

In September 2006, the Company and Pendana Limited BVI
(Pendana) entered into an agreement in connection with the Companys then
wholly-owned subsidiary DEL. The agreement was made in an effort to establish
DEL as a permanent presence in Europe to develop European projects. Under the
terms of the agreement, Pendana completed a private placement with the Company,
whereby the Company issued 2,332,361 common shares and 583,090 share purchase
warrants for gross cash proceeds of $2,000,000. The warrants are exercisable at
$1.26 and expire on August 2, 2008. In addition, the Company issued a total of
3,000,000 warrants, with an exercise price of $1.2375, to Pendana, 1,000,000 of
these warrants expire on April 24, 2007 and the remaining 2,000,000 warrants
expire on February 28, 2007. The additional warrants were valued using the
Black-Scholes option pricing model using the following assumptions: risk free
interest rate of 4.17%; dividend yield of 0%, volatility factors of 35.23%; and
an expected life of 0.5 years. Pendana also received a 20% interest in DEL, with
Dynamotive maintaining the remaining 80% interest. The Company further agreed to
loan DEL $2,000,000 on commercial terms.

Pursuant to the terms of the agreement, 20% of the net cash
generated by DEL will be distributed to Pendanas agent and 80% to the Company
in settlement of the intercompany debt. In the event DEL wishes to seek further
debt or equity funding to finance specific projects at any time following the
date of the agreement, Pendana shall have the right of first refusal.

At the date of acquisition, DEL was substantially inactive and
no non-controlling interest was recorded as a result of this transaction, as the
net asset value at that date was in a deficit position and DEL has not yet
obtained profitable operations. As a result of the sale of this 20% interest in
DEL, the Company has recorded a loss of $420,400 in its operations for the year
ended December 31, 2006. The Company continues to consolidate the accounts of
DEL as the Company maintains its remaining 80% ownership interest.

10. LONG TERM INVESTMENT

As at December 31, 2006, Dynamotive holds 2,658,994 (2005 
Nil) common shares of Renewable Energy Corp (ROC) incorporated in Victoria,
Australia, a subsidiary of Enecon Pyrolysis Pty Limited. It represents a 6.6%
interest in the entity. For the year ended December 31, 2006, the entire
long-term investment of $100,000 has been offset against amounts received from
ROC and recorded as deferred revenue (note 14).

77

---

|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

11. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

|                                    |  | 2006      |  |  | 2005      | 
|----------------------------------- |  | --------- |  |  | --------- | 
|                                    |  | $         |  |  | $         | 
|                                    |  |           |  |  |           | 
|Trade accounts payable              |  | 3,141,341 |  |  | 5,499,062 | 
|Accrued compensation                |  | 239,287   |  |  | 41,692    | 
|Accrued liabilities                 |  | 2,665,838 |  |  | 1,429,942 | 
|Bank of Scotland
      guarantee(i) |  | 391,821   |  |  | 344,160   | 
|                                    |  | 6,438,287 |  |  | 7,314,856 | 

|(i) | In 2001, Border Biofuels Ltd. (BBL, a company in
      liquidation which was 75% owned by the Company) entered into a credit
      facility with the Bank of Scotland for a maximum of $391,821 (2005 -
      $344,100) (£200,000). The credit facility is denominated in British Pounds
      Sterling and is guaranteed by the Company. During 2002, BBL became
      insolvent. If the Bank is unable to realize on its collateral with BBL, it
      has the right to seek settlement from the Company for payment. Although
      there is currently no indication that the Bank will pursue the Company,
      the Company in 2002 recognized the full amount of the guarantee as a
      current liability. BBL remains in liquidation at December 31, 2006, there
      has been no change in status regarding the settlement of the credit
      facility.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12. CONVERTIBLE DEBENTURES

|(a) | In 2005, the Company issued $1,825,000 of convertible
      debentures including $175,000 of debentures issued to officers and
      directors (or companies controlled by officers and directors) of the
      Company. These debentures were due between June and September 2006, had an
      interest rate of 10% payable in shares and were convertible into Company
      common shares at rates between $0.40 and $0.425 per share. These
      debentures were collateralized by certain government grant receivables and
      guaranteed by the Company. In September and December 2005, $1,150,000 of
      debentures were converted into 2,727,941 common shares and 681,985 Series
      U warrants. In addition, 101,071 shares and 25,267 Series U warrants were
      issued in 2005 as an interest payment on the debenture. During the first
      six months of 2006, the remaining $675,000 of the debentures were
      converted into 1,613,969 common shares and 484,787 Series U warrants. In
      addition, 109,370 shares and 29,493 Series U warrants were issued in 2006
      as an interest payment on the debenture. As at December 31, 2006, no
      debentures were outstanding.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

78

---

|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

12. CONVERTIBLE DEBENTURES (contd)

|    | The original proceeds of the debenture were allocated to
      the debenture and the conversion feature at December 31, 2005 based on
      their relative fair values. Accordingly, $1,173,409 was originally
      allocated to the debenture and $651,591 was allocated to the conversion
      feature. The carrying value of the debt was being accreted up to its face
      value over the term to maturity. The accretion of the debt discount began
      in June 2005 and $96,695 was accreted during the period to December 31,
      2005. The amount of $426,357 was expensed in 2005 due to the conversion of
      the debentures. During the first six months of 2006, $20,645 of the debt
      discount was accreted and $107,894 was expensed due to conversion of the
      remaining debentures.                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | As at December 31, 2005, restricted cash of $172,813 was
      held by the Companys lawyer as collateral for short-term convertible
      debentures. In January 2006, debenture holders converted the same amount
      into Companys common shares and these funds became
  non-restricted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(b) | In December 2004 the Company entered into an agreement
      with an Ontario corporation (the Vendor) to pay for equipment and
      services in exchange for an $830,013 (C$1,000,000) convertible debenture
      (the Agreement). The debenture was convertible into common shares of the
      Company at the market price at the time of conversion, subject to a
      minimum conversion price of $0.40 per share and a maximum conversion price
      of $0.60 per share. In addition, for each share issued upon conversion,
      the debenture holder would receive 1⁄2 share purchase warrant. Each whole
      warrant is exercisable for two years from the date of issue at 5% above
      the market price at the time of conversion. The debenture bore no interest
      and the principal was due on December 10, 2009. In September 2005, the
      Vendor converted the entire debenture into common shares of the Company at
      a price of $0.54 per share and received 1,535,001 shares and 767,500
      two-year Series S warrants exercisable at $0.57 per share.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | The Agreement also called for the Company to enter into a
      marketing agreement with the Vendor. In connection with the marketing
      agreement, in early 2005 the Company issued to the Vendor 500,000 Series U
      warrants to purchase common shares of the Company, exercisable at $0.49
      per share during the period from January 4, 2005 to December 31, 2006. The
      Vendor has exercised these warrants subsequent to December 31,
  2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | The proceeds of the debenture have been allocated to the
      debenture and warrants at December 31, 2004 based on their relative fair
      values. Accordingly, $307,463 was allocated to the debenture, $440,592 was
      allocated to the conversion feature and $81,958 was allocated to the
      warrants. The carrying value of the debt was being accreted up to its face
      value over the term to maturity. No amount of the discount was accreted in
      2004 since the debt agreement only became effective in December 2004. The
      accretion of the debt discount began in January 2005 and the entire
      balance of $522,550 ($440,592 related to the conversion feature and
      $81,958 related to the warrants) was expensed upon conversion in September
      2005.                                                                                                                                                                                                                                                                                          

79

---

|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

13. LONG-TERM DEBT

In 2004, the West Lorne BioOil Co-Generation LP (the LP)
entered into a loan agreement with a Bahamas Corporation for an $830,013
(C$1,000,000) loan. The loan bore interest at 1.25% per month with interest due
monthly and the principal due on August 11, 2007. The LP could repay the loan at
any time without penalty. The loan agreement also called for the Company to
issue 312,500 Series T warrants to purchase common shares of the Company,
exercisable at $0.49 per share for a period of three years, as part of the loan
financing. The loan was collateralized by the assets of the LP and guaranteed by
the Company. The debt and accrued interest were fully settled in June 2006.

The proceeds of the loan were allocated to the debt and
warrants based on their relative fair values. In 2004, $760,209 was allocated to
the loan and $69,804 was allocated to the warrants. The carrying value of the
debt was being accreted up to its face value over the term to maturity. The
accretion of the debt discount began in January 2005 and $22,591 was accreted in
2005. During first five months of 2006, $9,459 of the debt discount was accreted
and $37,754 was expensed due to the repayment of the loan in June 2006.

14. DEFERRED REVENUE

In 2006, the Company received a total of $950,000 in payments
from three unrelated companies as licensing fees. $500,000 from Rika Ltd. as
payment for a Master License to develop project opportunities in the Ukraine and
the Baltic republics using Dynamotives patented pyrolysis technology; $150,000
from Classic Power Inc. as an initial payment on a Plant License for Guelph,
Ontario, Canada; $200,000 from Renewable Oil Corporation Pty Ltd. (ROC) for a
Master License to develop project opportunities in Australia and $100,000 from
ROC as a deposit on an initial plant license.

Deferred revenue is net of $330,000 advanced to entities
controlled by Rika Ltd. (note 5) and a $100,000 long-term investment in ROC
(note 10).

All the above funds are non-refundable and have been recorded
as deferred revenue.

80

---

|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

15. SHARE CAPITAL

[a] Authorized share capital

The Companys authorized capital consists of an unlimited
number of common shares with no par value and unlimited Class A preferred shares
with no par value with each having attached special rights and restrictions. No
preferred shares were issued and outstanding at December 31, 2006 and 2005.

[b] Issued and outstanding common shares

|                                                                 |  | Issued      |  
|---------------------------------------------------------------- |  | ----------- | -
|                                                                 |  | #           |  
|Balance, December 31, 2003                                       |  | 69,915,654  |  
|Issued for cash and proceeds received in prior year              |  |             |  
|Pursuant to private placement
      (iii)                        |  | 16,906,913  |  
|Pursuant to exercise of stock options                            |  | 569,284     |  
|Pursuant to exercise of warrants                                 |  | 188,333     |  
|Issued for settlement of fees payable (iii)                      |  | 2,999,113   |  
|Issued for services (i)                                          |  | 2,425,641   |  
|Issued for SA Rights                                             |  | 124,860     |  
|Shares redeemed and cancelled                                    |  |            |  
|Balance, December 31, 2004                                       |  | 93,129,798  |  
|Issued for cash and proceeds received in prior
      year        |  |             |  
|Pursuant to private placement, net of issuance
      costs (iii) |  | 17,303,998  |  
|Pursuant to exercise of stock
      options                      |  | 1,239,139   |  
|Pursuant to exercise of warrants                                 |  | 1,873,084   |  
|Issued for settlement of fees payable (iii)                      |  | 3,347,869   |  
|Issued for services (i)                                          |  | 1,656,643   |  
|Issued on conversion of convertible debentures                   |  | 4,364,013   |  
|Issued on conversion of project advance                          |  | 342,287     |  
|Shares to be redeemed and cancelled (ii)                         |  | (44,956     | )
|Balance, December 31, 2005                                       |  | 123,211,875 |  
|Issued for cash and proceeds received in prior
      year        |  |             |  
|Pursuant to private placement, net of issuance
      costs (iii) |  | 24,001,562  |  
|Pursuant to exercise of stock
      options                      |  | 1,411,716   |  
|Pursuant to exercise of warrants                                 |  | 17,574,713  |  
|Issued for settlement of fees payable (iii)                      |  | 2,394,907   |  
|Issued for services (i)                                          |  | 2,003,664   |  
|Issued on conversion of convertible debentures                   |  | 1,723,339   |  
|Cancellation of Escrow
      Shares                              |  | (556,000    | )
|Balance, December 31, 2006                                       |  | 171,765,776 |  

81

---

|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

15. SHARE CAPITAL (contd.)

|[i] | The Company has entered into various agreements for
      services with its employees, directors and non-employees to be settled
      with various stock awards. For awards issued to employees and directors,
      the fair value is determined using the market price on the date of grant
      and for non-employees the fair value is determined using the market value
      on the date of completion of the services.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | The Company issued shares issued for services are
      described below:                                                                                                                                                                                                                                                                                                                                                       

|                                               |  | Issued    | 
|---------------------------------------------- |  | --------- | 
|                                               |  | #         | 
|For the year end December 31, 2004             |  |           | 
|Shares issued for services:                    |  |           | 
|Consulting services                            |  | 2,393,459 | 
|Employees
      and directors                  |  | 32,182    | 
|Total shares issued for services in 2004       |  | 2,425,641 | 
|                                               |  |           | 
|For the year end December 31, 2005             |  |           | 
|Shares issued for services:                    |  |           | 
|Consulting services                            |  | 1,078,201 | 
|Share issuance costs                           |  | 487,940   | 
|Employees, directors and officers              |  | 90,502    | 
|Total shares issued
      for services in 2005 |  | 1,656,643 | 
|                                               |  |           | 
|For the year end December 31, 2006             |  |           | 
|Shares issued for services:                    |  |           | 
|Consulting services                            |  | 1,270,258 | 
|Share issuance costs                           |  | 676,533   | 
|Employees,
      directors and officers        |  | 56,873    | 
|Total shares issued for services in 2006       |  | 2,003,664 | 

|[ii] | At December 31, 2006, the Company had nil [2005 - 44,956;
      2004 - nil] common shares to be redeemed. The redeemable shares had a fair
      value of $nil [2005 - $23,780; 2004 - nil] which were issued as a partial
      payment of outstanding invoices returned to the Company as a result of the
      final settlement with a vendor.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

82

---

|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

15. SHARE CAPITAL (contd.)

|[iii] | During the year ended December 31, 2006, the Company
      completed private placements for gross proceeds of $21,072,712 [2005 -
      $7,138,730; 2004 - $6,491,511]. Share issuance costs related to these
      private placements totaled $2,402,344 [2005 - $1,033,113; 2004 -
      $665,820], of which $232,722 [2005 - $35,041; 2004 - $385,035] was paid in
      cash and $2,169,622 [2005 - $998,072; 2004 - $280,785] was paid in shares
      and warrants. Share issuance costs paid in shares were valued based on the
      quoted market price on the date of private placements. The fair value of
      the warrants were estimated using the Black-Scholes option pricing model
      with the following weighted average assumptions: risk free interest rate
      of 4.06% (2005  3.58%; 2004  3.02%); dividend yield of 0% (2005  0%;
      2004  0%); volatility factors of 54.5% (2005  61.5%; 2004  84.2%); and
      weighted average expected life of 2 years (2005- 2 years; 2004  2years).
      Pursuant to the private placement agreements in 2006, 9,082,305 Series S
      warrants [2005  7,006,257 series S warrants; 2004  4,479,559 series Q
      warrants and 4,227,739 series S warrants] were issued in 2006 [note
      15(f)].
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|      | In 2006, the Company also issued 2,394,907 [2005 -
      3,347,869; 2004 - 2,999,113] fully vested shares for settlement of fees
      payable with a total fair value of $3,036,562 [2005 - 1,836,047; 2004 -
      1,427,565]. These shares were valued based on the quoted market price on
      the date of the settlement agreement. This resulted in a loss on
      settlement of accounts payable of $98,189 [2005 - $nil; 2004 -
  $nil]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

[c] Shares to be issued

At December 31, 2006, the Company has 1,836,532 [2005 
4,673,439] common shares to be issued which are comprised of:

|[i]   | 966,023 [2005  779,140] common shares which are to be
      issued to directors and non- employees for services rendered under
      compensation arrangements in 2006 with a fair value of $1,022,718 [2005 -
      $502,394].                                                                                                                                                                  
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                                                                                                                                                                   
|[ii]  | 838,204 [2005  468,204] common shares which are to be
      issued to directors and officers as bonuses during the year with a fair
      value of $700,530 [2005 - $252,830].                                                                                                                                                                                                                   
|      |                                                                                                                                                                                                                                                                                                                                                                                                   
|[iii] | Nil common shares relating to a private placement
      commenced during the year ended December 31, 2006 [2005  2,826,095] and
      32,305 [2005 - 600,000] common shares are related to exercise of warrants
      for gross proceeds of $18,091 [2005 - $342,000]. At December 31, 2006, the
      Company had received $nil [2005 - $1,957,000] in cash for these shares to
      be issued.
|      |                                                                                                                                                                                                                                                                                                                                                                                                   
|[iv]  | Subscription receivable of $nil [2005 - $34,392] related
      to nil [2005  90,502] common shares issued to an officer in
  2006.                                                                                                                                                                                                                                                               

83

---

|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

15. SHARE CAPITAL (contd.)

[d] Escrow agreement

In December 1995, the Company placed in escrow 1,232,000
shares, issued for nominal consideration, to be released from such escrow
agreement as the Company achieves certain milestones. During 1999, the Board
approved an amendment to the escrow agreements release provisions that applied
to 676,000 of the shares held in escrow above. The amended release provisions
were that 1/3 of the common shares in escrow were to be released upon the
Company achieving each of a capitalized stock value of $30 million, $50 million
and $100 million.

During the year ended December 31, 2000, 450,666 of the common
shares were released from escrow as the milestones were reached. In February,
2006 the Companys market capitalization exceeded $100 million and as a result,
the remaining 225,334 shares were released from escrow and were issued to the
holders.

In March 2006, 556,000 common shares were cancelled and
returned to the Treasury as the milestone (one share for each $0.17 of cash
flow as defined in the agreement) expired without being reached. Accordingly,
the Company has reduced common share capital by $247,368, based on the average
per-share amount of the common shares at the date of cancellation, with a
corresponding increase to contributed surplus.

As at December 31, 2006, nil [2005 - 781,334] common shares are
held in escrow.

[e] Stock options

At December 31, 2006, the following stock options to directors,
employees and non-employees were outstanding:

Options
        Outstanding
      Options
        ExercisableWeighted-Number
      Average
      Weighted-
      Number
      Weighted-Range of
      Outstanding at
      Remaining
      Average
      Exercisable at
      AverageExercise
      December 31,
      Contractual
      Exercise
      December 31,
      ExercisePrices
      2006
      Life
      Price
      2006
      Price$0.20 - $0.23
      4,885,617
      6.58 years
      $0.21
      4,885,617
      $0.21$0.33 - $0.50
      9,536,833
      5.18 years
      $0.47
      9,406,833
      $0.47$0.58 - $0.90
      574,583
      2.45 years
      $0.58
      574,583
      $0.58$1.00 - $1.35
      1,020,000
      4.93 years
      $1.21
      132,500
      $1.01$1.50 - $1.60
      872,500
      2.63 years
      $1.59
      872,500
      $1.5916,889,533
      4.81
        years
      $0.50
      15,872,033
      $0.46


84

---

|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

15. SHARE CAPITAL (contd.)

From time to time, the Company has provided incentives in the
form of stock options to the Companys directors, officers, employees and
others. The Company has reserved 25,764,866 [2005 - 18,488,525] (15%) of its
common shares for issuance upon the exercise of stock options of which at
December 31, 2006, 8,875,333 [2005 - 4,575,275] are available to be granted. The
exercise price and the vesting terms of the options are determined by the
Compensation Committee of the Companys Board of Directors. The exercise price
will generally be at least equal to the market price of the common shares at the
date of the grant.

Stock option transactions for the respective periods and the
number of stock options outstanding are summarized as follows:

|                             |  | No. of Common   |   |  | Weighted Average | 
|---------------------------- |  | --------------- | - |  | ---------------- | 
|                             |  | Shares Issuable |   |  | Exercise Price   | 
|                             |  | #               |   |  | $                | 
|Balance, December 31, 2003   |  | 10,015,988      |   |  | 0.41             | 
|Options issued               |  | 3,393,769       |   |  | 0.36             | 
|Options forfeited or expired |  | (900,750        | ) |  | 0.70             | 
|Options exercised            |  | (569,284        | ) |  | 0.32             | 
|Balance, December 31, 2004   |  | 11,939,723      |   |  | 0.38             | 
|Options issued               |  | 4,068,916       |   |  | 0.48             | 
|Options forfeited or expired |  | (856,250        | ) |  | 0.72             | 
|Options exercised            |  | (1,239,139      | ) |  | 0.30             | 
|Balance, December 31, 2005   |  | 13,913,250      |   |  | 0.39             | 
|Options issued               |  | 4,665,999       |   |  | 0.82             | 
|Options forfeited or expired |  | (278,000        | ) |  | 0.66             | 
|Options exercised            |  | (1,411,716      | ) |  | 0.45             | 
|Balance, December 31, 2006   |  | 16,889,533      |   |  | 0.50             | 

During 2005, the Company reduced the expiry date of 400,000
options issued to officers from the original expiry date of three years to two
years.

During 2004, the Company extended the expiry date of 6,606,617
options issued to officers from the original expiry date for an additional
period of five years.

85

---

|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

15. SHARE CAPITAL (contd.)

The weighted-average fair value of options granted in 2006
where the stock price is equal to the exercise price of the options, greater
than the exercise price of the options and less than the exercise of the options
was $0.58, $0.54, and $0.78 respectively [2005 - $0.58, $0.54, and $0.46; 2004 -
$nil, $0.40 and $0.41] .

Compensation expense recognized for options granted or modified
in 2006 or prior periods was $1,933,233 (2005 - $2,103,328; 2004 - $2,680,175).
The fair value of stock options and warrants granted in 2006 is estimated at the
measurement date using the Black Scholes option pricing model with the following
weighted average assumptions: Risk free interest rate of 4.12% (2005  3.7%;
2004  4.3%); dividend yields of 0% (2005  0%; 2004  0%); volatility factors
of the expected market price of the Companys common stock of 60.5% (2005 
79.9%; 2004  92.7%); and weighted average expected life of the option of 3.8
years (2005  6.5 years; 2004  4.9 years).

Expected volatilities are based on historical volatility of the
Companys stock using available data and other factors. The risk-free interest
rate is based on Canadian Treasury Instruments. As the Company does not
currently pay cash dividends on common stock and does not anticipate doing so in
the foreseeable future, the expected dividend yield is zero. The Company uses
historical data to estimate option exercise, forfeiture and employee termination
within the valuation model. For non-employees, the expected life of the options
approximates the full term of the options.

[f] Common share purchase warrants

At December 31, 2006 the common share purchase warrants
outstanding were as follows:

|                  | No. of Common   | Exercise       |                                              
|----------------- | --------------- | -------------- | ---------------------------------------------
|                  | Shares Issuable | Price          | Expiration Date                              
|                  |                 |                |                                              
|Series Q Warrants | 3,545,203       | $0.20 to $0.75 | January 12, 2007 to August 31, 2008 (note 24)
|Series R Warrants | 2,500,000       | $0.20          | August 31, 2008                              
|Series S Warrants | 19,286,163      | $0.44 to $2.06 | January 4, 2007 to May 31, 2011 (note 24)    
|Series U Warrants | 946,348         | $0.46 to $0.53 | September 22, 2008
      to January 21, 2009 
|                  |                 |                |                                              
|Total             | 26,277,714      |                |                                              

86

---

|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

15. SHARE CAPITAL (contd.)

Summary of warrants exercised and issued during the year end:

Number of Common Shares Issuablevia Warrantsvia Warrants
      via Warrants
      cancelled orIssued
      exercised
      expired
      atat December
      during the
      during the
      during the
      DecemberSeries
      31,
        2005
      year
      year
      year
      31,
        2006
      Exercise PriceP Warrants
      3,735,482
      
      (3,735,482)
      
      
      $0.40Q Warrants
      10,357,295
      
      (6,811,757)
      (335)
      3,545,203
      $0.20 to $0.75R Warrants
      2,500,000
      
      
      
      2,500,000
      $0.20S Warrants
      15,998,808
      9,532,275
      (5,906,032)
      (338,888)
      19,286,163
      $0.44 to $2.06T Warrants
      312,500
      
      (312,500)
      
      
      $0.49U Warrants
      1,207,252
      548,038
      (808,942)
      
      946,348
      $0.46 to $0.5334,111,337
      10,080,313
      (17,574,713)
      (339,223)
      26,277,714


Of 26,277,714 outstanding warrants, 25,638,047 warrants are
vested. 14,086,502 of the Series Q, S, and T warrants are callable by the
Company for $0.001 to $0.01 per warrant on 30 days notice. 409,618 of the Series
Q warrants are callable by the Company for $0.001 to $0.01 per warrant on 30
days notice. 1,100,000 of the Series S warrants are callable by the Company for
$0.001 to $0.01 per warrant on 30 days notice as soon as the Companys shares
have closed at or above $2.00 for 20 consecutive trading days. 8,451,594 of the
Series S and U warrants are callable by the Company for $0.001 to $0.01 per
warrant on 30 days notice as soon as the Companys shares have closed at or
above $3.00 for 20 consecutive trading days.

|(1) | The Series P warrants were issued as part of a private
      placement and for services of non- employees. These warrants vested upon
      successful completion of the private placement and as services were
      performed respectively. During the year ended December 31, 2004, pursuant
      to various private placements agreement, the Company issued 2,700,000
      Series P warrants with an exercise price of $0.40 per share, expiring on
      April 1, 2006. In 2006, all Series P warrants were exercised.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(2) | The Series Q warrants were issued as part of a private
      placement for cash and services. These warrants vested upon successful
      completion of the private placement and as services were performed. In
      2002, 818,418 Series Q warrants were issued as part of a loan agreement to
      certain directors of the Company. In 2006, 6,811,757 [2005 - 1,134,793]
      warrants were exercised at a weighted average price of $0.37 [2005 - 0.31]
      per share.                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(3) | The 2,500,000 Series R warrants were issued as part of a
      loan financing in 2003 at an exercise price of $0.20 per share. As at
      December 31, 2006, the warrants continue to be exercisable and
      outstanding.                                                                                                                                                                                                                                                                                                  

87

---

|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

15. SHARE CAPITAL (contd.)

|(4) | The Series S warrants were issued during the year as part
      of a private placement for cash and services. Of the 9,532,275 [2005 
      11,088,569] warrants issued, 9,082,305 [2005  7,006,257] were issued in
      relation to private placements. The remainder of the warrants were issued
      for issuance costs. These warrants vested upon successful completion of
      the private placement and as services were performed.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(5) | The Series T warrants were issued as a part of a loan
      agreement in 2004 and the warrants vested immediately upon issue. In 2006,
      312,500 [2005 - nil] warrants were exercised at a weighted average price
      of $0.49 [2005  nil] per share. In 2006, all Series T warrants were
      exercised.                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(6) | In 2006, 548,038 [2005 - 1,207,252] Series U warrants
      were issued during the year as a part of conversion of convertible
      debentures. These warrants vested immediately upon issue with a weighted
      average exercise price of $0.49 [2005 - $0.51].                                                                                                                                                                            

Compensation expense recognized for warrants issued during 2006
was $1,152,368 [2005 - $707,166; 2004 - $601,250].

[g] Stock appreciation rights

In 1998, the Company established a stock appreciation rights
plan whereby the participants will be entitled to require the Company to redeem
the stock appreciation rights (SA Rights) for an amount equal to the excess of
the market value of the underlying common shares over the initial value of the
SA Right at the date of grant. The SA Rights have vested as the Company achieved
stock value targets as defined in the agreement.

The Company also has the right to redeem the SA Rights at its
option under certain circumstances. The Company has the sole exclusive election
to redeem the SA Rights in cash, shares or in a combination of cash and shares.
The number of SA Rights that can be granted under the plan until December 31,
2008 cannot exceed 2,500,000.

At December 31, 2006, 300,000 [December 2005 - 300,000] SA
Rights were outstanding and 300,000 [December 2005 - 200,000] were vested. These
300,000 SA Rights, with an initial value of $0.40, expire on December 31, 2008.
There were no SA Rights issued, redeemed or forfeited during the past three year
period.

88

---

|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

15. SHARE CAPITAL (contd.)

[h] Contributed surplus

The following is a continuity of contributed surplus for the
respective periods:

|                                                               |  | Contributed | 
|-------------------------------------------------------------- |  | ----------- | 
|                                                               |  | Surplus     | 
|                                                               |  | $           | 
|Balance, December 31, 2003                                     |  | 4,815,679   | 
|Effect of change in accounting policy {note 3}                 |  | 797,602     | 
|Fair value of warrants related to
      convertible debentures |  | 522,550     | 
|Fair value of warrants related to long-term debt               |  | 167,010     | 
|Stock-based compensation expense                               |  | 3,281,425   | 
|Balance, December 31, 2004                                     |  | 9,584,266   | 
|Fair value of warrants related to
      convertible debentures |  | 652,398     | 
|Stock-based
      compensation expense                         |  | 2,810,494   | 
|Balance, December 31, 2005                                     |  | 13,047,158  | 
|Escrow shares cancelled/forfeited                              |  | 247,368     | 
|Loss on sale of subsidiary                                     |  | 420,400     | 
|Stock-based
      compensation expense                         |  | 3,085,601   | 
|Balance, December 31, 2006                                     |  | 16,800,527  | 

[i] Stock based compensation and payment

The Company has recorded stock based compensation and payment
as follows:

|                                       |  | 2006      |  |  | 2005      |  |  | 2004      | 
|-------------------------------------- |  | --------- |  |  | --------- |  |  | --------- | 
|                                       |  | $         |  |  | $         |  |  | $         | 
|Balance sheet items                    |  |           |  |  |           |  |  |           | 
|Property, plant and equipment          |  | 1,941,324 |  |  | 327,533   |  |  | 350,812   | 
|Share issue costs                      |  | 2,169,622 |  |  | 996,876   |  |  | 280,785   | 
|Accounts payable                       |  | 969,261   |  |  | 492,136   |  |  | 17,893    | 
|Other assets                           |  | 100,637   |  |  |          |  |  |          | 
|                                       |  | 5,180,844 |  |  | 1,816,545 |  |  | 649,490   | 
|Income statement items                 |  |           |  |  |           |  |  |           | 
|Marketing and business development     |  | 179,917   |  |  | 477,079   |  |  | 108,000   | 
|General and administrative             |  | 2,571,175 |  |  | 2,327,161 |  |  | 3,835,201 | 
|Loss on settlement of accounts payable |  | 98,189    |  |  |          |  |  |          | 
|Research and development               |  | 1,586,498 |  |  | 892,817   |  |  | 787,403   | 
|Interest expense
      and other       |  | 14,408    |  |  | 67,970    |  |  | 97,200    | 
|                                       |  | 4,450,187 |  |  | 3,765,027 |  |  | 4,827,804 | 
|                                       |  |           |  |  |           |  |  |           | 
|Total stock based compensation and     |  |           |  |  |           |  |  |           | 
|payment                                |  | 9,631,031 |  |  | 5,581,572 |  |  | 5,477,294 | 

89

---

|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

15. SHARE CAPITAL (contd.)

[j] Basic and diluted loss per common share

|                                              |   | 2006        |   |   | 2005        |   |   | 2004       |  
|--------------------------------------------- | - | ----------- | - | - | ----------- | - | - | ---------- | -
|                                              |   |             |   |   |             |   |   |            |  
|Numerator                                     |   |             |   |   |             |   |   |            |  
|Net loss                                      | $ | (14,252,382 | ) | $ | (11,997,344 | ) | $ | (9,916,215 | )
|                                              |   |             |   |   |             |   |   |            |  
|Denominator                                   |   |             |   |   |             |   |   |            |  
|Weighted average number of common shares      |   |             |   |   |             |   |   |            |  
|outstanding                                   |   | 153,685,553 |   |   | 108,790,519 |   |   | 81,760,633 |  
|Escrowed shares                               |   |            |   |   | (781,334    | ) |   | (781,334   | )
|                                              |   | 153,685,553 |   |   | 108,009,185 |   |   | 80,979,299 |  
|                                              |   |             |   |   |             |   |   |            |  
|Basic and
      diluted loss per common share | $ | (0.09       | ) | $ | (0.11       | ) | $ | (0.12      | )

16. COMMITMENTS AND CONTINGENCIES

Commitments

The Company has the following future minimum annual lease
commitments for premises and equipment:

|               |  | $         | 
|-------------- |  | --------- | 
|2007           |  | 932,000   | 
|2008           |  | 244,000   | 
|2009           |  | 132,000   | 
|2010           |  | 58,000    | 
|2011           |  | 53,000    | 
|2012 and after |  | 233,000   | 
|               |  | 1,652,000 | 

Pursuant to employment agreements with certain officers of the
Company, which expire between May 31, 2007 and July 31, 2011, the Company is
obligated to pay the full term of contract in the event of the officers early
termination. As at December 31, 2006, the compensation obligation payable over
the next four years amounts to $3,944,913 (2005 - $5,308,806).

In connection with the Companys West Lorne project upgrade and
construction advances related to the 200TPD plants (see note 6), the Company has
outstanding construction commitments of approximately $8.2 million.

90

---

|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

16. COMMITMENTS AND CONTINGENCIES (contd)

Contingencies

In the ordinary course of business activities, the Company may
be contingently liable for litigation and claims with customers, suppliers and
former employees. Management believes that adequate provisions have been
recorded in the accounts where required. Although it is not possible to estimate
the extent of potential costs and losses, if any, management believes that the
ultimate resolution of such contingencies will not have a material adverse
effect on the consolidated financial position of the Company.

17. RELATED PARTY TRANSACTIONS

The transactions with related parties are in the normal course
of operations and are recorded at amounts established and agreed between the
related parties. In addition to the transactions described in note 15, the
Company had the following transactions with related parties:

|[a] | Consulting fees and salaries of $1,763,575 for the year
      ended December 31, 2006 [2005 - $1,940,421; 2004 - $3,053,332] have been
      paid to Directors (or companies controlled by Directors) of the Company.
      Included in the amount above, is $543,122 [2005 - $974,392; 2004 -
      $2,288,556] paid by stock based compensation [note 15(b)(i)].
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                   
|[b] | Consulting fees and share issue costs of $nil for the
      year ended December 31, 2006 [years 2005 - $87,395; 2004 - $574,326] have
      been paid to a shareholder of the Company. Included in the amount above,
      is $nil [2005 - $1,113; 2004 - $513,958] paid by stock based compensation
      [note 15(b)(i)].                                       
|    |                                                                                                                                                                                                                                                                                                                                                                   
|[c] | As at December 31, 2006, $nil [2005 - $82,529; 2004 -
      $136,370] was advanced to a Director of the Company in connection with the
      formation of a joint venture for the development of the Companys BioOil
      technology and related products. The joint venture had not been formalized
      and the advance was written-off on December 31, 2005.
|    |                                                                                                                                                                                                                                                                                                                                                                   
|[d] | The amounts due from/to related parties, which are
      non-interest bearing, unsecured and due on demand, are comprised of the
      following:                                                                                                                                                                                                                 

|                                |  | 2006      |  |  | 2005      | 
|------------------------------- |  | --------- |  |  | --------- | 
|                                |  | $         |  |  | $         | 
|Receivable                      |  |           |  |  |           | 
|Due from directors and officers |  | 5,925     |  |  | 11,926    | 
|                                |  |           |  |  |           | 
|Payable                         |  |           |  |  |           | 
|Due to directors and officers   |  | 1,218,932 |  |  | 1,005,447 | 

91

---

|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

18. LOSSES AND UNUSED DEDUCTIONS CARRIED FORWARD FOR INCOME
TAX PURPOSES

As at December 31, 2006, the Company has loss carryforwards of
approximately $44,369,000 to apply against future taxable income in Canada
($40,711,000) and the United Kingdom ($3,658,000) and $1,121,000 and $494,000 of
federal and provincial investment tax credits respectively available for future
use in Canada. The United Kingdom loss carryforwards can be carried forward
indefinitely. The Canadian losses and investment tax credits expire as follows:

|     |  | Federal Investment |  |  | Provincial Investment |  |  | Loss          | 
|---- |  | ------------------ |  |  | --------------------- |  |  | ------------- | 
|     |  | Tax Credits        |  |  | Tax Credits           |  |  | Carryforwards | 
|     |  | $                  |  |  | $                     |  |  | $             | 
|     |  |                    |  |  |                       |  |  |               | 
|2007 |  | 115,000            |  |  |                      |  |  | 4,744,000     | 
|2008 |  | 25,000             |  |  |                      |  |  | 5,386,000     | 
|2009 |  | 49,000             |  |  | 8,000                 |  |  | 3,974,000     | 
|2010 |  | 167,000            |  |  | 94,000                |  |  | 4,614,000     | 
|2011 |  | 197,000            |  |  | 109,000               |  |  |              | 
|2012 |  | 54,000             |  |  | 30,000                |  |  |              | 
|2013 |  | 58,000             |  |  | 32,000                |  |  | 4,352,000     | 
|2014 |  | 456,000            |  |  | 221,000               |  |  | 8,506,000     | 
|2026 |  |                   |  |  |                      |  |  | 9,135,000     | 
|     |  | 1,121,000          |  |  | 494,000               |  |  | 40,711,000    | 

In addition, the Company has scientific research and
experimental development expenditures of approximately $5,892,000 [2005 -
$4,898,600] that can be carried forward indefinitely to apply against future
taxable income in Canada.

Future income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The Company has
recognized a valuation allowance for those future tax assets for which it is
more likely than not that realization will not occur. Significant components of
the Companys future tax assets as of December 31, 2006 and December 31, 2005
are as follows:

|                                                |  | 2006        |   |  | 2005        |  
|----------------------------------------------- |  | ----------- | - |  | ----------- | -
|                                                |  | $           |   |  | $           |  
|                                                |  |             |   |  |             |  
|Loss carryforwards                              |  | 16,053,000  |   |  | 13,594,000  |  
|Research and development deductions and credits |  | 3,160,000   |   |  | 2,018,000   |  
|Property, plant and equipment                   |  | 1,492,000   |   |  | 1,069,000   |  
|Financing costs                                 |  | 896,000     |   |  | 655,000     |  
|Total future tax assets                         |  | 21,601,000  |   |  | 17,336,000  |  
|Valuation
      allowance                       |  | (21,601,000 | ) |  | (17,336,000 | )
|Net future tax assets                           |  |            |   |  |            |  

92

---

|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

18. LOSSES AND UNUSED DEDUCTIONS CARRIED FORWARD FOR INCOME
TAX PURPOSES (contd.)

The tax benefit of net operating losses carried forward and the
associated valuation allowance were reduced by $986,000 (2005 - $1,044,000),
representing the tax effect of losses which expired during the year.

The potential income tax benefits relating to these future tax
assets have not been recognized in the consolidated financial statements as
their realization did not meet the requirements of more likely than not under
the asset and liability method of tax allocation. Accordingly, no future tax
assets have been recognized as at December 31, 2006 and 2005 and no income tax
provision or benefit has been provided for any of the periods presented. Had a
tax benefit been provided, the Companys expected effective tax rate for the
reversal of the tax benefit would be 34.18%, 34.12% and 35.62% in 2006, 2005 and
2004, respectively.

The Companys future tax assets include approximately $896,000
[2005 - $426,000] related to deductions for share issuance costs, in excess of
amounts deducted for financial reporting purposes. If and when the valuation
allowance related to these amounts is reversed, the Company will recognize this
benefit as an adjustment to share capital as opposed to income tax expense in
the Consolidated Statement of Loss.

19. SUPPLEMENTAL CASH FLOW INFORMATION

|                                             |  | 2006     |   |  | 2005    |   |  | 2004      |  
|-------------------------------------------- |  | -------- | - |  | ------- | - |  | --------- | -
|Net change in
      non-cash working capital |  | $        |   |  | $       |   |  | $         |  
|                                             |  |          |   |  |         |   |  |           |  
|Receivables                                  |  | (442,216 | ) |  | 153,693 |   |  | (90,890   | )
|Prepaid expenses and deposits                |  | (237,452 | ) |  | (49,305 | ) |  | (96,852   | )
|Accounts payable and accrued liabilities     |  | (12,244  | ) |  | 29,445  |   |  | 2,274,898 |  
|Deferred revenue                             |  | 520,000  |   |  |        |   |  |          |  
|                                             |  | (171,912 | ) |  | 133,833 |   |  | 2,087,156 |  
|                                             |  |          |   |  |         |   |  |           |  
|Interest paid                                |  |          |   |  |         |   |  |           |  
|Short-term
      interest paid               |  | 174,257  |   |  | 131,971 |   |  | 26,000    |  

For stock based non-cash investing and financing activities,
see note 15(i).

93

---

|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

20. GOVERNMENT ASSISTANCE

Government assistance received during the year ended December
31, 2006 in the amount of $1,559,085 [2005 - $1,664,640; 2004 - $3,611,412] has
been recorded as a reduction of expenditures.

|Government assistance applied to:       |  | 2006      |  |  | 2005      |  |  | 2004      | 
|--------------------------------------- |  | --------- |  |  | --------- |  |  | --------- | 
|                                        |  | $         |  |  | $         |  |  | $         | 
|                                        |  |           |  |  |           |  |  |           | 
|Property, plant and equipment and other |  | 1,331,964 |  |  | 853,673   |  |  | 2,829,117 | 
|Research and development                |  | 227,121   |  |  | 782,423   |  |  | 765,106   | 
|Other expenses                          |  |          |  |  | 28,544    |  |  | 17,189    | 
|Total                                   |  | 1,559,085 |  |  | 1,664,640 |  |  | 3,611,412 | 

|[a] | Technology Partnerships Canada                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | During 1997, the Company entered into a contribution
      agreement with Industry Canada- Technology Partnerships Canada (TPC)
      whereby the Company is entitled to receive a maximum of approximately $7
      million (Cdn$ 8.2 million) or 37% of eligible expenditures, as defined in
      the agreement. The agreement, as amended, specifies that in the event
      commercial viability is achieved, then the assistance is repayable,
      commencing January 1, 2005 based on royalties from sales of specified
      products resulting from the project to a maximum of $13.7 million (Cdn$16
      million) or until the expiration of contract on December 31, 2014. As at
      December 31, 2006, the Company has received $6.0 million (Cdn$7.0 million)
      under these agreements. In 2006, the Company received $640,852 [2005 -
      $1,007,318; 2004 - $800,000] from TPC. As at December 31, 2006, $1,087,910
      [2005 - $627,582; 2004 - $236,548] is included in government grants
      receivable. As the Company has not achieved commercial viability and no
      revenue has been recorded from the project, no repayment has been made and
      no amount accrued for TPC assistance as at year end.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|[b] | Sustainable Development Technology Canada                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | On March 5, 2004 the Company signed a Contribution
      Agreement with Sustainable Development Technology Canada (SDTC) whereby
      SDTC will contribute $4.3 million (Cdn$5 million) to the capital cost of
      the Companys West Lorne 100 tonne per day BioOil co-generation project
      development. This amount is a grant and is accounted for as a reduction in
      the capital cost of the project. During 2006, the Company received payment
      of $428,669 (Cdn$ 500,000) [2005 - $657,322 (Cdn$ 796,478); 2004 -
      $3,056,468 (Cdn$3,703,522)] from SDTC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

94

---

|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

21. RESEARCH AND DEVELOPMENT

The breakdown of the research and development is as follows:

|                                        |  | 2006      |   |  | 2005      |   |  | 2004      |  
|--------------------------------------- |  | --------- | - |  | --------- | - |  | --------- | -
|                                        |  | $         |   |  | $         |   |  | $         |  
|Research & development expenditures     |  | 4,629,465 |   |  | 3,586,855 |   |  | 3,670,936 |  
|Less: government assistance             |  | (227,121  | ) |  | (782,423  | ) |  | (765,106  | )
|Less: Product sales - BioOil            |  | (123,594  | ) |  |          |   |  |          |  
|Less: Product
      sales - Electricity |  | (30,966   | ) |  |          |   |  |          |  
|Total                                   |  | 4,247,784 |   |  | 2,804,432 |   |  | 2,905,830 |  

22. SEGMENTED INFORMATION

In 2006 the Company has one reportable segment, BioOil Power
Generation. The BioOil Power Generation segment relates to the biomass-to-energy
technology. Substantially all of the Companys operations and assets are in
Canada and are solely focused on the development and commercialization of its
technology. BioOil Power Generation is biomass-to-energy technology that
converts low value forest residues and agricultural by-products into BioOil for
use in power generation or other industrial energy purposes.

For the years ended December 31, 2006, 2005 and 2004 the
Company recorded no revenue.

23. RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES

The Company prepares its consolidated financial statements in
accordance with Canadian generally accepted accounting principles (Canadian
GAAP), which conform in all material respects to those in the United States
(U.S. GAAP), except as follows:

|[i]  | Under U.S. GAAP, the excess, if any, between the fair
      value of the shares in escrow and the carrying value, will be recorded as
      compensation expense upon release from escrow. Under Canadian GAAP, shares
      released from escrow do not give rise to compensation expense.                                                                                                                                                                                                                                                                                                                                                                    
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|[ii] | Under Canadian GAAP, prior to the accounting change in
      2004 the Company accounted for all stock-based compensation issued on or
      after January 1, 2002 to non-employees using the fair value based method
      and recognized no compensation expense for stock-based awards to
      employees. The effect of retroactively applying, without restatement, the
      fair value based method of stock-based compensation to options granted to
      employees rather than the previously noted intrinsic method was to
      increase the deficit as at January 1, 2004 by $797,602 with the
      corresponding increase to contributed surplus.

95

---

|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

23. RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (CONTD)

|      | Beginning January 1, 2006, the Company adopted the
      recommendations of the Statement of Financial Accounting Standards No.
      123R, Accounting for Stock-based Compensation (SFAS 123R), and has
      applied the recommendations of this standard using the modified
      prospective method. Under this application, the Company is required to
      record compensation expense for all awards granted or modified after the
      date of adoption and for the unvested portion of previously granted awards
      that remain outstanding at the date of adoption. Accordingly, no prior
      periods were restated or cumulative adjustments recorded upon the adoption
      of this standard.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|      | Prior to the adoption of SFAS 123R, the Company accounted
      for stock-based compensation plans under the intrinsic value method of
      accounting as defined by Accounting Principles Board (APB) Opinion No.
      25, Accounting for Stock Issued to Employees and applied the disclosure
      provisions of Statement No. 123, Accounting for Stock-based
      Compensation, as amended.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|      | For years ending prior to December 31, 2006, if the
      exercise price of an employee stock option award is not fixed in the
      functional currency of the Company or in the currency the employee is
      paid, the award is accounted for as a variable award until the award is
      exercised, forfeited, or expires unexercised. The Company measures
      compensation as the amount by which the quoted market value of the common
      shares of the Companys stock covered by the grant exceeds the option
      price, compensation arising from changes in the market price are included
      in the measurement of loss.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|[iii] | Under US GAAP, the conversion feature of the convertible
      debt issued by the Company meets the criteria to be classified as equity.
      As a result, the Company follows Emerging Issue Task Force (EITF) No.
      00-27 and records the proceeds of the convertible debts based on the
      relative fair value of the convertible debt, the contingent warrants
      issuable upon conversion and any detachable warrants. In accordance with
      Issue 15 of EITF 00-27, at the time of conversion, the contingent warrants
      that were issued upon conversion of the convertible debenture should be
      recognized. As a result of the difference in the calculation of relative
      fair value for the allocation of proceeds under Canadian and US GAAP, the
      carrying value of the convertible debt liability under US GAAP should be
      increased by $56,077 with a corresponding decrease in shareholders
      equity. Additional interest expense as a result of recognition of
      contingent warrants less the effect of the reduction of accretion of
      interest was adjusted to the Consolidated Statements of Loss under US
      GAAP. In addition, in accordance with Issue 10 of EITF 00-27, the
      commitment date of the convertible instruments related to the paid-in-kind
      (PIK) accrued interest should be the date the interest was accrued. As a
      result, an additional beneficial conversion feature (BCF) was calculated
      on these convertible instruments issued for PIK accrued interest on the
      convertible debentures that were outstanding as at December 31, 2005,
      amounting to $14,490 for the year ended December 31, 2005. No accretion on
      this additional BCF was included in the net

96

---

|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

23. RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (CONTD)

|     | loss for US GAAP purposes as it is immaterial given the
      short time period that the convertible debentures were outstanding.
      Additional BCF on the convertible instruments related to the PIK accrued
      interest for the convertible debentures that were converted during the
      fiscal year 2005 was calculated as $27,943. The full amount was charged to
      interest expense upon the conversion of the debentures.                                                                                                                                                                                                                                                             
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|     | During the year ended December 31, 2006, the Company
      settled the remaining convertible debentures as described in note 11. As a
      result, the Company accreted the remaining debt discount, which under US
      GAAP, resulted in an additional accretion expense of $81,560, which
      includes the recognition of the contingent warrants issuable upon
      conversion of the debenture. The Company has determined there was no
      additional BCF on the convertible instruments related to the PIK accrued
      interest for the convertible debentures that were converted during the
      fiscal year 2006.                                                                    
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|[iv] | Under Canadian GAAP, the Company can capitalize start-up
      or pre-operating costs until commercial production is established. Under
      US GAAP, any pre-operating costs or deferred expenses related to start-up
      operations are expensed as incurred. For the year ended December 31, 2006,
      this difference resulted in write-off of $100,637 (2005 - $nil; 2004 -
      $nil) under US GAAP.                                                                                                                                                                                                                                                                                         
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|[v]  | For U.S. GAAP purposes, the Company presents the
      disclosure requirements of Financial Accounting Standard No. 130 (SFAS
      130) in these consolidated financial statements. SFAS 130 requires the
      presentation of comprehensive income and its components. Comprehensive
      income includes all changes in equity during a period except shareholder
      transactions. Other accumulated comprehensive income comprises only the
      cumulative translation adjustment.                                                                                                                                                                                                          
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|[vi] | New Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|     | SFAS No. 155                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|     | In February 2006, FASB issued SFAS No. 155, Accounting
      for Certain Hybrid Financial Instruments  an Amendment of FASB Statements
      No. 133 and 140. Among other things, SFAS No. 155 permits the election of
      fair value re-measurement for certain hybrid financial instruments that
      would otherwise require bifurcation under Statement 133, Accounting for
      Derivative Instruments and Hedging Activities. These hybrid financial
      instruments would include both assets and liabilities. SFAS No. 155 is
      effective for fiscal years beginning after September 15, 2006. The Company
      is currently evaluating the impact of the provisions of SFAS
  155.

97

---

|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

23. RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (CONTD)

SFAS No. 154

In June 2005, the FASB issued Statement
of Financial Accounting Standard No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and FASB
Statement No. 3, Reporting Accounting Changes in Interim Financial Statements
(SFAS 154). The Statement applies to all voluntary changes in accounting
principle, and changes the requirements for accounting for and reporting of a
change in accounting principle. SFAS 154 requires retrospective application to
prior periods financial statements of a voluntary change in accounting
principle unless it is impracticable. SFAS 154 requires that a change in method
of depreciation, amortization, or depletion for long-lived, non-financial assets
be accounted for as a change in accounting estimate that is affected by a change
in accounting principle. Opinion 20 previously required that such a change be
reported as a change in accounting principle. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The Company has determined the adoption of this
pronouncement did not have a material impact on the Companys financial
statements.

SFAS No. 157

In September 2006, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standard (SFAS) No. 157, Fair Value Measurements (FAS 157). FAS 157
defines fair value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles, and expands
disclosures about fair value measurements. The provisions of FAS 157 are
effective fiscal years beginning after November 15, 2007. The Company is
currently evaluating the impact of the provisions of SFAS No. 157.

FIN 48

In June 2006, FASB issued
interpretation No. 48, Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109 (FAS No. 109) (FIN 48). This
interpretation prescribes a recognition threshold and measurement attribute for
tax positions taken or expected to be taken in a tax return. This interpretation
also provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. The
evaluation of a tax position in accordance with this interpretation is a
two-step process. In the first step, recognition, the Company determines whether
it is more-likely-than-not that a tax position will be sustained upon
examination, including resolution of any related appeals or litigation
processes, based on the technical merits of the position. The second step
addresses measurement of a tax position that meets the more-likely-than-not
criteria. The tax position is measured at the largest amount of benefit that is
greater than 50 percent likely of being realized upon ultimate settlement.
Differences between tax positions taken in a tax return and amounts recognized
in the financial statements will generally result in a) an increase in a
liability for income taxes

98

---

|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

23. RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (CONTD)

payable or a reduction of an income tax
refund receivable, b) a reduction in a deferred tax asset or an increase in a
deferred tax liability or c) both a and b. Tax positions that previously failed
to meet the more-likely-than-not recognition threshold should be recognized in
the first subsequent financial reporting period in which that threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not
recognition threshold should be de-recognized in the first subsequent financial
reporting period in which that threshold is no longer met. Use of a valuation
allowance as described in FAS No. 109 is not an appropriate substitute for the
de-recognition of a tax position. The requirement to assess the need for a
valuation allowance for deferred tax assets based on sufficiency of future
taxable income is unchanged by this interpretation. This Interpretation is
effective for fiscal years beginning after December 15, 2006. The Company is
currently evaluating the impact FIN 48 will have on the Companys consolidated
balance sheet and statement of operations.

SAB 108

In September 2006, the SEC issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when quantifying Misstatements in Current Year Financial
Statements" ("SAB 108"). SAB 108 requires companies to evaluate the materiality
of identified unadjusted errors on each financial statement and related
financial statement disclosure using both the rollover approach and the iron
curtain approach. The rollover approach quantifies misstatements based on the
amount of the error in the current year financial statements whereas the iron
curtain approach quantifies misstatements based on the effects of correcting the
misstatement existing in the balance sheet at the end of the current year,
irrespective of the misstatements year(s) of origin. Financial statements would
require adjustment when either approach results in quantifying a misstatement
that is material. Correcting prior year financial statements for immaterial
errors would not require previously filed reports to be amended. SAB 108 is
effective for fiscal years ending after November 15, 2006 (the Company's fiscal
year ending December 31, 2006). The Company has determined that SAB 108 did not
have a material impact on its consolidated financial statements.

99

---

|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

23. RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (CONTD)

If US GAAP were followed, the significant variations on the
consolidated statements of loss and comprehensive loss would be as summarized in
the table below.

|                                                    |  | 2006        |   |  | 2005        |   |  | 2004       |  
|--------------------------------------------------- |  | ----------- | - |  | ----------- | - |  | ---------- | -
|                                                    |  | $           |   |  | $           |   |  | $          |  
|                                                    |  |             |   |  |             |   |  |            |  
|Loss for the year, Canadian GAAP                    |  | (14,252,382 | ) |  | (11,997,344 | ) |  | (9,916,215 | )
|Adjustment for release of escrow shares (i)         |  | (235,068    | ) |  |            |   |  |           |  
|Adjustment for stock based compensation
      (ii)  |  |            |   |  | (934,131    | ) |  | 1,511,031  |  
|Adjustment to accretion of interest expense (iii)   |  | (81,560     | ) |  | (193,249    | ) |  |           |  
|Adjustment for other assets (iv)                    |  | (100,637    | ) |  |            |   |  |           |  
|Loss for the year,
      US GAAP                    |  | (14,669,647 | ) |  | (13,124,724 | ) |  | (8,405,184 | )
|                                                    |  |             |   |  |             |   |  |            |  
|Unrealized gain/(losses) on foreign currency        |  |             |   |  |             |   |  |            |  
|translation                                         |  | (354,810    | ) |  | 219,713     |   |  | 35,733     |  
|Comprehensive loss
      for the year, US GAAP      |  | (15,024,457 | ) |  | (12,905,011 | ) |  | (8,369,451 | )
|                                                    |  |             |   |  |             |   |  |            |  
|Weighted average number of common shares            |  |             |   |  |             |   |  |            |  
|outstanding                                         |  | 153,685,553 |   |  | 108,009,185 |   |  | 80,979,299 |  
|                                                    |  |             |   |  |             |   |  |            |  
|Basic and diluted loss per common share,
      U.S. |  |             |   |  |             |   |  |            |  
|GAAP                                                |  | (0.10       | ) |  | (0.12       | ) |  | (0.10      | )

|                                       |  | 2006       |   |  | 2005       | 
|-------------------------------------- |  | ---------- | - |  | ---------- | 
|                                       |  | $          |   |  | $          | 
|Total assets, Canadian GAAP            |  | 38,093,699 |   |  | 16,962,573 | 
|Adjustment for
      other assets (iv) |  | (100,637   | ) |  |           | 
|                                       |  |            |   |  |            | 
|Total assets, US
      GAAP            |  | 37,993,062 |   |  | 16,962,573 | 

|                                                                      |  | 2006      |  |  | 2005      |  
|--------------------------------------------------------------------- |  | --------- |  |  | --------- | -
|                                                                      |  | $         |  |  | $         |  
|Total liabilities, Canadian GAAP                                      |  | 6,958,287 |  |  | 8,670,165 |  
|Adjustment for allocation of proceeds of convertible debt
      (iii) |  |          |  |  | 41,587    |  
|Adjustment for accretion of interest expense (iii)                    |  |          |  |  | (18,775   | )
|                                                                      |  |           |  |  |           |  
|Total liabilities, US GAAP                                            |  | 6,958,287 |  |  | 8,692,977 |  

100

---

|Dynamotive Energy Systems Corporation
|-------------------------------------
|                                     
|NOTES TO CONSOLIDATED                
|FINANCIAL STATEMENTS                 
|                                     
|December 31, 2006                    

23. RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (CONTD)

|                                                                      |  | 2006       |   |  | 2005      |  
|--------------------------------------------------------------------- |  | ---------- | - |  | --------- | -
|                                                                      |  | $          |   |  | $         |  
|Total shareholders equity, Canadian GAAP                             |  | 29,780,489 |   |  | 8,292,408 |  
|Adjustment for allocation of proceeds of convertible debt
      (iv)  |  | (100,637   | ) |  |          |  
|Adjustment for allocation of proceeds of
      convertible debt (iii) |  |           |   |  | (41,587   | )
|Adjustment for
      accretion of interest expense (iii)              |  |           |   |  | 18,775    |  
|                                                                      |  |            |   |  |           |  
|Total
      shareholders equity, US GAAP                             |  | 29,679,852 |   |  | 8,269,596 |  

The non-controlling interest, and cash flows under accounting
principles generally accepted in Canada are the same as the non-controlling
interest, and cash flows under the accounting principles generally accepted in
the United States.

24. SUBSEQUENT EVENTS

|a) | Subsequent to the year end, during the period from
      January 1 to April 17, 2007, the Company issued 2,280,259 common shares
      for total proceeds of $2,480,900, relating to a private placement
      commencing during the first quarter of 2007. In addition during the period
      from January 1 to April 17, 2007, the Company received $4,373,000 on the
      exercise of 744,166 options and 6,851,049 warrants.                                                                                                                                                                                                                                                                                     
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|b) | On April 5, 2007 the Company entered into certain amended
      agreements with Erie Flooring and Wood Products (Erie) regarding the
      supply by Erie of wood to the West Lorne BioOil plant over the next 12
      years at no charge and the provision of char from the BioOil plant to Erie
      at no charge. In relation to these agreements, Dynamotive agreed to pay
      for the purchase and installation of a char based boiler system and
      related char delivery infrastructure. The terms include an immediate
      payment of $500,000 to Erie and a further $359,000 to Erie in equal
      monthly payments plus 8% interest, over the next 10 years for the purchase
      of the boiler.

25. COMPARATIVE FIGURES

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

101

---

Item 18. Financial Statements

Not applicable.

Item 19. Exhibits

|Exhibit | Exhibit Description                                                                                                                                                                                                                                                                                        
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |                                                                                                                                                                                                                                                                                                            
|1.1     | Memorandum of Dynamotive Technologies Corporation, as
      amended to August 15, 2000 (filed as Exhibit 3.1 to the Companys
      Quarterly Report on Form 10-QSB filed on August 15, 2000 and incorporated
      herein by reference.)                                                                  
|        |                                                                                                                                                                                                                                                                                                            
|1.2     | Amendment to the Memorandum of Dynamotive Energy Systems
      Corporation, dated July 3, 2001 (filed as Exhibit 3.1(b) to the Companys
      Quarterly Report on Form 10-Q filed on August 14, 2001 and incorporated
      herein by reference.)                                                         
|        |                                                                                                                                                                                                                                                                                                            
|1.3     | Articles of Dynamotive Technologies Corporation, as
      amended to date (filed as Exhibit 3.2 to the Companys Quarterly Report on
      Form 10-QSB filed on August 15, 2000 and incorporated herein by
      reference.)                                                                               
|        |                                                                                                                                                                                                                                                                                                            
|1.4     | Notice of Alteration to the authorized share structure of
      the Company as filed with the British Columbia Corporate and Personal
      Property Registries on October 28, 2004 (filed as an exhibit to the
      Companys Form 20-F filed on May 30, 2005 and incorporated herein by
      reference)
|        |                                                                                                                                                                                                                                                                                                            
|1.5     | Notice of Alteration to the Articles of the Company as
      filed with the British Columbia Corporate and Personal Property Registries
      on November 24, 2005 (filed as an exhibit to the Companys Form 20-F filed
      on June 29, 2006 and incorporated herein by reference)                      
|        |                                                                                                                                                                                                                                                                                                            
|1.6     | Copy of the Limited partnership Agreement establishing
      the West Lorne BioOil Co-Generation LP referred to the Consortium Master
      Agreement filed under 4.6 below                                                                                                                                
|        |                                                                                                                                                                                                                                                                                                            
|4.1     | Sustainable Development Technology Canada Contribution
      Agreement dated as of March 5, 2004 (filed as an exhibit to the Companys
      Form 20-F filed on June 1, 2004 and incorporated herein by reference)                                                                                         
|        |                                                                                                                                                                                                                                                                                                            
|4.2     | Modification No. M1 to the Sustainable Development
      Technology Canada Contribution Agreement dated as of April 6, 2004 (filed
      as an exhibit to the Companys Form 20-F filed on June 1, 2004 and
      incorporated herein by reference)                                                        
|        |                                                                                                                                                                                                                                                                                                            
|4.3     | Loan Agreement between Memorial Gift Trust, James Acheson
      and the Company dated June 3, 2003 (filed as an exhibit to the Companys
      Form 20-F filed on June 1, 2004 and incorporated herein by reference)                                                                                       
|        |                                                                                                                                                                                                                                                                                                            
|4.4     | Technology Partnerships Canada Agreement dated July 29,
      1997 including amendments dated February 2, 1998 to August 29, 2003 (filed
      as an exhibit to the Companys Form 20-F filed on June 1, 2004 and
      incorporated herein by reference)                                                  

102

---

|Exhibit | Exhibit
      Description                                                                                                                                                                                                                                                                   
|------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |                                                                                                                                                                                                                                                                                             
|4.5     | Amendment to the Technology Partnerships Canada Agreement
      dated November 23, 2004 (filed as an exhibit to the Companys Form 20-F
      filed on May 30, 2005 and incorporated herein by reference)                                                                                   
|        |                                                                                                                                                                                                                                                                                             
|4.6     | Consortium Master Agreement dated February 11, 2004
      (filed as an exhibit to the Companys Form 20-F filed on May 30, 2005 and
      incorporated herein by reference)                                                                                                                 
|        |                                                                                                                                                                                                                                                                                             
|4.7     | Alliance Agreement with UMA Engineering Ltd. dated
      January 29, 2004 (filed as an exhibit to the Companys Form 20-F filed on
      May 30, 2005 and incorporated herein by reference)                                                                                                 
|        |                                                                                                                                                                                                                                                                                             
|4.8     | Loan Agreement between Environmental Engineering &
      Consultants Limited and the Company dated November 3, 2004 (filed as an
      exhibit to the Companys Form 20-F filed on May 30, 2005 and incorporated
      herein by reference)                                                 
|        |                                                                                                                                                                                                                                                                                             
|4.9     | Settlement Agreement between Magellan Aerospace Limited,
      West Lorne BioOil Co-Generation LP and the Company dated December 10, 2004
      (filed as an exhibit to the Companys Form 20-F filed on May 30, 2005 and
      incorporated herein by reference)                           
|        |                                                                                                                                                                                                                                                                                             
|4.10    | Convertible Note Agreement between Paul Hughes, COO and
      the Company dated May 31, 2005 (filed as an exhibit to the Companys Form
      20-F filed on June 29, 2006 and incorporated herein by reference)                                                                             
|        |                                                                                                                                                                                                                                                                                             
|4.11    | Executive Services Agreement with Andrew Kingston dated
      August 1, 2004 and Amended Executive Services Agreement with Andrew
      Kingston dated September 29, 2004 (filed as an exhibit to the Companys
      Form 20-F filed on June 29, 2006 and incorporated herein by reference)
|        |                                                                                                                                                                                                                                                                                             
|4.12    | Executive Services Agreement with Richard Lin dated
      August 1, 2004 and Amended Executive Services Agreement with Richard Lin
      dated September 29, 2004 (filed as an exhibit to the Companys Form 20-F
      filed on June 29, 2006 and incorporated herein by reference)        
|        |                                                                                                                                                                                                                                                                                             
|4.13    | Executive Services Agreement with Brian Richardson dated
      October 1, 2005 (filed as an exhibit to the Companys Form 20-F filed on
      June 29, 2006 and incorporated herein by reference)                                                                                           
|        |                                                                                                                                                                                                                                                                                             
|4.14    | Executive Services Agreement with Jan Barynin dated May
      17, 2004 (filed as an exhibit to the Companys Form 20-F filed on June 29,
      2006 and incorporated herein by reference)                                                                                                   
|        |                                                                                                                                                                                                                                                                                             
|4.15    | Shareholder Agreement with Pendana
        Limited BVI and Dynamotive Biomass Resource Corporation dated September
        22, 2006*                                                                                                                                                        
|        |                                                                                                                                                                                                                                                                                             
|4.16    | Joint Venture Agreement with
        Pendana Limited BVI and Dynamotive Europe Limited dated September 22,
        2006*                                                                                                                                                                    

103

---

|Exhibit | Exhibit Description                                                                                                                                                                                                                                                                                                                  
|------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |                                                                                                                                                                                                                                                                                                                                      
|4.17    | Consulting
        Agreement with Desmond Radlein, Ph. D dated December 8, 2006*                                                                                                                                                                                                                                                     
|        |                                                                                                                                                                                                                                                                                                                                      
|4.18    | Executive
        Services Agreement with Anton Kuipers dated January 16, 2007*                                                                                                                                                                                                                                                      
|        |                                                                                                                                                                                                                                                                                                                                      
|4.19    | Loan
        Agreement with Dynamotive Biomass Resource Corporation dated September
        30, 2006*                                                                                                                                                                                                                                
|        |                                                                                                                                                                                                                                                                                                                                      
|4.20    | Loan
        Agreement with Dynamotive Europe Limited dated September 30, 2006*                                                                                                                                                                                                                                                      
|        |                                                                                                                                                                                                                                                                                                                                      
|4.21    | Umberlla
        Amending Agreement by and amongst Erie Flooring & Wood Products and
        West Lorne BioOil Co-generation LP and Dynamotive Energy Systems Corporation
        dated April 5, 2007*                                                                                                                               
|        |                                                                                                                                                                                                                                                                                                                                      
|4.22    | Engineering,
        and Construction Management Agreements with Tecna S.A. dated July 7, 2006*                                                                                                                                                                                                                                      
|        |                                                                                                                                                                                                                                                                                                                                      
|4.23    | DT2
        Engineering, Development Agreements with Tecna S.A. dated July 7, 2006*                                                                                                                                                                                                                                                  
|        |                                                                                                                                                                                                                                                                                                                                      
|4.24    | Escrow Agreement,
        dated January 10, 1995, by and among the Company, Montreal Trust Company
        of Canada and the holders of the 3,140,900 escrowed shares (filed as Exhibit
        10.21 to the Companys Registration Statement on Form SB-2, Registration
        No. 33-98622, and incorporated herein by reference.)
|        |                                                                                                                                                                                                                                                                                                                                      
|4.25    | February 9,
        2000 Agreement to Purchase Patents and Rights between Dynamotive Technologies
        Corporation and RTI Resource Transforms International, Ltd., (filed as
        Exhibit 10.28 to the Companys Form 10- QSB filed on May 15, 2000,
        and incorporated herein by reference.)                           
|        |                                                                                                                                                                                                                                                                                                                                      
|4.26    | Heads of Agreement
        with Consensus Business Group and Joint Venture Proposal for Consensus
        Business Group dated February 20, 2006 (filed as Exhibit 10.29 to the
        Companys Form 20-F filed on June 29, 2006 and incorporated herein
        by reference)                                                     
|        |                                                                                                                                                                                                                                                                                                                                      
|12.1    | Certification
        of chief executive officer                                                                                                                                                                                                                                                                                     
|        |                                                                                                                                                                                                                                                                                                                                      
|12.2    | Certification
        of chief financial officer                                                                                                                                                                                                                                                                                     
|        |                                                                                                                                                                                                                                                                                                                                      
|13.1    | Certification
        of chief executive officer  Section 906 of the Sarbanes-Oxley Act
        of 2002                                                                                                                                                                                                                             
|        |                                                                                                                                                                                                                                                                                                                                      
|13.2    | Certification of chief financial
      officer  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                       
|        |                                                                                                                                                                                                                                                                                                                                      
|15.1    | Audit
        Committee Charter*                                                                                                                                                                                                                                                                                                     

*Filed as an exhibit to this Annual Report on Form 20-F for the
period ended December 31, 2006.

104

---

SIGNATURES

The registrant hereby certifies that it meets all of the
requirements for filing on Form 20-F and that it has duly caused and authorized
the undersigned to sign this annual report on its behalf.

|                    | **Dynamotive Energy Systems Corporation**
|------------------- | -----------------------------------------
|                    |                                          
|Date: June 27, 2007 |                                          
|                    | By:                                      
|                    |                                          
|                    |                                          

105

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